LONDON MARKET OPEN: Off-Target retailer sends NY stocks tumbling

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(Alliance News) - London was following Wall Street lower early Thursday, after a major US retailer reinforced concerns about the damage to business being caused by rampant inflation.

The FTSE 100 index was down 97.54 points, or 1.3%, at 7,340.55 early Thursday. The mid-cap FTSE 250 index was down 306.30 points, or 1.5%, at 19,643.14. The AIM All-Share index was down 8.91 points, or 0.9%, at 944.04.

The Cboe UK 100 index was down 1.5% at 731.39. The Cboe 250 was down 1.5% at 17,358.73, and the Cboe Small Companies down 0.2% at 14,732.39.

In mainland Europe, the CAC 40 in Paris was down 1.4% while the DAX 40 in Frankfurt was down 1.6% early Thursday.

‘The sentiment in the market is highly negative as traders and investors are largely concerned about an economic downturn and soaring inflation. The earnings results from Walmart and Target have made one thing clear: for them inflation is such a problem that retail giants like Target are struggling to absorb the shock created by them,’ said Naeem Aslam, chief market analyst at AvaTrade.

Shares in retailer Target dropped 25% in New York after reporting a first-quarter profit ‘well below’ expectations due to surging costs. This followed retailing peer Walmart earlier in the week posting an ‘unexpected’ result for its first quarter, with profit dropping, amid inflation and supply chain issues.

Wall Street closed deeply in the red on Wednesday, with the Dow Jones Industrial Average ending down 3.6%, the S&P 500 down 4.0%, and the Nasdaq Composite down 4.7%.

It was the Dow and S&P's chunkiest points losses since June 2020, with a relief rally on Tuesday proving only temporary as inflation fears battered stocks once again.

‘The anxiety over the impact of high inflation on corporate earnings and consumer demand sent the whole market down,’ said Marshall Gittler, head of Investment Research at BDSwiss. ‘Note that while the S&P 500 followed Target stock price for much of the day, Target started to recover a bit near the close but no such luck for the market as a whole.’

In London early Thursday, DIY retailer Kingfisher was at the bottom of the FTSE 100, down 6.1%, as the stock went ex-dividend, meaning new buyers no longer qualify for the latest payout.

Also towards the bottom of the index was Royal Mail, down 5.9% after warning there is ‘downside risk’ to consensus expectations for the year ahead after registering a drop in annual profit.

Revenue for the financial year that ended March 27 rose 0.6% to £12.71 billion from £12.64 billion, with its domestic UK arm registering a 1.6% sales decrease but GLS revenue up 4.4% in sterling terms.

However, pretax profit dropped 8.8% to £662 million from £726 million. In its UK unit, adjusted operating profit jumped 21% with the margin up 90 basis points, but European and North American parcel operation GLS reported a 4.5% decline in profit on sterling terms with a 80 basis points margin drop.

Royal Mail proposed a final dividend of 13.3 pence, taking its full-year payout to 20p. This is double on the 10p paid out the year before.

Looking ahead, Royal Mail said current adjusted operating profit consensus of £303 million sits within range of potential outcomes but ‘with downside risk’. This would be down sharply on the £758 million posted for the recently ended financial year.

‘Whilst a difficult environment persisted over the last year, with operational challenges caused by Omicron and tight labour markets, we continued to see financial tailwinds from the pandemic, which are now dissipating. We also have clear headwinds as we enter 2022-23, such as weakening GDP and growing inflationary pressures,’ said Chair Keith Williams.

Scottish Mortgage fell 3.9%. The investment trust reported a net asset value total return of minus 13% for the 12 months to March 31, lagging its benchmark, the FTSE All-World Index, which returned positive 13%.

‘There was cause for optimism as the global economy reopened following the initial period of lockdown. However, it did so in a stuttering fashion that brought with it the spectre of higher inflation and rising interest rates. These factors, together with concerns about Chinese regulation and Russia's assault on Ukraine, spread fear amongst markets and significantly reduced the valuations of many growth companies,’ the firm said.

Scottish Mortgage counts vaccine maker Modena, electric car maker Tesla, and WeChat-owner Tencent amongst some of its largest holdings.

HomeServe jumped 11% in the FTSE 250 after agreeing to be taken over by Brookfield Infrastructure Partners in a deal worth £4.08 billion.

Brookfield has offered 1,200p per share in cash for each HomeServe share. This represents a 71% premium to HomeServe's closing price on March 23, being the last business day before the start of the offer period, and is 14% above Wednesday's closing price of 1,053.65p.

The HomeServe directors will unanimously recommend that shareholders back the deal.

‘Whilst the HomeServe board did not solicit an offer from Brookfield, they believe that the acquisition, at 1,200 pence per HomeServe share, reflects the strength of the HomeServe business and its future prospects,’ the company said.

easyJet rallied 2.1%. The airline said it expects to fly near pre-pandemic capacity in the coming months, as it reported a narrowed interim loss.

easyJet reported a surge in revenue to £1.50 billion in the half-year to March 31 from just £240 million in the Covid-hit prior-year period. Its pretax loss narrowed to £557 million from £645 million.

The company posted a headline pretax loss of £545 million, slimming from £701 million. This was towards the bottom end of its previously guided range of £535 million to £565 million.

easyJet benefited from a relaxing of Covid restrictions in the period, flying increased capacity - with passenger revenue soaring to £985 million from just £170 million year-on-year - and demand returning, though there was a temporary Omicron blip during the winter.

Looking ahead, easyJet expects to operate 90% of pre-pandemic capacity in the third quarter and said that fourth-quarter capacity on sale represents 97% of pre-virus levels.

Commented Davy Research: ‘We continue to believe that the revenue momentum into the summer will drive upgrades on easyJet's financial year consensus pretax profit of £11 million (Davy: £23 million), meaning the profits in the H2 summer will be above the winter losses...Peak summer will be key.’

In Asia on Thursday, the Japanese Nikkei 225 index closed down 1.9%. In China, the Shanghai Composite rose 0.4%, while the Hang Seng index in Hong Kong was down 2.7%. The HK index was dragged down by Chinese tech stock Tencent, down 6.4%, following some disappointing earnings on Wednesday. In Sydney, the S&P/ASX 200 fell 1.7%.

Gold was quoted at $1,813.27 an ounce early Thursday, down from $1,817.50 on Wednesday. Brent oil was trading at $110.45 a barrel, firm against $109.83 late Wednesday.

Sterling was quoted at $1.2359 early Thursday, falling from $1.2402 at the London equities close on Wednesday.

The euro traded at $1.0483 early Thursday, soft against $1.0497 late Wednesday. Against the yen, the dollar fell to JP¥128.10 from JP¥128.21.

Thursday's economic calendar has the latest US initial jobless claims number at 1330 BST.

By Lucy Heming; lucyheming@alliancenews.com

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