For once, UK stocks and the British pound are heading in the same direction. Data showing the highest inflation rate in the UK for nearly two years catapulted sterling higher, but factors other than the pound drove stocks higher too.
Impressive earnings from British retailers Burberry and ASOS, banks getting a positive read across from rising profit at Bank of America and a rebound in oil prices all helped the FTSE 100 recover the 7000 mark.
UK inflation jumping by the most in two years has spooked concerns of a cost of living crisis. If prices continue to rise then they could soon offset the average rise in wages, leaving people with less disposable income. Alarm bells ringing at 1% inflation is at odds with the Bank of England’s inflation target of 2%, and demonstrates the Brexit-effect on opinions towards the UK economy.
The drop in the pound should eventually be inflationary but the ONS has said there is ‘no explicit evidence the lower pound is pushing up the prices of everyday consumer goods.’ This makes sense in that Eurozone inflation also hit a near-two year high in data reported this week. At the moment. Inflation is increasing because of a rise in fuel costs and clothing prices no longer falling. Once the impact of the lower pound is passed through from a rise in the cost of imported goods, inflation is likely to exceed 2%.
Where the effect of the devalued pound has been more explicit, is in today’s corporate profit guidance. There are clear winners and losers from the fallout in the pound. Clothing retailers Burberry and ASOS have raised profit targets whilst Ryanair has issued a profit warning, all citing the GBP exchange rate as an important factor.
US stocks opened higher following well-received results from media streaming firm Netflix and inflation data showing higher prices and another reason for the Federal Reserve to raise rates this year.
Shares of Netflix are expected to jump as much as 20% on the open of US trading. Surprisingly strong subscriber growth both in the US and overseas has reinstalled confidence that Netflix can still see strong growth despite rising competition, especially from Amazon. Netflix have long argued that having more competitors will just raise awareness of streaming as an alternative or addition to cable TV, and these numbers bear that out.
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