Investment Insights

FTSE 100 Posts Best Week in Six Months

  • Jul 26, 2023
  • Andrew Gillham

A better than expected UK inflation report propelled the FTSE 100 to its best week since January. Elsewhere, performance amongst international stock markets was mixed as investors await this week’s interest rate decisions from the Federal Reserve, European Central Bank and Bank of Japan.

The Office for National Statistics revealed on Wednesday that annual UK consumer price inflation slowed to 7.9% in June, down from 8.7% in May, in a large part due to falling petrol and diesel costs. Food and non-alcohol price inflation slowed to 17.3%.

The core inflation rate, which excludes more volatile items such as food and energy, also slowed more than expected to 6.9%. Although headline inflation is running at four times the Bank of England’s 2% target rate, the report provides some hope that than painful interest rate hiking cycle is now making an impact and inflation is trending in the right direction.

Just a couple weeks ago, markets were pricing in UK interest rates to reach 6.25% by the end of the year but the peak is now expected to be 5.75%. The BoE’s Monetary Policy Committee meet next week and it is a coin flip whether they will hike interest rates by another 0.25% or 0.5% according to money market futures.

Companies to report second quarter earnings included budget airlines EasyJet and Ryanair. Shares in Ryanair tumbled 6% on Monday despite it generating record profits of €663 million, nearly four times higher than in the same period last year. Its previous record quarterly profit was €397 million, set in 2017.

Ryanair’s average air fares increased 42% year on year to €49, more than offsetting a 23% increase costs, and it benefitted from strong demand for travel over the Easter and the additional bank holiday in the UK.

However, markets reacted negatively to the company’s more cautious outlook for the year ahead. The airline lowered its full-year passenger forecasts from 185 million to 183.5 million due to delays delivering new Boeing aircraft and CFO Neil Sorahan pledged to push its competitive advantage of low fares to fill planes.

EasyJet also reported record quarterly pre-tax profits of £203 million, up from a loss of £114 million in the same period last year, but its shares also fell 4% on the day of the announcement. Whilst it said it expects to generate another record profit in the current quarter, the airline cautioned the air traffic control strikes in Europe will be heavily disruptive.

Earlier this month, it cancelled 1,700 flights over the summer, around 2% of its overall schedule, in advance to avoid on-day cancellations and compensation payments. EasyJet’s average revenue per seat increased 22% to £90.49.

Elon Musk was not only in the headlines due to his rebranding Twitter to “X”. Shares in Tesla fell 10% on Thursday after it reported that its gross profit margin fell to 18.2% in the second quarter, the lowest level in four years, due to price cuts to boost sales.

Musk warned it could cut prices further if the global economy remains in “turbulent times”, anticipating an uplift in valuations further down the road from autonomous-driving capabilities. Musk revealed that Tesla will invest at least $1 billion into Project Dojo by the end of 2024, a supercomputer designed to handle the vast amounts of data needed to create autonomous-driving software.

Energy prices continued their upwards trajectory on supply concerns and hopes for more economic stimulus from Chinese policymakers. Brent Crude rose $4 to a near 3-month high of $83 a barrel.

The US oil rig count fell to 530, its lowest level since March 2022, whilst China’s politburo admitted that measures are needed to expand domestic demand and increase consumers income. It is expected to cut interest rates further and provide more support to its troubled property sector.

(Cover Image Source: Azzedine Rouichi)

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