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“The FTSE 100 started Thursday on the front foot despite selling in Asia and the US overnight,” says AJ Bell Investment Director Russ Mould.
“There were decent gains for BP and Shell as oil prices extended their recent upwards movement on concerns over Middle Eastern supply. The region remains a tinder box due to the Israel-Gaza war, and disruption to shipping routes through the Red Sea is also a key factor behind the surge in crude.
“A big drawdown in US crude supplies – robust North American production played a key part in keeping a lid on prices in 2023 – is also a contributing factor.
“Overnight the minutes from the Federal Reserve’s latest meeting were published and they struck a gnomic tone.
“Those inclined to believe a pivot to lower rates is on the way could take reassurance from indications the central bank thinks inflation is under control and its references to the risks an ‘overly restrictive’ approach might pose to the health of the economy.
“Anyone more cautious on the prospects for near-term rate cuts could point to a reference to maintaining a restrictive stance ‘for some time’.”
JD Sports / Next
“When one of the biggest names in retail issues a profit warning, you know life is hard for the sector.
“News from JD Sports that full-year pre-tax profit will be up to 12% below the £1.04 billion guidance given last September has disappointed the market. Sales growth has been softer than expected and margins have been squeezed by high levels of promotional activity.
“JD is not alone in having to slash prices to shift stock as consumers continue to battle the impact of high interest rates and simply cannot afford everything they may want. Plenty of other names in the retail sector have recently given similar messages about a slowdown in sales growth and/or the need to run big promotions, including Zara’s owner Inditex, H&M and ASOS.
“JD’s products fall into the discretionary spending category – they are nice to have, but not essential. When times are hard, consumers are going to prioritise their spending in favour of things they really need.
“That might explain why Next has fared better with its latest trading update. We all need to buy coats, jumpers and so on, and Next is better positioned to capture the ‘essentials’ trade. Interestingly, its full-price sales were better than expected in the last nine weeks of 2023, suggesting that some shoppers are happy to pay up for what they perceive to be good quality ‘must have’ items.
“For JD, issuing a profit warning is a terrible start to the new year. It will put pressure on management to up their game and find innovative ways to shift more stock without sacrificing too much margin. Any interest rate cuts from the Bank of England will be a gift to the consumer and therefore to companies like JD, but there is no guarantee that will happen any time soon.”
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