Rally fizzles out, Tesco pandemic costs, Sterling & Boris
Optimism is fizzling out as doubts grow about how and when exactly quarantine and lockdown restrictions will end. The failure of Eurozone finance ministers to agree joint action underscores the limited capacity of governments to cushion the coming economic fallout.
Shares in Europe are opening with a softer tone after a strong start to the week. The S&P 500 ended slightly lower by 0.2% on Tuesday, and the two-day rally in Asian equities reversed course on Wednesday.
Traders are trying to pick a bottom in shares, and scientists are trying to pick the peak in the pandemic. Both exercises typically result in a lot of false starts before the real thing.
In the latest developments in the virus, there have been 75,000 global deaths associated with COVID-19, 10,000 of which have been in France. There was the single largest increase in daily cases in New York State yesterday, but the Chinese City of Wuhan in which the virus originated has seen its travel restrictions lifted.
It looks like pandemic curves will not flatten in time to reach April deadlines set by many governments to review lockdown measures. A few exceptions, including Czechoslovakia, have eased restrictions, but most of those deadlines come in about a week’s time. That would mean a reset for likely another three weeks. An extension of lockdowns and associated deeper economic hardship is probably priced in but raises the chance of a re-test of the March lows in stock markets.
Tesco emphasises costs
It’s not the very respectable 14% rise in Tesco’s annual profits that investors are looking at. The financial year ended in February before the coronavirus outbreak. It’s the year ahead that matters, and Tesco is unable to give a financial forecast for it. The uncertain length of the lockdown means there is very little visibility on future demand for products and services, even the essentials that Tesco sells.
Supermarket shares have outperformed wider markets during the pandemic because panic buying has meant extra sales. What has become a little clearer on these results from Tesco is the rising cost pressures that come along with the pandemic. Notably, Tesco hired 45,000 temporary workers in the last two weeks to cover staff sickness. The regular staff will still be paid, and the extra staff will be on higher wages. The takeaway is that supermarkets are a good defensive posture in a portfolio right now but don’t expect huge growth from the holdings.
Later on, Wall Street discount retailer Costco will report sales, and we expect a similar story to Britain’s Tesco with the added supply chain headaches associated with selling a lot of products made in China.
Forex markets calm with Boris in ICU… so far
The Prime Minister entering the ICU has seen an already flagging rally in the British pound take a pause. A broader improvement in risk sentiment, as well as measures by the Fed to ease dollar liquidity issues, are reasons to think the uptrend in the pound can hold. If it were to arise that Johnson’s condition deteriorated at a time when stock markets turn lower, we’d expect the bottom to fall out in Sterling.
S&P 500 to open 1 point higher at 2660
Dow Jones to open 50 points high.