The fortnight-long rally for the FTSE 100 is beginning to dwindle and the magical 8,000-point mark isn’t going to be reached any time soon.
Having suffered the Monday blues yesterday, the index continued its sluggish momentum with a flat start on Tuesday.
This comes after worries about a potential US government shutdown and growing investor fears about China’s property sector, with a cloudy outlook from retailer ASOS further undermining sentiment.
ASOS — which saw its luck dissipate as pandemic restrictions eased — continued to disappoint investors, with yet another poor showing. Q4 sales fell a staggering 15% as high inflation continues to trump consumer spending. As a result, the board warned that earnings before interest are now expected around the bottom end of their previous guidance of £40-60m.
Still, the stock is largely unmoved, which is a surprise, as investors would have expected a bloodbath considering the downwardly revised guidance. But this could largely be down to the fact that “expectations were already extremely low”, according to Wes Wilkes, CEO of wealth manager, Net-Worth NTWRK. Additionally, the market might have opted to look at the positives rather than the negatives from this trading update — and there were a few.
For instance, although the e-commerce fashion giant missed its guidance of a 200bps improvement, adjusted gross margins in H2 were still up 150bps from last year. More encouragingly, inventory levels, which had bogged down full-price sales, were down 30%. This is arguably more important as it leaves room for margins to expand in the coming months with fewer items on sale. The firm stated: “We remain on track to return stock to pre-COVID levels by the end of FY24 (reducing stock below £600m), which will importantly continue to drive down our net debt”.”
Meanwhile, Card Factory continues to play its cards right as the company posted results that were ahead of expectations. Pre-tax profit spiked by a monumental 73% to £25m at the company’s half-year stage, while revenue increased 12% to £221m, resulting in a jump of 65% in earnings per share (EPS) to 5.6p. Even so, the shares were deep in the red Tuesday morning, down 7% despite management expressing confidence that they expect to “deliver a good outturn for the year”.
Wilkes states one potential reason for this is the stock’s already strong performance this year, up 35%. He stated that “much of the good news was baked into that, and whilst its price-to-earnings (P/E) remains low at 6.8, there would be some caution about its ability to continue to grow earnings further from here. However, there is plenty of potential upside in the stock price compared to its peers”.
But the outlook remains cloudy for ASOS shares and the wider retail sector. Wilkes said: “Markets in general and certainly the FTSE 100 are very much at the ‘mercy of the macro’ currently, with the Bank of England’s activities and the economic outlook driving much of the index’s price moves”.
Housebuilders, in contrast, had a strong session on Tuesday morning with most of them shooting into the green. This comes after news that Santander was the latest amongst the big providers to cut its mortgage rates with HSBC also following suit early Tuesday. On the back of the Bank of England pausing its rate-hiking cycle, the Spanish-owned lender cut its 5-year fixed rate (60% LTV) to 4.95%, which could trigger further rate cuts from lenders.
David Walsh, Director at Kite Mortgages said: “With swap rates coming down, it is to be expected that lenders pass this on to consumers through lower fixed rates. There is a lot of competition between lenders to meet their targets as we approach Q4, which I expect will mean more lenders join the sub-5% party in the coming days and weeks.”
Nevertheless, there will be lingering fears that August’s cooler-than-expected inflation print could be an anomaly, as higher oil prices could see inflation, and subsequently mortgage rates, tick back up in the coming months. But for now, added Walsh, “with more and more positive press on interest rates coming down, we are likely to see more buyers coming back to the market. This positive shift will surely be reflected in housebuilder stocks in anticipation of a more active property market.”