FTSE 100 falls on dual US and UK inflation shocks

Natasha Doris
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FTSE 100 falls on dual US and UK inflation shocks

The latest inflation figures did little to cheer markets on Wednesday, after UK CPI fell to 9.9% in August, dropping below July’s 40-year record of 10.1%.

The FTSE 100 dropped 1.2% to 7,293.5 during lunchtime trading, dragged down by rising fears of higher interest rates and the aftershocks of Tuesday’s hotter than expected inflation figures of 8.3% for August, failing to meet analyst expectations of 8.1%.

US futures clawed back a slight amount of ground, with the NASDAQ rising 0.4% to 12,165.7, the S&P 500 increasing 0.3% to 3,965.2 and the Dow Jones climbing 0.2% to 31,300 in pre-open trading.

“Despite some of the key factors behind surging inflation easing slightly, many prices continue to go up and markets are not happy,” said AJ Bell investment director Russ Mould.

“With the 8.3% number for August higher than the 8.1% expected by economists, investors took fright and we saw an almighty sell-off on the markets, including a 5% decline in the tech-heavy Nasdaq index.”

Evelyn Partners chief investment strategist Daniel Casali added: “On the one hand, headline CPI inflation came in lower-than-expected, but the underlying core CPI measure remains stubbornly high, increasing the pressure on the Bank of England to raise interest rates by more than the 50bps expected by the Bloomberg consensus of economists when it meets on 22 September.”

EU calls for energy revenues price cap

Meanwhile, utilities stocks circled the bottom of the FTSE 100, after European Commission President Ursula von der Leyen called for a price cap on non-gas energy suppliers across the bloc to assist vulnerable families as the cost of living crisis and surging energy prices threaten to plunge households across the continent into a harsh, cold winter.

The revenues cap is expected to raise £121 billion, with the cap set to impact producers of low-cost power including renewables and nuclear.

“In these times it is wrong to receive extraordinary record revenues and profits benefiting from war and on the back of our consumers. In these times, profits must be shared and channelled to those who need it most,” said von der Leyen in a statement.

United Utilities shares fell 3.6% to 143.8p, Severn Trent declined 3.6% to 2,684.5p, Centrica dropped 2.4% to 82.8p and National Grid decreased 2.2% to 1,055.7p.

Retail companies rise

However, retail companies gained on the relief of a less extreme cost of living crisis, sparking hopes of increased consumer spending.

Next shares rose 1% to 5,886p, JD Sports Fashion climbed 0.1% to 127.4p and Kingfisher increased 0.1% to 247.5p.

Oil receives boost

Oil companies enjoyed a boost to $93 per barrel in Brent crude after reports of bullish demand from the International Energy Agency (IEA), with the Agency expecting a large-scale switch from gas to oil projected to average 700,000 bpd from October 2022 to March 2023, doubling the rate compared to last year.

The positive news for energy groups follows estimations for growth in international oil demand to rise in 2022 and 2023 by the Organisation of the Petroleum Exporting Companies, which noted major economies were doing better than expected despite problems including spiking inflation.

Shell shares rose 0.1% to 2,331.2p and BP shares gained 0.3% to 463.1p.

C&C Group trading slows down as inflation bites, €900m net revenue expected

Natasha Doris
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0
C&C Group trading slows down as inflation bites, €900m net revenue expected

C&C Group shares fell 3.6% to 167.5p in late morning trading on Wednesday following a reported a slowdown in on-trade momentum over Q2 2023 due to the impact of inflation on discretionary consumer spending in its pre-close trading statement.

The premium drinks company mentioned an expected HY1 2023 net revenue climb of 35% compared to last year, with expected net revenues of €900 million in the six months to 31 August 2022, broadly in line with comparable pre-Covid figures.

C&C Group also noted a projected operating profit range of €52-55 million against €16 million the year before and €64 million in HY1 2020.

The firm said trading through HY1 saw demand return “robustly” at the start of the term, however the impact of cost of living concerns resulted in a slowdown in trading momentum over Q2 2023.

Meanwhile, C&C Group confirmed an expected net debt to adjusted EBITDA of approximately 1.5 times at 31 August 2022, hitting its previously declared aim.

The company highlighted the further reduction in leverage multiple reflected the benefit of €43 million in proceeds from the first two tranches of three equal tranches from the sale of its interest in Admiral Taverns, along with good cash generation from the group over HY1 2023.

C&C Group added it intended to review the potential return of capital to shareholders including dividends in HY2 2023.

Dunelm increases market share as cost of living crisis eliminates competition

Natasha Doris
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Dunelm increases market share as cost of living crisis eliminates competition

Dunelm shares rose 2.7% to 743p in late morning trading on Wednesday, after the firm announced a total sales rise to £1.5 billion in FY 2022 against £1.3 billion in the previous year.

Meanwhile, the group noted digital total sales of 35% from 46% year-on-year.

Dunelm reported a record pre-tax profit of £209 million compared to £157.8 million, along with a gross margin of 51.2% from 51.6%.

“Looking in the rear-view mirror Dunelm can only see sunny skies as it reports another record profit. But a glance through the windshield reveals a massive consumer cloud about to break over the business,” said AJ Bell investment director Russ Mould.

“Dunelm hasn’t faced a heavy shower yet. Sales have remained ‘robust’, albeit modestly lower year-on-year in the first 10 weeks since the year end on 2 July, and that is testament to the company’s skills as a retailer.”

“Over recent years Dunelm has been one of those names in the retail sector which has got the basics right. It has products people want to buy, at a price they want to pay, and it puts them in front of shoppers at the right times.”

The firm pointed out a homewares market share gain of 1.4% and continued share gains in furniture.

“Like other survivors in the retail space, Dunelm should benefit from market share gains as smaller and weaker rivals fall by the wayside,” said Mould.

The home furnishing retailer also confirmed an operating costs:sales ratio of 37.5% against 39.1%.

The company highlighted a net debt of £23.8 million against net cash of £128.6 million the year before.

Dunelm commented it was on track to deliver FY 2023 results in line with analyst expectations, and estimated a 50% gross margin for the FY term.

The company also said it was set to manage costs through efficiency improvements and operational grip.

“We feel confident and well prepared to weather the current economic pressures – we emerged from an unprecedented global pandemic as a bigger, better business and we believe we have the tools in place to do that again. That said, the operating and economic environment is extremely challenging,” said Dunelm CEO Nick Wilkinson.

“In this environment, we have to make every pound count, both for ourselves through our tight operational grip and cost discipline, and for our customers, through our offer of outstanding value at all price points.”

Dunelm hiked its ordinary dividend per share to 40p from 35p, and declared a special dividend per share of 37p from 65p.

“For now, the company is sticking with full-year forecasts. But even Dunelm can’t change the economic weather and it seems likely sales will eventually suffer as people wait a bit longer to replace that duvet set or pair of curtains,” said Mould.

“As the retailer desperately tries to make ‘every pound count’, to use the language of chief executive Nick Wilkinson, doing what it can to keep a lid on costs and offer customers value, there may be some confidence that it can emerge from the storm a stronger business.”

Redrow, CleanTech Lithium, and Bidstack with Alan Green

UK Investor Magazine
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Redrow, CleanTech Lithium, and Bidstack with Alan Green

In this Podcast we discuss:

  • Redrow (LON:RDW)
  • Bidstack (LON:BIDS)
  • CleanTech Lithium (LON:CTL)
  • Evrima (LON:EVA)

Register for the UK Investor Magazine Virtual Investor Conference 27th September here.

Alan Green joins the Podcast for a deep dive into UK equities and global markets. We start by looking and the most recent instalments of inflation data from the US and UK.

In both circumstances CPI inflation fell from the prior month’s reading with the US falling to 8.3% and the UK dipping to 9.9%. However, the US reading of 8.3% was above estimates of 8.1% and at odds with the market’s pricing of equities in the run up to the announcement. US stocks posted the biggest declines since 2020 yesterday and we explore the potential playbook for investors going forward.

Redrow is a company particularly exposed higher interest rates and the cost of living crisis but has still managed to produce to 10% revenue increase in 2021. We look at how their shares could perform in the coming weeks and months.

Bidstack recently posted £2m profit for the first half, a dramatic increase from the same period a year prior. Given the huge potential for the company, we explore how Bidstack provide shareholder value in the future.

CleanTech Lithium released a resource upgrade yesterday and we drill down into the numbers and what investors can expect in the near future.

We finish by dissecting Evrima’s portfolio and the discount of their mining investments compared to the current share price.

Pound gains against dollar on lower UK inflation

Natasha Doris
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0
Pound gains against dollar on lower UK inflation

The Pound rose against the dollar on Wednesday morning after UK inflation fell below the double digits to 9.9% in August, following a 40-year record of 10.1% in July.

The Sterling rose to $1.1546 earlier in the morning and was trading at $1.1543 in late morning trading.

UK inflation fell primarily on lower petrol prices, which saw inflation at the pump drop to 32.1% from 43.7% month-on-month as petrol costs slid 14.3p per litre. Meanwhile, diesel prices declined by 11.3p per litre on an annual basis, compared to a 1.5p per litre rise the last year.

The Pound hit a 37-year low of $1.14070 last week after soaring energy prices threatened to plunge the UK into a cold winter recession. However, the energy price cap freeze introduced by Prime Minister Liz Truss last Thursday served to assuage the immediate fear of critical damage to households over the next several months.

UK inflation falls to 9.9% in August on lower petrol costs

Natasha Doris
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0
UK inflation falls to 9.9% in August on lower petrol costs

UK inflation fell to 9.9% in August, returning below double-digits after hitting a 40-year record of 10.1% in July.

Falling petrol prices were the main driver behind the inflation slowdown, with the annual rate for motor fuels easing to 32.1% from 43.7%, as a result of petrol prices falling 14.3p per litre over the period.

Diesel prices also fell by 11.3p per litre over the year, against a 1.5p per litre rise a year previously.

“It’s way too early to say that inflation has peaked, but the dip below double figures is psychologically important for households getting ready for what they’re expecting to be a difficult winter,” said AJ Bell financial analyst Danni Hewson.

“Prices are still excruciatingly high but there have been falls in key goods, most notably the price of petrol.”

“A litre of unleaded fell by 14.3 pence over the month with diesel down by 11.3 pence, making the cost of filling up slightly more manageable for families and businesses.”

Food prices

However, food prices saw the largest spike month-on-month since 1995, increasing 13.1% year-on-year against a 12.7% surge in July.

The biggest contributors to the food price growth were milk, cheese and eggs, while the overall prices for food and non-alcoholic beverages rose across 2022, with the 1.5% climb between July and August marking the largest July to August rise since 1995.

“[Don’t] be fooled into thinking the cost-of-living crisis is over. Anyone who wheeled their trolly down supermarket aisles last month will know this,” said Hewson.

“Food prices rose by 13.1% over the year to August, and the jump month on month was the biggest since 1995. Milk, cheese and eggs were singled out by the office for national statistics – dietary staples people rely on and usually consider affordable options.”

Bank of England interest rates decision

The figure will likely boost hopes of a less severe cost of living crisis as winter draws nearer, however it remains to be seen how the Bank of England will react in its next interest rates decision.

“On the one hand, headline CPI inflation came in lower-than-expected, but the underlying core CPI measure remains stubbornly high, increasing the pressure on the Bank of England to raise interest rates by more than the 50bps expected by the Bloomberg consensus of economists when it meets on 22 September,” said Evelyn Partners chief investment strategist Daniel Casali.

Energy price cap freeze

However, the recent energy price cap freeze has helped assuage fears of soaring 20% inflation some analysts had estimated before the energy prices assistance.

“There’s no denying August’s fall is good news for UK households and there’s a real sense of expectation that the spectre of 20% inflation has been pushed firmly aside following the government’s energy price freeze announcement, but there is still a real possibility that there will be more bumps on the long road back to the two percent target,” said Hewson.

“While energy prices have been capped, people will still be paying more for their gas and electricity come October and, as the nights draw in, they’ll also be using more power.”

“Then there’s the big question about what else the new Chancellor might pull out of his hat when he finally delivers his emergency budget expected next week. And with concern mounting that the promised help with energy costs for businesses might not be ready for roll out before November, there are still huge variables to consider which may well stoke the inflationary fire once again.”

Redrow returns to pre-Covid profitability on strong housing market

Natasha Doris
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1
Redrow returns to pre-Covid profitability on strong housing market

Redrow shares climbed 1.2% to 481.9p in early morning trading on Wednesday after the house builder reported a return to underlying pre-Covid profits.

The firm highlighted an underlying pre-tax profit of £410 million in FY 2022 from £314 million last year, alongside a statutory pre-tax profit of £246 million against £314 million.

Redrow mentioned a £2.1 billion revenue compared to £1.9 billion as the business strengthened on post-Covid recovery.

“I am delighted to report a year of strong growth which has resulted in our underlying profits returning to the record levels achieved in 2019 prior to Covid. Revenue increased by 10% to £2.14bn and underlying profit before tax was up 31% year on year, both ahead of our pre-Covid 2019 figures,” said Redrow non-executive chairman Richard Akers.

Meanwhile, the company hit 5,715 legal completions against 5,620 year-on-year, along with a total order book of £1.44 billion from £1.43 billion.

“Given rising inflation and higher interest rates it is not surprising the buoyant housing market has moderated recently and demand has returned to historically average levels,” said Akers.

“It is on this basis we have prepared our medium term plan and we are confident our timely investment in land, combined with strong demand for our Heritage homes, will support our continued growth.”

“In addition, our opening order book of over £1.4bn has put us in an excellent starting position for the 2023 financial year. As a result, the business is well placed to deliver another set of strong results.”

Redrow noted an underlying ROCE of 24.5% against 18.5% in the previous year.

The house building firm announced net cash at 3 July 2022 of £288 million from £160 million the year before.

“House prices have proved remarkably robust since the pandemic struck, buoyed by pent-up savings and cheap mortgages. Redrow, like other housebuilders, has gushed cash in this environment and is earning huge margins to boot,” said Wealth Club head of equities Charlie Huggins.

“Redrow’s premium quality housing is resonating strongly in the current environment, with the ‘race for space’ supporting demand for larger, family homes. But, make no mistake – the biggest reason for Redrow’s success is high house prices, and the general strength of the housing market.”

Analysts noted the slowdown in the housing market, along with the looming threat of crippling interest rates and the potential of a freezing recession as winter approaches.

“That is something over which it has no control, and the big bad wolf of recession could be about to blow away the good times,” said Huggins.

“Increasing house prices in recent years mean home buyers are having to borrow more to get on the housing ladder. Combine that with rising interest rates, which ultimately mean more expensive mortgages, and the affordability of property could fall substantially. If interest rates keep rising, it’s hard to see how the housing market would be immune.”

“This is the kind of environment where you find out which housebuilders have built their success on a base of bricks, and which are about to have their sticks and straw blown away by.”

The group confirmed an underlying EPS of 96p compared to 73.7p and a statutory EPS of 57.7p from 73.7p.

Redrow declared a final dividend per share of 22p against 18.5p over FY 2022 and also noted its £100 million share buyback launched in July 2022.

Rio Tinto announces Pilbara JV with Baowu Steel Group

Natasha Doris
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0
Rio Tinto announces Pilbara JV with Baowu Steel Group

Rio Tinto shares dropped 1.9% to 4,858.2p in early morning trading on Wednesday, after the group announced its joint venture with China Baowu Steel Group to develop the Western Range ore project in Pilbara, Western Australia.

Rio Tinto will reportedly invest $1.3 billion of the total $2 billion investment to develop the mine.

The mining company said the Western Range’s 25 million tonnes of iron ore would help sustain production of the Pilbara Blend from the firm’s existing Paraburdoo mining hub.

The project currently includes the construction of a primary crusher and an 18 km conveyor system linking it to the Paraburdoo processing plant.

Rio Tinto confirmed construction was scheduled to start in early 2023, with first production expected in 2025.

The mining group noted its share of the capital costs were already included in its capital expenditure guidance of approximately $9-$10 billion for each of 2023 and 2024.

Rio Tinto commented there was no upfront consideration being paid by either firm.

The two commodities companies agreed to enter an iron ore sales agreement at market prices, covering a total of up to 126.5 million tonnes of iron ore over approximately 13 years, together with the joint venture.

“This is a very significant milestone for both Rio Tinto and Baowu, our largest customer globally. We have enjoyed a strong working relationship with Baowu for more than four decades, shipping more than 200 million tonnes of iron ore under our original joint venture, and we are looking forward to extending our partnership at Western Range,” said Rio Tinto CEO Simon Trott.

“The development of Western Range represents the commencement of the next significant phase of investment in our iron ore business, helping underpin future production of the Pilbara Blend, the market benchmark.”

Baowu Resources chairman Shi Bing added: “The signing of the joint venture agreement for the Western Range Project is a significant event in the history of cooperation between Baowu and Rio Tinto. We fully appreciate the persistent efforts of both teams in accomplishing the important achievement. The Bao-HI joint venture has been successfully operating for more than 20 years, leading us to a win-win result, and reaping friendship and trust.”

Dollar gains against pound and Euro

Natasha Doris
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0
Dollar gains against pound and Euro

The dollar gained against the Sterling at 13:30 BST following the latest US inflation report, which revealed inflation lowered to 8.3% in August, yet failed to meet analyst expectations of 8.1%.

The unexpectedly hot report sent the Pound spiralling from $1.17330 to $1.15593 at 14:00.

The Sterling was trading at $1.15804 at 14:50 as markets digested the figures.

Investors hoped a lower inflation rate might curb the US Federal Reserve’s hawkish stance on interest rate moves, however the slight fall in inflation confirmed fears the figure will come nowhere near dissuading the Fed from further aggressive rate hikes.

However, the prospect of higher rates served to send dollar strength higher, with the currency also gaining against the Euro, which dropped from $1.01765 to $1.00326.

FTSE 100 sinks into the red after US inflation report

Natasha Doris
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0
FTSE 100 sinks into the red after US inflation report

US CPI inflation dropped to 8.3% from 8.5% in August, however the figure came in above analyst expectations of 8.1% and month-on-month prices excluding excluding food and fuel rose 0.6%.

The FTSE 100 plunged in line with global equities as markets adjusted for even more sharp rate hikes.

US stocks opened on a pessimistic note, with the Dow Jones falling 1.9% to 31,762.1, the S&P 500 sliding 2.3% to 4,014.9 and the NASDAQ dropping 3.1% to 11,886.

US Federal Reserve chair Jerome Powell confirmed hawkish sentiment at the Jackson Hole convention last month, announcing he would continue to hike rates until inflation was far closer to the Fed’s 2% aim.

“Inflation is running well above 2%, and high inflation has continued to spread through the economy. While the lower inflation readings for July are certainly welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” said Powell.

He added at the conference that the Fed’s decision would be based on economic data from August, including the inflation report.

“We our moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%. Our decision at the September meeting will depend on the totality of the incoming data and the evolving outlook.”

Investors had hopes pinned on lower inflation to dissuade Powell from an aggressive rates move. However, it appears the latest report will do little to slow the pace of rate hikes at the next policy meeting.

Supermarkets

Supermarket stocks fell to the bottom of the index, with the cost of living crisis driving customers away from higher end grocers to discounters as food inflation soars.

Kantar announced Morrisons had lost its spot as a Big 4 grocer, and had been replaced by German budget retailer Aldi.

“The appeal of the German discounters continues to grow as household budgets are increasingly squeezed. This presents a challenge to Tesco and Sainsbury’s too,” said AJ Bell investment director Russ Mould.

“The fact that Aldi and Lidl offer not only bargain prices but also decent quality products and produce makes the established players jobs much harder.”

Sainsbury’s shares fell 2.7% to 207.5p and Tesco shares dropped 3.4% to 244.3p.

Ocado shares tumbled to the bottom of the FTSE 100, spiralling 13% to 691.5p after the supermarket reported lower sales and rising energy costs in its pre-close FY 2022 trading update.

“We remain focussed on providing Ocado Retail customers with the best possible value to help them navigate the cost of living crisis, and are encouraged by the positive underlying trends in the business which underline the value of Ocado’s differentiated proposition to customers,” said Ocado Retail chairman Tim Steiner.

“As consumer spending stabilises, we expect Ocado Retail will again deliver attractive and accelerating growth in sales and a strong recovery in profitability.”

“For … these reasons, we are optimistic for the future even while recognising the challenges that higher energy bills and other inflationary pressures are creating for our customers today.”

Retail

Retail shares also felt the blow of higher interest rates, with the news sending fears of lower consumer spending through the roof.

Kingfisher shares slid 3.8% to 247.1p, Next fell 3.1% to 5,871p and JD Sports Fashion decreased 2.8% to 127.7p.

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