- Middle East concerns ease and a Ukraine funding deal is agreed.
- FTSE 100 has more spring in its step in early trade.
- Gold dips back from record highs amid easing of Israel/Iran tensions.
- Brent crude slips back to hover near four-week lows as high interest rates look set to linger in the US.
- Big week for mega cap tech stocks with fresh Tesla price cuts in focus.
- Rumours swirl that Ocado is mulling a move to a listing in the US.
- Mobico’s CFO leaves after National Express owner delayed results and annual profits slide.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The FTSE 100 has spring in its step at the start of the week, amid an easing of geopolitical tensions. The pulse of positivity comes in the absence of fresh retaliatory attacks by Israel or Iran and the US flexing its funding muscle and passing a crucial aid package for Ukraine. But some unease is set to continue about high valuations on Wall Street, following a string of falls last week. The focus is switching to earnings season kicking off, and tech giants have a lot to prove as concerns grow about the era of high interest rates continuing. With the S&P 500 dipping below the psychologically important 5,000 mark, some negative sentiment continues to bubble.
Fears of a Russian victory over Ukraine have dissipated, with the long-awaited passing of the $60.8 billion funding deal by the US House of Representatives. Chunks of funding are expected to be used imminently to bolster Ukraine’s air defences and dwindling shell reserves to repel attacks in the East. The legislation also contains $26 billion for Israel and $8.12 billion for the Indo-Pacific, including Taiwan. For now, concerns about the huge and growing US debt pile are largely on the back burner and confidence in the US administration’s ability to pay interest due remains solid, but the clamour of voices calling for spending restraint is likely to grow.
With governments bolstering their defence capabilities, military contractors are eyeing up the potential for lucrative contracts ahead. Increased spending on drones, missiles, fighter aircraft, equipment and training is likely to end up being another inflationary pressure. Eyes will be trained on the US GDP snapshot on Wednesday and the personal consumption expenditures price index out this Friday, which will be super-crucial parts of the picture for the Federal Reserve ahead of its decision on interest rates due on May 1st. The data is expected to show that inflation is remaining stubborn, and now expectations for multiple rate cuts this year are fizzling out fast.
Gold prices slid away from record highs as the upwards pressures which have pushed the precious metal higher eased. The calmer re situation in the Middle East, combined with expectations that the Fed will be slow to cut interest rates, means gold is less attractive for some investors than yield-bearing assets like government bonds. The potential for more fractious relations has prompted some central banks to increase gold holdings to reduce reliance on US dollars as a safe-haven asset and that trend is unlikely to disappear.
Oil prices have dipped back, with Brent Crude hovering around $86 a barrel, heading towards four-week lows, amid hopes that fresh supply complications in the Middle East won’t materialise. With high interest rates are now expected to linger for longer in the US, which is also adding to expectations of lower demand for energy.
The big tech earnings set to be revealed this week will have to meet great expectations to stop fresh falls on indices. Rising government bond yields are also putting stocks under pressure, with investors eyeing up the potential for higher, more stable longer-term returns offered by US Treasuries, given the already super-high valuations achieved by mega tech stocks.
Meta, Alphabet and Microsoft are to report later this week, with Tesla’s results out tomorrow. Elon Musk’s EV darling has suffered from a distinct reversal of fortunes and is lagging further behind the Magnificent Seven pack. The hoped-for sharp acceleration of demand for EVs has not materialised as consumers, burned by cost-of-living fires, have put off purchases. Margins have come under pressure as Tesla has tried to compete with nimble rivals and it seems there will be little respite, with fresh rounds of price cuts coming into force in China, Europe and the Middle East over the weekend. Tesla’s share price has already been through an ugly squall, and these latest pricing decisions indicate there could be more turbulence to come. However, there will be hopes that the move to cut the price of its full self-driving software could lead to an acceleration in take up and a real chance to boost profits.
As big tech appears to be teetering at a cliff edge of fresh falls, it may do the job of quashing some of the speculation over whether UK-listed firms might be better off emigrating to the US in search of untapped riches. A group of Ocado investors are reported to be the latest calling for a switch to the Nasdaq to be considered, given the disappointing performance of shares over the last few years. Frustration appears to be being vented at the market, for not understanding Ocado’s true tech credentials. If rumours become reality this would be a big blow for the London Stock Exchange. However, there is no guarantee that US investors would give the company an easier ride. While the group’s impressive robotic systems for retailers are market leading, there are still big question marks about demand. Funding these cutting-edge customer fulfilment centres is also an expensive business. Ocado is still grappling with potential legal action with M&S over a withheld £190mn performance payment for the Ocado Retail business. Shifting a listing to New York instead, might see grumbles about high executive pay ease off, given US remuneration comparisons, but it won’t solve the company’s other challenges.
The departure of Mobico’s chief financial officer James Stamp, comes as no surprise given the accounting issues the company has been grappling with. Having to delay filing annual results is never a good look. Although some blame was put at the door of the German statistics office for changing indices used to calculate the recovery of energy costs, this was a considerable delay and it raises questions about whether there were deeper accounting problems afoot. These problems have piled on top of other challenges facing the company, which have conspired to push pre-tax profit down 36% to £92.9m, according to the long-awaited annual results, published today. A resilient labour market has been keeping the wage bill high and the cost of training school bus drivers in Norther America has been onerous. This is a weight the company is hoping to shed by selling off this part of the business. Sharp u-turns in policy also haven’t gone down well, particularly the launch and then abrupt closure of the Touromo brand in the UK, aimed at day trippers. Revenue growth shows signs of encouragement, but Mobico still faces an uphill journey to restore investor confidence.”
