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Slow start for Europe ahead of UK spending review

CMC Markets

Another record day for US stocks and a fresh 29 year high for the Nikkei 225 has seen markets here in Europe open modestly higher this morning as momentum begins to show signs of slowing ahead of tomorrow’s US Thanksgiving holiday.

Over the past week or so the outlook for stocks, as well as the global economy, has brightened considerably as the prospect of a number of vaccines, along with what looks like a relatively seamless transition of power in the US has prompted a bout of optimism that a pathway to recovery is opening up. Despite this brighter outlook, the path there continues to look long and arduous.

French president, Emmanuel Macron, announced a modest relaxation to France’s lockdown, however there was huge disappointment for bars and restaurants who were told they would have to remain closed until 20 January. In the UK, the government here also outlined a three-tier system of rules in the lead-up to Christmas, which in turn received some criticism from various parts of the hospitality sector.

The hope is that chancellor of the exchequer Rishi Sunak’s spending review later this afternoon will offer this beleaguered sector some semblance of hope, and get them over the winter hump into March, and the prospect of a recovery. The chancellor is already on track to spend over £400bn this fiscal year alone in tackling the pandemic. Today he is expected to outline further measures to support the economy, spending £4.3bn on supporting the newly unemployed back to work. The primary focus is likely to be on infrastructure, particularly in the hardest hit areas with a focus on green initiatives like battery factories and wind farms.

There has been talk of a pay freeze for public sector workers outside the care sector and emergency services, which has received some pushback, despite the widespread job losses in the private sector. While there might be some logic to this from a public finances point of view, and the fact that public sector workers have by and large been insulated from the worst effects of the pandemic, it also seems the wrong time to pick this sort of fight. The sums saved in the short term by a pay freeze are not that great in the wider scheme of things, and are unlikely to foster a climate of goodwill either, at a time when the country needs it the most.  

The UK banks sector has long been dominated by the big four, with rather mixed fortunes for newcomers in recent years. One of these newcomers, Virgin Money, has had a rough ride of things in recent years, however Virgin Money's share price has more than doubled since the lows in September. In May, the company suffered a 60% drop in profits in its first half, while also stating that around 12,000 of its credit card customers were seriously in arrears by three months or more. The bank set aside £322m in respect of non-performing loans with £164m of that Covid-19 related, while giving payment holidays to 60,000 mortgage holders and 32,000 credit card customers.

Today’s full-year numbers have seen this increase to 67,000 mortgage holders, along with 58,000 personal payment holidays. The bank booked further provisions of £501m in non-performing loans while booking a full-year statutory loss after tax of £141m, which was an improvement on last year’s £207m loss, but nonetheless still points to a challenging economic environment. CEO David Duffy expressed optimism about the future as far as the vaccine news was concerned, however he said that the economic benefits were unlikely to be felt by the bank in the near term. This rather downbeat tone appears to have knocked some of the gloss off the recent rebound in Virgin Money's share price, with the shares lower in early trade. Across the wider sector, talk of a lifting of the ban on paying dividends by the European Central Bank next year is giving the larger banks a bit of a boost in early trade, with HSBC leading the way, however these early gains seem to be melting away.   

Babcock International's latest H1 update has seen the company post an operating profit of £143.1m, well down from the same period last year of £250.6m. Revenues were slightly lower at £2.1bn, however the order book was higher at £17.2bn. New CEO David Lockwood said that management would be undertaking a strategic review of priorities and reporting back in May, on the strengths and weaknesses of the various businesses. In respect of its civil aviation business that was disrupted significantly, while the company declined to offer any guidance for the second half due to concerns about future government contracts and the uncertainty around the pandemic.      

Melrose Industries, the turnaround specialist who controversially took over GKN in 2018, reported its latest Q3 numbers this morning, saying that business was operating at the top end of expectations for this year. In September Melrose announced a range of job cuts in the aerospace business due to the slowdown in civil aviation, as well as a H1 loss of £131m as revenues fell to £4.1bn from £5.6bn. At the time the company said it expected sales to fall by 30% in 2020, and today’s latest update has seen that figure increase to a fall of 37%, with little sign of a recovery. Other areas of the business in automotive and air management were both trading slightly ahead of expectations.

US markets look set to open modestly firmer after yesterday’s record-breaking session, with most attention set to be on deluge of data releases, including weekly jobless claims, as well as personal spending. We also have the final Q3 GDP revision which is expected to be confirmed at 33.1%. Weekly jobless claims are set to fall modestly to 730,000 after last week’s surprise rise to 742,000, which raised concerns that unemployment levels could well start to turn back up again. Continuing claims are still expected to fall further given the longer lag, down to 6m, from 6.37m. Another important number is the latest personal spending figures for October as an indicator of how confident US consumers were in the lead-up to the US election. This is expected to slow sharply from the 1.4% seen in September, to 0.4%, which would be the lowest since the April slide of -13.6%, while personal income is expected to slip by 0.1%

The latest FOMC minutes are unlikely to offer much of a window into the Federal Reserve’s thinking when it comes to any next steps, as far as monetary policy is concerned. Coming as the meeting did, the day after the US election there would have been precious little visibility as to who would be in the White House in January, let alone what any future fiscal stimulus plan would look like. Unsurprisingly the central bank chose to keep a low profile, with a unanimous decision, unlike September, merely content to re-stipulate the need for further fiscal measures from US policymakers. One thing the Fed did do, prior to the election, was lower the minimum loan size of its 'Main Street Lending Program' to $100,000, from $250,000 in order to catch more of the smaller businesses which ran the risk of falling through the cracks however this funding will now end, after treasury secretary, Steve Mnuchin, withdrew funding from the programme. Today’s minutes could also give us further insight into what other monetary policy discussions took place, and what else could be coming down the pipe in the weeks and months ahead.

HP shares are also likely to be in focus after the company beat expectations for Q4 revenues and profits, while also raising its guidance for Q1. Revenues came in at $15.26bn, while profits came in at $0.62c a share, above expectations of $0.52c. Laptop computers were big sellers, as revenues rose by 18%., while sales of consumer screens and accessories rose by 59%. HP also raised Q1 guidance to $0.64c a share from $0.57c a share. 


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