The FTSE 100 gave back some of this week’s gains on Wednesday as short-term profit taking and concerns around the health of the UK consumers hit the supermarkets.

In a FTSE 100 index dominated by overseas revenues, Wednesday’s trade was dictated by UK facing companies as the UK’s supermarkets and retailers sank following Tesco’s interim update.

Tesco said their profit would be towards the lower end of guidance and revealed falling margins as the cost of living crisis drove consumers to budget lines.

Tesco shares fell some 3.6% while premium retailer Ocado saw its shares sink 5.8% as investors extrapolated Tesco’s results across the rest of the market. Ocado was the FTSE 100’s worst performer at the time of writing.

“Supermarkets are no strangers to dealing with cost-of-living pressures, there’s been an all-out price war in the industry for some years now,” said Matt Britzman, Equity Analyst at Hargreaves Lansdown.

“Amongst the larger players, Tesco’s arguably been one of the standout businesses in the battle against low-cost outfits but pressures on consumer spending can only build for so long before something must give.”

“That pain’s slowly starting to feed into performance, as shopping behaviours continue to normalise from bumper levels seen over the pandemic and inflation keeps costs high – that’s meant full year profit guidance got a slight downgrade toward the bottom end of the previous range.”

Sainsbury’s shares were 4.3% weaker ahead of their interim results in early November.

Truss Speech

Liz Truss’s conservative conference speech failed to ignite any further confidence in UK assets as GBP/USD fell 1% to 1.1360. Investors are awaiting the OBR’s economic assessment to gauge the impact on the UK’s finances and the Prime Minister’s speech provide no respite for concerns her mini-budget would cause economic difficulties in the short-term.

UK housebuilders have been one of the most heavily hit sectors since Kwasi Kwarteng’s fiscal announcement, and today Persimmon, Barratts Developments and Taylor Wimpey ended a three-day rally from their worst levels last week.

The FTSE 100 was down 1% to 7,015 at the time of writing.

Tesco is taking on discounters Aldi and Lidl in a price war as the cost of living crisis drives consumers to seek out better value products.

This was reflected in a growing revenue but lower gross and operating profit as Tesco sells an increasing amount of budget items.

Statutory revenue including fuel for the 26 weeks to 27th August was £32,456m, up from £30,416m in the same period a year prior.

However, despite group revenue growing 6.7%, gross profit fell to £1,723m from £2,448m a year prior.

The biggest impact on gross profit was an impairment charge caused by higher discounts. Statutory operating profits fell 43.6% to £736m.

Tesco have taken discounters Aldi and Lidl head-on with Low Everyday Prices and Clubcard Prices and is well placed to maintain their market share, but the retailer will see their margins suffer as a result.

“Tesco is in a better position to face competition from discounters. Our experts say Tesco has strong pricing power, a sufficiently wide range of products for customers to trade down in the store, and a big advantage in its Clubcard loyalty scheme,” said Orwa Mohamad, a Consumer Sector Analyst at Third Bridge.

“Aldi and Lidl may be gaining market share but this is mainly from Morrisons and Sainsbury’s as savvy shoppers hunt for bargains in the cost-of-living crisis.”

As well as revealing damaging impairments charges in their interims, Tesco also suggested the outlook was becoming even tougher as the cost of living crisis and higher interest rates further squeezed spending. Stopping short of an all out profit warning, Tesco said they saw profits towards the lower end of their previous retail operating profit guidance of between £2.4bn and £2.5bn.

“The uncertainty is palpable in the company’s outlook comments and inevitably this will make the market rather nervous,” said AJ Bell investment director, Russ Mould.

“On the plus side, Tesco is entering a difficult period with a decent market position and solid balance sheet.”

“However, it is hard to see the coming months as anything other than extremely difficult, with cost inflation affected not only by higher energy and labour costs but also the cost of importing goods from overseas thanks to lower sterling.”

Horizonte Minerals shares dropped on Wednesday after the group completed an oversubscribed £70.5m fundraise to help fund the development of their Brazilian nickel and achieving assets first production at Araguaia in 2024.

The Horizonte Minerals share price fell beneath the 90.5p placing price on Wednesday to trade at 88p at the time of writing.

Due to restrictions on making the offer available to retail investors, meaning Horizonte would have to produce another prospectus at a cost, the company opted to exclude retail from the offer.

However, any retail investors that would have liked to participate in the offer can now buy Horizonte Minerals shares at a lower price on the open market.

There was strong demand for the offer from institutions which was oversubscribed with the gross proceeds increasing from an initial target of £61.7m to £70.5m.

“I am pleased to announce the completion of the Fundraise. I would like to thank all existing shareholders for their continued support and welcome our new shareholders as we work towards first production at Araguaia in Q1 2024 and in parallel progress feasibility work at Vermelho,” said Jeremy Martin, Chief Executive Officer of Horizonte.

“Significant progress has been made since we broke ground at Araguaia in May and we remain well positioned to transition into a scalable Tier 1 nickel producer. We look forward to updating the market as construction advances at Araguaia.”

Omega Diagnostics shares had a storming start to Wednesday’s session after the company announced positive data from VISITECT® CD4 Advanced Disease Rapid Test evaluations.

Omega Diagnostics agreed the sale of VISITECT® CD4 to Accubio Limited in August and are set to receive an additional £4m should there be a successful outcome of a clinical study in Kenya.

The study analysed 300 specimens and concluded that the VISITECT® CD4 Advanced test showed high sensitivity of 96.0%. This will likely satisfy WHO pre-qualification status and can be included in the VISITECT® Performance Evaluation.

 Omega Diagnostics shares were 18% higher at 2.7p at the time of writing.

“We are extremely pleased to receive this draft report, detailing that the test has shown high diagnostic accuracy. Whilst we have no visibility of the WHO pre-qualification requirements, it is encouraging to formally receive these positive results,” said Jag Grewal, CEO of Omega Diagnostics.

“If the VISITECT® CD4 Advanced Disease test successfully meets all WHO pre-qualification requirements, it will continue to be made available for sale by Accubio and the Company will receive the full £4.0m of deferred consideration. We look forward to updating shareholders on the outcome in due course.”

The FTSE 100 surged on Tuesday as bargain hunters stepped in to pick up beaten down stocks after a strong session in the US overnight.

The FTSE 100 flew back through 7,000 to trade as high as 7,040 around midday on Tuesday.

“US markets finally got something to cheer about in the first session of the fourth quarter. Both the S&P 500 and NASDAQ posted their biggest daily increases since August as US Treasury yields pulled back 0.18 percentage points,” said Matt Britzman, Equity Analyst at Hargreaves Lansdown.

However, Britzman warned while optimism is returning to markets, it may be short-lived.

“Whilst rallies in most global indices is certainly a welcome reprieve, underlying issues very much remain,” Britzman said.

Nonetheless, FTSE 100 blue chips that had been heavily hit since the mini-budget became the target of investors seeking out bargains.

Hargreaves Landsown was the top riser gaining 6%, while Entain, Melrose and Legal & General were all up over 5% higher.

Legal & General issued a trading statement on Tuesday and focused on the strength of their cash position and solvency. Legal & General shares had fallen sharply last week as investors fretted about their exposure to UK government bonds during high periods of volatility.

“It’s not often that Legal & General has to calm investors’ nerves, given it is meant to be a steady as she goes type of business. Its shares enjoyed a relief rally after reassuring the market that it hasn’t been a forced seller of gilts or bonds, and that it continues to have a good solvency coverage ratio,” said Danni Hewson, financial analyst at AJ Bell.

Slow interest rate hikes?

With a backdrop of rising prices and the threat of a recession, the large jumps in interest rates have been unnerving markets.

The Australian central bank hiked rates by 25bps overnight – a lower increase than expected – and raised the question of a near term peak in the global hiking cycle.

“The cash rate has been increased substantially in a short period of time,” said RBA Governor Philip Lowe in a statement.

If the Australian central bank’s decision and subsequent comments prove to be the beginning of a trend of central banks slowing the pace of hiking, it may begin to improve sentiment around the depth of any recession and bring investors back into equities.

However, inflation is still soaring in many countries and Australia is a somewhat insular economy compared those of Western Europe and the US.