Ryanair upgrades, Superdry and Joules miss
Ryanair has defied fears about the airline market suffering from weaker demand and too much supply. Management today has reported a stronger than expected Christmas and New Year. Forward bookings Jan to Apr are running 1% ahead of this time last year, and Ryanair believes this will result in slightly better than expected ave. fares in Q4, while full year Group traffic will grow to 154m (previously guided at 153m). On the negative side, Laudamotion is underperforming, with average fares lower than expected despite the solid traffic growth and load factors. Price competition with Lufthansa is to blame. Forecast net loss widen from under €80m to approx. €90m.
As a result management has raised Full Year profit guidance from €800m – €900m, to a new range of €950m – €1,050m.
This is a big improvement from the Nov update, when we noted: “First half revenue grew 11% to €5.39bn, with profits flat at €1.15bn. But fares were down 5%, due to the weak consumer demand in the UK and overcapacity in Germany and Austria. Ryanair is facing headwinds from lower fares, higher fuel bills and rising staff costs. The fuel bill rose 22% (+€289m) to €1.59bn, on +11% traffic growth. Ex-fuel unit costs rose 2%, largely because of higher staff costs, increased pilot pay and higher than expected crew ratios. Faced with these headwinds Ryanair will need to cut costs.”
Ryanair remains very well placed to take advantage of consolidation in short haul European air travel. But its low cost model is facing headwinds.
JD Sports continues to perform. In a short trading update that offered little in the way of detail, management stuck to full year group headline profit before tax being in the ‘upper quartile’ of current market expectations, which range from £403 million to £433 million. From the tone of the statement it seems it was tough in the UK in the Christmas period but they think overseas sales are better and will follow through into January numbers. So I think we need to wait and see how this pans out.
JD Sports has a lot of work to do in cracking the US with its Finish Line fascias but there is hope that management is well experienced enough to achieve it. The problem is the shares are priced for perfection and with the big brands shifting more and more to direct sales, the US will be difficult. But betting against Cowgill and co has not paid off yet. Shares could dip.
Betting against Superdry on the other hand….has worked out pretty well. In an update today management say the peak trading performance has been lower than expected as the business continues the ‘strategic transition to a full price stance’. As we noted with Marks and Spencer, discounting is murder if you don’t have the brand power to avoid it. Superdry saw lower than anticipated retail sales of £23m since Black Friday, predominantly online.
The numbers are woeful – group revenue -15.8%, in-store revenues -18.5% and wholesale revenue -16.9%. E-commerce revenues dropped by more than 9%. Profits are now see between £0 and £10m. Shares could be down around 20% on this. Julian Dunkerton has an awful lot of work to go – does the full price strategy actually have legs? Sales are being hammered – margin gains may be for nought.
Joules’ run of luck has come to an end. Posh wellies may be a niche market after all. Full year profit before tax will be significantly below market expectations. Retail sales over the seven-week period to Jan 5th were significantly behind expectations and decreased by 4.5% against the prior year. A weak online sales performance was to blame, which management explains was “due to an internally generated stock availability issue through the important end of season sale event, the cause of which has now been addressed”. In other words they mess up on stock just like Marks & Spencer did. Too many posh wellies? Not enough polo shirts? Who can say, but shares seen at least -10%.
Anglo ‘rescues’ Sirius, Sainsbo’s makes grocery progress, Greggs performance baked in to shares
Anglo American is to play white knight to Sirius Minerals. Anglo is in advanced talks to but Sirius for 5.5p a share, valuing the business at £386m. The offer is a roughly 40% premium to yesterday’s close price although we can hardly call that undisturbed. AAL has until Feb 5th to make a firm offer. AAL shares were down 2.25% on the news – the project still requires major investment.
Shares in SXX jumped 35% after Anglo confirmed its bid – there was bid for the stock yesterday clearly as news of the offer leaked. Whilst this is great news for the holdouts and many retail investors still clinging to the stock, the valuation is still barely a tenth of what it once was.
If anyone can, Anglo can. As one of the largest miners in the world, it has the financial clout and expertise to make this project happen. We also wonder whether the government may have offered certain assurances. The fact this offer is public could make raising cash for other sources very tricky now, if not impossible, forcing SXX into something of a corner – even if the price is not the best they will have to accept it. The market knows they need cash ASAP but with this offer on the table, it’s now the only show in town – they have to recommend it or it’s curtains. Anglo is picking up a distressed asset on the cheap.
Sainsbury’s numbers don’t look fabulous but grocery remains broadly positive with a second straight quarter of growth amid a very challenging market. The problem lies with Argos.
Total grocery sales rose 0.4% but general merchandise (Argos) was down 3.9%. This was more disappointing than expected and seems to be down to a poor performance in toys and gaming. Clothing was very strong at +4.4% and delivered a particularly robust online performance.
That left total like-for-like sales -0.7%, which was broadly in line. Whilst, as we noted in November, tentative signs of recovery in the core grocery division, it cannot be ignored that under Mike Coupe the business has delivered five straight quarters of LFL sales declines (ex-fuel). Whilst Q2 showed some arresting in the decline, Q3 has not continued in the same vein. Shares were up and down around the flat line in early trade – it’s hard to really make a case for these results changing the narrative meaningfully – I think most of us would have hoped for a little better but grocery is good.
Greggs delivered again with another upgrade to add to November’s. Company-managed shop like-for-like sales were 9.2% with total sales up 13.5%. Fourth quarter like-for-like sales grew by 8.7%. Full year profits seen slightly higher than previously expected. Despite exceptionally tough prior year comparisons trading remains remarkably strong and with plans for more outlets there is still some growth in there, albeit you have to assume the kind of double digit growth won’t last. Shares dipped 3% on profit taking for sure. But with the company now valued at £2.4bn, is all the future growth fully baked in?
Equity roundup: Aston Martin and Morrison
Morrison’s lean Christmas
It was a lean Christmas at the Morrison household but the grocer managed to stick to profit forecasts and is upbeat about the year ahead. Group like-for-like sales excluding fuel were down 1.7% in the 22 weeks to Jan 5th, with retail responsible for all of this decline whilst wholesale was flat. Total sales fell 1.8% over the period – although it’s interesting that it’s chosen not provide more specifics on the performance over the key Christmas period.
Q3 was also soft with group LFL –1.2%, with wholesale contributing –0.1 percentage point to the decline and retail adding –1.1%. Management described trading conditions as exceptionally challenging. Aldi’s numbers support the case that consumers tightened their belts over the festive period a little more than expected. Nevertheless, decent cost control means 2019/20 profit before tax and one-off items is still expected to be within the current range of analysts’ forecasts.
So, first out the gate among the big four listed grocers and Morrisons passes the test – trading was tough and for sure they are leaking market share to the discounters, whilst the election in December certainly had an impact.
But MRW hit forecasts and shares have bounced 3.5% as a result following a bit of selling on Monday in the wake of the Aldi numbers. The read across has been felt in the sector with TSCO up a touch, SBRY also doing well. Marks and Spencer shares have jumped 4% as Berenberg raised the stock to buy from sell.
Kantar data has also crossed the wires and confirm it was a tough old patch for supermarkets. Tesco sales -1.5%, SBRY -0.7%, Asda -2.2%, MRW -2.9%. Discounters continue to gain ground.
Nielsen numbers meanwhile indicate grocers endured the worst Christmas period since 2014. Again Sainsbury’s looks to have held up better with sales -0.4% over the 12 weeks to Dec 28th, while Tesco -0.9% and Morrisons -.2.5%.
So far it seems Christmas was a bit lean for supermarkets and there was not the hoped-for big post-election splurge, but perhaps it was not quite as bad as feared.
Aston Martin: Stroll on
Profits warnings never come alone – they usually come along like buses in batches. True to form, following a warning last summer and sailing pretty close to one in November, Aston Martin is warning profits will be between £130m and £140m, about half the £247m last year. Shares dropped 13% to £4.53.
The numbers are pretty horrid, albeit retail sales rose 12% (heavy discounting when buyers can see multiple models on the forecourt is impossible to avoid).
- Core wholesales declined 7% year-on-year to 5,809
- Year-end cash balance was £107m, giving expected net debt and leverage ranges of £875m-£885m and 6.2-6.8x respectively.
That net debt figure is a major concern. The only good news is the DBX order book has risen to 1,800 which means Aston can unlock an additional $100m in 2022 notes. This is a drop in the ocean though and for sure Aston needs to raise cash in some way. The bond market looks unpalatable but even an equity raise could prove tricky. The rationale to go private is impossible to resist – the brand still has the cache to make it appealing. Stroll on.
Grocers have little to cheer from Aldi numbers
There is little to cheer in the Aldi numbers for the UK’s big grocers. Shares in Tesco (TSCO), Sainsbury’s (SBRY), Marks & Spencer (MKS) and Morrisons (MRW) were all notably softer after Aldi delivered a disappointing Christmas trading update. Whilst we should always take numbers from private companies with a pinch of salt, the performance does not suggest that the big 4 listed supermarkets experienced a tremendous festive bounce.
In the four weeks to Dec 24th, sales at Aldi rose 7.9%, which was below the 11% rate we saw across the whole of 2018. It also fell short of the 10% in the same period of 2018. Like-for-like sales were said to be positive but no figure was provided – for sure almost all the growth is coming from new stores. We know that margins are being hit hard too as it a) expands and b) keeps prices down.
Investors are braced for a lacklustre Christmas for the big 4 listed supermarkets, but this points to arguably a bigger slowdown than had been expected. If even the discounters are seeing growth rates decline, we should expect similar for the larger names – it is hard to imagine they are picking up market share back from the Germans. Moreover, if Aldi’s growth slipped despite 47 more stores operating at the end of 2019 versus the start of the year, we should expect a poor Christmas performance across the piece.
The election may have had an impact, shortening the period in which UK consumers were prepared to splash the cash on groceries for Christmas. Undoubtedly the election will have reduced the overall spend in Dec – the question is just how much.
Dates for the diary
Jan 7th – Morrisons Christmas trading statement – could be tough – particularly in retail which has been underperforming with the overall numbers held up by solid wholesale performance.
Jan 8th – Sainsbury’s Q3 trading update – Signs that the worst may be over as management take their heads out of their Asda deal and refocus on core grocery division. LFLs have just about started to head in the right direction again.
Jan 9th – Tesco Q3 and Christmas trading update, Marks & Spencer Q3 trading update. The former is likely to do OK but serious question marks over whether Marks can deliver on the food front. More worrying for Marks is Clothing and Home which the Nov update showed were in a real mess. Could be grim.
No deadline for China trade deal
Equity markets in Europe and US futures were hit as Donald Trump upped the ante again on trade, warning that there is no deadline for doing a deal with China and that it’s probably be better to wait until 2020 and even after the November presidential election to agree terms. The chances of a deal by Dec 15th just took another turn lower.
Markets simply aren’t priced for this; for a trade deal to be that far in the future – if one can even be struck at all. After weeks of making generally positive noises on a deal being very close, there is a real sense now that a deal is not so very near at all and markets need to reprice. Combined with the barrage of tariff threats on the EU, the comments can be taken as a sign that the White House has no qualms about levying further tariffs and is happy about using trade as a economic, political and diplomatic weapon.
Of course, Donald Trump’s shoot-from-the-hip comments in these kind of interviews need to be taken with a dose of salt – we could just as easily see him row back on this later, as has happened countless times already. We’re only ever a tweet away from saying that a deal is very close to see a rebound. However, it’s clear that hopes for even a skinny deal being done this year have diminished in the last two days and markets are reflecting this.
Meanwhile, France has promised a strong response to the plans to hit $2.4bn of French goods with 100% tariffs. It’s worth noting that while the chance of a meaningful escalation in EU-US trade spats – tit-for-tat tariff hikes – is relatively low, it’s clearly a risk.
Dow futures fell 100 points to test horizontal support at 27,660 and bouncing off that level to pare some losses, with the cash market eyeing an open down c90pts around 27690 as of send time. Meanwhile European markets were also hit, although the DAX remains in positive territory. The FTSE 100 is having a hard time, down more than 1%.
Tariffs are very much the talking point:
- The US government may levy a punitive tariff of up to 100% on $2.4 billion in imports from France, including cheese and Champagne (Christmas is cancelled). This is in retaliation for France’s digital services tax that targets the big US tech giants.
- The White House also threatened the EU with a fresh round of tariffs in relation to the Airbus case. Whilst the US has already slapped tariffs on $7.5bn of EU goods, the US trade representative threatened to go beyond that.
- Tariffs on imports of steel and aluminium from Brazil and Argentina will be re-imposed in retaliation for ‘massive devaluation’ of their currencies. Nonsense of course – quite clearly they couldn’t manipulate clay.
- Meanwhile no real signs of progress on that all-important phase one deal with China by Dec 15th, although the US may still kick that can down the road.
Probably three salient points in this to bear in mind.
- What we are seeing is the weaponization of trade and using it for diplomatic purposes. It is no coincidence that these announcements come as Trump lands in London for the Nato summit and a chance to demand European allies spend more on defence.
- It will also draw attention away from the Chinese talks, which clearly are not yielding the necessary outcome as far as the White House is concerned. US support for Hong Kong protesters has not helped build bridges and we have seen China retaliate in its own way. Beijing seems sensitive to conflating anything about Hong Kong with trade talks though.
- And, three, it’s a clear signal to Beijing that Trump is not shying away from tariffs – as he said yesterday – if there is no phase one deal the tariffs will go up.
Uber drops as London bans app
Transport for London has stripped Uber of its licence to operate in the capital. The company has 21 days to lodge an appeal, which it has said it will do, and it continue to operate until such appeal is completed.
Shares printed -5.9% in pre-market trading at $27.82 at one stage before paring losses just ahead of the open to trade 4.3% lower. The stock is barely a couple of dollars away from theall-time low. It could be a rocky session out there today.
Uber has suffered a big blow with this ruling. London, with about 3.5m users, is the largest market in Europe for Uber. London is one of the group’s ‘fab five’ cities that account for around a quarter of global revenues. There is a clear and obvious hit to revenues, if the ruling is upheld, which it seems likely it will. Competition in the shape of Bolt and Ola are ready and willing to step in at the drop of a hat in the capital and it could be forgotten pretty quickly once gone. At least a drop in revenues should also equate to narrower losses.
More broadly it betrays the scope and depth of the legal and regulatory problems faced by Uber. The list of legal issues is long and broad in its scope and geography. These present ongoing overhang for the stock as, whilst there have been problems about corporate culture, largely the run-ins with the regulators and policymakers pertains to the very structure of the business itself and how it operates; taxation, labour laws and consumer safety are the milking stool of regulatory instability. It betrays also the fact that cities and local lawmakers do have considerable leverage should they wish to use it. Uber will continue to face elevated competition from local rivals and a high-degree of regulatory scrutiny that threatens to undermine how it does business.”
Apple eyes $250 after earnings
Apple posted record Q4 revenues despite slower iPhone sales and guided for a very strong holiday quarter. Shares popped 2% to reach $248 again and you can definitely sense there’s appetite to push thus stock to new all-time highs above $250. Earnings per share beat handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to $64bn.
What we learned
iPhone sales matter a lot less…
This improvement on both top and bottom line came despite a 9% drop in iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it shows how much of the lifting is now being done by other parts of the business. It suggests Apple is reaching an inflection point where it’s no longer dependent on the iPhone for EPS growth. This is across the board a positive.
…because Services and Wearables are roaring ahead
Wearables, Home and Accessories knocked it out the park, with sales up 54% to $6.52bn. This was by far the fastest growing segment and will account for an increasing percentage of sales, currently c10%.
Services growth remains good at 18%. Stripping out certain one-off items that knocked the Q3 number, this represents consistent sequential growth from the last quarter. Whilst still very positive, it’s a comedown from the +20% levels seen in preceding quarters. But with a clutch of new services rolling out, not least Apple TV+, a renewal of past growth rates is on the cards. Higher margin, recurring Services revenues are a key reason why multiples may rise – they’ve already climbed to about x20 TTM vs x15 average over the last five years.
American consumers are in good shape
The US consumer remains strong. Almost all the growth came from the Americas, which is dominated by US sales. American consumers still look in good shape. Sales in Europe, Japan and Greater China fell.
Holiday quarter could be record breaking
Guidance for the fiscal first quarter is bullish, and Apple could mark a record for quarterly revenues. Apple is guiding revenue of between $85.5 billion and $89.5 billion.
Early indicators suggest the iPhone11 is performing well with consumers. Favourable comparisons in China from last year are assured, given the previous year’s downswing in iPhone sales in the region. Moreover we can expect further improvement in iPhone sales through the 2020 year on the anticipated 5G rollout.
Apple earnings preview
The Q4 results from Apple are never the most important, but as ever they will contain key guidance on the next quarter’s expected iPhone sales and wider performance of the company.
The Street expects EPS of $2.84, short of the $2.91 in the same quarter a year ago, on revenues of $62.9bn, flat on last year, which was a record. In the last update, investors were particularly impressed by robust Q4 guidance which was ahead of the Street’s expectations. Apple guided revenue to between $61bn and $64bn versus expectations of $60.9bn prior to the Q3 report. The Q3 numbers broadly showed that consumers are still extending the upgrade cycle and holding on to iPhones longer but stickiness in the Apple ecosystem remains strong. The 13% growth in Services was a disappointment and represented another quarter of deceleration. However, excluding a couple of one-off items, the growth was more like 18%, according to Tim Cook.
Apple has beaten EPS expectations every quarter for the last two years. Wall Street analysts have been consistently upgrading their expectations for the stock and raising price targets over the last quarter.
What to watch
Number one is the guidance for the 2020 fiscal first quarter. This is pivotal to our understanding of how well Apple thinks the iPhone 11 is doing – there is only 10 days of iPhone sales included in the Q4 release. The recent strong performance of the stock reflects increased confidence in the iPhone 11 as well as growing hopes for next year’s expected 5G phone. The iPhone 11 has done way better than expected before its launch. We’ll get a first glimpse of iPhone 11 sales in Q4 – the market is expecting Apple to sound bullish on demand for the forthcoming holiday quarter.
Given the backdrop of slowing growth in China, Hong Kong protests and the Sino-US trade war, investors will be watching for the Greater China sale with interest. This has been a problem area for Apple but there have been more encouraging signs, particularly with the lower priced iPhone 11 catching the interest of Chinese consumers. Investors will also want an update on how potential tariffs will impact the business.
Services revenues will be another key area as Apple looks to pivot towards this side of the business. Growth in Q3 was modest versus comparisons from last year, although that was down to one-off items. However, the launch of a range of new services like Apple TV+ should underpin further growth, albeit not so much in the reported period. Key to the rerating of the stock and to support the higher multiples we’ve got now is for this division to do well.
On that front we are also looking at margins. Services makes up about 20% of Apple’s revenue, up from c16% a year before. Margins from Services is around 64%, vs roughly 31% for hardware. The question is at what point can Apple start to significantly guide its margins higher? As we said in July: “This could be an area for an upside surprise, if not now then perhaps heading into the year-end.” Apple has guided gross margin between 37.5% and 38.5% for Q4.
Also expect strong performance in Wearables, which now account for about 10% of sales. Mac sales may be a touch softer due to supply problems.
The stock has rallied through the $240 mark to break new all-time highs although it’s seemingly hit resistance at the $250 round number. The stock has rallied about 8% since it released its new iPhone range – this may be an indicator the market is expecting upgraded guidance off the back of higher-than-expected iPhone sales. A strong Q4 is already priced in.
Indeed, we may add that earnings multiples appear stretched. The trailling 12-month PE ratio has risen above 20 versus an average of 15 over the last 5 years. Whilst there may be encouragement that this is about a re-rating of the stock as it pivots away from being a hardware business to a services business, it makes it ripe for sellers on any miss, although Tuesday’s selloff helps on that front.
Downside break could see $232 retested. Upside look for the $250 level as the barrier to further gains.
S&P 500 hits all-time high, Alphabet, Beyond Meat to report
For all the chatter, bulls remain in charge: we’ve just had another all-time high for the S&P 500, breaking the July 26th peak at 3,027.98 to trade as high as 3,042. The break higher above the previous record high may likely open up a new leg higher, although we will need to see where this closes tonight – though at present it’s looking odds-on to finish above the previous 3,025.86 closing peak.
It’s a remarkable achievement against faltering corporate earnings, a festering (if not quite total) trade war, and softer macro data everywhere you look. Bulls had tried their hardest Friday but some really positive noises on trade nudged us over the line today. President Trump said the US and China are looking to be ahead of schedule on sign the ‘phase one’ trade deal at the APEC meeting in Chile in mid-Nov. The bar on a US-China trade deal had been set so low that the market seems content with this pretty puny agreement. At least the direction is positive.
Although earnings are softer, we’ve seen a beat rate of about 75% of those S&P 500 stocks reporting so far. We’ve also got the Fed carrying out stealth QE in the shape of these overnight repo interventions, which it beefed up last week and increasingly don’t look very temporary. When you have unlimited liquidity and can bank on the Fed coming to the rescue, risk wins. It doesn’t look like the Fed will disappoint this week either, although it may choose to use this meeting to signal a pause to its rate-cut cycle. Also of course we have the ECB relaunching QE and even the BoJ might try to find some more pennies down the back of the sofa – quite what it can do beyond what’s already doing is hard to fathom, but that’s never stopped a central bank before.
The market is starting the week very much risk-on, but there are a lot of risk events coming up this week, as we detailed in the week ahead. Gold has softened significantly today as risk finds bid, with the metal sinking to $1493.
European equities are looking in much better shape than they were this morning. The DAX firmed to 12,960, a gain of 0.5%. The FTSE managed to rally into positive territory around lunch time having been down for much of the morning as it caught a lift from the US and the comments on trade. The prospect of an election doesn’t seem to frightening investors too much. Sterling steady around $1.2860 as it looks near certain that we’ll have a General Election in Dec.
A couple of interesting earnings reports are due out tonight. First Alphabet, expected to deliver approx. $40.3bn in revenues after the close tonight. Slowing growth in ad revenues in Q1 (+17%, or +19% on constant currency basis) spooked traders but this was put right by the improvement (+19%, or 22% on constant currency basis) in Q2. That’s probably the number one metric for investors in Q3. After Q2 we noted that we do still see a trend in declining revenue growth.
Q2 earnings per share rose to $14.21 against the c$11.30 expected. This was a significant beat to earnings and revenue forecasts and demonstrates that the wobble in Q1 may have been temporary. Nevertheless, Alphabet will have to get used to more competition in the digital ad space from the likes of Amazon and Facebook. Investments were a big factor in the quarter’s strong performance, delivering earnings of $2.7bn on the $9.9bn in net income.
Beyond Meat may be very volatile over the next couple of days with the company set to report third quarter earnings after the close tonight. The company might report a profit but the biggest danger to the stock is the volume of new shares that will be unloaded on the market tomorrow when the lock-up ends. Shares have been battered down from the all-time highs and it remains heavily shorted, but investors who got in before the IPO are still minimum x4 on the deal with the stock at $100 versus $25 on IPO. If the earnings beat, you could end up with a lot of volume and volatility as lock-up stock gets dumped.
Mixed open for Europe, Amazon dips, Barclays PPI shame, luxury boost
Will we have a yuletide election or will we be left in purgatory for longer?
It was a mixed open for the main bourses in Europe today although the Euro Stoxx 50 started to move lower along the DAX as the morning progressed. Luxury stocks doing well after Moncler and Kering’s Gucci brand posted strong growth despite the trouble in Hong Kong. Burberry road on the coat-tails of its Italian pals to rise 1.5%. Utilities off a touch – could be General Election risks re Labour nationalisation plans. Scottish Mortgage Investment Trust down off the back of the Amazon drop as it makes up 9% of the fund.
European and US equity markets rose yesterday, but that was before the Amazon numbers dropped
Asia has been weaker after a fairly hawkish speech on China
by Mike Pence that’s not going to do much to soothe trade jitters. He attacked
China’s ‘destabilising’ influence as well as their human rights record in Hong
Kong, and attacked US corporates for becoming Chinese lap dogs – singling out
Nike in particular, saying they check their conscience at the door or some such.
Amazon shares got whacked in after-hours trade following a big earnings miss. Operating income declined to $3.2bn from $3.7bn the same quarter a year ago. The massive investment in next-day delivery is dragging on profits, although it’s an essential move for the firm. Amazon expects to spend $1.5bn on delivery costs – double the last quarter. The company is clearly back in the investing for growth and future profitability mindset, so investors may need to be patient. Although revenues missed a touch, net sales ballooned 24% to $70bn. This doesn’t feel like it’s all that bad. The drop in income is down to investing. AWS profits were $2.3bn.
Intel though beat expectations easily and returned to growth. EPS came in at $1.42 vs $1.24 expected, and management raised the FY guidance to $4.60.
It’s been an interesting week so far. US stocks have really struggled for direction amid a deluge of earnings. Whilst earnings have been broadly positive with a c80% beat rate of S&P 500 firms reporting so far, there’s been some outliers and that’s the worry for investors. The bar’s been set very low so misses are leapt upon. The main misses for Boeing, Caterpillar, McDonalds, Texas Instruments and now Amazon are the sort to weigh on sentiment as these are kind of bellwethers.
It’s different in Europe, where the receding threat of a no-deal Brexit (though vanished) has seen the major bourses set the pace. We’ve seen breakouts in the DAX and Euro Stoxx 50, which have risen to the highest in almost two years. Eurozone PMI data has been mixed, but it’s not getting worse, and that may suggest the worst is over. Meanwhile investors do, as we suggested at start of the week, seem to be buoyed by the prospect of EU-US trade talks replacing auto tariffs due to hit soon.
The FTSE has also enjoyed a fine week, albeit the index remains within pretty well-worn ranges. We’ll see if it make ground up to 7400. It’s currently around the Oct 1st close – if it break north from here then the late Sep highs around 7400 are within touching distance.
On Brexit, today should produce an out one of sorts. We should know whether Boris Johnson gets his election, slated for Dec 12th. They say turkeys don’t vote for Christmas so it remains unclear whether Labour will go for it, given what the polls say.
Sterling sold off sharply on the prospect of an election and the high degree of fresh uncertainty that introduces. From trading as high as 1.2940 GBPUSD sank briefly below 1.28 before coming back. At send time, the pair was softer in early trade at 1.2830.
If Boris doesn’t get his election, what then? The key now one feels is whether no-deal risks come back and bite us. There’s a clear sense in the market it’s off the table, but we are in very strange and uncertain times.
EURUSD has come back down in the wake of the ECB meeting/Draghi farewell event to test support on the 1.10 round number. Gold followed the cue for a breakout to move north of $1500 yesterday.
Ouch – another big PPI hit for Barclays. The bank swung to a loss after taking an extra £1.4bn provision for PPI claims. As we’ve said before, the complete lack of visibility all of these banks have had on the cost of PPI claims is a scandal in itself. We noted in September: The other great PPI scandal is how shareholders have been consistently low-balled, fobbed off and undersold the impact of the redress, leaving them with lower capital returns and lower dividends than they would have expected. Barclays has now spent £11bn on settling PPI claims. However, the line has been drawn under this and banks can move on at last.
The good news for Barclays is in the investment banking division. No doubt Ed Bramson will be dismayed, but for other shareholders the performance is greatly encouraging. The corporate and investment bank posted a 77% rise in pre-tax profits to £882m. In trading, fixed income revenues rose 19%, while equities rose 5%.
The PPI charge left the bank nursing a loss of £292m. Profitability targets now look tricky. The return on tangible equity target of 9% in 2019 is still on track with the YTD number at 9.7% despite turning negative in Q3, but it’s clearly going to be a lot harder to hit the 10 goal for 2020. Shares rose over 2% on the open despite the soft numbers – the PPI claims might be bad but they are by and large a thing of the past.