Markets braced for US rate rise, housebuilders up on stamp duty cut reports, and JD counts the cost of Cowgill exit

“There is really no question of whether the Federal Reserve will raise rates or not today. They’re almost certainly going up. The key unknown is exactly how much the central bank will push up the cost of borrowing. The consensus is for a 0.75 percentage point rise, which would be the third hike of such magnitude in a row. That would push rates to the 3-3.25% range, the highest since 2008,” says Russ Mould, Investment Director at AJ Bell.

“There is a generation who have never seen rates that high, and now they’re about to get the shock of their life as credit becomes a lot more expensive. Rates could feasibly go even higher in the coming months, which spells trouble for both consumers and businesses as it could take a long time for high rates to bring inflation down to the Fed’s 2% target rate.

“Higher rates will cause pain to households and businesses, with the jobs market being closely watched for signs of redundancies and hiring freezes. The Fed is having to be cruel in order to restore price stability.

“Equities have been pricing in higher rates for some time, as evidenced by a rocky performance this year. So far in 2022 the main indices in the US have delivered negative returns for investors, with the Nasdaq down 28%, the S&P falling nearly 20% and the Dow Jones sliding 16%.

“The FTSE 100 has been spared most of the pain, with the UK index down a mere 3.9% year-to-date, helped by having strong exposure to energy companies (beneficiaries of higher commodity prices), tobacco (value stocks are back in fashion) and banks (higher interest rates boost their earnings). And ahead of the Fed’s latest rate decision, the FTSE 100 continued to keep its chin up, rising 0.2% to 7,204, thanks to strength in housebuilders, commodity producers and retailers.

“Speculation that the new UK Government will announce a cut to stamp duty has breathed some life back into housebuilders’ shares, which had been weak this year on fears of a property market slowdown. Investors have lost count of how many times the Government has provided stimulus measures to the housing industry, and once again it looks like the sector will receive an energy boost from Number 10.

JD Sports

“There can’t be too many deals with such an outsized impact relative to their scale as JD Sports’ ill-fated acquisition of smaller rival Footasylum.

“Not only was JD eventually forced to sell the business by the competition authorities, but revelations around the way the transaction took place were a key catalyst in the departure of its boss Peter Cowgill – a central figure in the sportswear chain’s rise.

“Perhaps this was an evolution the company needed to go through anyway – it’s never a great look for the executive functions in a business to be combined. Following Cowgill’s departure JD is now moving to a more traditional structure with a separate chair and CEO – a long overdue move.

“However, the acrimonious nature of his exit means JD is having to take some extraordinary steps to ensure there’s no lasting damage from the affair.

“A total pay-off to Cowgill running into millions looks a heavy price for ensuring he doesn’t take his skills to any of JD’s rivals, or poach any of its key staff. As a coda Cowgill will also provide consultancy services to the business.

“JD will hope this draws a line under the whole episode and frees up management to tackle what could be a hugely challenging period for even the best retail names.

“The succession process at JD has certainly been more fractious than the one executed at Frasers Group, with Mike Ashley following his long-time rival Cowgill out of the door but willingly handing over the reins to his son-in-law Michael Murray.

“Incoming JD CEO Regis Schultz will now at least be spared the distraction of having a hugely influential predecessor at loggerheads with the business, but he will still face a hard act to follow in less than advantageous circumstances.

“One result of new leadership at both JD and Frasers may be smoother relations with regulators and the City.”

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