The Week Ahead - FOMC, US Q2 GDP, Barclays, Lloyds, NatWest, Apple, Robinhood IPO - 26th July 2021
- Fed rate meeting – 28/07 – it almost seems counterintuitive that the change of narrative from the June Fed meeting, which saw a number of Fed members start to talk in terms of a tapering of asset purchases, as well as a 2022 rate hike, appears to have come just before an increase in concerns about a slowdown in the global recovery story. The sharp rise in Delta variant cases seen in the last few weeks, has fuelled concerns, that for all the optimism over economic reopening, the reality is that coming out of the pandemic is likely to be a much longer road than the market has been originally pricing. Some of the fears over inflation have already started to subside in the bond markets, whether by accident or design, largely due to cooling commodity prices, as well as concerns that the global recovery may well be weaker than anticipated all the way back in March. As the FOMC gears up for the Jackson Hole symposium next month, global central bankers are likely to have to weigh up how to balance higher inflation in the short term, against a concern that a possible tightening of monetary policy could well exacerbate worries about a slower pace of economic growth, as infections rates rise across the globe.
- Germany IFO Business Confidence (Jul) – 26/07 – for most of this year German business confidence has been rising with both manufacturing output as well as services activity showing much more resilience than was the case at the end of last year. In June, IFO business activity hit its highest levels in two years, however recent events across Western Europe with respect to the floods are likely to see a slowdown in economic activity. The tragic events as well as concern over how to recover any lost capacity could well see this indicator suffer a big fall in both the current assessment as well as the expectations index.
- US Consumer Confidence – (Jul) – 27/07 – US consumer confidence managed to hit a post pandemic peak in June of 127.3, as the US economy continued to its path to recovery. It still remains very fickle if recent retail sales numbers have been any guide, and the latest personal spending data would also suggest that a lot of US consumers are in no rush to spend their stimulus payments over concern about rising cases of the Delta variant. June retail sales saw a decent rebound in retail activity, however as has been the case for most of this year US consumer spending has been very much an on-off affair, which suggests the scope for a slight slowdown in this week’s consumer confidence numbers.
- US Q2 GDP – 29/07 – the US economy has managed to rebound very well from last year’s sharp -31.4% fall in GDP. Since that huge contraction the economy has managed to post three consecutive quarters of expansion, and this week’s initial Q2 numbers are set to make it a fourth. In Q1 the economy expanded by 6.4%, driven largely by two big stimulus interventions by the US government at the end of last year, as well as in March. The spill over effects of this are set to ripple over into Q2 with the various fiscal interventions set to continue until September. Manufacturing has been particularly strong in Q2, while the slow recovery in the services sector, along with the return of theme parks is likely to give a boost to economic output. Expectations are for the US economy to expand by an annualised 8%, with personal consumption once again set to be a key driver of the recovery.
- US Personal Spending/Income (Jun) – 30/07 – if the retail sales numbers for June are any guide, then this week’s spending numbers could well see a rebound after slowing in May to 0%. Since the 4.2% expansion in March, April and May spending numbers have been on the soft side as US consumers retain elements of caution about the economic outlook in the face of an everchanging virus outlook, even as vaccination rates start to slow down. Some of the slowdown in spending can be put down to higher fuel prices which may well have deterred unrelated consumer discretionary spending. Nonetheless for all of the optimism about the US economic rebound it is notable that retail sales growth has been patchy on a month-to-month basis. This was borne out by a 0.9% gain in April retail sales, followed by a 1.7% contraction and then a 0.6% rise in June. This would appear to suggest that US consumers are still cautious about the economic outlook. Expectations are for June personal spending to rise by 0.5%, however personal incomes still look a little on the weak side which won’t help, especially with core inflation at a 30-year high. In May we saw a 2% decline in personal incomes, and this looks set to be followed by a -0.6% decline in June. While some of this is a hangover from the March stimulus bump a third consecutive monthly decline would still be a concern for the wider recovery story. On the plus side, jobs growth is still heading in the right direction and wages do appear to be recovering which means all we probably need to see here is evidence of a direction of travel on the income side.
- Barclays H1 21 – 28/07 – in the days leading up to Barclays Q1 numbers back in April, the Barclays share price hit its highest levels since December 2019, on optimism that the market volatility and rising yields seen in Q1 would deliver healthy revenues and profits across the board. With US banks releasing loan loss reserves set aside due to the pandemic to boost profitability there was an expectation that UK banks would so the same as the economic picture started to brighten. These April highs proved to be the high-water mark for Barclays, and the shares have slipped back since then towards the 200-day MA, after FICC trading revenue came up short, and the bank unlike its peers, chose not to release some of its loan loss provisions, back onto the balance sheet, possibly through an abundance of caution more than anything else. Total income fell 6% to £5.9bn from the same quarter last year, while lower impairment provisions meant that net operating income saw a 40% increase to £5.8bn, boosting attributable profits to £1.7bn. One thing the Q1 numbers did prove was that CEO Jes Staley was probably correct in pushing back on activist shareholder Ed Bramson to force the slimming down of the investment, and despite the miss on fixed income, the equities business saw a big beat, and banking fees also came in better than expected. In light of the reaction to recent US Q2 numbers, we are likely to see a similar pattern play out with respect to Barclay’s investment bank revenue. FICC revenue saw misses across the board for US banks which suggests we’ll see something similar for Barclays. Equities trading did well in Q1 so will be looking for something similar in Q2, and we’ll also be looking to see if there is decent demand for loans as an indicator of the strength of the recovery story for the UK economy, as business start to reopen in the second quarter of H1.
- Lloyds Banking Group H1 21 - 29/07 – Lloyds Banking Group shares have outperformed since its Q1 numbers helped push the share price to 15-month highs in May. Since those peaks, the Lloyds’ share price has slipped back, however year-to-date the shares are very much the outperformers as far as UK banks are concerned, up over 25%. They have been falling in recent weeks, largely over concern about slower growth prospects and falling yields, in line with the rest of the sector. Unlike Barclays, Lloyds did release some of its loan-loss reserves, siphoning back £323m, while also pledging to accrue dividends with the intention of resuming a progressive and sustainable dividend policy. Loan demand for housing was a particular strong point in Q1, with its open mortgage book seeing a 6% increase from a year ago, to £283.3bn, and a 2% rise over the quarter, though credit card spending was down 19% over the year, and 6% on the quarter at £13.5bn. Given the recent strength in the housing market this may have continued in Q2. Management was also more confident about the outlook, saying that lending margins were expected to improve over the rest of the year, with net interest margin expected to be in excess of 245 basis points, up from 240 at the end of the previous quarter, while also seeing an increase in customer deposits. There was a note of caution around the outlook given that more of its customers could find themselves in financial difficulty in the months ahead due to the latest lockdown. Statutory profit in Q1 came in at £1.4bn, with expectations around Q2 expected to be equally as optimistic, however that optimism over the second half could be tempered by recent events as Delta variant cases rise, and the economic picture looks less certain.
- NatWest Group H1 21 – 30/07 – NatWest Group share price is also up around 20% year to date as the reopening of the UK economy in Q2 has boosted optimism about the recovery prospects. Its Q1 numbers also prompted a similar uplift in the share price as new CEO Alison Rose continued to implement her new strategy for the bailed-out lender. Earlier this month the shares hit their highest levels since February 2020. In Q1 the bank was able to release £102m back on to the balance sheet, which in turn boosted profits to £946m, above expectations of £539.5m. Like Lloyds, NatWest has also seen a rise in customer deposits during the quarter, with an increase of £7.3bn, compared to Q4, as customers cut back on spending during the lockdown. Similarly, mortgage lending was robust with an increase of £9.6bn, while personal loan demand saw a decline, as did the level of credit card balances. One of the wider concerns with NatWest has been its low NIM (net interest margin) levels, the weakest of all UK banks. NatWest has the thinnest in the UK banking sector at 1.66% and given how the yield curve steepened in Q1 we would have expected to see an improvement here, and we didn’t, seeing a fall to 1.64%. The bank blamed this on lower structural hedge income. A year ago, net interest margin was at 1.89%, while in April Lloyds upped their estimates for NIM, so NatWest has plenty of room to improve here, as we look towards to today’s Q2 numbers. Expectations are for consumers to spend more as lockdown restrictions end, while also watching demand for mortgages, other loans, and credit card spending.
- Robinhood IPO – 28/07 – after filing for its IPO on 23 March, this week looks set to see this much anticipated IPO start trading, with the company set to raise $2bn, by selling up to 55m shares at a price between $38 and $42 a share. This would give the company a valuation of up to $40bn, joining the ranks of Coinbase whose own listing generated a great deal of early interest, before its shares slipped sharply, along with the fortunes of bitcoin. Robinhood has said it intends to reserve between 20% and 35% of its Class A shares to its customers who have driven a lot of the growth in the business over the last 12 months. Promoted to level up access to financial markets the app has spawned a renaissance of interest in the stock market amongst a younger cohort of traders determined to take on the Wall Street giants with varying degrees of success. Its monthly active users have more than doubled in the past 12 months, rising to 17.7m during Q1 of this year, and up to 22.5m towards the end of Q2. The company has had its fair share of problems this year due to the speed of its growth, and which forced it to raise $3.4bn in February from by Ribbit Capital and Sequoia Capital amongst others in order to ensure the business met deposit thresholds required by the various clearing houses that handle the trading orders on its platform. The big surge in orders earlier this year overwhelmed the company due to the higher levels of capital needed to cover their exposure in the various stocks that were being traded, with over 600,000 downloads of its app in one day at the end of January. This led to several lawsuits being brought which could result in fines in the weeks and months ahead. The company has already said it expects to pay a $30m fine in respect of an anti-money laundering probe of its crypto business. This is on top of a $70m fine from FINRA violations dating back to 2016, and a $65m settlement with the SEC, at the end of last year.
- Apple Q3 21 – 27/07 - Expectations around an Apple earnings announcement is always high, and the Q2 numbers in April were no different. A year ago, Apple revenues were $58.3bn for Q2, while this year expectations were for a much higher number of around $77bn, with the new 5G iPhone expected to drive sales growth. As appears to be the norm these days Apple blew through expectations with record Q2 revenues of $89.58bn, driven by iPhones, $47.9bn, iPad, $7.81bn, services, $16.9bn, Mac, $9.1bn and wearables of $7.84bn. All of these numbers were eye wateringly good, for comparison, a year ago the iPhone saw revenue of $28.9bn, $19bn lower. The company declared a dividend of $0.22c a share, as well as authorizing another $90bn to the existing buyback program, as it generated net income for Q2 of $23.6bn. The company may have been late in adopting a 5G handset, but they seem to be more than making up for it. As we look towards the upcoming Q3 numbers expectations are for double digit growth for this quarter, although chip shortages may affect overall sales numbers, which means we could see a slowdown in sales. The working from home revolution has certainly helped Mac sales while services revenue continues to make up an increasing proportion of Apple’s product mix. The last quarter also saw Apple introduce a raft of upgrades including iOS 15, WatchOS8, with a new health app, and a host of new features for Apple TV, HomePod mini. Expectations are for profits of $1 a share.
- Amazon Q2 21 – 29/07 - has been one of the big gainers from the shift to home working over the past 12 months, its full year numbers for last year seeing a big jump in revenues. In Q4 alone the company reported revenues of $125bn, a rise of 44%, with retail ecommerce seeing a similar percentage rise of 43%. Earnings of $7.22bn blew away expectations, for Q4 and $21.3bn for the year was an 84.1% increase on 2019. This was despite a huge increase in costs with 175k new employees in Q4, as it expanded its grocery delivery capability by 160%. The increase in sales still managed to outstrip rising costs as a result of safeguarding measures for its staff, with total costs for 2020 coming in at $11.5bn for the year. Amazon Web Services has also driven some of the gains seen in revenues and accounted for $45.37bn last year, which when looked at through the prism of total revenues is still quite a small slice of the overall pie. Its retail business still accounts for the lion’s share of total revenue, with a 37.6% increase from the previous year to $386bn. Amazon managed to carry this theme into its new fiscal year by smashing expectations in Q1, with revenues of $108.5bn and profits of $15.79 a share, crushing estimates of $9.54c. The online stores business saw net sales of $52.9bn, while Amazon Web Services saw net sales of $13.5bn. In the streaming space Amazon is also ramping up its Prime Video offering in an attempt to take on Netflix, with recent reports it is spending $500m on a new Lord of the Rings TV series, while also adding Starz, Britbox and Discovery+ as add-ons, and acquiring MGM studios for $9bn. In terms of its Q2 sales forecasts Amazon was bullish pushing them higher to between $110bn and $116bn, while profits for Q2 are expected to come in at $12.20c a share.
- Tesla Q2 21 – 26/07 - Since entering the S&P 500 on 21 December 2020 at $666, Tesla’s share price has just about managed to hold on to the upward momentum in place since the beginning of 2020, when the shares were down at the lowly levels of $83. Having hit a record high of $895 in January, the shares have slipped back in the past few months, as questions start to get asked about whether this sort of valuation can be sustained, at a time when the likes of General Motors, Ford and Daimler are ramping up their electric vehicle offerings, and have the ability to scale much more quickly. Last year Tesla only just missed out on meeting its target of selling 500,000 cars in a year, with the addition of extra capacity in its new Chinese factory helping hugely in this regard, and hopes high that 2021 could see the company break this target. Tesla is making great strides in building up capacity, with other new plants in Austin, Texas, and Brandenburg in Germany due this year, though the German plant does appear to have hit some snags, which could delay the opening. The China love story also appears to be running into problems, after the Chinese regulator ordered the company to fix a safety issue on all cars sold there, due to a problem which means the autopilot can be enabled remotely. This requires a costly fix on over 285,000 vehicles. Tesla has done well in managing to post consistent profits on a quarterly basis over the past 12 months, though this has been achieved by sleight of hand via regulatory credit and energy storage sales. Tesla’s share price has held up fairly well so far this quarter, but that appears to have more to do with CEO Elon Musk talking up bitcoin and extolling the virtues of cryptocurrencies as a means of payment, than for its ability to sell cars. Gross margins on Tesla cars fell to 19.2% in Q4, the lowest in 12 months, though on the plus side we did see positive free cashflow of $2.79bn, although this slowed to $293m in Q1. You can argue whether a decline in margins really matters, but at a time when competition is only expected to get fiercer, and Tesla has already cut prices in China and will probably continue to do so as it brings production costs down, the pressure on margins is likely to increase. In Q1, Tesla delivered 185,000 vehicles, mostly the Model 3 and Model Y. The Model S and X had about 2,000 deliveries, with the hope that production and deliveries can be ramped up. Tesla hopes to start producing its new crossover SUV Model Y at new plants in Austin and Brandenburg this year, however the delays in Germany could slow this rollout. Profit is expected to come in at $0.94 a share, with revenue around $11bn.
- Microsoft Q4 21 – 27/07 - It’s set to be a big quarter for Microsoft as it looks to round off a record year. In April the company saw its revenues come in above $40bn for the second quarter in succession, posting $41.7bn for Q3, slightly down from the previous quarters $43.1bn, while profits came in at $14.8bn, a 38% rise from the same period last year. The company saw decent gains across all of its segments, with cloud computing up 23% to $15.1bn, productivity and workplace subscription services, up by 15% to $13.6bn, while personal computing and gaming saw a rise of 19% to $13bn helped by the launch of the new Xbox X gaming console. Huge demand for PC’s also helped boost the numbers here. As we come to look ahead to its Q4 numbers there has been huge amounts of interest over the past few weeks over its Windows 11 upgrade path.
- Pfizer Q2 21 – 28/07 – has used its scale to complement the BioNTech jab, forecasting $15bn in additional sales in 2021, which could well add $4bn to its profits. In the US it is charging $19.5 per dose while in the EU the company has recently raised prices from €12 to €19.5 per dose in 2022/2023, which is incredibly altruistic of it! In its last set of annual accounts, the company turned over $47.6bn, however estimates for 2021 are for an increase to $62.5bn, mainly because of the pandemic, which would see its earnings surge. For a comparison at the end of 2019, revenues came in at $41.2bn, meaning in the space of two years revenues would have risen 50%. When looked at through this prism it is a little surprising that Pfizer shares are only modestly higher year to date, and still below the highs we saw in December 2020, particularly given they have a dividend yield of just under 4%
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