- Cautious mood descends on market after hawkish huddle of central bankers.
- FTSE 100 opens lower as concerns persist about impact of interest rates.
- Shares in Pennon and United Utilities dip as concerns about water sector persist amid Thames Water emergency talks.
- H&M sales surge in June thanks to hot weather, with quarterly results beating expectations.
- Moonpig shares fly upwards in early trade as sales stay on track.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’A more cautious mood has descended on financial markets as investors have been reminded that the interest rate hiking cycle is not yet at an end. The trio of the Fed’s Jerome Powell, the ECB’s Christine Lagarde, and the Bank of England’s Andrew Bailey made a hawkish huddle at the central bankers meeting in Portugal.
All warned that further rate rises were to come with inflation staying persistent, with at least two hikes expected from the Fed by the end of the year. This dampened early enthusiasm on the S&P 500 which ended flat, although the Nasdaq stepped up again powered by the resilience of big tech.
European indices have also opened in a lacklustre fashion, as worries still bubble about the effect of further hikes on economic growth with the threat of recessions reappearing on the horizon. The FTSE 100 has opened lower with housebuilders again on the backfoot as worries about the mortgage market persist amid higher rate expectations. A weaker oil price, with Brent crude falling back under $74 a barrel nudged energy stocks lower, with traders’ eyes fixed on the impact of higher interest rates on demand for the black stuff.
Andrew Bailey has warned that higher interest rates will have to stick around but stressed the Bank did not think interest rates would have to go as high as priced in by financial markets, which is currently around 6.25%. if the so-called terminal rate is lower, it may provide some relief to mortgage holders whose refinancing deadlines are looming later this year, or early next year. As financial markets reassess expectations, some of the less-expensive deals could be put back on the table. It’s clear that policymakers will be keeping a very close eye on the jobs data going forward, particularly the rate of wage growth, as Andrew Bailey has stressed the tight labour market is behind persistent inflation. Fewer British workers have flooded back into work after Covid compared to other countries, with high levels of long-term sick partly to blame. With the government locked in an industrial dispute with NHS staff, who are struggling under the cost-of-living crisis, it won’t help with clearing the operation backlog and helping people get fitter for work. Longer-term structural issues and a lack of long-term funding appear to have laid the unstable ground for inflation to breed more persistently than in other countries.
Emergency talks surrounding the future of Thames Water are continuing with no resolution yet in sight. The government is standing by with a promise of a temporary takeover through a special administration regime, a process energy firm Bulb went through last year. But Thames Water, is a giant in the water industry, supplying 15 million households, has a customer base ten times the size of Bulb’s, so it’s likely to prove more difficult to find a buyer, particularly given its £14 billion debt load. The big question is whether the company’s investors including overseas pension and sovereign wealth funds will be willing to stump up a promised financial lifeline of £1 billion. Pouring more money into a financial black hole Thames Water appears to have dug, is clearly an unwelcome prospect, with little hope of future returns given the huge infrastructure work needed to mend leaks and sewage discharges.
Shares in United Utilities and Pennon are weaker today as concerns spike about the industry but have largely escaped significant investor flight, given that their finances are considered to be more stable. However, questions have now been raised about the potential precariousness of other water firms. Ofwat had been monitoring Southern Water and Yorkshire Water, as well as Thames Water, given its concerns over their financial resilience. In its 2022 annual report it also flagged worries about Northumbrian Water and Portsmouth Water for having fallen far short of expectations when it came to the level of dividends paid given their relative financial resilience.
Shoppers resilience has come through loud and clear in H&M’s results, increasing sales in many markets despite the cost-of-living squeeze. It’s been stuck in the middle of fashion bun fight with Shein skimming off cash-strapped customers while Zara appeared to outshine it in the fashion stakes, but it’s pulling itself up amid the competition. Raising the fashion stakes of its higher-end brand Cos has helped, but arguably H&M’s styles are also proving more appealing with operating profits of $438.55 million for the third quarter beating expectations. The sun has been shining on the fashion retail sector thanks to the recent good weather and the race to the shops to nab summer styles helping boost numbers in June with sales up 10% from a year earlier. Previously announced job cuts and store closures are also yet to show up in the figures, and the company is targeting an ambitious 10% margin next year.
Moonpig has flown upwards in early trade helped after an update showed trading was in line with previous guidance. The company says its on track for full year revenue growth of 5.2% for the full financial year to £320 million, with margins set to stay resilient. Concerns about the cost-of-living crisis hitting discretionary spending had kept Moonpig shares penned in but they’ve got a new lease of life, giving shareholders more confidence the company is plodding in the right direction. Although its revenue wings were clipped last year after consumers shifted to buying lower cost gifts, it has shown more resilience of late despite the cost-of-living headwinds, with big events like Mother’s Day proving a draw for personalised cards.’’
