Interactive Investor

Must read: Fed head comments, UK GDP, Diageo, Richemont

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

10th November 2023 08:57

by Victoria Scholar from interactive investor

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Jerome Powell, US Federal Reserve chief 600

    GLOBAL MARKETS

    European markets are under pressure, taking their cues from a negative close on Wall Street after Federal Reserve Chair Jay Powell indicated that interest rates may need to rise further, snapping a winning streak for equities and pushing bond yields higher. The US dollar index is on track to end the week in the green. 

    Meanwhile, bitcoin is going from strength to strength, rallying 4% in the past five days, and is up by a third over the past month, driven by hopes that a spot bitcoin exchange-traded fund (ETF) could be approved soon. Ether also surpassed $2,000 for the first time since April.

    UK GDP 

    UK GDP came in flat in the third quarter, down from growth of 0.2% in the prior quarter, but ahead of analysts’ expectations for a decline. This was still the worst quarterly performance of the UK economy in a year. The services sector shrank by 0.1% while construction grew by 0.1% and production was flat. There were drops in ‘health, management consultancy and commercial property rentals. These were partially offset by growth in engineering, car sales and machinery leasing’, according to Darren Morgan, director of economic statistics at the Office for National Statistics (ONS). 

    While the latest quarterly UK GDP figures came in slightly better than expected, it was a lacklustre performance highlighting the sluggish macro picture. As elevated inflation and higher interest rates take their toll, there’s a growing risk of a shallow recession in the UK next year as the lagged impact of prior interest rate hikes begin to make their way through the economy. Bringing down inflation remains the government and the Bank of England’s key priority, even as it comes at the expense of economic growth.

    DIAGEO 

    Diageo (LSE:DGE) has issued a warning that organic operating profit growth would decline in the first half due to weakness in Latin America and the Caribbean, which accounts for nearly 11% of its total net sales. Sales in the region are forecast to slump by over 20% year-on-year in the current fiscal first half. 

    Macroeconomic headwinds are dampening demand for Diageo’s offering in the Caribbean and Latin America. The consumer slowdown is prompting customers to switch to cheaper substitute drinks instead, weighing on Diageo’s branded sales. In Europe and Asia Pacific, it also expects slower momentum in the current half year. Trading down among consumers is a key risk to Diageo’s strategy which has been to focus on quality over quantity. The economic downturn is likely to mean fewer consumers are willing or able to pay more for expensive high margin premium spirits. 

    While alcohol is typically viewed as a relatively economically resilient part of the market, shares in Diageo have struggled lately, down almost 20% year-on-year including today’s decline. That's sent the stock to the bottom of the FTSE 100 as consumer spending on drinks in bars, restaurants and clubs weakens in certain geographies.

    RICHEMONT

    Compagnie Financiere Richemont SA Class A (SIX:CFR) reported quarterly constant currency sales growth of 5%, slowing significantly from 19% in the previous quarter. Six-month sales rose by 6% to 10.22 billion euros, missing analysts’ expectations. The luxury conglomerate highlighted the ‘uncertain macroeconomic and geopolitical environments, demanding comparatives and significant adverse foreign currency movements.’ 

    Asia Pacific was a bright spot, with sales up 14%, and jewellery outperformed enjoying 10% sales growth. However, its first half operating profit (EBIT) declined by 2% to 2.66 billion euros, missing analysts’ expectations and watch sales contracted by 3%. 

    The disappointing performance at Richemont echoes a similar slowdown in performance at French rival LVMH Moet Hennessy Louis Vuitton SE (EURONEXT:MC). The weak global macro backdrop with rising interest rates, elevated inflation and China’s bumpy recovery are weighing on demand for luxury goods, particularly watches at Richemont. Luxury was a market winner at the start of the year, but the sector’s glow is now fading as even the aspirational, higher end customers feel the squeeze with spending on the decline as belts tighten.

    Shares in Richemont are trading sharply lower, dragging rivals like The Swatch Group AG (SIX:UHRN) and LVMH with it.

    These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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