- FTSE 100 opens flat as caution reigns on markets.
- Brent Crude erases some gains amid higher crude stockpiles, trading around $75 a barrel.
- Cautious consumers have soured sales at Starbucks with appetites waning for expensive frothy coffees.
- Deutsche Bank has turned a significant corner, swinging back into profits in the third quarter.
- Barratt Redrow has released a more optimistic forecast, indicating that buyer confidence is being built up thanks to cheaper mortgages.
- Energy equipment and services company Baker Hughes’ third quarter revenue come in slightly below expectations.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’Caution is reigning on financial markets amid growing expectations that borrowing costs might come down slower in the US, the world’s largest economy, while political uncertainty and the threat of conflict spreading in the Middle East is also keeping investors a little more wary. The FTSE 100 has opened flat as speculation continues to swirl about the tax changes coming in the UK Budget. The result of the US Presidential election still looks to be on a knife-edge which will be playing on minds.
Brent Crude has erased some of the week’s gains after a larger than expected stockpile built up in the US last week. The American Petroleum Institute data indicated that crude inventories came in almost double than forecasts at 1.6 million barrels. Economic growth prospects in China are also being closely monitored with the latest stimulus plans helping put a floor under prices but there is still ongoing concern about future demand in the country. While welcome, this week’s reduction of key lending rates in China highlights the ongoing need for stimulus given the extent to which real estate troubles have filtered through to the wider economy.
Cautious consumers have soured sales at Starbucks with appetites waning for expensive frothy coffees. In China, sales have dropped off dramatically, down 14% but the big worry for the chain is its performance in the United States, where comparable sales fell 6%. Pricey lattes are among the casualties of the belt-tightening environment, as households grapple with higher bills than they’ve been used to and elevated borrowing costs. New innovative sweet syrup concoctions aren’t enough to lure more customers through the doors and Starbucks has pledged now to fundamentally change its strategy. Getting the customer experience right will be crucial, given the competition from self-serve machines and home brews. Consumers are likely to pay more for a personalised service and a cheery chat from a barista, and a soulless experience is likely to encourage more to get their caffeine fix at home or work instead.
Deutsche Bank has turned a significant corner, swinging back into profit in the third quarter, with results beating expectations, with share buy backs now on the cards again. After a disappointing performance in Q2, the bank is starting to pluck the fruit of its big cost-saving drive launched in February which aims to reduce roles by 3,500 by next year. It’s also drawn a line under the long-running legal dispute over allegations it underpaid in its acquisition of Postbank, having settled with claimants in August. This meant it was able to release some of the hefty litigation provisions it had set aside for the case, helping boost profits. Its proposition of helping clients navigate uncertain economic times is paying off, with commissions and fee income up 5% a year, with net inflows of €27 billion across its Private Bank and asset management business. This business growth offers resilience at a time when European banks are operating in an environment of sharply declining interest rates compared to their US peers.
Barratt Redrow has released a more optimistic forecast, indicating that buyer confidence is being built up thanks to cheaper mortgages becoming available. House prices have begun rising again but better deals from brokers mean affordability has improved which is filtering through brighter prospects for business. Barratt’s last set of full year numbers were a painful read with completions dropping sharply, and this update will provide solace for investors. With more here’s my colleague, equity analyst Aarin Chiekrie:
“In the first update since the dotted line was signed on Barratt’s acquisition of Redrow, the enlarged group signalled that it’s got big plans ahead. Together, Barratt Redrow expects to deliver between 16,600 and 17,200 new homes this year, with plans to build that figure up to 22,000 over the medium term, making it a serious force in the market. These will be spread across different geographies and with three differentiated brands under its umbrella, it’s able to meet the needs of different types of buyers at various price points.
Sales rates are well ahead of the prior year, and there’s a strong landbank ready to be unleashed when the housing market recovers. Markets are pricing in interest rate cuts at every Bank of England meeting out to March 2025, which should ease mortgage availability and affordability pressures, and Barratt Redrow looks well placed to be buoyed by the rising tide.
The enlarged group hopes to deliver at least £90mn of cost savings by trimming the fat on overlapping processes. If operations can be streamlined and new homes delivered as expected, there’s plenty of opportunity for profits to rebound over the medium term. But as with any merger, there will be challenges along the way.”
Energy equipment and services company Baker Hughes’ third quarter revenue come in at a resilient clip – rising at 4% but results still came in slightly below expectations as my colleague Derren Nathan, head of equity research explains:
‘’’Energy equipment and services company Baker Hughes’ third quarter revenue came in a fraction shy of guidance, growing modestly by 4% to $6.9bn. But strong pricing and cost discipline saw underlying cash profit (EBITDA) continue its strong growth trajectory, rising 23% to $1.2bn, on track for a full year outcome of around $4.5bn. New orders however disappointed, albeit against a very strong comparative. But despite a 22% fall in intake, the orderbook remained unscathed at $33bn. It means the company has headroom to accommodate some lumpiness in ordering activity. This tends to ebb and flow with commodity prices and geopolitical tensions which can affect the timing of clients’ investment plans.
But within both of its divisions there were some key awards of note, including the largest order of Integrated Compressors to date for the Margham Gas storage facility in Dubai, providing stability to Dubai’s energy supply by strengthening the system’s ability to switch between natural gas and solar power. In Oil Field Services & Equipment contracts to supply Petrobas with 43 miles of flexible pipe systems in Brazil’s Santos Basin, demonstrates the company’s ability to capture some of the rising investment in offshore exploration whilst demand for solutions to boost efficiency at older fields was strong.
Overall, Baker Hughes is well placed to meet energy companies changing needs through the energy transition. That means it should benefit from structural growth drivers that are less sensitive to the macroeconomic environment. Growing levels of service revenues for the installed equipment base as well as a drive to introduce digital data driven solutions both in traditional oil field management as well as future facing technologies such as carbon capture should also help on that front. There’s plenty of reasons for investors to be confident about the company’s future, but if order weakness persists into the next quarter that’s likely to set off some alarm bells. Shareholders will also be keeping a close eye on the forthcoming US presidential election. Onshore drilling in American shale basins has slowed of late. A Trump win could well see a splurge of new drilling permits. But on the flip side the company is a sector leader when it comes to new energies, which means its in a better place than many if Harris takes the White House. ‘’
