MKS, TSCO dip on mild profit ‘upgrades’, European stocks slightly weaker

Morning Note

Deluge of corporate earnings in the UK today…time to wade through some of the highlights. Retailers have been strong thus far and Tesco and Marks have continued the theme, although the anticipated full-year profit upgrades were rather mild and shares dipped in early trade. Investors were primed for a bit more, but should note that every little helps.

TSCO – Tesco numbers don’t disappoint, overall, despite tough comparative year ago figs. Market share the best in four years, strong Clubcard membership, and Christmas sales up over 9% over 2019, +2.7% vs last year. Given lockdowns last year this is impressive. Booker sales +20% as the restaurant trade bounced back despite the impact of Omicron + convenience stores doing well. Profit outlook improves – management say they expect full-year profit ‘slightly above’ the top-end of the previous £2.5bn to £2.6bn guidance. But UK Q3 LFL of +0.2% was short of the +0.6% expected. Shares dipped over 1%; typical post-earnings results pattern for Tesco. How Tesco uses its scale and Clubcard to weather pricing + inflation headwinds will be key to the year ahead, though it comes into it in very strong shape. Investors should be mindful that Tesco is starting to throw off a lot of cash and dividend yields are attractive.

MKS – Marks & Spencer delivered more good progress over Christmas. Food sales increased 12.4% as the good momentum in-store continued over Christmas. Impressively, in the update to MKS says the business generated its ‘highest ever Christmas sales’, with December growth in line with the performance for the quarter, Clothing & Home sales increased 3.2%, but within this full price sales grew by 45%. Store sales down 10% but online +50% is in the right place. International sales increased 5.1%, thanks to a doubling in the online component.

Having previously, at the time of the half-year results in Nov, raised the full year profit outlook to ‘in the region of £500m’ from the £300m-£350m range set out in May, management now say they expect full year profit before tax and adjusting items of ‘at least £500m’. Not a material upgrade as such but one that will keep investors focused on the long-term and hope that it means a return of the dividend when FY results are announced later in the year. Shares are up 85% in the last year, recovering in tandem with a much stronger retail performance. Shares dropped 4% this morning, perhaps on a milder-than-hoped-for profit outlook. A lot of the good news – as reflected in the rally for the shares in recent months – had been baked in after November’s major profit upgrade. Today’s update continues to the good news story but does not shift the narrative materially.

Elsewhere… Halfords stuck to guidance for the full year (-3% in early trade), Dechra +1.7% with results in line. Hays +1% after reporting a record quarter with fees up 37%. Perfect conditions for recruiters with staffing shortages everywhere. Countryside -15%, said trading below expectations; CEO Iain McPherson to step down

Meanwhile, European stocks were slightly weaker in early trade after yesterday’s rally. We had a solid session for the FTSE 100 on Wednesday, marking a new pandemic high at 7,565. This morning trading a little lighter but no signs of fright.

US CPI came in at a 40-year high of 7% but market reaction was muted as it was largely in line, albeit the core reading was a bit higher than expected. At first the absence of any upside surprise to the headline number left risk bid: NDX futures rose, the dollar declined. NDX turned lower after the first hour of trade to go lower, the dollar kept on falling, taking out the first 23.6% Fib support at 95.20.

In the end stocks rallied and the three major Wall Street indices ended higher, but the price action suggests ongoing uncertainty re the Fed and inflation. ARKK fell, megacap quality names lifted boats – MSFT and GOOGL both +1%. Tesla up almost 4% – couple of PT upgrades in the last two days helping bulls feel good about themselves again.

Whilst stocks managed to end the day higher, the dollar kept on falling. DXY here breaking key trend support, moving close to the 100-day line, where support could emerge at 94.60. US PPI inflation and unemployment claims are the main data points to watch today. Weakness in the dollar could continue for some time if markets are confident in the global recovery, but US inflation/Fed cloud the outlook.

Dollar Index 13.01.2022

EURUSD rallied and broke free from its narrow two-month range, taking a 1.14 handle. The shift in USD positioning seems clear but the Fed may yet surprise with a more aggressive cycle. The cross is just pausing in its advance at the 23.6% retracement of the decline since the start of 2021.

EURUSD Chart 13.01.2022

Cable took at 1.37 handle, bulls still charging. 1.38 remains in focus.

GBPUSD Chart 13.01.2022

 

Fresh two-month highs for oil after a big drawdown in US inventories. WTI rose above $82, path to $85 remains open, though that’s maybe where it tops again and momentum fades. Prices a tad cooler this morning but $82 holds.

Crude Oil Futures 13.01.2022