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Commercial real estate drags on the FTSE 100, as markets drift

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Today’s market session has been more akin to watching paint dry with little in the way of strong direction in the underlying indexes, with the FTSE 100 slipping back, while the DAX has edged higher.

Europe

The focus today, as it has been for most of this week has been on individual company trading updates which have prompted some of the main decliners today on the London market.  

JD Sports shares have taken a bit of a battering today, briefly slipping to their lowest levels since late January before rebounding, despite reporting record full year revenues of £10.1bn, although higher charges and other losses of £550m helped push pre-tax profits lower to £440.9m, a decline of 50% from last year’s £654m. On guidance the company said it expects full year pre-tax profits for next year to come in at just over £1bn, despite a slight decline in gross margins.

Having seen its peer Land Securities post a loss yesterday due to lower portfolio valuations, British Land has followed suit posting a pre-tax loss of just over £1bn, as higher rates hit the value of its own property portfolio, sending the shares sharply lower. Rental income on the other hand posted a modest increase rising to £418m over the year. On guidance British Land outlined an expectation of annual growth between 2% to 4% for campuses and retail parks, and 4% to 5% for London Urban logistics.

Experian shares are also on the back foot after posting a 19% decline in pre-tax profits for 2023, as well as proffering 2024 organic revenue guidance of 4% to 6%, which was below expectations.

One company that is doing well today is accounting software company Sage Group, which is outperforming after raising its full year guidance, for organic recurring revenue growth for the year to rise by 11%, up from its previous 9% estimate. On its H1 numbers the company reported a 12% rise in its H1 underlying revenue numbers.

Melrose Industries is also higher after upgrading its 2025 operating margin and profit guidance, due to anticipated improvements in its aerospace division, specifically around its engines business. This upbeat assessment has had the added effect of giving a boost to Rolls-Royce, which is exposed to the same sector.  

US

US markets have opened modestly higher with the focus still very much on discussions over in DC and little in the way of overall direction. As with Europe the focus has been on individual company earnings and announcements.

US regional banks are back in the news after Western Alliance reported that deposits had risen by $2bn since the end of the previous quarter. This has prompted similar gains in the likes of PacWest Bancorp and Zions Bancorp.

Target shares have struggled since hitting six-month highs at the start of February and have been languishing since reporting a sharp fall in Q4 profits back in February. Today’s Q1 numbers have seen Target report revenues of $25.32bn, which was slightly above consensus, while profits also beat, coming in at $2.05 a share, however their Q2 guidance pointed to trouble ahead, while reiterating the full year profits outlook of $7.75 to $8.75 a share.

Target cited the risks that theft was shrinking its margins, which management said was rampant and could cost the business up to $1.1bn over the year, in the form of lost profits and increased investment to prevent so-called “shrink”. The company went on to say that the problem could prompt store closures in particularly problem areas. For Q2 Target said it expects to see profits slip to between $1.30 and $1.70 a share.

Manchester United shares have pushed further away from this week’s six-month lows on reports that a Qatari based group had made an improved offer for the club as the ownership tug-of-war continues.  

FX

The penny finally appears to be dropping that the Federal Reserve is in no rush to cut rates this year, given this week’s pushback by several FOMC policymakers with respect to their concerns over the stickiness of current levels of inflation. This realisation has helped push the US dollar index to its highest levels since late March, with the greenback pushing back towards its recent peaks against the Japanese yen and sliding back towards the 1.0800 area against the euro.

The pound was little changed even as Bank of England governor Andrew Bailey acknowledged that the central bank might have to do more when it comes to rates given how sticky prices were proving to be. He went on to push back strongly on criticism that the MPC was partly to blame for the fact that inflation was so high, due to overly loose monetary policy in the past, saying that no-one could have foreseen the impact of the Russian invasion of Ukraine. This of course rather overlooks the fact that the Bank of England started its rate hiking cycle back in December 2021, when CPI was at 5.4% and over double the 2% target. Even then the hike was a paltry 15bps, which is the monetary equivalent of taking a knife to a gunfight. If they’d gone harder and quicker like the Federal Reserve have done, who knows what the counterfactual might have been, but to pretend that they didn’t make any mistakes is arrogant presumption at its worst.        

Commodities

Gold prices look set to push back towards their April lows, as the rise in US yields along with the strength of the US dollar takes some of the lustre away from the yellow metal.

Crude oil prices have rebounded from their lows of the week, with the downside limited by this week’s announcement that the US will be a buyer on any dip between now and August as they look to refill the SPR. The IEA also estimated that demand would pick up once the China recovery story starts to gain traction, although given how disappointing this week’s China data was there is a risk that the IEA is overestimating how much of a rebound we might see.

Volatility

E-commerce play Baidu saw its US listed ADRs put in a solid performance on Tuesday following better than expected earnings, helped along by increased advertising revenues. That has pushed the stock towards four-week highs, with one day volatility printing 97.83% against 51.81% for the month.

Keeping with earnings and telecoms play Vodafone also saw elevated levels of price action after the new CEO said there was work to be done in improving the company and 11,000 jobs would be axed. The underlying fell by seven percent, pushing one day volatility to 109.51% against 43.44% on the month.

Copper prices remain under pressure, coming close to levels not seen in almost six months on Tuesday, with disappointing economic news from Beijing overshadowing forecasts of a deficit being seen for the metal in the coming months. One day vol is slightly up from the figure we reported 24 hours ago, standing at 22.95% against 21.35% for the month.

CMC’s proprietary basket of US outdoor living stocks, the JK OutdoorLiving share basket, fell close to 3%. Home Depot is a significant constituent here so with the company reporting falling sales yesterday and revising its forward guidance lower too, this appears to have resulted in some read across to the wider sector. Consumer spending appears to be cooling and that was sufficient to push one day vol on the basket to 30.05% against 28.04% for the month.

A spike in Canadian inflation was sufficient to see USD/CAD sell off briefly on Tuesday, although the losses proved to be somewhat temporary, and the pair was flat on the day. One day volatility stood at 6.9%, up from the one month reading of 5.58%.


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