Crunch time for Kwarteng, Netflix cut-price package goes down well and Royal Mail plans big job cuts amid industrial action

“It’s been a wild ride on the markets this year and there are still plenty of opposing forces which could push and pull equities, bonds and currencies in one direction or the other,” says Russ Mould, Investment Director at AJ Bell.

“After yesterday’s yo-yo session on Wall Street where higher than expected inflation figures initially caused a slump and then a sudden reversal, European and Asian markets have chosen to take an optimistic view and moved higher. How long that will last is another matter.

“Investors need to accept that high inflation could stick around for longer and that interest rates will almost certainly move a lot higher in the near-term. It will take a lot of short-term pain to get inflation back towards central bank targets.

“There was plenty of action in the UK as investors speculate about a potential Government U-turn on tax cuts. That fact Chancellor Kwasi Kwarteng is leaving his US trip early to return for crisis talks only stirs the speculation pot faster in terms of what might happen next. At this stage, the nation is asking if his tax cut plan or his job are toast, potentially both.

“Always look at the bond market if you want to know what the smart investors are thinking, and a drop in gilt yields on Friday tells you one of two things. Either the Bank of England is hoovering up gilts sold by pension funds (pushing up the price and pulling down the yield) before the end of its support measures today, or markets believe the chancellor is going to rip up his mini-budget and start again. The smart money is probably on the latter.”

Netflix

“If the current market backdrop isn’t stimulating enough, investors are certainly sitting back with the popcorn watching Netflix with interest.

“Pricing details of its new advertising-backed subscription package went down well with the market, sending its share price up 5%. It is hoped that a cheaper offering will reignite subscriber growth and stop customers from leaving during the cost-of-living crisis. It’s better to keep people at a lower price than lose them altogether.

“That’s fine during hard times, but when the global economy is starting to look stronger Netflix will almost certainly want to get more money out of its customers. It’s easy to get hooked on a diet of discounts and customers might not find the advertisements before a show or film too distracting, so there is a risk that they stay on the lowest subscription package permanently.”

International Distributions Services (Royal Mail)

“It may have changed its name, but old problems remain for the company formerly known as Royal Mail.

“The now incredibly prosaically named International Distribution Services, which still operates as Royal Mail in the UK alongside its international parcels division GLS would, you’d like to think, lean into an identity with so much heritage. It says a lot about the challenges it is facing that it wants to ditch all that history.

“For years the company has been fighting a battle against a heavily unionised workforce to deliver efficiency improvements and the relationship between staff and management is now at an all-time low following the recent strikes.

“To what extent the threatened redundancies represent brinkmanship to prevent further planned industrial action is an open question, but regardless the whole episode is hugely damaging to the business.

“Royal Mail has singularly failed to take advantage of the momentum provided by a big increase in parcel volumes during lockdown and arguably could have done more to secure the goodwill of employees who were effectively frontline workers during the pandemic.

“Arguments at the time of its privatisation that it had somehow been sold off on the cheap will now stick in the craw of anyone who invested at the initial 330p per share.

“Focus may turn to a demerger of the two businesses to allow the better-performing GLS business to thrive as a standalone entity – something the wider group has mooted and which shareholders may now be keen to push for.”

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