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Michael Hewson
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Boosting of the stock market

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.

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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)

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