Caution ahead of Fed decision amid US bank turmoil, Flutter lifts and Cineworld agrees bankruptcy deal

by | May 3, 2023

Market Report: Caution ahead of Fed decision amid US bank turmoil, Flutter lifts and Cineworld agrees bankruptcy deal

  • Investors set to stay cautious as bank turmoil continues ahead of Fed rate decision.
  • US regional banks suffer fresh sharp falls  as worries continue about fragility.
  • Ongoing concerns linger about banks’ exposure to commercial real estate.
  • Brent crude holds below $76 a barrel as global growth worries rise.
  • Flutter lifts after grabbing fresh market share in the United States.
  • Cineworld takes step closer to exiting bankruptcy proceedings.
  • Wet March and cost-of-living storm dents DIY sales at Wickes.

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

‘’Caution is set to take centre stage ahead of the Fed’s interest rate decision later, as investors mull what’s ahead for the mighty US economy.  Worries have ratcheted up again that a maelstrom of problems are lurking within regional banks and that there could be another breakage as interest rates are set to be hiked again. There was hardly a pause for breath after the JP Morgan takeover of First Republic Bank before fears rocked regional banking stocks yet again, with PacWest one of the biggest fallers, dropping by more than 30% at one point.

The tide of concern is rising about the ailing health of regional US bank portfolios, with many sitting on large unrealised losses, at a time when deposit flight is all the rage. The ease of withdrawals in the digital age is causing increased nervousness, given the speed of banking collapses over the past two months. Commercial real estate is under stress because of sharply higher interest rates, with many billions of loans coming up for renewal.  Dwindling deposits at smaller lenders in particular are expected to  make them more conservative in their lending, which is set to be a fresh drag on the US economy with repercussions around the world. Demands from Republicans to cut spending to avoid the US smashing the debt ceiling could also slow down activity further, and the forecast mild recession could deepen.

Policymakers are now staring into the void, trying to assess the extent to which the expected lending slowdown and potential spending contraction will do the job of further rate hikes, or whether sticky core inflation necessitates another hike. On balance another 0.25% rise is expected, pushing rates to 5.25% before the pause button is pressed, and investors will be intently looking for clues in chair Jerome Powell’s narrative about whether the break from hikes is imminent and when cuts could be on the way. The FTSE 100 has opened in positive territory and US futures point to a slightly higher open, but trading is expected to be lighter as the Fed decides the way forward. With Lloyds Bank beating profit expectations for the first quarter, it will allay concerns that ominous creaks in US regional banks will spill over into problems across the pond.

Brent Crude has fallen further back, trading around $75  barrel as traders assess the prospects for slowing demand as fresh interest rate hikes are expected, not just from the Fed but also the European Central Bank this week. Usually, the US and China are ravenous for oil, but with an American recession expected and Beijing posting a weaker than expected manufacturing snapshot, appetites appear to be waning.

Flutter continues to grab market share in the United States and profit from the lucrative sports betting market. It’s roared ahead grabbing an ever-bigger slice of play with sports betting revenues in the United States up 147% and pushing overall US revenues up by 92%. Online gaming is also another money spinner with revenues up 43% year on year Stateside. With mobile gaming is expected to outstrip growth forecasts for the overall app market globally  over the next few years, with a compound annual growth rate of more than 15% expected, Flutter is well placed to capitalise on the desire to play anytime, anyplace, anywhere.

The equity wipe out of existing Cineworld shareholders has inched a step closer after a US court approved plans for it to raise $2.2 billion from lenders as part of its exit from bankruptcy. The company is trying to turn a new page on its pandemic horror story and has reached a settlement with some of its creditors who had been demanding more shares in return for the debt swap. The curtain is set to raise on Cineworld’s new future when final court approval on bankruptcy proceedings is due on June 12th. Recent hits like Super Mario Bros movie and Dungeons and Dragons: Honour Among Thieves have provided a lift to sales to propel its new chapter. But given the shakeup of the movie industry and the might of the streaming giants, its likely to mean ticket sales will never fully recover to the heady days of the past.

March rain, combined with housing market nervousness and cost of living worries have been a  chill wind for the DIY sector. Demand for do-it-yourself products suffered at Wickes in the first quarter with like-for-like sales down 0.6%. Although there are signs of brisker sales towards the end of the quarter, with budgets still set to be squeezed in the months to come, there is unlikely to be a big wave of projects planned by homeowners wielding brushes and hammers. However, trade sales held up well,  helping keep overall performance in line with expectations. Rising costs have been a headache, but one which is starting to ease, with inflation set to come in at 5% for the full year. While the Covid DIY craze has clearly eased off, plenty of people have learnt new skills and are likely to be keen to use them again when household budgets recover. Wickes has a strong value proposition to keep up with these longer-term trends but may need to put up with a bit more inclement weather in the short term.’’

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