Rolls-Royce to Raise 2.5 Billion Pounds to Strengthen Balance Sheet as COVID-19 Hurt

Rolls-Royce Holding Plc, one of the world’s leading producers of aero engines for large civil aircraft and business jets, said that it was exploring options to raise up to 2.5 billion pounds ($3.2 billion) to enhance balance sheet resilience and strength.

The second-largest provider of defence aero engines globally said it was considering a variety of structures including new debt issuance, a rights issue and potentially other forms of equity issuance.

No final decisions have been taken as to whether or when to proceed with any of these options or as to the precise amount that may be raised, the company said.

Rolls-Royce’s shares closed 5.13% lower at GBX 180.15 on Friday; the stock is down over 70% so far this year.

Rolls-Royce stock forecast

Ten analysts forecast the average price in 12 months at GBX 295.71 with a high forecast of GBX 498.66 and a low forecast of GBX 80.92. The average price target represents a 64.15% increase from the last price of GBX 180.15. All those ten equity analysts, three rated “Buy”, four rated “Hold” and three rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of GBX 336 with a high of GBX 677 under a bull-case scenario and GBX 130 under the worst-case scenario. Berenberg raised the stock rating to “Buy” from “Hold” but lowered their target price forecast to GBX 270 from GBX 890.

Other equity analysts also recently updated their stock outlook. Credit Suisse cut their target price to GBX 200 from GBX 210; JP Morgan cuts the target price to GBX 80 from GBX 90; Jefferies cuts price target to GBX 500 from GBX 700; Citigroup cuts price target to GBX 564 from GBX 960 and UBS cuts target price to GBX 265 from GBX 328.

Analyst views

“Rolls-Royce has underperformed the peer group YTD and appears to trade on a single-digit P/E multiple in 2022 – much lower than major peers. There are fundamental reasons for this: high exposure to long-haul traffic and high operating leverage mean there is greater earnings and cash flow volatility in the near term,” said Andrew Humphrey, equity analyst at Morgan Stanley.

“Cash outflows of £4 billion in 2020 and around £500 million in 2021 will lead to higher leverage, and we, therefore, believe Rolls-Royce will need to address balance sheet structure to regain an investment-grade credit rating,” Humphrey added.

Upside and Downside Risks

Upside: 1) Faster recovery in widebody traffic. 2) Trent 1000 in-service issues have been demonstrably resolved. 3) Cash targets are met and cash flow quality improved. 4) Additional orders restore the market’s confidence in widebody prospects, highlighted by Morgan Stanley.

Downside: 1) Accelerated retirements of mid-life Trent-powered widebody aircraft. 2) Further cost overruns on Trent 1000. 3) Change to mid-term cash guidance.

Health Concerns Hammer Stocks, Dollar Jumps 

Europe

Traders in Europe are paying close attention to developments in the US. According to Reuters, 42 of the 50 states in the US registered an increase in the number of new cases yesterday, so that is influencing sentiment on this side of the Atlantic.

Grafton Group shares are in demand today as the company confirmed that trading in June was better than expected. The group, like its peers, remarked on the pent up demand as a result of the lockdown. Revenue last month increased by 11.4% to £247.8 million. It is worth noting the company made an acquisition last July, so the numbers were a bit misleading, but nonetheless, demand was robust.

The pandemic had a negative impact on the business as revenue for the six month period fell by over 19% to £1.06 billion, but traders are focused on the rebound in activity since things have gone back to normal. Grafton is in a strong position in terms of liquidity as it has access to £658 million, so there are no concerns on that front. No guidance was issued on account of the uncertainty. In April, it was announced that directors would be taking a pay cut, and because of the strong trading last month, the cut has been reversed, and that is a sign the company is over the worst of the crisis.

Rolls Royce shares had a volatile start to the trading session on the back of its first half update. The engineering giant has been hit hard by the pandemic as air travel has been severely impacted, so in turn demand for aircraft engines has tumbled. In May, the group announced plans to cut up to 9,000 jobs from its workforce of 52,000. At the back end of last week, the group said it was exploring its options in regards to strengthening its balance sheet, and traders took that as a sign that even more restructuring plans would be mapped out.

This morning, the group said it cut costs in the first half by £300 million, and it will cut costs by another £700 million by the end of the year. Its pro-forma liquidity position stands at £8.1 billion. The stock initially traded higher as dealers were encouraged by the cost cutting plans, but the positive move didn’t last long. Traders latched onto the fact that cash outflow was £3 billion in the first half and that an additional £1 billion would flow out in the rest of the year. Looking further down the track, the company expects cash consumption to significantly reduce. Rolls Royce is targeting free cash flow of at least £750 million in 2022.

Vistry, the housebuilder, saw a doff-off in completions in the first half as the lockdown disrupted activity, but demand is respectable and the order book is healthy. In terms of forward sales, including partnerships, the group has £1.26 billion worth of work in the pipeline, and that has taken the light off the underperformance in the first half.

Revenue from house building in the six month period was £344 million, and that was a big fall from the £854 million registered last year. The fall in revenue from the partnership’s unit was less severe. Efficiencies from integration are improving at a faster rate than expected. The net debt position was cut to £355 million from £476 million in May. The sizeable fall in debt should take some pressure off the company in terms of interest rate payments.

Persimmon issued an update covering the first six months of the year. It was similar to that from Vistry, whereby there was a fall in the number of houses it completed, but the order book is robust. Revenue in the six month period was £1.19 billion, which was a 32% fall on the year. Average selling prices ticked by 3.7% to £225,050. The order book is up 15% on the year at £1.86 billion. The economic climate is uncertain, but the housebuilder confirmed that cancellations are at historic lows.

The housebuilding sector as a whole is higher today on the back of yesterday’s announcement from Rishi Sunak, the Chancellor of the Exchequer, the stamp duty threshold will be lifted from £125,000 to £500,000.

SAP shares hit a record high as its preliminary second quarter results were well-received. Revenue increased by 2% to €7.64 billion. Operating profit rose by 7% to €1.96 billion. The group confirmed that full-year earnings will be €8.1-€8.7 billion.

Boohoo shares are back in fashion after a torrid few days. The group is still carrying out an investigation into its UK supply chain. There has been an allegation that the group was connected to a supplier who paid its staff below the minimum wage, something Boohoo has denied.

US

The S&P 500 is showing a loss of over 1% as the health crisis is hanging over sentiment on Wall Street. Lately, the tech sector has been booming, but even the NASDAQ 100 is 0.35% lower this afternoon.

The initial jobless claims reading fell from 1.41 million to 1.31 million. It has dropped for 14 weeks in a row. The continuing claims update came in at 18.06 million, and that was a fall from the previous reading of 18.76 million. It is clear that the labour market in the US is improving, but the pace of progress is slow. Several US states have either paused or reversed the reopening of their economies so that is likely to hold back the jobs market.

Walgreens Boots Alliance shares are in the red as the third quarter EPS was 83 cents, while equity analysts were expecting $1.19. Revenue was slightly higher on the year as it was $34.63 billion, fractionally topping forecasts. Same store sales in the US increased by 3%, and traders were anticipating a decline of 0.2%. The UK business suffered amid the lockdown even though stores remained open as it was deemed an essential service. The group is cutting costs on account of the economic environment. Boots will cut 4,000 jobs.

Carnival Corp shares are up today as it was announced that its Germany subsidiary, AIDA, will recommence three cruises from August. The business has to restart from somewhere, and even if that is a low point, but at least it projects a positive message.

The recent rally in Chinese stocks has spilled over to the US, as stocks like NetEaseJD.Com and Alibaba have listings in New York too. Recently, the China Securities Journal published a bullish article about domestic equities, and the positive sentiment is still doing the rounds.

Bed Bad & Beyond shares have tumbled on the back of the latest quarterly update. Revenue fell by 49% to $1.31 billion, undershooting the $1.39 billion forecast. The loss per share narrowed to $1.96, but equity analysts were predicting a loss per share of $1.22. The company plans to close roughly a fifth of its namesake stores over the next two years.

It was reported that Wells Fargo is planning on cutting jobs, the group will post its latest quarterly numbers next week.

FX

The US dollar index fell to its lowest level in nearly one month in this session, but it has since rebounded as traders are in risk-off mode. EUR/USD is down today on account of the move in the greenback. The latest trade data from Germany showed that imports and exports in May increased by 3.5% and 9% respectively. Both readings showed huge rebounds on the month, but the levels missed economists’ forecasts of 12% and 13.8% respectively.

GBP/USD was higher earlier, but the turnaround in the greenback hit the currency pair. Political uncertainty exists in regards to the UK’s post-transition period relationship with the EU, but the pound has been gaining ground this week. According to a report from the FX options market, there has been an increase in the number of bullish trades on GBP/USD.

Commodities

Gold is just about above the $1,800 mark. Yesterday the metal hit its highest level since September 2011 and it remains in its uptrend. The commodity has been popular lately as it attracted safe-haven flows but that isn’t the case today on account of the upward move in the dollar. European and most US equity markets haven’t retested their June highs as health fears continue to circulate, and that has helped gold in the past month.

Oil prices are in the red today as fears that US demand will dwindle on account of the pandemic has impacted the energy market. The EIA report yesterday showed that gasoline inventories in the US fell by over 4.8 million barrels, a sign that people were driving more. The finer details showed that areas where lockdown restrictions were reintroduced, saw a fall in consumption, so traders are mindful of that today.

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

By David Madden (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)

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)