Risk aversion returns as UK retailers post earnings in challenging consumer environment

Risk sentiment remains fragile this morning, as geopolitical tensions continue to flare up, and Nvidia’s sales to China are the latest tool President Trump is using to target Beijing. Stock market futures are a sea of red this morning, as the market backs away from risk for the second straight day.

Tesco earnings saved by Christmas

In the UK, the focus on Thursday is on domestic matters, specifically who were the retail winners from the crucial Christmas trading period. Tesco reported earnings that missed estimates, 3Q Like for like sales were 3.1%, versus estimates of a 4.8% gain. However, sales picked up over the Christmas period, rising 3.3%. This contributed to their highest UK market share in over a decade and allowed the company to confirm its earnings guidance for this financial year at the high end of estimates. Thus, earrings were saved by Christmas for the grocer and they could be up to £3.1bn. Online sales were also strong and rose more than 11%.

Overall, its earnings have not been a roaring success, although the pickup in Christmas trade is encouraging, and managing to retain the high end earnings guidance for this year could also boost sentiment towards the UK’s largest supermarket chain. Its stock price has been static for the past month, as investors wait for a driver. This earnings report may not set the world alight, but it could boost the share price later as it suggests that Tesco can maintain market share and profits in a challenging operating environment and where the UK consumer is constrained.

M&S food proves its worth yet again

M&S also reported earnings this morning. It reported a record number of customers in its stores. Once again, its food business is driving the company. Food sales rose by 5.6% over the Christmas period, weaker than the 7% expected, however food offset a sales decline in fashion, home and beauty, where total sales fell 2.5%. International sales also rose by a respectable 1%. The company reported Q3 sales, which were strong, rising by 24%. This suggests that disruption caused by the cyber attack earlier this year has been resolved.

Full year profit guidance is unchanged, and the company said that it would reshape its strategy based on an ‘uncertain consumer environment’. This point could weigh on the share price, as investors worry about how M&S’s high-end food offering could fare now that the Christmas lights have been taken down. The share price is down 1.5% in the past month, and we will need to see if this descent earnings report is enough to turn that around.

Nvidia caught in the cross hairs

While tech stocks managed to buck the trend and post gains on Wednesday, this may not be case on Thursday. Nvidia and Sandisk both rose more than 1% on Wednesday, however, we think that the AI chipmaker could come under pressure today after it announced that it was changing its terms for sales of its H200 chip to China, with all sales now having to be paid upfront.

These chips are a serious chunk of change, so this move could ostensibly hurt Nvidia’s sales. In recent weeks, analysts had upgraded their sales forecasts for this year on the back of China sales hopes, thus we should expect some unwinding of this later today, which could weigh on Nvidia’s share price, and hurt US AI firms more generally.

Nvidia a pawn in US/China spat once more

There has also been an impact on Asian shares, as this could hurt China’s AI ambitions. The CSI 300 and the Hang Seng are both lower this morning, after the news broke. More worryingly, it suggests that Nvidia is once again being used as a pawn in the geopolitical power play between the US and Russia. If Beijing sees this move as being an order from Trump, then it risks raising tensions further and igniting China’s ire. China and US relations are already teetering on the brink after the US capture of Venezuelan leader Maduro, and after the seizure of a Russian linked oil tanker destined for China. Thus, retaliatory action from the Chinese should be expected in the coming days.

UK government bond yields a winner from risk aversion

Overall, the air of nervousness is likely to persist on Thursday, especially as we lead up to US Payrolls on Friday. Risk aversion was notable in the bond market on Wednesday, with a sharp drop in government yields, as geopolitical tensions and a decline in German inflation helped push yields to multi month lows.

Interestingly, it was UK Gilts that outperformed their global peers on Wednesday, and the 10-year yield fell more than 6bps, even though UK inflation remains elevated. This suggests that the market is hoping inflation will fall from here, which has weighed on the pound in recent sessions, as the dollar, yen and Swissie catch a bid from the reduction in risk sentiment.

Ahead today, we think that the markets will be nervous as we lead up to Friday’s payrolls report and as they watch out for further signs of geopolitical risk and the fallout in the latest spat between China and the US. This could keep downward pressure on equities, and this time it could drag tech stocks with it.