Top Financial Market stories of the week

Monday 8th June 2020-Friday 12th June 2020

The price of oil has been falling across global markets since COVID-19 first broke out in China at the end of 2019. The cost fell to less than $20 a barrel at the peak of the crisis- less than a third of the price at the start of the year. The plunge in prices has taken a severe toll on the oil industry and as a direct result of the global slump in demand, BP has taken the decision to cut 10,000 jobs worldwide. It is thought close to 2000 jobs will be lost in the UK.

Bernard Looney, BP’s CEO, stated, “ The oil price has plunged well below the level we need to turn a profit… we are spending much much more than we make… and as a result, our net debt rose by $6bn in the first quarter.” They also confirmed that the majority of the job cuts would be office based. There are also plans to get rid of one-third of the senior management roles and freeze pay until March next year for those who are kept on.

The S&P 500 wiped out its year-to-date losses in final minutes of Monday. The index advanced 1.2% to close at 3,232.39, back above the level at the start of 2020. The Nasdaq composite also added 1.1% to set a new closing record of 9924.75. US stocks have climbed more than 40% from a mid-march low, with the Nasdaq up 10.6% since the start of the year and the S&P 500 now little changed.

The rally was sparked mainly because of investor optimism regarding US economic recovery and on the back of Friday’s upbeat job’s report which showed employers had added 2.5m jobs last month. Support from the US Federal Reserve has also helped relieve the economic strain. The Federal Reserve slashed interest rates to zero and launched an ultimate bond buying programme.

However, it is worth noting that the US economy still has long difficult path of recovery ahead with unemployment is still hovering above 13%.

The Spanish group, Inditex, has slumped to its first quarterly loss as a public company. The world’s biggest clothing retailer which owns Zara, Massimo Dutti and Bershka chains among others, announced a €2.7bn plan that will see up to 1200 stores closed (16% of its global outlets) over the next two years.

The group announced they intend to pivot more aggressively toward selling online. Inditex plans to spend €900m annually in the next three years on improving its technology as well as focusing on its better stores. The company expects online sales to account for a quarter of its business by 2022.

Online supermarket Ocado raised more than £1bn of fresh equity and debt as it sought to capitalise on a surge of interest during the coronavirus pandemic. The FTSE 100 group said it wanted the extra cash to give it the “financial flexibility to move quickly and capitalise on the full capacity over the medium term. They cited the accelerated shift to online grocery shopping because of the lockdown.

Ocado raised the £1bn from a slightly discounted equity placing and a comvertible loan. The equity placing of £657m was announced and completed overnight at a price of 1960p and topped up with a £350m convertible loan. The group’s share price fell 5.8% in morning trading on Thursday after the placing which came at a discount.

Following this fundraising the group will have £2.2bn of cash on its balance sheet, boosted by selling half its UK retail business to Marks and Spencers last February and £600m bond issue in December.

The UK economy will be worst affected by the coronavirus pandemic, the Organisation for Economic Co-operation and Development (OECD) has warned. They stated that “as a service based economy the UK is heavily affected by the crisis”. The services sector, including financial service hospitality and tourism, makes up about three-quarters of the UK’s GDP.

If there is no second wave of the virus, the OECD said the UK economy will contract by 11.5% in 2020, the sharpest decline of any other of the 37 members of the organisation. This drop is also three times larger than the decline during the 2009 financial crisis.

However, if there is a second wave of “rapid contagion” later on in the year, the OECD predicts UK GDP will contract by 14%. France and Spain are also both expected to see their economies shrink by a similar number, 11.4% and 11.3% respectively.

Investors were rattled by Federal Reserve’s dire assessment of US economic prospects and concerns that a new wave of COVID-19 infections was coming. This resulted in stock markets in the US and Europe suffering their worst one-day falls since March.

The S&P 500 slumped 5.9% and the Nasdaq fell 5.3% , retreating from its high earlier this week. The Federal Reserve warned that it expected there to be a ‘long road’ to recovery in the US at near zero for the foreseeable future and continue to buy government backed securities.

Banks stocks also dropped as analysts reflected on the impact of prolonged low interest rates on profitablity. JP Morgan Chase dropped 8.3% on Thursday alone and Citigroup lost 13.3%.

European stocks also took a hit, with the UK’s FTSE 100 closing down 4% and the German DAX 4.5%.

However, on Friday US stocks made a partial recovery and the S&P was up 1.3% higher. This recovery was fragile and European stocks also suffered as a result. The German DAX finished 0.2% lower having been up around 1.7% at midday. The FTSE 100 finished with a 0.5% having made gains of around 1.6% earlier.

At least 69 companies have issued equity valued at £5m or more since the middle of March due to the pandemic. According to the data complied by analysts at Real Hunt, UK listed companies have raised £10.5bn in total from shareholders.

In the UK and elsewhere, companies in some of the worst hit sectors such as travel and leisure, moved quickly to issue new shares to shore up their balance sheet as sales plummeted. One of the first companies to market was high street retailer WHSmith, which issued stock worth £166m in early April to protect the business in what it described as “the most challenging of trading environments”.

The UK’s economy shrank by 20.4% in April- the largest monthly contraction on record. This contraction was three times greater than the decline seen during the whole of the 2008–09 crisis. Much of the damage in April was due to a 19% drop in the services industry where sectors such as air transport, travel agents and restauratnts lost around 90% of their output.

According to Bloomberg, this decrease means the nation has effectively seen almost 18 years of groth wiped out in two months. This is likely to increase the pressure on the Bank of England to provide more vital support as UK outlook dampens further.

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