TalkTalk bid, IMB up on smoking, S&P 500 breaks range

Morning Note

The yo-yo week on Wall Street continues with stocks bouncing after Donald Trump tweeted support for a range of fiscal stimulus measures, having earlier set the market down by calling off talks on a comprehensive package until after the election. Whether it’s now or after November, what’s been made clear to investors is that fiscal stimulus is on its way.

The timing becomes less important – doubts would resurface if there is a contested election result that leaves Washington lawmakers unable to come to a deal. However, Joe Biden’s lead in the polls would suggest this is becoming less likely, albeit my inclination is that Trump will do a lot better than the polls indicate.

Europe opens higher, can Wall Street gain for a second day?

The S&P 500 rose to its highest level since the start of September, finishing up 1.74% at 3,419, with the Sep 4th closing high at 3,426 offering the daily resistance. All 11 sectors rose. The Dow climbed 530 points, or 1.9%, to notch its best day since July. The Nasdaq added 1.9%.

The question is whether market can put two straight days of gains together, something it’s not managed in a week. The range-bound nature of the market right now and the general uncertainty around stimulus and the election – not to mention the Q3 earnings season about to kick off – may make it tough to cement gains.

Nevertheless, futures point to further gains when the cash equities open later. European markets opened higher in early trade on Thursday.

FOMC minutes

Fed minutes showed that officials are divided over the application of the central bank’s new policy framework. Policymakers ‘discussed a range of issues associated with providing greater clarity about the likely path of the federal funds rate in the years ahead’.

Meanwhile a report from Fed economist Michael Kiley called for the central bank to juice bond holdings by another $3.5tn to support the economy. The market probably liked this idea, too. Participants agreed on the uncertainty facing the economy, albeit there are the likes of Bullard who think it’s all going to be fine by the end of the year.

Weekly unemployment claims data later today will be watched as closely as ever.

German exports rose more than expected in August, climbing by 2.4% vs expectations for 1.7%. However, this was down from the 4.7% recorded in July. Exports to the US were down 21%, whilst China imported only 1.1% less goods than last year.

Toscafund offer boosts TalkTalk shares

TalkTalk shares shot higher after it received an offer Toscafund Asset Management for 97p a share. TALK rallied over 16% to exactly 97p. Executive chairman Charles Dunstone needs to approve the takeover for it pass. With no discount and no premium in the price this morning, the market seems to think he is.

There were signs of something afoot in the summer – Dunstone purchased 1m additional shares at the end of June at 86p after Tosca raised its stake to 29%.

TalkTalk had somewhat gone off my radar of late so I must revert to a two-year old note from 2018: “Increasingly TalkTalk looks like it’s ripe for takeover. It provides a good entry point into the UK broadband market and with growing subscriber numbers, there is plenty to recommend it.

Indeed, with a strong subscriber base, improving margins and shares still at multi-year lows, for anyone looking for an entry point into the UK broadband market then it’s probably your best bet.”  Recently it’s enjoyed decent cash growth on better fibre rates and cost control.

Imperial Brands rises alongside smoking demand

Smoking kills: Imperial Brands is seeing increased demand for its products as a result of the pandemic. And it’s good old fashioned cigarettes and tobacco we’re talking here – ‘next generation products’ like vaping are down 30%. Another unwanted side effect of governments’ inept, disruptive and failing approach to dealing with the coronavirus.

It’s been about fighting Covid at all costs and the UK government for one has systematically failed to consider the wider public health implications of their response. For example, Matt Hancock recently admitted that cancer patients would only be treated if the virus was ‘under control’.

Management today noted: “We have experienced some COVID-related changes in consumer behaviour with increased overall demand against our expectations, as consumers appear to have allocated more of their spend to tobacco, as well as some demand shifts between different markets and channels. This has resulted in better than expected volumes, driven by improved volume trends in several key European markets and in the US.”

Group revenues are slightly ahead of the half-year guidance, but additional manufacturing costs as a result of Covid have been incurred. Constant currency earnings per share are down about 6%, in line with expectations.

EasyJet on track for first-ever annual loss

Meanwhile, EasyJet reports today it’s on course for its first-ever annual loss as a result of the pandemic restrictions on air travel that have crippled the industry. Management expects to report a group headline loss before tax in the range of £815m to £845m after flying 50% fewer passengers than last year.

The airline flew 38% of planned capacity in Q4, in line with the September update in which it said capacity would be slightly less than 40%. These sorts of losses were anticipated and, overall, I think investors only really care about liquidity and headroom to get out the other side of this. On that front easyJet had a cash position of £2.3bn as of the end of September and it’s lowering costs aggressively to reduce the cash burn wherever it can – Q4 cash burn was less than Q3, which is a positive. Capacity of Q1 2021 will be at 25%.

With winter coming it’s usually a lean time for airlines and it’s going to be a long period of uncertainty as we await to see whether next summer is strong enough to prevent further cash being required. But easyJet looks ok for now.

Plans for a testing system for arrivals into the UK to reduce the quarantine period would be a boost, but there many factors that will weigh on demand, from unemployment to fears about the virus itself.