Marketmind: Over to You, Christine

A look at the day ahead from Karin Strohecker.

September has already seen many major indexes, from the S&P 500 to STOXX 600, ease after multi-month winning streaks. Both European and U.S. equity futures point to more falls ahead on Thursday, while Treasury and Bund yields are off the mid-July highs hit earlier this week.

But there’s much more than an ECB meeting to fret about — Beijing’s regulatory crackdown shows no sign of a letup.

Chinese gaming and media stocks – including Tencent Holdings and NetEase – have suffered further sharp falls after regulators summoned gaming firms to ensure they implemented new rules for the sector.

The impact of the widening crackdown is being felt as far as Tencent shareholder Prosus in Amsterdam which is set to open 3.5% weaker.

Shares and bonds in the embattled Evergrande Group too slumped further after media reports the property developer would suspend interest payments due on some loans and all payments on its wealth management products.

And then there is the U.S. debt ceiling quagmire, with Treasury Secretary Janet Yellen warning again that cash and extraordinary measures might run out in October.

On the data front, China factory gate inflation jumping 9.5% to a 13-year-high in August shows no let up in price pressures. In Britain, a lack of new homes for sale boosted house prices again.

Corporate news a-plenty too. EasyJet will raise more than 1 billion pounds ($1.4 billion) through a share sale. Similar news elsewhere in the travel sector too, with Japan Airlines announcing $2.7 billion in borrowing to weather the prolonged COVID-19 impact.

Key developments that should provide more direction to markets on Thursday:

ECB holds monetary policy meeting and presser

-Lloyd’s of London swung to H1 pre-tax profit of 1.4 billion pounds, helped by rising premium rates

-Fed speakers: San Francisco Fed President Mary Daly 12:05 GMT; Chicago President Charles Evans 15:05 GMT

-Emerging markets: Malaysia, Peru, Serbia, Ukraine central bank meetings

Auctions: U.S. 30-year bonds, 4-week t-bills.

U.S. earnings: Oracle

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

($1 = 0.7263 pounds)

(Reporting by Karin Strohecker; editing by Sujata Rao)

 

Lloyds Restores Dividend as Profits Recover on Brighter Outlook

By Iain Withers and Lawrence White

Lloyds posted pretax profit of 3.9 billion pounds ($5.4 billion) for the six months to June, ahead of the 3.1 billion pound average of analyst forecasts compiled by the bank.

The bank had posted a first-half loss of 602 million pounds the previous year, after setting aside billions to cover potential bad loans due to the COVID-19 pandemic.

Lloyds also announced a 0.67 pence interim dividend, a day after rival Barclays unveiled more than $1 billion worth of shareholder payouts.

The bank confirmed the acquisition of digital savings and retirement group Embark, adding 410,000 customers and 35 billion pounds of assets.

Like rivals, Lloyds is looking to expand in wealth management amid a pandemic-driven savings boom, to make up for squeezed margins from record low Bank of England rates.

The bank released 656 million pounds of its bad loan provisions, after upgrading its economic forecasts following a rapid rollout of COVID-19 vaccines in Britain.

But its results were weighed down by 425 million pounds of “remediation charges”, including compensation for historic fraud at its HBOS Reading branch and a previously disclosed fine for misleading insurance customers.

Lending increased by 7.5 billion pounds as the economy began to open up during the period, but was again outstripped by growth in deposits – up 23.7 billion pounds as customers continued to build up savings.

Lloyds is in the midst of a shake-up of its top team after long-standing boss Antonio Horta-Osorio left in April to become chairman of Credit Suisse.

Finance director William Chalmers is running the bank before HSBC veteran Charlie Nunn takes the helm next month. Nunn and chairman Robin Budenberg – who stepped into his role in January – are expected to devise a refreshed strategy for the bank.

($1 = 0.7178 pounds)

(Reporting by Iain Withers and Lawrence WhiteEditing by Rachel Armstrong and Mark Potter)

Bank of England to Ease Rule for Small Lenders to Boost Competition

Banks are required to issue MREL, or minimum requirement for own funds and eligible liabilities, which is a form of debt that can be written down to absorb losses and avoid repeating the 137 billion pound ($188.6 billion) taxpayer bailout of lenders in Britain during the financial crisis more than a decade ago.

The targets were set under European Union rules, which Britain now can amend more easily after leaving the bloc last December.

“Making it easier for firms to grow into MREL responds directly to firms’ concerns about barriers to growth created by the step up in MREL requirements as firms expand their balance sheets,” Bank of England Deputy Governor Dave Ramsden said in a statement.

The central bank has authorised 27 new banks since 2013, but Lloyds, Barclays, HSBC and NatWest continue to dominate retail lending and the so-called challenger banks have said that blunt thresholds for issuing MREL create a “cliff edge” that holds them back from building market share.

The BoE proposed replacing its indicative threshold of 15 billion to 25 billion pounds with a notice period setting out when a lender can enter transition to its MREL targets if the company grows beyond 15 billion pounds in total assets.

The central bank would assess a lender’s business plan as it approaches the 15 billion pound threshold and issue a bespoke transition path.

“The banking industry must now assess the implications of the new regime in terms of ability to compete, and highlight any potential challenges to how they serve customers or change their business models as a result,” said Tom Groom, a financial services partner at consultant EY.

The proposals for an extended transition path directly respond to calls for change, the BoE’s Ramsden said.

“They are inherently flexible and agile as they allow for a further extension if unforeseen circumstances demand it,” Ramsden said.

Challenger lenders Metro Bank, TSB and Co-op Bank did not respond immediately to requests for comment.

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

($1 = 0.7264 pounds)

(Additional reporting by Iain WithersEditing by Alison Williams and David Goodman)

COVID-19 Pushes Lloyd’s of London to $1.2 Billion Loss in 2020

The 330-year old market, home to around 100 syndicate members, expects to pay out 3.4 billion pounds in 2020 COVID-19 claims net of reinsurance, it said in a statement.

Lloyd’s CEO John Neal said 2020 had been “an extremely challenging year marked by a global health crisis of a scale never seen before”.

“The year was also marked by a high frequency of natural catastrophe claims and the UK’s formal exit from the EU, driving further losses and uncertainty,” he added.

Gross written premiums declined by 1.2% to 35.5 billion pounds in the specialist insurance market – which covers everything from oil rigs to footballers’ legs – after Lloyd’s scaled back some loss-making business lines last year.

But Lloyd’s said premium rates had risen 10.8% last year and rate rises had continued into 2021. Insurers typically increase rates after experiencing large losses.

(Reporting by Carolyn Cohn; Editing by Alexandra Hudson)

Europe and US Join in on China’s Rally, Home Builders Jump

Europe

A securities journal that is controlled by the Chinese government ran a front-page editorial which mapped out the prospect of a bullish run in stocks, and that triggered buying in domestic equities. The CSI 300, rallied over 5%, and it closed at its highest level since 2015. The positive mood from China influenced dealers in this part of the world, even though the health crisis is still a major worry. On Saturday, the WHO claimed there was over 212,000 new cases of Covid-19, a new daily record. The Beijing authorities can’t talk up their own market forever, so it is likely in the next few days, the pandemic will be back in centre-stage as far as traders are concerned.

The UK house builders are enjoying a positive move today as it is believed the government will change the stamp duty rules in a bid to encourage activity in the sector. Under the existing scheme, if you purchase a property in England or Northern Ireland worth more than £125,000, you incur stamp duty, unless you are a first time buyer. There is talk the threshold could be raised to £500,000, and it might last for up to six months. There is talk that Rishi Sunak, the Chancellor of the Exchequer, will reveal the plans on Wednesday, with the intention of it being a part of the Autumn budget. Redrow, Vistry and Persimmon shares are in demand today.

Sticking with the house builders topic, Barratt Developments, confirmed that annual completions tumbled by over 29% to 12,604. Average selling prices were a touch higher at £280,000. The lockdown was blamed for the drop-off, but it in starting the new financial year with ‘cautious optimism’, as the full year order book stands at 14,326, up from 11,419 last year. The company has over £300 million in cash, it has access to £700 million in a credit facility, and it is eligible to tap into the Covid Corporate Financing Facility, so it is well positioned to work its way through its busy order book.

Rolls Royce shares clawed back some of the ground it lost on Friday when it announced it was reviewing potential options to strengthen its balance sheet. The engineering giant was already in a weakened position in advance of the pandemic on account of the issues in relation to the Trent 1000 engines.

The company supplies aircraft engines so the travel bans and the bleak outlook for the aviation industry compounded the firm’s problems. At its update in April, the group confirmed its liquidity position stood at £6.7 billion – which was a result of two rounds of financing. The group is clearly comfortable in terms of liquidity, and it seems like some restructuring is in the pipeline. Keep in mind, it warned about cutting 9,000 jobs in May.

DS Smith shares are in the red today as Jefferies downgraded the stock to hold from buy, and cut the price target to 310p from 350p. Last week the company posted a 5% increase in adjusted pre-tax profit, but it cautioned it was too soon to return to paying dividends.

Antonio Horta-Osorio, the CEO of Lloyds, will step down in June 2021. Mr Horta-Osorio has been in the top job for a decade. Under his leadership he turned the group around from a bank which was reeling from the credit crisis, and part-nationalised, to a fully private firm and a dividend payer.

Boohoo shares have fallen out of fashion after it was reported that one of its suppliers paid its staff poorly and the working conditions were substandard too. The group has become very popular recently as its fast fashion strategy combined with its online only model has been a hit with younger consumers.

The much-awaited ‘Super Saturday’ didn’t seem to be that super, as the re-opening of pubs and restaurants wasn’t the big deal that some people were predicting. Restaurant Group and Mitchells & Butlers are in the red.

US

The mood on Wall Street is positive as the US economy continues to rebound. The final reading of the services PMI report for June was 47.9, and keep in mind the May reading was 37.5. The ISM non-manufacturing reading was 57.1 – its highest level since February.

It was reported that Uber has acquired Postmates, the food delivery group, for $2.65 billion. Uber Eats is a direct competitor of the company but it is believed the two businesses will remain separate. There might be a merger of back-end technology. Last month merger talks between Uber and Grubhub fell apart due to antitrust issues, but the latter teamed up with Europe’s Just Eat.

Dominion Resources shares are in the red after it was announced the company has agreed to sell off its gas storage and transition network to Berkshire Hathaway, Warren Buffett’s, investment vehicle, for $4 billion. Mr Buffet’s firm will take on $5.7 billion of the group’s debt too, so the transaction comes to nearly $10 billion. In other news, Dominion and Duke Energy scrapped their plans for the Atlantic Coast pipeline project on account of rising costs.

Amazon shares have topped $3,000 for the first time as the tech giant asserted its dominance during the lockdown. It had the edge retailers that were forced to close.

FX

The risk-on sentiment of traders as weighed on the US dollar. In the past few months, the greenback has become a popular safe-haven play, and given the surge in equities today, we are seeing dealers dump the US dollar. The currency received a nice boost towards the end of last week on the back of the better-than-expected jobs report form the US. Today, currency traders are less interested in the recovery in the US economy, as they are fixated on the overall risk-on mood.

EUR/USD and GBP/USD have been helped by the negative move in the greenback. The UK construction PMI reading for June was 55.3 – it’s highest in nearly two years. The eurozone retail sales update for May was 17.8%, and that was a big improvement from the -12.8% in April.

Commodities

Gold has been nudged up by the dip in the drop in US dollar. The commodity’s inverse relationship with the dollar is working in its favour today. The metal has a history of attracting safe haven funds, but seeing as dealers are keen to take on more risk today, it is likely that gold’s positive move is almost exclusively down to the weakness in the dollar.

The optimism that is doing the rounds in relation to stocks seems to be influencing oil traders too. Equity markets and energy products have broadly moved in tandem in the past couple of months and it seems the lack of nerves in stocks has helped sentiment in WTI and Brent crude. The stark news from the WHO over the weekend that there was a new record set of new Covid-19 cases has been shrugged off by equity and energy traders alike.

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

By David Madden (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)