EU Leaders Finally Agree on Pandemic Fiscal Package

US markets saw yet another record for the Nasdaq, while the S&P500 closed at its highest level since late February.

For the last few days all eyes have been on the political theatre going on in Brussels as EU leaders strive to cobble together a recovery fund that will somehow create a consensus between the various interests of 27 member states, and its leaders and deliver help to the likes of Spain, Italy and Greece, whose economies have been hit hardest by the coronavirus pandemic.

The latest compromise appears to be in the form of grants of €390bn, down from the initial €500bn, with low interest loans of €360bn, with the total sum of the pandemic recovery fund set to remain at €750bn. The leaders also agreed as a €1trn budget for the period of the next 7 years.

The Netherlands, led by PM Mark Rutte had insisted on certain changes being made, including a much lower grants figure, however it appears a compromise has been found in the form of a larger rebate. This would be bigger than the one they receive now under current EU budget rules.

These larger rebates would also apply to the other hold-outs including Austria, Denmark and Sweden. The Dutch PM also secured an emergency brake that would allow any country that was not satisfied with attempts by other countries to honour reform promises to call a halt to any monies being allocated to these countries. This brake, however would be time limited to approximately three months, however there were no details as to how any sanction would be applied if a breach were discovered.

The talks at the weekend which have spilled over into this week, have also touched upon the upcoming EU budget, which will need to be increased substantially in the coming years, not only to deal with the current pandemic, but for the EU to be able to meet its climate targets. With the UK leaving the bloc that will also mean much higher contributions from the remaining member nations, something that is proving to be somewhat of a sore spot.

While markets have reacted positively to the prospect that some form of deal will be agreed, with the German DAX leading the way in Europe, it will still need to be approved by all other EU member parliaments over the coming weeks.

This will mean any funds are unlikely to be available until the beginning of next year at the earliest, and even if all the funds are made available, the money will be nowhere near enough to compensate for the billions of euros of lost tax revenue, that has pushed southern European countries even deeper into their fiscal black holes.

While markets have been buoyed by the prospect that this deal has been agreed, the money in question is but a fraction of what is required to help the likes of Italy, Spain and Greece get out of their current difficulties. This deal is likely to be yet another sticking plaster on a dysfunctional monetary union, as it lurches from one crisis to another. On a more positive note what this agreement does do is establish the principal of some form of joint debt issuance, and it is this which can be construed as a baby step towards wider fiscal integration.

As a result today’s European session is expected to see a higher open, with the DAX set to open at its highest level in almost 5 months. .

Later this morning we’ll get another look under the hood of the UK economy and the amount of extra borrowing that the UK government undertook in June to keep the economic motor of the UK ticking over in response to the current coronavirus crisis.

The previous two months saw the UK government has borrow over £100bn, an exceptional post war intervention to support an economic shock that will reverberate for years to come. In April we saw £47.8bn, added to the national debt, followed by another £54.5bn in May as the UK treasury paid the wages of over 8m private sector employees.

Since then we’ve since discovered that the UK government shelled out over £15bn in respect of PPE to deal with the crisis, more money than it spends on the Home Office, Treasury and Foreign Office combined, while the number of jobs getting government support has risen to over 10m. Expectations are for another £40bn to be added to the national debt.

At some point the UK government will have to look at how they intend to pay for all of this, but for now with 2- and 5-year yields in negative territory, and 10 year yields below 0.2%, it isn’t something they need to be too concerned about right now.

We’re expecting to see another big number today for the June numbers, as the costs of the furlough scheme continue to rack up, and UK borrowing moves above 100% of GDP for the first time since World War Two.

The US dollar slipped to a one-month low yesterday as optimism over a deal in Brussels pushed the euro close to its best levels this year. The pound also enjoyed some decent gains ahead of the release of more economic data this week which is likely to lay bare the fairly lacklustre nature of the economic rebound as lockdown restrictions continue to be eased.

Bank of England chief economist Andrew Haldane maintained his recent view that the UK economic rebound was likely to be v-shaped in nature despite the announcement of further job cuts, this time from high street retailer Marks and Spencer yesterday. His view does appear to be a minority one on the MPC, with the declines in the pound seen last week driven by market expectations of a further cut in interest rates by the Bank of England at its September meeting.

EURUSD – broke above 1.1370 last week and has continued to edge higher with the highs this year at 1.1495 the next key resistance, after breaking above the 200-week MA, for the first time since June last year. A break above the 1.1500 level opens up a potential move towards 1.1570 and the 2019 highs. Support comes in at the 1.1370 level.

GBPUSD – another solid day yesterday, the pound has support at the 1.2500 area, with resistance currently at the 1.2680 area as well as the 200-day MA at 1. 2720. The larger resistance remains at the 1.2770 area as well as the June highs at 1.2815.

EURGBP – the June peaks at 0.9175/80 remain a key resistance zone, and the failure thus far to move beyond them does keep the bias slightly negative for a return to the 50-day MA at 0.8980, as well as the July lows at 0.8920.

USDJPY – currently has fairly solid support down near the 106.50 area, and resistance up near 107.50, as well as cloud resistance at the 108.00 level.

FTSE100 is expected to open 37 points higher at 6,298

DAX is expected to open 103 points higher at 13,150

CAC40 is expected to open 32 points higher at 5,125

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Netflix Share Price: Netflix Posts Record Revenue, but Slips on Guidance Caution

Reports out of Europe that Netflix and YouTube were reducing streaming quality due to a surge in use were the first indications that the lockdowns were having the unintended side effect of potentially breaking the internet.

These reports also helped prompt investors to re-evaluate expectations around streaming company earnings, which had markets attempting to project how much Netflix, as well as their sector peers would beat their projections for Q1 subscriber growth.

In Netflix’s case they blew through their estimates, adding 15.8m new subscribers, well above the 7m estimate.

The biggest concern for Q2 as lockdown measures were eased is whether Netflix would be able to add to these numbers, or whether we would see a Q2 drop off, on account of a pull forward effect.

In Q1 revenues came in at a record $5.77bn, while market reaction to last night’s Q2 numbers would appear to suggest that the big run higher may well have run its course, despite the company adding over 10m new subscribers to its consumer base, well above expectations of 7m.

The company also saw revenues rise to $6.15bn, again beating expectations as new users feasted on a raft of new content which included Michael Jordan’s documentary “The Last Dance”, however profits came in short of expectations of $1.81c a share at $1.59c, largely due to a one-off charge.

Despite the better than expected revenue and subscriber numbers, caution over Q3 appears to have prompted some caution as the shares slipped sharply in post market trading after the company warned that new subscribers in the upcoming quarter may well come up short due to pull forward effects starting to wane as lockdown measures continue to get eased further, as we head towards the end of the year.

Management estimates for new subscribers in Q3 were set very low at 2.5m new subscribers, well below expectations of 5.3m, while revenue estimates were set at $6.33bn, also below analyst estimates.

Netflix went on to say that it doesn’t expect the current production shutdown to impact its 2020 content slate in a significant fashion, however some new content may well get pushed back towards the back end of 2021.

On an even more positive note the company was cash flow positive for Q2, and said it was optimistic that free cash flow would break even by year end, as it continues to narrow the gap between what it spends, and what it has coming through the door in revenue.

To sum up, last night’s negative reaction to Netflix’s guidance may be more to do with much of the good news being already priced in, as well as some investors setting their expectations a little too high.

There is certainly a case for arguing that Netflix isn’t worth the high valuation assigned to it by the markets, however one can’t argue the fact it is number one in its field by some distance, and continues to set the bar, as far as its peers are concerned. Netflix has still had a stellar year so far in terms of new subscribers so it’s completely understandable for management to reset expectations a touch, given that in the space of two quarters, the company has added nearly as many subscribers as they did in 2019, when they added 27.83m new customers

Netflix management appears to be being prudent in resetting market expectations, given recent gains in the share price, while they also announced that chief content officer Ted Sarandos was being elevated to co-CEO alongside Reed Hastings. Whether that is a wise move or not depends on your view about the wisdom of having two CEO’s.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

European Markets slip Ahead of the ECB

China Q2 GDP showed a 11.5% rebound, more than reversing the -10% fall in output seen in Q1, suggesting a nice v-shaped recovery in economic activity. The annualised number recovered to 3.2% from -6.8%.

If you had any doubts about the accuracy of China’s GDP numbers before this morning’s announcement, these figures only serve to reinforce that scepticism, as they appear to completely diverge from most of the data that has come out of China since April. In terms of the trade data, both imports and exports have been weak, while retail sales have also struggled.

Retail sales have declined in every month, by -7.5%, -2.8% and -1.8% in June, and with the Chinese consumer now making up around half of China’s economic output, I would suggest these numbers in no way reflect the real picture regarding China’s economy at this moment.

After yesterday’s strong session, markets here in Europe have taken their cues from the weakness in Asia markets and opened lower, as some of the vaccine optimism of yesterday starts to taper off.

On the results front Ladbrokes and Coral owner GVC Holdings have fallen back after reporting a decline in group net gaming revenue of 11%, in the first half of the year, largely down to the suspension of sporting events. The biggest falls in like for like revenues were in the UK and Europe with sharp drops of 86% and 90% in Q2, largely down to the wholesale closure of stores, though with the re-opening of shops in June these numbers are now starting to pick up again.

On the plus side, helping offset that weakness online gaming revenue rose, rose 19% in H1, with a 22% rise in Q2, with a strong performance in Australia. Management said they expect first half earnings to be within the range of £340m-£350m, while CEO Keith Alexander is set to retire and will be replaced by Shay Segev.

Energy provider SSE has said that coronavirus impacts on operating profits are in line with expectations, with profit expected to be in the range of £150m and £250m, though this could well change. The company has said it still expects to pay an interim dividend of 24.4p in November, in line with its 5-year plan to 2022/23.

In terms of renewable output, this came in below plan, but was still higher than the same period a year ago.

Purplebricks shares are higher after announcing the sale of its Canadian business for C$60.5m to Desjardins Group

Aviva announced that it has completed the sale of a 76% stake in Friends Provident to RL360 for £259m.

Royal Bank of Scotland also announced that from 22nd July 2020 it would henceforth be known as NatWest Group, subject to approval as it strives to draw a line under the toxicity of the RBS brand. This toxicity has dogged the bank since the 2008 bailout, along with the various scandals, around rate fixing, PPI and the GRG business, that have swirled around the bank since then. Investors will certainly be hoping so given the current share price performance, and hope that the change in name isn’t akin to putting lipstick on a pig.

Consumer credit ratings company Experian latest Q1 numbers have shown a large fall in revenue growth across all of its regions with the exception of North America, and which helped mitigate a lot of the weakness elsewhere.

The euro is slightly softer ahead of this afternoon’s ECB rate decision, which is expected to see no change in policy. At its last meeting the European Central Bank hiked its pandemic emergency purchase program by another €600bn to €1.35trn, with the time horizon pushed into the middle of June 2021. The ECB still needs to formally respond to the challenge of the German court irrespective of its insistence it is covered under the jurisdiction of the European Court.

Even where Germany is concerned optics are important, particularly if the ECB wants to be seen as a responsible arbiter of the economy across all of Europe, and the PEPP still remains vulnerable to a legal challenge, due to its difference with the previous program. The bank could also indicate if it has any plans to start buying the bonds of so called “fallen angels”. These are the bonds of companies that were investment grade, but have fallen into “junk” status as a result of the pandemic.

This morning’s UK unemployment numbers don’t tell us anything we don’t already know. The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 650k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

US markets look set to take their cues from the weakness seen here in European markets, with the main attention set to be on the latest June retail sales and weekly jobless claims numbers.

Retail sales are expected to rise 5% in June, some way below the 17.7% rebound seen in the May numbers which reversed a -14.7% fall in April. The strength expected in the June number seems optimistic when set aside the employment numbers, and the 13m people still not working since March. This suggests that this number could well be highly fluid and while a lot of US workers have managed to get their furlough payments, it doesn’t necessarily follow that they will spend it.

Weekly jobless claims are still expected to be above the 1m mark, with a slight reduction expected to 1.25m from 1.31m. Continuing claims are expected to fall further to 17.5m, however these could start to edge higher in the coming weeks as US states issue orders to reclose businesses in the wake of the recent surge in coronavirus cases.

Twitter shares lost ground lost night after the bell as it became apparent that the accounts of high profit individuals like Elon Musk, Warren Buffet and former US President Barack Obama were hacked by a bitcoin scammer. All verified accounts were shut down as a result as Twitter scrambled to get on top of the problem. It’s difficult not to overstate how embarrassing this is for Twitter given that the blue tick offers certainty that the user of the account is the person they claim to be. To have them hacked is hugely embarrassing, and undermines the integrity of the whole blue tick process.

American Airlines shares are also likely to be in focus after the company announced that 25,000 jobs could be at risk, when the furlough scheme runs its course. United Airlines has already said it could cut up to 36,000 people, up to 45% of its workforce.

Netflix Q2 earnings are also due after the bell with high expectations that the company can build on its blow out Q1 subscriber numbers of 15.8m. Q2 is expected to see 7m new subscribers added.

Bank of America is also expected to post its latest Q2 numbers with the main attention on how much extra provision for bad loans the bank will add to its Q1 numbers.

Dow Jones is expected to open 160 points lower at 26,710

S&P500 is expected to open 18 points lower at 3,208

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

UK Unemployment Numbers Disguise Fall in Employment Numbers

The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 660k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Dixons and Burberry Slide, as ASOS Outperforms, US Banks Remain in Focus

Investors also appeared to be unconcerned that the vaccine prompted some side effects in these early stage trials, however Asia markets were slightly more mixed with the Bank of Japan leaving rates unchanged.

The Nikkei225, and Korean markets pushed higher, however Chinese and Hong Kong markets slid back in the wake of President Trump signing the legislation revoking Hong Kong’s special trade status.

Markets here in Europe have taken their cues from the late rally in the US, opening higher as the tug of war between the bulls and the bears continues with respect to the next significant move.

The DAX is once again trading back close to the highs we saw in early June, while the FTSE100 is once again back above the 6,200 level, having been in a fairly broad 6,000/6,400 range for the past four weeks.

Luxury fashion retailer Burberry has had to contend with a number of challenges over the last 12 months, from the disruption of its Hong Kong business as well as the fallout from weaker Chinese demand and the spread of coronavirus. In May the company reported full-year numbers that saw operating profits slide 57% to £189m Revenues were hit hard by the costs of the disruptions in Hong Kong as well as the closure of various stores due to coronavirus pushing their impairments up to £245m.

This morning’s Q1 numbers are slightly better, with Q1 sales declining 45% while Q2 sales are expected to fall by between 15% and 20%. Retail revenue almost halved from £498m to £257m. This is a little disappointing but not altogether surprising, and given recent news of further restrictions in Hong Kong, could be viewed as being on the optimistic side, which probably helps explain why the shares are lower in early trade.

The improvement in Q1 is mainly down to stores in mainland China and Korea re-opening, however given the recent challenges posed by coronavirus, management appear to be looking towards making some savings in the way the business is run by introducing some changes, taking a restructuring charge of £45m.

Some of these changes, as well as some office space rationalisation could mean a reduction in headcount at its London Head Office, delivering annual savings of £55m.

Electrical retailer Dixons Carphone reported its latest full year numbers, which saw revenues come in around 1% above expectations, at £10.17bn, and down 3% on 2019 levels.

The company posted a loss after tax of £163m, largely down to the impact of Covid-19, which impacted the UK and Ireland mobile operations causing revenues to fall 20%. This was primarily down to the closure of stores at the end of March. All other areas of the business saw revenues increase over the period. While losses have reduced, and the outlook set to remain uncertain, the shares have slipped sharply in early trade, however all other areas of the business performed quite well, which suggests that investors might be overreacting to the losses in the mobile division, which Dixons is pulling away from in any case.

Fast fashion retailer ASOS latest update for the four months to the end of June, has seen the shares push back up towards this year’s high on expectations that profits are likely to be at the upper end of forecasts. Group sales saw an increase of 10% to just over £1bn for the period, with the customer base seeing a rise of 16%. Most of the sales growth came in its EU market, with a rise in sales of 22%. Gross margins were lower to the tune of 70bps, a trend that seems likely to continue given the current environment.

In a sign that fashion companies are becoming increasingly nervous about their brand reputation, ASOS also announced that they were axing contracts to suppliers who were found to be in breach health and safety, as well as workers’ rights regulations.

Homeware retailer Dunelm Group was one of the few success stories in UK retail last year, with the company posting strong operating profits and paying a special dividend. We are unlikely to see anything like that this year. The company closed all of its stores on the 24th March, furloughing employees under the governments job retention scheme, at a cost of £14.5m, and has slowly been reopening the business since late April, when it reopened its on line operations. At the time it said it had enough capital to withstand store closures of up to six months.

Fortunately, that hasn’t come to pass, and the company never had to draw on its £175m financing facilities. All of its stores have now re-opened, with one-way systems and strict social distancing guidelines in place. The in-store coffee shops are expected to reopen by the end of July, while the share price has managed to recover most of its losses for this year. This morning’s Q4 update, has seen total sales for the quarter decline by 28.6%. Online sales more than made up for that with a rise of 105.6% year on year, with the month of May seeing a 141% increase.

In terms of the full year numbers, sales were only down 3.9% on the prior year at £1.06bn, with profits before tax expected to be in the range of £105m to £110m, down from £125.9m the previous year, which given the disruption over the last few months is a pretty decent performance.

In terms of the future, costs are expected to increase to the region of £150k per week, however given how badly coronavirus has affected other retailers, Dunelm has ridden out the storm remarkably well.

The pound is holding up well after a weak session yesterday with the latest inflation numbers showing a modest uptick in June to 0.6%, with core prices rising 1.4%, from 1.2% in May.

Crude oil prices are a touch higher this morning ahead of an online meeting of OPEC+ monitoring committee which could decide whether the group is inclined to maintain the production cuts currently in place, which are due to expire at the end of this month.

US markets look set to open higher, building on the momentum seen in the leadup to last nights close, with the focus once again back on the latest bank earnings numbers for Q2.

Having seen JPMorgan, Citigroup and Wells Fargo collectively set aside another $28bn in respect of non-performing loans yesterday, that number is set to increase further when the likes of Bank of America, Goldman Sachs and Bank of New York Mellon report their latest Q2 numbers later today.

In Q1 US banks set aside $25bn in respect of credit provisions, and the key takeaway from yesterday was that while these banks trading divisions were doing well, their retail operations were starting to creak alarmingly. This is why Wells Fargo suffered its worst year since 2008, given that it lacks an investment banking arm, and could well see the bank embark on some significant cost saving measures over the course of the next few months.

The difference between Wells Fargo and JPMorgan’s numbers couldn’t have been starker, with Wall Street trading operations doing well, while Main Street painted a picture of creaking consumer finances.

Dow Jones is expected to open 190 points higher at 26,832

S&P500 is expected to open 15 points higher at 3,212

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Will US Banks’ Share Prices Suffer as Covid-19 Takes its Toll?

It’s a bumper week for US bank results, with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo all revealing how they fared in Q2. These results are likely to be closely scrutinised for further evidence that US banking chiefs are concerned about setting aside higher provisions in respect of large-scale loan losses, after the $25bn set aside at the end of Q1.

The impact on the US, UK and European banking sectors has been fairly similar in terms of share price performance, with banks a serial drag on all of the major indices. The S&P 500 is now back to slightly negative year-to-date, while the CMC Markets US Banks share basket is down 35%.

CMC bank baskets sector comparison (2020)

Source: CMC Markets

One shouldn’t read too much into this similar performance given that US banks have come down from a much higher baseline. But the declines do highlight where the pressures lie when it comes to the weak points in the global economy, as rising unemployment puts upward pressure on possible loan default rates.

This higher baseline for US banks came about in the aftermath of the financial crisis, when US authorities took much more decisive action to shore up their banking sector in the wake of the collapse of Lehman.

The thought process as the crisis was unfolding was that capitalism needed to take its course in allowing both Bear Stearns, as well as Lehman, to collapse in order to make the point that no one institution was too big to fail. It’s certainly a sound premise, and in most cases allowing a failing business to fold wouldn’t have too many long-term consequences.

Unfortunately, due to the complex nature of some the financial instruments designed by bankers and portfolio managers, it was a premise that was destined to fail. Its failure still scars policymakers’ reaction function when they make policy decisions today.

It soon became apparent in the fall of Lehman, that allowing one big player to fail caused widespread panic in the viability of almost every other financial institution. Like pulling one Jenga block out of a tower of financial complexity, it undermined the stability of the entire construct.

Some institutions continue to be too big to fail, as well as being too big to bail out, meaning that global policymakers only have the tools of annual stress tests to ensure that these institutions have the necessary capital buffers to withstand a huge economic shock.

Since those turbulent times when US authorities forced all US banks to clean up their balance sheets, by insisting they took troubled asset relief program (TARP) money, whether they needed to or not, the US banking sector has managed to put aside most of its problems from the financial crisis.

As can be seen from the graph below, the outperformance in US banks has been remarkable. However a lot of these gains were juiced by share buybacks, as well as the tailwind of a normalised monetary policy from the US Federal Reserve from 2016 onwards, and a US economic recovery that peaked at the beginning of 2019.

US banks’ share price performance

Source: CMC Markets

It should also be noted that while Bank of America has been by far the largest winner, it was also one of the biggest losers in 2008, due to its disastrous decision to purchase Countrywide. The deal prompted the Bank of America share price to plunge from levels above $50 a share to as low as $3 a share, costing the bank billions in losses, fines and aggravation.

UK and European banks shares in similar plight

UK authorities have also gone some way to improving the resilience of its own banking sector, though unlike the US, we do still have one big UK bank in the hands of the taxpayer, in the form of Royal Bank of Scotland. Others have been left to fend for the scraps in fairly low-margin banking services of mortgages, loans and credit cards.

UK banks’ trading operations were also curtailed sharply in the wake of the financial crisis, in the mistaken belief that it was so-called ‘casino’ investment banking that caused the crisis, rather than the financial ‘jiggery-pokery’ of the packaging and repackaging of CDOs of mortgages and other risky debt.

In Europe, authorities have made even fewer strides in implementing the necessary processes to improve resilience. The end result is that the banking sector in the euro area is sitting on very unstable foundations, with trillions of euros of non-performing loans, and several banks in the region just one large economic shock away from a possible collapse.

The current state of the banking sector

While we’ve seen equity markets remain fairly resilient in the face of the massive disruption caused by the coronavirus pandemic, the same cannot be said for the banking sector, which has seen its share prices sink this year.

Nowhere is that better illustrated than through our banking share baskets over the last 15 months.

Banking sector vs US SPX 500 comparison

Source: CMC Markets

Despite their fairly lofty valuations, the share price losses for US banks have seen a much better recovery from the March lows than has been the case for its UK and European counterparts.

This has probably been as a result of recent optimism over the rebound in US economic data, although the recovery also needs to be set into the context of the wider picture that US banks are well above their post-financial-crisis lows, whereas their European and UK counterparts are not.

Another reason for this outperformance on the part of US banks (black line) is they still, just about, operate in a largely positive interest rate environment, and also have large fixed income and trading operations, which are able to supplement the tighter margins of general retail banking. They have also taken more aggressive steps to bolster their balance sheets against significant levels of loan defaults.

In Q1, JPMorgan set aside $8bn in respect of loan loss provisions in its latest numbers, while Wells Fargo set aside $4bn. Bank of America has set aside $3.6bn, while Citigroup has set aside an extra $5bn. Goldman Sachs also had a difficult first quarter, largely down to setting aside $1bn to offset losses on debt and equity investments.

With New York at the epicentre of the early coronavirus outbreak, Bank of New York Mellon’s loan loss provision also saw a big jump, up from $7m a year ago to $169m. Morgan Stanley completed the pain train for US banks, with loan loss provisions of $388m for Q1, bringing the total to around $25bn.

What to look out for as US banks report Q2 figures

As we look ahead to the US banks Q2 earnings numbers, investors will be looking to see whether these key US bellwethers set aside further provisions in the face of the big spikes seen in unemployment, and the rising number of Covid-19 cases across the country.

Another plus point for US banks will be the fees they received for processing the paycheck protection program for US businesses. It’s being estimated that US banks that are part of the scheme have made up to $24bn in fees, despite bearing none of the risk in passing the funds on from the small business administration.

In the aftermath of the lockdowns imposed on the various economies across Europe, the Eurostoxx banking index hit a record low of 48.15, breaking below its previous record low of 72.00 set in 2012 at the height of the eurozone crisis. It’s notable that UK banks have also underperformed, though it shouldn’t be given the Bank of England’s refusal to rule out negative rates, which has helped push down and flatten the yield curve further.

This refusal further suppressed UK gilt yields, pushing both the two-year and five-year yield into negative territory, and eroding the ability of banks to generate a return in their everyday retail operations.

It’s becoming slowly understood that negative rates have the capacity to do enormous damage to not only a bank’s overall probability, but there is also little evidence that they can stimulate demand. If they did, Japan, Switzerland and Europe would be booming, which isn’t the case.

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

European Stocks Open Lower, as UK GDP Data Disappoints

In Asia markets were also a little twitchy over rising tension between the US and China over China’s actions in the South China sea, while Hong Kong tightened its own restrictions over a further rise in cases.

The latest Chinese trade data did appear to offer some optimism, that the Chinese economy was continuing its slow road back from its February lockdown with imports rising 2.7% in June, against an expectation of a 9% decline, the first positive figure for imports this year, while exports also rose a better than expected 0.5%.

This could bode well for this week’s China Q2 GDP data which is due out on Thursday, and is expected to see a rather optimistic quarterly bounce back of 9.5%.

This improvement in Chinese data doesn’t appear to have offered much in the way of a catalyst for a recovery in Asia markets with the Nikkei 225 closing sharply lower.

Markets in Europe have taken their cues from the slide in US and Asia markets opening lower this morning after the latest UK GDP data for May showed that the economy rebounded on a monthly basis by a very disappointing 1.8% in May, well below expectations of a 5.5% rebound with the index of services really disappointing at a pretty miserable 0.9%.

Both manufacturing and industrial production numbers for May showed a decent rebound, with recoveries to 8.4% and 6% respectively, however the services sector was hugely disappointing, with index of services showing a 0.9% improvement when a more robust 4.8% number was expected. Given that services make up 75% of the UK economy it is becoming ever clearer that the road back to recovery is going to be a long and arduous one.

One important caveat is that this sort of monthly data particularly relating to GDP is and services is notoriously difficult to collate, particularly at times like this, which means we could see significant subsequent revisions in the coming months. As such it should be viewed very much from within that prism, in the same way someone throws darts at a dartboard blindfolded.

The latest BRC retail sales numbers for June were more promising, rising 10.9% as a rise in online shopping saw some pent-up post lockdown demand released. Supermarket sales were a particularly strong area, however the more traditional areas of high street shopping remained weak, and there is a risk the upcoming government insistence on the wearing of face masks in stores, could hinder any recovery in this regard.

At a time when the economy is so fragile, it seems rather counterintuitive to insist on face coverings in shops, where human interaction can be kept to a minimum due to a strict entrance policy, without insisting on the use of them in restaurants and pubs, where human interaction is much greater, and the risk of contracting Covid-19 is much higher. You can’t on the one hand say its altruistic to wear a mask in a shop, where the risk of infection is lower, and then say that its ok not to wear a mask in pubs, restaurants or bars.

In a further sign that on-line shopping appears to be the way to go Ocado this morning released its latest first half numbers and as expected the company saw a big surge in revenues.

Ocado has had a number of problems over the years, but the rise in its share price hasn’t been one of them and has been one of the big winners of the ongoing Covid-19 disruption of the UK economy, despite it never having made a profit.

Today hasn’t been any different, with a pre-tax loss of £40.6m. Ocado’s strength lies in its unique technology which has received a significant boost as a result of the coronavirus pandemic.

Today’s first half numbers showed that revenues rose 27%, despite the company temporarily closing its website in order to deal with the increased demand in on-line traffic, while it also saw a first half operating loss of £17.7m.

The company said it was positive on the outlook, however declined to offer any guidance and said it plans o spend £600m on capital expenditure this year, from the proceeds of its recent £1bn capital raising.

Soft drinks and tonic maker Fevertree announced this morning that it has seen a solid start to the year. Off trade sales for the 12-week period to June 12th saw a 34% increase year on year, as alcohol consumption amongst consumers went up during lockdown, with the US showing a particularly strong performance. On trade sales were weaker as a result of the various lockdowns closing bars and other licensed premises.

Fevertree also announced the acquisition of Global Drinks Partnership, its sales agent in Germany for €2.6m.

On-line electrical retailer AO World also reported its final results for the year ended March 2020, which won’t have captured the likely upsurge in business since the end of March lockdown. Total revenue still increased 15.9%, to over the £1bn, with the UK business contributing to the bulk of that, while operating losses slowed to £3.8m.

In terms of the future the company is optimistic on the revenue front, and expects to achieve positive EBITDA in Germany on revenues of €250m. as far as the UK economy is concerned while revenue is currently ahead of expectations, white goods demand could be affected by a slower recovery in the UK economy, the housing market, as well as uncertainty over the end of the Brexit transition period t the end of the year.

Amongst the worst performers on the FTSE100 in early trade is Halma, the technology company which has seen its share price fall sharply in early trade after reporting full year numbers in line with expectations.

Revenues for the year ended 31st March 2020 rose 11% to £1.34bn, while statutory profits before tax rose 8% to £224.1m. The dividend was increased by 5%, however the company outlook was a little disappointing, with revenue expected to be 4% lower in Q1 from a year ago, with profits for 2021 also expected to be 5% to 10% lower than 2020.

Cyber technology group, and owner of AVG antivirus Avast is also sharply lower after hitting a new record high yesterday, on the back of a revenue and price upgrade from Peel Hunt at the end of last week, even though the broker still rates the stock as a sell.

The pound is a little bit softer on the back of this morning’s UK economic data, which can only be described as disappointing at best. If the Bank of England is looking for early signs of a recovery then they must have a very strong microscope, or they must be hoping that the June numbers will be much improved. UK gilt yields have also softened further as markets once again mull the prospect of a rate cut in September.

US markets look set to open modestly higher after yesterday sharp sell off as investors look ahead to the latest Q2 numbers from JPMorgan Chase, Citigroup and Wells Fargo.

JPMorgan could do well given its more diverse operations, however investors will be looking to see whether these key US bellwethers set aside further provisions in the face of the big spikes seen in US unemployment, and the rising number of Covid-19 cases that are currently being seen across, a wide swathe of US states right now.

Another plus point for US banks will be the fees they received for processing the Paycheck Protection Program for US businesses. It is being estimated that US banks that are part of the scheme have made up to $24bn in fees, despite bearing none of the risk in passing the funds on from the Small Business Administration. We could also see announcements of job losses with talk last week that Wells Fargo could be about to announce thousands of cuts due to its higher costs.

Lockheed Martin is also likely to be in focus after China said it would impose sanctions on the company.

US CPI inflation numbers for June are expected to show a significant uptick to 0.6% from 0.1%.

Dow Jones is expected to open 40 points higher at 26,125

S&P500 is expected to open 6 points higher at 3,161

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Rolls Royce drags on the FTSE100, as SAP Boosts the DAX

Investors appear to be making the conscious decision to find safety in the US trillion-dollar big caps rather than move their capital into the traditional safe haven of government bonds.

Asia markets have taken their cues from yesterday’s positive US session, despite the continued rise in coronavirus cases across the US, and which US Federal Reserve President Loretta Mester expressing concern that the rising virus count is introducing increased downside risks to the US economic recovery. On Wednesday we saw Texas set a new record for daily cases, hospitalisations hit a new high in California, while Arizona posted a new record number of deaths.

After two successive negative European sessions, markets here in Europe have taken their cues from yesterday’s recovery in US markets and this morning’s positive Asia session, opening modestly higher, though still well off their peaks from Monday, and struggling to make much in the way of headway early on.

If anything, the rising coronavirus case count in the US, is helping to weigh down any confidence in a more global recovery in equity markets, however on the plus side there doesn’t appear to be any evidence of a second wave here in Europe so far as various lockdown measures continue to get eased.

While this is positive for markets in Europe the lack of any imminent agreement between EU leaders on any pandemic recovery fund appears to be deterring a wholesale move of capital back into European markets for the time being.

The problems in the aerospace sector continued to be laid bare this morning as Airbus the European plane maker reported that it had failed to obtain any new aircraft orders for the third month in succession. This is equally bad news for Rolls Royce who have been having difficulties of their own, as they reported their latest first half numbers this morning.

Last Friday there were reports that Rolls Royce was looking at reinforcing its balance sheet further by raising additional capital, or disposing of some of its assets with ITP Aero, its Spanish operation one likely option. There was no mention of raising additional capital in todays’ Q2 update which has seen management say that they expect a better performance in the second half of the year.

Good progress has been made in reducing one-off costs with £300m achieved in H1, with another £700m expected by the end of 2020. The company also said it would be taking a charge of £1.45bn over the next 6 years, in respect of reducing the size of its hedge book, with £100m of that charge being taken this year and £300m in 2021 and 2022, and then £750m spread over 2023 to 2026.

The company also said that they had pro-forma liquidity of £8.1bn, including an undrawn credit facility of £1.9bn, and commitments for a new 5-year term loan facility of £2bn underwritten by a syndicate of banks and a partial guarantee from UK Export Finance. The company also took a £1.45bn write down in respect of hedges spread over 6 years.

Not all sectors are in the doldrums, with the increasing focus on cloud technology, helping to benefit the tech sector, as more and more business moves on line. This morning German software giant SAP reported an improvement on its Q1 numbers, with cloud revenues rising 21% in Q2, driven by improvements in its Asia markets.  This outperformance in SAP has helped underpin the DAX in early trade this morning.

Rio Tinto this morning announced it was closing its New Zealand operations as an aluminium supply glut takes its toll on its profits.

In the wake of yesterday’s budget measures on stamp duty, house builder Persimmon announced its latest first half update.

Unsurprisingly given the lockdowns in April total revenues fell to £1.19bn, down from £1.75bn in 2019, with completions sharply lower at 4,900, down from 7,584. On the plus side average selling prices were modestly higher at £225k, however higher costs are likely to eat away at overall margins in the months ahead, which could act as a drag on profitability.

Much will depend on whether the removal of stamp duty for properties up to £500k will offset any loss of confidence prospective buyers have about the economic outlook. Recent mortgage approvals data suggests that consumers are becoming much more cautious.

In terms of future expectations there does appear to have been a fairly strong rebound since sales offices reopened with forward sales up 15% from the same period last year, helping to push the shares higher in early trade.

Vistry Group also posted a positive first half update, delivering a total of 1,235 completions in H1, down from 3,371 a year ago, with an average selling price of £290k. Revenue was sharply lower at £344m, down from £854m in 2019. Forward sales saw an improvement to £1.66bn, up from £1.5bn at the end of May.

Real estate investment trusts have had a rough time of it recently, with Intu going into administration only recently. Workspace Group has been one of those companies that have done things a little differently over the last ten years, in terms of how it sold its office space, and that has helped cushion it to some extent, due to its focus on small or micro businesses, selling flexible office space, and short-term leases with superfast connectivity.

This does appear to be reflected in this morning’s Q1 update, which has seen the company report cash collection of rents at 75%, net of rent reductions and deferrals. The company has received 65% of rents due in Q2, compared to 80% a year ago. Activity in its business centres has remained low at 15% of normal. Demand is now picking up as lockdowns get eased further.

Building materials and DIY retailer Grafton Group has seen its shares rise in early trading after it reported H1 numbers, which saw revenues fall 19.4% to just over £1bn. June trading has proved to be more resilient, with revenues 11.4% higher than the same period last year.

Boohoo shares are also sharply higher this morning as buyers start to return after the precipitous falls of earlier this week, with some saying that the declines have been too severe, when set against the underlying long-term fundamentals.

US markets look set to open modestly lower against this morning’s rather indifferent European session, with the main focus once again set to be on the latest weekly jobless claims numbers, and in light of the recent re-imposition of lockdowns, the main focus will once again be on continuing claims and whether that number starts to edge up again in the weeks ahead. This could take some time to be reflected in the numbers with continuing claims expected to fall below 19m to 18.95m.

Weekly jobless claims are expected to fall to 1.37m.

Bed Bath and Beyond shares are also expected to be in focus after the company announced the closure of 200 stores over 2 years due to a 50% fall in sales.

Delta Airlines is also expected to give its latest Q2 update and it’s not expected to paint a pretty picture. Delta had a standout 2019 largely due to its reliance on sales of Premium class tickets. Business travel, which a lot of national carriers rely on, is likely to see a big drop off in the months ahead as companies realise that lots of meetings can take place just as easily on Zoom and other remote conferencing facilities.

Year on year revenue for Q2 is expected to decline by 90%, with the carrier losing 85% of its flight capacity at the height of the pandemic, while losses are expected to come in at $4.43c a share. Delta expects to add 1,000 new flights to be scheduled this month, and another 1,000 in August.

Dow Jones is expected to open 60 points lower at 26,007

S&P500 is expected to open 4 points lower at 3,166

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Rolls Royce Share Price: Rolls Royce Expects Better H2 as it Bolsters Liquidity

In 2016 the Rolls Royce CEO took the decision to execute a turnaround plan that saw underperforming areas trimmed back and the business focus on key growth areas of civil aviation and maintenance.

At the time it seemed the perfectly sensible thing to do with airlines expanding their fleets, and switching to new greener and leaner models of aircraft.

Soon after this it became apparent that its Trent 1000 engine, which powered the Boeing 787 Dreamliner was starting to develop problems, with cracks forming on the turbine blades, the costs of which started to spiral out of control, causing the company to post a £2.9bn loss in last year’s full year numbers. To compound this there appears to be another issue with this power unit in reports yesterday that suggested a problem elsewhere, within the turbine itself.

In 2018 this strategy of focussing its energies on civil aviation started to develop further problems, with the decision by Airbus to stop production of its A380 aircraft, resulting in further write-downs, of nearly £250m.

Recent events due to Covid-19 have compounded these problems as the wholesale grounding of aircraft across the world, and its customers taking steps to delay or cancel future aircraft orders, saw its revenue base clobbered hard.

The collapse in air travel has seen nearly half of its projected revenue disappear, as airlines ground their fleets, and the various travel bans bite.

In order to shore up its finances and preserve its cash flow the company had to defer bonuses for its CFO and CEO, pull the dividend for the first time since 1987, as well as securing an additional $1.5bn revolving credit line in April, in addition to the $2.5bn it secured in March.

Throughout all of this, the company also announced plans to cull 9,000 jobs in its civil aerospace division, out of a global workforce of 52,000. These plans drew the ire of the trade unions, however if the cash isn’t coming in and isn’t likely to either, furloughing staff merely delays the inevitable.

It is these concerns about the long-term durability of the company’s aerospace division, against a backdrop of much lower spending from Boeing and Airbus, that caused investors to take fright last Friday on reports that Rolls Royce was looking at reinforcing its balance sheet further by raising additional capital, or disposing of some of its assets with ITP Aero, its Spanish operation one likely option.

There was no mention of raising additional capital in todays’ Q2 update which has seen management say that they expect a better performance in the second half of the year.

Good progress has been made in reducing one-off costs with £300m achieved in H1, with another £700m expected by the end of 2020. The company also said it would be taking a charge of £1.45bn over the next 6 years, in respect of reducing the size of its hedge book, with £100m of that charge being taken this year and £300m in 2021 and 2022, and then £750m spread over 2023 to 2026.

The company also said that they had pro-forma liquidity of £8.1bn, including an undrawn credit facility of £1.9bn, and commitments for a new 5-year term loan facility of £2bn underwritten by a syndicate of banks and a partial guarantee from UK Export Finance.

With airlines likely to remain in defensive mode for at least another 12 months Rolls Royce cash flow is likely to remain constrained for a while yet, with full year revenues look set to be £4bn lower than last year, and unlikely to improve much in 2021.

In a sign that life can come at you fast, it was only at the end of February that CEO Warren East was proclaiming that free cash flow would be positive to the tune of £1bn by the end of this year.

Given recent events the company won’t even get close to that, with current estimates expected to see a total cash outflow of approximately £4bn.

While the defence business has remained resilient, the civil aerospace division is likely to remain constrained for some time to come, and while wide body engine flying hours are showing signs of picking up, they are still down 50% in the first half of this year.

As long-haul flights have started to increase in China, and the Asia Pacific region this figure should improve in the second half, however it is unlikely to improve significantly with flying hours expected to be down 55% over the rest of the year, and only at 70% of 2019 levels in 2021.

In terms of deliveries Rolls Royce continues to plan for 250 wide body engine deliveries in 2020, however as Boeing and Airbus have found out recently, and Airbus announced this morning, new orders are becoming hard to come by, and that’s before we consider the prospect of further cancellations, as airlines cut costs.

Rolls Royce defence has continued to perform well, last year the company won a new £350m contract from the Ministry of Defence to maintain and repair the engines of RAF Typhoon aircraft. Last month the company also won a host of US Navy contracts totalling $115.6m to build a variety of engines, propulsion units and services.

Today’s update goes some way to alleviating investor concerns about the company having to raise extra capital in the short term, however it is clear that a lot of things will have to go right over the next 12 months, for these concerns not to come back. There is also the prospect of further job losses, unless management can get better control of the company cash flow, with management targeting £750m of free cash flow by 2022.

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

More Woe for Boohoo, as Markets Look to Sunak – Chancellor of the Exchequer

Covid-19 cases have been rising sharply across the US sunbelt for a couple of weeks now, and while this was causing some concern about delays to reopening plans, the death rate wasn’t following suit. This appears to no longer be the case, with the death rate starting to rise sharply amidst a concern that the authorities in some regions could run out of ICU capacity.

Comments from Atlanta Fed President Raphael Bostic didn’t help, as he expressed concern that the US economic rebound, which had been looking quite robust, was showing signs of stalling as a result of the rise in cases.

A WHO official also warned that it wouldn’t be a surprise if coronavirus deaths started to rise sharply again, as the virus continued to sweep a path across North and South America.

This overnight weakness has seen European markets open lower this morning, with all eyes on UK Chancellor Rishi Sunak’s statement to the House of Commons later today where he will put some additional flesh on the bones from last week’s speech by Prime Minister Boris Johnson.

A lot of the detail does appear to have been heavily trailed already, with help for the arts to the tune of £1bn, as well as incentives for employers to hire trainees or apprentices in the 16-24 age group, to help gain important work experience, at a time when the UK economy is likely to see unemployment levels rise sharply.

It is also expected that the rail companies will see their emergency contracts extended as a result of the continued lower passenger footfall on their services. The current extension is due to expire in September.

A stamp duty holiday extension has also been widely touted, with the Chancellor expected to raise the minimum threshold to £500k, though it’s hard to see how that will help that much. People don’t tend to move if they are worried about their jobs.

We could also find out whether the Chancellor plans to tweak the furlough scheme further, in terms of making it more sector focussed, particularly in the hospitality sector, which has been hit hardest by the lockdown measures.

On Monday the government also outlined a £3bn increase in green investment to help fund energy saving measures in schools and other public buildings.

Boohoo shares have been hit hard over the past couple of days over reports that Jaswal Fashions a factory in Leicester, and a reported supplier to Boohoo, was operating below the required standards as set by UK health and Safety, and was paying below minimum wage levels. Boohoo have strenuously denied any knowledge of the malpractices, and promised an investigation.

This morning Boohoo announced that they had engaged Alison Levitt, a top QC, to investigate the claims around the supply chain and help restore the brands reputation. If management were hoping that this would help stabilise the share price and draw a line under recent events, they couldn’t have been more wrong, with the shares falling again, and now down over 35% this week.

These additional declines appear to have more to do with a number of key social media influencers announcing they were pulling their support for the brand, while Next, Asos and Zalando have dropped the company’s products over the allegations.

HSBC shares have fallen sharply on the open on reports that the US government could target the Hong Kong dollar peg in retaliation for China implementing its new security law. Whether this would actually happen is unclear, however it would be a major escalation were the US to go down the route of destabilising a currency.

Warehouse and industrial property manager Segro announced this morning that it had received up to 93% of the £37m rent it was due on the current quarter, after adjusting for reprofiled rent payments agreed with its customers.

UK and US transport provider FirstGroup PLC announced a rather sobering set of full year numbers this morning, reporting a statutory loss of £152.7m, for the year ended 31st March. Most of this loss came about as a result of a poor performance in its US operation, and various charges and costs there.

On the plus side there was a decent performance from Great Western and the West Coast partnership, however all of this can’t disguise the fact that this is rear view mirror stuff, and the outlook is markedly different now. This is why the company has suspended any further guidance, with the company receiving government help for the lower passenger numbers on its UK services.

The pound appears to be little moved by the current shadow boxing going on with respect to the EU/UK trade talks. Prime Minister Boris Johnson repeated the UK’s willingness to leave the EU without a trade deal in comments to German Chancellor Angela Merkel, if the EU were unwilling to be more flexible.

Gold is higher again, hitting its best levels since November 2011, and an eight and a half year high, as haven demand pushes it ever closer to $1,800 an ounce.

US markets look set to recover some of yesterday’s lost ground with a more positive open later today.

Boeing shares could be in focus on reports it has settled 90% of the death claims in respect of the 2018 737 MAX Lion Air crash which killed 189 people. There aren’t any details as to how much has been paid out.

Dow Jones is expected to open 40 points higher at 26,930

S&P500 is expected to open 8 points higher at 3,153

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

European Markets Slip Back, While Halfords gets a Puncture

Markets elsewhere in Asia were slightly less exuberant, with the Nikkei225 slipping back from three-week highs.

To that end markets here in Europe have opened lower with profit-taking kicking in ahead of the peaks that we saw in June. While optimism of a v-shaped recovery still remains quite high it is being tempered by concerns about rising coronavirus cases globally, translating into a similar percentage rise in mortality rates. This doesn’t appear to be happening at the moment, however with the markets back close to their June peaks it would appear that the overriding sentiment is one of ahead of those June peaks.

These types of moves are becoming emblematic of how markets have been moving over the last month. We’ve seen sentiment ebb and flow from being quite bearish, to fairly bullish without ever breaking out of the range we’ve been in since we posted those June peaks.

The rebound in the FTSE100 on the other hand has been much more modest, as the index continues its underperformance, with the index way off its June peaks, unlike the rest of Europe where the recent rally has seen us move back close to those highs.

One retailer that has managed to ride out the worst of the coronavirus storm has been automotive parts and cycle retailer Halfords who reported their full year numbers this morning, though you wouldn’t know it given the share price reaction this morning, with the shares dropping sharply.

Classed as an essential business it largely remained open throughout the lockdown, though some stores were closed. The business benefited from a boost from higher bicycle sales as people sought to avoid public transport, and make use of the good weather to move around in a healthy way as part of their daily exercise regimen.

At the beginning of May Halfords said that full year results would be boosted by increased sales during the lockdown which would push profits up to £50m to £55m.

Today’s numbers saw revenues rise to £1.155bn, with auto centres providing an 18.8% boost. The retail part of the business saw a 2.7% decline, not surprising given lower footfall towards the end of its financial year. Underlying profit before tax came in above expectations at £55.9m, with cycling sales showing a rise of 2.3%, while gross margins improved by 27bps.

In terms of current trading 77 stores still remain closed, while group sales for the 13 weeks to 3 July were lower by -2.8%, year on year, which, while disappointing was still better than expected back in March. Cycling has been the outperformer, with sales up by 57.1% on a like for like basis, while motoring has seen revenue decline 45.4% on a like for like basis, as people use their cars less.

Management also offered some guidance, based on three separate scenarios, and it is this it would appear that is responsible for this morning’s share price weakness, as all three scenarios paint a picture of much lower profit numbers. The worst scenario saw profits falling to zero or lower, with net debt rising to £60m, while scenario three saw profits fall to between £10m and £20m and net debt coming in at mid £40m.

The reason for the lower profit estimates, was purely down to a sales mix more geared towards cycling, which is a much lower margin business and away from its auto centres business.

Another sector hit hard by the shutdowns has been the retail sector, which has already been struggling in the lead up to the crisis. The recent collapse of retail landlord Intu last month points to the vicious circle of falling sales, putting pressure on rents.

Unlike a lot of its peers JD Sports Fashion was one of the few retailers that had managed to set aside the weak retail outlook with a solid performance in 2019, sending its shares to record highs of 884p in December last year. In the space of four weeks in February and March this all changed as the shares plunged to a low of 275p before finding a base, and rebounding. We have managed to recover most of that lost ground, trading just shy of 700p, however management do face some challenges.

This year’s full year numbers for the year ended 1st February don’t cover the period of the shutdown of the UK economy, reflecting the success of last year, with revenues rising 30% to £6.11bn, helped by an increase in stores across Europe, and the Asia Pacific region, with 52 of those in Europe. Profit before tax saw a rise of 3% to £348.5m, however all of this is rear view mirror stuff, and bears no relation to the outlook now.

In March management took the decision to close all of its stores in the UK, Europe and the US, though online sales still remained open. The suspension of business rates will help cushion some of the effects of this government enforced lockdown, with management suspending future guidance until further notice. Stores have now begun to reopen, with the majority of stores now trading again, however footfall has been weak, particularly in shopping centre locations, as consumers avoid high density areas.

The company also had to take note of the recent decision by the Competition and Markets Authority to block its £86m acquisition of Footasylum, despite the brand only accounting for 5% of the retail market. Management have confirmed their intention to appeal the decision while also working with the CMA, in conducting the divestment process.

For now, the Footasylum business will continue to be run separately, however given the weak retail environment it is highly unlikely that JD Sports will be able to find a buyer for the business without taking a sizeable loss on any forced sale, assuming of course they can find a buyer for an asset, that to all intents and purposes is now worth a lot less than what was paid for it.

The hotel and leisure sector has also been hit hard by the coronavirus shutdown, and Premier Inn owner Whitbread has been at the forefront of that.

Having reported some decent full year numbers in May, the coronavirus shutdown blew a huge hole in its expectations for this year, with all but 39 of its hotels in the UK remaining closed, with the assumption that they would have fairly low occupancy until September. This looks set to change in the coming weeks as the UK gets set for a big reopen, with the company saying that 270 UK hotels and 24 restaurants have now reopened with the rest of the property real estate to set to re-open by the end of the month.

In Germany, there was also positive news with all 19 hotels there now re-opened, with most of these open since 11th May.

While the hotel chain now has the luxury of an extra £1bn from its recent rights issue, management remained cautious about the outlook for the rest of the year.

Unsurprisingly its Q1 numbers don’t paint a pretty picture, with a 79.8% decline in like for like sales, but today’s update was never about that, it was more about management expectations of demand for the months ahead at a time when Whitbread is uniquely placed to benefit for higher bookings for the summer season, even if business bookings in more metropolitan areas struggle to recover.

The tone of the statement suggests some optimism that areas that benefit from tourism should be able to cope, however with sports events still closed to the wider public, and business bookings also subdued, it is likely to be a long road back for the Premier Inn owner, and this morning’s early fall in the share price appears to reflect that early pessimism.

Fresh from yesterday’s news that Commerzbank CEO Martin Zielke was stepping down the bank, this morning the bank announced it would be shutting half of its branches in Germany, as it attempts to draw a line under a restructuring process that has endured numerous fits and starts over the past two to three years.

For the second day in a row, German economic data undershot expectation in May, even as the economy continued its reopening process. After two months of large declines industrial production rebounded by 7.8%, well below expectations of 11%, though it was still much better than the 17.9% decline seen in April. Yesterday factory orders also undershot expectations, suggesting that while the German economy was getting back on its feet, the process of doing so was proving slightly more difficult than expected.

The US dollar is outperforming today, largely as a result of the weakness in equity markets as it benefits from some haven buying.

US markets look set to take their cues from today’s weaker European session, with a lower open, as profit taking kicks in after yesterday’s exuberant move higher.

Crude oil prices are also slightly softer on the back of the weaker sentiment prevailing in early trading this morning.

On the companies front Levi Strauss will be releasing its latest Q2 numbers later today. Since the company IPO’s last year, the share price has drifted lower. The underperformance, has been particularly disappointing given that the company is actually profitable, unlike most of last year’s tech stock flotations. This quarter is likely to see the company fall into a loss due to the pandemic hit and the fact that most if its retail outlets were closed.

In Q1 the company posted revenues of $1.51bn, above expectations, which meant the company was able to pay a dividend of $0.08c a share. This week’s Q2 result is unlikely to come anywhere close to Q1’s, however managements withdrawal of guidance in Q1, means that expectations are low. On the plus side its international reach means that they will still be able to shift product, even if some markets are closed. It also has $1.8bn in liquidity which means it should be able to ride out the current uncertainty. The company is expected to post a Q2 loss of -$0.41c a share

Dow Jones is expected to open 220 points lower at 26,067

S&P500 is expected to open 20 points lower at 3,159

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

All Change for Commerzbank and Lloyds CEO’s, Rolls Rebounds after Friday Plunge           

The bulk of these big rise in case numbers came from South America as well as the US, where almost 130k of these new cases occurred. In a holiday shortened week for US equity markets a strong rebound in non-farm payrolls numbers for June saw the Nasdaq close at a record high, while the S&P500 closed at its best levels since early March.

Expectations of a continued recovery, as well as the prospect of another fiscal intervention from the US administration, has helped offset any concerns that the rising infection rate could see death rates in the sunbelt of the US start to rise sharply, and curtail any economic bounce back.

Last week the latest Chinese Caixin non-manufacturing PMI came in at its highest level in over ten years, helping to offset any concerns that localised infections might derail the rebound in economic activity.

An editorial in the Securities Time, a Chinese state media journal helped push the Shanghai CSI300 to its highest level in over 5 years, with the Hong Kong market shrugging off any security law concerns to close above its 200-day MA for the first time since mid-February.

This strong Asia rebound has helped markets here in Europe open the week on a very strong note, helped by reports that the EU commission had given conditional approval for the use of Gilead Sciences remdesivir drug to be used on coronavirus patients in the region, after markets here in Europe had finished the week on a fairly downbeat note on Friday.

Asia focussed bank HSBC is amongst the early big gainers, after a strong rally in its Hong Kong share price.

On Friday afternoon Rolls Royce shares took an absolute beating, they were already sharply lower, even before the late announcement that management was looking at its options with respect to bolstering its balance sheet, sliding 10% back towards the ten-year lows we saw back in May, though we have recovered some of that in early trade this morning.

Rolls Royce shares have had a torrid time of it of late, already weighed down by the rising cost of fixing problems with the turbine blades of the Trent 1000 engine that powered the Boeing 787 Dreamliner, the coronavirus shutdown has seen its revenue base from the civil aviation sector, which accounts for almost $9bn of its annual turnover almost wiped out, as airlines ground their fleets and cancel orders.

The company has already announced plans to cut 9,000 of its 52,000-workforce, as well as securing an additional $1.5bn revolving credit line in April, in addition to the $2.5bn it secured in March.

Later this week the company is expected to update the market with respect to its latest Q2 performance, where we may well see the company supply further information on last Friday’s reports that could see it attempt to raise extra cash, as well as look at various other options, to bolster its balance sheet, including a possible disposal of ITP Aero, its Spanish operation.

Over the weekend we saw further sections of the UK economy re-open as pubs, restaurants and cinemas were allowed to reopen, with new social distancing guidelines in place.

Contrary to fears that there would be widespread scene of over exuberance the re-openings turned out to be fairly low key, probably because most people were content to stay away, or some venues chose to wait until today, or later in the month to reopen, away from the glare of the Super Saturday hyperbole.

Cineworld, along with a lot of other cinema chains, decided to give itself more time to prepare and is scheduled to reopen its venues on 31st July. Its shares are under pressure this morning on reports that Canada’s Cineplex is taking legal action over the collapse of the $2.1bn merger deal with Cineworld.

In June Cineworld decided to call time on the deal, citing breaches by Cineplex, which Cineplex denied. While the legal action isn’t a surprise the deal was already raising any number of questions from shareholders in any case.

The logic behind the deal looked questionable, even before the coronavirus pandemic broke out, particularly since Cineworld’s balance sheet was already under strain from the Regal acquisition a few years ago, and last year’s numbers were already showing reduced revenues as well as footfall. Cineworld’s debt at the end of last year was already above $7bn, and an increasing subject of concern, with the company taking various steps in recent months to shore up its balance sheet.

In calling off the Cineplex deal last month management may well have been taking the least bad option, pursuing a potentially ruinous deal, or running the risk of a lawsuit that may mean they have to pay some sort of compensation. Of the two options the latter would probably be the cheaper option, and at the risk of being cynical that could well turn out to be the cheaper option.

Lloyds Banking Group shares are slightly higher despite the news that CEO Antonio Horta Osorio will be standing down at the end of June next year. Horta Osoria has spent the last ten years turning around the bailed-out bank from a virtual basket case, after it was forced to swallow HBOS in 2008 to a strong and stable performer, whose share price performance over the past ten years, doesn’t do justice to the job done.

In 2018 the bank reported record profits of £5.3bn, and while 2019 was disappointing largely due to PPI provisions, the fact remains that the bank has managed to return to some semblance of health, shake off the dead hand of government support, and a final PPI bill of over £20bn. The banks biggest concern now, apart from the dividend suspension is likely to be the lack of a rebound in the UK economy, and the prospect of a rise in non-performing loans

Commerzbank shares are also in focus this morning after the surprise resignation of CEO Martin Zielke, as well as the Chairman on Friday. The bank has been struggling for some time to try and implement a turnaround plan, and is in the process of a big restructuring plan that could result in over 10,000 job losses in the coming months.

Having overseen a sharp decline in the share price in recent months there has been widespread dissatisfaction about the bank’s performance, with the German government, which has a 15% stake, along with activist shareholder Cerberus critical of the bank’s governance. Today’s sharp rise in the share price would appear to reflect some confidence that any new CEO, whoever that maybe, won’t do a worse job than the previous one, with Roland Boekhout, the banks head of corporate clients the early frontrunner for the role.

Aviva has also announced the appointment of Amanda Blanc as its CEO with immediate effect. Previous CEO Maurice Tulloch has taken the decision to retire immediately for personal health reasons.

UK house builders are on the up on reports at the weekend that the UK Chancellor of the Exchequer might consider raising the stamp duty threshold from £125k to £500k this week in an attempt to kick start a recovery in the housing market.

Barratt Developments this morning also issued a trading update ahead of the release of its full year numbers on 2nd September. All sites were reopened by 30 June, while completions were down for the full year from 17,856 in 2019 to 12,604 this year, largely down to the shutdown in the final quarter of the year.

The full year order book has remained strong, with forward sales well ahead of last year’s 11,419 at 14,326, with a value of £3.25bn. Overall selling prices were more or less in line with last year’s levels, with the total selling price at £280k, only slightly above 2019’s £274.4k.

The company also thanked the government for the support offered to the sector, with respect to the job retention scheme and said it will repay all furlough money used during the shutdown to pay its employees.

Boohoo shares have dropped sharply this morning, after reports at the weekend that Jaswal Fashions a factory in Leicester, and a reported supplier to Boohoo, was operating below the required standards as set by UK health and Safety, and was paying below minimum wage levels.

Boohoo have insisted that the company is not registered as one of their suppliers, and are taking steps to identify the company in question. The company also insisted that all of their suppliers must comply with UK standards.

The US dollar is on the back foot in early trade this morning, with overall sentiment positive everywhere else.

The exuberance being seen across global equity markets, appears to be helping to boost oil markets this morning, with Brent crude prices closing back in on last month’s three month highs.

US markets look set to continue their recent upward progress with another strong open later today, with the Nasdaq expected to open at another new record high.

Berkshire Hathaway are likely to be closely watched after it was reported that it was buying Dominion Energy’s natural gas assets in a deal worth $4bn. This appears a rather odd decision for Warren Buffett, given the trend for moves towards renewable energy, and which Dominion, along with a whole host of other energy companies, along with most oil and gas majors, appears to be transitioning towards to.

Uber shares could see some interest after it was reported that it would be acquiring Postmates for $2.65bn, as it looks to beef up its food delivery business, in an attempt to further diversify away from its reliance on its taxi business. Having missed out on GrubHub, due to regulatory concerns, let’s hope they have better luck here.

Dow Jones is expected to open 461 points higher at 26,288

S&P500 is expected to open 47 points higher at 3,177

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Europe set for a positive start, as Q2 draws to a close   

The rebound that we’ve seen in Q2 is still quite remarkable when looked through the prism of where we were at the end of March, when all of the government lockdowns were only just beginning. The FTSE100 while also looking to finish higher for the third month in a row, has been the serial underperformer of the bunch, lagging well behind, when compared to the steep falls seen in Q1.

US markets have also seen a similarly remarkable rebound, particularly when you look at the economic landscape now, and where we were heading into the crisis, although the S&P500 hasn’t really moved much from where we finished at the end of May.

Last night’s rebound in US markets, came about despite a warning from the WHO that the epidemic was running out of control and a continued rise in infection rates across a number of US states. There was also some concerns about second waves in China and South Korea, however these infection spikes came from a fairly low base.

The recovery in sentiment was also helped by a 44.3% rise in pending home sales in May, however the wider story would appear to be that investors may be making the calculation that politicians won’t stop the ongoing moves to reopen economies around the world, despite rising infection rates, banking on perhaps, that it is the least worst option.

It is this calculation that appears to be driving risk appetite, along with the fact that while the infection rate is rising the fatality rate is not, and it is that, more than anything, is probably the most important statistic. The reality is that Covid-19 is here for the foreseeable future and while an increase in infections is not particularly desirable, as long as it doesn’t translate into a higher fatality rate then the worst that can happen is likely to be localised lockdowns.

This appears to be playing out here in the UK with the city of Leicester set to be excluded from the grand re-opening on the 4th July, with non-essential shops to close from today, over concerns about a big rise in infection rates there. Chancellor Rishi Sunak will then follow that up with a budget statement next week.

Prime Minister Boris Johnson will also be making a speech later today,

Where he will outline a £5bn accelerated infrastructure spending plan, with a more detailed “new deal” plan to be published in the autumn.

As we look towards today’s European open, we look set to take our cues from last night’s positive US finish, even if the sentiment took a brief knock after the US Commerce Secretary Wilbur Ross announced that Hong Kong’s special trading status was set to be revoked, thus putting the territory on the same setting as China, in terms of being subject to all of the same tariffs and trade restrictions. This action was a pre-emptive response to this morning’s passing of the new China security law, which the US says poses risks to US sensitive technology.

This appears to have been widely expected with Asia markets finishing the month higher on the back of this morning’s latest China manufacturing and non-manufacturing PMI’s for June which showed another fairly decent month of economic activity, following on from decent readings in May.

The manufacturing number came in at 50.9, while non-manufacturing showed an expansion of 54.4, both above the readings from May.

We’ll also be getting the final Q1 GDP numbers for the UK economy, which aren’t expected to change much from the previous readings, and could even be adjusted slightly lower.

These numbers are unlikely to tell us anything new about the UK economy’s performance at the beginning of the year. The economy was slowing even before the March lockdown, largely due to widespread flooding in February, which not only hit consumer spending, but also the wider economy in general.

On a quarterly basis, the economy is expected to contract by -2%, and on an annual basis by -1.6%. The lockdowns that started across Europe in March are expected to result in big declines in both imports and exports, which are expected to see even bigger falls than the previous readings, with falls of -12.2% and -9.4% respectively.

Concerns about deflation in the euro area are likely to take centre stage later this morning with the latest flash estimate of CPI for June. This is expected to come in at 0.2%, with core prices set to slow further to 0.8%, down from 0.9% in May.

EURUSD

Found support at the 1.1160/70 area last week, before rebounding back towards the 1.1350 area. Rebound continue to look shallow with a break below 1.1160 potentially opening up a return to the 1.1020 area and the 50, and 200-day MA’s.  Above the 1.1350 area retargets the highs from June at 1.1425.

GBPUSD

Continues to drift lower with the next support at 1.2215, with a break below here targeting a move back to the May lows at 1.2075.  We need to see recovery back above the 1.2450 level to stabilise and open up the 1.2540 level and last week’s high.

EURGBP

While above the 0.9000 area the bias remains for a move back to the 0.9240 area, if we hold above 0.9020. Trend line support from the lows this year comes in at the 0.8950 area.

USDJPY

Currently below the 108.00 area, however a break higher has the potential to see a move towards the 108.70 area. While below 108.00 the risk is for a move back towards the 107.20 area.

FTSE100

Is expected to open 20 points higher at 6,245

DAX

Is expected to open 68 points higher at 12,300

CAC40

Is expected to open 25 points higher at 4,970

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Virus Resurgence Concerns, Set to Keep Markets on the Defensive

Rising infection rates in the US, which saw some US states either postpone their reopening’s or close back down again, saw equity markets slide lower on the week on Friday, over concerns that any economic recovery may well take longer to take hold. In spite of these concerns the losses that we saw turned out to be fairly modest when compared to previous sessions, as well as previous weeks.

There is no question that some investors are calling into question the pace of any recovery in economic output, with gold prices hitting their highest levels since October 2012, however the reality remains that while there is concern about the economic impact of a second lockdown, the bar to another countrywide one being implemented remains very high indeed.

The damage already done in other parts of the health care sector has likely put paid to that idea, which means investors, like everyone else will have to get used to the fact that Covid-19 is here to stay, and we will all have to learn to live with it, along with the related impact on our day to day lives.

As we start a new week, as well as coming to the end of the month and Q2, these concerns about a much more prolonged recovery, as infection rates continue to rise in a number of US states, are likely to be more of a drag on US stocks in the short term, though they are also set to act as a drag elsewhere as well.

These concerns look likely to overshadow some of the more positive sentiment elsewhere, as economic data continues to show further signs of improving in places like Asia and Europe, where second wave concerns aren’t anywhere near as immediate for now, though new localised outbreaks in China and South Korea over the weekend, continue to act as reminders that the virus remains far from defeated.

Crude oil prices also slipped back a touch last week, and have continued to weaken after hitting their highest levels since 6th March last week, retracing 50% of the decline from this year’s peaks to the April lows in the process. A large part of the reason for the pause has been concern about the rise in cases in the US, as well lower demand as US driving season gets under way in earnest.

Last week the IMF became the latest global organisation to downgrade its forecasts for the global economy, joining the likes of the OECD and World Bank in painting a pessimistic outlook for any recovery this year. It was notable that the fund was more optimistic than the likes of the OECD and Word Bank on a global basis with a -4.9% prediction, while its regional outlook was also more varied.

For example, the IMF predicted an -8% contraction in the US, a much more pessimistic assessment than the OECD’s -7.3% contraction estimate, with the IMF much more optimistic about China, than the OECD. The fact is a lot of these assessments are guesswork, reliant on a whole host of unknowns including the prospect of a second wave in the autumn, as the weather gets colder and populations are forced back indoors.

Markets in Asia have taken their cues from Fridays sharp fall in the US, the continued rise in infection rates over the weekend, and the rise in global deaths to over 500k by trading lower, and this weakness is set to manifest itself into a similarly weaker open here in Europe this morning.

This week we’ll get another insight into how well the restarting of economic activity is going across Asia, Europe and the US, with the latest insight into economic activity in June, as lockdown measures continue to get eased, and governments try to restore a semblance of normality to everyday life.

Tomorrow the UK government is set to layout its own plans for an investment bonanza with extra money for infrastructure, schools and hospitals, against a backdrop of the worst economic outlook since the second world war.  The details are expected to be laid out by PM Johnson in an announcement sometime tomorrow.

The further easing of flight and travel restrictions and quarantine measures across Europe in the coming days, could well help give another lift to the travel sector, while reports from TUI and Hays Travel over the weekend of a surge in bookings, is encouraging that something could be salvaged from what’s left of the remaining 2020 summer holiday season, not only here in the UK, but also in Europe as well.

EURUSD – found support at the 1.1160/70 area last week, before rebounding back towards the 1.1350 area. Currently appears to be struggling to maintain the momentum from the lows in May, with a break below 1.1160 potentially opening up a return to the 1.1020 area and the 50, and 200-day MA’s.  Above the 1.1350 area retargets the highs from June at 1.1425.

GBPUSD – last week’s rebound to the 1.2540 area quickly ran out of steam keeping the prospect of a move towards the May lows at 1.2075 a realistic possibility. A move below the1.2300 level could well be the beginning of such a scenario with 1.2240 the next key support.

EURGBP – while above the 0.9000 area the bias remains for a move back to the 0.9240 area, if we Trend line support from the lows this year comes in at the 0.8950 area.

USDJPY – last week’s low at 106.00 has seen the US dollar rebound towards the 107.50 area. We need to see a move back through here and the 50-day MA to argue for a move towards the 108.00 initially and then potentially the 108.70 area.

FTSE100 is expected to open 37 points lower at 6,122

DAX is expected to open 89 points lower at 12,000

CAC40 is expected to open 34 points lower at 4,875

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

The Week Ahead – US Jobs Report, Fed Minutes, Global PMIs, UK Q1 GDP in Focus

US employment reports (June) – 02/07

After the loss of a record 20m jobs in April, expectations were high that May’s non-farm payrolls report would produce further job losses in the millions. This turned out to be far from true, as the numbers for May confounded expectations with 2.5m jobs added, breaking another record for jobs gained in the process. We’ve seen significant divergence in the wider health of the US economy and ergo the labour market in recent weeks.

It would appear that the return of furloughed employees in May helped dilute the effect of the mass job losses in April, with the resulting upturn in some of the consumption data, like retail sales, pointing to a decent economic rebound. The big question is whether this rebound can continue into June, at a time when continuing claims remain stubbornly high, close to the 20m level. Expectations are for this trend to continue, not only in the official non-farm payrolls, but also in the ADP report, which is due on Wednesday. Estimates are for 3.6m jobs to be added back to the US labour market in Thursday’s non-farms, with the ADP report predicted to show job gains of 2m. The unemployment rate is expected to fall back to 12% from 13.3%.

US Federal Reserve minutes – 01/07

the US Federal Reserve rate-meeting in June turned out to be every bit as dovish as expected. Fed chair Jay Powell expressed particular concern about inequality, which he said could continue for the next four decades, and that millions of people could be out of work for some time. Against such a dark outlook he went on to say that it wasn’t the Fed’s role to care about asset prices and whether they were too high, saying the central bank’s main role was to support the US economy and keep the financial system afloat.

Despite some encouraging economic data since the 10 June meeting, Mr Powell has remained insistent that it’s too early to draw too many conclusions this early in the crisis. Wednesday’s minutes should offer insight into the discussions over various measures taken by the FOMC, including their concerns about a second wave and the health of the US banking system. In the face of consumer and business defaults, it will be interesting to discover whether there was any discussion over the recent surprise intervention in the corporate bond market, which many considered unnecessary.

UK Final GDP (Q1) – 30/06

Final Q1 GDP numbers are unlikely to tell us anything new about the UK economy’s performance at the beginning of the year. The economy was slowing even before the March lockdown, largely due to widespread flooding in February, which hit consumer spending. On a quarterly basis, the economy is expected to contract by -2%, and on an annual basis by -1.7%. The lockdowns that started across Europe in March are expected to result in big declines in both imports and exports, which are expected to fall -10.8% and -5.3% respectively.

Global Manufacturing PMIs – 01/07

The manufacturing sector has proved to be much more resilient than the services sector, even though it has still suffered from the economic shutdowns of the past few weeks. Any rebound here is likely to be muted, given that services activity remains subdued. Backlogs of existing products, such as unsold cars and other manufactured products, will need to be worked off before manufacturing can restart in earnest. There should be improvements from the levels in May, if last week’s flash PMIs from the US, UK, Germany and France are any guide.

Global Services PMIs (June) – 03/07

After the horror show of the recent record low levels in April’s services purchasing manager indices (PMI) numbers, there’s been a steady recovery, with the rebound in May expected to gain further traction in the June data, as the various economies continue their reopening processes. Last week’s flash PMIs from Germany, France and the UK would appear to bear this out, despite concerns about a second wave of infections prompting some concern.

The biggest fear remain around the tourism sector for Spain and Italy, who rely so much on tourism in their services sector, and who are accelerating the opening of their economies to try and generate some form of revenue this year. The flash PMIs showed a continuation of the improvements from May, and are expected to come in at 50.3, 45.8 and 47 respectively for Germany, France and the UK, though there could be upward adjustments. Spain and Italy are also expected to improve from 27.9 and 28.9 respectively in May, but the figures won’t change the prospect of a significant economic contraction in Q2.

Sainsbury’s Q1 (FY21) results – 01/07

Supermarkets have been one of the few businesses that have managed to avoid the worst of the coronavirus pandemic. While supermarket peer, Tesco, attracted criticism for not deferring its dividend, Sainsbury’s was slightly more cautious when it released its full-year numbers at the end of April, deferring a dividend decision until the end of the year. A £500m increase in costs has offset the spike in grocery sales as a result of panic buying in March and beginning of April, while additional safeguarding measures for its staff has also acted as a headwind.

That spike in sales continued into May with an 11% rise in sales year-on-year, as shoppers gravitated towards the big two supermarkets on the basis of a wider range of products and bigger spend. It also helped that Sainsbury’s online operation, due to its Argos acquisition, has a lot more resilience, but there are still weaknesses in its proposition. Unlike Tesco, it has held on to its bank, and with a tough macroeconomic outlook that could be a drag on profitability, though it does have the added cushion of a £450m saving in business rates. It’s clear that Sainsbury’s new CEO, Simon Roberts, will need to do a lot better than his predecessor if he wants to close the gap with Tesco in the years ahead.

Constellation Brands Q1 (FY21) results – 01/07

The closure of bars, pubs and restaurants will have hit sales across all of its brands, even accounting for increased sales from supermarkets, off-licences and liquor stores, as a result of the various lockdowns. In March, Constellation Brands pulled its guidance for the upcoming year in the wake of the uncertainty over coronavirus, despite beating Q4 earnings. The company is also behind Corona beer, which has seen sales fall over its name association with the virus. A particular drag on its profitability was its stake in Canadian cannabis company, Canopy Growth, after it posted a full-year loss of $576m. To offset this, Constellation CFO Gareth Hankinson said the company expects to receive $850m from the sale of Gallo Wines. Despite lockdowns globally, Q1 profit is estimated to come in at $2.10 a share.

Germany Unemployment (June) – 01/07

Having been lauded for both its medical and fiscal response to the coronavirus crisis, Germany has been fortunate that the economic damage in terms of unemployment appears to have been limited. Since March, unemployment has only risen from 5% to 6.3%, which seems extraordinarily low when you consider the economic damage wrought across Europe in recent weeks. Over the last two months, claims for unemployment have risen by 610,000, which in a country of 80 million seems on the low side, and these figures could escalate in the coming months.

FedEx Q4 (FY20) results – 30/06

FedEx suspended its full-year outlook in March, citing the significant impact of coronavirus, despite posting an increase in quarterly revenue that beat market expectations. The loss of its Amazon contract was a big blow earlier in the fiscal year, however revenue still remained fairly resilient. On the flip side, the enforced shutdowns have seen an explosion in online shopping, which should translate into a significant pickup in deliveries across all of its regions. Even in freight you would expect to see a rebound, as companies safeguard their supply chains. This should see profit come in above Q3, with expectations of $1.87 a share, up from $1.41.

Japanese Tankan survey (Q2) – 01/07

With the Japanese economy just coming out of a state of emergency at the same time as fluctuating infection rates, it’s hard to get a gauge of how business optimism is likely to change in the months ahead. This week’s latest Tankan survey will have to deal with the prospect that economic activity could take a lot longer to return to normal, with the possibility that the 2021 postponement of the Olympics could turn into a wholesale cancellation, unless the Japanese government can get on top of the wider infection rate. All of the main surveys are predicted to see even larger declines than in the first quarter, though remaining well above the worst levels in the wake of the 2008 financial crisis, with manufacturing much more pessimistic than the non-manufacturing surveys.

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)