- Confidence in UK economic growth fell by 19% between June and July according to the HL Investor Confidence index.
- FTSE 100 struggles to find sure footing as inflation concerns affect sentiment.
- Cautious start expected on Wall Street as more US bank earnings come into focus.
- Fresh ESG concerns loom for McDonalds as the company is hit by harassment claims in the UK
- Brent crude hovers around $78 a barrel.
- Ocado returns to profit for its retail arm, as lower prices lure in customers
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The FTSE 100 has shaken off some of the worries about a slowing Chinese economy but inflation concerns are still hovering and investors are apprehensive about the prospects for the UK. However, Ocado’s retail arm returning to profit has put a bit more of a spring in the step for the index in early trade.
It’s not surprising that the FTSE is finding it hard to regain a firmer footing, given that investor confidence in UK economic growth has fallen by almost a fifth compared to last month, according to the HL Investor Confidence Index.
With inflation shocking in its stubbornness, the Bank of England opting for a super-size interest rate rise, and more hikes expected, investors are increasingly concerned about the knock-on effect on the wider UK economy. The global picture is for now a background worry, even though US Treasury Secretary Janet Yellen has also warned that China’s slowing growth will cause ripple effects around the world. Brent crude hasn’t been able to hang onto brief gains made after data showed a tightening of US oil supplies, with expectation of slowing demand as China decelerates keeping a lid on prices.
Caution is set to dominate trading in London ahead of tomorrow’s latest reading on consumer prices. Headline inflation is expected to limp downwards, but worries will be creeping back in about food prices staying sticky, with Russia exiting the Black Sea grain deal, and refusing to guarantee safe passage for ships exporting wheat and corn. Although wheat futures have retraced some of yesterday’s jump, on hopes the deal may be revived in the months to come, they are still 11% higher compared to the level being traded at the end of May.
After a spritely start to the week there is set to be a bit more wariness on Wall Street ahead of more corporate results, with financials in focus including Bank of America and Morgan Stanley. JP Morgan set a high bar on Friday with results beating expectations. Bank of America is expected to report some robust numbers given that the consumer banking business remains strong, and credit conditions haven’t markedly deteriorated. With inflation trotting down closer to target, and economic indicators showing resilience, there will be hopes less money will have to be set aside for bad loans. Although Morgan Stanley’s investment banking business is set to continue to show weakness, its wealth management business could once again be a bulwark, helping offset falling fees.
McDonalds has been caught in the eye of another ESG storm, this time due to harassment allegations at a number of its restaurants in the UK. The fast-food giant has already been fighting off efforts by billionaire activist Carl Icahn to improve the treatment of pigs in its supply chain. Now, its social and governance credentials are under the spotlight over the way complaints by young staff members, about how they were abused, were repeatedly swept under the carpet. McDonalds has been forced into crisis mode by this wide-reaching investigation, and although it’s apologised for ‘falling short’ it’s clear that its franchise model in this respect leaves a lot to be desired. Although the model is a highly efficient operation in terms of profits, with McDonald’s off the hook for many of the typical restaurant running costs, this arms reach approach clearly is not robust enough everywhere to ensure there is enough support for staff members, if individual management teams fail in their HR responsibilities.’’
Ocado returns to retail profit
Sophie Lund-Yates, lead equity analyst:
‘’Ocado has returned to profit in its retail business on an EBITDA level, thanks in part to efforts to cut prices which has helped coax shoppers back. Ocado is a useful bellwether for the UK’s middle classes, and the extent of action needed to reinvigorate sales speaks to the significant challenges being faced in all corners of the economy. Pressure on Ocado’s overall margins is significant, especially because of efforts to improve its relationship with Marks & Spencer, which is damaging the bottom line.
Ocado’s shares have lifted 7% though on news that costs are under control for now, with runaway capital expenditure a thorn in the group’s side when it comes to the construction of its high-tech customer fulfilment centres. The current economic environment makes it more difficult to entice grocery chains to sign up to Ocado’s techy fulfilment systems – with supermarket margins already being squeezed as they walk the tightrope between higher costs and not alienating their core customers with unreasonable price hikes. To that end, it’s the speed and scope of future deal-making that’s under the microscope where Ocado’s concerned, although recent progress shouldn’t be knocked.
