- UK markets open higher, European inflation expected to ease
- US markets set to give back some of yesterday’s gains
- Asian stocks rise despite weak survey data
- TSMC CEO calls out robust AI demand
- Oil rises on supply concerns
- BATS and Pennon eye up improving profits
Matt Britzman, senior equity analyst, Hargreaves Lansdown:
“UK markets have opened with a small spring in their step, with the FTSE 100 up 0.25%. British American Tobacco and Pennon were among those reporting results this morning, both signalling positive profit momentum on the horizon. Broader European markets are joining in, with inflation data out today that’s expected to show further easing – an outcome that would strengthen the case for further rate cuts.
Asian stocks pushed higher, seemingly ignoring a disappointing Chinese manufacturing survey that showed activity contracting in May. The data highlighted the ongoing toll of the trade war with the US, yet markets held out hope for a potential phone call this week between the US and Chinese leaders. That optimism didn’t extend to commodities, with copper sliding more than 2%, reflecting a more cautious view of global manufacturing demand.
US markets managed to shake off a weak opening and finish with a flourish last night. But with earnings season over, it’s trade talks and economic data that’s driving things, and that tends to be a volatile backdrop in today’s world. Futures markets point to a reversal of most of yesterday’s gains, with investors looking for clues in the data as to whether the US economy is starting to feel the effects of trade disruption.
Despite some uncertainty, the AI trade is still going strong. TSMC’s CEO admitted this morning that tariffs are a factor, but demand remains so high that supply can’t keep up. That’s more good news for Nvidia investors, who are riding a wave of momentum after last week’s solid earnings report. Tariffs are likely pose a short-term risk, but underlying trends are pointing in one direction, and the AI train has well and truly left the station. Nvidia shares are managing to hold on to yesterday’s gains despite a weaker broader futures market.
Brent crude oil rose to around $64.80 a barrel this morning, marking its second day of gains as tensions around the world raised concerns about tighter supply. Peace talks between Russia and Ukraine made little progress, while Iran signalled it might reject a US nuclear proposal. At the same time, a wildfire in Canada disrupted production, and OPEC+ chose not to ramp up output more than it already had.“
Derren Nathan, head of equity research, Hargreaves Lansdown:
“The rate of smokers stubbing out their cigarettes for good in the US looks to be accelerating, with industry volumes falling 9% so far this year. Against this backdrop, British American Tobacco’s guidance of a return to growth and profit in this key market this year should give investors some comfort, as a renewed commercial focus sees it grab value share in more premium products. But globally, it’s a more competitive picture, with the group struggling to maintain both volume and value share.
In new categories, continued competition from illegal vapes in North America means that growth in this segment has been at best smouldering, in the low single-digit range for the first half. The group’s turning its attention to oral pouches, which don’t face these same headwinds, but there are some doubts as to whether the market for its Velo brand is large enough to move the dial. Overall, there have been enough positives to nudge up full-year sales growth guidance to 1-2%, but with underlying profit guidance unchanged, it’s unlikely to light a fire under the share price. The share buyback for the year has also been increased slightly from £0.9bn to £1.1bn, but that’s down to the continued sell down of its stake in India’s ITC rather than a step change in operating performance.”
Aarin Chiekrie, equity analyst, Hargreaves Lansdown:
“Pennon managed to keep revenue streaming in last year, with the acquisition of SES Water helping the full-year total float 15% higher to £1.0bn. And with Pennon accepting the regulators’ price review, customers’ bills look set to continue growing. Markets are currently forecasting this year’s total to buoy to a new high-water mark of £1.2bn, up a further 14%.
The top line growth should help to fund Pennon’s mammoth investment plans, with the group required to spend £3.2bn fixing and upgrading its water networks over the five years to March 2030. Pennon’s made good early progress in this area, with record levels of capital expenditure last year, as public scrutiny on the sector has been mounting due to pollution of rivers and lakes. While it was pleasing to see early progress on this front, with the overall number of pollution incidents falling year on year, the increased investment weighed on profitability last year.
In the long run, these infrastructure projects are expected to be a net benefit, increasing the group’s asset base, which plays a role in its allowed revenue and therefore earning power. As a result, profitability is set to rebound sharply this year. But until Pennon cleans up its act on the pollution front, investor sentiment around the company is likely to remain murky.”
