HSBC and BP shares rally, European equities struggle after capitulation

Morning Note

HSBC dividend hopes rekindled: Shares rallied 6% on upbeat noises from management that it intends to start paying dividends again despite profits falling by a third as lower interest rates bit.

In its Q3 statement today the bank said the board will consider whether to pay a “conservative” dividend for 2020.

It will depend on regulators – we noted yesterday that shares in UK banks were slow to respond to reports the Bank of England is talking to commercial banks about restarting divis. The prospect of dividends coming back will interest income investors again and with returns cut all over the place, anything that offers yield will be snapped up.

The bank reported profit before tax was down 36% to $3.1bn, mainly from lower revenue, which declined 11% to $11.9bn. Asia was the sole source of positive income as it reported profit before tax of $3.2bn in the third quarter, despite interest rate headwinds.

It underlines the fact HSBC’s exposure and reliance on Greater China has been a positive this year in the wake of the pandemic and the economic recovery in that region being swifter than in Europe/US.

Cuts to interest rates by central banks left net interest margin at 1.20%, which was down 36 basis points from Q3 2019. Expected credit losses and other credit impairment charges were down $100m to $785m thanks to a steadier outlook for the economy.

Loan losses for the full year are seen around the lower end of the $8bn-$13bn range. Whilst banks are now setting aside less for bad loans than they did at the height of the pandemic in the spring, it’s unclear whether fiscal support is only kicking this particular can down the road.

Management warned specifically about ongoing US-China trade tensions and the uncertainty over the UK withdrawal from the EU. They also warned that the low-interest rate environment continues to put pressure on net interest income and will exert further headwinds through the fourth quarter before they are seen stabilising in 2021.

Are things starting to stabilise at BP? Shares rallied 2% as the company swung back to a profit in the third quarter. Underlying replacement cost profit for the quarter rose to $86m, compared with a loss of $6.7 billion for the second quarter of 2020 and down 96% from $2.3 billion profit for the third quarter of 2019.

BP said the result benefitted from the absence of significant exploration write-offs and recovering oil and gas prices and demand. This was partly offset by a significantly lower oil trading result, the company said. The dividend was maintained at 5.25 cents.

Fundamentally it’s just really tough to make money with oil prices at these levels – BP’s breakeven is at $42 and Brent today trades at $41 with a negative outlook as demand remains depressed and global inventories build. Whilst oil prices have certainly stabilised since the worst period of volatility in the spring, they have stabilised at materially lower levels than the industry would like.

Weaker oil prices combined with the catalyst of the pandemic is accelerating the green drive away from reliance on hydrocarbons. The commitment to renewables will require further investment and this may require further divestments.

Management says they have agreed or completed transactions for almost half the $25bn target by 2025. Net debt at quarter-end was $40.4 billion, down $0.5 billion, with the company saying it is on course to reach its $35bn target. Gearing at 33% was above last year and higher than where Bernard Looney would really like it to be.

Stocks in Europe struggled this morning after US markets were down heavily in the previous session and there was a weak handover from Asian equities. Yesterday’s capitulation across equity markets may require a bit more of a washout before the bulls are happy to come in again – they may even decide to wait for the US election to be over first, although after an hour of trading on Tuesday we have seen the bourses steadily come back to the flatline.

Stimulus seems like a bust before the election after Pelosi and Mnuchin failed to reach agreement on a call on Monday and Mitch McConnell adjourned the Senate until Nov 9th.

Pre-election volatility would be expected but this is occurring just as we are seeing the average number of new daily cases of coronavirus in the US hitting a record high, with former FDA boss Dr Scott Gottlieb warning of an exponential spread of the virus. Strict lockdowns across Europe and the problem of getting fiscal support where it needs threatens to create a double-dip recession.

Election jitters, no progress on a stimulus package and surging case numbers culminated in an equity market capitulation yesterday.

The S&P 500 declined almost 2% and under the 50-day simple moving average at 3,408, though it rallied off the lows at 3,364 in the last hour to finish at 3,400. Among the volume leaders, Snap declined 4.4%, Apple was flat ahead of Thursday’s earnings and American Airlines dropped over 6% as travel stocks were among the worst performers. Cruise liners sank by 8-9%.

The situation in Europe was no better, though the FTSE 100 failed to put in a new low. The DAX capitulated with a decline of 3.7% sparked by SAP’s pessimistic outlook and the German market is trading at levels not seen since June.

Earnings today to watch out for 

27Oct   Microsoft Corp.   Q1 2021 Earnings  
27Oct   Pfizer Inc.   Q3 2020 Earnings  
27Oct   Merck Co.   Q3 2020 Earnings  
27Oct   Eli Lilly and Co.   Q3 2020 Earnings  
27Oct   3M Co.   Q3 2020 Earnings  
27Oct   AMD (Advanced Micro Devices) Inc.   Q3 2020 Earnings  
27Oct   Caterpillar Inc.   Q3 2020 Earnings  

Election Watch

Biden lead cut to 7.8pts nationally but holds at 4.1pts in battlegrounds. Trump trailed Clinton by 2.8pts in the key swing states at this stage in 2016.

Elsewhere, whilst equity markets are volatile, bonds haven’t moved much with US 10-year Treasury yields at 0.80% and 10-year TIPS at –0.91%. With little movement there, gold is finding itself hugging its 21-day SMA and stuck between its 50-day and 100-day moving averages.

FX markets remain relatively calm. GBPUSD was steady at 1.30 as Brexit talks continue in London and EURUSD was holding around 1.18 ahead of the ECB meeting this Thursday. US durable goods orders on tap today expected at +0.5%, with core reading seen at +0.3%.

Gold movement on 27.10.2020