Wednesday preview: Lloyds, Next and Capita results in focus, FOMC 'a non-event'
Wednesday's Fed policy meeting is predicted to be a "non-event", meaning there will be more attention on the first of the August PMI surveys and another busy day of company news as BAE Systems, Capita, Lloyds and Next are among those reporting.
There will also be numbers from Aggreko, AG Barr, Dignity, Direct Line, Man Group, Rio Tinto, Smurfit Kappa, and St James's Place.
Lloyds will be the first of the UK high street banks to report, with Barclays and RBS coming later in the week. While Lloyds financials have been looking increasingly healthy, its shares, like those of its peers, have been going nowhere.
The consensus forecast is for a profit before tax of £1.6bn for Lloyds, including £410m in PPI provisions, £262m in restructuring costs and a £110m loss on disposal of the Irish residential book, announced in May.
UBS said the key issues will be on the net interest margin, mortgage market competition, hedge income contribution, SVR run-off, deposit re-pricing capacity, loan losses, impact of IFRS9 versus underlying credit quality, falling house prices in London and Brexit.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said rising interest rates should be positive for the banking sector in the longer term, but the withdrawal of Funding for Lending and the Term Funding scheme earlier this year has meant a cheap source of credit has dried up for the banks, which will offset margin gains if monetary policy tightens, with Lloyds having drawn £41bn from the two schemes, which is around 9% of its total loan book.
For investors, the big shadow cast over the Lloyds and other UK bank shares is Brexit, he added. "While this sentiment doesn’t look like shifting any time soon, investors are being paid to wait. Lloyds is expected to deliver a total dividend of 3.44p this year, equivalent to a 5.5% income yield. By contrast savers are unlikely to see such a generous rate on Lloyds cash accounts for quite some time, to say the least."
Back in April, Capita confirmed plans for a £700m rights issue to enable the outsourcer to carry out a new strategy after a "significant deterioration" in new business wins and business volumes that it said were likely to continue to weigh on profits in 2018. Wednesday's results should see new CEO Jonathan Lewis should on provide an update on his efforts to sort out the outsourcing company he branded "too complex" and relying too much on acquisitions for growth. CFO Nick Greatorex this month gave notice that he intends to leave, seven months after Lewis was appointed.
Analyst Michael Hewson at CMC Markets has been impressed by the Lewis's willingness "to take a hatchet to the problems surrounding the business has increased optimism that the company, which has the earned the unfortunate moniker of 'Crapita', would be able to get out of the hole it has found itself in". Hewson said May's rights issue would help, but the government recent decision to change its mind on a MoD contract was a recent negative.
A half-year update for high street bellwether Next will be in focus for the whole retail sector, just as important as the British Retail Consortium's shop price index. The clothing retailer, which last provided an update in May, has like the rest of the industry been battling the structural changes to the high street, a soft consumer environment and some self-inflicted problems with its product range.
For the first quarter, Next brand sales were up 6% in the 14 weeks to 7 May, with the retail estate seeing sales decline 4.8% and the online directory business growing sales 18.1%. Management upped full year profit guidance for the year to January 2019 by £12m to £717m, though still a 1.3% decline year-on-year, with EPS up 3.7% thanks to buybacks and less tax.
Industry data suggests the UK clothing & home market has been running much stronger in the second quarter than the first, analysts at Deutsche Bank said. "Next's full price brand sales declined 3% in Q1 last year and rose by 0.7% in Q2. As a result of the better market we now assume a more modest deceleration," they suggested, from 6% in Q1 to 4.3% in Q2.
UBS, Next’s house broker, predicts a 3% rise in full-price sales, while Shore Capital looked for a continuation of first-quarter sales trends with retail down around 5% and Directory sales up around 12%.
MACRO DATA
The August Federal Open Markets Committee meeting on Wednesday should come and go with very little fanfare, economists suggest, after policymakers updated the language in its June statement.
"For one, it is quite rare to see significant tweaks in a meeting that is not accompanied by a press conference," observed RBC Capital Markets, where economists think the FOMC is poised to raise the funds rate by further 50 basis points this year and another 100bps in 2019. "But for the 1 August Fed meeting, things have not shifted significantly enough to warrant any notable alterations."
Strategists at TD Securities said the near-term optimism is "already fully priced into market expectations" for a September rate hike, with Fed Chair Jerome Powell's recent testimony also optimistic, although he did note business concerns about trade disruptions.
"We see low odds for a correspondingly dovish tilt to the balance of risks, however," TD said, with a base case that this will be a non-event for rates, with limited impact on the dollar and broader forex as the focus remains on "post-BoJ noise" and the Thursday's Bank of England decision.
Wednesday August 01
INTERNATIONAL ECONOMIC ANNOUNCEMENTS
Auto Sales (US) (20:30)
Construction Spending (US) (15:00)
Crude Oil Inventories (US) (15:30)
ISM Prices Paid (US) (15:00)
MBA Mortgage Applications (US) (12:00)
PMI Manufacturing (GER) (08:55)
PMI Manufacturing (EU) (09:00)
PMI Manufacturing (US) (14:45)
UK ECONOMIC ANNOUNCEMENTS
BRC Shop Price Index (00:01)
PMI Manufacturing (EU) (09:30)
FINALS
Hargreaves Services
INTERIMS
Aggreko, BAE Systems, BBA Aviation, Capita, Dignity, Direct Line Insurance Group, Getbusy, Lloyds Banking Group, Man Group, Rio Tinto, Smurfit Kappa Group, St James's Place, StatPro Group
TRADING ANNOUNCEMENTS
Barr (A.G.), Koovs, Next
SPECIAL DIVIDEND PAYMENT DATE
Record
AGMS
CML Microsystems, Dods Group
FINAL DIVIDEND PAYMENT DATE
Next, Record, Tate & Lyle
INTERIM DIVIDEND PAYMENT DATE
BBA Aviation 5% Cum Prf, Stride Gaming
QUARTERLY PAYMENT DATE
Mercantile Investment Trust (The)