Markets retreat on Fed move, Shell has record quarter, Next’s growth stalls and Trainline turns to Europe

“Investors have been praying for central banks to stop raising interest rates for some time, but the strongest possible hint yet from the Federal Reserve that it will stop increasing the cost of borrowing doesn’t seem enough to put them in a good mood,” says Russ Mould, Investment Director at AJ Bell.

“The Fed’s 0.25 percentage point hike last night was widely expected, so that won’t have been the cause of putting markets in a bad mood. However, the central bank did send signals that it may pause further increases in rates against uncertainties regarding the state of the economy and the banking sector.

“So why didn’t stock markets rally? Many investors thought falling inflation would be the principal reason why the Fed would pivot. That’s not the case now. Under the current circumstances, the Fed is more likely to pause rate hikes because the US faces the prospect of a recession and in light of more banks struggling. Therefore, not a reason to celebrate.

“The state of the banking sector is the one to watch as that has been the key worry point for markets this year. Just as we thought the crisis was past its worst, PacWest shares tumbled yesterday, raising the prospect that it might be the next US bank to seek a buyer or raise new capital. This news is enough to have put a chill on the markets.

“Stocks with notable US exposure were among the biggest fallers on the FTSE 100, including Pearson, Ashtead, Experian and JD Sports. Likewise, on the FTSE 250, one of the biggest fallers was 4imprint which is mainly a US business. These movements suggest investors might be reassessing the outlook for the US, perhaps changing their expectation for a recession from a shallow one to something more serious.”

Shell

“Achieving a record first quarter profit even when the energy price environment has not been supportive is some feat by Shell and constitutes a solid start for new chief executive Wael Sawan.

“Today’s numbers make their own argument for Shell’s integrated structure, with its energy trading arm helping to make up for lower oil and gas prices.

“In a bid to close a yawning valuation gap to its US peers, Shell is busily buying back shares. This undermines any pleas of poverty amid a push for increased levies on its bumper profit.

“A big driver of earnings and cash flow for Shell in recent times is its integrated gas business. Like Jupiter, Shell is a gas giant – with the £47 billion acquisition of BG back in 2016 helping to make it a leader in liquefied natural gas.

“Gas could have an important role to play in the energy transition as the world waits for the advancements in battery and renewables technology which could enable green sources of energy to provide consistent baseload power.

“If that proves the case then Shell’s big push in this area over the last decade will look prescient. Sawan is still to put his stamp on the business and, as an inside appointment, will be widely expected to maintain the approach pursued under his predecessors.

“Investors will find out if he has any surprises up his sleeve at an investor day in the US on 14 June.”

Next

“While Next’s latest sales update was moderately ahead of its prior expectations, it is nothing to get excited about. Sales growth has stalled and the only area where it is making decent gains is from the income attached to customer credit accounts.

“Next has a serious growth problem and while it may remain a profitable business, a company of its calibre is expected to show financial progression year after year. Repeated guidance for an 8.7% decline in full-year pre-tax profit suggests the business needs to pull a rabbit out of the hat to regain its mojo.”

Trainline

“Like a player of popular board game Ticket to Ride, Trainline has broadened its horizons by buying a European expansion pack. While it has been bedevilled by strikes in its core UK market, on the Continent it is growing rapidly.

“Expanding in Europe is a solid move, particularly given many of these territories benefit from better invested rail infrastructure and more affordable ticket prices, which help drive more people to take the train.

“In the UK, the threat posed by the new state-backed Great British Railways and its own central ticketing hub has receded as, perhaps inevitably, the project has somewhat ground to a halt.

“Trainline must continue to prove it can be more than just a simple ticketing platform by offering innovative features, like flagging cost savings through splitting your journey into multiple tickets that cost less in total than one ticket for the whole route.”

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