- FTSE 100 continues declines as global markets retreat amid interest rate and Chinese economy fears and soaring UK borrowing
- UK retail sales fell 1.2% in July, worse than expected
- Jitters around BAE’s $5.5bn acquisition of Ball Aerospace adds pressure to the valuation
- Oil price heads for weekly decline
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown:
“The FTSE 100 has followed global equities into negative territory, as concerns over interest rates continue to lead the narrative, which is currently saying that equities aren’t flavour of the month. Minutes from the Federal Reserve’s July meeting hinted further interest rate hikes could be ahead as policymakers continue to grapple with inflation. There’s also been a spike in the cost of UK government borrowing, which has risen to the highest level since the financial crisis – as those worries about higher interest rates caused yields on UK and US bonds to shoot up sharply. At the same time, there are growing concerns over China’s property crisis and a weakening economy, as struggling property giant Evergrande filed for protection from creditors with the US bankruptcy court in Manhattan yesterday. All-in-all, the atmosphere isn’t an inviting one for equity markets as we round off the weak.
UK retail sales have fallen 1.2%, considerably worse than expected as July was bogged down with bad weather and consumers continue to tighten their belts. The broad-based nature of the declines across most sectors suggests this is a consumer weakening on a large scale, rather than a sector-specific problem. The interesting element is the fall in food sales, which is an area where inflation has been running especially hot. The scope of changes to shopping habits on essentials like groceries speaks to the level of financial stress that’s starting to feed through to consumers. The thing to keep in mind though is that the worst of the squeeze on incomes is yet to be felt, as many people are yet to roll off their more affordable mortgages – so for consumer-discretionary stocks, this will be something to watch closely.
BAE has seen £1.5bn wiped off its valuation, with little respite from that pressure in early trading, as investors mull its decision to buy Ball Aerospace. While it’s widely acknowledged the foray into space tech is an exciting one, there are lingering questions about the price being paid, with the multiples looking expensive. The substantial purchasing price may also be raising questions over the group’s remaining firepower to fuel high-octane shareholder returns that investors have become accustomed to. The reason we haven’t seen a more substantial sell off rests on the fact this deal is regarded as highly exciting and overall a good fit within BAE’s existing portfolio.
The international oil benchmark has shed 3% so far this week, which puts it on track to break seven straight weeks of gains. Brent crude has nudged up slightly to $84 a barrel, but is still down overall for the week. Deepening concerns about the Chinese property market and global interest rate environments are the primary levers orchestrating the weakness in price.”
