The S&P/ASX 200 (ASX: XJO) index is expected to open higher on Wednesday morning, according to the latest data from the Sydney Futures Exchange. Here’s what you need to know…
Earnings season disappoints
In a precursor to what could be another extremely volatile period, earnings results from Q1 in the US, which includes only one month of social distancing restrictions, are looking comprehensively weak. Ford Motor Co. reported a quarterly loss of $632 million as revenue fell 15% to $34 billion. The company expect the loss to blowout to $5 billion in Q2 as COVID-19 shutdowns impact production.
PepsiCo announced that stronger snack sales, up 6.8% for the quarter, weren’t sufficient to offset weaker drink sales. Meaning profit fell as revenue increased 5.1%. The company withdrew all guidance for the second quarter.
On the positive side, Google’s parent company Alphabet Inc (GOOGL) appears to be (so far) shrugging off concerns from the Great Virus Crisis (GVC) with revenue increasing 13% for the quarter, $41.2 billion, and profit growing from $6.6 billion to $8 billion. Alphabet’s YouTube business is going some way to offset weaker advertising sales dominated by travel and consumer businesses.
New highs
The Stoxx Europe 600 hit a seven-week high on Tuesday, as investors gain confidence following the ECB’s trillion-dollar support package and the gradual reopening of many countries. Worryingly, COVID-19 cases have spiked in Singapore and many experts now suggest we may be living with the virus for many years not months to come. Global markets have clearly diverged into have’s and have not’s, which is only being exacerbated by the spate of capital raisings. In the US, it is big tech weathering this storm and hitting the large portion of the S&P 500 in history, around 22%, with reducing ‘breadth’ (or fewer companies driving performance) commonly seen as a negative for markets.
Australian banks in focus
Closer to home the Australian sharemarket couldn’t hold onto a strong global lead finishing down 0.2% on Tuesday.
The selling pressure came from the banking sector as National Australia Bank (ASX: NAB) exited its trading halt after cutting its dividend and announcing its intention to raise another $3.5 billion. Westpac Banking Corp (ASX: WBC) announced $1.6 billion of writedowns, with an increased likelihood they will do the same as NAB.
In Australia, there is a clear difference between those companies raising capital to survive (travel, retail etc.) and those opportunistically tapping markets to acquire in this difficult environment. Lend Lease Group (ASX: LLC) falls on the former, with the company in a cash flow bind due to its billions of dollars of projects and very skinny margins. Hence, management’s decision to not only sell future profits from apartment sales but also raise $1.15 billion in new capital. Lendlease will likely also see coming devaluations on their huge property asset funds, which is why we sold LLC shares from client portfolios.
This morning update was written by Drew Meredith, Director of Wattle Partners.
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