Lloyds disappoints, Rio Tinto suffers, Domino’s pricing power in doubt and Conroy brings golden joy

“A 2% to 3% drop in the main US indices last night was the market waking up to the fact it had been too complacent about interest rates and inflation,” says Russ Mould, investment director at AJ Bell.

“January’s global stock market rally represented a shift in investor sentiment, with many people believing that central banks, particularly the Federal Reserve, were close to the end of the interest rate rise cycle. With signs of inflation easing, investors thought the cost of borrowing wouldn’t get too much more expensive and so risk appetite was returning for equities, cryptocurrencies and more.

“A bucket of cold water was poured on the market last week when two Federal Reserve members indicated they would support a 50 basis-point hike in the next US interest rate decision. In essence, a larger hike than some expected, and a signal that the Fed would be nowhere near the end of its rate hike cycle, let alone the prospect of seeing rates come down later in the year.

“With US markets closed on Monday for a holiday, investors had three days over the extended weekend to let the prospect of further rate hikes sink in. The reaction was to start taking some money off the table as markets reopened on Tuesday. Contagion spread across Asia and Europe and now we’ve got investors wondering if they should be more cautious again.

“That’s reflected by what’s in vogue on the FTSE today. It’s no coincidence that pharmaceuticals, tobacco and consumer goods companies outperformed the market – all defensive names whose goods and services are in demand no matter the state of the economy.

“The risk-off mentality explains why miners were among the biggest fallers. An assumption that rates could continue to rise theoretically raises the risk of more damage to the economy, and commodity producers’ fortunes are highly sensitive to economic activity.”

Lloyds banking

“Shouldn’t the banks be doing better this earnings season? Rising interest rates are usually a cause for celebration in the industry but instead of striking up the band the sector has just left investors feeling rather flat.

“Lloyds is just the latest name to disappoint the market. The problem is that rates are rising at a time when the economy is slowing, a somewhat unusual situation reflecting the exceptional inflationary pressures facing central banks.

“This means that while higher rates are boosting profit in the short term, they are creating a situation whereby lots of businesses and consumers are struggling to pay their debts.

“A key feature of Lloyds’ latest update is the need to put aside more money to cover bad loans, with the bank already seeing modestly increased signs of stress out there.

“The numbers themselves were broadly in line with what had been forecast, though updated medium-term guidance will likely disappoint the market given it falls short of what its closest lookalike – NatWest – is promising in terms of returns.

“Lloyds is facing its own pressures on costs, although the company remains confident in its ability to keep rewarding shareholders with generous dividends and share buybacks. Given a sketchy track record and an uncertain outlook this may not be enough to secure the patience of investors.”

Rio Tinto

“Rio Tinto’s latest results illustrate how the mining industry’s fortunes fluctuate from year to year.

“Having enjoyed a boom in 2021, a pullback in commodity prices in 2022 has led to a big drop in both earnings and the dividend. This was already expected by the market, hence the mild share price reaction to the news.

“What happens next is more important – a reopening of the Chinese economy should in theory lead to a rise in commodity demand, helping to offset any potential weakness in other parts of the world.”

Domino's Pizza

“Consumers have had enough of price hikes, judging by comments from Domino’s Pizza Enterprises, which is the fast-food chain’s largest franchisee out of the US, with operations in such places as Australia, France, Germany and Japan.

“Its share price fell 24% after reporting a slump in profit as fewer customers could stomach the higher price of pizzas.

“This is becoming a trend, with big brand owners saying that sales volumes are falling as customers can’t afford to keep paying more and more for products.”

Conroy Gold & Natural Resources

“Among the tiddlers, Conroy Gold & Natural Resources jumped 35% after finding high grades of gold during exploration of a prospect in Northern Ireland.

“While the numbers are interesting, Conroy has previous form with over-hyping discoveries.”

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