Stock markets are deep in the red as sentiment has turned 180 degrees from yesterday’s very bullish move.

Europe

Equities pushed lower in early trading and the mood has been bearish throughout the session. Yesterday’s bullish move was Chinese led and that optimism has fizzled out today. Looking back at it, the positive moves that were witnessed yesterday were always going to be difficult to replicate as it was fuelled by an editorial in a securities journal that is owned by the Chinese government, who essentially encouraged its citizens to purchase domestic stocks. Now that the excitement is over, dealers have to face the fact the pandemic isn’t going to go away anytime soon.

The European Commission (EC) didn’t help sentiment as the body cut its growth outlook for the eurozone. It now predicts the currency area will contract by 8.7% in 2020, while three months ago it projected a decline of 7.7%. According to the group, the Italian economy will contract by 11.2% this year, and that is a sizeable revision form the initial forecast that it will shrink by 9.5%. The EC feels the negative revisions were warranted as the easing of lockdown restrictions took place at a slower rate than expected, which might prove to be sensible in terms of the health situation.

The OECD warned that UK unemployment could hit 14.8% if there is a second wave of Covid-19.   

Halfords shares have tumbled today as the company cautioned about its outlook, and it mapped out three bleak scenarios for 2021. The company confirmed that trading in the first three months was better than expected, but it is still cautious in its outlook. It predicts that like-for-like (LFL) revenue for next year will be between 5% and 9.5% lower on the year. Annual underlying pre-tax profit was £55.9 million in 2020, and that was a touch higher than its own forecast. The outlook seems to be overly pessimistic. Gross margin ticked up by 27 basis points to 51.1%. The retail division saw margins increase by 20 basis points to 48.2%, while the auto centres unit saw margins fell by 250 basis points to 65.5%. The lockdown prompted a rise in cycling as a way to avoid using public transport, but it is a lower margin business. On the other side of the coin, the motor operation has been impacted by the pandemic as people took few car journeys.

JD Sports confirmed that full year revenue increased by 30% to £6.11 billion, while EBITDA on a comparable accounting basis increased by 28% to £623.6 million. The retailer warned that the pandemic will have a material impact on next year’s results. Stores began to reopen in April and the majority are back in business, but footfall at shopping centres is weak as some people want to avoid such premises for health purposes. Online sales have been strong, so that helped cushion the blow of the lockdown, and it will probably help counteract the potentially weakened high street performance. It will resume paying dividends when the conditions allow it, but given the current climate, dealers are not holding out much hope. 

Micro Focus registered a goodwill impairment of over $922 million, and that is why the group posted a first half operating loss of $906.7 million, which was a big swing from the profit of $32.6 million in the previous year. In the six month period, adjusted earnings, which removed exceptional items, fell by 15.5% to $552.2 million. In March, the group suspended its dividend and no interim payment was made. The board has the intention of proposing a final dividend, but it will be related to its performance and the macroeconomic backdrop, but the group feels the business climate is unlikely to improve in the second half.

Whitbread, the owner of Premier Inn, revealed that total UK LFL sales slumped by almost 80% in the first quarter. Last month the group raised over £1 billion from a rights issue so it is in a good position to get through the next few months. Things are going back to normal for the company, as over 270 hotels and 24 restaurants in the UK have reopened, and the majority of the rest of its businesses will reopen next month. All 19 hotels in Germany have resumed trading.  

SIG, the insulation specialist, is performing well today and that is possibly because the UK government is expected to launch a scheme to encourage people to insulate their homes. The aim of the move is to become a greener economy. 

US

The S&P 500 is flat this afternoon as dealers are cautious in the wake of the big gains that were posted yesterday. The move in the S&P 500 is largely down to the tech sector, as the NASDAQ 100 is up over 0.8%

The US government are pouring funds into pharmaceutical companies that are working on drugs that will hopefully be used to tackle Covid-19. The funding scheme is called Operation Warp Speed. Novavax, received $1.6 billion in funding – the largest instalment handed out from the programme. Money will be spent on testing and production for a potential vaccine for the virus. The pharma company are aiming to have 100,000 doses ready in early 2021. Regeneron received $450 million under the government scheme too as it is working on an anti-viral treatment.

Tesla shares continue to motor higher as it set yet another all-time high. Morgan Stanley, upped its price target for the stock to $2,070. Netflix and Apple has also notched up record highs.

FX

Earlier in the session the US dollar index was showing decent gains as bargain hunting and short covering helped the currency. The major rally in global stocks yesterday hit the US dollar, because lately it has been a common flight to quality play. In light of the bearish sentiment in equities today, the currency was in relatively high demand, but over the past few hours it has been drifting lower, so now it is flat on the session. EUR/USD is in the red on the back of the move in the greenback.

GBP/USD is higher as traders are a little optimistic in relation to the UK-EU situation. David Frost, the UK’s chief negotiator, will have dinner with Michel Barnier, the EU’s chief negotiator, tonight at Downing Street.  Some dealers are hopeful the informal setting should help move along the talks. Recently, both sides said they wanted a deal but disagreements over areas such as fishing have yet to be resolved.   

Commodities

Gold is up in the session. The slide in the dollar in the past few hours has helped the metal gain ground. The robust inverse relationship between the two markets is playing out today. The metal hit its highest level since October 2012 a while ago. It didn’t quiet reach the $1,800 mark, but if the bullish trend continues, it is likely to be cleared.    

WTI and Brent crude are showing small gains today as the deep production cuts that are in place by OPEC+ are still on traders’ minds. The energy market has been a bit lacklustre as there are concerns there will be more localised lockdowns, or that there will be a reversal of the reopening of economies amid increasing coronavirus cases – this has acted as a cap to potential gains. 

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