By Powerscourt on 30/07/2020
Federal Reserve Chairman Jerome Powell painted a downbeat picture of the US economy on Wednesday as he warned that the virus had the potential to knock US economic recovery off course.
“The path of the economy is going to depend to a very high extent on the course of the virus and on the measures that we take to keep it in check,” Powell said, in what sounded like a coded warning to the Trump administration that its failure to tackle the health crisis would store up economic problems for America.
As the Fed’s rate-setting committee left interest rates on hold, Powell said that economic data suggested that hiring and consumer spending had both weakened in the seven weeks since the committee last met. Despite the gloomy economic data, the Fed’s rates decision temporarily juiced US markets, with the S&P closing up well over a percentage point although the Nikkei was lower into Thursday.
Deaths in the US from coronavirus continue to rise relentlessly, topping 150,000 on Wednesday with signs that cases are still rising in California, Florida and Texas, the worst-affected states.
In the UK the government is reported to be planning to increase the period of self-isolation required for people with coronavirus symptoms by three days, as anxiety grows of rising virus levels in Europe. While figures in the UK are currently low by global standards, advisers to the government are alarmed by a resurgence of the virus in continental Europe, particularly in Spain.
The world is beginning to get used to a new pattern whereby new resurgences are emerging even after initial surges have stabilised, as in Spain and other parts of Europe, and health authorities are hoping more rigorous testing programmes will prevent a full-blown second wave.
But authorities in Vietnam are perplexed by a recent coronavirus cluster around Da Nang, which has emerged more than three months after Vietnam declared itself free of the virus. For the emerging South East Asian nation, which was keen to leverage its virus-free status this to secure investment, the new cluster is a blow, but it may prove interesting for epidemiologists.
In another potent symbol of what coronavirus has done to the travel industry Boeing on Wednesday said it would stop producing its iconic 747 jetliner from 2022, sooner than expected, as it announced deep cuts to its production and jobs after losing $2.4 billion in the second quarter. Airbus also announced results Thursday (see below).
The problems traditional industries are facing now are in stark contrast with those of the tech giants whose fortunes seem if anything to have been improved by the virus. On Wednesday the CEOs of Alphabet (parent of Google), Apple, Amazon and Facebook were grilled in Congress on a range of topics related to their market power, from alleged censorship to their treatment of third-party sellers. The four men may have faced a grapeshot of accusations of anti-competitive behaviour. But their calm front signalled very clearly that these companies currently feel they have little to fear.
WHAT ARE COMPANIES SAYING?
Retail & Consumer
The world’s largest brewer Anheuser-Busch InBev took a $2.5bn writedown on the value of its operations as the Covid-19 pandemic heavily impacted global consumption of beer. The impairment charge related to the brewer’s African units, which in a “worst-case scenario” from the impact of the pandemic would be worth less than their previous book value. Despite the sharp cut into beer sales during Q2, the company said performance had improved towards the end of the period as restrictions eased.
Yum China, the nation’s largest fast food chain and operator of popular brands including KFC and Pizza Hut, reported a fall in sales for the second consecutive quarter in the three months ending June as the coronavirus pandemic discouraged local residents from dining out. The company reported Rmb1.9bn in total revenue in the second quarter, down 11 per cent from a year before. “Our recovery is nonlinear and uneven,” said Andy Yeung, Yum China’s chief financial officer. He added that the problem would remain unless “there is a significant change in situation”.
Nestlé narrowly beat expectations for the first half, despite the pandemic cutting into sales of water and confectionery. It said organic first-half sales growth was 2.8 per cent, ahead of the 2.3 per cent that analysts had expected. This was led by premium pet food brands Purina Pro Plan and Purina One, as households continued pampering their animals in lockdown, including buying the products online. Nestle’s ecommerce sales surged almost 50 per cent to reach 12.4 per cent of overall sales.
Pest control firm Rentokil posted marginally higher first-half revenue and an 11% dip in profits on Thursday, as an expansion of its disinfection services offset the effect of business closures and extra costs in the coronavirus crisis.“We are now expanding our Hygiene category into new countries as well as launching additional services,” Chief Executive Officer Andy Ransom said in a statement.
British drugmaker AstraZeneca topped second-quarter sales and profit estimates and backed its 2020 forecasts, helped by strong sales in lockdowns. Product sales, which exclude payments from tie-ups, rose 9% to $6.05 billion (4.66 billion pounds) in the three months ended June 30 on a constant-currency basis.
French luxury group Hermes said that comparable sales in the second quarter fell by 42% due to the fallout of the coronavirus pandemic and that the impact of the health crisis for the whole year was too difficult to assess at this stage. The situation remained “difficult”, even though it was improving, in Europe and the United States, CEO Axel Dumas told reporters. He noted that it was impossible to predict when foreign tourists, which in the summer months can represent 70% of European sales for luxury groups, would resume travelling.
Industrials & Transport
Volkswagen, the world’s largest carmaker, saw a loss in the second quarter due to the effects of the pandemic despite cutting costs and re-closing factories in order to reduce output. Pre-tax profits fell from a profit of €9.6bn in the first half of 2019 to a loss of €1.4bn, with revenues down 23 per cent to €96bn, and car sales falling 27 per cent to 3.9m vehicles. CFO Frank Witter said, “We introduced comprehensive measures aimed at reducing costs and securing liquidity early on, which enabled us to limit the impact of the pandemic on our business to a certain degree. Due to the positive trend exhibited in our business over the past few weeks and the introduction of numerous attractive models, we look cautiously optimistic to the second half of the year.”
Airbus reported that its industrial system adjusted to new production levels, cash containment and business resizing are on track. It reported a first-half net loss of €1.9bn against net income of €1.2bn in the same period last year. Chief Executive Officer Guillaume Faury said, “the impact of the COVID-19 pandemic on our financials is now very visible in the second quarter, with H1 commercial aircraft deliveries halving compared to a year ago. We have calibrated the business to face the new market environment on an industrial basis and the supply chain is now working in line with the new plan. It is our ambition to not consume cash before M&A and customer financing in H2 2020. We face a difficult situation with uncertainty ahead, but with the decisions we have taken, we believe we are adequately positioned to navigate these challenging times in our industry.”
Boeing has said it will stop making its classic 747 plane and is eyeing steeper job cuts than those it has previously announced. It reported a $2.4bn (£1.8bn) loss as the pandemic depressed demand for air travel. “The reality is the pandemic’s impact on the aviation sector continues to be severe… “We are taking the right action to ensure we’re well positioned for the future,” said Boeing boss Dave Calhoun.
Renault, French carmaker, reported a record €7.3bn loss in the first half of the year due to the pandemic and the contribution from its alliance partner Nissan also plunged fell. Renault owns 43 per cent of the Japanese carmaker which has decided to not pay out a dividend.
Total, French oil major, saw profits collapse by 96 per cent in the second quarter. It reported that adjusted net income fell to $126m in the second quarter, compared to $2.9bn in the same period last year. Total said the results were helped by a strong performance by its trading unit. The group’s chief executive Patrick Pouyanné said, Total “faced exceptional circumstances: the Covid-19 health crisis with its impact on the global economy and the oil market crisis with Brent falling sharply to $30 per barrel on average, gas prices dropping to historic lows and refining margins collapsing due to weak demand.”
Royal Dutch Shell
Shell reported adjusted earnings of $638m in the three months to June 30, from $3.5bn in the same period the previous year. Strong crude and oil products trading alongside lower operating expenses buffered Shell from the plunge in energy prices. It also announced a post tax impairment charge of $16.8bn, which the company had previously signalled, after it updated its price outlook and considered the longer-term impact of coronavirus on its finances, demand for energy products and the global economy.
Uber said it will keep its Asia Pacific headquarters in Singapore at least until December 2022, pausing a potential plan to relocate to Hong Kong. “We have seen strong public support for reform, but not the level of certainty from the government that we need,” Uber said. “As we continue those efforts, we have decided to keep Singapore as a regional hub for the medium term.”
Financials & Real Estate
Standard Chartered’s earnings fell in the second quarter as the bank suffered heavy credit impairment charges and announced redundancies amid the coronavirus pandemic. Pre-tax profits at the emerging markets-focused lender fell 40 per cent year on year during the period to $733m, the bank reported.It confirmed it would push ahead with “a small number” of job cuts but did not say which sections of the business would be affected.
Credit Suisse reported pre-tax income of SFr1.6bn ($1.75bn) for the quarter, while its net income attributable to shareholders rose by 24 per cent compared to a year earlier to SFr1.2bn. It benefited from a surge in trading and the Swiss domestic market’s resilience to the pandemic to increase pre-tax income for the second quarter by 19 per cent compared to a year earlier. New CEO Thomas Gottstein said: “In a continued volatile market environment, we delivered a strong performance. Despite persistent challenges caused by Covid-19, our employees again showed outstanding commitment and dedication.” As part of the restructuring, the group announced a new investment banking division and combined its risk and compliance divisions.
Lloyds Banking Group
Lloyds Banking Group fell to a £676m loss in the second quarter, after the UK’s lockdown had a “much larger than expected” impact on the economy. The company put aside a further £2.4bn to deal with expected customer defaults, up from £1.4bn in the first three months of the year. Further, the lender saw some signs of improvement in recent weeks, with rising levels of consumer spending and housing market activity. However, it said the outlook “remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year.”
Jupiter Fund Management
British money manager Jupiter, posted an 8% fall in assets under management for the first half of the year. Total assets at the end of June were 39.2 billion pounds, down from 42.8 billion pounds at the end of December. “Although we suffered a significant fall in AUM due to both outflows and markets in the first quarter of the year, the second quarter has seen a return to moderate inflows and a partial recovery in asset prices,” said Andrew Formica, chief executive.
Man Group,the world’s biggest-listed hedge fund firm, saw $1.7bn in client outflows during the three months to June. The combination of investment losses earlier in the year and client withdrawals meant that the firm’s assets have still dropped by 8 per cent, or $9.4bn, since the start of the year. The firm’s first-half profits dropped to $94m from $157m as performance fees earned on its funds slumped. Man said that investors pulled money from some of its computer-driven long-only and absolute return funds.
Generali, Italy’s largest insurer. reported that profits halved in the first six months of the year as it dealt with the effects of the pandemic. it said that said that turmoil in the investment markets cost it €226m, while it also made a €100m contribution to a pandemic emergency fund. Overall, net profits at the company dropped 57 per cent to €774m, although operating profits were flat as improvements in asset management and property & casualty insurance were offset by lower profits from life insurance.
Insurance group RSA Insurance has reported a first-half record for underwriting performance which saw growth in profits of 33%, while statutory results were hit by Covid-19 financial market impacts. Group chief executive Stephen Hester said: ‘Each region of RSA contributed in line or better than our plans, driven by improved attritional loss ratios. We are pleased with progress towards our ‘best in class’ ambitions, and the underwriting performance which is a first half record for RSA.
Samsung Electronics expects a gradual recovery in demand for mobile devices and consumer electronics in the second half after the pandemic hurt smartphone sales.“Looking to the second half, overall demand for D-ram is expected to pick up from new smartphone launches, while uncertainties remain around geopolitical issues including trade disputes,” Samsung said. The company reported a 7.23 per cent rise in second-quarter net profit to Won5.6tn ($4.6bn) on strong demand for computer chips driven by the work-from-home trend. Operating profit jumped 23.48 per cent year on year to Won8.1tn while sales fell 5.6 per cent to Won53tn in the April-June period.
Orange, France’s number one telecoms group, contained the financial damages stemming from the COVID crisis in the second quarter. The company’s overall second-quarter sales dropped 0.4% to 10.4 billion euros (9.43 billion pounds), while core operating profits over the period were down by 1.8% as COVID-triggered lockdowns in Europe drove costs higher and led to a loss in lucrative roaming fees. “This crisis has revealed the strategic nature of telecoms networks for our economies and even society as whole,” Chief Executive Officer Stéphane Richard said.
IN THE NEWS
Fed warns resurgence of virus threatens economic recovery – Financial Times
Apple, Amazon, Facebook, Google face claims of ‘harmful’ power – BBC
UK worried about second wave in Europe, won’t hesitate to act on quarantine – Reuters