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Market roundup
Global equity markets largely pushed higher this week on positive economic data. The Nasdaq hit a record high, as did the gold price, while the S&P500 is just 1% below its February peak.
Markets in the UK, Europe, US and Asia all rose on Monday, as surveys of manufacturing businesses in the US, UK and Europe suggested that manufacturing activity was increasing. The FTSE100 saw the largest daily increase, jumping by 2.3% on Monday, pushing back up through the 6,000 level to 6032.85. The FTSE100 closed effectively flat on Tuesday, pausing for breath after Monday’s jump. BP was a standout performer, how- ever, gaining 6.5% despite halving its dividend as it accelerated plans to become a zero-carbon company.
Wednesday saw more gains, with the FTSE100 up 1.14% and the FTSE250 gaining 1.9% as hopes grew about an agreement on a new US stimulus package.
UK equities fell again on Thursday after the Bank of England left interest rates unchanged and warned that the recovery could take longer than expected. The FTSE100 closed down 1.27%. Markets were also lower across Europe as investors waited nervously for developments on the stimulus package before Senate closes for summer recess today. US shares rose, however, after better than expected initial jobless claims, with the S&P500 rising by 0.64% and the Nasdaq setting a new record at 11,108.07. Gold also set a new record with futures hitting $2,069.4. In early trading on Friday, UK shares were heading up.
Company focus: Serco
Outsourcing company Serco reported profits up by 53% during the past six months amid soaring demand for its services in the pandemic. The company, which provides defence, security, im- migration, health and transport services for governments in more than 20 countries, was also awarded the contract to manage the UK’s coronavirus test and trace programme. Underlying trading profit rose to £77.6m, up from £50.6m a year earlier. Revenues jumped by 24% to £1.8bn.
Revenue from contracts related to the coronavirus totalled about £130m. Performance was boosted by contract wins in 2019 and the acquisition of the Naval Systems Business Unit of Alion, a key provider to the US Navy. Serco said its order intake was “strong” at £1.9bn, taking the order pipeline from £14.1bn at the end of 2019 to £14.5bn. Serco reiterated earlier guidance this week, with full-year revenue forecast to be around £3.7bn, and a profit of between £135m and £150m — both up on last year. Nevertheless, shares closed down by 15.7% on the day.
Economic roundup
There was some positive data this week confirming that business activity is continuing to rebound as economies reopen. However, significant worries remain about the labour market, with the number of layoffs still rising despite improving business activity. Production by UK factories rose sharply in July, with growth in output growing at its fastest pace since late 2018. The index of business activity as measured by the IHS/Markit purchasing managers’ index (PMI) for the manufacturing sector rose to 53.3 in July from 50.1 in June. Any figure above 50 means activity is growing. However, the sector continued to shed jobs, albeit at a slower pace than previous months.
It was a similar story in the US, where the Institute for Supply Management’s manufacturing index increased to 54.2 last month from 52.6 in June. However, the report still showed that the industry is laying off staff and adding to the US’s burgeoning unemployment rate.
The IHS/Markit Manufacturing PMI for the EU told the same story: rising production and new orders, but falling employment.
The equivalent surveys covering the services sectors illustrated the same trends, consistent with an economic recovery but cautious on spending. The IHS/Markit PMI for the UK services sector rose to 56.5 in July from 47.1 in June, its most rapid increase in five years. This does not mean that the sector is as healthy as it was five years ago, but merely that the number of companies reporting rising business levels matched that of five years ago, and today of course, business levels are rising from a much lower base.
However, staff numbers fell at “a steep and accelerated pace” as firms prepared for the winding back of government support and consequent rise in unemployment, making it hard to gauge business levels.
On Thursday the Bank of England amended its economic forecasts to show a faster initial recovery followed by a much slower return to pre-pandemic levels of economic growth. After leaving interest rates unchanged at 0.1%, the Bank said that a robust recovery in consumer spending is expected to boost the rebound in the next few months, leading to a 9.5% drop in GDP over the year, compared to a previous estimate of a 14% contraction. But in the third quarter, when the furlough scheme ends, it says the recovery will slow down, and will only return to pre-pandemic levels at the end of 2021. It also painted a more optimistic picture on employment, saying that unemployment would rise to 7.5% by the end of the year, down from a prediction of nearly 10% it made in May. This is below estimates from most economists.
Part of the rebound in consumer spending can already be seen. Retail sales rebounded sharply in June and almost 175,000 new cars were purchased in July after sales collapsed during previous months. However, many economists worry that the surge in business activity in sales is the result of “pent-up” demand from the lockdowns that will taper away by the autumn.
Employment data in the US was less bad than expected, with initial jobless claims still rising by 1.2m over the past week, although that is the lowest since the pandemic started. Continuing claims also fell, but Congress is still debating whether to extend its extra weekly unemployment payments which had been introduced in March. The payments expired last week, leaving millions facing a drastically reduced income.