Germany’s top court laid down a challenge to the European Union: who is the final arbiter in European law? Apparently, they don’t think it is the ECJ. German judges think the ECB needs to show buying bonds under QE was proportionate – by what yardstick? They have 3 months to comply or the Bundesbank won’t be allowed to play.
The ECB is clearly not amused. In a very brief update, the central bank said it ‘takes note’ of the judgment by the German Federal Constitutional Court but remains ‘fully committed’ to its price stability mandate. Finally, it added simply: “The Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate.” Quite clearly the German court cannot overrule the ECJ – that's the whole point, it’s why we wanted out. Italy’s PM Conte agrees, noting that ECB independence is at the heart of European treaties.
The euro has held onto losses to test the 1.0820 level this morning, as German factory orders declined 15.6%, more than the 10% expected. As I noted yesterday, anything that casts doubt on the ability of the ECB to provide the backstop to the bond market is a concern and is euro-negative. It also seems this decision will likely kill of any hope of collective debt issuance to tackle the current crisis. And a challenge to the PEPP bond buying by the ECB from the same German actors looks likely. There is yet a tail risk that the Bundesbank is forced not to take part in ECB bond buying in three months’ time – this would cause chaos.
The S&P 500 rose yesterday but closed where it opened at 2868, some 30 points off the highs of the day. The lack of any real conviction has led to a mixed start to trading for European markets, where Monday’s rebound looks to be under threat.
Oil rallied strongly but pulled back from the highs as traders realised once again that storage is still a problem. Whilst clearly there are signs of supply and demand rebalancing because lockdown measures are being lifted, but it’s going to be a slow process and it’s hard to see it righting itself before the Jun WTI contract is up. Crude oil inventories rose 8.4m barrels, according to data from the American Petroleum Institute (API) late on Tuesday. The more closely watched EIA inventory data is released at 15:30 London time and is forecast showing a similar kind of build around 8m barrels. Front month WTI bounced off resistance at $26 to pull back to under $24.50 in early European trade.
Today’s ADP (NASDAQ:ADP) payrolls print will be an amuse-bouche for the weekly jobless claims starter on Thursday followed by Friday’s nonfarm payrolls main course.
Equities
You can imagine the steam blowing out of Peter Cowgill’s ears as he heard the CMA decision... JD Sports says it – obviously – fundamentally disagrees with the CMA’s decision to block its takeover of Footasylum on competition grounds; a decision that was not so obvious. The CMA thinks the deal would leave shoppers ‘worse off’ and see fewer discounts and less choice in stores and online.
Mike Ashley will be delighted. The CMA has essentially agreed with the Sports Direct (LON:FRAS) argument that the JD-Footasylum tie-up would lessen competition among key must-have brands like Nike (NYSE:NKE) and Adidas (DE:ADSGN). As previously noted, and as JD Sports was very keen to point out, with Footasylum having less than 5% market share you would have to question whether the CMA has got this right. However, in this case it was not about the overall market share, but the supply of certain key brands, and on that front JD Sports and Footasylum dominate so-called ‘must-haves’. Their combination would have given them a powerful position in the market that a simple market share metric doesn’t quite explain.
Ocado reports sales at its UK retail division are flying. This is good, but we all know online grocery demand spiked for a short period and let’s face it, Ocado (LON:OCDO) and the rest have not been able to expand capacity fast enough. Try finding a slot earlier than 3 weeks from today and you will appreciate that the model doesn’t flex easily to meet great increases in demand. This is not necessarily a problem long term of course - more of a concern is how the M&S tie-up will affect sales.
Growth in retail revenue in the second quarter to date is 40.4% up on last year, compared to 10.3% growth in the first quarter. Management noted that the number of items per basket appears to have passed its peak as consumers return to more normal behaviour. Less loo roll, more fresh stuff.
And we all know the long-term investment thesis rests on the international deals. A key milestone has been achieved - the delivery of the first international CFCs to international partners Casino of France and Canada’s Sobeys. But payback from all this will be slow. In Feb management said they expect International Solutions earnings to decline due to continued investment in building the business, and increased support costs.
Structurally, Ocado looks perfectly placed to benefit from the new post-Covid-19 world. Shares, which have surged to fresh all-time highs, already reflect this but continued to rally today, up 3%.
ITV (LON:ITV) is on the other side of this, buffeted by long-term structural viewing shifts driven by cord cutters and the upending of the traditional advertising model by Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB). Covid-19 could not have come at a worse moment, but at least viewing figures are up as we all linger at home. Total advertising for the four months to the end of April was down 9%, driven by a 42% slump last month. The outlook for May and June is not great either. Q1 was actually pretty solid, with total advertising up 2% as originally guided, and online revenues up 26%. Total external revenue was down 7% at £694m, with Studios revenue was down 11% at £342m. Shares jumped 5%.