Global equity markets were quiet on Tuesday with US cash bond and equity markets closed for the Independence Day holiday.

The FTSE 100 was up 2 points to 7,530 at the time of writing. US futures markets were open but were little changed.

After yesterday’s sell-off, a slight rebound in AstraZeneca shares helped offset weakness in Sainsbury’s and UK banks. Some UK housebuilders were softer after being downgraded by JP Morgan.

“Earlier this year housebuilders were breathing a sigh of relief as the surging mortgage rates seen in the wake of the mini-Budget eased. That’s no longer the case amid sticky UK inflation and the prospect of higher rates for longer,” said AJ Bell investment director Russ Mould.

“Ahead of a string of updates from the sector, negative commentary from investment bank JPMorgan is putting the likes of Persimmon and Barratt Developments on the back foot.”

Persimmon and Barratt Developments were down 0.3% and 0.1%, respectively.

UK banks

UK banks were weaker after the FCA summoned them to discuss low savings rates. Savings rates have failed to keep up with rising interest rates, and banks’ practices are being scrutinised.

Barclays, HSBC, Lloyds and NatWest will meet with the FCA this Thursday.

“The FCA’s approach will be particularly interesting as its new “Consumer Duty” framework comes into force at the end of July 2023 and will empower the FCA to set higher and clearer standards of consumer protection across the financial services sector and require firms to put their customers’ needs first,” said Gareth Mills, Partner at law firm Charles Russell Speechly.

“How they enforce those requirements is likely to form a large basis of this week’s discussions with the big banks”.

Sainsbury’s

Sainsbury’s was one of the FTSE 100’s top fallers on Tuesday despite reported strong sales growth in the first quarter. The supermarket said reducing prices to compete with budget supermarkets had helped volumes rise.

“Sainsbury’s has come out the gate swinging, insisting that its efforts to keep prices low have seen shoppers buying a higher number of items, with first-quarter sales rising over 9%,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“This comes at a time when chatter about unfair profiteering from the big supermarkets has reached fever pitch. This supermarket giant has spent a great deal on reducing prices, especially around Aldi price match campaigns and the introduction of Nectar prices.”

This investment in winning market share may sacrifice margins for the full year, and shares fell 2%.

Sainsbury’s is pushing forward with aggressive price strategies and is stealing market share from competitors as volumes rise.

Sainsbury’s has implemented a ‘Food First’ strategy to match prices with budget competitors Aldi and Lidl. Their efforts are paying off, with group like-for-like sales excluding fuel rising by 9.8%. Grocery sales were 11% higher in the first quarter.

The supermarket noted food prices were starting to fall, and they were passing these savings on to customers by cutting prices on over 120 everyday items since March.

“If the overall value of a supermarket’s sales were not going up at a time of rampant food inflation, something would be seriously wrong, but what’s more telling in the latest update from Sainsbury’s is news of an increase in volumes,” said AJ Bell investment director Russ Mould.

“Under Simon Roberts, who took over the business a little more than three years ago, there has been a renewed focus on its core food retail operation and this seems to be paying off. The market positioning of Sainsbury’s means it could be taking some business away from the more premium-priced Waitrose and Marks & Spencer, helping to compensate for any market share lost to the German discounters Aldi and Lidl.

“The company is also benefitting from its deliberate push to use its Nectar loyalty scheme to offer keener prices to repeat customers, cribbing the idea from its main rival, Tesco.”

Sainsbury’s maintained their outlook and guided for an underlying profit before tax of between £640 million and £700 million in the full year.

Sainsbury’s shares were down 1.8% at the time of writing.

Equity analysts at JP Morgan have downgraded FTSE 100 UK housebuilders as the immediate outlook for the UK housing market worsens.

JP Morgan have downgraded their price targets for Taylor Wimpey, Persimmon, Barratt Developments and Berkeley Group Holdings.

Persimmon cut to ‘neutral’ from ‘overweight’ with a new price target of 1,090p, down from 1,600p.

Taylor Wimpey price target cut to 94p from 130p, ‘neutral’ rating maintained.

Barratt Developments price target cut to 390p from 430, ‘neutral’ rating maintained.

Berkeley Group price target cut to 4,400p from 4,800p, JP Morgans remains ‘overweight’.

The downgrades resulted in lower share prices for the four housebuilders on Tuesday.

Recently released data from Nationwide showed the average UK house price rose 0.1% in the month to June, but this was before the Bank of England hiked interest rates by 0.5%.

Average 5-year fixed mortgage rates rose above 6% this week.

The FTSE 100 was higher in thin trade on Monday after a strong session in Asia translated into a positive start for miners and other cyclical sectors.

The FTSE 100 was 0.3% higher at 7,556 at the time of writing.

The spluttering nature of China’s pandemic recovery has been a cause of concern for markets that have historically relied on China to drag the global economy higher with domestic 6%-8% growth rates.

Chinese growth of 4.5% in Q1 is a far cry from pre-pandemic levels, and investors are increasingly looking to the Chinese authorities for any hints of stimulus.

On Monday, expectations of further China stimulus and a slight easing in US inflation data were the core drivers in European stocks.

“Asian stocks took their cue from Friday’s rally on Wall Street, prompted by data showing core inflation in the US is easing, perhaps reducing the need for too many more rate hikes across the Atlantic,” said AJ Bell investment director Russ Mould.

“There is also improved sentiment towards the Chinese economy, reflected in strong gains for miners on the FTSE 100 on Monday. Now some of the disappointment about a slower than expected post-Covid recovery has eased, the focus is turning to potential financial stimulus and support which could have positive implications for metals and energy demand.”

While equities ticked higher on Monday, the general mood in markets will likely see stocks trade headline to headline as inflation and central bank action drives sentiment.

FTSE 100 movers

At the time of writing on Monday, the FTSE 100’s top five risers on the day were all commodities companies.

Anglo American was the top riser, closely followed by Glencore, BP, Rio Tinto and Antofagasta. Should China act to stimulate its economy further, natural resource demand will be buoyed and support mining and fossil fuel production profits.

AstraZeneca was the FTSE 100’s top faller after releasing lung cancer therapy trial results. While the results showed improvement in survival rates compared to alternatives, the results were not statistically significant.

Premier African Minerals and Kodal Minerals have been tipped as two of AIM’s foremost battery metals companies well-placed to supply lithium to the burgeoning electric vehicle manufacturing industry.

Indeed, their lithium assets are potentially world-class. Premier African Minerals’ Zulu lithium project contains 20.1Mt @ 1.06% Li2O & 51.05ppm Ta2O5 at a 0.5% Li2O cut-off.

Kodal Minerals’ Bougouni Project has a resource of 21.3Mt at 1.11% Li2O, with 11.6Mt at 1.13% Li2O in the Indicated category and 9.7Mt at 1.08% Li2O in the Inferred category.

These significant resources caught the attention of Chinese partners, who have agreed to provide funding to develop their mines and bring them into production.

Both companies have secured the interest of major Chinese lithium players, and both Premier African Minerals and Kodal Minerals have so far let their partners down.

Kodal Minerals have failed to arrange the required conditions set out by their partner Hainan Mining to satisfy the criteria for issuing $100 million in funding for the Bougouni project.

Premier African Minerals is embroiled in a dispute with Canmax about their lithium offtake agreement terms. Canmax made a $34m prepayment for lithium and has issued a termination notice after Premier Minerals missed production milestones.

Both Premier African Minerals and Kodal Minerals need to up their game not only for their current shareholders but for the sake of the wider UK junior natural resource sector.

These two London-listed junior minerals companies have achieved a feat many won’t – identify a commercially viable resource and secure funding for production.

Should the two companies be unable to deliver on their potential, some investors will lose faith in the sector.

Corporate improvements

Kodal Minerals’ communications strategy has been woeful, leading to a 50% drop in the share price from their recent highs. Releases have been vague and left investors in the dark.

Premier African Minerals made a poor choice of mine construction contractor resulting in their offtake partner terminating their agreement. They are now locked into a dispute around the repayment of the prepayment amount. They may bring in a new funding partner, but Canmax won’t go quietly.

In both cases, their investors have suffered.

Thankfully, the disappointing series of events above ground doesn’t impact what the companies have below ground.

There is, however, a risk the value investors extract from their respective resources is diminished by poor management decisions.