Headlines and deadlines as talks move into the weekend

It’s been a lacklustre end to the week as European markets ebb back and forth between positive and negative territory, as both US stimulus talks and UK-EU trade talks move into the final straits, with both threatening to stretch into the weekend and perhaps beyond, pushing the deadlines, as well as the patience of the markets, to the limit.

Royal Mail shares are lower after coming in for criticism from business leaders over postal delays, saying that the company is not being transparent over the levels of disruption that it is dealing with. This is particularly bad timing given yesterday’s news that Amazon and Hermes are in talks with the Post Office for it to handle parcels in preference to Royal Mail, which currently delivers all parcels from the Post Office.

Lloyds Banking shares are under pressure today, though that is probably more to do with the stalemate around UK-EU trade talks, rather than the news that the bank has scrapped bonuses this year to all of its staff. Nonetheless this is still a worrying move in terms of the outlook for its profits this year. This move would appear to highlight the pressures that all banks are under this year, with respect to non-performing loans. The bank did warn earlier this year that bonuses would be cut if underlying profit fell more than 20% below target. So far this year Lloyds has set aside £4.1bn in respect of bad loans, with an expectation that this could rise as much as £5bn.

NatWest Group’s numbers also painted a similar picture earlier this year with an expectation of between £3.5bn and £4.5bn in impairment this year. Their shares are also lower today. The new restrictions and lockdowns are likely to put further pressure on bank margins as we head into next year, and today’s move by Lloyds may not be the last, especially if restrictions carry on well into next year and unemployment continues to rise. Both Lloyds and NatWest, more than HSBC and Barclays are much more susceptible to the slings and arrows of the domestic economy due to their lack of investment banking operations.  

Hikma Pharmaceuticals is the best performer after gaining FDA approval for the roll out of its generic version of GlaxoSmithKline’s Advair drug. Wagamama owner Restaurant Group has slipped back after reporting that the impact of the November lockdown saw cash burn rise to £5.5m a month, some £2m higher than in March, due to higher furlough contribution payments, and other related costs. The company went on to say that the new tighter restrictions were likely to mean that a similar trend was likely to play out over the rest of the quarter, with two-thirds of its restaurants closed, a problem that is unlikely to improve until well into the first part of next year, if a new lockdown is imposed in January.

With fixed costs like rents still needing to be paid, despite the government help on wages being extended to April, it is becoming ever clearer that the hospitality sector could well be a lot smaller, coming out of these new restrictions as the money starts to run out. The extension of furlough money, while welcome, won’t save a business that is haemorrhaging cash through having to pay continued fixed costs, without the necessary cash inflow to offset the outflow.

If there is another post-Christmas spike in infections, which seems likely and leads to longer lasting restrictions into January, and February, this could have severe consequences for those hospitality businesses that are already on the brink.

US

US markets have opened higher, with the S&P 500 opening at a new record high, as talks on a new $900bn US stimulus plan look set to drag into the weekend, with a deadline once again getting stretched to it limits.

Tesla shares have jumped to new record highs as it gets set for its debut on the S&P500 on Monday. The shares are already up over 600% this year alone, and since mid-November when it was announced that it would be included in the US benchmark index it has ratcheted up another $200 since then.  

Moderna shares are also slightly lower after the FDA pushed back on reports that emergency approval for use as a second Covid-19 vaccine had been granted overnight. The approval is still likely to be forthcoming, however it appears that some jumping of the gun has taken place It is still a much better candidate than the Pfizer vaccine from a logistical point of view, due to a much higher storage temperature of -20C degrees.

FedEx’s latest Q2 numbers came in much better than expected, revenues coming in at $20.6bn well above expectations, with the average daily package volume rising by 29% over the quarter. Profits were also higher than expected, with EPS coming in at $4.83c a share, above consensus of $4.01c. In light of how good these numbers were, it’s rather surprising that the shares have slipped sharply on the open, however uncertainty about the outlook and a reluctance to offer guidance appears to have prompted some profit taking.

FX

The US dollar is enjoying a bit of an end of week rebound after another week of losses as we get some position squaring at the end of the last full trading week of 2020, with the pound the biggest casualty as trade talks with the EU get pushed closer to the wire, with few signs of any compromise, on the remaining 5-10% of the deal.

The EU parliament upped the ante a little by setting a Sunday deadline to ratify a deal, however if the talks do drag into next week EU member states said that they would ignore that deadline if it meant avoiding a no deal outcome on the 1^st January 2021, with the EU Council allowing a provisional application without the approval of the parliament.  

UK retail sales for November declined by 3.8% which was slightly better than expected, however when you take fuel out of the equation, the fall was only 2.6%, while the October numbers were revised higher by 0.1%. to 1.3%.

The better-than-expected numbers for November show that even though the economy was locked down, and a lot of hospitality and retail was closed, the online part was able to pick up some of the slack, with a rise of 31.4%. Nonetheless it was still the first negative print since the end of the first lockdown. On a more positive note, consumer confidence improved in December to -26, from -33 in November, probably as a result over the news of a vaccine rollout.

Commodities

Copper prices have been on a tear of late, moving up to seven-year highs on speculation that a focus on renewable energy and a green agenda will carry the red metal to levels last seen in 2011, when it hit record highs. Copper is certainly a key component in electrical wiring and with the growing popularity of electric vehicles along with other battery-operated technology, and other renewables, demand for copper could well outstrip supply, over the next few years. However, given the move towards a greener and more environmentally friendly world I’m not sure more copper mines are the answer to a greener world.     

Gold prices have slipped back after some decent gains this week as the US dollar benefits from some end of week strength, and position adjustment.  

Bitcoin prices have continued their recent resilience, with little in the way of a dip thus far after breaking above its previous record highs, just below $20,000 earlier this week.

Crude oil prices have maintained their recent buoyancy, hitting new nine month highs, helped in some part by optimism that the vaccine rollouts starting to get underway will outweigh the short term negatives of rising coronavirus cases, and the prospect of more lockdowns in the New Year.