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European stocks pause, as UK jobless claims hit record high

After a really strong session yesterday which saw US markets post their best gains since the beginning of April, stock markets in Europe initially looked set to build on those gains further, however we've since come back from the highs of the day.

Asia markets enjoyed a similarly strong session, on rising optimism that we could well see a viable vaccine come from the various trials that are currently taking place across the world, while countries take baby steps out of various states of lockdown.

With Fed chair Jerome Powell equally insistent that the Federal Reserve has the capacity to go even further in terms of supporting the US economy in comments made at the weekend, investors will be looking to the Fed chairs testimony to US lawmakers this afternoon to reinforce that confidence.  

Investors are also taking comfort from a new EU recovery fund worth €500bn which was announced by German chancellor Angela Merkel and French President Emmanuel Macron yesterday, and would envisage the EU Commission raising money on bond markets, which would then come out of the EU budget in the form of grants to be paid to the most badly virus affected European economies.

This remains far from the done deal that a lot of people think it is, as it will still need to be funded and agreed by all 27 EU member states, which as we know can be akin to herding cats, but it is at least an acknowledgement that there is a requirement for some action, that doesn’t add to the overall debt load of countries like Spain and Italy. The fund does come with conditions in respect of structural reform, and that could be problematic given that Italy in particular has shown itself completely unable to address the weaknesses in its economy, which have created this problem.   

This still remains well short of so called a mutual bond or shared burden, and is intended very much as a one-off which means that it may not go anywhere near far enough when other countries are throwing much higher sums at the problem.

In any case European markets have started the day very much on the front foot, as they look to build on yesterday’s gains, however the real test of this week’s stock market strength is still to come as we close in on the highs we saw in April. To build confidence that this rally has legs, and is not another trap for the bulls, we need to see the FTSE100 break above the 30th April highs of 6,151, and the German DAX peak of 11,235. Thus far we still remain short of those key levels.

This morning’s UK data was every bit as bad as it was expected to be as monthly jobless claims for April rose above estimates to a record 856.5k, up from 12.2k in March, and would have been much higher, but for the governments furlough scheme which has seen over 7m people temporarily go on the payroll of the state.

The fact that we know this shows that the jobless claims numbers as they currently are have the potential to go much higher in the coming months. On a quarterly basis output hour also collapsed, declining 2.9% in Q1, compared to the year before, no doubt as a result of the slowdown in March which eventually resulted in the economy being locked down in the last week of the quarter. It also means that Q2 is likely to see an even bigger fall.

At around the same time the UK government published its latest tariff regime for the post Brexit economy with a plan for around £30bn worth of tariff cuts. This includes keeping tariffs on agricultural products including beef, and maintaining a 10% tariff on cars.

The pound has held up fairly well in spite of the data, and further central bank commentary, this time from MPC member Silvia Tenreyro who was quoted as saying that negative rates had had positive effects in the euro area.  This seems an extraordinary statement given the damage the policy has caused to the European banking sector over the past few years. Whatever it is they are putting in the coffee over at Threadneedle Street, it must be really strong.

European car sales also saw another horror show in April with a record decline of 76.3%, an even bigger decline from the 55.3% in March.

In company news Imperial Brands announced their latest half year numbers for 2020, which while in line with expectations, has seen management decide to reduce the dividend, sending the shares lower in early trade

Operating profits showed a decline of 19.6% to £925m, largely as a result of costs associated with the sale of the Premium Cigar Division, a goodwill impairment, and higher restructuring costs.

Total revenues were slightly higher, as the company slightly increased its market share. The company said that Covid-19 has had minimal impact thus far on the overall business, but this was expected to change in the second half of the year, and as such management have decided to reduce the dividend, in order to accelerate debt reduction and strengthen the balance sheet.  

Chilean copper miner Antofagasta announced that it was revising its recommendation over its final dividend, as a result of rising Covid-19 cases in Chile, and the quarantine imposed by the Chilean government over much of Santiago. The decision has been taken to reduce its final dividend of 7.1p a share.

Airline and travel stocks have picked up where they left off yesterday with more strong gains this morning with British Airways owner IAG having another good session, it is up 20% this week already, followed by Easyjet which is also up over 20% since last Thursday, as discussions continue over so-called air corridors. 

With equity markets in Asia and Europe getting caught up in all this exuberance US markets are still looking at a positive open, however they could well find their progress tempered by similar upside barriers, as they look to retest their previous peaks as well as the 200-day MA, which has tempered previous rebounds.

Moderna’s vaccine may well be yielding positive results, amongst many others, but it still remains well short of a viable large-scale solution, and as such any setbacks on the vaccine front could see recent stock market gains start to unravel.

On the earnings front we’ll also get to hear from Walmart, one of the few US retailers able to take on Amazon. Walmart saw its shares hit record highs in April, before slipping back a touch, though it is still close to the levels it closed at towards the end of 2019. It has proved to be remarkably resilient to the disruption caused by the spread of coronavirus, with its Mexico unit seeing a 15.4% rise in its first quarter profits, at the end of April. As one of the US’s biggest retailers it is likely to have been hit by the various shutdowns seen across its store real estate, and while its on-line operations are on a par with Amazon, its profit margins are much thinner. Furthermore, staff costs are likely to be higher due to sickness, as we’ve seen from similar retailers that have performed well due to their positions as grocery retailers, as well as general retailers. Profits are expected to come in at $1.158c a share.   

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