FTSE 100 slides again on higher UK rate outlook

It’s been another disappointing session for the FTSE 100, with weakness in real estate as well as the basic resource sector as it heads for its 4th successive daily decline, and its worst run of losses since early July.

Europe

With interest rates likely to stay higher for longer, after core CPI remain unchanged in July, property search website Rightmove is under pressure along with commercial real estate companies Land Securities and Hammerson. Banks are also starting to lose the benefit accorded to them from rising rates as higher rates for longer threatens to squeeze their margins and increase the pressure to pay savers more. 

With the England’s women team making it to the World Cup Final for the first time ever, bookmaker Entain revealed that women were betting in record numbers compared to the previous tournament in 2019, as well as the Euros in 2022. Perhaps this helps explain why the share prices for both Entain and Flutter Entertainment are both lower as the company gets set to pay out on the prospect of an England World Cup win.

UK construction company Balfour Beatty shares have been hammered despite reporting a 9% rise in H1 revenue to £4.5bn, and an increase in underlying pre-tax profit to £97m. The share price fall appears to have been driven by that fact that the order book declined again in Q2 and is now £1bn lower than it was at the end of last year at £ 16.4bn. We also saw lower margins in support services weighing on profitability there, along with disappointment that full year guidance was left unchanged.

The insurance industry has seen a big rise in premiums over the last 12-months whether it be house and contents insurance but motor vehicle premiums as well and today’s H1 numbers from Admiral appear to reflect that, with the shares being the best performers today on the FTSE 100, which in turn looks to have given a lift to Direct Line’s share price. H1 revenues rose 21% to £2.24bn with revenue from insurance rising 14% to £1.61bn. The motor insurance business delivered a profit of £298m in the first half, with group profits before tax rising 4% to £233.9m. The number of UK motor customers appeared to decrease in response to higher rates which were raised due to higher claims. Admiral has said it will pay an interim dividend of 51p per share, as well as a special dividend of 13p per share.

Aviva shares have seen a positive reaction in contrast to its peers in the wake of the release of its H1 numbers. A profit of £377m contrasted with a £198m loss a year ago, helped by a 12% rise in gross written premiums of £5.27bn. The insurer also saw growth in its wealth and retirement business with inflows £4.3bn, while saying it expects to deliver group operating profit growth of between 5% and 7% in 2023. 

B&M European Retail was one of the better performers yesterday and has continued to edge higher on speculation that it might look at buying some of Wilko’s distressed assets to add to its store portfolio.

Marks & Spencer continues to make gains on the back of yesterday’s positive trading update after Deutsche Bank and Barclays updated their price targets and looks on course for a return to the FTSE100. 

US

US markets opened cautiously mixed after their losses of yesterday and ahead of the release of today’s Fed minutes. It’s not clear what extra illumination today’s minutes can offer investors given that they are already quite dated and various Fed policymakers have had plenty to say since that July rate hike was implemented.

Tesla has once again reduced the prices for its cars in China this time reducing the prices of its Model S and Model X vehicles by around $10,000, after cutting prices on its Model Y SUV over the weekend.

Target shares have struggled over the past quarter, the shares falling to their lowest levels since mid-2020 back in June. Over the past few months there have been several cuts to guidance, with management warning of “shrinkage” impacting its margins at its last set of numbers, which is a euphemism for theft. 

Today’s Q2 numbers have seen revenues fall to $24.38bn, falling short of expectations, although profits saw a solid increase to $1.80 a share, comfortably beating the top end of forecasts of $1.70 a share, with the shares rallying strongly on the open. Today’s rebound comes across as slightly counterintuitive given that Target downgraded its full year forecast from $7.75 to $8.75 to between $7 and $8 a share. The retailer also projected Q3 profits of between $1.20 and $1.60 a share, although it is noteworthy that we have seen a decent improvement in operating margins, which would appear to account for the better profit numbers.

Coinbase shares are also doing well after the company won approval to sell futures directly to retail clients in the US.

FX

The pound has edged higher after UK CPI for July slowed in July to 6.8% as the lower energy price cap and slower food price growth helped bring the headline rate lower. Core prices remained steady at 6.9%, with services driven inflation remaining sticky.

Breaking down the numbers we saw services inflation rise to 7.4%, from 7.2% the highest level since 1992, driven largely by increases in health as well as restaurants and hotels inflation. Food price inflation slowed to 14.8% from 17.3%, with today’s numbers doing little to mitigate the risk that rates are likely to go up again when the Bank of England next meets in September.

The New Zealand dollar is also outperforming after the RBNZ kept rates unchanged at 5.5% and reiterated that they would stay there for quite some time, tweaking their forward rate forecasts in the process.    

Commodities

Crude oil prices appear to be treading water after two days of declines having ticked to one-week lows yesterday. The retreat from last week’s highs has been driven by concern over future demand in China as the economy there struggles with weak domestic demand. With reports emerging that China is reportedly buying Iranian oil in large amounts, it could be argued that demand for higher priced Brent is unlikely to be a priority when the domestic economy is so weak.

Gold prices are currently languishing near to one-month lows and support at $1,895 ahead of the release of today’s Fed minutes. With US yields continuing to look resilient the scope for further gold price weakness is likely to remain high. 

Volatility

Nvidia saw an active start to trade on Tuesday as the market reacted to news of analyst upgrades ahead of earnings. The gains however were broadly unsustainable, with the stock closing barely up on the session. One day vol printed 78.44% against 61.19% for the month.

There was a resurgence of interest across a few alt coins, with some notable downside moves being recorded. EOS lost around 5% in a matter of minutes; a pattern repeated across several other digital assets. One day vol on EOS stood at 108.68% against 47.59% for the month.

The FTSE 100 came in as one of the most active equity indices as markets reacted to news that strong wage growth could pave the way for yet more rate hikes from the Bank of England. The underlying dropped by more than 1.5%, delivering one day vol of 13.48% against 11.44% for the month.

That rate hike prospect also injected some life into cable, with the Pound against the US Dollar seeing some active trade. After a mixed session, the pair closed a little higher with one day vol printing 9.09% against 8% for the month, but momentum was even more pronounced on Aussie Dollar/Dollar. The release of the latest RBA meeting minutes proved instrumental here, with one day vol on the pair standing at 14.18% against 11.2% for the month. 

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