Market movers: Fed supercharges markets, Bank of England, Next, Barratts

Victoria Scholar, interactive investor's head of investment, runs through today's big stories and how financial markets are reacting. 

EUROPEAN MARKETS

European markets are trading sharply higher, buoyed by positive momentum last night that lifted US stocks after the Federal Reserve raised rates by 50 basis points for the first time since 2000 and indicated that there were more hawkishness to come, reassuring the market that the central bank is serious about tackling inflation. The FTSE 100 is trading back above 5,600 staging sharp gains with Mondi (LSE:MNDI) leading the charge after it announced plans to sell its Russian assets and exit the country.

BANK OF ENGLAND

The Bank of England is expected to carry out another quarter point interest rate rise today, lifting its Bank Rate from 0.75% to 1%, the highest level since 2009. There is an unlikely outside chance that the central bank follows the Fed last night with a more aggressive 50 basis point hike. However, it is more likely that the vote split will become less one sided with the potential for certain committee members to turn more cautious and dovish in light of the increasingly gloomy economic outlook. At the last meeting Deputy Governor Jon Cunliffe was the sole dovish dissenter.

It will also be interesting to see whether after today’s decision, there will be a shift in market expectations for where the bank rate will finish the year. At the moment the market is pricing in a series of further rate hikes to take the bank rate to around 2.25-2.5% by year-end, sharply at odds with the expectations of more prudent economists who are forecasting the bank rate to reach just 1.5% by early 2023.

Despite the Bank of England’s rate hiking path, the pound has been under pressure lately amid concerns about a growing risk of recession, a slump in consumer confidence and upgraded inflation forecasts as both growth and prices continue to travel in the opposite and wrong directions.

SHELL

Oil giant Shell (LSE:SHEL) has today posted a strong gain in first quarter adjusted earnings from the prior fourth quarter. Adjusted profit of $9.1 billion is up 43% compared to the last three months of 2021, with the oil major confirming a $3.9 billion post-tax charge following its exit from Russia. A first quarter 2022 dividend of 25 US cents per share is up 4% from Q4 2021 and group net debt of $48.5 billion is down 8%.

Shell’s share price now trades at multi-year highs and, even prior to today’s rally had risen 37% so far this year. Today’s results come with the price of Brent crude up by a similar amount and compares to a gain of under 2% for the FTSE 100 index. For investors, charges in relation to its Russian related assets were clearly not in the script at the start of the year. Calls for a government windfall tax are unlikely to disappear given energy costs are hitting consumers hard, while tackling climate change issues remains a pressing need for both the industry and governments globally.

More favourably, rocketing energy prices year-to-date have provided a massive boost to profits. The recovery in energy prices from the depths of the pandemic had already allowed Shell to reduce net debt and begin a renewed focus on shareholder returns. A forecast dividend yield in the region of 3.6% is not derisory in an environment of still low if rising interest rates. On balance and given no obvious reason for a major retreat in energy prices, analyst consensus opinion currently points towards a strong buy.

NEXT

Next (LSE:NXT) has maintained its profit before tax guidance for the full-year for £850 million, representing a 3.3% increase in earnings year-on-year if delivered. First quarter full price sales rose 21.3% in the quarter and group retail growth soared by 285% versus last year. However, this figure was distorted by lockdowns last year which meant that most of its stores were shut in the first quarter of 2021. Online sales also grew sharply by 47% in the quarter versus the pre-pandemic 2019/2020 year, however they were down versus last year again because online sales were boosted by retail closures last year.

Overall, the company has outperformed in store sales and underperformed in online sales, both figures though resulting from pandemic-era distortions last year when stores were shut and e-commerce boomed. However the online sales growth of near 50% since before the pandemic suggests that the boom in e-commerce although expedited by the pandemic is a trend that is enduring post Covid.

Shares in Next have been caught up in this year’s market volatility, shedding nearly 30% since the January high. Its exit from Russia and Ukraine cost the business £85 million in lost sales and caused the retailer to cut its outlook. Plus, it has been dealing with the macro pressures from cost inflation, a tight labour market and supply chain bottlenecks, prompting a series of analyst downgrades this year. However the stock still has another 45% downside to go before in order to re-test the March 2020 trough at the height of the pandemic-driven global market sell-off.

BARRATT DEVELOPMENTS

Barratt Developments (LSE:BDEV) reported total forward sales of £4.38 billion as of 1st May up from £3.7 billion last year and confirmed that it is on track to deliver full-year trading results in line with the board’s expectations. However the housebuilder pointed out the pressures from rising inflation and interest rates as well as cost inflation and the uncertainty around the war in Ukraine.

Despite recent share price weakness, Barratt is the latest housebuilder to issue an upbeat trading report, underpinned by a robust housing market in which demand is sharply outstripping supply. Despite the rising rate environment, figures from the Bank of England this week saw mortgage lending rebound to a six-month high as house prices rise, suggesting that rate hikes are yet to dampen appetite for mortgages, as individuals and families attempt to lock in better mortgage rates before they push even higher perhaps.

Although the inflating cost of materials is a key pressure for the sector, Barratt optimistically said its impact on margins will be broadly neutral or positive in the second half of the year. However a major headwind could emerge if the housing market starts to slow along with the broader economy.