Market report: FTSE 100 loses fizz, Rightmove rejects REA and Red Sea disruption drags on DFS
Susannah Streeter, head of money and markets, Hargreaves Lansdown:”The FTSE 100 has lost its fizz in early trade, as fresh concerns about the trajectory for the global economy kick in. An escalation of tensions in the Middle East is also raising inflationary concerns, as a widening of the conflict could see a spike in oil prices, pushing up transport and goods prices. Even though stocks on Wall Street gained new ground, with the S&P 500 closing at another high, sentiment in Asia and Europe is more subdued, with the optimism following the ‘kitchen sink’ stimulus from China’s central bank wearing off.
Focus has turned back to a disappointing consumer confidence reading in the US, indicating that there is set to be fresh caution about spending ahead. This would weigh on the world’s largest economy and the prospects for companies with a global footprint. It may also limit the number of expected interest rate cuts ahead. There is uncertainty about what’s the Fed’s main driver now is – bringing inflation to target or stopping a deeper economic slowdown and what that will mean for the direction of interest rates. Attention is now turning to Friday’s release of the latest Personal Consumption Expenditures Index, given that it’s the Fed’s preferred measure of inflation. It’s expected to tick up again, and Fed governor Michelle Bowman has warned about the upside risks to inflation and the potential for supply chains to be further snarled by conflicts and labour disputes.
Furniture group DFS has been feeling the effects of a double whammy of Red Sea disruption and consumer caution amid high borrowing costs. Many shoppers have shunned bigger ticket items like new sofas as they’ve grappled with high interest rates. Those who have ordered were hit by delays, which has meant the company has had to defer recognising some fourth quarter sales, deepening its woes and leading to a 65% fall in annual profit. Shares fell back as investors were warned about a long road to recovery for the furniture retailer.
Rightmove is playing hard to get and Rupert Murdoch’s REA Group is going to have to up its game again if it has a chance of winning over the board to accept a takeover offer. The bids so far have been rejected out of hand, and even the improved latest offer is considered to materially undervalue the company and its future prospects. With the UK government pledging to build 1.5 million new homes, interest rate cuts eyed and the property market springing into life again, Rightmove clearly sees significant growth opportunities ahead.
Brent Crude remains close to $75 a barrel as supply concerns continue to swirl. Although crude prices remain well below the peak in 2022, when they were nudging $120 a barrel, the intensity of the Israel’s attacks on targets in Lebanon has increased concerns that that the conflict will spread further across the Middle East. This could potentially affect the distribution of oil from Iran and the passage of tankers through the Strait of Hormuz, a key route for global crude supplies. Oil prices have risen 8% over the past fortnight as Israel’s war against Hezbollah has escalated. However, a lid is being kept on prices for now, given expectations of lower global demand and rising production in the US this year, as fracking and horizonal drilling has increased.
Gold prices remain hovering near record highs as its safe haven appeal gains more lustre amid heightened geo-political tensions. The super-size interest rate cut from the Fed and the expectation of more reductions this year has also helped lift prices as it’s weakened the dollar in. Gold is predominantly traded in US dollars so falls in the currency can make the metal cheaper for buyers, helping increase demand. The rise in gold prices this year has also been helped by buying from China, in particular its central bank. Part of the appeal of gold is as a hedge against inflation, which is staying above target in some economies and there are also concerns that governments across the world continue to run up high levels of debt, which is associated with a rise in long-term inflationary expectations.
The extent to which shoplifting remains a scourge for the UK’s retail sector is evident in Co-op’s results. The group still managed to return to half-year profit, despite thefts and fraud costing £39.5m. This is a savage bite out of its earnings so it’s not surprising that the group has taken a leading role in campaigning on this issue. The amount being lost to thieves is up 19% compared to last year and highlights the growing tide of criminality which retailers are having to deal with. Data from the Office for National Statistics shows that over the year to March, shoplifting offences were up 30% on the previous 12 months. They have hit the highest level since current police records began in 2003. This can’t just be blamed on cash-strapped consumers struggling to make ends meet. The big driver of such crimes are criminal gangs who target entire ranges of goods.
Boeing remains deep in a wage row, which is spelling fresh production trouble ahead. Shareholders who hoped that the arrival of a new CEO Kelly Ortberg in August would help the company make a fast exit from its difficulties are sorely disappointed. The deep-seated nature of the challenges the company is facing has come even starker, given the rejection of 30% pay offer to staff. Relations between management, union leadership and staff appear to have broken down further, given complaints by workers that they weren’t given time to vote on the latest proposal. The continuation of the strikes, affecting factories where the 737 Max and 777 aircraft are manufactured will add to Boeing’s production woes. Already orders have been arriving late, leading to reduced capacity for customers like Ryanair. Shares have crept lower this week and have fallen more 38% year to date, and the turbulence looks set to continue.”
