Market movers: FTSE 100, inflation, oil, ITV, TUI, Compass

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 higher, with sentiment picking up as investors look to the latest figures on US inflation out at lunchtime. Most sectors are trading in the green with technology and basic resources leading the charge, while healthcare is the sole laggard. The FTSE 100 is pushing higher inching closer to intraday resistance at 7,300, with Compass Group (LSE:CPG) trading at the top of the UK index thanks to strong results from the catering company.

INFLATION DATA

China’s annual inflation rate rose to 2.1% in April, the highest since November, topping analysts’ estimates and marching higher versus 1.5% in the previous month. Food prices rose for the first time in five months to hit the highest level since October 2020 as its zero-Covid tolerance policy led to supply disruptions. However, China’s factory gate inflation hit 8% topping analysts’ expectations for 7.7%, but easing from 8.3% in the previous month to hit a one-year low.

In Germany, April’s final CPI reading hit 7.4%, the highest level in more than 40 years and up from 7.3% in March. As the fallout from the Ukraine war takes its toll on price levels, there are increasing calls from policymakers for interest rates from the ECB to move higher sooner rather than later to prevent inflation from spiralling.

US inflation data out at lunchtime will be front-and-centre for markets amid concerns that rising price levels could push the world’s largest economy into recession. Price levels accelerated to 8.5% in March, the highest since December 1981, topping expectations while US GDP unexpectedly contracted in the first quarter dropping 1.4% on an annualised basis.

The inflation data will also provide some insight into whether the Federal Reserve needs to act more aggressively by accelerating its rate hiking path. While the data is expected to ease to 8.1%, stronger-than-expected inflation figures could put pressure on equities and lift the dollar if the market thinks a 75-basis point hike at one meeting is back on the table.

OIL

After WTI settled at a two-week low of $99.76 a barrel, oil prices are bouncing back with US crude trading firmly back above resistance turned key support at $100. The market is attempting to weigh up downside pressures from China’s Covid lockdowns, a strengthening US dollar and the growing risk of a global recession against the ongoing fallout from the Ukraine war, in particular the prospect of a European Union ban on Russian oil and the limiting effect that would have on the availability of supply.

Despite the market volatility, oil prices have been struggling for directional momentum over the last month with WTI stuck in a range between around $95 and $110 as traders await either a bullish or bearish breakout.

ITV

ITV (LSE:ITV) reported an 18% rise in first quarter external revenue to £834 million, while April advertising revenues rose by 9%, falling short of its previous forecast for 10% with this morning’s mixed report sending shares modestly higher. The British broadcaster said it is expecting a challenging summer ahead with ad revenue to fall 8% in May and drop 15% in June amid tough year-on-year comparables after the European Football championship lifted ad revenue last year.

In March, shares in ITV plunged despite reporting healthy full-year numbers at a group level, with investors spooked by the spending costs associated with its planned launch of the new ITVX streaming service later this year.

There has been no let up for the ITV bulls lately, with the stock continuing its descent after March’s plunge and a decline of close to 50% since the February highs. Without the Euros this summer, the outlook looks considerably more challenging, particularly when combined with the intense competition for eyeballs and inflation pushing up costs. With ITV pinning its hopes on its digital acceleration with the launch of ITVX in Q4, the company has a lot to prove with investors somewhat sceptical so far. While last year was a strong year for ITV, with growth in profits, revenues and a reduction in net debt, that strength is unlikely to be repeated this year.

TUI TRAVEL 

Shares in Tui Travel (LSE:TUI) are trading higher after it said it will turn a profit this year after its second quarter EBIT narrowed to 330 million euros from 633 million euros in the same period last year. Sales hit 2.13 billion euros, surging almost 10 times versus the same period in 2021 thanks to the gradual normalisation of international travel post-pandemic. Tui said summer season bookings are now at 85% of pre-pandemic levels, adding that job cuts are finished and it is in the process of rebuilding its staff.

Clearly this is a company that was hit hard by the pandemic, salvaged from the brink by government bailouts. In March it announced plans to repay the more than 4 billion euros that it borrowed in state aid. Fortunately, today’s update indicates that bookings are moving in a positive trajectory and holidaymakers are yet to be dissuaded by the 20% jump in peak season average selling prices versus 2019. This suggests that Tui can pass some of its additional costs from rising fuel bills and cost inflation onto customers as it aims to simultaneously pay back its debts and restore profitability.

Investors are encouraged by the robust trends within international travel as pent-up demand appears to be outweighing the cost-of-living crisis. Tui shares have been in recovery mode since the sell-off earlier this year when Russia invaded Ukraine but they are still 35% below the February high.

COMPASS

Catering company Compass is now putting the pandemic firmly behind it as the company flags up revenue growth above pre-Covid levels. Operating profit has recovered to £638 million compared with last year’s pandemic hit £168 million, with strong growth across all sectors. The client retention rate is at its highest ever, record new business wins of £2.5 billion over the last 12 months have been made, while net debt has fallen back to within management’s target range. Operating cashflow is up nearly 18% year-over-year and now underwrites a new share buyback programme of up to £500 million. Full-year profit margin guidance has been left unchanged, although the organic revenue growth estimate is nudged higher to a possible 30%.  

In all, rising costs, including those for food, don’t help, supply chain challenges persist, and the post pandemic trend of working from home has likely removed some of its former custom. On the upside, recovery from the Covid crisis is about complete, and management continues to highlight significant global structural growth opportunities, with just under half the worldwide food services market still self-operated. The company is paying a dividend again, albeit at a lower level than before the pandemic, and with today’s latest payment, leaves the shares on a historical yield of around 1.4%. For now, and given its alignment to the provision of food in what are highly uncertain economic times, analyst consensus opinion currently points towards a strong hold.