Wednesday’s plunge on Wall Street came as a shock and global markets are now readjusting. Sellers shaved 830 points off the Dow Jones Industrial Average and 4% of Nasdaq with big tech names like Amazon, Intel and Microsoft bearing the brunt of the decline. The picture is not looking much better this morning. The Nikkei and the Shanghai Composite closed over 4% and 5.7% lower respectively, the FTSE started the day with a 1.19% decline and continued to sink from there.
The plunge in US stock markets comes after a long run of almost undisrupted gains on Wall Street which were bound to come up for a correction. The strong US economic background that has supported share prices this year is now working against that same market. Rising interest rates are fuelling concerns that higher borrowing costs will erode the margins of US companies and with the domestic labour market at its strongest in nearly 50 years, wage pressures are filtering into companies’ costs. The 10-year Treasury yield is used as a reference price for mortgages, car loans and other consumer debt and a spike in those yields is hitting industries like car makers and house builders that are exposed to consumer borrowing.
Big banks to kick off US reporting season
How much damage has been inflicted on corporate bottom lines will become visible from Friday onwards when JPMorgan, Wells Fargo and Citigroup kick off the next round of earnings reporting. JPMorgan and its peers have enjoyed very strong earnings over the past quarters and although their income is still expected to show high growth in the current reporting period, a slowdown in new loan formation and a slight decline in income growth is likely to feature prominently.
Brexit and UK house prices
Brexit and UK house prices don’t mix well and the outlook for the next three to 12 months is now at its lowest since Britain’s divorce from Europe was announced. There are fewer and fewer buyers in the market and sales are taking longer than ever to complete. The plunge in London property prices is beginning to spread outside of the capital, particularly in the south east, while Northern Ireland remains the most vibrant market. The latest data dovetails with previous information from Halifax showing that house prices are at their lowest in six months.
WH Smith’s profits have met expectations
Rising airline passenger numbers have sent revenues soaring at WH Smith's travel business, while slime has helped cushion the blow on the high street.
Bottom-line profit has fallen unexpectedly, but that's thanks to some welcome changes at the high street business, including the closure of six weaker-performing stores.
At the underlying level, profits have met expectations. The dividend has been hiked by more than hoped, cementing WH Smith's reputation as a reliable supplier of higher pay-outs.
A key growth driver going forward will be the company's international travel business. At the moment, shops outside the UK only account for about 10% of trading profit in the travel division.
Investors could be a little disappointed that there's no clear guidance on how many new stores WH Smith would like to open overseas this year. There's plenty of room for it to move, especially in North America, where it has yet to open a store.
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