Europe

Having got off to a positive start yesterday, today’s price action looks set to follow the pattern of last week, where after a similar Monday rally, sentiment deteriorated as concerns about profit margins in the face of rising prices saw certain sectors come under further pressure. Bond yields have also come under pressure over concerns that the weak US CPI number has been driven by demand deterioration, thus raising concerns about the global recovery story as we head into Q4.

This has resulted in a mixed session for European markets with the travel sector once again acting as one of the main punchbags, with the likes of easyJet and IAG towards the bottom of the FTSE350, as uncertainty over the relaxation of UK travel rules continue to weigh on a sector, that will now have to wait until next year, after another disappointing summer season.

This morning’s statement from ABTA that new bookings this year were 83% below 2019 levels with no prospect of a let up before 2022 is likely to augur in a wave of job losses across the sector as furlough comes to an end on September 30th.  

After initially opening higher this morning, Trainline’s share price has also slipped back, despite announcing H1 results that were slightly better than expected.

Even though the shares are still down year to date, part of the reason for the lacklustre reaction to today’s numbers, could be that the share price has already recovered a lot of the lost ground this year and is up over 40% from its June lows. The company said ticket sales have been improving in recent weeks, helped by higher levels of holiday travellers, topping £1bn. For the full year the business expects to see sales in the region of £2.4bn to £2.8bn, as domestic travel continues to return to some sort of normal. Total revenues rose to £78m with profits, with an expectation of a return to profit of about £14m EBITDA for H1, and full year EBITDA of between £35-£40m.

Basic resources are also underperforming, with copper prices falling back for the second day in succession, reversing a lot of the gains seen at the end of last week, and weighing on the likes of Anglo American, BHP and Rio Tinto, all propping up the FTSE100.

Ocado Q3 numbers weren’t well received by investors as revenues fell short of expectations, although the shares have recovered quite well from their lows of the day. The lukewarm reaction to today’s numbers came largely as a consequence of tougher comparatives, as well as the fire at the Erith fulfilment centre which crimped capacity at a crucial time. The business is also suffering from increased costs due to shortages of drivers. As a consequence of these factors, revenues suffered to the tune of £35m as well as incurring losses of £10m on top of higher costs of £5m.

JD Sports share price continues to go from strength to hitting a new record high after reporting H1 numbers which beat expectations. Revenues came in at £3.88bn, pushing profits before tax up from £61.9m to £439.5m, with the company’s expansion into the US helping to drive the numbers higher. The US business saw profits of £245m, with the recent acquisitions of Shoe Palace and DTLR contributing £72.9m. In its core UK market profits increased to £170.8m, with the company shrugging off store closures with a big uptick in its digital channels, although the reopening of stores in Q2 saw a big jump in sales due to pent-up demand.  As a consequence of these numbers, full year profits guidance was upgraded to £750m, up from around £600m.

On the topic of its Footasylum acquisition, which is currently being blocked by the CMA, the company has said it will continue to make the case for the acquisition. These numbers certainly support its case, especially given the big jumps seen in the digital retail channels, not only from JD Sports itself, but also in the big brands themselves like Nike, whose digital sales have also surged.

It certainly seems a strange decision by the CMA given how little JD Sports paid for Footasylum, £90m, and yet this morning we saw JD upgrade its full year guidance by £150m. It’s certainly a smaller problem now than it was when they first did the deal.   

US

US markets initially opened higher, after the latest US CPI report showed that inflationary pressures moderated in August with core prices falling back from 4.5% to 4%, however the gains proved to be somewhat short-lived, with the declines seen in the likes of transport and hospitality prices raising concerns of a squeeze on profit margins, from continued supply chain disruptions. The decline being seen in US treasury yields also appears to be reflecting these growth concerns.

Apple’s share price has remained fairly resilient these past few months putting aside the falls seen in the wake of the EPIC Games ruling by a US judge. With the Christmas season approaching, the time has come for Apple to set out its stall for what tends to be its most lucrative quarter in tonight’s big September event. It’s likely that the company will be launching a new iPhone, probably the iPhone 13, with some speculation that it could come in pink. Putting to one side the colour of the device, the most interesting questions are likely to be over specification. Will we get a camera, display and chipset update, given that the iPhone 12 has been out nearly a year now?

There could also be mention of a new iPad, although all these products are likely to be more expensive due to the chip shortages being experienced across the board. The rumours on a new iPad are especially interesting with reports that Apple might be close to launching a new entry-level, ninth-generation tablet with a faster chipset. There is also speculation about an updated Apple Watch and AirPods.

Wells Fargo shares have shrugged off an intervention from Democrat Senator Elizabeth Warren, who has written to the Federal Reserve, urging them to force the break up of the bank, separating its domestic banking operations, from its Wall Street operations. This appears to be in response to another regulatory infraction which has seen the regulator fine the bank $250m for inappropriate handling of foreclosures, the latest in a line of issues that have seen the bank fall foul of the regulator.

FX

The latest UK unemployment data for July has helped give the pound a decent lift, ahead of tomorrow’s CPI numbers which could well open the way for the Bank of England to outline a reduction in its bond buying program when it meets next week. Total numbers on company payrolls returned to pre-pandemic levels, while job vacancies hit a new record high of over 1m in August. These numbers suggest that the decision to end furlough is probably the correct one. That being said, it is becoming clearer that in the post pandemic world we look set to see further job losses in the travel sector as overseas travel becomes less popular, and may not pick up again until next year, at the earliest.

Today’s softer than expected US CPI numbers for August has seen core prices slip back to 4%, supporting the central bank narrative that the current move higher in prices is transitory. What is slightly more worrying is that the rise in food and energy prices has continued to move higher, with all the inherent risks to consumer and discretionary spending in the weeks and months ahead.

While a move lower in used car prices and airline fares is welcome, a lot of the move lower may well have been due to a lack of demand, particularly in the case of the drop in airfares where US airlines last week pointed to a reluctance on the part of people to fly due to rises in delta variant cases. Furthermore, to a lot of people on lower incomes, these price declines won’t make much difference, as you can always choose not to fly, or buy a used car. Nonetheless the bigger than expected drop in core prices has seen the US dollar slip back, although it has recovered off its lows.  

Commodities

Crude oil prices have continued to edge higher, up for the third day in a row, and close to a six-week high as another Hurricane, Nicholas, starts to lash the Gulf Coast. With US output still below the levels it was pre–Hurricane Ida, and 40% of output still offline any further delays in returning to normal will mean that short term pressures on prices are unlikely to subside.

Natural Gas prices have continued their march higher, setting new seven-year peaks in the US, while in Spain, the Spanish government, in response to similar record surges in prices across Europe has taken steps to cap gas prices until March next year    

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