Global markets decline for second day in a row, investors await UK rate decision and rain does not stop play at Next

“Global markets extended yesterday’s declines as investors digested the prospect that US government debt is now considered lower quality following Fitch’s downgrade. The decision by the credit agency to cut the rating led to higher US government bond yields which in turn has a negative impact on equities,” says Laith Khalaf, head of investment analysis at AJ Bell.

“Asian markets were generally weak, while all the major European indices were in the red. The FTSE 100 fell 1.4%, pulled down by banks, miners and consumer goods companies. It wasn’t just a risk-off day – even the so-called defensive stocks were out of fashion. Perhaps investors just want to enjoy their summer break and so we could see markets drift until everyone is back behind the desk in September.

“Expectations for another interest rate hike from the Bank of England at lunchtime means the FTSE 250 is vulnerable to a sell-off if rates are lifted by more than expected. The market widely expects rates to go up by 25 basis points to 5.25% but a more aggressive hike could be bad news for housebuilders and retailers as it would put further pressure on household finances.

“London Stock Exchange Group fell 3.8% after reporting a 17.6% decline in half-year profit. Investors didn’t like the news and an increase to full year revenue guidance couldn’t even lift the mood. 

“Pets at Home also struggled to win over the market, with its shares dipping 0.8% despite reporting a decent trading update. The problem with Pets at Home is that its shares are priced on a premium rating. No change to forward earnings guidance meant that investors saw no reason to bid up the shares given their current valuation.”

Next

“A washout July could have been catastrophic for retailers and so there was a sense of nervousness ahead of Next’s summer trading update. While the rate of its sales growth slowed dramatically in the six weeks to 29 July versus the previous seven weeks, Next seems to have avoided a downpour and still managed to shift quite a bit of stock in the period.

“Consumers are looking for bargains so it is no surprise that the end of season sale has gone well for Next. Equally interesting is that full price sales are also thriving, suggesting that consumers are still happy to pay up for goods if it feels like they are getting good value for money.

“Fundamentally Next seems to be keeping its head above water in a difficult environment, but the outlook for its earnings is less attractive.

“The consensus forecast is for profits to decline in the current financial year and then only show modest improvement over the next two years. This raises fears that Next has a long-term growth challenge, which might explain why it has been trying so hard to in recent years to sell third party products through its website.”

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