European stocks rally, Rolls-Royce shares slide

Morning Note

European equity markets traded higher on Tuesday, recovering the losses of Monday’s soft session after a largely positive, though choppy, day on Wall Street. Tech stocks led by Apple dragged the broader US market higher ahead of an expected strong earnings season, whilst small caps were weaker. Asian shares traded broadly weaker overnight.

Joe Biden’s stimulus plans appear to face being watered down to appease lawmakers on the Republican side, with the president saying he’s open to narrowing eligibility for the $1,400 stimulus cheques for every American that form the centrepiece of the package. This should help the deal get through Congress, but the timing is becoming the issue – more delays on delays in the vaccine rollout are not supportive of risk appetite. Moreover, it’s becoming clear that governments are not going to lift restrictions as quickly as they might due to fears about mutations and vaccine delays.

The EU has levelled criticism at AstraZeneca over vaccine supply shortages and Brussels is tightening exports of vaccines produced in the bloc. The UK Minister for Covid Vaccine Deployment Nadhim Zahawi said on Tuesday that vaccine supplies were “tight”. EU health commissioner Stella Kyriakides said the EU would “take any action required to protect its citizens”.  Spats over vaccine supply and delivery take the place of fishing quotas and level playing fields, underlining the new rivalry that exists between Britain and Europe.

Despite a report indicating that global trade volumes have recovered to pre-pandemic levels, the rotation-reopening plays are unwinding. Airline shares are down another 2-3% this morning. US 10-year yields retreated to 3-week lows and the dollar is finding bid again. Gold remains steady in the range around the $1,850/oz region. The problem is that investors have loaded up pretty heavily on the re-opening bets in the wake of the vaccine announcements last November, so concerns about the pace of the rollout of vaccines, the easing of restrictions and a return to normality could see a further unwind of this trade in the near-term. As I said last week, whilst monetary policy support, pro-cyclical stimulus and vaccines create tailwinds for global markets, a 5%-10% correction in equity indices is not out of the question in Q1.

Don’t stop me now: GameStop shares went on a gamma and short squeezing rollercoaster yesterday. Shares, which had jumped 51% to $65 on Friday, opened at about $85 and then surged to $160 before closing up 18% for the day at $76. A wild ride, and there will be others like it, if the Reddit /r/wallstreetbets message board is anything to go by. After-hours trading indicates it will open up another +15% higher, but who knows where this stock is heading now.  The rally came despite a double-downgrade from Telsey Advisory Group, which slashed its rating on the stock to underperform from outperform, noting a basic disconnect between fundamentals and valuation. “The sudden, sharp surge in GameStop’s share price and valuation likely has been fuelled by a short squeeze, given the high short interest, and, to a lesser degree, speculation by retail investors on forecasts for the new gaming cycle and the involvement of activist RC Ventures,” the analyst note said.

Rolls-Royce said expected cash outflows this year would be £2bn, more than double consensus forecasts. Full-year 2020 free cash outflow was in line with previous guidance, whilst year-end liquidity stood at around £9 billion, at the upper end of the previously guided range, with £1bn cash cost savings from ‘mitigating actions’. Shares fell over 9% in early trade. Rolls has been battered by the pandemic as civil aviation activity has been smashed, but management expect to turn cash flow positive in the second half of the year as widebody flying hours pick up. The question is whether the pace of vaccine rollout and government easing of restrictions matches their expectations.

JD Sports confirmed it is looking at funding options to exploit opportunities in the retail space created by the pandemic. Following a Sky News report indicating the company is looking at a £400m share sale, the board confirmed this morning that it is exploring ‘additional funding options with a view to increasing its flexibility to invest in future strategic opportunities and that this may involve a non-pre-emptive equity placing’. Recent high street troubles have shown there are opportunities to build out scale – e.g. the recent bidding for the carcasses of Arcadia, Debenhams. Meanwhile, JD Sports has shown an appetite for deals with its recent acquisition of US retailer Shoe Palace.

Stocks up, Rolls-Royce down on rights issue

Morning Note

Stock market bulls got the signal they needed from US Treasury secretary Steven Mnuchin, who said the White House was serious about doing a deal with House Democrats on a stimulus package. Nevertheless, no agreement was reached after talks between Mnuchin and Nancy Pelosi.

The Democrats pulled a vote on their $2.2tn package; the White House has come up with a $1.5tn counteroffer. Stimulus is coming, the question really is only when – a deal before the election still looks difficult. Meanwhile end of month and end of quarter flows likely had a positive impact after a soft September.

Stocks end September lower

The S&P 500 rallied and closed above its 50-day moving average, perhaps offering bulls a signal of strength. The next major level is 3,400 and then the Sep 16th intra-day high at 3,428. The close at 3,363 left the broad market down 3.9% in September, its first down month since March. The Dow Jones fell 2.3% last month, while the Nasdaq was more than 5% weaker for September.

European markets did not fall as much, but they also didn’t rally as much in August. In fact, European equities have been stuck in a range for months now and are failing to really spark into life. Cyclically weighted indices leave investors searching elsewhere for growth (US tech mainly) amid a slow recovery from the pandemic. The FTSE 100 is still struggling to hold the 5,900 level.

European stocks remain in their broad ranges – nothing to get excited about yet and the implications of US election angst and rising case numbers is likely to prevent any material breakout. A vaccine could help, but it’s also no silver bullet to depressed demand and structural inefficiencies in the economy that have been years in the making.

Shares in Tokyo didn’t trade after an outage that last all day on what ought to have been a busy day for equity books. The Tankan survey showed business sentiment improved, but not by as much as expected. Chinese markets were closed for a holiday.

Palantir starts trading after direct-listing

Palantir got its direct-listing IPO with the odd hiccup as insiders struggled to access the transactional platform provided by Morgan Stanley. Nevertheless, the stock opened at $10 and reached as high as $11.42 before closing at $9.50.

It’s been a very solid year for IPOs despite the huge volatility in the spring. A dearth of growth and hunger for any kind of yield as actually made this a surprisingly good time for tech companies in particular to go public. The Renaissance IPO ETF, which tracks the newest and largest listings, is up almost 70% YTD.

Rights issue plans send Rolls Royce skidding

Rolls Royce shares sunk over 6% after the company finally outlined a rights issue that has been required for some time. The company has over £3bn in debt due next year so had to come up with something given the ongoing hit to cashflows. RR will raise £2bn by way of a 10-for-3 rights issue priced at a 41% discount to 130p closing prices yesterday.

Given the strategic importance to the UK, the government is also on hand with support in the shape of a further £1bn from UK Export Finance. Shares were trading at a 16-year low after the news and are down 82% this year – the rights issue comes after a sustained period of weakness with investors betting that management needed to shore up the balance sheet.

The pandemic has created a perfect storm for airlines and this has left Rolls Royce’s aerospace business in the mire.

Dollar retreats but Brexit headline risks threaten GBP

As called for, the dollar finally rolled over from the resistance at 94.60 to test the support at 93.70. The 21-day comes in around 93.50. Dollar softness left cable making weekly highs at 1.2950, but the 3-week range of 1.27-1.30 remains.

Brexit talks continue and EU ‘sources’ are out this morning saying the two sides have failed to close differences on state aid. Expect the usual headline risk for GBP crosses as the ninth round of negotiations wrap up on Friday. US weekly jobless claims today will be watched closely ahead of the NFP numbers tomorrow.

Oil prices rose after the EIA reported US crude inventories fell by 2m barrels, against expectations for a rise of 1.9m. Nevertheless, stocks at Cushing, Oklahoma rose 1.8m barrels and gasoline inventories also climbed.

As stated earlier this week, the outlook for crude is murky as production comes back on stream and demand recovery wanes. We need to also pay close attention to global stocks flipping to builds from draws over the next three months. WTI closed lower in September for the first time since April.

Chart: Dollar softens, looking at potential RSI trend line being broken and potential MACD crossover if 93.70 fails to hold

All eyes on Powell, oil steady in face of Laura

Morning Note

Golf can be bad for your career. Just ask Phil Hogan, the now ex-EU trade commissioner, who’s resigned after a golf dinner in Kildare which fell foul of Ireland’s coronavirus restrictions. Maybe he was testing his eyesight – ‘ah yes, I can see that prawn. I’m safe to go to Claridge’s now’.  Golf hasn’t been this newsworthy since Tiger Woods went for a joy ride.

Global stocks hit a record high as the FTSE All World Index beat its peak set in February. The only word we can use to describe this is ‘liquidity’. It’s simply a result of a huge injection of stimulus and money that has needed to find a home. The S&P 500 and Nasdaq also both notched fresh record highs.

For the most part the path of least resistance is upwards – for global stocks led by the US that is probably true when there is so much liquidity and so little yield. But for the UK market, the path of least resistance seems to be sideways – the FTSE 100 remains anchored to 6,000 and it may take a move in the FX markets to drastically alter its range-bound price action.

Will Powell’s speech live up to expectations?

European indices were flat to slightly negative in early trade on Thursday ahead of Jay Powell’s speech at 14:10 London time. Investors are waiting for the substance of the speech amid expectation he will detail the outcome of the monetary policy framework review (that is the title of today’s speech).

The Fed chair is expected to tee up a new monetary policy framework based around average inflation targeting (AIT), which would let the Fed run the economy as hot as it likes for a longer period. Of course, he may skirt round the details and prefer to use the September FOMC meeting to make a formal announcement.

Expectations are rather high ahead of this speech – there is a potential to underwhelm.

WPP and Hays earnings hopeful, Rolls Royce dives towards one-year low

WPP shares rose 5% after the company reported a 15% drop in life-for-like revenues less pass-through costs in the second quarter but signalled the worst is over for the advertising market. The company also said it is on course to achieve the upper end of the £700-800m cost savings target and declared an interim dividend of 10p.

Trading is improving but lumpy. In July, the LFL revenue less pass-through costs of -9.2% was a steady improvement on Q2 but the performance across markets remains volatile.

Another good bellwether Hays said it’s seen some stabilisation in fees since May and ‘modest’ signs of improvement in permanent hiring. Net fees were down –11% for the year to the end of June, whilst pre-tax profits were –63% lower as a result of a collapse in recruitment due to the pandemic. Shares ticked up 1%.

Even worse news for Rolls Royce; shares slumped over 7% and neared the 52-week low after the engineer reported a £5.4bn loss due to the crippling of civil aviation during the pandemic. It also included a £2.6bn loss from FX hedges. Underlying revenues were down by a quarter. CFO Stepehen Daintith has resigned.

Hurricane Laura in focus for oil markets

Oil prices were steady as Hurricane Laura makes landfall in the US amid significant amount of production and refinery shut ins. The hurricane is at risk of strengthening to a category 5 storm. WTI (Oct) maintained the $43 handle but backed off from a 5-month high.

Yesterday the Energy Information Administration noted a draw of 4.7 million barrels last week, but oil inventories remain 15% above the average for this time of year.

The market reaction has been rather muted by the fact inventories are unseasonably high and demand is down compared to last year. Whilst more than 80% of Gulf of Mexico crude production has been shut in, stocks at Cushing at 25% above the five-year average, and distillates are 24% above average.

One further note on yesterday’s inventory data relating to travel and the airlines – over the four weeks to Aug 21st jet fuel product supplied was down 45.7% compared with the same four-week period last year.

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