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Coronavirus Spread Concerns Weigh On Equities, Boosts Gold

Published 21/02/2020, 10:50

A rise in new cases of the coronavirus in China, as well as South Korea has prompted further weakness in Asia markets overnight, even as some Chinese factories restart operations, after their extended shutdowns.

This has prompted European markets to open slightly lower this morning as we head into the weekend and concerns that the economic effects of this infection will likely to be much more longer lasting and economically damaging than originally thought, as infections start to increase rapidly across the rest of Asia. Gold has continued to surge overnight now well above $1,630 an ounce and on course for further gains towards $1,700 an ounce.

These concerns about a fat tail when it comes to economic weakness have seen some ground for optimism that the fall out can be contained by this morning’s flash PMI numbers for February from France and Germany. The latest French manufacturing number came in at 49.7, slightly worse than expected, but not disastrous, while on the plus side services improved to 52.6.

Germany remains the bigger concern as Europe’s largest economy and a huge industrial base, and rather surprisingly its latest manufacturing number was better than expected, coming in at 47.8, and a thirteen-month high. This better than expected number has seen the euro edge a little higher, however any after effects of the virus may well make themselves known a little farther out.

The main sectors under pressure in early trading are luxury with Burberry slipping back again after yesterday’s declines, to levels last seen in July last year. Others in the sector are also lower including LVMH in Paris.

The oil and gas sector is an early underperformer as oil prices slip back on rising concern that the early optimism for a quick rebound in demand as concerns about coronavirus diminish may well have been premature.

Last month Pearson shares hit ten-year lows in the wake of the announcement of the departure CFO Coram Williams (NYSE:WMB). Coming so soon after the departure of CEO John Fallon it spoke to a management that had overseen a drastic slide in the share price and an incoherent restructuring program deciding to walk away from the wreckage of their failed project.

In December last year, the company announced the latest in a long line of asset sales, selling the remaining 25% of its stake in Penguin Random House to Bertelsmann for £530m, thus completing a process which began back in January 2017, when they announced their intention to sell their 47% stake. The loss of thousands of jobs over the past few years, along with the sale of a range of businesses including the K12 US school textbook business in the early part of last year, still hasn’t been enough to turn the business around, with last month’s profit warning sending the shares down even further, now languishing at their lowest levels since 2009.

Today’s full year results merely confirm the outlook painted just over a month ago. Overall sales fell 9% to £3.87bn, while profits for the year came in at £266m, down from £590m a year ago.

In terms of the outlook outgoing CEO John Fallon expressed optimism that operating profits for 2020 would rise to between £410m and £490m, excluding the Random House proceeds, while stating that the downward trends in the US Higher Education business would continue, being only partially offset by modest growth in digital, as well as single digit growth in all the other businesses.

Let’s hope he’s correct in his assessment, and is able to leave his successor a solid foundation, after 5 years of share price decline.

In further signs of the strains that the retail sector is under real estate company Hammerson this morning announced it was selling a number of retail parks in its portfolio, including ones in Telford, Rugby and Middlesbrough, for £400m. the sector has been struggling with falling rental income for several years now and this disposal leaves the company with just its stake in the Brent Cross shopping centre in its portfolio, which is also up for sale.

With the shares already down around 5% this week due to uncertainty over their restructuring plans and a 33% fall in profits, HSBC is back in the spotlight this morning on reports that Unicredit (MI:CRDI) CEO Jean Pierre Mustier is in the frame for the CEO role, currently being occupied by interim CEO Noel Quinn. Given that earlier this week the bank announced up to 35k job losses along with plans to significantly restructure the business, this seems a rather backwards way of doing things.

Like you would in a football team, surely you get the management structure in place first, then perform surgery on the structure of the team, not the other way around. While no one doubts Mustier’s credentials for the role at HSBC given his success in turning Unicredit (MI:CRDI) around, the way in which the HSBC board is behaving in relation to its treatment of Quinn suggests that they are making it up as they go along. That’s never a good look and maybe HSBC need more than a new CEO.

US markets slipped back yesterday, but still overall remain fairly resilient. That said the weakness in Europe looks set to see a lower open.

Dow Jones is expected to open 100 points lower at 29,120

S&P 500 is expected to open 13 points lower at 3,360

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