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Market Report: Resilient opening ahead of key rates decision

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Steve Clayton, Fund Manager at HL Select

4 August 2022

Market Report: Resilient opening ahead of key rates decision

  • The Bank of England is expected to make the largest interest rate hike in more than quarter of a century later today.
  • A report from think tank Resolution Foundation warns UK inflation could hit 15% next year.
  • NEXT has raised its expectations on full year sales and profit.
  • Glencore has reported half year underlying profits of $18.9 billion, more than double last year’s pace

Steve Clayton, Fund Manager at HL Select:

Markets are opening firmly this morning against a backdrop of a roaring performance on Wall Street last night but facing the announcement later today of what is widely predicted to be the largest jump in UK interest rates for 27 years. Wall Street brushed off the tensions between the US and China, heightened by Senator Nancy Pelosi’s visit to Taiwan, with the S&P index adding 1.6% and the tech-heavy NASDAQ Composite index adding 2.6% overnight. Asia delivered more muted gains and market futures are suggesting that European and UK markets are set to open positively

The Resolution Foundation, a UK think-tank focused on the financial health of the UK personal sector has warned that UK inflation is poised to touch 15% next year, due to soaring gas prices which are continuing to set new records. That will push the Bank of England to raising rates by 0.5% today, says the Foundation. If it happens, it will be the first time since 1995 that the Bank has lifted rates by a half point. The forecast comes a day after the National Institute for Economic and Social Research warned that the rising cost of living was set to push poorer households into a perilous financial state, with the Institute predicting that one in five British families will have no savings at all by 2024.

Judging by what retailer NEXT plc has to say this morning, the UK consumer is unconcerned. NEXT have raised their expectations for full year sales and profits after strong recent trading. The company have seen sales so far come in £50m above expectations and they raise their profit guidance by £10m as a result. High Street trends are normalising back toward pre-pandemic conditions, with the group’s High Street stores recovering sales volumes, while the growth rate of the online channel is returning to historic levels after the extraordinary growth of the pandemic period. Overall, full-price sales were 4.7% ahead of management expectations.

NEXT launched their seasonal sale event as the heatwave struck. Unsurprisingly, customers stayed in their gardens, so the rate of clearance is below plan, but more than made up by full-price sales strength outside of the heatwave. The group now see their profits growing by 4.5% for the year to end January 2023. The outcome could be better or worse than that, depending on how the weather turns out in the next few months and how inflation impacts on customer behaviour, says NEXT.

Rolls Royce, the aero engine manufacturer released half-year numbers this morning which the group said showed growth in order intake, revenue and cash flow. They also showed the group swinging into losses for the first half of the year. Outgoing Chief Executive Warren East highlighted the ongoing recovery in the aerospace sector, where flying hours increased versus the last year. That drives Rolls Royce’s servicing revenues and is expected to lead to a full year operating profit, with margins broadly unchanged on last year’s 3.8% level. The group have received clearance for the sale of their interest in ATP Aero which will raise around £2bn in proceeds, allowing the group to pay down their debt, including all of their variable interest rate borrowings.

Mining giant Glencore has reported half year underlying profits of $18.9 billion, more than double last year’s pace. The group’s trading division made more in the first half than it had previously predicted for the full year. As a result, Glencore have upped their distributions to shareholders by $4.5bn through a combination of dividends and share buybacks. The profits were driven by surging coal prices.

Tritax Big Box REIT plc, one of the leading owners of large-scale distribution warehouses in the UK reported 10% growth in its asset value for the half year and said that its market was supported by positive and enduring structural drivers, with record levels of occupier demand. The group has seen record rates of lettings, signing an additional £17.8m per annum of rental income. The dividend rises by 4.7%.”

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