Sober start for stocks as the Fed looks to get tough, and Entain's online dip won't diminish its takeover appeal

“European markets started in fairly sober mood – with UK stocks no exception – unsurprising perhaps given some tough rhetoric from the US Federal Reserve on interest rates and the latest round of sanctions imposed by the West on Russia yesterday,” says AJ Bell Investment Director Russ Mould.

“Both the cure, higher interest rates, and the disease, surging prices, are harmful to markets right now. The minutes from the Fed’s latest meeting showed it plans to drastically scale back asset purchases and that there is backing among its members for big rate hikes, all helping to pour cold water on investor sentiment.

“Amid the latest Russian sanctions, Shell has quantified the hit from its exit from the country at a larger than initially anticipated $5 billion – the modest resulting fall in its share price reflects the fact that the company is also pointing to a big benefit from surging energy prices.

“BP endured the heavier fall, likely on a read-across as investors looked at what it might imply for its much larger Russian footprint.

“The UK Government has launched a long-term strategy for secure and sustainable power. Predictably the plan has attracted criticism from opposition politicians – a key point being the reluctance to give full backing to onshore wind and the apparent openness to boosting fossil fuel production and reconsidering fracking.

“Nuclear power is central to the strategy – however this will do little to help the current struggle facing businesses and households from a drastic rise in electricity and gas prices with the lead times on building new reactors often longer than a decade.

“Despite cost-of-living pressures the UK housing market continues to defy gravity, enjoying their biggest jump in six months according to data from Halifax. The dynamics of insufficient supply and strong demand continue to underpin prices, but you have to believe that will change at some point and, when the market turns, it could be painful.”

Entain

“Entain has become a big beast of a player in the gambling world, and it continues to shoot for the moon in terms of ambitions.

“Never content with making the most of what it already has, the group continues to spread its tentacles with the recent launch of an innovation hub called Ennovate to develop next generation immersive entertainment services.

“While its goal to be a key player in the sports and entertainment metaverse could be a few years in the making, no-one can accuse the business of standing still.

“In some ways, one must wonder why it retains physical betting stores as these represent gambling days of old. Yet in its favour is the fact they still contribute financially to the business, and the shops saw a big recovery in trading during the first quarter whereas online slipped back.

“The company implies there isn’t any need to worry about recent online weakness as last year’s first quarter was so strong that it was always going to be hard to beat this time round.

“Amid growing concerns about a slowdown in the global economy as consumers battle the rising cost of living, gambling might be one of the few industries to see resilient demand. In tougher times many people will try and bet what money they can spare in a bid to strike it lucky and win a bounty that can help pay the bills.

“Whether that is a wise move is another matter, but Entain is unlikely to be as concerned about the current backdrop than other consumer-facing firms such as electronic goods and fashion retailers.

“That means its focus will remain on three key things: regulatory developments, who else can it buy and who might buy it?

“The gambling sector has long been subject to tighter regulation as governments try to find new ways to make sure vulnerable people are not getting into trouble through betting, as well as continuously increasing the tax income from this pastime.

“Despite this headwind for the industry, the sector continues to be a hot spot for takeover activity and Entain has already turned from predator to prey. MGM Resorts and DraftKings have both tried and failed to buy the business, but the more Entain grows the more likely it is that we’ll see either these parties come back again or someone else throw their hat in the ring.”

These articles are for information purposes only and are not a personal recommendation or advice.