Week ahead: ECB and Bank of Canada rate meeting, UK monthly GDP, Rolls Royce, ITV, Morrison and AMC

1. ECB rate meeting – 11/03

Over the last 12 months the ECB has really been the only game in town when it comes to supporting the European economy, despite the lack of urgency from EU policymakers in taking fiscal actions of their own. They’ve not been helped by a weaker US dollar either which recently pushed the Euro up above the 1.2000 level and added to the deflationary pressure on an economy that has tipped back into recession and is unlikely to recover much in terms of its services sector before the second half of 2021, due to tighter lockdown restrictions that have been in place for most of Q4 last year, and look to get extended into Q2 of this year. One saving grace has been the performance of the manufacturing sector which appears to be performing well. To offset the weakness in the services sector which is struggling with various lockdown restrictions the central bank expanded its Pandemic Emergency Asset Purchase program in December for the second time in 2020, from €1.35trn to €1.85trn, as well as extending it another 9 months until March 2022. While this helps buy time, along with new loan programs in the form of TLTRO’s the ECB can’t act alone given it is already operating at the limits of its mandate. It needs help on a much bigger fiscal scale, which at the moment is only just coming in a fairly limited form in the form of the EU recovery fund, and only €390bn of the €750bn of that fund, in the form of grants, far too low to really make much of a difference. While the ECB has gone to great lengths to insist that their monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar is not helping their cause, nor is a sharp rise in borrowing costs, which could cause problems for the like of southern European countries with large debt burdens. The huge fiscal stimulus plan in the US is starting to prompt concerns of a sharp rise in real yields which central bankers appear to have been slow in pushing back against. With the Federal Reserve solely focussed on its role as the US central banker, it appears to have forgotten it is also the world’s central banker. The ripple out effect of the recent sharp rise in yields gives the ECB a real problem in trying to keep a lid on borrowing costs, and while we are seeing localised measures to address the pandemic, the slow response in rolling out the vaccine in Europe is making life much more perilous for the fragile economies of Spain, Italy and Greece who are in the most economic need. With the damage from the pandemic likely to extend well into 2021, Europe really needs to get its act together, otherwise further economic schisms could open up further over the next 12 months.    

2. China Trade (Feb) – 07/03 

The Chinese economy finished 2020 on a strong note, its surplus hitting a record high in December. Exports rose by 18.1%, slightly down from November’s 21.1% but still better than expected, and the seventh successive month of growth. The strength was primarily as a result of the continued lockdowns in the rest of the world saw the export of PPE and other medical related products do well. As vaccines continue to get rolled out across the world this trend could well slow in the coming months. In the latest trade numbers this week for February the overall numbers will also cover the lead up to Chinese New Year, which could well help boost the imports numbers, given they cover the January period as well. With imports rising 6.5% in December, it would be very surprising if we didn’t get a strong number this week, with expectations of a 15.8% rise. This bounce will also be skewed due to the comparison with February last year when the Chinese economy was locked down, due to its own set of coronavirus restrictions. Exports are also set to increase with a 41% rise year on year. The timing of Chinese New Year will also be a factor in this week’s combined numbers for January and February.   

3. UK manufacturing Production (Jan) – 12/03

The UK manufacturing sector has been a rare ray of light amongst all the pandemic gloom if recent PMI data are any guide. The sector, by and large, has managed to stay open despite all of the lockdown restrictions, the pity being it makes up such a small part of the UK economy. Since the ending of the first lockdown the sector has grown consistently every month since the declines a year ago that saw a 4.6% decline in March 2020, and a 24.4% decline in April. This trend of unbroken positive readings is expected to falter in January, with the tighter restrictions acting as a bit of a brake on activity, with a fall of 0.8% while industrial production output is expected to decline 0.8% as well.

4. UK GDP (Jan) – 12/03

Having seen a gain of 1.2% in December the monthly GDP number for January is likely to be a sobering affair, given the tighter measures that were imposed at the beginning of the month. Services in particular are expected to take a hammering, and while the UK economy appears to have avoided the dreaded double dip recession, the only unknown about the contraction we’re about to see in the first quarter of 2021 is how big is it likely to be. The Bank of England estimates a contraction of 4% for Q1, which seems quite modest given that non-essential retail isn’t expected to return until 12th April. Index of services saw a 1.7% rise in December. This is expected to reverse in the latest numbers for January.

5. US CPI (Feb) – 10/03 

The recent sharp rise in bond yields in the US suggests that some investors are concerned about upward pressure on prices in the weeks and months ahead. Certainly, the sharp rise in commodity prices is likely to have significant pass-through effects in the coming months, putting upward pressure on prices in the shops, unless companies choose to absorb them. The recent cold snap in the US also had the effect of driving up energy prices in February which hasn’t helped, however the main concern is as to whether or not any of these price rises is permanent or transitory. The fiscal stimulus payments should go some way to absorbing some of this, however even that of itself is likely to be inflationary. In January we saw US CPI slip back to 1.4% from 1.6% in December. This could well reverse in the coming months, and we could well head back towards the levels we were at a year ago when US CPI was at 2.4%. For now, the pandemic has had a deflationary effect, however the various measure of fiscal support look set to reverse that in the coming months, and the recent sell off in US treasuries would appear to support that.     

6. Bank of Canada – 10/03 

The Bank of Canada is having to contend with similar problems as the rest of North America, with a slowdown in hiring trends heading into the winter, and the prospect of tighter restrictions as the weather gets colder. At the end of last year hiring trends slowed sharply in Q4, with December showing the Canadian economy lost 62.6k jobs. This has been a sharp slowdown from the 378.2k seen in September. In January this picture got even worse with the loss of a further 212.8k jobs, though all of these were in the form of part time positions. In terms of full-time roles, we actually saw a rise of 12.66k full time jobs. This weakness in the Canada labour market gives the Bank of Canada a bit of a problem with rates already at record lows, and a Canadian dollar that recently hit three-year highs against the US dollar. On the plus side, if the US economy continues to improve at its current rate, the Canadian economy should get a decent uplift as a result. The rebound in oil prices is also acting as a tailwind for the currency. With interest rates already at record lows of 0.25% and the Canadian dollar close to three-year peaks against the US dollar central bank officials will be hoping that the loonie has probably hit its peak, so that financial conditions don’t tighten further. No changes are expected in monetary policy.  

7. ITV PLC FY20 – 09/03

When ITV reported its H1 numbers in August both sides of its business were impacted as a result of the various shutdowns of the UK economy, with total advertising revenue for the period declining 21% to £671m, while broadcast revenue dropped 17% to £824m. ITV Studios, normally an outperformer saw a 17% decline to £630m due to having to pause its production capabilities due to various lockdown measures. In Q3 this deteriorated further on a percentage basis with a 19% decline to £902m. Overall, there wasn’t that much to cheer even if advertising trends did improve in July and August, notably with respect to travel companies advertising getaways, and car and indoor furnishing companies boosting ad spend. In order to preserve cash, the company pulled its interim dividend while saying it would continue to focus on reducing costs by £60m on a temporary basis, with a view to making around half of those savings permanent. In Q3 the picture improved a little as production resumed, albeit with higher costs due to Covid-19 mitigation measures. Advertising trends also improved with total advertising revenue improving slightly to be down 16% in Q3. In terms of the outlook the picture for Q4 was more optimistic with an expectation that advertising revenue would rise by 4%. While the return of sport to our screens will have helped boost ITVs advertising revenues in the second half, and Britbox revenues are likely to see an improvement, it is likely to be an uphill struggle for this terrestrial broadcaster unless advertising revenue shows evidence of a sustained pickup.  

8. Rolls Royce FY20 – 11/03

At one point there was some concern as to whether Rolls Royce would be able to survive the in the wake of the collapse in air travel as a result of the pandemic. With the company reliant for 50% of its revenue on aviation air miles the company was facing a cash crunch. In October, Rolls Royce shares fell to their lowest levels since 2004, after the the company announced its plans to raise extra cash to bolster its finances. The launch of a £1bn bond issue as well as a £2bn 10 for 3 rights issue at a 41% discount to 130p was eventually taken up by shareholders, and along with the progress on the vaccine rollout we’ve seen a decent rebound in the share price. The company still isn’t out of the woods yet announcing that it is likely going to have shut its factories in the summer for two weeks to help stem the losses. At its last trading update the company estimated a free cashflow outflow of £2bn. This is based on 2021 wide body engine flying hours of 55% of the levels of 2019, with an expectation of turning cash flow positive at the end of the second half of the next fiscal year. This seems a touch optimistic, given that air travel is unlikely to be able to return to any semblance of normal this year. And that’s even before allowing for the various cuts to headcount and any planned asset disposals. In 2019 annual revenues came in at £15.45bn, with half of that coming from maintenance and other aftermarket services. Rolls Royce will do well to get anywhere near to half that number for 2020.     

9. Morrison FY20 – 11/03

The first week of January generally tends to be a decent bellwether for economic activity over the Christmas and New Year period, and Morrison was quick out of the blocks at the beginning of the year with a rise of 9.3% in like for like sales over the festive period, which augurs well for a decent full year performance. The digital business has been the main beneficiary over the past 12 months, and in the early of its final quarter these saw a rise of 24%, over the same period a year ago, helped largely by the Morrisons on Amazon service, as well as the new relationship with Deliveroo. Costs have risen as a result of the pandemic, with Morrisons saying that these are likely to be higher by £50m by the end of the financial year, taking the total cost to £280m for 2020/21, due to the tighter restrictions since December. Management still expects pre-tax profit to come in between £420m and £440m, before the £230m deduction in respect of the repayment of business rates for the year 2020/21. On a more positive note, Morrisons is also expected to benefit from the decision earlier this month to extend its supply agreement with McColls for a further three years.   

10. Churchill Capital IV Q4 20 – 11/03

SPAC’s (Special Purpose Acquisition Companies) have been in the news a lot in the past few weeks, and Churchill IV has been one that has seen a lot of share price volatility in its pursuit of Lucid Motors, an electric vehicle maker looking to target the higher end of the electric vehicle market and is backed by the Saudi sovereign wealth fund. While it trades like an equity, in reality it’s a shell company or financing vehicle, and rather than operating a business it’s like a pick and mix buffet where investors put money in and the SPAC invests in fledgling businesses. With no financial track record to speak of these types of companies are very difficult to value which means investing in one is akin to taking a leap in the dark. Last week Churchill IV agreed a deal with Lucid to raise funds to expand its factory in Arizona, and help to bring its vehicles to market. The deal which is set to generate $4.4bn in cash values the Lucid business at $24bn, and has seen Churchill Capital IV shares plunge from its recent highs near $60, however they are still up over 400% on the year.

11. AMC Entertainment Q4 20 – 10/03

As outlined previously the problems being suffered by the cinema sector were already well documented even before the arrival of the pandemic. The challenges being faced by the competitive streaming markets were already making it hard to compete, and the closure of cinemas as a result of the economic lockdowns merely compounded those problems. While attention has been focussed on the survival of Cineworld here in the UK, AMC Entertainments problems are no less serious, with the company seeing its revenues plunge 90.9% in its Q3 numbers to $119.5m. While it’s much better than the $18.9m it saw in Q2 it needs to be put in the context of the $1.3bn in the same period a year ago. The owner of the Odeon chain and IMAX cinemas posted a net loss of $561m in Q2, and $905.8m in Q3. This compares to a loss of $54.8m a year ago. The continued postponement of the latest James Bond film “No Time to Die” as well as the decision by Warner Brothers release its 2021 film slate straight to streaming once again throws into sharp focus the challenges facing the entire industry when we get a full reopen. Its deal with Universal to shorten the theatrical window to 17 days, with Universal giving the theatre a proportion of the revenue when selling directly to consumers is helping boost its revenue numbers, but it’s not a silver bullet. AMC shares have seen a huge uplift in recent weeks, back to levels last seen in 2018, before the pandemic, however that’s not because of an improvement in prospects, its more to do with being caught up in the Reddit/GameStop saga which saw small investors try to squeeze short sellers out of the market, with the #SaveAMC hashtag trending on several online platforms. This share price surge did have one unexpected bonus, as it offered AMC the opportunity to raise another $304.8m by selling stock in January bringing the total raised since December to $917m, which helps buy the business more time, as we look towards an economic reopening towards the end of Q2. Expectations are for a loss of $4.09c a share.  

12. Bumble Q4 – 10/03

Another IPO that sprang out of the blocks when it was launched earlier this year. The online dating app made CEO Whitney Wolfe Herd a billionaire overnight as the online dating app raised $2.2bn and initially valued the business at $7bn. With 42m active users and a unique selling point of letting women make the first move, the app appears to have struck a chord with investors with the shares rising sharply in the first few sessions, pushing the value up to over $70, and over $12bn. The company has competition in the form of Match Group, which owns Tinder and Match.com, while Facebook is also looking capitalise on the growth in online dating apps. This week’s numbers will be Bumble’s first as a public company and given that in the first nine months of the year it returned a $117m loss on revenues of $417m its unlikely we’ll see much of an improvement in the Q4 numbers when additional IPO costs are added in. Full year revenues are expected to come in at $543m, a rise of 24% year on year.