Market report: Wheat prices jump adding to food cost worries while easyJet bookings glide higher
- Russia attacks grain stores in Ukraine as Europe’s breadbasket risks being cut off
- Wheat prices jump adding to worries food price inflation will stay sticky
- Sterling lower against euro and dollar as UK interest rate expectations dip
- FTSE 100 opens slightly higher, with miners boosted by expectations of Chinese stimulus
- US futures drop as Netflix and Tesla results disappoint
- easyJet bookings glide higher but worries remain about a spending squeeze
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’Just as painful food inflation was beginning to ease, Russian attacks on grain storage facilities in Ukraine risk causing another spike in costs of staple ingredients. Wheat futures have jumped after missiles were fired at infrastructure, following Moscow’s decision to leave the Black Sea Grain deal. Hopes that a fast deal to revive the pact could materialize are dissipating, with Russia’s position appearing more intractable after it said that any ships heading Ukrainian ports will be considered carriers of military cargo and attacked. Although its highly disappointing for Western shoppers, dealing with prices increases at the tills, this move is treacherous for countries grappling with severe drought, particularly in the horn of Africa, where millions of people are at risk of acute food insecurity and famine. Cutting off Europe’s breadbasket region yet again could hardly come at a worst time as unusually hot weather has descended. The escalating crisis is coinciding with a severe dry spell in key growing regions in the United States, which is leading to lower expectations of yields for the ongoing harvest, with US wheat stocks for 2023/24 projected to come in at a 16 year low. This highly unwelcome collision of factors has pushed up US wheat futures prices by more than 13% since Tuesday, adding to concerns that food prices will remain very sticky.
Despite the uncertainty about where grocery bills head next, relief at the UK’s headline inflation number is still reverberating around markets. Falls in the price of fuel were the biggest driver of the fast move downwards in the rate of consumer price rises and that trend does not look like it’ll be reversed significantly any time soon. Oil prices have steadied around $79 a barrel amid expectations of lower demand in China, as investors still waiting for more detail about what further economic stimulus from Chinese authorities will look like. The expectation that levers will be pulled to boost domestic demand across the world’s second largest economy has helped push up commodity stocks, which are among the biggest gainers on the FTSE 100 in early trade.
In expectation that the Bank of England won’t push up interest rates so far, with 5.75 – 6% the expected peak prices in by markets, the pound has lost ground against the euro. It’s come off yesterday’s low of €1.149 and is trading around € 1.152 but that’s down from € 1.17 compared to a week ago. Against the dollar, sterling is trading at $1.29 down from $1.31 on 13 July. Bond yields are also lower, for 2-year gilts they are hovering around 4.86% down from above 5% earlier yesterday.
US futures have dipped following results from Netflix and Tesla which failed to fire up investors with enthusiasm. Although Tesla’s profits beat Wall Street expectations for Q2 thanks to sales volumes due to its cut-price strategy on key models, the lack of detail surrounding the production of the much-heralded Cybertruck disappointed investors. Netflix super-charged its subscriber base but its revenue in Q2 didn’t meet analysts’ forecasts, leading to a slide in the share price in after hours trading.
Concerns are growing that a slowing economy, combined with the erosion of lockdown savings will weigh further on spending on discretionary goods and services, particularly big-ticket items like cars and nice to have but not necessary streaming accounts in the months ahead.
The desire to travel has remained strong, with easyJet’s bookings gliding higher but investors seem cautious about what’s ahead with shares dipping in early trade.”
Sophie Lund Yates, lead equity analyst, Hargreaves Lansdown:
‘’easyJet has beaten analyst expectations as it rides the wave of consumers seeking out budget options for their getaways. Planes are fuller too which helps margins, and customers also aren’t shying away from lucrative add-ons, which are jet-fuel for the top line. The rebound in profits is a highly welcome change of path, but there are clouds gathering.
Wider industry strikes have the potential to cause havoc across the system, and the extent of this won’t be known just yet. The broader implications of sweeping cancellations or changes will dent profit momentum in a big way if the issues are protracted.
easyJet’s doing a great job at controlling what it can, and the cost-base and proposition are spot on. The easyJet Holidays business is going from strength to strength too, as post-pandemic travel needs seem to lean towards convenience offerings. The way in which holidays are treated has definitely shifted, with time in the sun appearing in family spending as an essential, rather than an option. How long this can continue while interest rates continue to rise is unclear, but the level of overall resilience being seen in travel spending is providing a much larger buffer for the likes of easyJet than had been expected.”
