Market report: Inflation worries, AI enthusiasm and FTSE reshuffle
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Financial markets are fracturing in terms of sentiment, with AI exuberance continuing to power mighty tech while worries about high interest rates lingering keep investors cautious elsewhere. The FTSE 100 has opened on the back foot, as stubborn inflation remains in focus and the General Election campaign continues to throw up economic and corporate uncertainty.
The Nasdaq powered to fresh highs after the chip giant Nvidia gained another 7%. As we are still believed to be in the early stages of the adoption of artificial intelligence, enthusiasm about the potential ahead is helping maintain the AI rally, even though the trajectory of demand for the technologies is hard to map. Financial markets are increasingly running on two-speeds as alongside the AI frenzy, more broadly investors are becoming more wary about the impact of high borrowing costs on economies. The inflation snapshot in Australia has been unnerving, showing an acceleration to 3.6% year on year, rather than a decline.
A key inflation snapshot is due out later this week in the US, the core Personal Consumption Expenditures Price Index, the Fed’s preferred inflation barometer. This will be seen as a crucial part of the picture in determining whether high interest rates are set to linger for longer. It’s not expected to have budged much, and the worry is that stubborn prices will keep policymakers ultra-cautious. However, if the snapshot shows an easing of pressures, it’s likely to calm current jitters.
The weekend’s OPEC+ meeting is coming into focus, and there are forecasts that producers will extend output cuts into the third quarter, reducing supplies on world markets. Oil prices are hovering around the highest levels in a month with Brent Crude is trading at $84.5 dollars a barrel. Distressing scenes of intense fighting in Rafah in Gaza have also sparked fresh concerns about the potential for a widening of the conflict. Another attack on a container ship in the Red Sea has also highlighted the ongoing disruption to trade routes. However, with the dollar gaining ground, and higher borrowing costs expected to linger, there are still swirling questions about the impact on demand, which is helping keep a lid on prices to some extent.
Royal Mail owner IDS has rallied again after news broke that the board has agreed to a formal takeover offer from its major shareholder, EP Group, led by Czech billionaire Daniel Kretinsky. Crucially, the offer is believed to deliver extra commitments to keep the name and the brand, rule out compulsory redundancies and keep the company headquartered in the UK. There is still some caution about whether the deal will go ahead, given that the government has the power under the National Security and investment act to potentially block the deal. IDS comes with a lot of Royal Mail baggage, particularly the obligation to deliver letters six days a week as the UK’s universal postal service, at a time when volumes are in sharp decline. But group’s international arm GLS has long been considered the jewel in the company’s crown, enjoying a level of success which Royal Mail has found elusive and EP Group will have been eyeing up the long-term opportunities here, particularly if inflation subsides further which should help margin growth.
The runners and riders are jostling for place in the upcoming FTSE review and the main moves in the FTSE 100 look set to be a demotion for St James’ Place and Ocado and a promotion for Vistry and DarkTrace.
Shares in St James’ Place are down by 24% year to date, after a torrid 10 months, putting it deep in the relegation zone. The turbulence was prompted by concerns about its business model following the introduction of the new Consumer Duty last summer which imposed a legal requirement to treat customers fairly. Confidence was dented after the company slashed its dividend and announced it had set aside £426 million for potential client refunds.
Ocado looks set to leave the FTSE 100 in this latest reshuffle with its shares down 44% year to date. There’s been an improvement in the retail side for Ocado, with Customer numbers having passed the one million mark and volumes showing impressive growth. However, potential legal action looming with M&S over a withheld performance payment has knocked sentiment. Deals are also not being signed as fast as investors were hoping on for its future growth engine, Solutions. It charges third-party retailers to use Ocado’s robotic systems. There’s still big potential here, but timeframes of growth look more questionable and that’s knocked the valuation. It’s led to speculation that the company may pursue a listing in the US instead, which appears to be behind the boost in its share price this week.
Housebuilder Vistry looks set to enter the FTSE 100 as it appears to be in an attractive position to capitalise on demand for new homes. Shares are up 37% year to date, as investors applauded its full year results and a strong growth outlook for the year ahead in terms of completions. With interest rate cuts eyed on the horizon, house prices have begun edging up again and confidence is tentatively returning to the housing market. Vistry’s aiming to build 18,000 new homes by the end of the year, an increase on last years’ total.
The Cambridge-based cybersecurity and artificial intelligence company Darktrace is set for a temporary place in the FTSE 100, ahead of its takeover by the US private equity business Thoma Bravo which is due to be completed later this year.
After six months in the FTSE 250, Investment and Savings company Hargreaves Lansdown will be added to the FTSE 100, effective from this Friday. Flutter Entertainment will be deleted from the FTSE 100 Index, as its opting for a listing in New York and Molten Ventures will be added to the FTSE 250 Index.
Other potential movers in the upcoming reshuffle next week include the Ukrainian iron ore miner Ferrexpo which looks set to be demoted from FTSE 250. Although it appears to have overcome many of its production operational issues, reporting a rise in production and sales for its Ukrainian subsidiary, it’s now been mired in legal challenges, which have affected sentiment, with shares down by more than 51% since the start of the year.
National Express owner Mobico is also in the relegation zone from the FTSE 250. Shares are down by around 30% since the start of the year as confidence has ebbed away following amid accounting issues and other operational challenges.
Investment funds Next Energy Solar Fund Ltd and Octopus Renewables Infrastructure Trust PLC could also be in line for demotion from the FTSE 250. Brunner Investment Trust looks likely to be promoted to the FTSE 250, alongside Alpha Group International PLC, asset manager Liontrust Asset Management PLC and pensions consulting and administration services firm XPS Pensions Group PLC.”
The FTSE All Share Index Quarterly Review is based on market capitalisations on Tuesday 4 June with changes taking effect after the close of business on 5 June, and effective from 24 June.
