BT and banks help to underpin the FTSE100, as retailers drag

Europe

European markets have had a steady day, taking a pause after the gains of the past couple of days, as investors mull over the latest inflation numbers that we’ve seen from China and the US over the last 24 hours.

These inflation numbers, from both countries, would appear to give the impression that we could be near a short-term peak on this current inflationary surge, and while no-one is suggesting that we will see a sharp reversal from current levels, perhaps we may have reached a near term top.

Despite the choppiness since the start of the year markets in Europe are still in positive territory, while the FTSE100 has got off to a flyer, up over 2%, with big gains for banks and the oil majors.

Today we’ve taken a bit of a pause with the FTSE100 and DAX both treading water for the most part, trading either side of the flat line, with the focus on more decent trading updates from the retail sector, although to look at the share price reaction, you’d have been forgiven for thinking they weren’t that great, although they could always have been better.

It has in fact been a day of decent quarterly numbers for UK retail, not that you’d know it, with both Tesco and Marks and Spencer share prices slipping back, although this could simply be a case that expectations were perhaps a little bit too high leading into the numbers, and there are concerns as we head into the final quarter, for both, that cost-of-living pressures might impact their final Q4 numbers, heading into the spring.

For Tesco, unlike most of its peers, UK sales saw an increase of 0.2%, and though this was below expectations of 0.6%, this is still impressive when compared to the tough comparatives of last year, and on a 2-year basis this was even higher at 6.9%.

Even allowing for the modest expectations miss, Tesco said expectations for adjusted retail operating profits, which were revised up in the H1 numbers to between £2.5bn and £2.6bn, are now expected to come in slightly above that number, which is still pretty good, when you consider all of the challenges facing staffing, as well as supply chain disruption.

Marks and Spencer share price and business has also seen a decent recovery this year as its deal with Ocado prompted a sharp rebound in its fortunes. In November the shares gapped up to their best levels since December 2019, after the retailer upgraded its full year forecast for the second time this year, reporting H1 profits after tax of £159.9m. The gains were driven by a 10.4% rise in food sales, while the serial underperformer, the clothing and home business, delivered a 17.3% rise in full price sales.

Today’s Q3 numbers have continued to build on the improvement in H1 with a a 10% rise in food sales. Its general merchandise division, which for so long has been a drag, continued to improve, with clothing and home sales increasing 3.2%.

It could be that the decision to allow boutique third party retailers like FatFace and White Stuff to offer their products online under the “Brands” section has helped improve the general rate of turnover through the digital channels.

Nonetheless M&S has said it expects to see profits of at least £500m which is a modest upgrade to its H1 guidance which stated they would be in the region of £500m.

The rest of the sector has also underwhelmed today, with JD Sports and Next floundering at the bottom of the FTSE100, although JD Sports losses are more to do with the fact that chairman Peter Cowgill sold 10m shares at an average price of 213.33p per share, while Next has gone ex-dividend.

In contrast, we’ve seen ASOS share price shoot higher after the online retailer announced that it plans to move its listing from the AIM market and onto the Main Market. Management assesses that this is likely to incur costs of around £10m to £13m in H1, and is expected to take place next month.

In terms of its business, total group revenue rose by 5%, to £1.39bn, helped by a 13% increase in the UK business. Full year guidance was left unchanged with revenue growth expected to be in the range of 10% to 15% and adjusted profits before tax expected to be between £110m and £140m.  

Housing stocks have also underperformed today after Persimmon reported that it expects full year revenues to come in at £3.61bn, a % increase on 2020’s £3.33bn. This fell short of market forecasts of £3.72bn, and was also below the levels seen in 2019.

On the outlook, forward sales remain strong at £1.62bn, compared to £1.36bn in 2019, with 75 new outlets due to open in the first half of the new fiscal year. Taylor Wimpey has also slipped back ahead of its numbers which are due next week.   

On the upside, financials are performing well with Barclays, NatWest Group and HSBC all near the top of the FTSE100 as they continue to build on their solid start to 2022.

BT Group is also higher on reports that it is nearing a deal to offload its BT Sport channel for around £580m to DAZN. Negotiations are still ongoing and there is interest from other parties, with Discovery said to be interested in a joint venture.  

US

US markets opened slightly higher, after December PPI came in slightly below expectations and weekly jobless claims edged up to 230k at the start of the year.

The Nasdaq 100 appears to be leading the way with chip stocks getting a lift after Taiwan Semiconductors upgraded its chip growth forecast for 2022, helping to give the rest of the sector a lift, with Applied Materials and AMD coming in behind it.

Delta Airlines has seen its shares rise after reporting Q4 profits and revenue that came in ahead of expectations. Revenues came in at $9.47bn, and although the Omicron surge in December prompted a slowdown due to staff shortages, as well as fewer travellers, and continues to do so, the airline was confident about the next few months. Delta went on to say that Q1 revenues are expected to come in at around 75% of 2019 levels, with overall capacity expected to rise to 85% of 2019, and that it expected to return to profit by the end of Q2.

Investors will also be paying attention to Fed vice chair nominee Lael Brainard at her nomination hearing, and her views on the course of monetary policy over the next few months, particularly over the pace of the rate hike pathway.   

FX

The US dollar has continued to slide after December PPI fell to 9.7% from 9.8% in December, in another sign that we may well be near the peak of this particular inflationary surge. On a month-on-month basis the fall was even starker, falling from 1% to 0.2%. Consequently, the US dollar index has continued to slip back, falling to a two-month low.

The US dollar losses have been across the board, with the commodity currencies performing the best, with the likes of the Australian and Canadian dollar doing well. The prospect that inflation could be starting to top out offers encouragement and a little more certainty about the longer-term growth outlook, bringing more certainty around manufacturing costs.

The pound has also been able to push higher, up through the 200-day MA, with the prospect we could see a move towards the October highs at 1.3830 in the coming weeks.   

Commodities

Crude oil prices have remained steady near to their two-month highs after we saw a bigger than expected draw in US inventory data yesterday. The demand outlook continues to look positive, as we look towards the spring months, with many countries relaxing travel restrictions, thus opening up the prospect of more travel in the coming weeks.