Proactive Investors -
- FTSE 100 down 20 points to 8205
- GSK (LON:GSK) tumbles on US vaccine restriction
- DS Smith tops risers as takeover confidence grows
Why are markets down?
Stocks are struggling for direction this week, says Kathleen Brooks, research director at XTB, with the FTSE 100 down 0.8% over five days, the S&P 500 down 0.16%, the Nasdaq is lower by 0.32% and the Eurostoxx 60 index down 0.3%.
"For now, the sell off is mild, but there is a sense of lethargy in global stock markets right now," says Brooks, adding that the bond market was driving sentiment as global sovereign bonds sold off, pushing up bond yields.
The sell off has continued into Thursday, with UK 10-year Gilt yields up 3 basis points today, French yields up 2 basis points and the US 10-year Treasury yield up by 1 basis point.
"The 10-year UK Gilt yield is higher by 13 basis points so far this week. While it may not sound like a lot, this is a big move for the bond market, and it can have a ripple effect on other markets," Brooks says.
There is a strong positive correlation between the UK 10-year Gilt yield and the US 10-year Treasury yield, which have moved together nearly 80% of the time so far this year.
"This means that when US Treasury yields are moving, the chances are UK Gilt yields will follow, since the Treasury market is the most important bond market in the world.
As the 10-year Gilt yield also has a mildly negative correlation with the FTSE 100 and the 10-year Treasury yield also has a negative relationship with the S&P 500, it means "when bond yields rise, stocks tend to sell off".
European markets have been "somewhat indecisive" today, says market analyst Joshua Mahony at Scope Markets.
The FTSE is down 0.25%, while the benchmarks of France, Spain and Italy are down 0.5-0.7%, while the early gains for the German DAX are now erased
"While we saw early gains for French stocks, the fact that we are seeing them fade once again comes as no surprise as we approach the weekend election," says Mahony, with yesterday seeing another poll point towards gains for the far-right National Rally party.
A Bloomberg poll of polls has NR and its allies at 36% of the vote, which remains well below the 50% marker, highlighting the fact that we will likely have to wait until a week on Sunday to find out the result.
"With that in mind, traders should expect a jittery period ahead, with the fears of a fresh surge in borrowing costs and financial instability driving potential CAC and euro weakness," he says.
Today the US economy comes into focus again, with the final GDP and core durable goods orders data released ahead of tomorrow’s crucial core PCE inflation release.
"Signs of weakness in the jobs market have started to spread through alternate areas of the economy, with yesterday’s new home sales figure falling to a 2024 low.
"While the Fed will be concerned that we are seeing tentative signs of distress across parts of the US economy, the question over at which point it influences to Fed to react remains key," says Mahony.
DS Smith tops leaderboard after suitor situation clears
DS Smith is up over 6%, topping the FTSE 100, after news filtered through that makes its takeover by International Paper Co (NYSE:IP, ETR:INP) more likely.
Brazilian pulp maker Suzano said it had ended talks to buy IP as the US paper and packaging group had not been interested in the highest price it was willing to pay.
Suzano said it had raised its offer to "the maximum price" for the transaction to generate value, but this had been "without engagement from the other party".
"Therefore, in observance of its commitment to capital discipline, Suzano formalizes that it will not pursue a transaction involving the acquisition of International Paper," it said.
DS Smith agreed to a takeover by IP for £5.8 billion in April.
Is 'Swiftonomics' a lie?
Taylor Swift is on the European leg of her world tour, with her performances in venues like Wembley Stadium and Anfield touted by some to generate £1 billion for the UK economy.
The tour's popularity is so large that it has been placed on par with the Olympic Games in France and the Euros in Germany as the key events expected to help boost European economies at a time when a recession is close in the rear-view mirror.
However, not everyone is convinced that "Swifonomics" is real.
Looking at her performances in Stockholm over three dates in May, the artist was able to sell around 180,000 tickets, generating some US$81 million for the city.
However, when zooming out and looking at Sweden's overall economy, the concert makes very little impact on the country's US$623 billion annual output.
Carl Bergkvist, chief economist at Stockholm's chamber of commerce, told Reuters: “This extra turnover is a great weekend boost for Stockholm and in particular, its tourism sector.
"But it’s just that — a weekend, with no visible or significant impact on overall economic growth.”
Carsten Brzeski, an economist at ING, echoed similar thoughts, calling the Swift effect "extremely small and temporary, at best".
"There is copious research in the run-up to big events outlining the economic benefits but after the fact you need a magnifying glass to find these so-called benefits in the numbers," he said.
UK car manufacturers pile pressure on incoming government
Car manufacturers in Britain are placing more pressure on the incoming government after it demanded support, days after Vauxhall's owner Stellantis (LON:0QXR) threatened to shut its production factories in the UK.
The Society of Motor Manufacturers and Traders (SMMT) has urged the next government to "back British manufacturing" by offering tax cuts and changes to regulation, which is expected to help with the adoption of EVs.
"Maintaining the status quo is not an option,” the lobby group said, claiming that the UK was at risk of being "outcompeted" by the US, China, and the European Union.
Mike Hawes, chief executive of the SMMT, said: “Massive change is underway in the UK’s car factories as manufacturers retool for new electric models.
“Amid strong international competition for green automotive investment, however, the UK needs to ensure it has the most attractive conditions for manufacturing businesses and a compelling offer for existing and new investors."
Earlier this week, Stellantis UK boss Maria Grazia Davino warned the company could stop making vans in the UK due to the government's targets for EVs.
She claimed government sales mandates for zero-emission vehicles "could be very damaging" for its operations.
Bunzl shares move higher as margin increases grow earnings
Bunzl (LON:BNZL) shares are up close to 1% after it upgraded its guidance for the year based on improved margin performance in the first half of the year and previous acquisitions.
Analysts at Shore Capital said the increase in margins is expected to add 2% to 3% to its earnings.
Revenue growth in 2024 is expected to be "robust", while the group's operating profit margin is now expected to be "slightly above" 2023 levels.
For the first half of the year, sales are expected to be down 3-4%, with underlying revenue falling 5%.
"Whilst the current half is set to see revenue challenges, we look for a return to positive organic development metrics in H2," said Robin Speakman at Shore Capital.
"A strong balance sheet remains a feature of Bunzl supporting the acquisitive growth strategy.
"Cash generation continues to deliver asset allocation options and... Bunzl retains material firepower to further its acquisitive and organic development strategy as a ‘cash compounder’."
Global inflation nerves won't stop rate cuts, says analyst
Analysts do not believe the unexpected rise in inflation in Canada or Australian CPI hitting six-month highs will affect the UK's chances of rate cuts this summer.
Following Canada's inflation surprise a month after its central bank cut rates, economists are now readying for a 45% chance of another in July, down from a 70% likelihood earlier this week.
Meanwhile, there is a 50/50 chance Australia will hike interest rates by 0.25% by September.
Yet, analysts at UBS aren't convinced these two issues will affect the global rate cutting cyle.
"Noisy inflation data may be sufficient to keep policymakers cautious in their moves, but the global disinflationary process is well established, in our view," analysts at the Swiss bank said.
"Easing price pressures and other economic considerations should encourage central banks to start or continue cutting rates.
"In the US, while Federal Reserve Governor Michelle Bowman this week said keeping policy on hold for some time is likely necessary, we believe incoming data on inflation, growth, and the labour market will justify a first cut in September.
"Across the Atlantic, a growing number of policymakers at the Bank of England highlighted that their decision to remain on hold last week was finely balanced, and we expect the European Central Bank to ramp up policy easing in the coming months."