Today's Markets: Stocks climb as focus shifts from inflation to slowdown

Stocks rise but UK consumer confidence falls

June 24, 2022

Sentiment steadies
Recession fears growing - UK consumer spending slides
Commodity prices easing

European stocks rose in early trade on Friday after a solid session in Asia which followed an up day for Wall Street. Stocks in London and Paris rallied as much as 1 per cent, whilst Frankfurt was about half of one percent higher for the session. The S&P 500 rallied 1 per cent and is headed for a weekly gain of 3.3 per cent, with the Dow Jones up 2.6 per cent and the Nasdaq Composite outperforming with a rise of 4 per cent. This gain for tech seems to be a yield play. European stock markets are headed for much smaller weekly gains but remain in the green as of this morning. Increasing worries Russian will cut off gas supplies as it flexes its muscles with flows down a lot lately. Head of German utility RWE said European solidarity will come under “significant stress” if the bloc cannot sort out how to prioritise gas supplies if Russia cuts them off. US nat gas yesterday extended losses apparently on cooler temperatures forecast in North America.

Recession fears: commodities down, yields down. Contrary trade saw US tech bid on lower yields, whilst energy and basic materials were down again. 10yr Treasury close to breaching 3 per cent with 2s 20bps below indicates the market is worried about slower growth over the longer term but confident the Fed will hike to neutral – around 3 per cent or so - this year, and then possibly start cutting in 2023. Rates have moved sharply to wipe out all the extra yield since the hot CPI report and the Fed’s 75bps hike. Recession fears mean the market has dialled back its expectations for just how the far the Fed will go, which is helping growth stocks to mount a defence. PMIs are declining and lower commodity prices has the market more focused on slowdown than searing inflation, which seems on-balance net positive for stocks. But this masks lots and we don’t know how far earnings estimates need to come down… arguably the multiple compression we have seen points to the market already pricing in lower earnings growth, not just a higher risk-free rate. Frankly the give-back in yields looks complacent but there might be more of it before bonds are sold again.

Brexit Britain: UK consumer confidence fell to the lowest on record in June. The GfK survey declined one point to –41, the lowest since the series began in 1974. To put this in context, it’s worse than at time during Covid, or the financial crisis. The reason is simple enough – stagflation. It’s a pocketbook/kitchen table issue in inflation – can I pay my energy bill? Can I pay for food? These are not issues that a rich western country like ours should be facing and point to systemic policy failure by governments of all hue. On which note, Boris Johnson’s confidence must have been shaken (I joke, it’s unshakable) by stinging by-election losses in Yorkshire and Devon. It underlines that the country is sick of this government and BoJo has become an election liability for the Tory party. There will be a lot of very worried MPs this morning... still amazes me the confidence was held before these by-elections.

Cost of living: Retail sales fell by 0.5 per cent in May led by a 1.6 per cent decline in food sales. The ONS said the reduced spending in food stores seems to be linked to the impact of rising food prices and the cost of living. There would have been a shock from the April energy price rise for many that led to belt-tightening. Retail stocks are under pressure and further dragged down by Germany’s Zalando slashing guidance.

Meanwhile, there is maybe some good news on the inflation front as commodity prices are dropping. Brent crude is still holding the trend support I showed yesterday, but it remains under pressure and around 20 per cent off the March peak. Natural gas was sharply lower again yesterday, back to $6, down by almost 40 per cent in a little over two weeks. Copper down hard again to lowest since February 2021. Similar story in softs with wheat and sugar back to their lowest since March 1st. Easing of commodity prices would clearly be a massive boost to the Fed and other central banks trying to battle inflation. This decline in commodity prices, combined with lower bond yields, seems to be underpinning this latest market bounce, though I don’t believe this is ‘the’ bottom. A weekly close above 3,800 for the S&P 500 would be constructive and indicate the rally has a bit more to run before it’s sold again.

Companies

Barclays buys Kensington for £2.3bn

Barclays (BARC) has completed the purchase of Kensington Mortgages for £2.3bn as the troubled bank seeks to expand its footprint in the residential mortgage market. Kensington is a privately owned mortgage lender that holds a 0.4 per cent market share of the total UK mortgage market, with £11bn of loans under management. The company is entirely present in specialist niches – self-employed workers, young professionals, flexi-fixed term – and would complement Barclays’ Woolwich business, which caters mostly to the mainstream saver/borrower market.

The deal is interesting from an investor perspective in that it might be a sign that Barclay’s management will now pay more attention to its core lending business, after a year of dealing with distractions and mishaps at its perennially troublesome investment banking arm. The share price has underperformed and had been heading towards two-year lows prior to this deal being announced. Though the loan amounts aren’t material to the bank’s core balance sheet, it gives Barclays the opportunity to develop more specialist lending lines. JH

Cost of living hitting food spending

In bad news for the food retailers, the latest retail sales data from the Office for National Statistics’ (ONS) shows that consumers in Great Britain are cutting back on food spending as the cost of living crisis continues to bite.

Food store sales volumes fell by 1.6 per cent in May, said the ONS, with total retail volumes down by 0.5 per cent. This puts food volumes 2.4 per cent below pre-pandemic levels. The ONS said that “reduced spending in food stores seems to be linked to the impact of rising food prices and the cost of living”, with almost half of people recently surveyed by the statistics body saying that they bought less food in the last two weeks when shopping.

Silvia Rindone, UK&I retail lead at EY, said that “we are now seeing rising food prices and the cost of living begin to affect consumer spending at all levels of the socio-economic scale.”

Retailers have warned about the impact of the cost of living crisis and soaring prices on trading in recent updates and results. Tesco (TSCO) said that its retail sales fell by 1.5 per cent in an update to 28 May, while J Sainsbury (SBRY) and Marks and Spencer’s (MKS) have also flagged pressures on margins and volumes due to the inflation and cost environment. CA

Essentra boxes off £312mn sale of packaging arm

Components maker Essentra (ESNT) is to sell its packaging business to Austrian company Mayr-Melnhof for £312mn.

Essentra said it would use the proceeds to strengthen its balance sheet and to top up contributions to its defined benefit pension schemes.

Essentra placed two of its three divisions – packaging and filters – under strategic review last year with the intention of focusing on its core components business.

The three divisions are similar in size, although packaging is the largest. It contributed 38 per cent of the group’s £960mn of sales last year and held about 40 per cent of its total assets of £1.28bn.

The sale, which is expected to complete in the fourth quarter, does not include the packaging arm’s operations in India, which account for less than 1 per cent of its revenue. Options for this business are being assessed separately.

The review of its Singapore-based cigarette filters business is ongoing and Essentra said it would decide on the best use of its cash once this concludes, accounting for the need to maximise shareholder value “after allowing for sufficient flexibility of the components business to pursue value creating opportunities”. MF

Neil Wilson is the Chief Market Analyst at markets.com