Must read: FTSE 100, gilts, H&M, Porsche, Mitchells & Butlers

Never a dull moment on financial markets at the moment, our head of investment rounds up the big macro events and hot company news.

GLOBAL MARKETS 

European markets have opened lower, with the major bourses all trading in the red. Amid a volatile week for UK markets with the FTSE 100 having swung from losses to gains yesterday, the UK index has opened lower with the positive glow from the Bank of England’s £65 billion intervention fading fast.

Housing stocks are leading the leg low with Barratt Developments (LSE:BDEV) down as much as 10% and Rightmove (LSE:RMV) also sharply lower. Next (LSE:NXT) is also trading near the bottom of the FTSE 100 after slashing its guidance. 

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UK MARKETS 

Gilt yields plunged yesterday while prices jumped after the Bank of England carried out an emergency intervention to buy an unlimited amount of long-dated bonds to restore confidence in a dysfunctional market. 30-year gilt yields saw the biggest daily drop since records began in 1992, falling from the highest level since 2002. The shorter end of the curve also saw gilts rally with 2 and 10-year yields also falling.

The central bank is expected to spend £65 billion over 13 days to soothe the markets and restore financial stability. It also suspended its quantitative easing unwind programme to sell gilts, buying long-dated bonds instead. The Bank of England’s move was driven by concerns about pension funds, with some at risk of collapse following the slide in gilts following rising collateral calls on LDIs (liability driven investments) used by pension funds. 

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Although this is a short-term plan to restore order to the tumbling UK bond market, there are concerns that it could add to the UK’s inflationary pressures, alongside sterling’s weakness and the government’s expansional fiscalism which could all exacerbate upward price pressures. In order to curtail almost double-digit inflation, the Bank of England could very well carry out a jumbo 100 basis point rate hike in November, double its already aggressive 50 basis point lift last week. 

There is a tug-of-war taking place between the Bank of England’s monetary tightening and the government’s fiscal stimulus, with the former looking to bring inflation back towards 2%, while the latter is looking to boost demand and economic growth as the two sides clash with each other. 

The pound is under pressure once again, down by around 1%, languishing near lows not seen since 1985, while the FTSE 100 is more than giving back yesterday’s gains. UK gilt yields are trading higher across the curve this morning with bond prices lower reversing some of yesterday’s bond market rally following the central bank intervention.

H&M 

Hennes & Mauritz AB Class B (XETRA:HMSB)’s fiscal third quarter pre-tax profit hit 689 million crowns, below expectations for 2.98 billion crowns and less than last year’s 6.09 billion crowns. This included a one-off cost of 2.1 billion crowns related to its exit from Russia following the invasion of Ukraine. Its gross margin fell to 49% from 53.2% a year ago. 

Sky-high inflation, squeezed household budgets, sliding consumer confidence and one-off costs from exiting Russia have created a perfect storm for H&M’s profitability which fell sharply along with margins.

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The world’s second-biggest fashion retailer’s earnings are in stark contrast to its rival Inditex which enjoyed a surge in profits in its forecast-topping first half earnings this month thanks to its strong working capital management. Investors have had a difficult time this year with H&M’s shares lately which are down 45% year-to-date and down 50% over the past five years with shares sharply under pressure again today.

PORSCHE 

It is IPO day for Porsche, which has opened for trade on its first day as a public company, following its spin-off from its parent company Volkswagen AG (XETRA:VOW). 

The stock is currently trading just above its final price of 82.50 euros per share (at the top end of the range announced earlier this month) but has fallen from its debut price of 84 euros.

This is Germany’s biggest IPO in over a quarter of a century and the second largest IPO in German history after Deutsche Telekom with Porsche seen as the crown jewel of the VW Group. Porsche CEO Oliver Blume said this is ‘a historic moment’.

Porsche hopes this flotation will help to fund its shift towards battery technology and become as successful as Ferrari NV (NYSE:RACE)’s IPO in 2015. However there are concerns that Blume is spreading himself too thinly with a dual role as CEO of Porsche and the head of Volkswagen.

MITCHELLS & BUTLERS  

Shares in Mitchells & Butlers (LSE:MAB) are under pressure after warning of higher energy and utility costs in the next financial year. These costs have risen from £80 million in 2019 to £150 million this year with the pub and restaurant group forecasting further increases in 2023. 

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The group behind Toby Carvery, All Bar One and Browns has been struggling with rail strikes and extreme heat which have negatively impacted sales and profitability. Hospitality more broadly continues to face headwinds from staff shortages and food and energy inflation. Plus, with expectations for a UK recession and falling consumer confidence, discretionary spending is likely to struggle with less demand for restaurants and bars to come.

Shares in Mitchells & Butlers have slumped 5% today, extending recent declines after slumping over 50% year-to-date.