FTSE higher with central banks in the spotlight, Glencore eyes Teck coal assets and Frasers takes stake in AO

“The FTSE 100 ticked higher on Monday as central banks once again find themselves in the spotlight,” says AJ Bell Investment Director Russ Mould.

“The Fed is widely expected to keep its finger on the pause button when it announces its decision on rates on Wednesday. The US is showing some signs of slipping into a recession and inflation has eased considerably, even if it still stands a long way above the Fed’s 2% target.

“A last-minute shift in the plan cannot be ruled out given the Fed is taking a data-driven approach and inflation numbers from the US are out tomorrow. A higher-than-expected number could set the cat among the pigeons.

“The calculus is different for the Bank of England, given the UK’s more persistent inflation alongside warnings from a Bank of England official of further rate hikes, which felt like a parent telling a sickly child they need to take their bitter medicine. Unwelcome but not unexpected. Its meeting next Thursday is expected to see another hike, barring anything dramatic.

“Glencore’s purpose is not to win friends but to make money and it seems to have spotted an opportunity to do so at Teck Resources. Having attempted to buy the whole company, it is now offering to purchase the steelmaking coal part of the business which Teck has been attempting to spin off.

“There’s a merry-go-round of coal assets in the industry as companies don’t want to be left holding what is seen as a dirty fuel. Even for Glencore a plan to demerge Teck’s coal operations with its own within a couple of years of any deal suggests it wants to quarantine the rest of its assets from coal.”

AO/Frasers

“Frasers’ purchase of a 18.9% stake in AO initially seems an odd move but there is some logic to it.

“The company has traditionally focused on fashion-related investments as a way of expanding its empire of predominantly sports and athleisure brands.

“In recent years it has aspired to get more money from its customer base and a natural extension has been to focus on things that make people look and feel good beyond simply the clothes on their back. That explains its push into beauty, handbags and sofas through such brands as Flannels, House of Fraser and Sofa(.com).

“If it has dressed people and partially furnished their homes, it makes sense to think about other ways to get these customers to part with more cash.

“It has become fashionable to have sports equipment at home, whether that be exercise bikes, weights or rowing machines. These are incredibly bulky to get to people’s homes, so there is merit in finding ways to make the delivery process more efficient for such items as well as existing homeware products it is selling – which is where AO’s expertise might come in handy.

“Frasers is always one to spot a bargain and the big sell-off in AO’s share price - from above 400p in 2021 to sub-40p last summer - will not have gone unnoticed. It describes the investment as the foundation for forming a strategic partnership – while it is easy to speculate that Frasers will eventually acquire AO outright, it has form for taking equity stakes but not making full takeovers.

“There is one odd thing about the deal, however. Logistics services are a commodity – it doesn’t need to spend £75 million on buying nearly a fifth of a business when it could talk to any number of delivery companies for help. Talk that Tuffnells is about to go into administration might even present an opportunity if it wanted to own a logistics firm.”

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