Live Markets: UK retail: risks now more balanced

Royal Unibrew A/S

31/10/2022 12:20

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      STOXX 600 little changed
    

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      Euro zone inflation hits new record
    

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      Trading muted on big central bank week
    

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      U.S. stock futures inch lower
    

  
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    UK RETAIL: RISKS NOW MORE BALANCED (1220 GMT)
    Britain's retail stocks have taken a pounding in 2022. 
    The FTSE 350 Retail Index  .FTUB4040  is down a whopping 42%
this year, versus an almost 8% decline for the broader FTSE 350
 .FTLC , which incorporates both the FTSE 100  .FTSE  and FTSE
250  .FTMC .
    The impact of high and persistent inflation on consumer
incomes has been a drag, but analysts at Goldman Sachs have
acknowledged that post the sharp underperformance, the risks are
now more balanced. 
    "We still think it is too early to expect a reversal in
Retailers' prospects but equally there are some things which
favour the sector," GS analysts said in a research note on
Friday, citing five key positives. They are;
    1. Commodity and freight headwinds are beginning to reverse
    2. Energy prices, more broadly gas, have come off their
highs
    3. Sterling has risen from the lows
    4. The CBI's latest Distributive Trades Survey showed a
bounce
    5. The fiscal risk premium for the UK has diminished
considerably.
    Still, Goldman notes that there are areas that point to
continued underperformance, including an expected decline in
households' available cashflow, expected rebound in energy/gas
prices, higher corporate tax rate and expectations that recent
sterling strength is temporary. 
    "On balance, we think further underperformance is more
likely; we are still some way from a trough in the UK consumer,"
GS said. 
    "Also, there remains the unknown of how vulnerable
households are to higher mortgage costs, and while rate
expectations have declined from the peak rate, hikes are still
likely to be steep."
    The BoE meets on Thursday where they are expected to raise
the Bank Rate by 75 bps to 3.0%, the highest level since 2008.  
    (Samuel Indyk)
    *****
    SURGING WHEAT PRICES RAMP UP INFLATIONARY PRESSURES (1144
GMT) 
    The market is pondering the implications of soaring wheat
prices after news that Russia backtracked from a U.N.-brokered
deal to export Black Sea grains, with the developments expected
to add to already red hot inflationary pressures.
    "Food inflation has been a big deal and any decline in grain
shipments from Ukraine is not going to help the inflation
issue," said Lyn Graham-Taylor, senior rates strategist at
Rabobank.
    "It's another wrinkle to add to the many inflationary issues
out there."
    Russia's withdrawal is likely to hit shipments to
import-dependent countries, deepening a global food crisis and
sparking gains in prices.
    Commodity prices are now back at the top of the agenda after
having receded in relevance somewhat since the summer, according
to a note from AJ Bell investment director Russ Mould, who
highlights the "increasingly difficult tightrope" for monetary
policy makers on both sides of the Atlantic.
    Wheat soared after Russia invaded Ukraine, but prices eased
in the second quarter thanks to the prospect of renewed
Ukrainian grain shipments through the negotiated Black Sea trade
corridor agreement, UBS investment strategists wrote in a note
on Monday.
    The end of the deal - as well as weather-related downgrades
in Australia and Argentina - have prompted UBS strategists to
raise their wheat price forecast for end-March to $9.50 a bushel
from $8.25.
    Chicago wheat futures were up about 6% on Monday.
    "Money managers have been wrongfooted by the latest
developments after raising bearish bets on Chicago wheat futures
by 63% to a 28-month high in the week to October 25," said Ole
Hansen, Head of Commodity Strategy at Saxo Markets in a note.
    (Lucy Raitano)
    *****
    SCREENING FOR CREDIT RISK IN EUROPE (1126 GMT)
    Rates are rising and with them, so are debt costs. But where
exactly are these higher financing expenses going to bite?
    Citi has looked into it and while it estimates an overall 2%
hit to STOXX 600  .STOXX  earnings excluding financials, it says
this "masks considerable variation across sectors and companies"
depending not only on leverage, but also on debt structure.
    The U.S. bank has found that the impact will be much greater
for unlisted small and mid-sized companies because of their
larger exposure to floating-rate debt.
    "For unlisted smaller and medium-sized companies, the impact
from rising rates is greater. Their borrowing is overwhelmingly
in floating-rate loan markets and thus, the interest increase is
almost immediate," say Citi credit strategists.
    "The average impact on earnings over the next year is 4-5
times bigger than for large listed companies," they add.  
    Looking closer at the European equity market's debt
exposure, Citi finds that 10% of outstanding debt matures in
2022 or 2023, which it says "should be manageable".
    Citi estimates 15% of STOXX debt is at floating rates,
almost double that of the S&P 500  .SPX , with utilities and
industrials most exposed, while IT, energy and healthcare are
the least exposed. 
    Want some names? Citi point to 16 stocks that could see
headwinds from rising debt costs: Schibsted, Adevinta, Entain,
Flutter, ATOS, Enel, Terna, Amadeus, Faurecia, Grifols, Royal
Unibrew, Britvic, Campari, Umicore, Telefonica and Barry
Callebaut.
    (Danilo Masoni)
    *****
    THE PROBLEM WITH THE ECB’S 2% INFLATION TARGET (0919 GMT)
    European Central Bank policymakers seem ready to stand
firmly behind plans to tame inflation by raising interest rates
even if that pushes the bloc into recession.
    And their 2% target is quite far away from current inflation
as recent data show consumer prices are up 10% year-on-year.
    According to Unicredit’s group chief economics advisor Erik
F. Nielsen, “with its singular mandate of price stability,
interpreted as 2% inflation, the ECB’s present reaction may be
understandable.”
    However, “inflation targeting at 2% was dreamt up at a time
when nobody imagined the change in the world we now experience,
including in commodity prices,” he argues in his Sunday wrap.
    “Furthermore, if the ECB really means to pursue inflation at
2% in 2024-25, regardless of the fact that it’s predominantly a
cost-push phenomenon, they’ll end up destroying so much demand
during the next year or two that a big margin of spare capacity
will open up,” he adds.
    “Apart from the economic and social costs (and political
costs?), this means that inflation almost certainly will
undershoot the target in the years following 2024-25. If so,
they wouldn’t have fulfilled their mandate, in my
interpretation,” he says.
    Nielsen estimates that if monetary policy succeeds in
bringing overall eurozone inflation down to 2%, that would
trigger a decline in GDP of 4%-5% during the next 2-3 years.
    (Stefano Rebaudo)
    *****
    STOXX DIPS (0917 GMT)
    No big moves in early trading for European bourses as
traders mark time ahead of big central banks' decisions this
week starting with the Fed on Wednesday that could set the
direction ahead for markets after a strong October.
    The pan-European STOXX 600  .STOXX  index moved around
parity in early deals and was last down 0.15% as a gauge of euro
zone equity volatility  .V2TX  popped up after Friday's drop,
while sectoral gauges were pretty muted.
    On the radar for today is euro zone flash CPI for October
which is forecast to hit a new record high of 10.2%, which will
likely cement bets for more aggressive ECB action after the
central bank raised rates by 75 basis points last week.     
    (Danilo Masoni)
    *****
    EUROPE EYES SLIGHTLY POSITIVE START (0733 GMT)
    European shares look set to open up slightly today, drawing
on the constructive tone from Asia following a strong Wall
Street close on Friday in the wake of solid earnings from Apple.
    Euro STOXX 50, DAX and FTSE futures were last up between 0.1
and 0.3%, although the session could be volatile as traders gear
up for another rate hike from the Federal Reserve on Wednesday.
    U.S. futures fell around 0.3-0.5%.
    In corporate news, Credit Suisse is keeping investors busy
after the loss-making Swiss bank unveiled details of its planned
 capital hike. On the watchlist is Fresenius Medical Care after
the world's largest kidney dialysis provider cut its outlook.
    Glencore could be a mover too this morning on an FT report
saying Tesla held discussions over taking a stake in the
London-listed miner. The talks ended with no deal reached.     
    (Danilo Masoni)
    *****
        NOT EVEN HALF-TIME (0705 GMT)
  
    As a blitz of central bank rate meetings from Australia and
Britain to the United States keeps investors on edge this week,
markets will also wrestle with crucial data on inflation and
jobs.
    Monday kicks off with the euro zone's October flash
inflation estimate, which is expected to remain elevated with a
10.2% year-on-year rise.
    With the ECB just delivering its second 75-basis-point (bps)
rate increase to stem price pressures, authorities are desperate
to see if their actions are having the desired impact.
    ECB governing council member Klaas Knot said on Sunday that
the central bank's next move in December is likely to be between
50 and 75 bps.
    "We are not in even half-time yet," Knot said in an
interview with Dutch TV programme Buitenhof, referring to the
ECB's fight against surging euro zone inflation.
    Euro zone borrowing costs jumped on Friday after
stronger-than-expected inflation data from countries including
France, Germany and Italy.
    Factory surveys early in the week are expected to add to
evidence of weakening global demand.
    But for global investors, the Fed's meeting on Tuesday and
Wednesday will take centrestage along with Friday's U.S. jobs
data.
    Asian stocks edged up on Monday on expectations that the Fed
will tone down its expected rate hikes after this week's
meeting. The Fed is all but set to increase rates by 75 bps on
Wednesday.
    Data last Friday showed that U.S. consumer spending rose
more than expected in September while underlying inflation
pressures persisted.
    In a move that could deepen a global food crisis, Russia
suspended participation from a U.N.-brokered deal to export
Black Sea grains, sending Chicago wheat futures 5% higher on
Monday.
    Meanwhile, Luiz Inacio Lula da Silva narrowly defeated
President Jair Bolsonaro in a runoff election on Sunday that
marked a stunning comeback for the leftist former president and
the end of Brazil's most right-wing government in decades.     
    Key developments that could influence markets on Monday: 
    Economic data: Germany Sep retail sales, UK Sep mortgage
lending, Euro zone Oct flash CPI, flash Q3 GDP
    U.S. economic data: US Oct Chicago PMI
    (Anshuman Daga)
    *****
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Personal consumption    https://tmsnrt.rs/3zpS42t
No respite    https://tmsnrt.rs/3znViDG
EU open    https://tmsnrt.rs/3fo6byH
inflationforward    https://tmsnrt.rs/3NsJHcw
Retail stocks underperform    https://tmsnrt.rs/3gY2tMp
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