Market report: Relief floods in as US eases off hostilities in Iran conflict
Susannah Streeter, chief investment strategist, Wealth Club: “A dam of tension has eased with relief flooding into financial markets, amid hopes that hostilities will cease in the Middle East, with the Trump administration making conciliatory moves. The Footsie 100 has rallied higher, with optimism replacing pessimism, given the ceasefire looks more likely to hold. The DAX in Frankfurt and the CAC 40 in Paris have also jumped in early trade. Trump’s announcement that Operation Epic Fury has been concluded, has triggered a wave of buying given there’s less of a chance of the situation escalating once more. Relief is starting to seep into the bond markets, with UK gilt yields easing off amid hopes that inflation might not head quite as high if a longer-term resolution can be negotiated.
Brent crude has been on the descent, but it’s still trading above $108 dollars a barrel indicating that there’s still scepticism around, and concern about how to get so many vital energy shipments moving again with the Strait of Hormuz still effectively blocked. There’s still a big diplomatic impasse to break through, and so for now, the energy crunch is still a harsh reality to navigate.
Next has demonstrated it was in a highly resilient position before the Iran war began, with its wardrobe of brands attracting high demand. Its curated marketplace offering, helped power up transactions for an exceptional period of trading with sales up 6.2%. It means it’s lifted full-year guidance for pre-tax profits to £1.218bn from £1.21bn.
However, the onset of hostilities put creases in its performance. Logistics issues are slowing international sales, however an uptick at the end of the quarter indicates these were beginning to be ironed out.
Nevertheless, it’s had to size up painfully higher freight and energy costs – which totalled a £47m hit. But Next is tailoring its operations to try and absorb the shock, with some price rises planned internationally, and cost cuts elsewhere to try and keep profits intact. Understandably, the company remains cautious given the unpredictability of the conflict and the current consumer caution swirling, and shares dipped slightly in early trade.
There’s a bit more fizz returning to Diageo with flat first-half sales replaced with a bit more sparkle. Net sales were up 2.3% for the quarter compared to a year ago, providing cheer to shares in early trade.
Although there’s no change to the guidance, better performances in Europe, Latin America and Africa have added a bit of zing to the picture and a cause for celebration. There was a seasonal lift due to the early arrival of Easter and there are also some tentative signs that a frenzy of World Cup fever will keep spirit demand higher
However, the hangover from the tariff effects is lingering with North America sales still proving a headache at a time when demand was already weaker. Americans aren’t hitting premium brands in the same way, potentially due to trading down but also competition in the market from domestic names. It means that the full year still points to a contraction but with the tone a little more positive about the outlook, with cost savings on track, a glass half full attitude is starting to return.
There will be worries that cheap pints might be the latest casualty of higher costs facing pubs, given JD Wetherspoon’s latest update. It demonstrates the extent to which the sector is grappling with mounting financial pressures despite steady demand.
Although the bar is still busy, with Wetherspoon’s value offering continuing to pull in punters, margins risk being diluted as the rising cost burden froths up. Management has warned that profits could come in slightly below expectations, suggesting higher wage bills, energy prices and input costs are starting to eat into takings.
The danger is that something has to give, and the worry will be that low pricing which is a cornerstone of Wetherspoon’s appeal may come under pressure. While the World Cup and extended opening hours may provide a short-term boost to sales, they’re unlikely to fully offset the squeeze, leaving the group with the increasingly tricky balance of keeping prices low while protecting profitability.”