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Weaker start for Europe, as markets look to Trump/Biden face-off

Weaker start for Europe, as markets look to Trump/Biden face-off

European markets have opened slightly lower this morning despite a strong US session, and a decent start to the week, in which we saw banks and technology stocks lead the charge higher, while the Russell 2000 also joined in the exuberance, posting its best one-day gain since June.

The optimism in the US appears to be as a result of some movement by the Democrats on a possible stimulus proposal which has seen them reduce their headline number to $2.2trn, if the White House meets them part way on other measures. This still seems a high bar, but as with all things in Washington, events could surprise.

While this is progress of sorts, we still remain some way short of a possible deal, and investors will also have to deal with the noise of tonight’s presidential debate in Ohio between President Trump and Democrat challenger Joe Biden, where the insults are likely to flow thick and fast. I think it’s probably safe to say the contest will be somewhat prickly, and even a half decent performance from Joe Biden could well trigger some anxiety in US equity markets, given that the Democrats have a much more interventionist stance towards business and the economy, with policies geared towards stronger policy action on competition policy, antitrust enforcement, privacy policy and cybersecurity. This may help explain the more cautious tone for markets in Europe today, particularly as we are coming to the end of the month, as well as the quarter.

Today’s biggest losers appear to be some of yesterday’s biggest gainers, with HSBC slipping back after its best one-day gains since 2009. Airlines are under pressure again with IAG lower as the number of global coronavirus deaths rises above 1m, while Rolls-Royce has also continued to come under pressure, as it slips back towards last week’s lows.  

On the trading update front Greggs latest Q3 numbers were a little disappointing, with the company announcing that it will have to start looking at cutting the number of jobs and reducing the number of hours worked by its employees in the face of the recent tightening of restrictions. The company was unable to participate in the chancellor’s 'Eat Out to Help Out' scheme due to their seated areas remaining closed, while the warm weather in August also hurt takeaway demand. Like-for-like sales for Q3 were running at about 71.2% of the level seen in 2019, with management citing an uncertain outlook, though activity levels had improved to 76.1% in September. In July, the company revealed a 45% fall in first-half revenue to £300.6m, sending it into a pre-tax loss of £65.2m, from a profit of £36.7m in the previous year. Not surprisingly, no interim dividend was declared as management took steps to shore up the balance sheet.

This morning we’ve seen the latest FY numbers from Ferguson, which show that the company has managed to ride out the worst of the coronavirus pandemic with full year revenues coming in 1.4% above estimates, but still 0.9% lower from the previous year. Profits were down 4.8% at $1.26bn, with the company reinstating the dividend, which has helped send the shares up sharply in early trade to a new record high. Ongoing revenue was up 2% at $19.94bn with the US being the main driver of that. When the company reported its H1 numbers in May, the UK operation was the main drag and has continued to be so, with a 15.4% decline in revenues. For some time now management have been looking to spin off the underperforming UK operation, under the old Wolseley name, due to it being a drag on profitability, however the pandemic appears to have put paid to that idea in the short term.

Discount retailer B&M European is also doing well in early trade after reporting a strong first half of the year. A rise in H1 group revenue of 25.3%, has seen the shares rise to a new record high, while the company also updated its guidance for the rest of the year, with UK stores seeing a 19.1% rise in like for like growth over Q2.

The pound has continued to look buoyant after yesterday’s comments from Bank of England deputy governor Dave Ramsden that the lower bound for rates was at the current 0.1%. This would appear to suggest that the path to a negative rate for the Bank of England may well not be as clear cut as first appeared. EU/UK trade talks are also set to continue this week, with the ebb and flow of optimism over pessimism likely to make for a choppy week.

We also have the latest lending data for August, as consumers continue the tentative reopening of their wallets, after having repaid £16bn in consumer credit in the first three months of lockdown, more than the entire sum borrowed in 2019. Expectations for consumer credit for August are for a rise of £1.5bn on top of the £1.2bn in July.   

US markets look set to open slightly lower after their impressive gains yesterday, with the main focus likely to be on tonight’s presidential debate as well as today’s direct listing of Palantir Technologies. Palantir is a US software company which specialises in big data analytics, with the US government being one of its biggest clients with $1.5bn worth of contracts, particularly in respect of defence, and counter terrorism through its service Palantir Gotham. The company has yet to make a profit, like most recent IPOs or direct listings, so it’s not unique in that, but that hasn’t stopped markets assigning a valuation of $22bn to the company.

Last year it's reported to have lost $579.6m, and it hasn’t made a profit since it was founded in 2003, while on the revenue front the picture is equally as worrying, with annual revenues last year at $740m, and operating expenses which appear to be on the high side, at over $500m. These expenses aren’t expected to reduce anytime soon and in the risk factors summary section the company says it may well not become profitable in the future. Despite these concerns there appears to be plenty of interest, as investors bet on the prospects of future revenue growth at a time when data is the new currency of choice. The voting structure of the business also makes being a shareholder somewhat problematic in that all the power lies with the company’s co-founders. If that’s not a red flag I don’t know what is.

Ride-sharing app Uber, fresh from winning its battle to operate in London, is reported to be looking to buy into Free Now, the joint venture between BMW and Daimler as it looks to build its presence in the European market.   

We also have a raft of Fed officials speaking later today, however their messaging isn’t likely to be that much different to recent comments from Fed chair Jay Powell. We have the likes of Williams, Harker, Clarida, and Quarles all likely to comment on financial stability and monetary policy.

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