Markets slip on delayed recovery concerns, US bank earnings in focus

Most of what President-elect Joe Biden announced yesterday, with respect to a fresh fiscal aid package for the US economy, was pretty much in line with expectations, $1.9trn worth of support in a variety of areas, specifically in the form of $350bn in state aid, an increase in the minimum wage, and a further $1,400 in stimulus payments to US workers.

There was little in the way of detail about future longer term spending commitments on infrastructure and other types of investment including education, energy and green investment, however this is likely to come once he has got his feet under that desk in the Oval office.

Market reaction was typically benign with markets in Asia drifting lower, while bond yields also slipped back after Fed chair Jerome Powell slapped down any talk of a possible tapering of Federal Reserve asset purchases by saying the US central bank wasn't looking to step back any time soon. With Fed vice chairman Richard Clarida and Fed board governor Lael Brainard also being dovish it is quite clear that while there are some on the FOMC who may be slightly more on the hawkish side, the senior players on the FOMC are still on the same page.

European markets reaction has also been typically underwhelming, opening lower after a fairly lacklustre week, in which talk of extended lockdowns has overshadowed the rollout of various vaccination programs, which in Europe appear to be lagging well behind the likes of the UK and US.

Last night the French government tightened restrictions further, imposing a 6pm curfew, while there has also been talk this week that German Chancellor Angela Merkel is looking at extending restrictions in Germany well into April in order to try and push down on rising infection and death rates there. In Italy the government has also collapsed, a not unusual occurrence but highly inconvenient given the pandemic is still raging there as well.

On the company's front engineering and industrial software group Aveva reported that Q3 revenue growth beat expectations, helping to push year to date revenues higher by 1.5%, while also expressing optimism about the full year outlook.

When it comes to collecting rents, the last year has been a difficult one for landlords and real estate investment trusts. Segro this morning appears to be bucking the trend here, announcing that for the year to date to the end of last year 98% of all rents had been collected.

In terms of the upcoming quarter this has fallen to 88% of the £63m rent that is due, with most of this subsequently expected to be paid by the end of Q1.

British American Tobacco received a boost this morning after announcing that the UK Serious Fraud Office has closed its investigation into suspicions of business corruption which had been ongoing since August 2017. No charges were brought in regard to these suspicions.

It has been a tough year for the aerospace sector and Meggitt has been one of many company's hit hard by the shutdowns in civil aviation. Fortunately, it also does a lot of business in defence and energy which has helped cushion some of the blow.

Group revenues are expected to come in at £1.7bn, with underlying operating profit expected to be between £180m and £200m. Management left guidance unchanged from the last update in November.

Babcock is another company with exposure to the aerospace sector, being cushioned by its exposure to the defence sector. Underlying revenue was down 3% at £3.4bn, in the previous year, with underlying profits also expected to decline 34% to £202m.

On the positive side the order book continues to look strong, rising £3.1bn to £16.8bn, however the biggest concern longer term is over cash flow, and to that end management have started a review of contract profitability along with the strategic review which was announced in November, details of which are expected to outlined in the full year results. Market reaction has been rather brutal with the shares down sharply in early trade.

Emerging markets asset manager Ashmore Group has seen assets under management rise by $7.5bn to $93bn over the quarter, with client activity broadly in line with the previous period.

The closure of gyms over the last few months has decimated the finances of Gym Group, which has seen total revenue slump to £80.5m from £153.1m a year ago. The company has lost almost half of its trading days due to various government restrictions. Monthly cash burn is currently in excess of £5m, however with £100m of bank liquidity, however given there is no clear end date to restrictions management have said they are in discussion with their banks with respect to future covenant tests.

The latest UK economic data was somewhat of a mixed bag, with industrial and manufacturing production weaker than expected in November, however the GDP numbers, while bad, were slightly better than expected. As a result of the November restrictions the UK economy contracted by 2.6%, with services down 3.4%. On a rolling 3-month basis this meant the economy slipped back from 10.5% expansion to a 4.1% rebound, better than the 3.3% expansion that was expected. This, however, is not expected to improve that much in December so there is little to cheer here. The pound is a little softer against the US dollar but more or less unchanged against the euro.

US markets also look set for a lower open with all eyes on the upcoming numbers from US banks with JPMorgan, Citigroup and Wells Fargo set to take centre stage.

With the US Federal Reserve giving the green light last month to resume dividends and share buybacks, the main focus is likely to be on those banks who can afford to do so, as well as how much more, if any banks set aside in respect of future loan loss provision.

Most US banks have already set aside a lot of cash in respect of this during the first three quarters, so it will be noteworthy whether they see fit to add any more, particularly in light of the recent deterioration in the US employment picture, or start to pare back in anticipation of an economic recovery in 2021.

A good barometer of US consumer spending and demand is likely to be US retail sales for December, which are due out later today. In November we saw these slide sharply by 1.1%, and there is a high probability that the December numbers could well be similarly weak, given the surge in deaths and infections, as well as tighter restrictions we saw in a number of US states during the month.

Expectations are for 0% which seems optimistic on the face of it.

Dow Jones is expected to open 100 points lower at 30,891.

S&P500 is expected to open 10 points lower at 3,785.