Must read: Bank of England, Rolls-Royce, JD Sports, Wood Group, Disney

Our head of investment rounds up the morning's big news.

GLOBAL MARKETS 

European markets have opened higher with most stocks on the FTSE 100 trading in the green. 

G7 finance ministers are meeting in Japan today, with Treasury Secretary Janet Yellen commenting that a US default is ‘unthinkable’ and would rank as a ‘catastrophe.’ 

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China’s annual inflation rate hit 0.1% in April, sliding from 0.7% in March and below analysts’ expectations, marking a two-year low amid a bumpy recovery out of the pandemic. Producer prices fell 3.6%, the seventh consecutive month of deflation.

BANK OF ENGLAND

The Bank of England is widely expected to raise interest rates by a further 25 basis points at lunchtime today. This would lift the bank rate to 4.5%, the highest level since 2008, marking the twelfth consecutive rate increase. The central bank is also expected to upgrade its economic growth forecasts for this year as the risk of recession subsides. However, it is also expected to raise its inflation forecasts for the year. 

The outlook for interest rates beyond today is less clear, with the Bank of England likely to be closely guided by the speed at which the inflation data improves. Goldman Sachs this week warned that the bank rate may need to continue to increase in 25 basis point increments to 5% by August to combat ‘ongoing inflationary pressures’. 

While energy prices have been coming down, the UK is still grappling with food price inflation following extreme weather in Spain and North Africa. There are also second-round inflationary effects from higher wages among workers and higher prices passed onto consumers by businesses facing elevated costs. 

UK inflation remains stubbornly high, stuck above 10% at odds with the US and Europe which have seen their inflation rates start to come down. Food and non-alcoholic drinks inflation remains particularly high at 19.1% in March. 

Cable (GBPUSD) hit the highest level since April 2022 after US inflation fell to 4.9% on Wednesday, the first drop below 5% in two years and in anticipation of today’s Bank of England rate increase. However, GBPUSD is giving back some of those gains today, although the pound remains firm against the euro.

ROLLS-ROYCE 

Rolls-Royce Holdings (LSE:RR.) said it is on track to meet guidance for operating profit of between £800 million and £1 billion this year. Flying hours hit 83% of pre-pandemic levels in the first four months of 2023. 

Shares in Rolls-Royce have had enjoyed an incredibly strong year so far, rallying over 50% amid optimism towards the new CEO Tufan Erginbilgic and a strong earnings performance last year, thanks to the recovery in international aviation post Covid. Erginbilgic has been spearheading a major transformation programme which has reinvigorated the engine maker’s bull case. He also recently appointed a new CFO, in another sign that he is making his mark. In January, when he was appointed CEO, Erginbilgic described Rolls Royce as a ‘burning platform’. 

Rolls Royce is the FTSE 100’s best performing stock over the past six months, although the stock is still trading at less than half of its value from its 2018 peak and is giving back some of those gains today.

JD SPORTS 

JD Sports Fashion (LSE:JD.) has appointed Dominic Platt as its next chief financial officer. He will join the sports retailer from financial services firm BGL Group where he was also CFO. Current financial chief Neil Greenhalgh will depart the business later in summer after four years in the role. 

Platt will be part of JD Sports’ ambitious growth plans, including significant store expansion with £500-600 million spending on this a year. Earlier this week, JD Sports announced a proposed acquisition of French trainers brand Courir for 520 million euros, also accelerating its growth strategy. 

JD Sports appears to be defying the economic doom and gloom, with investors feeling optimistic towards the stock. JD Sports has enjoyed a gain of more than 27% so far this year, and over 38% in the past 12 months, landing it among the top performers on the FTSE 100.

WOOD GROUP

John Wood Group (LSE:WG.) reported first quarter revenue of $1.45 billion, rising year-on-year following a weak 2022. Its order book on 31 March hit $5.7 billion, declining versus December. The energy and materials engineering company kept its expectations for 2023 unchanged, but warned it is ‘mindful of the uncertain economic outlook.’ 

Investors await news from Apollo about whether the US private equity giant intends to make a firm offer for Wood ahead of the 17 May deadline. Last month it proposed a takeover price of 240p per share, representing a valuation for Wood Group of £1.66 billion. 

A number of deep pocketed private equity firms have set their sights on UK targets this year including Wood Group, THG Ordinary Share (LSE:THG), Sureserve Group (LSE:SUR), Network International Holdings (LSE:NETW) and Dechra Pharmaceuticals (LSE:DPH)s. The UK market has underperformed Europe in recent years amid reputational damage since Brexit, providing attractive valuations for acquisitive companies. Plus the pound suffered last year, adding to the UK’s allure but with sterling rebounding, time is ticking for overseas buyers looking to capitalise on the FX advantage.

DISNEY 

The Walt Disney Co (NYSE:DIS) reported fiscal second-quarter earnings which broadly met analysts’ expectations on the top and bottom line. However, Disney+ streaming subscribers fell by 4 million, hitting 157.8 million versus expectations for 163.17 million, sending shares down almost 5% after-hours. Investors shrugged off a stronger performance in its parks, experiences and products division which enjoyed 17% revenue growth to $7.7 billion, mostly thanks to strong sales in its theme parks. 

After a tough 2022 in which the stock shed over 40%, Disney shares have enjoyed a significant recovery this year, thanks to the broader rebound in growth stocks, significant restructuring including 7,000 job cuts, as well as Bob Iger’s return as CEO. However, these earnings highlight the intense competition in the streaming wars amid an onslaught of incumbent and new entrants in the sector. Disney has also been dealing with a political battle with Florida’s governor Ron DeSantis, a drop in Disney+ Hotstar revenue in India and a writers’ strike which has impacted some of its productions.