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ECB in focus, as Rolls-Royce slips to a multibillion-pound loss

Christine Lagarde

While US markets managed to finish another record-breaking day higher with the Dow setting new records it was notable that for all the chatter about weaker bond yields being supportive of the highly valued tech sector, that the Nasdaq finished the day lower.

Last night’s treasury auction turned out to be a bit of an anticlimax, with demand for the 10 year sufficiently robust to allay investor concerns about a lack of enthusiasm for US treasuries, while President Biden signed off on the latest $1.9trn US stimulus package.  

Asia markets took their cues from the positive finish in the US, and today’s European market open has followed suit, with the DAX once again setting new record highs.

Basic resource stocks are leading the early gainers on the FTSE100, on the back of firmer copper and crude oil prices.

Banks and financials are under performing as bond yields lose ground, with HSBC, Standard Chartered, NatWest Group and Barclays all near the bottom of the index, with HSBC the biggest faller after being cut to sell by Investec.

Rolls-Royce was already wrestling with serious problems even before the pandemic came blowing in from China a year ago, its share price well down from its 2018 peaks, as problems with its Trent 1000 engine which powered the Boeing 787 Dreamliner, causing the company to post a £2.9bn operating loss in its 2018 full year numbers, followed by a loss of £850m in 2019. This morning’s operating loss of £2.1bn is almost as large as the one saw in 2018, and while the size of it is certainly sobering, unlike last year optimism is probably in shorter supply due to the uncertainty about when air travel is likely to return to any kind of normal post pandemic.

That said, management appear optimistic about the future estimating a free cash flow outflow of £2bn for 2021, which is based on wide body engine flying hours of 55% of the levels of 2019, with an expectation of turning cash flow positive at the end of the second half of this fiscal year, with positive free cash flow of £750m in 2022, based on engine flying hours of 80% of 2019 levels.

This does appear come across as somewhat optimistic, however investors appear to be giving management the benefit of the doubt for now, with the shares higher in early trade, on the basis that for all of the problems seen in the past three years, there is perhaps a feeling that, in the words of the song by D-Ream, “things can only get better”

Supermarkets have been at the forefront of the UK pandemic response over the past 12 months, and have come in for some unwarranted criticism over some of the help they received as the pandemic hit the UK economy. By and large they have adapted well to the challenges thrown up by recent events, with WM Morrison first out of the blocks today with its preliminary full year numbers for 2020.

The digital business has been the main beneficiary over the past 12 months, and in the early of its final quarter these saw a rise of 24%, over the same period a year ago, helped largely by the Morrisons on Amazon service, as well as the new relationship with Deliveroo.

Costs have risen as a result of the pandemic, with Morrisons confirming a total cost of £290m for 2020/21, due to the tighter restrictions since December.  

At the beginning of this year management said it expects pre-tax profit to come in between £420m and £440m, before the £230m deduction in respect of the repayment of business rates for the year 2020/21. This morning’s preliminary full year results confirmed that assessment with pre-tax profits of £431m, which after the deduction fell to £165m. The supermarket paid a final dividend of 5.11p.  

On a more positive note, Morrisons is also expected to benefit from the decision earlier this month to extend its supply agreement with McColls for a further three years, with 300 McColl stores to be converted to Morrisons Daily over the same period. In terms of guidance management expect 2021/2022 profit to be higher than the £431m achieved this year, excluding the waived rates relief.

WPP shares are slightly higher this morning after the company announced a bigger than expected loss of £2.97bn, after writing down £3.1bn in a significant revaluation of large parts of its business. Management also announced the resumption of its share buyback program as well as a 14p final dividend, while reiterating its full year guidance for 2021.

The recent weakness in the euro has been a welcome development for the European Central Bank over the last few weeks, as we look towards today’s meeting as well as press conference from Christine Lagarde.

For the last 12 months the ECB has been the only game in town when it comes to supporting the European economy, despite the lack of urgency from EU policymakers in taking fiscal actions of their own.

Up until recently they haven’t been helped by a weaker US dollar either which pushed the Euro briefly up above the 1.2000 level and added to the deflationary pressure on an economy that has tipped back into recession, and is unlikely to recover much in terms of its services sector before the second half of 2021, due to tighter lockdown restrictions that have been in place for most of Q4 last year, and look to get extended into Q2 of this year.

One saving grace has been the performance of the manufacturing sector which appears to be performing well.

To offset the weakness in the services sector which is struggling with various lockdown restrictions the central bank expanded its Pandemic Emergency Asset Purchase program in December for the second time in 2020, from €1.35trn to €1.85trn, as well as extending it another 9 months until March 2022.

While this helps buy time, along with new loan programs in the form of TLTRO’s the ECB can’t act alone given it is already operating at the limits of its mandate.

It needs help on a much bigger fiscal scale, which at the moment is only just coming in a fairly limited form in the form of the EU recovery fund, and only €390bn of the €750bn of that fund, in the form of grants, far too low to really make much of a difference.

While the ECB has gone to great lengths to insist that their monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar hasn’t helped their cause, nor has a sharp rise in borrowing costs, which could cause problems for the like of southern European countries with large debt burdens.

The huge fiscal stimulus plan in the US is starting to prompt concerns of a sharp rise in real yields which central bankers appear to have been slow in pushing back against. With the Federal Reserve solely focussed on its role as the US central banker, it appears to have forgotten it is also the world’s central banker.

The ripple out effect of the recent sharp rise in yields gives the ECB a real problem in trying to keep a lid on borrowing costs, and while we are seeing localised measures to address the pandemic, the slow response in rolling out the vaccine in Europe is making life much more perilous for the fragile economies of Spain, Italy and Greece who are in the most economic need.

With the damage from the pandemic likely to extend well into 2021, Europe really needs to get its act together, otherwise further economic schisms could open up further over the next 12 months.

The best we can probably hope for today is more jaw-jaw from the ECB in terms of their efforts to keep a lid on the recent rise in yields.  

The US dollar has continued to slip back from the three-month highs we saw at the beginning of the week after yesterday’s softer than expected CPI data prompted some profit taking. In reality any evidence of higher inflationary pressures is unlikely to be visible in inflation data from February given that these sorts of pressure operate with a lag. The next two months are likely to be a much better gauge of where we are inflation wise as we head towards the longer days of the summer.  

US markets look set to pick up where they left off overnight with a solidly positive open ahead of the latest set of weekly jobless claims numbers, as US 10-year yields drop below 1.5% for the first time in a week.

Concerns about an upward surge in inflation appears to have receded in the short term, taking some of the heat out of the recent move higher in yields. Today’s latest jobless claims numbers are expected to come in at 725k, down slightly from 745k.

Bumble’s first set of earnings numbers as a listed company showed that Q4 revenues rose by 31% to $165.6m, however losses came in at $26.1m on account of higher costs, with the IPO also adding to this. In terms of the outlook the company said it expects full year revenues for 2021 to come in between $716m and $726m, with expectations of higher demand as the economy returns to normal post pandemic, with the shares rising over 4% in post market trading.  

AMC Entertainment’s full year losses were every bit as bad as feared, coming in at $4.6bn, however its Q4 numbers did offer a ray of hope of some semblance of normal as revenues came in at $162.5m, well below the $1.45bn a year ago, but higher than they were in the two previous quarters. In all honesty that wouldn’t have been difficult given that in Q2 we saw $18.9m and Q3 saw $119.5m in revenues, but investors appear to be adopting the glass half full approach. The company has closed a lot of its underperforming real estate, however the gains in afterhours trading are still hard to square with the fact that while things are likely to improve, the fact remains the cinema chain was losing money even before the pandemic.  

Roblox got off to a decent start on its first day of trading, post direct listing with the US digital gaming company reaching a $45bn valuation as the shares surged on the first day of trading. 

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