Must read: FTSE 100, sterling, and gilts under pressure, Deliveroo, Wickes

Our head of investment analyses latest developments on global stock markets.

GLOBAL MARKETS

European markets have opened lower on the final session of the week as investors digest a slew of corporate update and the political uncertainty in the UK. adidas AG (XETRA:ADS) has slumped to the bottom of the DAX amid a weaker demand outlook.

The FTSE 100 has opened lower, reversing yesterday’s modest gains as the market weighs up optimism towards the potential for a more economically savvy prime minister against concerns about a period of prologued political uncertainty. Utilities and defence stocks are outperforming while retailers like JD Sports Fashion (LSE:JD.), Frasers Group (LSE:FRAS) and Next (LSE:NXT) are at the bottom of the UK index on the back of disappointing UK retail sales figures, pointing to a deteriorating consumer outlook.

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The pound is under pressure after a short-lived rally around Liz Truss’ resignation, breaking back below $1.12. GBPUSD is on track to end the week lower despite Monday’s rally following the new chancellor’s change of fiscal direction.

UK RETAIL SALES

UK September retail sales fell by 6.9% year-on-year versus expectations for a decline of 5%. Month-on-month excluding fuel retail sales slumped by 1.5%, sharply below forecasts for a drop of 0.3%. Total retail sales were 12% higher in value terms but 1.3% lower in volume terms versus their pre-covid levels from February 2020.

The latest figures point to a dismal picture for the strength of the consumer as rising prices and squeezed household budgets leaves little left over for discretionary spending at the end of each month. The bank holiday for the state funeral of Her Majesty Queen Elizabeth II also negatively impacted the figures when many retailers were shut. With inflation above 10% at a 40-year high, consumers are having to part with more and more pounds for less and less goods, adding to growing fears of a looming recession, which looks like almost an inevitability at this stage.

Food store sales in particular have been hit hardest, given that food is experiencing the most acute inflation at 14.6%, the highest since 1980 and above the consumer price index average of 10.1%. Many consumers are trading down from branded to non-branded cheaper alternatives in the supermarket as well as considering price much more closely as a factor when deciding what items to place in the trolley.

UK PUBLIC SECTOR NET BORROWING

UK September public sector net borrowing hit £19.25 billion, sharply rising versus £8.58 billion in August. Excluding banks, it hit £20 billion, rising £2.2 billion versus the same period last year and was the second highest September borrowing figures since records began in 1993. The highest was in September 2020 at the height of the pandemic. Debt interest payable hit £7.7 billion which was the highest September figure since records began in 1997.

The post mini-budget bond market sell-off which sent yields soaring sharply increased the interest payable on central government debt during the final week of September, adding to repayment charges facing the Treasury. Interest rates have already been on the climb since late last year as the Bank of England attempts to bring inflation back down towards its 2% target. However, the fiscal chaos and gilt market mayhem in September added to the debt burden facing the public sector, contributing billions to the fiscal black hole that must be plugged in the chancellor’s medium-term fiscal plan set to be outlined at month-end. At least now Jeremy Hunt’s new fiscal strategy of cutbacks and tax increases complement rather than conflict with the Bank of England’s desperate attempts to curtail rising price levels.

UK CONSUMER CONFIDENCE  

The GfK consumer confidence indicator rose to -47 in October, better than expectations for -52 and the first improvement in a year. 

Although consumer confidence picked up slightly, the figure is still languishing near September’s record low of -49. The consumer is facing a perfect storm with wages struggling to outpace inflation, soaring mortgage costs, a painful increase in the price of essential goods, especially food and fears about the implications of a looming recession with the threat of job cuts and pay freezes. As well as economic instability, political uncertainty is denting consumer confidence with at least four chancellors and three prime ministers this year alone.

DELIVEROO

Deliveroo (LSE:ROO) said it expects full-year revenue to come in at the lower end of its guided range. Full-year gross transaction value is now expected to hit 4-8% at the lower end of its previously expected range of 4-12%. Confirming an earlier announcement, Deliveroo announced Scilla Grimble, who is current CFO at MoneySupermarket.com will be appointed as the delivery app’s CFO from 20 February next year. She has a wealth of experience working closely with consumer brands, having been head of consumer and retail investment banking for EMEA at UBS for a decade.

Deliveroo was very much a poster child stock of the stay-at-home pandemic trend in 2020 with supercharged demand for takeaways during lockdowns when restaurants and bars were forced to shut. However, the economic reopening and the cost-of-living crisis have dented demand for its non-essential offering. Financial markets have also been unkind to leveraged tech stocks this year given the global shift towards higher interest rates and the end of the era of cheap money. Plus, Deliveroo’s disastrous London IPO in April last year turned investors away from the business.

Shares in Deliveroo have had a torrid ride, shedding more than 70% since its flotation, pricing in the challenging consumer environment and rising cost pressures, forcing the business to streamline its operations by existing certain markets such as the Netherlands.

WICKES

Wickes Group (LSE:WIX) reported third quarter like-for-like sales up 2.6% versus growth of 0.8% in the first half. The retailer has maintained its full year adjusted profit before tax guidance to come in the range of £72-82 million. It expects full-year 2023 energy costs to be around £7.5 million higher than full-year 2022.

Wickes has been caught up in the stock market volatility this year with shares slumping nearly 50% year-to-date. The post-pandemic DIY boom is fading, and inflation is rising, putting downward pressure on demand and upward pressure on costs, squeezing the retail business during the cost-of-living crisis and ahead of a possible recession. Despite this, Wickes has been managing inflation by increasing prices, which has helped to boost revenues in the third quarter. However, this may not necessarily translate into a strong bottom-line performance given the pressures from soaring energy bills that look set to continue to dampen profitability.