Markets react to war plus NFP this week

Safe Havens, Gas & Oil, how will markets react on Monday, as Putin puts nuclear forces on alert.

Plus- This week.

1. US non-farm payrolls (Feb) – 04/03 – in the lead up to the January jobs report there was a lot of briefing about the prospect of a disappointing number, by both the Federal Reserve, as well as US government officials. It was therefore a big surprise when the resulting numbers not only confounded expectations, but also saw large upward revisions to November and December as well. The contrast was even more marked given the big -301k decline seen in the ADP jobs report only two days previously, with the Omicron variant being blamed for the decline because of absences through sickness and isolation expected to make themselves similarly felt in Friday’s numbers as well. What we got was a complete contrast, with a big jump in hiring in January to 467k, well above expectations of 125k, while the December number was revised higher from 199k to 510k, as the US economy added over 900k new jobs over the Christmas and New Year period. Despite all the concerns about a big hit to hospitality and retail due to Covid absences, food and drinking places saw job gains of 108k, while retail trade saw 61.1k new jobs added, which doesn’t quite tally with the big jumps that we’ve been seeing in the weekly jobless claims’ numbers in recent weeks. With the jobs market looking much better than initially feared, the wages data also came in better than expected, pushing yields higher. These numbers saw a jump from 4.9% to 5.7% in January, and with the economic data since then also coming in better than expected we’ve seen the odds of a 50bps Fed rate rise move up the agenda over the past few weeks. While several Fed officials have pushed back on this narrative another strong payroll and wages number this week does have the potential to put further pressure on the Fed to go for a 50bps move when they meet later in March. Expectations for February are for 400k jobs to be added, while the unemployment rate is forecast to fall to 3.9%. Another positive development in January saw the participation rate rise sharply to 62.2%, a decent jump from 61.9%, and the highest level since March 2020. Wage growth is expected to come in at 5.9%.

2. France, Germany PMIs (Feb) – 01/03 and 03/03 – last week’s flash PMIs showed an improvement in service sector activity in both France and Germany as the slow easing of restrictions continued throughout the month. On the manufacturing side activity was more mixed with France seeing an improvement to 57.6, while German activity slipped back from 59.8 to 58.5. Soaring power prices in Europe are unlikely to help here with the uncertainty created by events on the Ukraine, Russia border. We also have the latest numbers from Spain and Italy which were both poor in January on the services side, with Spain sliding to 46.6, from 55.8, while Italian services activity slid to 48.5. With inflation surging in both countries’ services activity is likely to remain under pressure, although we could see a half term pick up. Manufacturing has been more robust for both with Spain manufacturing at 56.2 in February and Italy at 58.3.

3. UK PMIs (Feb) – 01/03 and 03/03 – the relaxation of restrictions at the end of January appears to have released a wave of pent-up demand after the latest flash numbers saw a big rebound in services activity in February. Output expanded at its fastest rate in 8 months, albeit against a backdrop of a sharp rise in inflationary pressure. Inflation appears to be rising faster in the services sector than it is in manufacturing. Growth in new orders saw its fastest activity on 8 months, with strong activity in travel, leisure and entertainment. Services activity is expected to come in at 60.8, while manufacturing is expected to come in at 57.3.

4. Bank of Canada rate decision – 02/03 – with all the debate about a Federal Reserve rate rise, there is the prospect that the Bank of Canada might steal a march on them this week, by raising rates themselves. Canada is facing similar issues to the US, rising inflation with CPI at a 30 year high, and a labour market that is recovering. In January the central bank did warn that inflation was likely to be higher than forecast, through most of this year, and for a good part of next. With the Bank of Canada having already finished its bond buying program there is no obstacle to a 25bps rate hike this week, and with the Federal Reserve more or less guaranteed to carry out a similar move in two weeks’ time it would make sense for the Bank of Canada to raise rates this week.

5. EU CPI (Feb) – 01/03 – the pressure has intensified on the European Central Bank in recent weeks after January CPI remained high, rising to a new record high of 5.1%, despite higher base effects. With headline inflation already well above 10% in a number of Baltic countries the ECB’s refrain that we would see no rate hikes this year has quickly been ditched in all but name, after ECB President Christine Lagarde refused to repeat her remarks to that effect at her last press conference. With energy prices still very high and tensions on the Ukraine, Russia border elevated it is difficult to see how inflation can fall quickly. Producer price inflation has continued to remain high, in the mid to high 20 percentile across the bloc. We’ve already heard from a number of Governing Council members breaking ranks to call for the end of asset purchases this year and for a rate hike to come as soon as Q4, although recent events in Ukraine have added a counter narrative to that. Another strong CPI number for this week will only see those calls get louder.

6. Associated British Foods Q2 22 – 28/02 – ABF share price hit a 5-month high in January but has since slipped back, despite confirming a decent set of full year numbers, at the end of that month. The European business has been its weakest performing area due to store closures in Austria and the Netherlands, where the company saw a £30m sales loss. The US business on the other hand showed the biggest improvement. with overall sales up 37% from pre-pandemic levels. Total Primark sales were still 5% lower than pre-Covid. All the other businesses improved on their revenue performance from a year ago, with the exception of Grocery, which saw revenues of £1.2b, down from £1.22bn. Sugar saw a 12% rise in revenues, agriculture a 7% increase, and ingredients, up 6%. On current trading, costs have been rising, and some of these are being offset by price increases where necessary, while expectations for Q2 Primark sales are expected to be well above last year’s levels, with the outlook for full year revenues and profits unchanged. The removal of Plan B guidance at the end of January could also help deliver an upside surprise, after management admitted that the implementation of the restrictions in December prompted a sharp drop off.

7. Aviva FY 21 – 02/03 – the Aviva share price has seen some decent gains since November. CEO Amanda Blanc has been under pressure from activist shareholder Cevian Capital to improve shareholder returns, with £4bn expected to be returned to shareholders by June this year. Overall business in the first half was positive building on a solid Q1, seeing a 24% increase in inflows to its savings and retirement business, an increase of £1bn to £5.2bn, adding over 100k new workplace customers. Operating profits from continuing operations rose 17% to £725m. In Q3 the company saw net flows of £7.3bn into its savings and retirement business, a rise of 21%.

8. Darktrace H1 22 – 03/03 – it has been a turbulent few months for Darktrace shareholders, with the shares peaking at 1,000p back in September. Since the shares have more than halved, although they still remain well above their IPO price of 250p, the post IPO shine has well and truly disappeared. In September last year the company upgraded its forecasts for 2022 for annualised recurring revenue (ARR), from between 32% and 34%, to 34% to 36%, as it looks to add new clients. The declines started with a bearish broker note from Peel Hunt in October, which ultimately ended its brief flirtation with the FTSE100. In January the company upgraded its full year guidance for revenues and margins again, saying it expected H1 revenue to come in at $190m with year-on-year revenue growth expected to rise between 42% and 45%, up from a previous forecast of 37% to 39%, and had signed up over 6,500 customers by the end of 2021. This should have been enough to help put a floor under the share price; however, the company appears to have attracted the attention of short seller Shadowfall, who sent out a highly critical research note saying that its business model is watery-thin and won’t stand the test of time. The hedge fund says that its addressable market is nowhere near as big as they think that it is. The company also has the overhang of political risk after one of its major shareholders, Mike Lynch lost his extradition appeal to the US, while US prosecutors have applied for subpoenas to force the business to hand over emails and documents in relation to him. Lynch and has wife are the second biggest shareholder in the business, and they may well have to sell which could act as a short-term overhang. Last month Darktrace said it had signed a $1m deal with a multinational electronics corporation, with a presence in 70 countries and 250k employees. Last week the company also paid paid €47.5m for Cybersprint, an attack surface management company based in the Netherlands. The platform automatically detects, maps and searches for all digital assets related to a company’s brand, and identifies weaknesses or other vulnerabilities.

9. Taylor Wimpey FY 21 – 03/03 – when Taylor Wimpey reported in November the house builder said it expected to deliver full year results in line with expectations. For the time being management said that house price inflation was still offsetting build cost inflation meaning that margins were being maintained. Since then, a number of headwinds have started to blow including the government’s decision that house builders contribute to a cladding fund to address the issues thrown up the Grenfell fire. We’ve also seen the Bank of England raise interest rates twice with the potential for up to two more which could take the heat out of the housing market, and perhaps act as a cap on asking prices. In January, Taylor Wimpey said that it expected to report full year results in line with expectations, as well as an improvement in operating margins. Since then, the shares have recovered from 15-month lows. Total UK home completions increased by 47% to 14,087. Average selling prices were also higher at £332k, a rise of 3%. The order book for 2022 of £2.55bn, is down slightly from levels last year. Its Spanish business has also started to show signs of picking up again with 324 new homes on the order book compared to 126 a year ago.

10. ITV FY 21 – 03/03 – it’s been a fairly underwhelming 12 months for the ITV share price, however it has done better on the advertising front, as life returns to normal and people start to book holidays again. In the first half of its financial year its numbers were a little underwhelming, largely due to the reluctance to pay an interim dividend. In Q3 the update was much better, with ITV Studios posting a 32% increase in revenue, to £1.19bn, up from 26% in H1. Media and Entertainment also remained steady, with total advertising revenues up 30%, and on course to be the highest in ITV’s history, with an expectation that over the year it would rise by 24%. Profit to cash conversion is expected to be around 60% in 2021, up from the previous guidance of 30%. In December at an investor seminar ITV said that it expected ITV Studios revenues to recover to 2019 levels in 2022, with margins expected to rise to 13% to 15% by 2026. At the end of this year 14% of total revenues is expected to come from streaming, rising to 25% of total revenues by 2026.

11. Zoom Video Q4 22 – 28/02 – Zoom’s Q3 numbers back in November reflected the fact that while the business is still growing, the rate of growth is starting to slow, and that has seen the shares continue to fall over the last few months. This shouldn’t be unexpected given the return to normal working that has been seen over the course of the last 9 months. Revenues still increased, rising 35% to $1.05bn, and above expectations, with profits of $1.11c a share. When the company reported in November it raised its guidance, saying it expects Q4 revenues to come in at $1.05bn, and full year revenue of around $4.08bn, a rise of 54% year on year, and profits to increase to $4.84c a share. With the shares now back at levels last seen in May 2020 the bubble appears to have well and truly burst for a lot of these tech unicorns. That doesn’t mean they can’t fall further, even with the shares down over 75% from their 2020 peaks, and now with a market cap of $37bn, the valuation still seems a little on the high side, and increasing competition from the likes of Microsoft Teams, and Skype. Profits are expected to come in at $1.07c a share.

12. Vroom Q4 21 – 28/02 – the last few months has seen the sale of used car prices go through the roof with the latest CPI numbers showing prices up by as much as 40%. While used car prices have gone up, online car retailer Vroom has seen its share price go down equally as fast, if not faster. From being above $40 in July last year the shares are now well below $10. Since August the shares have more than halved, with the higher than projected losses of $0.70c a share in Q3 accelerating the declines. On the plus side revenues were higher at $896m. The outlook for Q4 wasn’t much better, with losses expected to stay at current levels, while revenues are expected to remain steady between $865m and $900m. The company appears to be selling more cars on a quarter-by-quarter basis; however, its operating costs are rising equally as fast and that’s its main problem, and it’s something it needs to get to grips with. Losses are expected to come in at $0.76c a share.

13. Target Q4 22 – 01/03 – US big box retailers have managed to address the challenges posed by the pandemic better than their smaller peers. Walmart is the market leader in his regard; however, Target has also done well. At its Q3 numbers back in November the retailer, beat expectations on revenues and profits. Revenues rose by 13.3% to $25.65bn, while profits came in at $3.03c a share. Same store sales also came in at a very healthy 12.7%, a decent increase on Q2’s 8.7%. Looking ahead to Q4 Target raised its guidance slightly on same store sales, however they did warn that costs were starting to rise, and which has seen the shares slide back from record highs over the last few months. When Walmart reported at the end of last month it cited higher supply chain costs as a challenge, and while the US consumer has seen a rebound in Q4 there is a concern that these costs could well rise further in the coming months. Profits are expected to come in at $2.88c a share.

14. Best Buy Q4 22 – 03/03 – like Target, Best Buy shares have dropped sharply since its Q3 update back on November, falling back from record highs. When the company reported in Q3 revenues came in ahead of expectations, coming in at $11.91bn. Profits also beat forecasts, coming in at $2.08c as the electrical retailer followed the trend of its retail peers Target and Walmart. Full year revenue guidance was also adjusted higher to $51.8bn to $52.3bn. One of the main reasons for the sell-off has been a familiar one, with Q3 gross margins falling short of expectations, amidst concern that this was likely to be a recurring theme heading into 2022. The sale of electrical items has been one of the few areas of decent demand in recent months and Best Buy is an Apple reseller, as well as being a specialist in electrical items, which means there is much higher scope for an upside surprise, given its business is much higher margin. Profits are expected to come in at $2.78c a share.

The week ahead: US non-farm payrolls, Bank of Canada, ITV, Darktrace, Aviva results (