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FTSE 100 gets another retail boost

A shopping centre

European markets have seen another positive session, with the FTSE 100 continuing to gain ground above the 7,700-level helped by another set of solid trading numbers from the UK retail sector.

For all the doom and gloom leading up to Christmas and the end of the year period, it would appear that while consumers are becoming choosier about where they spend their money, they are still spending it.

Europe

Milder weather in January also appears to be helping sentiment, fuelling optimism that the start of 2023 might offer some respite from further increases in energy prices.

Last week Next surprised the markets with a positive pre-Christmas trading update. Today JD Sports has carried on that positive vibe with a similarly robust trading statement. The retailer said that it had enjoyed a better than expected second half of the year, with expected revenue growth of more than 10% during H2, with the pre-Christmas period seeing a total revenue rise of 20%, helped primarily by a strong performance in the US business.

Consequently, expects to see group headline profit before tax to come in at just above the upper expectations of £985m. Like last week we’ve seen a positive correlation in the rest of the sector with Sports Direct owner Frasers Group getting a decent tailwind, along with Next which is also higher, after seeing a modest decline yesterday.

Having heard from the likes of Lidl and Aldi in the last few days that they had enjoyed a big jump in their pre-Christmas trading there was plenty of interest in how this consumer shift was likely to affect the likes of Sainsbury's and Tesco. Today’s numbers from Sainsbury would suggest a retailer that has also performed well, not that you would know it with the share price slightly lower, despite Q3 total sales rising by 5.2%, with grocery seeing a rise of 5.6%. Christmas grocery sales saw an acceleration to 7.1%. On a like for like quarterly basis sales rose by 5.9%, with the Argos business generating a decent uplift as shoppers eschewed the flakiness of a strike-ridden Royal Mail service, by doing their grocery and Christmas shopping all at once. 

This outperformance is expected to deliver full year underlying profit before tax at the upper end of the guidance range of £630m to £690m, despite concerns over price and margin pressures, which continue to act as headwinds. Despite this decent update, the shares are down for the second day in a row, although they are well off the lows of the day. The slight pullback of the last couple of days is probably more to do with some minor profit taking, and the fact that we’ve seen a 10% run higher to 9-month highs since the lows in December, with most of those gains coming in the first few trading days of this year.  

Darktrace shares have slid to record lows, dipping briefly below its 250p IPO price after cutting its recurring revenue growth forecasts for the full fiscal year to between 29.5% and 31%, from its previous forecast of 31% to 34%. Management said they expect H1 revenue to come in at $258m, an increase of 35.2% from a year ago, while the number of customers has risen by 741 since the end of the last fiscal year to 8,178. The rate of customer growth in percentage terms does appear to be slowing, however it is still in the mid 20%.

Housebuilders have slipped back after Barratt Developments reported a slowdown in sales rates for the first half of the year, compared to a year ago. Last year saw a sales rate of 0.79 net private reservations per week. Today’s numbers saw this come in at 0.44, with the housebuilder blaming the slowdown on the various political and economic uncertainties that played out during the back part of the trading period, along with increases in mortgage rates which slowed demand. 

Direct Line shares have plunged after the company cut its dividend blaming higher claim costs over the last 12 months. The company blamed higher subsidence claims because of the hot weather in the summer as well as the cold weather in January and December of last year, which is expected to push total claims for 2022 to almost double the previous expectation of £73m, to somewhere in the region of £140m.

Not surprisingly this has triggered weakness across the sector with the shares of Admiral, Aviva and Legal & General also lower over concerns about similarly higher claim costs hitting their top and bottom lines. 

US

US markets have taken their cues from today’s positive European session, opening higher on optimism that tomorrow’s CPI report will confirm a much brighter outlook for inflation, as investors front run a weak number.

Coinbase shares have continued to slide as the company continues to battle an uncertain outlook, in the wake of the collapse of FTX. A note today from BOA citing a “murky” outlook has added to the uncertainty. BOA downgraded the business. The announcement of over 1,000 job losses, or 20% of its workforce, in addition to last year’s job cuts shines a light on the challenges facing the industry. Coinbase has also said it is closing its operations in Japan as it looks to book up to $163m in restructuring charges, in a move that would see full year EBITDA losses in the region of $500m.

Tesla shares have edged higher after Goldman Sachs named it as one of its stock picks for the year.

FX

It’s been a mixed day for the US dollar today, gaining ground against the Swiss franc and the pound, but slipping back against the euro.

Further hawkish comment from ECB governing council member Robert Holzmann is keeping the single currency underpinned above the 1.0700 level, as he warned that core inflation was now the key focus when it comes to analysing inflation trends, and that rates would need to keep rising. This was a view endorsed by Finland governing council member Olli Rehn. 

As far as the US dollar is concerned while the peak inflation narrative has been helping to push the greenback lower and underpin the current positive sentiment in markets, this morning’s inflation numbers out of Australia should offer a warning to those who think that the path to lower inflation is a straight line, after annual CPI jumped more than expected from 6.9% in October to 7.3% in November.

With retail sales spending also looking strong, could the RBA have erred in slowing the pace of its rate hikes two months ago? More worryingly could complacency over peak inflation come back and bite markets when tomorrow’s US CPI numbers are released.

In any case this isn’t good news for the Australian central bank and could prompt a more hawkish shift from them at its next meeting in February.   

Commodities

Having got off to an awful start to the year, crude oil prices are slowly clawing back some of last week’s lost ground, with prices edging higher despite the latest API inventory data showing an unexpectedly large build of 14.9m barrels. Expectations had been for a fall in inventory with today’s IEA inventory, also showing a large build of 18.96m barrels, confounding expectations of a draw of 2m.

Gold prices have continued to edge towards resistance at $1,895, making a marginal new seven-month high in the process, although prices have slipped back, ahead of tomorrow’s US CPI report, as traders’ price the prospect of a weaker inflation report. On a technical basis gold is on the cusp of potentially posting a golden cross, which is when the 50-day SMA crosses above the 200-day SMA on what is generally considered to be a bullish signal. 

Volatility

Bayer continued to see elevated levels of price action during Tuesday’s session with the stock advancing towards levels last seen in early December. The price action remains a consequence of the stake building reported at the start of the week, with one day vol coming in at 73.92% against 35.99% on the month.

Sugar prices have seen some elevated levels of activity in recent days. The overall trend is downward, but US Dollar weakness was seen as lending some support to the underlying at the start of the week. That hasn’t been sustained however and one day vol on raw sugar came in at 43.97% against 34.92% for the month.

A solid day of gains for the tech-heavy NASDAQ as bargain hunters moved in left the index with exaggerated levels of price action. Having advanced a little over 1% on the day, daily volatility came in at 29.02%, against a one month print of 27.78%.

And natural gas prices continued their run lower on Tuesday, with the US cash contract finding support again around the $3.60 mark. The impact not only of warm weather but also near-record production is continuing to influence the market here, with one day vol of 94.88% against a monthly reading of 88.46%.


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