Market update: FTSE 100 revs up a gear again

LONDON (Capital Markets in Africa) – The FTSE 100 has set off on a climb higher, nudging ahead again on a record-breaking run. The fresh pulse of positivity comes as ceasefire negotiations in the Middle East continue and a more optimistic sentiment washes over the London market. Even the surprise resignation of HSBC boss Noel Quinn, didn’t stop the banking giant from posting share price gains this morning. Sharp gains may be held back, with a little more caution creeping in as the key meeting at the Federal Reserve starts, with speculation still swirling about how long interest rates will linger in the US. Although the world’s largest economy slowed more sharply than expected in the first three months of the year, key inflation readings show inflation remains stubborn and that’s dashed hopes for early and multiple rate cuts. If interest rates do linger for a lot longer, it’s raised concerns about the growth prospects for the engine of the global economy. 

China’s recovery
China’s recovery is still underway, but lost a little steam according to the latest snapshot of factory activity. The official purchasing managers index indicated that manufacturers churned out more goods in April, for the second successive month. The reading came in at 50.4, down from 50.8 in March, with anything above 50 indicating growth. High -tech manufacturing is powering the sector forward, showing that China’s efforts in becoming more self-reliant amid trade tensions, and chip wars with the US, may be starting to pay off.

Oil prices dip and gold stablises
As peace negotiations take place between Israeli and Hamas officials in Egypt, hopes for a ceasefire are being kept alive which has allayed some supply concerns and pushed down oil prices. However, truces talks have ended in bitter disappointment before, and airstrikes are continuing in Gaza, while attacks by Houthis rebels demonstrate the dangers for tankers in the Red Sea. Comments made at the outcome of the Federal Reserve Open Market Committee will also be closely watched. If interest rates stay higher for longer in the US, there is an expectation there will be lower demand for energy, as higher borrowing costs lead to a slowdown in growth. With investors taking a wait and see approach, gold has stabilised at around $2330 per ounce.

Tesla’s software deal
In the US, Tesla has given investors even more reasons to be cheerful. After pleasing the market with plans to accelerate the delivery of its affordable models, Elon Musk’s sights have been set firmly on ensuring it has a front seat in the development of autonomous vehicles. By joining forces with Baidu, and using its navigation system, it should be able to roll-out its full self-driving system, which has been available in other countries but not China. The deal underlines Tesla’s revolutionary force in the market. This will not only ensure Tesla’s software is an extra avenue for growth, but also gives is access to a mountain of data. Tesla’s data collecting power, and the potential for these vast wells of information to help power AI innovations, are one of the reasons Tesla fans are so bullish about its future, despite the fierce competition from rivals. Tesla’s arch rival in China, BYD, has seen profits fall as the price war has intensified and rivals jostle for market share. It made $630 million in the first three months of the year, down 47% on the previous quarter. BYD briefly stole Tesla’s crown as the world’s largest EV maker at the end of last year, before the US giant stole it back. It shows just how tough it is in the EV industry right now amid waning consumer demand and an oversupply of new models, and why Tesla’s software deal with Baidu has caused to much excitement given that it offers the potential for other revenue streams.

Howdens heralds encouraging start
Howdens, the kitchens and joinery supplier, appears to be benefiting from the uptick in activity in the housing market as interest rate cuts are eyed on the horizon. Industry data this week indicated that buyer confidence is continuing to grow with the number of homes going under offer this year so far higher than last year. With more people making a move, getting ready for renovations, it’s helped Howdens shift more kitchens. Howdens welcomed the encouraging start to the year, with revenue from its depots up 5.4% and international operations delivering a 4.6% increase. However, some more uncertainty has crept in about exactly when interest rate cuts will land in the UK, with some lenders making mortgage deal more expensive. Nevertheless, Howdens seems confident that demand will increase and is opening more depots and launching new products to appeal to homeowners either staying put for a refresh or taking on a new renovation.

Change at the top at HSBC
HSBC has thrown a spanner in the works. News that CEO Noel Quin plans to retire came as a surprise. Change at the top usually causes a wobble, more so when it’s unexpected, and this does raise some questions about how the strategy will evolve from here. The HSBC portfolio is going through a reshuffle, and Quin’s far from completing his mission to get costs under control.

He took the reins just as the pandemic was spreading across the world, a hugely uncertain time to lead a global bank and pivot away from its more traditional markets. He’s also had to navigate geopolitical tensions between the US and China, political unrest in Hong Kong, and plenty of shareholder unrest. He may be a hard act to follow, but market reaction suggests the strong position he leaves behind is enough to quell any uncertainty about who’ll lead the business from here.

Looking at the results, there was, as usual, a lot to unpack. The Canadian sale has been completed, meaning the special dividend is being released as expected. HSBC is moving forward with plans to ditch the Argentina business and has taken a $1.1bn hit in the process of reclassifying it for accounting purposes. This is all part of the ongoing strategy to shift away from non-core areas and focus more on Asia which is where investors see the most potential.

Strip out some of the one-off items, and underlying performance was a good chunk better than expected. As we’ve seen across the banking sector, impairment charges came in lower than expected. That’s particularly good news for HSBC, whose Chinese exposure has caused some issues in recent quarters. The lack of any material write-downs or impairments relating to Chinese commercial real estate is welcome.

Susannah Streeter, head of money and markets, Hargreave Lansdown.
Matt Britzman, equity analyst, Hargreaves Lansdown: