Market movers: global sell-off, UK GDP, Rolls-Royce, BT, crypto, Apple

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

EUROPEAN MARKETS

Risk-off sentiment is gripping European markets, which have opened sharply lower, dragged down by the tech-driven sell-off on Wall Street last night after US inflation data came in hotter than expected. All European sectors are in the red this morning with basic resources leading the declines.

The FTSE 100 has opened sharply lower, down by almost 2% within a whisper of breaking below support at 7,200, with miners like Glencore, Antofagasta and Anglo American towards the bottom of the index. Rolls-Royce Holdings (LSE:RR.) is at the top of the UK index thanks to an optimistic trading update.

UK GDP

UK first quarter GDP grew by 0.8%, falling short of estimates for 1% and slowing from 1.3% in the previous quarter. Year-on-year it also came in below expectations at 8.7% versus forecasts for 9%. IT, accommodation, food, transport and storage helped lift growth during the period, offsetting a decline in wholesale and retail with GDP now 0.7% above its pre-coronavirus level.

Month-on-month in March the UK economy contracted for the first time this year by 0.1%, disappointing versus estimates as the trajectory paints a gloomy picture, with 0.7% growth in January followed by no growth in February and now a negative reading for March. A drop in services and production drove the contraction, partially offset by a pickup in construction, which was the bright spot during the month, thanks to demand for repair works after the February storms.

March’s monthly data provides the first indication of economic contraction in the UK, raising concerns that a recession is looming. With supply side shocks from the war in Ukraine and spiralling inflation, the UK economy could be set to enter recession by the end of the third quarter if the next few months see the economy shrink further. Although the first quarter saw a pickup in post-Covid demand as Omicron eased and restrictions were lifted, with rising interest rates and the cost-of-living crisis, demand could be starting to peak, further dampening the economic outlook.

ROLLS-ROYCE

Rolls-Royce said trading was in line was expectations in the first four months in the year and kept its full-year guidance unchanged, thanks to the post-pandemic return to the skies combined with increased government defence spending. The engine maker said it is working closely to limit supply chain disruptions and has increased inventories to help mitigate raw material inflation. As previously stated, Rolls-Royce confirmed that its operating margin will be lower this year than last.

Today’s positivity comes as a welcome reprieve for shareholders and goes against the broader negative market sentiment with the stock up by more than 3% at the open.

The stock has had a torrid time lately, slumping in April after JPMorgan cut it from neutral to sell, accelerating recent losses with shares down by nearly 50% since the peak in September last year. This is a company that was hit hard during the pandemic, but now Rolls-Royce faces fresh challenges from its leadership uncertainty after CEO Warren East announced plans to leave combined with the slow recovery of civil aerospace flying hours which are both weighing on the business.

BT

Keith Bowman, Investment Analyst at interactive investor said: “Telecoms giant BT Group (LSE:BT.A) has reported largely in line full-year results. As expected, revenues fell 2%, with adjusted profit rising 2% as management continued to attack costs. The build out of both its fibre broadband and 5G mobile networks is ongoing, while its TV media content is being strengthened, evidenced by its recent deal with Warner Brothers Discovery. A final dividend of 5.39p per share adds to the 2.31p paid at the half-year point and delivers on its pledge to return a rebased payment. Management is also extending its cost savings target of £2 billion by end of full-year 2024 to £2.5 billion by the end of 2025.As for the share price, a gain of 4% year-to-date coming into these latest results compares to a fall of almost 1% for the FTSE 100 index. 

In all, the competitive environment remains intense, with rivals such as Sky competing hard to win broadband services. Shareholder returns are also not what they once were given heavy investment in network expansion. The cost-of-living crisis could also force some customers to cut back on non-essential purchases and subscriptions, potentially including BT’s pay-television sport service.

On the upside, a sizeable share stake held by telecoms dealmaker Patrick Drahi continues to generate speculative interest. Progress on cost savings is also being made, while the shares now sit on a historic and estimated future dividend yield of over 4% - not bad in an environment of still low if rising interest rates. On balance, and with the expansion of both its fibre broadband and 5G mobile networks offering potential for future growth, analyst consensus opinion currently points towards a strong hold.

CRYPTOCURRENCIES / COINBASE

Cryptocurrencies are plunging, with bitcoin down by more than 14% today against the US dollar at the time of writing, according to Coinbase. Bitcoin has broken below $27,000 and is on track for its seventh consecutive weekly decline. Since the March peak it is down by more than 40% and has shed around 60% since the November high.

Shares in Coinbase slumped 26% yesterday on the back of a weak first quarter scorecard in which the crypto platform reported a loss of $430 million, almost 10 times bigger than analysts' expectations. Its guidance was also disappointing, with Coinbase warning of softer trading volumes and user numbers this quarter, as the crypto sell-off takes its toll. The stock is down by more than 85% from its opening price from April 2021 on its first day of trading as a public company.

The crypto sell-off has been driven by the daunting macro backdrop of rising inflation and interest rates that has sent shockwaves through the tech sector, dragging cryptos down with it, confirming that bitcoin and others serve little purpose as a hedge against inflation. Stablecoins, which are digital tokens pegged to the value of traditional assets, have exacerbated this week’s crypto losses when one of the world’s largest, TerraUSD collapsed after losing its 1:1 peg with the US dollar. Unlike other stablecoins, Terra is linked to another token Luna, which slumped over 94% on Wednesday, dragging TerraUSD down with it.

APPLE

Saudi Aramcohas overtaken Apple Inc (NASDAQ:AAPL) to become the world’s most valuable company, hitting a record high valuation of around $2.43 trillion, overtaking the tech giant at $2.37 trillion. A combination of rising oil prices and tech sector turmoil have sent both stocks in opposite directions, with Apple losing its top spot. Earlier in the year Apple became the first company ever to reach a valuation of $3 trillion, but with concerns about inflation and Federal Reserve tightening and a sell-off in tech, the iPhone maker has been dragged down amid the turmoil, slumping 5% yesterday and shedding nearly 20% since the March high.

Although the Fed’s tightening path poses a risk to the more debt-dependent stocks in the tech sector, broader uncertainty has unfairly punished tech stalwarts like Apple and Microsoft Corp (NASDAQ:MSFT) which have strong fundamentals and cash positions. Once inflation passes its peak and the growth outlook improves perhaps later this year, arguably these stocks have the potential to outperform as the tech sector looks beyond its trough.