Stocks attempt rally after selloff, sterling down on Bailey remarks, Kingfisher enjoys DIY boom

Morning Note

Stock markets firmed in early European trade but remain battered and bruised by yesterday’s sell-off as fears of a second wave of cases and new lockdown measures dealt a blow to risk sentiment. Selling pressure has been building for some time and the dam broke yesterday.

A recovery in the final hour of trade lifted the market off the lows so it wasn’t full capitulation, but there could yet be more downside as the S&P 500 approaches correction territory.

SPX, Dow tumble, tech strength stems Nasdaq losses

The S&P 500 declined by 1.2% and the Dow dropped 1.8% but tech stocks fared better with the Nasdaq flat for the day. Shares in Apple rose 3% and Microsoft was up 1% as some of the Covid winners showed more resilience to fears over second waves of the pandemic and fresh lockdown measures, which seemed to be the trigger.

Despite the heavy selling, bulls put in a strong finish – the Dow was down over 900 points at the low before ending –500pts. At its lows the S&P 500 plunged by as much as 2.7%. Nevertheless, the broad market is now already –6% for the month of September, has notched four straight daily declines for the first time since March, and is over 8% off its all-time high.

The FTSE 100 fell over 3%, breaching the 21-day simple moving average line. Despite the pressure the bulls just held the 5,800 round number and closed above the Sep 4th low of 5,799. The Stoxx 50 breached the July lows and is now close to its Jun bottom having sunk under its 200-day SMA. The move follows a clear period of congestion that was calling for a breakout, having been caught in an ever-narrower range.

The DAX fell almost 4.5% with heavy selling into the closing bell seen as bears tried but failed to crack the 12,500 round number as the 78.6% retracement of the Feb-Mar rout held. There were modest gains in early trade on Tuesday but the rally looks a little wobbly.

Fading hope for another round of stimulus in the US is another weight, with the death of Ruth Bader Ginsburg over the weekend seen as a decisive blow against a bipartisan deal being achieved before the election, since it materially magnifies the polarisation in Washington. A deal will need to wait until after November 3rd.

In addition, a heavy ramp up in August with far too much hot money chasing too few shares, increasingly stretched valuations, the lack of a vaccine on the horizon and the rising risk of volatility around the US Presidential Election – and uncertainty over whether we will get a clean result – seems to have caught up with the markets.

UK government set to introduce new Covid curbs, Kingfisher gets DIY boost in Q2

The UK government is set to introduce fresh measures to ‘control’ the virus – curfews and working from home if possible. What a difference a month makes – only a few weeks ago we were being implored to get out and about to help out. It’s almost like they don’t know what they are doing.

While pub shares fell on curfew news, several earnings reports today highlight the uneven nature of the recovery so far, and the uncertain path ahead.

Tui – uncertainty over the course of lockdowns and quarantine rules is leaving holidaymakers unsure about booking in the coming months. The winter 20/21 programme has been further reduced by 20% since the Q3 update, to around 40% adjusted capacity, reflecting ‘the current uncertainty relating to travel restrictions’. TUI says it is currently 30% sold for the adjusted winter capacity.

Compared to the normal levels of prior year, bookings are currently down 59%, in line with adjusted capacity. Consumers are much happier to assume things will be ‘back to normal’ by summer 2021. Tui says bookings are up 84% but at 80% adjusted capacity, however we should caution that much of this will be pushback demand from this summer as consumers changed travel dates to next year.

Cost-cutting has helped TUI weather the storm – that and some whopping bailouts from the German government, but it and the entire travel industry needs governments across Europe to give far greater clarity over restrictions and quarantines. Shares rose a touch but the rest of the travel sector was weaker with Carnival off another –4% and IAG down –3% after a drubbing yesterday.

Kingfisher enjoyed a strong recovery in Q2 as DIYers tackled their jobs lists. This recovery has continued into Q3 to date, management say, with growth across all banners and categories. Q3 20/21 group LFL sales to Sep 19th are up 16.6%.

DIYers are driving the recovery – sales at B&Q rose 28% in Q2 on a like-for-like basis. Trade less so – Screwfix LFL sales were up just 2.4%, though they are +9.9% in Q3 so far – as the construction industry struggles to get going again. Overall UK & Ireland sales rose 2.4% in the first half despite lockdown as people rediscovered their homes and their desire for improving them. French bounced back strongly, with Q2 sales +27% vs the –41.5% decline in Q1.

First half sales were –5.9% lower. Overall H1 sales were a tad lighter but cost reductions meant adjusted pre-tax profit rose 23% to £415m, with retail margins +140bps to 9%. Shares rose 6% in early trade and have more than doubled off the March low.

Dollar climbs on Fed jawboning, BoE’s Bailey to speak today

In FX, the rollover in risk sentiment and some interesting Fed jawboning played into the dollar bulls, with DXY sustaining a breach of the channel on the upside and clearing its 50–day SMA, which had been a key point of resistance last week. Gold retreated under $1,900 at one point with the stronger dollar weighing.

The Fed’s Bullard said the US has done enough on the fiscal front, whilst Dallas Fed president Kaplan stressed that the Fed should not keep its hands tied by committing to ZIRP forever even if the economy bounces back. Powell stressed that the Fed will use all its tools to do whatever it takes.

More Powell today plus Bank of England governor Andrew Bailey, who said in remarks this morning that the recovery in Q3 has been ahead of expectations but stressed that the hard yards are ahead.

All the market wants to know is whether negative rates are coming or not – he said the Bank has looked ‘very hard’ at the scope to cut rates further, including negative rates. So this was not the attempt to distance the MPC from the negative rate comments in last week’s release to give the central bank more flexibility. As the MPC indicated last week, Bailey wants to leave negative rates on the table.

GBPUSD was under fresh pressure under 1.28 and could be set up for a bear flag continuation with a possible dive back to 1.22. If this holds, bulls need to clear 1.30 to be encouraged. The key test is the 200-day EMA around 1.2760 which was tested last week and held, encouraging a rally back to 1.30. Cable shed this support in the early European session as Bailey got on the airwaves – one to watch today with the 100-day the last line of defence.

Retail crisis? British Land and Kingfisher highlight troubles

Equities

British Land writes down property value

As we’ve said before, who’d be a landlord right now? (Intu warning signals more high street trouble, 03/05/19). British Land today follows Land Securities in writing down its assets due to the collapse in the high street retail sector. The firm has written down its portfolio by 4.8%, with the retail part of that written down by 11.1%. Management notes candidly that difficulties were most pronounced in department stores – no great surprise there. Elsewhere things are strong – offices +1.1%, other developments +10.8%. LFL rental growth of £15m offset the £14m impact from CVAs.

As a percentage of its portfolio, department stores down have been cut to 1% from 5% in 2014, highlighting just how far the sector has fallen in just a few years. Overall the retail portfolio is being downgraded substantially – hardly surprising given the rate of store closures and well-documented problems for a number of large and small players in the sector. 

Property companies like British Land – just like Land Securities yesterday – need to react to this and protect their interests. Land Securities wrote down the value of its property by £557million to £13.8bbn, with retail parks asset value -15.5%, and shopping centre assets -11.7%.

Earlier this month Intu said LFL net rental income will be down 4-6% this year. Previously it had guided for incomes to decline by 1-2%. As we said at the time, it may not be the last time that the company has to disappoint the market. In February it took a big write down on its property values, which dragged the company into the red. Clearly tough times for landlords, but tougher for retailers.

Kingfisher struggles in France

Kingfisher is today hosting an Innovation Day for investors and analysts in London today where it will show off some spangly new products. All very nice, but one rather feels that investors would prefer to see what the new strategy is going to look like and who the next CEO will be first. 

Trading remains tough in France, but things are improving in the UK, where B&Q enjoyed a decent bump in like-for-like sales. 

UK & Ireland total sales rose 5%, or 3.4% on a LFL basis. B&Q LFLs rose 2.8%, a good performance driven by weather-related sales. A rare event where a retailer says the weather helped. Screwfix remains a real stalwart and growth shows no real tailing off – sales up 9.6% and LFL +4.5%. 

France is much tougher – total sales -3.4% (LFL -3.7%). Castorama sales were down 2.4%, with Brico Depot –4.5%, or –5.1% LFL. Romania and Poland sales were very strong still. 

Pressure on management to come up with a new plan will mount and this could well include a look at breaking up this company into smaller parts. Sometimes you are not greater than the sum of your parts. 

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