Market snapshot: mood improves, Vodafone upgrades forecasts

US futures are rallying this morning after a tepid end to last week, as the apparent cooling of tensions in the Middle East drove the oil price lower and overshadowed AI concerns, at least for the time being.

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Traders had been unwilling to enter into positions ahead of a weekend which could have brought more hostility, and the main indices were largely flat as a result. There was widespread pressure on the AI trade which was most obviously reflected by a further Nasdaq decline, with the likes of Intel Corp (NASDAQ:INTC) falling by almost 8% despite exceeding estimates for its second quarter, with the VanEck Semiconductor index dropping by 3% as the questions over chipmakers lingered.

However, markets remain in positive territory ahead of some further challenges to come, with the Dow Jones, S&P500 and Nasdaq having risen by 8.1%, 8.3% and 7.5% respectively so far this year.

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Indeed, the scrutiny is set to sharpen this week with a slew of company updates, including four of the Magnificent Seven in the form of Meta Platforms Inc Class A (NASDAQ:META), Microsoft Corp (NASDAQ:MSFT), Apple Inc (NASDAQ:AAPL) and Amazon.com Inc (NASDAQ:AMZN). Such updates are implicitly under pressure, as evidenced by the reaction to Alphabet Inc Class A (NASDAQ:GOOGL) numbers last week, while more broadly earnings so far are on track to be some 26% higher than last year, which has brought an additional level of heightened expectations into the fray.

In the meantime, the oil price moved almost 6% lower to around $91 per barrel as a fragile truce emerged between the US and Iran, with a ceasefire in place to allow further negotiations although the US apparently remains “locked and loaded” should Iran stray from the course. The situation has been further complicated by Houthi attacks on oil facilities in Saudi Arabia although a path to de-escalation is the bull case.

In addition, while fears are growing that the Federal Reserve could consider hiking interest rates in its meeting this week due to inflationary concerns, the majority view is that rates will remain on hold although a September rise is on the cards.

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The Bank of England will be considering similar issues this week, although it also expected to leave rates unchanged at its meeting on Thursday. Some of the more recent economic releases have been more positive than expected, although the rise in mortgage rates and a generally sluggish rate of growth are clear headwinds.

Even so the FTSE250, which is perhaps more of a barometer on sentiment towards the UK, has managed to move ahead by 6.7% this year, with some brisk merger & acquisition activity across the index providing additional support.

At the same time, the FTSE100 has re-emerged as a haven destination as investors have increasingly sought options away from the beleaguered AI trade. Despite some inevitable weakness at the open among index heavyweights BP (LSE:BP.) and Shell (LSE:SHEL), which conversely caused International Consolidated Airlines Group SA (LSE:IAG) to bounce, there was a broad appreciation for the larger names within the index, with their stability and cash generation coming back into focus. The opening strength brings the primary index to a gain of 8.7% in the year to date and, equally promisingly, just 1% away from the record closing high achieved in late February.

Vodafone Q1

Vodafone Group (LSE:VOD) has had a strong start to the year as its transformation gains some traction, with total revenue rising by 9.7% to €10.3 billion (£8.8 billion) and service revenue by 9.8% to €8.6 billion in the first quarter.

In terms of strategy, the group had quite simply been fighting fires on too many fronts while dealing with an increasingly onerous debt burden, leading to the need for a significant transformation. What is now emerging is a smaller and less geographically diverse, but more focused operation.

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The UK business is one which the group is aiming to strengthen, and its mega-merger with Three UK recently progressed further as the company announced it would be taking full ownership of VodafoneThree, buying out the 49% stake of Chinese part owner CK Hutchinson for £4.3 billion.

In addition, the Africa operation is an area of particular promise, now accounting for 21% of group income, and saw growth in service revenue of 12.9% in the first quarter, compared to 10.9% in the final quarter of the previous financial year. The additional 20% stake Vodafone has taken in Safaricom, taking its holding to 55%, has resulted in upgrades to its earnings and cash flow numbers for the full year to reflect the additional boost.

All is not plain sailing, however. Despite an improving outlook, the most obvious thorn in the group’s side remains the German operation, which is the group’s largest and accounts for 30% of total revenue. Service revenue fell by 0.2% over the last year, although growth of 1.3% in the fourth quarter could be a more promising signal of things to come and has been followed by a rise of 1.2% in the first quarter.

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While the strategy is clear, the transformation in train and the valuation undemanding, investors will need to see stronger progress before raising the market consensus from its current view of a hold, although today’s positive opening reaction adds more momentum to a price which has risen by 33% over the last year, as compared to a gain of 18% for the wider FTSE100.