If concerns about the global outlook weren’t sufficient with the China recovery story looking increasingly flaky, we now have the increasingly loud sound of the debt ceiling deadline clock, and the continuing impasse between US policymakers finally attracting the attention of financial markets.
The modest declines of the last two days have accelerated today, with sharp falls across the board, as sentiment continues to deteriorate, raising the question as to whether this is the beginning of a market puke that gets US lawmakers attention and generates the urgency required to preserve the fiscal integrity of the US government. We’ve seen weakness across the board with heavy falls in the DAX, FTSE 100 and CAC 40 as European markets undergo their biggest one-day loss since March, with the FTSE 100 falling below its April low and to its lowest levels in six weeks.
UK housebuilders have been hammered on the back of today’s hotter than expected inflation numbers for April. The sharp rise in core CPI has prompted markets to project the prospect of another 100bps of rate rises from the Bank of England, sending gilt yields to their highest levels since October last year. Persimmon, Taylor Wimpey, and Barratt Development are amongst the heaviest fallers.
Also, under pressure Aviva shares are down sharply even as the company reported a strong Q1 trading update on the back of higher demand for private health solutions due to the NHS strikes. Revenues in general insurance and health both saw strong gains, with private healthcare sales rising by 25%. Workplace pensions are also performing well; however, a 15% decline in wealth net flows, along with a decision to leave its full year guidance unchanged, has seen the shares fall sharply, at a time when perhaps shareholders might have been hoping for more. Prudential and Legal & General are also lower.
We’ve also seen B&Q owner Kingfisher update the markets with its Q1 numbers, which were broadly in line with forecasts. As a reminder, when the company reported its full year numbers, they said that Q1 had got off to a good start across all its regions, although the French business was being impacted by strike action. In the UK, the poor weather in March, along with strike could have slowed the sales numbers after a strong start to the quarter. Q1 sales came in line with forecasts at £3.3bn, with the UK business seeing strong growth of 6.6% in Screwfix sales offsetting a 1.5% decline in B&Q sales. On current trading Q2 has got off to a slow start, with like-for like sales down 1%, but that full year pre-tax profits are on course to meet expectations of £634m.
Good news has been in short supply today; however, Marks & Spencer shareholders have had every reason to cheer today’s full year numbers which smashed expectations, sending the shares up to 14-month highs in the process. Statutory revenue rose by 9.6% to £11.93bn, £ 1bn higher than last year and well above expectations of £11.7bn, with a strong performance from both food and general merchandise. Food sales rose 8.7% to £7.2bn, while the performance in clothing and home also improved, rising by 11.5% to £3.7bn, with management touting a return of the dividend in 2024. Ocado shares are also getting a lift on the back of the M&S numbers despite confirmation of its relegation to the FTSE 250.
US markets opened sharply lower today as the prospect of a 1 June debt ceiling deal recedes further, raising the question of when the money runs out, or when a payment might get missed. Tonight’s Fed minutes have almost become a footnote against the wider concerns that US politicians are engaging in a dangerous game of chicken, when it comes to the US economy.
While the consumer in the UK continues to feel the pinch, and retail stores underperform, US retailers appear to be faring rather better. Today we’ve heard from Abercrombie and Fitch and Urban Outfitters, as well as Kohl’s all of whom have delivered better than expected numbers for the most recent quarter. Abercrombie saw Q1 revenue come in at $836m and a surprise profit of $0.39c a share, raising its sales guidance for the year to between 2% and 4%, while upgrading Q2 to between 4% and 6%.
Urban Outfitters reported a similar trend, higher than forecast sales and profits as did Kohl’s, all of whom have seen their shares surge, while the wider market has declined.
Williams-Sonoma, the US high end retailer and owner of Pottery Barn has seen its shares rise after Q1 revenue came in slightly below expectations at $1.77bn, although profits were much better, coming in at $2.64c a share. For Q2 the retailer was optimistic, reiterating its full year guidance of annual net revenue growth of between -3% to +3%, or around $8.27bn. The company also announced the launch of a new sustainable brand Greenrow.
Markets are set to face a further test later today as Nvidia, one of the biggest gainers on US markets year to date releases its Q1 numbers, having benefited from the euphoria around AI, which as seen its shares double in less than six months. Expectations are for revenues to come in at $6.5bn +/- 2%. Profits are forecast to come in at $0.92 a share.
The New Zealand dollar is the worst performer after the RBNZ hiked rates by 25bps but indicated that it was probably done as far as further rate hikes are concerned. There had been a general expectation that the RBNZ would carry on hiking and even perhaps been more aggressive with today’s move. They did go on to state that rates would need to stay at current levels until the middle of next year, which in turn could limit some of the decline in the longer term.
Despite UK gilt yields spiking sharply after today’s hotter than expected UK inflation numbers, the pound has found progress difficult to sustain, even as markets start to price in the prospect that we could see a further 100bps in hikes over the coming months. Today’s numbers are a further blow to the credibility of the Bank of England’s inflation fighting credentials and will do little to prevent further criticism that it has been asleep at the wheel over the last 18 months.
The US dollar has continued to gain ground pushing up to 2-month highs as it continues to benefit from higher US rate expectations and some haven demand. This seems somewhat counterintuitive given what’s happening in DC, with the debt ceiling shenanigans but given the lack of alternatives its also not surprising.
Crude oil prices have continued to build momentum on their gains from yesterday, pushing up to 3-week highs, after the warning from Saudi Arabian oil minister warned the markets about further weakness in oil prices. Given how OPEC+ caught the markets on the hop with a surprise production cut announcement in April, no one is taking any chances this time.
Copper prices have continued to come under pressure sliding to 6-month lows as doubts about Chinese demand continue to grow.
Shares from across the luxury goods sector took a hit on Tuesday after analysts flagged falling demand amongst consumers – especially in the US – for high end goods Hermes was the most notable faller, selling off by more than 6%, with Christian Dior and LVMH not far behind. These are all key constituents in CMC’s proprietary basket of luxury and lifestyle stocks which fell almost 3% during the session, printing one day vol of 19.62% against 17.42% on the month.
The Nikkei equity index appeared to find a turning point on Tuesday, with a degree of investor caution creeping in. There are concerns about both the US debt ceiling talks and the weight of money that has been flooding into Japanese investments of late, making fertile ground for profit taking. One day vol on the index came in at 18.92% against 13.48% for the month.
The crypto asset market remains relatively subdued, but Tron is once again the standout in terms of price action. The run higher appears to have hit pause, but Tuesday’s session was marked by a degree of oscillation as the asset approaches 12-month highs. One day vol stood at 41.89% against 27.85% for the month.
And at the stock specific level, Pfizer remains in focus following that drug breakthrough news earlier in the week. The underlying tacked on another 2% on Tuesday with some commentators adding that the upside here may not yet be fully priced in. One day vol on the stock sat at 72.37%, up from 34.99% on the month.