Interactive Investor

Must read: US-China tensions, oil, UK house prices, Deliveroo

European markets are in an upbeat mood ahead of US inflation data, says head of investment Victoria Scholar.

10th August 2023 09:02

by Victoria Scholar from interactive investor

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GLOBAL MARKETS

European markets are trading higher as earnings releases continue. All eyes are on US inflation data today for July, which is expected to increase from 3% to 3.3%, putting an end to 12 straight monthly declines. Investors are looking for clues to see whether the ‘soft landing’ thesis held by a number of economists is likely to play out or whether inflation will prove to be stickier than expected. The latter could prompt further monetary tightening from the Federal Reserve and in turn heighten the level of uncertainty for equities.

Meanwhile, US-Sino tensions ramped up after President Joe Biden announced a ban on US investments into certain Chinese technology industries such as computer chips and artificial intelligence. The UK is reportedly considering following suit.

Oil prices continue to stage gains after hitting multi-month highs on Wednesday driven by concerns over supply after a Ukrainian drone attack on an oil tanker last week and a steep drawdown in US fuel stockpiles following output cuts from Russia and Saudi Arabia. However tempering an even steeper increase are concerns about weaker demand particularly from China, which is struggling with weak imports and exports, a property slowdown, deflation, and a bumpy recovery out of the pandemic.

UK RICS HOUSE PRICE BALANCE

The Royal Institution of Chartered Surveyors (RICS) house price balance, which measures the percentage of surveyors reporting house price increases versus declines, fell to -53 in July from -48 in June, reaching the lowest level since April 2009 during the global financial crisis. Property sales fell at the fastest rate since April 2022, while rents jumped the most since 1999.

This data echoes recent reports from Nationwide and Halifax suggesting that the Bank of England’s aggressive stream of 14 consecutive rate hikes and the consequent surge in mortgage costs are sharply weighing on the housing market. The reduction in affordability of borrowing is prompting more and more would be buyers to turn to the rental market instead with increased demand leading to a jump in rents. Plus, landlords are dealing with increased costs because of inflation, which they are also passing on to their tenants.

While the decrease in house prices comes as a welcome development for first time buyers looking to get on the housing ladder, prices remain significantly above pre-pandemic levels and the jump in mortgage rates remain a major hurdle. However with the ‘mortgage price war’ ramping up as lender battle it out to gain customers, the intensification of commercial competition could play into the hands of would-be buyers, as lenders such as HSBC and Nationwide cut rates to boost demand.

DELIVEROO

Deliveroo (LSE:ROO) raised its full-year outlook, expecting pre-tax earnings of £60-80 million in the full-year, a sharp upgrade from its prior guidance for £20-50 million. It reported adjusted EBITDA in the first half of £39.4 million up from a loss of £51.6 million in the same period last year. Deliveroo said it has reached adjusted EBITDA profitability ahead of plan and is progressing towards generating consistent positive free cash flow.

Group revenues rose by 5% to £1.02 billion and gross transaction value (GTV) increased by 3% to £3.5 billion. The UK was a bright spot with GTV up 7% versus a drop of 3% internationally. It is planning to return £250 million of additional structural surplus capital to shareholders.

Macroeconomic headwinds and the cost-of-living crisis have squeezed consumer budgets, reduced spending power and denting food delivery demand. The food delivery business has been focusing on harnessing the growth potential of the grocery segment as well as highlighting the best value offers and promotions to customers on its app in an attempt to appeal to more cash-strapped customers. Price inflation and increased grocery demand helped drive a stronger performance despite a fall in order numbers. While Deliveroo has been dealing with increased labour costs, it has been trying to implement efficiencies in the rider network to help limit the inflationary impact.

Shares are staging gains today, thanks to a much rosier earnings outlook, bringing its year-to-date gain to around 44%. After a disastrous start to life on the stock market in March 2021, slumping 26% on its first trading day, shares have since fallen by over 50%. However, since the February lows, more positive price action has come back into play, driven by the rebound in technology stocks in 2023 and higher prices.

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