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LONDON MARKET MIDDAY: Stocks sink on conflict and US rate worry
Equities in London were firmly in the red Tuesday afternoon, with market confidence knocked by geopolitical tensions and US interest rate concerns, as a hat-trick of cuts by the Federal Reserve this year looks an increasingly distant prospect.
The interest rate picture in the UK was muddied by the latest batch of jobless data. The unemployment rate rose, though pay growth remained sticky, giving the Bank of England food for thought.
The FTSE 100 index slipped 111.04 points, 1.4%, at 7,854.49. The FTSE 250 fell 284.34 points, 1.4%, at 19,414.55, and the AIM All-Share was down 8.81 points, 1.2%, at 741.47.
The Cboe UK 100 was down 1.2% at 785.41, the Cboe UK 250 was 1.7% lower at 16,820.94, and the Cboe Small Companies was down 0.4% at 14,792.30.
In European equities on Tuesday, the CAC 40 in Paris lost 1.2% and the DAX 40 in Frankfurt plunged 1.4%.
Stocks in New York are called to open mixed. The Dow Jones Industrial Average is called 0.3% higher, but the S&P 500 down 0.1% and the Nasdaq Composite 0.2% lower.
‘Sentiment is shaky at best right now with heightened geopolitical tensions in the Middle East coming alongside increased concerns that the Federal Reserve may opt to maintain interest rates at the current levels for some time yet,’ Scope Markets analyst Joshua Mahony commented.
Against the dollar, sterling fell to $1.2446 early Tuesday afternoon in London, from $1.2458 on Monday. The euro fell to $1.0628 from $1.0636. Against the yen, the dollar traded at JP¥154.56 early Tuesday London time, up from JP¥154.32 at the European equities close on Monday.
Scope’s Mahony added: ‘While tomorrow’s inflation report will undoubtedly provide financial markets with a greater understanding of the timing around the first Bank of England rate cut, today’s saw a sharp jump in UK unemployment that highlighted the negative implications of keeping interest rates elevated for an extended period.
‘Unfortunately, wages remain well above the levels that the BoE would have desired, although that gap between the 5.6% average earnings figure, and 3.4% consumer price inflation does at least ensure that the standard of living should be improving. All eyes now turn to tomorrow’s UK inflation report, with big questions over whether the recent rise in energy prices will stifle the journey back down to 2% inflation.’
According to the Office for National Statistics, the UK jobless rate picked up to 4.2% in the three months to February from 4.0% in the three months to January. January’s three-month reading was upwardly revised slightly from 3.9%.
According to market consensus cited by FXStreet, a jobless rate of 4.0% was expected for the period to February.
The ONS noted average growth in regular earnings, so excluding bonuses, cooled slightly to 6.0% in the three months to February from 6.1% in the same period to January.
Including bonuses, average earnings rose 5.6%, in line with the growth seen in the three months to January, and above consensus of a 5.5% climb.
Data out of China showed the nation’s economic growth in the first quarter beat market expectations.
According to the National Bureau of Statistics, China’s gross domestic product expanded by 5.3% annually in the first quarter of 2024, beating FXStreet-cited market consensus of 5.0%.
However, industrial production data undershot expectations, growing 4.5% on-year in March, compared to consensus of 5.4%. Retail sales rose just 3.1% year-on-year last month, compared to consensus of 4.5%.
SPI Asset Management analyst Stephen Innes commented: ‘In summary, while China’s headline GDP figure offered a glimmer of optimism, the underlying weakness in domestic demand and industrial activity suggests that challenges persist for the world’s second-largest economy. Investors remain cautious amid uncertainties surrounding the pace and sustainability of China’s economic recovery.’
Brent fell back below the $90 a barrel mark, and gold was below its record level of over $2,431 an ounce. Both were higher than they were at the time of the London equities close on Tuesday, however, and Ebury analyst Matthew Ryan said they could rise further in the event of another escalation in the Middle East.
A sizeable escalation ‘would likely see a flight to safety in markets, whereby investors flock to the safe-havens at the expense of high-risk assets’, Ryan said.
‘The threat to global oil supply would also likely trigger a sharp move upwards in oil prices, which could comfortably jump above $100 a barrel should investors fear a wider regional war,’ the Ebury analyst added.
A barrel of Brent oil fetched $89.67 early Tuesday afternoon London time, up from $89.20 at the time of the London equities close on Monday. Gold rose to $2,369.98 an ounce, rising from $2,348.01.
In London, there was a slew of M&A activity on Tuesday.
DS Smith agreed to a takeover from New York-listed International Paper.
The bid values DS Smith, the London-based paper and packaging company, at around £5.8 billion on a fully diluted basis, and its enterprise value at around £7.8 billion.
The deal values each DS Smith share at 415p.
The stock fell 1.9% to 401.90 pence. Mondi, also a DS Smith suitor, gave back 0.6%. Earlier this month, Mondi’s ’put up or shut up’ deadline was extended to the close of play on April 23.
TClarke jumped 29% to 161.13 pence as the engineering services company agreed to a £90.6 million takeover from natural gas supplier and metering provider Regent Gas.
Regent will pay 160p per TClarke share, and shareholders also stand to receive the final dividend of 4.525p.
‘In addition to presenting an attractive premium for TClarke shareholders, this transaction presents tremendous opportunities for TClarke to chart its own course as part of a larger group with significant financial strength, flexibility and autonomy as TClarke continues to pursue its long-term strategies that will drive sustainable growth and innovation,’ TClarke Chief Executive Mark Lawrence said.
Hostmore added 5.5% as it agreed to combine with its own franchisor TGI Fridays Inc in a deal with an enterprise value of £177 million. The deal will see Hostmore shareholders owning a 36% stake in the combined unit, with current shareholders in TGI Fridays owning the remainder.
Casual dining chain TGI Fridays is currently owned by TriArtisan and MFP Partners. Because of the size of the stake in the combined company owned by TriArtisan and MFP, a waiver to rule 9 of the UK takeover code, which relates to mandatory offers, would need to be waived for the transaction to be completed. Completion is expected in the third-quarter.
The enlarged firm would be listed on London’s Main Market.
In addition, Hostmore said its first-quarter like-for-like revenue fell 7% on-year, ‘due principally to reduced consumer demand across the sector’.
Dr Martens plunged 30% after a profit warning. The Northamptonshire, England-based boot maker said a worse case scenario would see pretax profit in the year to March 2025 of around one-third of the level in the year just gone.
It expects US wholesale revenue will fall by double-digits in financial 2025. The decline in wholesale has a significant impact on profitability, it explained, with a base assumption being in the region of a £20 million pretax profit impact year-on-year, assuming no meaningful in-season re-orders.
Dr Martens also expects a £35 million headwind from inflation where it is seeing single-digit inflation in its cost base but leaving selling prices unchanged.
The company also expects to continue to require the additional inventory storage facilities, and therefore the majority of the £15 million of extra costs incurred in financial 2024 are expected to repeat in 2025.
Chief Executive Kenny Wilson said, ‘The FY25 outlook is challenging, and the whole organisation is focused on our action plan to reignite boots demand, particularly in the US, our largest market. The nature of US wholesale is that when customers gain confidence in the market we will see a significant improvement in our business performance, but we are not assuming that this occurs in FY25.’
‘We have built an operating cost base in anticipation of a larger business, however with revenues weaker we are currently seeing significant deleverage through to earnings.’
Dr Martens said Wilson will step down and that this ‘will be his final year’ at the helm.
Wilson will be succeeded by Ije Nwokorie, currently chief brand officer.
Dr Martens shares floated at 370 pence each but the stock has plunged 82% since then.
Still to come on Tuesday is a US industrial production reading at 1415 BST.
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