LONDON MARKET MIDDAY: More evidence of inflation damage hits shares

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(Alliance News) - There was no respite for stock-market investors globally on Thursday, as a dramatic sell-off of US shares on Wednesday amid economic concerns looked set to continue on Thursday.

The FTSE 100 index was down 177.36 points, or 2.4%, at 7,260.73 midday Thursday in London. The mid-cap FTSE 250 index was down 472.14 points, or 2.4%, at 19,477.30. The AIM All-Share index was down 14.37 points, or 1.5%, at 938.58.

The Cboe UK 100 index was down 2.5% at 723.72. The Cboe 250 was down 2.4% at 17,208.83, and the Cboe Small Companies down 1.2% at 14,591.92.

In mainland Europe, the CAC 40 in Paris was down 2.2% while the DAX 40 in Frankfurt was down 2.0% on Thursday.

‘Equity markets have faced volatility over the past 24 hours amid renewed worries that inflation could crimp profit margins and cause central banks to tighten policy more aggressively,’ commented UBS in a note.

Shares in US retailer Target dropped 25% in New York on Wednesday 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.

‘The earnings news and inflation data build on underlying worries over risks to global GDP growth posed by central bank tightening, the war in Ukraine, and pandemic-related lockdowns in China,’ said UBS, adding that markets are now pricing in 280 basis points of Fed tightening in total in 2022.

After Wednesday's rout, which saw major stock indices fall as much as 4.7%, the mood on Wall Street remained sour overnight. The Dow Jones was called to open Thursday's session 1.3% lower, the S&P 500 down 1.4% and the Nasdaq Composite down 1.5%.

Likely to be in focus in the US on Thursday, amid concerns about pressures on retailers, are first-quarter results from discount chain Ross Stores.

Despite Thursday's risk-off mood, the dollar slipped. Sterling was quoted at $1.2427 midday Thursday, firming against $1.2402 at the London equities close on Wednesday.

The euro traded at $1.0526, up against $1.0497 late Wednesday. Against the yen, the dollar fell to JP¥127.68 from JP¥128.21.

‘US slowdown concerns could be undermining the dollar,’ noted SPI Asset Management's Stephen Innes.

Gold was quoted at $1,829.29 an ounce, up from $1,817.50 on Wednesday. Brent oil was trading at $107.93 a barrel, down against $109.83 late Wednesday.

In London, Royal Mail was weighing on the FTSE 100 as the postal operator comes up against inflationary challenges. The stock was down 14% at midday.

In the financial year that ended March 27, the postal service registered a 8.8% drop in pretax profit, which fell 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 in sterling terms with a 80 basis points margin drop.

Looking ahead, Royal Mail noted an ‘uncertain’ outlook, compounded by talks with the Communication Workers Union over pay. It had tabled an offer worth up to a 5.5% raise for CWU grade colleagues, but this was rejected by the union, which has threatened industrial action.

‘Royal Mail had been making real progress with its turnaround plans, with the surge in parcel deliveries during the pandemic helping to lift a share price which had struggled since its 2013 privatisation. Now inflationary pressures are threatening to unpick that progress and have reignited troubles with its work force as talks continue to avert a potential nationwide strike,’ said AJ Bell investment director Russ Mould.

Scottish Mortgage Investment Trust fell 5.1% after underperforming its benchmark. The investment trust's NAV total return in the twelve months to March 31 was negative 13%, which drastically underperformed its benchmark - the FTSE All-World index - which instead gained 13%.

‘Investors in Chinese companies have suffered from President Xi's regulatory crackdowns in the name of 'common prosperity'. In retrospect, it has been a mistake to reduce our holdings in western online platform companies rather than their Chinese counterparts,’ Scottish Mortgage explained.

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

In the FTSE 250, Investec fell 5.9% despite saying annual profit more than doubled, owing largely to robust net inflows, solid top-line growth, and a strong economic recovery.

The Sandton, Johannesburg-headquartered financial services company multiplied its pretax profit to £697.3 million for the financial year ended March 31 from £331.6 million in the prior year. Funds under management expanded by 9.2% to £63.8 billion as at March 31 from £58.4 billion a year previously, underpinned by net inflows of £1.9 billion and improved market levels.

Investec Chief Executive Fani Titi said the group continues to navigate the uncertain outlook emanating from ongoing inflationary pressures and the economic effects of the invasion of Ukraine.

Bucking the declines was HomeServe, rallying 10% after agreeing to be taken over in a £4 billion deal.

Hestia Bidco, a subsidiary of Brookfield Infrastructure Partners, 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. The offer is also 14% above Wednesday's closing price of 1,053p.

The Walsall, England-based home repairs company said HomeServe directors will unanimously recommend that shareholders back the deal.

Broker Davy commented: ‘The offer is recommended and appears to have been pitched well at this level, especially in a pressured market.’

On AIM, shares in Knights Group jumped 33% after guiding to strong revenue growth and making an acquisition.

The legal and professional services firm expects revenue for the financial year that ended April 30 of around £125.5 million, up 22% on £103.2 million the year before. Underlying pretax profit is seen at a ‘minimum’ of £18.1 million, down from £18.4 million the year before.

Knights also said it has agreed to buy Coffin Mew, an independent law firm in the south east of England, for £11.5 million.

By Lucy Heming; lucyheming@alliancenews.com

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