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Recovery optimism helping to offset third-wave concerns

trader watching the markets move higher

European markets are set to finish a rather choppy week very much on the front foot, despite concerns about extended lockdowns in Europe, tighter restrictions between France and Germany, and the added winkle of the blockage in the Suez Canal.

Investors appear to be adopting a glass half full mentality when it comes to sentiment as we look ahead to the end of the month, and the quarter next week.

Markets appear to be working on the assumption that the container ship is likely to get pulled out of the canal wall on the high tide at the beginning of next week, and that despite concerns of a third wave in Europe, the global recovery will take up any early slack.

If next week’s ship flotation attempt fails, sentiment could well change, but for now the assumption is that we could see the Suez Canal unblocked in the next week or so.

Today’s UK retail sales numbers for February bode well for a big rebound in consumer demand as we head into Q2, while a better-than-expected German IFO number also points to rising optimism, about a global economic recovery even as Europe remains stuck in the mud spinning its reopening wheels. 

Energy and basic resource stocks are among the primary gainers with Anglo American, Rio Tinto, Antofagasta and Glencore leading the way.

Smith’s Group posted first half numbers today, which were, by and large, better than expected, while also raising the dividend, sending the shares to the top of the FTSE 100. The company’s oil business has been hit by the pandemic, its John Crane operation undergoing a restructuring to the tune of £70m.. Its engineering division has also been hit by the volatility in the oil price, with the recent recovery, helping to push up operating profits to £166m, ahead of market expectations. The performance of Smiths Medical, which the company still intends to separate from the rest of the business, and which is listed under discontinued operations, has stood out given that it was at the forefront of the forefront of the coronavirus outbreak. The company is a specialist in the production of medical ventilators, as the NHS scrambled to boost the number of breathing aids it needed to help save lives. On the flip side the decision by NHS doctors to hold off on elective procedures has hit revenues in the likes of its other specialties.

Airline and travel stocks are also doing well with easyJet, IAG and Whitbread also up on the day.

Building on the reopening theme, Carnival shares jumped sharply on the open after this morning’s announcement that they will be offering “Summer at Sea” luxury voyages around the UK on board the Queen Elizabeth. They have since slipped back off their intraday highs, however this is the first sign that the sector may be able to generate some sort of revenue during the summer months, and is also good news for the Southampton region. These cruises will take the form of round trips out of Southampton, lasting between 3 and 12 nights, and will include the Jurassic Coast, Cornwall and Lands End as well as the Scottish Islands. They will only be available to UK resident vaccinated guests only.

Aviva has been on a bit of a disposal spree in the last eight months, selling its Singapore business for £1.6bn to Singlife and a consortium of other buyers in September, as well as the sale of its stake in Italian business, Aviva Vita in November for €400m, and the Hong Kong and Vietnam businesses in December. At the beginning of the month, it announced another disposal, selling Aviva Italy to Allianz for €873m, while this morning the company raised another €2.5bn by offloading Aviva Poland to the same buyer. In total this means the company has generated cash proceeds to the tune of £7.5bn. This disposal spree is part of new CEO Amanda Blanc’s desire to focus on the company’s core markets of UK, Ireland and Canada. This morning’s deal announcement would appear to draw a line under the recent spate of asset sales, and shareholders will now be looking for the business to use the cash as part of the new strategic focus in cementing its position in its core markets.

In Europe we appear to be finally seeing progress on consolidation within the banking sector after Spain’s Caixa Bank and Bankia finally completed their merger deal, which is set to create the country’s largest bank with combined assets of €664bn. Caixa has paid a 20% premium to absorb Bankia which has had a rather chequered history.

The Spanish government appears to be keen to hand over control of Bankia, in which it holds a 62% stake, having had to step in in 2012, with a €22bn bailout, after a previous consolidation ended in the wipe out of thousands of Bankia’s small shareholders. Bankia was originally formed in 2010 as a result of the union of seven Spanish regional Cajas, which were struggling under a huge amount of non-performing loans, a rather unwise decision as it merely amplified seven small problems into one very large one.

It didn’t take long for that decision to unravel in spectacular fashion as a series of bad decisions saw the bank floated on the Madrid Stock Exchange in 2011 as the CEO Rodrigo Rato encouraged a host of Spanish small investors to back the newly created bank. It was obvious to a lot of people at the time that the so-called rescue was a disaster in the making, and eventually resulted in Spanish prime minister at the time, Mariano Rajoy, going cap in hand to the EU for a banking bailout.

The hope is that today’s completed merger of Bankia and Caixa Bank will finally draw a line under a sorry Spanish banking saga that caused a lot of hardship to ordinary people. The Spanish government's stake in the new bank will eventually be reduced over time.

In more good news for European banks, Spanish bank Santander this morning indicated that it was looking at a strong start to the year, with Q1 revenue in line with its previous quarter. The bank reiterated its guidance that it intended to return about 50% of its underlying profits to shareholders, once regulators allow.

US

US markets opened higher today taking their cues from the positive follow-throughs from the Asia and European sessions, and on course to finish a rather choppy week in positive territory.

The latest personal spending and income numbers for February came in broadly in line with expectations with personal income slipping 7.1% and personal spending falling 1%, as the January stimulus boost faded.

US banks are seeing some decent gains after the US Federal Reserve signalled that lenders that pass the next round of stress tests will be free to resume dividend increases at the end of June. This is yet another sign that the Federal Reserve appears to be becoming more confident about the post pandemic future with JP Morgan, Citigroup and Bank of America all higher on the day.

GameStop shares have continued to build on its big gains of yesterday with another strong start as it looks to wipe out its weekly losses. Having traded as low as $117 earlier this week the shares are now back above the levels, they closed last week, above $200 a share.  It still appears that the fundamentals matter less than the price action.

Baidu shares have continued to come under pressure in US trading over concerns that it, along with other dual listed Chinese shares, might be delisted from US exchanges as relations between the US and China become more strained.     

FX

The optimistic outlook over an economic rebound is being reflected in the currency markets with commodity currencies leading the way higher, led by the Australian and New Zealand dollar.

The pound has also developed a positive relationship with rising stock markets, pushing up close to one-year highs against the euro, as sentiment around the euro continues to bleed out, and politicians across Europe continue to bicker amongst themselves, lashing out about vaccine shortages.

The euro’s prospects look a little less bright in a week that has seen it hit a four-month low against the US dollar, though on the plus side German IFO business confidence did hit a 21-month high in March, at 96.6. Some of that reading may well have been taken before this week’s events that saw German Chancellor Angela Merkel conduct a U-turn on an Easter lockdown, and extend lockdown curbs to 18 April. 

Commodities

Oil prices have had a very volatile week, whipped every which way on concerns about the Suez Canal being blocked for an extended period of time, while at the same time finding the upside capped by concerns that all over the EU extended lockdowns will push any pickup in demand into Q3 for that region. This goes some of the way to explain why Brent prices may well finish the week slightly lower, from a week ago.


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