Written by Steve Clayton, fund manager at HL Select:
Today looks likely to be a re-run of the day after the Brexit referendum. Sterling has crashed but the stock market looks likely to head higher, if futures markets are any guide to what’s ahead.
The UK market is very international in its nature; most big companies listed in London actually earn most of their revenues and profits overseas. Those will be worth more in sterling terms as a result of the slump in the pound. So, expect shares in major stocks with big overseas earnings to lead the way today.
Domestic earnings though will be threatened. Retailers and other businesses who buy their inventory in from abroad face a loss of earnings. They can try to pass the higher cost of imported goods on to consumers, or they can try to cut their operating costs. But the speed with which sterling has fallen is going to prove a huge challenge.
Gold, copper and other metals have seen their prices tumble overnight, reflecting the impact of the dollar’s strength. They might cost less in dollars, but for buyers paying in sterling, the cost of commodities has actually risen. Brent Crude oil, one of the key global markers for energy costs dropped below $85 per barrel for the first time since 2020, whilst copper extended its price drop by a further $6 to $331 compared to a high water mark of $493 set in the spring.
Markets fell in Asia overnight. Nothing to do with UK tax cuts; rather, investors are factoring in higher inflation and higher interest rates into their views of future company profits. Inflation is proving to be as strong as it is stubborn, around the world, making it more likely that Central Bank will have to push interest rates higher in their efforts to bring inflation back down to manageable levels.
Bond yields are rising anew, with 10-year gilt yields pushing through 3.8% this morning. German Bunds are weak too, to a lesser extent, with the equivalent Bund yield now rising up through the 1.9% level. Yields on UK long bonds had been trading well below their US equivalents, but recent weeks have seen this position decisively reverse, leaving the UK facing one of the highest levels of long-term borrowing costs amongst major nations globally.
Company news this morning is pretty thin. Pendragon, one of the UK’s leading motor retailers has revealed an unsolicited bid approach f 29p per share from their largest shareholder, Hedin Mobility AB, a major player in the Swedish car sales market. RPS Group has recommended a 222p bid for the group from Tetra Tech Inc, topping the existing 206p offer from WSP. More and more companies are announcing their own planned routes to Net Zero. Today is easyJet’s turn. The group plan to introduce new, more efficient aircraft, more economical operating procedures and embracing new EU regulations that mandate the use of Sustainable Aviation Fuels. The group hope to cut their own emission intensity by as much as 78% by 2050 and will pay to offset the remainder.
Unilever was the top riser in the FTSE 100 in early trading, hitting a 12m high of 4178p, after announcing the planned retirement of its CEO Alan Jope at the end of next year. Investors were more likely reacting to the increased value of Unilever’s extensive overseas earnings in sterling terms in pushing the stock forwards this morning.