Positive Christmas trading updates from UK retailers, combined with figures showing UK retail sales rose in 2022, were not enough to give the London market a positive start on Tuesday.
A warning from the Bank of England’s chief economist about persistent inflation and some hawkish remarks by US Federal Reserve officials gave investors a reality check after a strong start to the year and ahead of a speech by Fed Chair Jerome Powell.
The FTSE 100 index was down 32.53 points, or 0.4%, at 7,692.41 early Tuesday. It remains up 2.0% so far in 2023.
The FTSE 250 was down 94.40 points, or 0.5%, on the day at 19,384.99, and the AIM All-Share was 1.84 points lower, or 0.2%, at 848.20.
The Cboe UK 100 was down 0.3% at 770.18, and the Cboe UK 250 was down 0.6% at 16,919.88. The Cboe Small Companies was down 0.2% at 13,736.55.
In European equities on Tuesday, the CAC 40 in Paris was 0.3% lower, while the DAX 40 in Frankfurt lost 0.7%.
It was a largely weaker day for Asian equity markets on Tuesday, following a strong day on Monday. The Shanghai Composite index ended 0.2% lower, while the Hang Seng in Hong Kong fell 0.3%. The S&P/ASX 200 in Sydney closed down 0.3%,
In Japan, the Nikkei 225 rose 0.8%. Tokyo was playing catch-up to other Asian exchanges, as markets there were closed for Coming of Age Day on Monday.
San Francisco Fed boss Mary Daly said rates would likely go above 5% before the policy board decides to stop lifting, while Atlanta Fed President Raphael Bostic tipped a similar level but added that they would not be changed for ‘a long time’.
The comments dealt a blow to investors hoping for a change of tack later in the year.
‘We are just going to have to hold our resolve,’ Bostic told the Atlanta Rotary Club. ‘I am not a pivot guy. I think we should pause and hold there, and let the policy work.’
All eyes are now on the release on Thursday of the US consumer price index for December. This will be a key input to the Fed’s next policy meeting at the end of the month.
In an otherwise quiet economic calendar on Tuesday, US Fed Chair Jerome Powell takes centre stage as he speaks at a central banking event in Stockholm at 1400 GMT.
The pound was quoted at $1.2165 early Tuesday in London, down from $1.2203 late Monday. The euro stood at $1.0740, down from $1.0749. Against the yen, the dollar was trading at JP¥132.03, higher from JP¥131.88.
Despite fading on Tuesday, sterling has enjoyed a decent start to the year, analysts at ING noted, a far cry from its post-mini-budget struggles in the autumn.
ING added: ‘Sterling has been performing slightly better, helped no doubt by the constructive risk environment at the start of 2023. The UK has quite a large country weight in global equity and debt benchmarks, meaning that flows into these products can provide some support. Sterling barely budged yesterday on comments from Bank of England Chief Economist Huw Pill that there were early signs that the UK labour market was softening. Again, market pricing of a further 100 [basis points worth of] BoE hikes to the 4.50% area this summer looks resolute.’
The BoE lifted bank rate by 50 basis points to 3.50% late last year.
At a speech in New York on Monday, the BoE’s Pill said inflation in the UK is ‘too high’ and that returning UK inflation to its 2% target on a ‘lasting and sustainable basis’ is ‘essential’.
The chief economist explained that a ‘distinctive context’ within UK of higher natural gas prices, a tight labour market, adverse labour supply developments, and goods market bottlenecks creates the potential for inflation to be ‘more persistent’.
In London, consumer stocks were in focus amid the release of UK retail sales figures for 2022 and as post-Christmas trading updates poured in.
UK retail sales increased by 3.1% in 2022 from the year prior, according to figures from the British Retail Consortium. Sales increased by 6.9% in December, against an increase of 2.1% in December 2021.
Card Factory shares rose 6.9%. It said it is trading ahead of expectations, as the greeting cards, wrapping and gift card seller said it has noticed a post-Covid shift back to the high street by UK shoppers, while the strikes at Royal Mail had hurt online sales.
In the 11 months to December 31, sales surged 28% to £432.6 million from £337.3 million in the same period a year earlier.
Card Factory now expects annual earnings before interest, tax, depreciation and amortisation of at least £106 million, ahead of consensus of £96.9 million. This would mean a pretax profit of around £48 million, it said, multiplied from £11.1 million. Ebitda in financial 2022 amounted to £85.6 million.
‘Strong seasonal trading in stores over the Christmas period was supported by our range development and value for money offer across both cards and gifts. Christmas trading also benefited from the agility provided by our vertically integrated model, as well as forward ordering and delivery of Christmas ranges, which underpinned strong availability in stores across the Christmas period,’ Card Factory said.
Models and collectibles maker Hornby said sales in the third quarter to December 31, covering the key Christmas period, were ahead of the prior year.
‘As a result, cumulative group sales for the financial year to date are ahead of last year by 6%. This has been driven by better availability of stock, price increases, and investment in e-commerce platforms and digital media,’ Hornby said.
However, it cautioned that sales figures were ‘behind budget’. It noted a ‘challenging consumer economic climate’ will hurt its annual outturn. It expects a ‘modest’ annual underlying pretax loss.
Shares slumped 14%.
‘We remain cautious in our outlook for the full year and beyond due to a high level of uncertainty around the impact of several factors on our sales such as inflation and mortgage costs for consumers but with employment expected to remain high we are hopeful that the confidence in consumer spending remains,’ Hornby added.
Elsewhere, AO World shares rose 6.3%. The online electricals retailer upped bottom-line guidance as cost cuts have offset falling sales.
AO said UK revenue in the three months to December 31, its third-quarter, fell 17% year-on-year, an outcome line with expectations.
‘However, the actions taken by the business to reduce costs and improve margins, as described in our interim results in November are gaining traction, and profitability is now running ahead of our previous expectations,’ AO said.
It now expects adjusted earnings before interest, tax, depreciation and amortisation in the range of £30 million to £40 million, ahead of previous guidance of the top end of a £20 million to £30 million range. Adjusted Ebitda in financial 2022 was £8.5 million, down from £64.4 million in financial 2021.
‘Pigs are flying!’ commented Clive Black at Shore Capital. ‘AO World has been a pretty joyless place for equity investors for some years now for a variety of well-versed reasons, not least of which was a failed European adventure. As such, it is most pleasing to see that the profitability light has shone.’
Shoe Zone shares added 7.6% as the company posted improved annual earnings for the year that ended October 1. Revenue rose 31% to £156.2 million from £119.1 million. Pretax profit climbed 43% to £13.6 million from £9.5 million.
The footwear retailer resumed dividends during its financial year. It proposed a 3.3 pence final dividend, as well as an 8.2p special payout. It brings its total dividend for the year to 17.0p.
Among London-listed large-caps, Scottish Mortgage Investment Trust, with stakes in big US tech firms, was hurt by interest rate worries. Shares were down 1.9% in early dealings.
Retailer Next fell 1.5%. Investec cut the stock to ’hold’ from ’buy’.
Next impressed the market with a cheery Christmas update last week, though since then, its stock rating has been cut by analysts at Credit Suisse. The Swiss bank on Friday cut the stock to ’underperform’ from ’neutral’.
Brent oil was quoted at $79.14 a barrel early Tuesday UK time, fading markedly from $80.46 on Monday. Gold was quoted at $1,872.34 an ounce, down from $1,874.24.
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