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Market Outlook

The Week Ahead: US inflation; Tesco, M&S results

Read our pick of the top stories to look out for in the week commencing 10 January 2022, and view our key company earnings schedule.

OUR TOP THREE EVENTS FOR 10-14 JANUARY 2022:

US CPI (December) – Wednesday

The US Federal Reserve’s recent decision to begin cutting its asset purchases by $30bn a month from January suggests that it is more worried about inflation than it is about the labour market. The upcoming release of inflation data, as measured by the US consumer price index (CPI), is therefore likely to play a key role in discussions about a mooted March rate hike, as the Fed grapples with rising price pressures, an economic slowdown caused by tighter Covid-related restrictions, and a decline in consumer confidence. In November, US CPI hit a 39-year high of 6.8%, and a further uptick seems likely in the December numbers, given that the producer price index (PPI) has increased to a record high of almost 10%. PPI has tended to be a leading indicator for CPI over the last 12 months. Headline CPI climbed higher towards the end of 2021, and that trend is likely to have continued into December, as restrictions caused supply chain disruptions. If we strip food and energy from the most recent PPI figure of almost 10%, we’re still at 7.7%, which means that there is a real possibility that headline CPI for December could hit or even exceed 7%, with PPI potentially moving above 10%.

Marks & Spencer Q3 results – Thursday

The M&S share price has climbed almost 80% in the past year, as the company’s deal with Ocado prompted a rebound in its fortunes. In Q1 M&S surprised the market with a strong quarter of revenue growth. Then, in November, the shares reached their highest levels for two years, as half-year profit after tax came in at £159.9m and the retailer upgraded its full-year forecast for the second time in 2021. The gains were driven by a 10.4% rise in food sales, while the clothing and home business, which has underperformed in the past, delivered a 17.3% rise in full-price sales. Looking towards the second half of the year, management said that initial trading had remained in line with Q2 performance, but warned that supply chain issues might increase costs. Nevertheless, bosses upgraded their full-year outlook, saying that they expected profit before tax to be in the region of £500m – a significant improvement on the £300m to £350m announced at the end of Q1. As we await this week’s Christmas trading update, shareholders will be hoping that momentum has been maintained, and they may even hope to hear M&S discuss the possibility of reintroducing its dividend.

Tesco Q3 results – Thursday

Tesco, the UK’s leading supermarket by sales, saw its market share grow to 27.7% in November, up from 27% a year earlier, according to data released by Kantar. Tesco consolidated its market-leading position ahead of Asda and Sainsbury’s. Tesco’s half-year numbers showed a 2.6% rise in group sales excluding fuel to £27.3bn, up from £26.7bn the year before. Operating profits also rose by more than 40% to £1.46bn, while profits before tax rose to £1.1bn, up from £551m a year earlier. The results prompted management to raise their full-year forecasts, with retail free cash flow, which fell to £797m in 2020, expected to rise to between £1.4bn to £1.8bn by the end of this financial year. Meanwhile, expectations for adjusted retail operating profits were revised up to between £2.5bn and £2.6bn, even though current sales levels are predicted to dip. Booker, the Tesco-owned wholesaler, rebounded strongly in the first half of the current financial year, as sales were boosted by the reopening of restaurants, cinemas and bars, although a slowdown likely occurred in December, as hospitality venues saw bookings cancelled due to rising Covid cases. The only weak spot for Tesco has been its Ireland operation, which has been negatively affected by Brexit. 

Tesco’s pre-Christmas trading numbers are likely to have held up reasonably well, given that the spread of the omicron variant and the UK government’s work-from-home advice meant many consumers limited their contact with the outside world. Last week’s Kantar data showed that Tesco’s grocery sales in the runup to Christmas fell 0.9% versus Christmas 2020. This compares favourably to competitors such as Sainsbury’s, which saw sales fall 4.4% from a year earlier. 

MORE KEY EVENTS (10-14 JANUARY):

WEDNESDAY 12 JANUARY

Sainsbury's Q3 results

Last August Sainsbury’s shares hit their highest levels since 2018 on reports that private equity firm Apollo, which missed out on a deal to buy Morrisons, was turning its attention towards Sainsbury’s. The upwards trajectory of the Sainsbury’s share price marks a significant turnaround from March 2020, when its stock hit a record low. Since those August peaks the shares have slowly slipped back. Even though business has remained good, investors seem unconvinced about the company’s prospects, despite a decent set of half-year results in November. Those results showed grocery sales had risen 0.8% from the high base of a year earlier, when sales surged amid lockdown stockpiling. Compared to 2019, the numbers showed a 9.1% rise. As for general merchandise, the picture was less positive, with sales down 5.8% versus the same period in 2020, but still up 1.1% compared to the same period in 2019. Online sales remained strong, coming in at £5.8bn. Underlying profit before tax totalled £371m, a rise of 23% on the previous year’s figure, putting the business on track for full-year underlying profit before tax of £660m. CEO Simon Roberts was cautious about the headwinds facing the business, pointing to challenges over logistics. But he expressed confidence that the business had put measures in place to deal with them and ensure the best possible performance in the runup to Christmas. On Wednesday we’ll find out whether that optimism was justified.

THURSDAY 13 JANUARY

ASOS Q1 results

Several online fashion retailers that had a stellar 2020, such as Asos and Boohoo, endured a tough 2021, as high street competition returned. The Asos share price has fallen by half in the past year, losing the lockdown-era gains that pushed the shares to 5,982p in March 2021, although that was still well short of its record high of 7,770p, set in 2018. Recent declines have come despite decent numbers – in October Asos reported revenue of £3.9bn for the year to the end of August, up 20% year-on-year, while adjusted profits before tax rose 36% to £193.6m. The biggest improvements in sales were in the UK, which saw a 36% rise, and the US, which posted a 22% increase. However, the company warned that in 2022 sales growth could slow to between 10% and 15%, with half-year revenue growth expected to be in the mid-single digits, and profits before tax expected to fall more than 25% to between £110m and £140m because of higher freight, delivery and labour costs, as well as a huge increase in returns costs. This helps to explain why the shares have fallen so much, even though full-year revenue is expected to come in at a record £4.36bn. Despite the recent falls in the share price, the company still has a healthy valuation of £2.3bn, well above that of Boohoo, and on well over twice the revenue. 

FRIDAY 14 JANUARY

China trade report (December)

While on-off lockdowns, the government’s zero-Covid policy, and port disruptions have hit China’s trade in recent months, the impact hasn’t been as marked as first feared. One reason for this is that businesses got ahead of supply chain issues by ordering early, giving themselves time to build up inventory levels. This front-running of inventories continued through Q4, with strong demand for machines and electrical goods. In October exports rose 27.1%, with November coming in only slightly lower at 22%. Imports have also started to show signs of picking up after slumping sharply in Q3 due to power cuts and factory shutdowns. In November imports surged 31.7%, exceeding expectations for growth of 21.5%, driven by inventory rebuilding and strong demand around “Singles Day”. A rebound in coal shipments to deal with an energy shortfall, and higher demand for copper, also helped boost imports. In December, both imports and exports are expected to have slowed, with imports expected to slip back to 27.5%, while exports are forecast to drop below 20% for the first time since July 2021. That said, given huge demand for Covid tests in December, the data could deliver an upside surprise.

UK GDP (November) 

After the last monthly GDP report revealed that the UK economy expanded only 0.1% in October, analysts are looking for a bit of a pickup in the November data. The October number was especially disappointing given that services output grew 0.4% compared to September, in line with expectations. The overall figure was weighed down by declines in industrial production and construction output, which fell 0.6% and 1.8%, respectively. This was mainly due to delays and disruptions caused by supply chain difficulties. The November data will provide an important benchmark in determining how well the UK economy performed in Q4, especially as December numbers are likely to have been negatively impacted by the spread of omicron.

US retail sales (December) 

Despite concerns about rising prices and falling consumer confidence, US retail sales held up well in the last quarter of 2021. Since the July contraction of -1.8%, we’ve seen four successive months of growth, though in November sales rose only 0.3%, compared to a rise of 1.8% in October. The November figure was disappointing, but was partly the result of many US consumers bringing their pre-Christmas spending forward to October because of concerns over supply chain issues and potential shortages. With the rise in covid infections prompting tighter restrictions across a number of US states in December, we could see another disappointing month for US retail sales, as consumers stayed at home and avoided crowded spaces. Control group numbers showing a decline of -0.1% in November sales also suggest that a similarly weak reading might be recorded for December.

Citigroup Q4 results

The release of loan-loss reserves was a recurring theme for US banks in 2021, but one that is unlikely to be repeated in 2022. This is perhaps reflected in Citigroup’s share price, which is down 2.5% in the last six months. In Q2, the recycling of provisions for bad debt helped Citigroup boost its profits by $2.4bn, or $2.85 a share, exceeding expectations of $2 a share, while revenue rose to $17.47bn. In Q3 Citigroup released another $1.16bn from reserves, lifting revenue to $17.8bn and profits to $2.15 a share. As for the bank’s performance by division, the trends were similar to JPMorgan. Equities and trading did particularly well in Q3, with revenue up 40% to $1.23bn, while the FICC division underperformed. The retail side, meanwhile, painted a picture of a US consumer in debt-repayment mode. Revenue in the credit card division declined 13%, suggesting that US consumers approached winter with a degree of caution. Profits for Q4 are expected to come in at $1.84 a share.

JP Morgan Chase Q4 results

The JPMorgan share price has risen more than 20% in the past year, as the bank built on the gains made in 2020. The resilience of US banks has been a hallmark of the pandemic, with consistently strong performances across the sector. In October JPMorgan’s share price hit record highs, though there have been signs in recent months that we could be on the cusp of a pullback as concerns about an economic slowdown in 2022 start to increase. The share price saw a big selloff in November on concerns over the consumer business and loan growth, which has been cited as a concern since Q2. The Q3 numbers, released in November, showed an improvement in credit card spending. But while small business customers were seeing a bit of an uptick, it was clear from the overall tone that the outlook remained challenging, with commercial and consumer loans both lower. The bank posted impressive numbers throughout 2021, with Q3 revenue beating expectations at $30.44bn, as profits surged to $3.74 a share, also exceeding expectations. This was largely due to another release of provisions set aside during the pandemic to cover potential loan losses; this time, the bank released $2.1bn. In most areas of the business, revenues beat expectations, although income from fixed-income instruments, currencies, and commodities (FICC) fell slightly short. This appears to be the biggest concern for shareholders – they’ve seen decent returns primarily as a result of the release of loan-loss provisions which has boosted payouts, but these windfalls are now firmly in the rear-view mirror. This means that future returns are likely to be much harder won. Profits for Q4 are expected to come in at $2.94 a share.

Index dividend schedule

Dividend payments from an index's constituent shares can affect your trading account. View this week's index dividend schedule

Selected company results

Monday 10 January Results
Accolade (US) Q3
Commercial Metals (US) Q1
Tuesday 11 January Results
Games Workshop (UK) Half-year
Wednesday 12 January Results
KB Home (US) Q4
J Sainsbury (UK) Q3
Thursday 13 January Results
ASOS (UK) Q1
Marks & Spencer (UK) Q3
Tesco (UK) Q3
Friday 14 January  Results
Citigroup (US) Q4
JPMorgan Chase & Co (US) Q4

Company announcements are subject to change. All the events listed above were correct at the time of writing.


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