US markets finished mixed yesterday, putting to one side a big jump in the Dow which was largely driven by a jump in banking stocks on the back of a rise in US bond yields, with the two year yield hitting 2.8% and the 10-Year yield near to its highest levels this year at 3.06%, and managing to sustain that level. The rise in borrowing costs wasn’t just confined to US markets with the German bund pushing up to multi month highs as did UK gilt yields.
For now stock markets appear to be largely indifferent to this gradual rise in borrowing costs, with a fairly subdued session in Asia today, while the recent rebound from the lows this month in Europe may find it more difficult to sustain if yields continue their upward March, particularly in the US.
On the company’s front, drinks giant Diageo (LON:DGE) issued a trading statement ahead of its AGM today, stating that it would see a significant currency hit from recent emerging market turmoil, which in turn would translate into a negative impact of £45m on operating profits and £175m in terms of net sales. In terms of overall sales volumes demand remains good more globally, but this hasn’t been enough to stop the shares trading sharply lower. This suggests that investors need to be prepared for warnings from companies with similar emerging market exposure. As an indicator of things to come this is a timely warning to investors that the effects of higher US rates and trade wars could prompt similar warnings in the coming months.
In the mining sector Rio Tinto (LON:RIO) shares have seen a decent rebound in the last few days as markets price out the prospect of a further deterioration in trade tensions, and this morning the company outlined its plans to buy back another $3.2bn worth of its shares in respect of the recent disposal of its coal assets.
The Swiss National Bank is unlikely to be comfortable with the recent rise in the Swiss francin the last six months, however there isn’t much they can do about it given the current environment. Today’s meeting left interest rates at a record low of -0.75% with little prospect of an increase in the near future.
The Norges (Central Bank of Norway) bank is also set to meet today and is widely expected to raise rates from 0.5% to 0.75% later this morning, the first rise in rates since 2011, with most of the attention likely to be in the guidance as to whether it will be a one off move or whether we can expect to see another two or three in the coming months. Any indication of a softer steer on guidance could see the Norwegian Krone slip back.
In an insight into the beleaguered UK construction sector Kier Group (LON:KIE) is the latest UK Company to show that UK construction has more than recovered from this year’s Carillion inspired turbulence. The company reported profits before tax of £106m, while revenues also improved to £4.2bn while a resilient order book of £10.2bn pointed to an outlook which is solid. In a way the Carillion saga could well have served as a cathartic reminder to the sector that if you look after the pennies, and by definition the margins, the profit should take care of itself. Let’s hope it’s a lesson that doesn’t get unlearned.
Yesterday’s big jump in UK inflation in August could well be bad news for today’s release of the latest retail sales numbers for the same month.
Increases across the board in a number of key areas including fuel prices, clothing and other transport and recreational culture costs has the potential to take some of the heat out of consumer spending after a big jump of 0.7% in July, which was largely driven by the hot weather and World Cup. Expectations are for a slowdown in retail sales for August by -0.2%, however if consumers feel more squeezed that could come in as an even bigger decline.
Much will depend on wages and there is some good news there if the 3.1% rise seen in July is any guide. If that pace of wage growth was sustained into August then we might not see such a slowdown, however with retail prices at 3.5%, the overall effect is likely to be small.
The pound did get a lift from yesterday’s inflation numbers and the rebound more than justified the Bank of England’s decision to raise rates in August, however they only have themselves to blame when it comes to the underlying inflationary pressure within the UK economy.
The misguided decision to cut rates in August 2016 exacerbated an already existing inflationary shock and as such has given UK consumers much less headroom in terms of their ability to absorb further increases in prices.
In any case the pound continues to be buffeted by the political winds surrounding Brexit, after it was reported that the UK and EU leaders were no further forward with respect to resolving the Irish border issue, as events in Salzburg suggest that a deal remains as far away as ever.
Dow Jones is expected to open 40 points higher at 26,445
S&P500 is expected to open 1.5 points higher at 2,909.5
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