Markets
Europe
The FTSE-100 finished yesterday's session 2.55% lower at 5,982.20, whilst the FTSE AIM All-Share index closed 3.82% worse-off at 676.96. In continental Europe, markets ended in the red on uncertainty surrounding Brexit, which continued to dampen investor sentiment. France's CAC 40 and Germany's DAX slid 3.0% each.
Wall Street
Wall Street extended losses for the second consecutive day in the wake of negative implications following Brexit last week. Additionally, a fall in oil prices resulted in losses in energy stocks. The S&P 500 fell 1.8%, with the material sector losing the most.
Asia
Equities are trading mixed as investors remained concerned over Brexit and its impact on the global economy. The Nikkei 225 gained 0.1% amid speculation that the Bank of Japan might boost stimulus measures. The Hang Seng was trading 0.8% down at 7:00 am.
Oil
Yesterday, WTI prices fell 2.7% to US$46.33 per barrel, while Brent oil prices dropped 2.6% to US$47.16 per barrel.
Headlines
Volkswagen reaches settlement with US car owners
German carmaker Volkswagen has reached a settlement of US$15bn with US car owners after admitting to cheating on emission tests. As per the deal, Volkswagen would offer to repair or buy back the affected diesel vehicles and pay owners compensation. According to news sources, the legal settlement reserves US$10bn to repair or buy back around 475,000 affected vehicles with 2-litre diesel engines and compensate owners with a payment of up to US$10,000.
Company news
Aviva (LON:AV., 346.20p) - Buy
Yesterday, Aviva informed it has conducted extensive research on the possible implications of Brexit and concluded that the company expects no substantial operational impact. The company estimates as of the closing on 24th June 2016, the solvency II coverage ratio remained 150–180%.
Our view: The UK exiting the EU has negatively impacted financial companies, including insurance firms. However, Aviva's update is an assurance to the company's fundamentally strong position, and its solvency ratio is well within the working range. The company boasts of a solid balance sheet, with low sensitivity to market stress, and has tripled the economic capital surplus over the past four years. As per Aviva's preliminary results, it had a solvency II ratio of 180% and surplus of £9.7bn. The company would continue to monitor the effects of Brexit. Overall, Aviva is well placed in both financial and operational aspects to deliver long-term growth. Therefore, we maintain a Buy rating on the stock.
easyJet (LON:EZJ, 1,020.0p) - Hold
easyJet, a low-cost European airline company, yesterday provided an updates on the impact of a significant number of disruption events in the third quarter ('Q3'). The Group said due to the impact of continued French Air Traffic Controllers ('ATC') strike, runway and congestion issues at Gatwick airport, severe weather, together with knock-on cancellations across the easyJet network, it has experienced 1,061 cancellations in the Q3 up to yesterday. In June alone, there was over 700 cancelations (June 2015: 487 cancellations), of which, over 300 flights were cancelled in the last seven days to 27 June 2016. The Group said these events have impacted Q3 pre-tax profit by c.-£28m, revenue per seat by c.-8.6% (previously guided c.-7%). Following the BREXIT victory on the EU Referendum, for the H2 FY2016, easyJet now expect revenue per seat to decline by at least a mid-single digit percentage points compared to the H2 FY2015 at constant currency basis. Moreover, recent movements in fuel prices and exchange rates is anticipated to add +£25m to the total fuel cost for the year to 30 September 2016. easyJet will provide a further update on current trading at its third quarter results on 21 July 2016.
Our view: A disappointing update punctuated with warnings and uncertainties. The operating environment in Q3 has been extremely challenging for all European airlines, being impacted by timing of an early Easter, the terrorist attack in the Brussels, the crash of EgyptAir, a series of ATC strikes (mainly French) and severe weather conditions. Such events have a direct impact on airlines as they forced flights cancellations plus addition costs as well as discouraging prospective travellers. These disruptions were not totally new news from easyJet, but the outcome of the Brexit 'Leave' vote was. The short term impact from this latest shock, the movement in fuel prices and foreign exchange rates, has added an estimated £25m to total direct cost, while economic uncertainties, consumer confidence, and depreciation of sterling is unlikely to recover at least for the FY2016 as summer tend to contain higher levels of discretionary leisure travel. Competition within the European short-haul market remain intense with its rival, Ryanair, having proposed a -7% reduction in average air fares in Q4, which will keep squeeze its margins as the fight for market share continues. One might anticipate lower consumer demand from the British nationals due to the weakened sterling, which could be somewhat offset by an increased number of foreign travellers. Beaufort has reviewed prospective disruption and uncertainty, which results in an aggregate adverse hit amounting to over-£100m on pre-tax profit for the FY2016. Long-term the outlook for easyJet has also become less certain, as its ability to fly without restriction across the Europe with no additional charges or access delays may now be restricted. Beaufort accordingly downgrades its recommendation on easyJet to HOLD until there is greater visibility for the sector.
Foxtons (LON:FOXT, 104.50p) - Hold
Yesterday, Foxtons issued a trading update ahead of interim results on 29th July 2016. The company warned its revenues and adjusted EBITDA for 2016 would be significantly lower than the previous year due to uncertainty in the London property market following Brexit. Foxtons expects revenues for H1 2016 to be lower than those for H1 2015, with lower adjusted EBITDA margins of around 20%, chiefly due to subdued sales volumes and cost associated with recent investments in its branch network.
Our view: The aforementioned update issued by Foxtons is a disappointing one. The company has lowered its revenue and profit margins for 2016 on uncertainty in the market following the UK's decision to leave the EU. Post Q1 2016, Foxtons witnessed a drop in sales volumes, dragged by a higher stamp duty and uncertainty surrounding Brexit. Although Foxtons' expansion strategy remains on track, and it has significant opportunity to expand its network across London, we are concerned about the company's reduced sales pipeline entering into Q2 2016. We remain confident of the company's long-term prospects, given its strong balance sheet and low debt. However, recent uncertainty in the property market is likely to depress growth and profitability in the near-to-medium term. Thus, in view of the factors above, we maintain a Hold rating on the stock.