Interactive Investor

Market snapshot: reasons to be cheerful, Rolls-Royce latest

8th February 2021 08:39

Richard Hunter from interactive investor

Events are generating cautious optimism among investors, although it's still tough for Rolls-Royce.

The stars are aligning for US markets, which could have positive repercussions for sentiment elsewhere.

The need for stimulus was further underlined by the non-farm payroll numbers, and a budget outline approved by lawmakers appears to have placed President Biden’s relief plan on the brink of success. Although the eventual amount may be subject to some compromise, the injection it will provide to economic recovery will likely be substantial.

Meanwhile, as the current reporting season enters its last busy week, the news has hitherto been surprisingly positive. Underpinned by strong showings from the likes of financials and big tech, there could yet be a swing to overall growth for the period, which would lift Wall Street out of the earnings recession it has been enduring for some quarters. As such, and with the vaccine rollout programme continuing to gather pace globally, outlook comments from corporates have also been cautiously optimistic.

This combination of events has lifted the main indices further, with the Dow Jones up by 1.8% in the year to date, the S&P 500 by 3.5% and with the Nasdaq extending its lead to stand ahead by 7.5%.

More broadly, the prospect of economic recovery later in the year has been positive for the oil price. The dual benefits of perceived additional demand and capped supply have propelled the price to around $60 per barrel, an increase of 15% since the beginning of the year.

With sterling continuing to build on its recent strength, the FTSE 100’s legion of largely overseas earners has been affected, and the index remains ahead by just 0.8% in the year to date, after an initially strong start.

However, a steady return to dividends, the potential of heightened M&A activity and an IPO market which has already had a couple of successes this year, could yet underpin further potential returns.

Elsewhere, Rolls-Royce (LSE:RR.) may also have succumbed to another blow from the pandemic, as reports suggested that it would be closing its jet engine factories for a two-week period over the summer due to insufficient demand.

The company, which was forced to raise £5 billion from shareholders late last year, is estimating cash burn of around £2 billion this year, with flying hours dropping to around 55% of 2019 levels. With the company being paid on hours flown by the airlines, there could be further pressure on a share price which has dived 60% over the last year.

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