The FTSE 100 slipped on Thursday as several large dividend payers traded ex-dividend and investors sold equities in the face of an uncertain wait for interest rate cuts that may be few and far between when they eventually come.

Interest rates are a hot topic for the market currently, and unfortunately, for equity bulls, the outlook has become a lot worse in the past 24 hours.

The FTSE 100 failed to stage a recovery from yesterday’s selloff as concerns about a lack of interest rate cuts this year sapped enthusiasm for stocks. US CPI came in hotter than expected yesterday and the ECB kept rates on hold today saying they would keep rates at the current level until inflation falls – which could mean a long wait.

That said, the ECB is likely to be the first major central bank to cut rates, possibly in June, as the European economy weakens.

“With the European economy weak and inflation falling, interest rate cuts are justified and needed. The same is not necessarily true of the US, where economic growth ‘exceptionalism’ is keeping its inflation uncomfortably high, calling into question whether the Fed can cut rates at all this year,” said Ben Laidler, Global Market Strategist at investment platform eToro.

We kept our interest rates unchanged at our latest meeting.

See our monetary policy decisions https://t.co/nLLQk6w1bL pic.twitter.com/rZ8Wex669f

— European Central Bank (@ecb) April 11, 2024

Higher oil prices added to inflation concerns after the US reported Iran was considering retaliatory measures against Israel, risking a serious escalation in Middle East tensions.

“After yesterday’s US inflation figures knocked the market for six, it’s no wonder that equities struggled for direction on Thursday,” said Russ Mould, investment director at AJ Bell.

“Hotter than expected inflation data has given the Federal Reserve yet another reason to sit on its hands and kick the prospect of a rate cut further down the road. The signs have been clear to see for a while and investors are now having to readjust their expectations for when we will finally see the much desired ‘pivot’ in monetary policy.”

The FTSE 100 was down 0.38% at session lows shortly after the ECB announced their rate decision on Thursday.

Ex-dividends

Aviva, Phoenix Group, and Lloyds all traded ex-dividend on Thursday and were among the top fallers. Aviva was the top faller, down 6.1%, after losing the rights to a chunky 22.3p dividend due to be paid 30th May. Phoenix Group was down 6%.

Easyjet was a big faller as oil prices spiked higher and travel stocks generally fell.

AstraZeneca was among the top risers after hiking its dividend 7% as shareholders voted on leadership remuneration.

“The main UK corporate news story today comes from pharmaceutical giant AstraZeneca, who have hiked their dividend by 7% on the same day as a key vote on leadership remuneration,” said Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown.

“Shareholders won’t be blind to the fact that this is a barely disguised sweetener, but it may quell appetites enough to get the divisive package through. The bigger picture for Astra still centres on the work it does on rarer and more complex treatments – dominating this area of the market takes very deep pockets, and that doesn’t appear to be under threat.

ASOS is set to confirm a sharp down in sales next week with the release of interim results for the 26-week period to 3rd March.

The company has already said sales will decline by 18%, so it will be no surprise when they report on 17th April.

It will be vital to see how they have managed the decline in sales. The company is under pressure to improve stock efficiency, and investors will be closely watching how much of the planned £600m targeted inventory reduction they have completed.

Achieving positive EBITDA for the full year is a big goal for ASOS. Any evidence suggesting they are on track to do this will be well received.

“ASOS has had a tough start to the year. Business transformation plans remain on track, but improving stock efficiency and reducing inventory levels comes at a cost,” said Guy Lawson-Johns, equity analyst, Hargreaves Lansdown.

“Full-year guidance remains unchanged, which includes 5-15% sales declines and positive cash generation. Investors will be looking for signs that better times are coming and that a return to growth in the final quarter of this year is still on the cards. 

“Active customer numbers will also be in the spotlight. It’s no secret M&S and Next have been growing sales in the third-party brands ASOS is known for, and newer entrants like Temu continue to be a threat. Ultimately, markets are looking for signs that the increased marketing spend and stock rationalisation are being well received by its target audience of fashion-loving 20-somethings.” 

ASOS shares are down 55% over the past year and will likely react positively to any improvements to previous guidance.

The FTSE 100 reversed very respectable early gains on Wednesday after the US CPI came in hotter than expected, sending equity investors running for the hills.

The US CPI release is one of two major events this week which have the potential to move markets as tensions around interest rates increase. A Year-on-Year US CPI reading of 3.5%, hotter than the estimated 3.4%, was not the outcome equity bulls would have hoped for.

“Every headline measure for the March CPI report came in ahead of economists’ expectations — which is exactly what stock bulls didn’t want to see,” said Bret Kenwell, US analyst at investment platform eToro.

“Month-over-month, year-over-year and Core CPI all came in hot, putting the Fed in a tough spot after they’ve recently reiterated an expectation for three rate cuts this year.”

The FTSE 100 was knocking on 8,000’s door going into US CPI and looked like it could break through the key psychological level. However, as the CPI numbers hit the wires at 1.30pm UK time, the FTSE 100’s gains of around 0.8% very quickly evaporated, and London’s leading index was trading negatively within the hour.

Having touched highs of 7,999 earlier in the session, the FTSE 100 was trading down 0.1% at 7,930. US equities opened the day in the red, and the S&P 500 was down over 1% at the time of writing.

US bond yields soared, adding to equity investor concerns.

US CPI promised to send waves through financial markets, and it delivered. Equity markets have melted higher despite central banks choosing not to cut rates in March. Today’s data suggests it could now be much later in the year before the Federal Reserve, Bank of England, and even the ECB will cut rates.

The ECB will decide on rates tomorrow, which is the other potentially market-moving event of the week.

A rate cut later in the year would be a major disappointment for investors, given that the earnings outlook for US equities is fairly flat for the rest of this year and that higher borrowing costs will not help improve the outlook.

Indeed, the number of US rate cuts this year will be an increasing concern. Coming into 2024, markets were pricing as many as 7 US rate cuts this year. That has dropped to one single rate cut.

Ultimately, many investors will have to rethink their view of the world.

Tesco

Tesco shares perked up on Wednesday after Britain’s largest supermarket said it increased market shares by balancing increasing premium sales and bolstering its efforts to fight off budget competition. Group sales grew 7.4% in 2023/24, driving a 10.9% increase in retail operating profit.

Tesco shares started the day with a steady increase and were over 5% higher before the US CPI reading. Unlike the rest of the market, Tesco held their own, and shares were trading 5.9% higher at the time of writing.

“Tesco is reaping the benefits of putting the customer first. For some time, it has been lowering prices on core lines in recognition that consumers are under financial pressure. That’s helped it to maintain appeal to a large number of shoppers and retain their loyalty while also helping it better compete against Aldi and Lidl. The results are clear to see – profit is going up; the business is in great shape; and it is growing market share,” said Russ Mould, investment director at AJ Bell.

“It’s helped that Tesco has benefitted from people trading down from higher end retailers. Accepting that a high interest rate environment means more careful monitoring of how money is spent, even wealthier individuals have taken steps to shift their spending habits.

“Whereas once they might have been happy to spend big at Waitrose or Ocado, some of these consumers have shifted to Tesco and found that its Finest range still offers the higher quality products they desire, but at a cheaper price point.”

Cyclical sectors suffered the worst losses after the CPI release, with miners and housebuilders feeling the pinch. Antofagasta was the worst hit, down 4%.

Ocado dropped 3%.

MicroSalt shares were higher on Wednesday after the low-sodium salt technology company announced entry into the premium foodservice market.

MicroSalt has again demonstrated its burgeoning addressable market by inking a deal with Canadian Carma Hospitality Group. Carma will use MicroSalt in its 12 restaurants across Montreal.

Although MicroSalt’s growth strategy is largely in the B2B market and assists food manufacturers in reformulating their products to reduce sodium content, today’s announcement endorses the company’s product in that it illustrates the broad range of end customers.

Rick Guiney, CEO of MicroSalt said:

“Inclusion of our low sodium solution with the Carma Hospitality Group is a great endorsement of our ability to provide a low sodium yet tasty solution. It demonstrates the wide appeal of Microsalt and offers a real-world example of our potential in the foodservice channel. The restaurants within the Carma Hospitality Group represent some of the best food establishments in Montreal and we are extremely proud to be affiliated with their culinary team. We also expect that this [relationship with/endorsement by] Carma will result in other restauranteurs embracing our critically needed product.”

Carma’s co-founder was equally upbeat about the relationship and was pleased to adopt MicroSalt’s innovations.

“Our use of Microsalt underscores our commitment to excellence, and innovation. We are proud of our ability to use leading technology applications in our kitchens to ensure the absolute best and unforgettable dining experiences,” said Co-founder of Carma, Mike Zaki.

MicroSalt shares were 7% higher at the time of writing.