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UK furlough scheme masks unemployment hit

While yesterday’s focus was on rising infection rates in the US, India, China and Japan, today it's on the announcement yesterday by the Federal Reserve that it would start buying the corporate bonds of an index of companies that meet its eligibility criteria, which helped push US markets back into the green, after spending most of the day in negative territory.

The purpose of yesterday’s actions appears to be designed to keep the borrowing costs of large corporations at an affordable level, however they were already at fairly low levels, even before yesterday’s intervention, which makes the timing of the announcement rather strange, particularly coming as it did on the back of the launch of its Main Street Lending program, which was announced earlier in the day.

Fed chair Jay Powell is due to testify later today to US policymakers on Capitol Hill, and perhaps someone will have the wherewithal to ask him why the central bank felt compelled to intervene in a market when yields were already at multiyear lows.

Stocks were given an additional boost by reports that another $1trn stimulus plan might be in the works, primarily designed to target infrastructure, specifically targeting roads, bridges as well as 5G.   

As a result of these two factors, markets in Asia have surged higher with the Japanese Nikkei 225 rising 5%, with the Bank of Japan holding fire on further policy measures for now, opting not to add to its May 21st announcement that saw it lunch a new lending program for small and medium sized businesses.

This positive read across has seen markets here in Europe climb sharply on the open, in stark contrast to yesterday’s losses as we look at another turnaround Tuesday for stock markets.

Airline and travel stocks are helping lead the gainers this morning with Carnival, IAG and EasyJet leading the gainers. EasyJet also announced the new delivery dates of the 24 aircraft from Airbus it deferred on April 9th in a move that could well take the sting out of its feud with founder Stelios Haji-Ioannou who is looking to block the transaction.

Having originally deferred the aircraft beyond December 2022, it has now been agreed that they will arrive between 2025 and 2027, with an increased price tag, adjusted for inflation of up to £95m.

On the earnings front Ashtead’s share price has seen an almost V-shaped rebound this year, falling sharply from record highs in February the share price collapsed in March falling over 60% before rebounding to recover all of its losses to be trading back close to breakeven for the year.

As a barometer of economic activity, this leasing and equipment rental company has a presence in both US and UK markets, and in March reported a pre-tax profit for Q3 of £225m, which was slightly down from the year before, though revenues were higher. At the end of April, the company issued a profits warning, with its US market expected to see a 15% decline in revenue as a result of the US shutdown.

Today’s full year numbers have confounded these pessimistic expectations, with pre-tax profits coming in at £1.06bn, slightly above lowered expectations, with revenues seeing an increase of 9%, while free cash flow rose to a record £792m.

More importantly for income investors the company proposed a final dividend of 33.5p, making 40.65p for the full year, and slightly higher than 2019’s 40p, sending the share sharply higher to a new record high.  

Fresh from yesterday’s news that it was pulling out of its plans to buy Cineplex for $2.8bn, and which may well yet be subject to a legal challenge, Cineworld has outlined its latest cinema re-opening plan for the UK and other regions, with the UK and US set to reopen on 10th July with management optimistic that its new slates of films, which include Top Gun Maverick, Mulan and Tenet will encourage customers back through the doors.  

UK fast food retailer and baker Greggs has also followed suit with its own plans to reopen the rest of its shops, with a large scale of re-opening of selected shops by the middle of June, with 800 shops open for takeaway only by the 18th June, completing the rest of the shop estate by early July. The company has also outlined plans to accelerate the development of delivery and click and collect services, starting with 19 shops this week and extending these services to further regions as soon as possible.

Engineering and oil field services provider Wood Group has also seen its shares rise, after securing two US solar power contracts worth $200m in the US state of Virginia, which are set for delivery in late 2021, and 2022.   

The latest UK unemployment data painted a rather mixed picture of the economy in April and May. The ILO unemployment rate remained steady at 3.9% for April, however the jobless claims data for the months of April and May painted a rather different picture and probably a more accurate one. April jobless claims were revised higher to just over 1m from 856k, while in May we saw a rise of 528k, pushing the claims rate up from an adjusted 6.3% to 7.8%. This is probably a better reflection of where we are unemployment wise, but with the furlough scheme skewing the numbers it could well take until the autumn before we get a more accurate picture of where we are in this regard.

Despite the rebound in equity markets, oil prices have been more subdued after yesterday’s losses, gaining only modestly with the latest IEA report saying that demand for oil won’t fully recover until at least 2022.

US markets look set to take their cues from today’s surge in Asia and European markets with a strong open ahead of the latest US retail sales numbers for May, where we could see a rebound After the surprise of a positive US non-farm payrolls report, there is some optimism that we could see consumer spending rebound in May, after three consecutive monthly declines. In April retail sales slid a record -16.4%, while some recent retail reports have seen online sales break records across the board. This appears to have raised expectations that we might see a positive rebound as lockdowns get eased across the US, with a rebound in the region of 6%.


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