Markets remain fragile after yesterday’s big sell-off, Lok’n Store goes cap in hand and Shell reveals pockets of weakness

“After yesterday’s miserable day on the markets when investors gave a knee-jerk reaction to the Federal Reserve’s meeting minutes and partial US employment figures, there was still a sense of nervousness in the air on Friday, even if equities avoided another major sell-off,” says Russ Mould, Investment Director at AJ Bell.

“It was widely accepted that interest rates would keep having to go up to combat inflation. Yet signals about further hikes from the Fed, followed up by an unexpectedly large increase in private sector jobs, still seemed to catch the market off-guard, pulling down equities and pushing up bond yields.

“US payroll data released later today will be watched closely by investors. The country is expected to have added 225,000 jobs in June, down from the previous month’s 339,000 but still seen as a high level. Unemployment is expected to be 3.6% against 3.7% in May. If these forecasts are correct, it would reinforce the impression of an ongoing tight labour market and give the Federal Reserve a solid reason to keep pushing up rates.

“High interest rates are taking their toll on businesses and consumers. In the UK, house prices fell by 2.6% in June which represents the biggest annual drop since 2011. Many people simply cannot afford current mortgage rates and so the housing market is suffering.

“Even activity among lower-priced homes has taken a wobble. MJ Gleeson builds properties for the ‘affordable housing’ market, typically selling to young, first-time buyers. But even this company is not immune to market weakness.

“It completed the sale of 1,723 homes in the 12 months to 30 June 2023 versus 2,000 homes in the previous year. The housebuilder notes that more than 20% of sales in its second-half period went to buyers over 55 years old, more than double the amount seen a year earlier. That suggests many people might have downsized because they couldn’t afford the mortgage on their previous property.

“Lok’n Store retreated nearly 8% after raising £20 million through issuing stock at a big discount to its price on 5 July. It wants a slug of cash to accelerate its development pipeline of self-storage buildings. The fact the fundraising was significantly oversubscribed goes to show that investors liked the opportunity of getting stock at a bargain price in recognition that the money could generate positive returns down the line.”

Shell

“Shell has trailed its second quarter results and the good news is there may be a little less ammunition for advocates of harsher windfall taxes. The bad news is this is because its results are likely to be somewhat less impressive than they have been in recent quarters.

“How much the drop in earnings from its natural gas trading operation is a function of what Shell describes as ‘seasonality’ in the market, and how much it is just cyclical weakness linked to a softening economy is an open question. Investors appear to be sitting on their hands rather than coming down on one side or another judging by this morning’s share price reaction.

“The company also expects the numbers to be marred by field maintenance which will limit production. Even considering a record first quarter of the year Shell has fallen behind its US peers and there is a danger a weak showing could undermine it further.

“Chief executive Wael Sawan, who began his tenure at the start of 2023, has a plan to boost Shell’s valuation and play catch-up with its American rivals by trimming operating costs and limiting spending to areas where he is confident big returns can be made.

“This hard-nosed approach has also meant abandoning planned oil production cuts which were previously a part of Shell’s energy transition strategy. This might be well received by shareholders but could lead to increased political and even regulatory pressure.

“Sawan has also signalled he is open to moving Shell’s listing to the US, something which would be yet another blow to the prestige of the UK market.”

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