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Does the Fed Live up to Expectations or Not?  

The S&P 500 trades at about 20x earnings and whilst this is not extreme, it may be a bit fat. Either the market starts to think the Fed won’t cut as much as expected or growth stumbles...some are talking about being on the edge of some genuine volatility in the market, focusing on the very narrow leadership.   
Fed speakers aplenty today but otherwise quite a light calendar outside of company earnings. 


Look to the Banks, They Say 

New York Community Bank – the one that rescued Signature last year – plunged 22%, extending its decline since it reported a loss last Wednesday. Moody’s downgraded its debt to junk. “NYCB’s core historical commercial real estate lending, significant and unanticipated loss on its New York office and multifamily property could create potential confidence sensitivity,” Moody’s said.  

“The company’s elevated use of market funding may limit the bank’s financial flexibility in the current environment.”  

The problem we have is that if the Fed does cut as the growth remains robust, I’d anticipate a pretty response in inflation. ECB’s Isabel Schnabel: “From historical experience ... inflation can flare up again.”  

So, we think that the Fed won’t cut much as the market implies – but the market can probably live with this and recalibrate on the time horizon side of things. As long as earnings hold up then the market can manage.  

The outlook of course varies between geographies – the US is registering monster jobs and GDP growth; Germany just logged the longest downturn on record for industrial production after notching a seventh straight monthly decline in output. 


Trading Going Sideways 

Stocks are basically flat this morning, The FTSE 100 tested the 7,700 area but was found wanting again...BDEV to buy Redrow points to the trouble for housebuilders from higher rates even if they have rallied in the last three months – consolidation will make it easier to ride out a turbulent future as the UK wrestles with impossible housing and labour shortages.  

The interim results from BDEV are not pretty – revenues down a third and total completions down 28.5%, gross margins down 730bps, profits down 70%.  

A chill wind has been blowing over the housebuilders - better to huddle together for warmth …BDEV shares fell 6% on the news it would purchase Redrow, which rallied almost 14%.   

Here’s BDEV results today

 BDEV results

Under the terms of the transaction Redrow shareholders will receive 1.44 Barratt shares for each Redrow share, implying a market cap of £2.52bn for Redrow, a premium of around 27% based on yesterday’s closing price...still yesterday showed the construction industry is its most optimistic in two years and Halifax today reports house prices rose for a fourth straight month to the highest since October 2022…so things are looking up as rates are expected to fall. 


At The Bottom Shelf 

Sainsbury’s shares fell almost 4% on a strategy update that will cost money in the short term. Capital expenditure will increase to between £800 million and £850 million per year over the next three years and the company will make an additional £70 million investment in FY 2024/25 in its Smart Charge Electric Vehicle (EV) charging network.  

It seems that despite expected profit growth this will impact near-term free cash flow, though management still forecast retail free cash flow of at least £500 million per year and now forecast at least £1.6 billion over the next three years.    


In The Meantime, Elsewhere... 

We’ve had plenty of corporate updates across Europe. Smurfit Kappa shares rallied over 4% as it reported a return to volume growth; Carlsberg reported revenue growth of 9.2%, Orsted axed its divi. The USD shed some ground against its major peers. EURUSD rallied to hold the longer-term trend. GBPUSD held its 200-day line at 1.2560 and has kicked on this morning a bit. 



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