Tesco profits slump, stocks swinging on mixed stimulus messages

Morning Note

Stocks fell after Donald Trump nixed hopes of a stimulus deal, or so it seemed. The S&P 500 declined 1.4% on the day having earlier traded higher.

But Trump also called for support for airlines and then sent a tweet addressing the House Democrat leader Nancy Pelosi: “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?”

In short, Republicans, including the President, don’t want to pay for a tonne of social programmes which Democrats have made part of the stimulus bill. But they do want to support the economy. Stimulus is clearly coming some way, somehow, just probably not before the election.  Or it could, who knows.

Markets remain clearly on the hook to the headlines but the fundamentals haven’t changed much. The election is taking on more significance the closer it gets and markets just want it out of the way to move forward.

Biden’s lead in the polls is compelling and tonight’s vice presidential debate probably won’t change much with so few voters undecided. Nevertheless, Trump is back and cannot be written off just yet.

Indeed whilst the S&P 500 fell, it didn’t even look at 3,300 and remains in the middle of the September range. Earlier it briefly broke the Sep 16th intra-day high, hitting 3,431.  European markets are similarly short of much direction right now – in fact they’ve been clamped in a tight range since June and were flat in early trade on Wednesday.

Tesco shares up on earnings

Tesco profits fell as costs and sales rose. Operating profit before nasties was down 15% despite group sales rising almost 7%. Retail free cash flow decreased by £91m year-on-year to £554m. Tesco Bank is becoming a headache and needs to be offloaded – sales here slipped a third and it slumped to an operating loss of £155m due to provisions for bad debt and lower income.

Management noted that a ‘marked deterioration in macro-economic indicators, particularly UK unemployment and GDP, drove an increase in the provision for potential bad debts’. Shifting the financial division on to some other party seems like one of the first things for Ken Murphy. Having already offloaded the mortgage book, Tesco has one foot out the door already.

Booker continues to do well with Retail sales up 22%; offsetting Catering sales falling 12%. And whilst we often compare Tesco to a super tanker that can take a long time to turn around, Tesco’s scale has been important in retooling for the pandemic age.

Online delivery capacity more than doubled to reach 1.5m slots a week, which compares favourably with Ocado and the problems it has in building capacity. Whilst increases costs, being provisioned to handle more online orders is essential and makes Tesco look well placed – shares rose over 2%.

Democrat report hammers big tech

As flagged in yesterday’s note, a Democrat-led Congressional committee has issued a damning report on big tech. Following more than a year of reports and investigations, the 449-page report said Amazon, Apple, Alphabet and Facebook enjoy ‘monopoly power’ and called on them to restructure their businesses and possibly even be broken up.

It’s just a report at this stage but a Democrat clean sweep in November’s elections could see elements become legislation. Share in the four companies fell by around 2-3% yesterday.

FOMC meeting minutes later will be parsed for any further details on what policy makers believe could trigger any tightening. The September meeting minutes ought to provide more granular detail about how policymakers view the shift to average inflation targeting, and to what extent the consensus is strained by this.

EIA data in focus for oil

EIA inventories out later today coming the API report yesterday showed build in crude stocks of 951k barrels in the week ending Oct 2nd. As previously argued, we need to closely watch global inventories flipping from draws to builds which would signal demand failing to re-emerge at the levels anticipated.

EIA is forecast to record a draw of 1.2m barrels. WTI is trading at $40 but faces resistance.

Chart: E-mini futures take elevator down on Trump tweets but climb stairs back up