European stocks are pointing to a mixed start amid a cautious mood in the market explains, Fiona Cincotta.
While economies across the region are gradually starting to reopen boosting optimism of an eventual return to normality, crude oil continues to tank unnerving investors.
Nervous Openings
Europe is gradually releasing virus curbs. Spain and Italy the two hardest hit countries in Europe are due to lay out plans to loosen virus restriction as leaders are keen to get the economies back up and running. Italy could soon join countries such as Germany, Netherlands and Austria and allow Italians out onto the streets for the first time in weeks. However, the easing of restrictions comes with a heavy dose of weariness. The markets have managed an impressive run from mid March's low and the S&P 500 is now only 20% away from its all-time high. However, this turn higher has been based on optimism that economies can quickly reopen and return to some form of normality. A second wave of infection would smash that optimism and send riskier assets sharply lower again.
WTI Dives Amid Heightened Storage Concerns
Oil prices have been closely tied to sentiment across the past few weeks. While stocks rallied in the previous session despite the price of oil tanking, that is not proving so easily achieved today. Oil has dumped another 12% in early trade, adding to the 23% decline from Monday, on dwindling crude storage capacity.
With OPEC+ cuts not due to start until May 1, combined with the fact that economies are reopening gradually, a realization is hitting that any increase in oil demand will be gradual rather than a sudden jump to pre-coronavirus levels. Furthermore the 10 million barrels per day (bpd) OPEC+ cut planned doesn’t even scratch the surface of the 30 million bpd hit to demand that lock down is estimated to have caused.
Part of the decline in WTI is also owing to retail investment vehicles, such as ETF’s selling out front month June contracts and buying into later months to avoid the massive losses seen last week when the May contract dived below 0.
Oil prices are a reflection of supply and demand. Simply there is too much oil for the reduced and only very gradually increasing demand. Inventory numbers will be very much in focus this week, particularly at Oklahoma Cushing storage, which is set to reach full capacity as soon as mid-May.
HSBC Profits Dive 48%
HSBC was the first of the big UK banks to report and the numbers made for grim reading. Given the state of the economy and lack of visibility ahead bank’s earnings are all about loan loss provisions amid recession hit borrowers. Profits halved as the bank to $3.2 billion, below expectations, as bad loan provisions were beefed up to $3 billion owing to covid-19 impact and the collapse in oil price. Without naming names, HSBC alluded to the inclusion of a charge for Hin Leong Trading, the oil trading company which is restructuring billions of dollars of debt.
These results will encourage HSBC to press ahead with its restructuring plan. Cutting costs, stripping out management levels and shifting capital from under-performing parts of the business has never been so crucial.
What to Watch: UK Banks Earnings
This week major UK banks will be announcing earnings: HSBC tomorrow April 28; Barclays Bank, April 29; Lloyds Bank, Thursday April 30 and RBS Bank, Friday May 1.
What to Watch:
1. Loan provisions
As coronavirus wreaks havoc with the economy fears are rising that the economic downturn caused by the outbreak will make it harder for borrowers to repay their debt. Banks are staring down the barrel at the prospect of more loans going bad at the same time than in any other period in history.
Loan loss provisions charges are expected to surge to levels not even seen in the darkest days of the financial crisis. Each of the big four banks is looking at £1 - £1.5 billion in addition to standard charges this quarter and this number is expected to get worse for Q2.
Deutsche Bank reported on Sunday and gave us a taste of what is to come, saying it had taken €500 million provisions for credit losses during Q1, up 257% from a year earlier. HSBC is expected to report the largest provision of £1.4 billion whilst profits are expected to halve.
Unsecured retail lending is the focus of concern, so credit cards, personal loans and car finance. Barclays is particularly exposed as it is one of the top 10 credit card issuers in the US where more than 26 million people has lost their job in the last month.
That said, banks are better positioned to withstand the fallout from the coronavirus crisis, than they were to withstand the financial crisis.
2. Guidance
Guidance will also be closely watched, however, it is also worth keeping in mind that forecasting will be little more than guess work at this stage, given the lack of visibility across the quarter. Let’s not forget that we don’t even know how or when lock down is going to draw to a conclusion in the UK. Regulators are encouraging banks to moderate estimates until full repercussions are clearer.
3. Margins
Net Interest Income will be in focus after the BoE slashed interest rates to historically low levels. Retail and commercial focused banks such as Barclays, Lloyds and RBS tend to get most of their income from charging interest. These banks are particularly exposed. The fact that these banks also have high fixed costs owing to the many physical branches and thousands of employees mean that fixed costs will also be running high and margins squeezed further.
4. Trading
As we saw with US banks, those banks with larger trading divisions benefited from market volatility. Investors will be hoping that Barclays trading arm will have benefited in the same way. Meanwhile, at RBS, investors will be looking for an update on the downsizing of this loss-making arm.
5. Share prices
UK Banks are off their lows struck at the end of March, but only just. Barclays share price has fared better than its peers, owing to its trading arm. This sector looks a long way off from any meaningful recovery.
Fiona Cincotta is a Market Analyst for Currency Live
