BP, Shell and power stocks lead sharp market decline

A bright start to the session soon evaporated and the FTSE 100 made a fresh five-week low, but there was optimism among some small-caps.

Selling pressure over BP (LSE:BP.), Shell (LSE:SHEL) and Tullow Oil (LSE:TLW) shares increased today as the prospect of big interest rate hikes in Europe, the UK and US deepened global recession fears.

Brent crude futures extended this week’s decline and the FTSE 100 index lost 1% of its value after Europe’s hotter-than-expected inflation reading of 9.1% raised the chances of a steep 0.75% increase in European Central Bank interest rates next week.

Higher borrowing costs on top of the continent’s ongoing energy crisis will fuel concerns about demand destruction, particularly with the US Federal Reserve and Bank of England poised to announce further big hikes at their meetings next month.

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The bleak September outlook for monetary policy meant the London market surrendered a positive start for the second session in a row. BP, whose shares were trading at a post-pandemic high prior to Friday’s hawkish speech by Federal Reserve chair Jerome Powell, topped the FTSE 100 fallers board with a decline of 18.8p to 430.45p.

Shell also lost 92p to 2,247p as Brent crude weakened as far as $95 a barrel from the $105 seen on Monday evening. Power companies SSE (LSE:SSE) and Centrica (LSE:CNA) also suffered, while the oil weakness was replicated in the FTSE 250 following falls of 2.8p to 49p for Tullow Oil and 62p to 1,290p for the North Sea and Mediterranean-focused production company Energean (LSE:ENOG).

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The weak UK outlook and prospect of more aggressive rate rises in the US meant the pound weakened to 1.16 versus the US dollar, with Capital Economics today warning of new depths of 1.05 by the middle of next year.

It believes the worst of the global economic downturn is yet to be felt, and with high inflation preventing central banks from cutting rates, the consultancy expects the S&P 500 to drop from 4,000 to 3,600 by the end of the year and the FTSE 100 from 7,400 to 6,700.

A weaker pound usually benefits the international FTSE 100 but there was no such outperformance today as the FTSE 250 was closer to its opening mark, down 41.1 points at 19,108. Big risers included WH Smith (LSE:SMWH) after a gain of 46.5p to 1,446.5p.

A small-cap star stock and buying opportunity 

Amid the gathering economic gloom, one small-cap stock stood out by increasing its profits guidance for the third time in as many months.

Shoe Zone (LSE:SHOE) shares rose 12.5p to 157.5p as the discount retailer said demand for summer and back-to-school products meant it continued to beat expectations. It now sees profits for the year to 2 October as not less than £10.5 million, up £2 million from June’s first upgrade.

The company, which operates 368 stores and employs 2,700 staff, recently paid 2.5p a share to shareholders after an earlier-than-expected return of dividend payments with May’s interim results. The stock had been trading as high as 196p earlier this month.

Cake Box (LSE:CBOX) shares moved in the opposite direction after it lowered profits guidance to reflect inflationary pressure as well as the impact of this summer’s heatwave.

Shares tumbled 62p to 117p but broker Liberum said the weakness represented a buying opportunity after cutting its 2023 earnings forecast by a third with a new price target of 250p.

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Liberum said the balance sheet was in “rude health” with no debt, adding that on its new forecasts the shares trade on a forward earnings multiple of 5.1 times with a 5% dividend yield.

It said: “While disappointing to be cutting numbers, there is no change to the underlying cash generative growth story underpinned by franchisee demand for new stores and new channels such as online and kiosks in supermarkets.”

Another cash-generative company reporting today was life and pensions consolidator Chesnara (LSE:CSN). Its shares fell 3.5p to 302p despite extending its record of uninterrupted dividend growth to 18 years, with plans for a 3% half-year increase to 8.12p a share on 21 October.

The company, which administers about one million policies and operates as Countrywide Assured and Sanlam Life & Pensions in the UK, reported a 16% decline in economic value to £527 million or 351p a share. That was 7% below Peel Hunt forecasts and dragged down by the decline in equity markets and widening of credit spreads.

However, the All-Share company said it had a “strong and resilient” solvency position and substantial cash balances for future acquisitions and to support the dividend strategy.