There were mixed fortunes for global markets as US investors paused for breath after another week which has seen the Dow Jones and S&P500 scale to new record highs, and where China continued to fly on yet another stimulus announcement.
In the US, new home sales slipped by 4.7% in August, which tends to play into the Federal Reserve’s recent decision to cut rates by more than most had expected. The labour market will return to central focus today with the release of the weekly jobless claims number before attention switches to inflation tomorrow with the Fed’s preferred measure, the Personal Consumption Expenditure index, being revealed. Expected comments from Chair Powell later in the day could also provide some clues on the Fed’s current thinking, with the market consensus undecided between further cuts of either 0.25% or 0.5% at the next meeting in November. In the meantime, a tepid trading session on Wall Street did little to derail the progress of the main indices, where the Dow Jones remains ahead by 11.2%, the S&P500 by 20% and the Nasdaq by 20.5% so far this year.
China was again the primary driver of market rallies across Asia, where the authorities have come out with all guns blazing this week. Overnight there was an announcement of more stimulus in the form of a pledge to prop up the ailing economy with “forceful” interest rate cuts and adjustments to both monetary and fiscal policies. There was an additional commitment to remedy the situation within the beleaguered property sector, while the possibility of an injection of some $140 billion into its state banks was also teased. The moves over recent days have been in sharp contrast to the last few months, where an increasing investor clamour for more meaningful stimulus had apparently fallen on deaf ears.
The Chinese cheer washed onto UK shores, with a strong open propelled by some notable gains in the mining sector as the potential for higher demand and therefore commodity prices attracted some meaningful buying interest. The likes of Prudential (LON:PRU) and Standard Chartered (LON:STAN) also rode the wave given their Asian focus. The possibility of an even stronger opening rally was capped by the oil majors, where a combination of both broker downgrades and a weak oil price overnight following reports that Saudi Arabia could be increasing its output resulting in falls of more than 4% for both BP (LON:BP) and Shell (LON:SHEL). Nonetheless, the gains have led the FTSE100 to being ahead by 7.5% in the year to date, and within a tantalising 1.5% from its record high.
Diageo
In a very brief trading statement ahead of today’s AGM, Diageo (LON:DGE) reiterated its current challenges amid a global environment which has seen pressure on its premium brands as customers have traded down to cheaper alternatives.
The Latin American and Caribbean region has been a particular thorn in the side. Despite revenues which account for around 10% of the group total, the sharp decline of around 15% in sales as reported at the full-year results in July have had an amplified effect given the higher margin nature of the products there. Overall, any price hikes which the company introduced were unable to keep pace with the drop in volumes. The difficulties contributed to a 5% decline in underlying operating profit, and for the moment the group is maintaining that its expectations for the current trading year are unchanged,
More positively, the group has been taking measures to limit the effect of lower volumes such as inventory controls, while Diageo refers to a consumer environment improving as being a matter of when, and not if. In the meantime, the group benefits from a major global footprint, which offers diversification and an impressive portfolio of products, among which tequila and Guinness remain stars of the show in continuing to post double digit revenue growth. The warmth of the reaction to the update in opening exchanges also pointed to the fact that the group retains a loyal following.
Even so, the developments over the last year have taken the sheen from a stock traditionally regarded as a core portfolio constituent. The move towards zero-alcohol products is also something which the company is monitoring, and anecdotally the introduction of Guinness Zero is finding favour among a new younger generation in addition to the ongoing attraction of its flagship brand. However, the scale of the challenges ahead is reflected in a share price which has fallen by 20% over the last year, as compared to a gain of 8.4% for the wider FTSE100 and by 34% over the last two years. It therefore follows that until such time as an improvement in customer demand becomes evident, the market consensus of the shares as a hold is likely to remain in place.