Our head of investment rounds up the morning's big news.
European markets are mostly in the red, taking their cues from last night’s Federal Reserve-driven sell-off on Wall Street. The FTSE 100 is under pressure with Admiral Group (LSE:ADM) dragging the index lower after the motor insurer slashed its dividend.
The Dow, the S&P 500 and the Nasdaq all shed more than 1% with the DJIA leading the declines after Fed Chair Jerome Powell indicated that there could be further and faster rate hikes to come.
Risk-off sentiment is dragging oil prices lower with Brent crude inching closer to breaking below $83 a barrel. Brent and WTI suffered their biggest one-day drop since January while the dollar gained strength.
FED CHAIR POWELL’S TESTIMONY
In a testimony in front of the Senate Banking Committee, Fed Chair Jerome Powell indicated that the US central bank could be preparing for more aggressive rate increases ahead. It comes after the latest US inflation data came in hotter-than-anticipated. Despite the Fed’s hawkish stream of hikes over the past year, core inflation remains persistently higher at 5.6% in January and the US economy is also proving to be stronger than expected.
US stock markets sold off yesterday amid the prospect of further tightening, while the dollar and Treasury yields rose. Focus will be on Friday’s US non-farm payrolls report in which good news could be bad news; a strong headline jobs figure and wage growth could pave the way for a less accommodative 50 basis point move from the Fed in March. Markets are currently pricing in around a 50-50 split between chances of a 25-basis point move and a 50-basis point move at the Fed’s next rate setting meeting. Futures contracts suggest the policy rate will peak around 5.25%-5.5% in June but some are expecting the Fed Funds rate to push beyond that.
UK REC/KPMG JOBS REPORT
The REC/KPMG monthly permanent job placements index hit 46.3 last month falling from 46.8 in January, falling for a fifth consecutive month.
The figure highlights the cautiousness among businesses to hire permanent staff amid the macroeconomic headwinds of slowing growth, a softening consumer, rising interest rates, and inflated costs. Many businesses are looking for ways to cut costs, particularly on labour given the tightness in the jobs market which makes hiring workers more expensive. Companies are relying more and more on temporary workers as a way to fulfil staffing needs without adding to fixed labour costs.
adidas AG (XETRA:ADS) reported a fourth quarter operating loss of €724 million, caused by the termination of its Yeezy partnership. The sportswear giant was forced to slash its dividend in 2022 to €0.7, less than a quarter of its pay out in the previous year of €3.30 a share. Currency neutral revenue also took a hit, falling by 1% in the fourth quarter. China was also a weak spot with sales slumping 36% last year, and down 50% in the fourth quarter.
Inventory write-offs and one-off costs relating to the termination of its Yeezy partnership in October have cost Adidas dearly, resulting in an operating loss in the fourth quarter and a decline in sales. On top of that, sales in China fell sharply last year amid Beijing’s strict lockdown measures. Plus Adidas has been dealing with increased supply chain costs post pandemic and the macroeconomic backdrop which has weakened the consumer and prompted heavy discounting to attract customers.
Shares in Adidas have had a strong start of 2023 up around 10% amid the revival in risk appetite to kick off the year, but shares are under pressure today as the extent of the financial strain associated with the end of its Yeezy tie-up becomes clear.
Darktrace (LSE:DARK) has reduced its 2023 guidance for free cash flow to approximately 50-55% of adjusted EBITDA down from 60-65%. First half revenue increased by 35.8% to $259 million while net profit slid 86% to $581 million. Darktrace said that ‘hacktivist’ threats are on the rise with ChatGPT lowering the ‘barriers to entry for threat actors’. CEO Poppy Gustafsson described the macroeconomic backdrop as challenging and said there was a slowdown in new customer wins.
In January shares in Darktrace fell sharply after Quintessential Capital Management, a short seller made allegations about potential contract irregularities before its IPO in 2021. Darktrace hired EY last month to carry out an independent review of its finances.
While the stock had a strong start to public life, surging between April and October 2021, shares fell sharply after its investor 180-day lock-up ended and some analysts questioned its lofty valuation. At one stage it fetched a valuation of nearly £7 billion but is now worth just a fraction of that, with shares down more than 45% over a one-year period.
Shares in Admiral have slumped to the bottom of the FTSE 100, hitting the lowest level since November after the motor insurer cut its full-year dividend by 40% to 112p per share, sharply below expectations for a payout of 168.2p per share. Full-year profit before tax slid by 39% to £469 million also below estimates for £491.5 million.
Admiral has been struggling with the macroeconomic uncertainty and high levels of inflation. Insurers benefitted from low levels of claims during the pandemic when lockdowns and government restrictions meant fewer cars were on the roads, resulting in a drop in the number of accidents. The resumption of economic normalcy last year has sharply boosted the level of claims, resulting in a much higher level of pay outs to customers post covid. With many key car parts coming from Russia and Ukraine, the war over the last year has also caused major supply disruption for insurers too. Plus new rules at the start of last year, which mean that insurers must offer renewing customers the same offer as new customers, is another headwind for Admiral.
Shares in Admiral have sharply underperformed the FTSE 100 lately, shedding 20% over a one-year period versus a gain of 13.5% for the broader large cap index.
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