European stocks are mixed as Sainsbury’s trading update shows food is still star of the show

Financial markets are looking a little lost as we reach mid-week, with no clear direction or narrative to drive markets. European stocks have opened with the Eurostoxx mildly higher and the FTSE 100 lower. E-mini futures for the S&P 500 also suggest that US markets could open higher later today.

The FTSE 100 is whipsawing around in a tight range as trading gets going, as the market tries to decide if its happy with Sainsbury’s after its Christmas trading report. BP and Shell are both higher at the start of trading on Wednesday, although whether they can extend gains could depend on what the oil price does next and if it can continue its recent rally.

Sainsbury’s food sales fail to drive profit forecast higher

The Christmas trading update from Sainsbury’s was as expected, good for food, not so good for everything else.  

We already knew that its grocery sales growth was strong, after last week’s Kantor data. However, the non-grocery sales were a weak point. Clothing sales were down 6% in the 6 weeks to 6th January 2024, compared with a decline of 1.7% in Q3. General merchandise sales were also weak over the Christmas period, with declines of 3.7% in the 6 weeks before January 6th, including Argos.

Grocery sales have been a bright spot for retailers this Christmas, yet Sainsbury’s non-food sales points to weakness in the UK consumer, and a disappointing start to the season for retail trade. It adds to evidence that the UK consumer is pulling back on buying ‘things’ and instead focussing on buying experiences, with strong sales growth for airline fares in recent months.

The Sainsbury’s results can be used to judge wider trends for the UK consumer: they are still eating, and eating well. Data from NIQ on Tuesday showed that spending on food was at a record high for the UK in the week leading up to 23rd December, at £4.8bn, a rise of 4.3% on 2022. The nation’s sweet tooth helped to boost confectionary sales, which were a top performer and saw growth rise by 17.3%!

Sainsbury’s confirmed its pre-tax profit level for FY 2024 at £670- £700mn, which missed analyst forecasts, suggesting that food sales alone cannot power Sainsbury’s to outperformance when it comes to profits for this year.

There was some good news in the figures, even with the decline in clothing and general merchandise sales Sainsbury’s still maintains that its retail free cash flow will be £600mn for 2024. From a fundamental perspective, Sainsbury’s still has a strong balance sheet, propped up by food sales.

After sales numbers, profit forecasts and free cash flow levels are the two metrics that investors care about most. We saw B&M also miss analyst estimates for their profit levels on Tuesday, yet it managed to reverse early weakness in the share price and closed higher on the day. Sainsbury’s share price has risen more than 23% since October, and is close to its highest level since 2018. There is the potential for more upside for this stock if investors take the view that lower food inflation and rising food sales can continue to power Sainsbury’s profits.

Sainsbury’s is also managing to do well against its competitors (excluding M&S), and in grocery volume terms it was third to Aldi and Lidl in the 12-weeks to December 24th 2023, with stronger grocery volumes than Tesco, Asda and Morrisons.

Markets head lower while waiting for US inflation and earnings data

Investors and traders are waiting for US inflation data on Thursday and the start of US Q4 earnings season on Friday, to get a grip on what the Fed will do next and what US banks can tell us about the strength of the real US economy, and profits at non-tech US firms.

Stocks have had a mixed start to the year, with this week’s earlier rally fading as we await key fundamental news. The 10-year US Treasury yield is above 4%, and the dollar is higher across the board so far this week, which is also taking the shine off equity market performance. Interestingly, there is no panic in the market, and the Vix index remains at a very low level.

No panic in the markets

Interestingly, future implied volatility for the Vix has also fallen recently, and suggests that for now, the future market outlook is for orderly market moves. Of course, an unexpected inflation reading on Thursday could change things, or a weak earnings season, so the market should not let the low levels of volatility sway them into a false sense of security.

Japan’s stock market boom continues into 2024

Elsewhere, Japanese stocks have been the stand out performers so far in 2024. The Nikkei rose to its highest level since 1989 on Wednesday and is up more than 2%. Momentum is to the upside, which could see this index target its all-time high of nearly 40,000 last reached at the end of 1989. All sectors of the index performed strongly, except energy, which suggests that the rally for the Nikkei is broad-based. This also makes it likely that the market will attempt to push this index to a fresh record high in the short term.

It is worth noting that the Nikkei rally is looking extended and the index has risen by more than 30% in the past 12 months, so whether it can continue to extend gains if it manages to break to a fresh record high, could depend on what the broader market is doing. For now, the Nikkei is powering ahead on its own, and has broken away from the rest of the global stock market pack. Nikkei volatility has picked up slightly compared to the Vix, which may also spur further movement in the Japanese index.