Morning Note: Market selloff, Uber tanks again, Vodafone grasps the nettle

Forex
Indices
IPO
Morning Note

It was another, more brutal sell-off on Wall St led Asian shares lower overnight, setting us up for a nervy session in Europe. Futures right now look positive but we may well see selling pressure re-emerge.

SPX closed 2.41% lower, taking it back to March levels. This was its worst decline since the turmoil at the start of January. The Nasdaq suffered its worst day since December as tech stocks were the worst hit from the fallout of the US-China spat. The Dow shipped over 600 points, to end around 25,324, with some of its biggest hitters affected by the China trade story directly (Boeing, Apple).

Risks for now seem very much skewed to the downside until we see some kind of equilibrium achieved again. The market is seeing the window for a deal causing tightly, although with tariffs not taking effect yet we could yet see some improvement in relations. If this is the third shoulder of a giant triple top in the market there is a hell of a long way to go lower. But we are probably not at that stage yet. The Fed remains on side – bets on a cut this year have shot up from around 50/50 to around 75%.

Commodities

Gold spiked higher as a risk-off proxy. Prices which had dithered around $1280 level for a while drive up through the big round number at $1300 and was last just down a shade beneath this.

Oil had risen amid escalating tensions in the Persian Gulf. However the reality of the trade war began to hit home later and crude prices slid again. Brent, which had leapt clear of $72, was last holding just shy of the all-important $70.60 level. This is a level we have talked about time and time again and it is proving something of magnet for Brent right – a decisive break in either direction could signal a fresh direction.

FX markets are completely ignoring the whole stooshie, although there a touch of movement in the Chinese yuan, but not a lot. Little movement for now as central bank liquidity is onside to keep volatility low. BoJ now also talking more stimulus should consumer prices lose momentum.

Uber stock reels post-IPO

It was a bruising session for Uber with shares down by more than 10% on the day. Adding insult to injury, they fell further after market to trade below $37.

Following the Uber and Lyft debacles, there are now questions over whether some remaining unicorns choose to lust this year. The likes of Airbnb and WeWork could decide to pull their planned IPOs until there is more certainty.

Moreover current market conditions do not seem favourable for listings right now and companies may prefer to wait for a rebound in the broad market before listing. That said, it’s too easy to lump all IPOs into the same basket and see a read across.

There have been notable positives in the latest round of IPOs – Beyond Meat, Zoom and Levi’s shares rising firmly from the strike price post-IPO. Perhaps it’s just a case of good old fashioned stock picking and valuations after all.

Vodafone cuts dividend

Vodafone has bowed to pressure and cut its dividend. Or rebased to use the euphemism. The dividend was cut from 15 eurocents to 9, which is a very hefty cut indeed and investors will punish this move. Unlike some notable others, though, Vodafone has grasped the nettle and chosen to put the future of the business ahead of short-term returns to yield hungry investors. Now it’s not great news, but at least it shows the new CEO is willing to think longer term and is seeking to manage the debt.

On top of controlling debt, one of Vodafone’s key problems is the very large investment needed for 5G rollout. Auctions in Italy and elsewhere (Sweden, Australia) indicate the enormous costs and further divestments to shore up the dividend whilst still investing enough in capex seems inevitable. It is very likely Vodafone will flog its towers as part of this strategy, or to use another euphemism in today’s update – monetise. Vodafone also announced that it will sell its NZ business for $2.2bn in a move that frees up some cash.

Today’s results were full of euphemisms actually. The raw results showed a 6.2% decline in revenues and a loss for the year of €7.6bn. But instead management is directing us to ‘alternative performance measures’, which show far healthier EBITDA growth of 3.1% and group services revenues rising by 0.3%. Caveat emptor. In addition to the 5G cost, Vodafone faces a number of competitive headwinds in Italy, Spain and South Africa. There’s a lot of restructuring going on amid big changes in the industry with 5G. Management seems to be grasping the nettle and should be allowed time to deliver on the strategy

Apple earnings preview: eyes on services revs, margins and China

XRay

A whopper of a profits warning at the beginning of January has done nothing to dent Apple’s share price performance in 2019, which is +40% higher this year. So what happens now, with expectations reset lower? Here’s our quick take on what to expect as Apple reports its fiscal second quarter numbers after the close on Tuesday.

It’s all about the pivot away from iPhone unit sales to focus investor attention on Services revenues and the wider Apple ecosystem. Of course, iPhone unit sales won’t be reported. 

Q1 marked a 5% decline in revenues company wide as revenues from iPhone sales declined 15%. Total revenues from everything else plus services was up 19%.

Apple’s guidance

In its Q1 earnings update the company provided the following guidance for Q2: 

  • revenue between $55 billion and $59 billion 
  • gross margin between 37 percent and 38 percent 
  • operating expenses between $8.5 billion and $8.6 billion 
  • other income/(expense) of $300 million 
  • tax rate of approximately 17 percent 

Wall Street is anticipating EPS of $2.36 v $2.73 a year ago, whilst revenues are also seen declining from $61.1bn last year to $57.4bn.  

Dial back to the Jan warning from Tim Cook and it was China where the real trouble lay. We would expect some improvement here to be seen in this quarter’s numbers with demand for iPhones picking up again in the wake of price cuts. 

Services in focus

On Services, clearly the marked it eyeing another bumper jump in revenues, which were up 19.1% in the first quarter. But the impact on overall margins will also be important. The higher margins here should deliver ongoing support to group margins. For Q1, it reported Services margins of 62.8% against 58.3% in the year before.  

We’ll also be looking for anything relating to its suite of new products launched in March – credit card, streaming service, News+ and Arcade. Whilst only News+ was available after the launch event, we may get more of a feel of how these services will affect the bottom line – pricing will be of particular importance. Don’t hold out for much detail in the earnings report, although there could be something in the earnings call.  

Markets will also be eyeing capital returns. A year ago the company committed to $100 in buybacks and dividends over a two-year period. We may well Apple outline further capital returns via an increase in the dividend (10% is being talked about, against a 16% rise last year) and more buybacks. Even if the number are a touch soggy the prospect of more capital returns should keep investors on side. 

Average price target from the 36 analysts we track suggests a 3% downside to the current price at a little short of $200. Following a strong showing so far in 2019, Tuesday’s earnings may result in some changes to price targets on the upside. 

Key focus: Are Services revenues really going to continue to accelerate enough to offset the plateau in iPhone sales? Is there evidence of a bounce back in China?

Brexit compromise, dire PMIs, a lift for Facebook and a drop for Lyft

Forex
Morning Note

Facebook up on Deutsche Bank Instagram note, Lyft receives first “Sell” rating

Despite the negative news-flow swirling around Facebook as it battles concerns over privacy and extremist content, stock has continued to climb today, registering a 3.3% gain. A new note from Deutsche Bank states analysts believe that Friday’s addition of a Checkout on Instagram feature for the image-sharing platform could bring in revenue of $10 billion by 2021. Facebook is currently trying to move away from its reliance on ads, which currently generate 98% of revenues.

Finding alternative revenue streams is important for the company as it faces pressure to clamp down on who it is allowing to advertise, especially as the platform comes under scrutiny for the role of paid ads during elections and other political events.

At the other end of the spectrum is Lyft, which yesterday closed below $69.00; under its IPO price. The stock has been hit by its first “sell” rating. Michael Ward of Seaport Global has set a target price of $42 per share, claiming the current price represents a “leap of faith” in the willingness of consumers to forgo car ownership in favour of ride-hailing services.
Executives at rival ride-hailer Uber may not be looking forward to their upcoming float as much now. Lyft’s performance could significantly dent the price investors are willing to pay; it seems that holding a company valued at many times earnings and yet to post a profit isn’t quite the golden opportunity many first believed.

Looking at the wider markets, sentiment remains positive after fresh signs that the US and China are nearing a deal to end the months-long trade war between the world’s two largest economies. Recession fears are easing and global stocks climbed to six-month highs, while a move out of safety pushed the German ten-year yield back above 0%.

Asian shares hit a fresh seven-month-high, with the Hang Seng up 0.9% to break above the 30,000.00 handle before consolidating around 29,950.00, and the Nikkei 225 up 1.3% to flirt with 21,800.00.

European shares are also higher; the DAX has registered a 1% gain. Signs that the UK government may be moving towards a softer Brexit have helped nudge the FTSE up nearly 60 points; resistance remains around 7,400.00.

Cable caught between Brexit compromise and service sector stumble

Having exhausted all other Brexit options, Theresa May last night announced that the UK needed another short Article 50 extension, and extended an offer of talks to Labour leader Jeremy Corbyn. May still doesn’t want the UK to take part in European Elections, but wants to avoid a no-deal Brexit; currently scheduled for April 12th.

It marks a significant change in strategy, and cable responded positively. Sterling was up 0.5% against the dollar this morning, but gains were trimmed following a dire reading from the March services PMI. Analysts expected the reading to drop from 51.3 in February to 50.9, but the sector instead recorded a contractionary 48.9.

Taken together, the PMIs are waving a red flag for the UK economy. Only the manufacturing sector continues growing, and that is because of companies stockpiling ahead of Brexit.

The uncertainty facing businesses is an anchor on the UK economy, but can May and Corbyn craft a deal between them that appeases Parliament? The move certainly signals the Prime Minister is ready to consider a softer Brexit, but will anyone buy it?

During normal times, a consensus between Conservative and Labour leaders would have a strong chance of uniting the house. But we have to remember the circumstances and the leaders in question. Tories aren’t likely to vote for anything with Corbyn’s fingerprints on, while the Labour party isn’t exactly Corbyn’s biggest fan either.

Cable remains higher – a deal that potentially avoids further economic damage is clearly better than no deal that threatens even more (so markets believe). A soft patch for the economy can be overlooked if things get cleared up quickly, and hope this is the case has kept GBP/USD supported around $1.3175.

Market Commentary – China, Brexit and easyJet

Morning Note

Markets distracted by Chinese manufacturing growth, Brexit votes continue, easyJet issues profit warning 

Data showing surprise growth in Chinese manufacturing during March has stoked gains for equity markets today. Asian stocks are leading global indices higher; the Hang Seng gained over 500 points, while the Nikkei rose 300 points. European equities followed suit, led by Germany’s DAX, which broke through 11,700.00 before trimming gains to trend around the 11,650.00 handle. US futures indicated a higher opening, with the Dow above 26,100.00 and the NASDAQ indicated 1% higher around 7,470.00. 

China’s Caixin manufacturing PMI climbed into positive territory for the first time in four months, printing at 50.8 against analyst expectations for a reprint at 49.9. Even more notable was the rise in staffing levels in Chinese factories; the first recorded since 2013. 

Progress in US-Sino trade talks has helped increase external demand, but the bulk of new activity was as a consequence of renewed stimulus by the Chinese government. But one positive reading from China does not a crisis avert, and markets might want to take a look at the latest numbers from the Eurozone before dropping bonds and rushing back into equities. 

Manufacturing in the euro area saw its largest decline in almost six years last month, with powerhouse economy Germany leading the drop. The German PMI tumbled to 44.1 – lowest since July 2012 – while the aggregate currency bloc indicator fell from 49.3 in February to 47.5 in March. 

US manufacturing data is set for release this afternoon; February saw a worse-than-expected decline – another could slam the brakes on the equity rally. 

UK parliament ready to vote on further Brexit options 

Cable has found strong bid this morning, with 0.5% gains taking GBP/USD back towards the key $1.3100 handle. However, positive moves for sterling are less to do with developments in the UK political sphere and more to do with a move out of safe-havens as described above. The dollar is also down versus the euro, Aussie, and Kiwi. 

MPs are getting ready to hold another series of indicative votes today, with some of the defeated motions returning for a second attempt, although others have been replaced with new options. On the menu are everything from ruling out a no-deal exit to demanding a no-deal exit, a referendum to prevent a no deal, and a referendum on any deal passed by Parliament. 

It’s hard to see any of these options gaining a majority after the events of last week, which leaves us awaiting a fourth vote on Theresa May’s Withdrawal Agreement. The Prime Minister may threaten a general election should the proposal fail, which seems unlikely to sway many who opposed the deal, considering most of them are the opposition parties and even many Conservative MPs have openly called for one. 

Turbulence for UK airlines as easyJet issues profit warning 

Rising costs and Brexit have hammered easyJet’s bottom line. The company announced it expects to make a pre-tax loss of £275 million during fiscal 2019 – up from an £18 million loss in the first half of 2018. The company also stated that it was “cautious” with regards to the H2 outlook. 

Bookings for early summer have seen revenue per seat rise slightly, but in the first half the metric is expected to have dropped 7.4% in line with guidance issued in January. Increased passenger numbers are forecast to have pushed revenue 7.3% higher to £2.34 bn, in-line with the analyst consensus. 

First-half costs are guided 19% higher thanks to the cost of fuel and investment in measures to minimise summer disruption, with preparations including spare planes and crew. 

EasyJet shares dropped 8% on the news, with read-through seen across the sector. Ryanair fell 3.2%, while IAG – owner of rival British Airways – slipped 1.5%. 

For easyJet, the damage from Brexit uncertainty is the impact it is having upon consumers; the company itself is well-prepared for even a no deal Brexit. The EU Parliament has approved air connectivity legislation and the UK has confirmed it will reciprocate – allowing UK and EU air carriers to continue operating. 

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