FTSE lower as Evergrande deal collapses, Unilever's inflation warning, Barclays gets investment banking boost

“The FTSE 100 slipped in early trading on Thursday as China’s Evergrande crisis reared its ugly head again,” says AJ Bell Financial Analyst Danni Hewson.

“The heavily indebted property developer failed to complete a key asset sale to leave it teetering amid fears of wider contagion from a potential collapse of the business.

“This hit stocks with Chinese exposure, most notably the mining sector. China is the world’s biggest consumer of many metals and minerals.

“Rising Covid-19 cases in the UK were also affecting sentiment amid fears measures might need to be brought in over the winter to control the spread of the virus.

“Bitcoin is back in gravity-defying mode – hitting a new record high amid the launch of exchange-traded funds in the US, set up to track the cryptocurrency.

“The question is whether bitcoin can make these gains stick after falling sharply from a previous peak earlier in the year.”

Unilever

Unilever reckons inflation is here to stay. That’s bad news not just for investors in the consumer goods giant but also for central bankers.

“The like of the Federal Reserve will have been hoping inflationary pressures would ease sooner rather than later as they walk the tightrope of keeping prices from overheating while not choking off the recovery by raising interest rates too far and too fast.

“However, given the breadth of costs Unilever is exposed to and the fact that dealing with input costs is bread and butter for a consumer goods company, a warning that inflation will be higher in 2022 carries weight.

“For now Unilever hopes price increases, running at the highest rate in years, will keep margins flat year on year but the company faces its own balancing act of not increasing prices so much that its products are no longer competitive. It is a real test of the strength of the company’s brands.

“After all, will we really stick with branded soap at a materially higher price when there’s an unbranded alternative sitting next to it on the shelf which is an order of magnitude cheaper?

“If enough consumers decide they can put up with a cheaper alternative then it would become a big problem for Unilever.”

Barclays

“Unlike peers like Lloyds and Natwest which retrenched in the wake of the financial crisis to become fairly straightforward lenders, Barclays still has a major investment banking arm.

“This allowed it to follow in the footsteps of US peers which earlier this month reported a major boost from the recent frenzy of dealmaking in financial markets and the wider corporate world.

“For Barclays this was balanced out by a big decline in bond trading but still enabled it to deliver a notable beat of analyst expectations and a record nine-month performance.

“The Covid recovery, uncertain as it is, has also allowed Barclays to release some of the cash buffer it built up to cover any loan defaults which resulted from the pandemic. This underpins the bank’s commitment to returning capital to shareholders through dividends and share buybacks.

“Barclays also pointed to an improving rate environment which should boost margins as it supports an increase in how much Barclays charges to lend.

“A decade or more of ultra-low rates has really put the profitability of this core banking function under pressure. Management are clearly reading the runes and like many observers drawing the conclusion that inflationary pressures will force central banks to increase interest rates sooner rather than later.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.