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Stocks rally, US stimulus in focus, dollar extends gains

Stocks rally, US stimulus in focus, dollar extends gains

European stock markets are set to close firmly higher even though there aren’t many reasons to be cheery. 


US politicians still haven’t come to a compromise in relation to the $1 trillion stimulus package. Republicans and Democrats are still squabbling over the finer details of the scheme, but traders are clearly hopeful that some sort of agreement will be achieved in the end. US lawmakers from the political divide know all too well that a cash injection is required but for the time being they are not prepared to find a happy medium. The health crisis is still bubbling away in the background. South Africa and Mexico have seen a jump in the number of coronavirus cases. There is talk that Germany will introduce new measures for fear of a second wave. The Australian state of Victoria has declared a state of emergency, and there are fears that other parts of the world will re-introduce tough restrictions too. US-China relations are under strain again as there is talk that President Trump will take a tough stance on some tech companies that are backed by the Chinese government.         

HSBC shares have fallen to their lowest level since 2009 as its second quarter bad debt provision was $3.8 billion, topping the $2.7 billion forecast that equity analysts were expecting. Quarterly pre-tax profit tumbled by 82% to $1.16 billion, and that greatly undershot the $2.5 billion consensus estimate. The bank predicts that losses on loans this year could be $8-$13 billion. Last week, Barclays, Lloyds and NatWest Group posted larger-than-expected provisions for bad debts. In the first six months of the year, HSBC saw revenue fall by 9% to $26.7 billion and pre-tax profit dropped by 65% to $4.3 billion. The pressure on bond yields caused net interest margin, the margin on lending, to slip to 1.33% from 1.54% in the first quarter. The bank mapped out cost cutting plans before the health emergency, and now it intends to speed up those plans.     

At the end of last week International Consolidated Airlines Group announced that it plans to raise up to €2.75 billion from an equity release. The airline will use the funds to beef up its balance sheet on account of the challenging environment. Today, UBS, Berenberg, Barclays and HSBC cut their price target for the company. The cut from Barclays was the largest as the bank’s price target is now 188p, down from 335p.

Hammerson shares are in the red as it was reported the company is considering raising funds from a rights issue. In addition to that, the commercial property specialist is in talks about potentially selling its 50% stake in Via Outlets to its own joint venture partner APG. The firm owns well-known shopping outlets such as Brent Cross Shopping Centre in North London and the Bullring in Birmingham. The sector has been suffering for several years as footfall at retail parks has been in decline due to the rise of e-commerce. The lockdown accelerated the move to online shopping and in turn it has put additional pressure on the sector. Recently, Intu Properties went into administration, so it is not exactly surprising that Hammerson is looking to restructure their business.  

Just Eat shares are higher today on the back of price target upgrades from Jefferies and Deutsche Bank. Jefferies upped their target for to 10,800p from 9,800p.

XP Power shares hit an all-time high today on the back of strong first half results. The company posted a 45% increase in orders to £145.8 million. Own-design XP product revenues increased by 10% on an annual basis to £84.9 million – a record level. Gross margin ticked up fractionally to 44.9%. The company reinstated its dividend. The second quarter pay-out is 18p. A minority of companies are returning to paying dividends so XP Power stands out for the right reason.  

Domestic transport stocks like Go-Ahead Group and National Express are in the red on the back of localised lockdowns in the UK and worries about more being in the pipeline too.           


The NASDAQ 100 has set a new record high as tech stocks remain in demand. The index is up over 0.9%, while the S&P 500 is up 0.5%. In the past few months, it has been very common for the NASDAQ 100 to outperform the broader index. Political wrangling between Democrats and Republicans will remain in focus as traders are banking on a deal being brokered. The US economy continues to recover as the ISM manufacturing report for July was 54.2, an improvement on the 52.6 posted in June. 

Microsoft is in talks to purchase TikTok’s US division, the video-sharing group that is owned by China’s ByteDance. The social media company is caught up in the latest round of tensions between the Trump administration and the Chinese government, as the Donald said he would ban the app in the US. According to Mike Pompeo, the US Secretary of State, President Trump will crack down on a number of software firms that are controlled by the Chinese government. Should Microsoft acquire TikTok, Mr Trump might change his tune if the company is taken over by a US group.

Marathon Petroleum has agreed to sell its Speedway petrol station chain for $21 billion to Seven & I Holdings – the group that owns 7-Eleven convenience stores. The move will help Seven & I gain greater exposure to North America. Marathon has been under pressure from an activist investor, Elliott Management, to spin-off assets, and the Speedway deal is a part of the appeasement.  


The US dollar has continued its rebound. On Friday morning, the greenback fell to its lowest level in over two years, but it staged a recovery and it closed near its high of the day. The bullish momentum has continued into this session and in turn it has hurt EUR/USD and GBP/USD. Major European nations announced their latest manufacturing reports today. Spain, Italy, France, Germany and the UK all saw growth in their respective manufacturing industries between June and July. The reports are encouraging but the bullish move in the dollar has overridden the readings.   

The rally in the greenback has hit AUD/USD hard. On Friday, the currency pair hit its highest level since February 2019. The Australian dollar is in the red even though copper has rallied on the back of the well-received China manufacturing data was posted overnight.   


Gold has lost some of its shine because of the rebound in the US dollar. The inverse relationship between the two markets has weighed on gold today. Earlier in the session, the metal printed a fresh record high but the strength of the dollar prompted some profit taking. The risk-on appetite of traders is also a factor in gold’s slide as some dealers are diverting funds into equities.

WTI and Brent crude are higher this afternoon on the back of the broader positive sentiment. In the past 24 hours, we have seen manufacturing reports from China, the eurozone, the UK, and the US, and they all showed growth on the month. The announcements point to a continued recovery in the world economy.          


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