FTSE 100 holds firm, China mulling investment in construction, LVMH sell-off constrains European stocks, GSK in new Zantac legal settlement, Travis Perkins and Forterra issue warnings

“The FTSE 100 was flat on Wednesday morning, consolidating yesterday’s big gains amid continuing noises within the US Federal Reserve that the need to hike interest rates has gone,” says AJ Bell Investment Director Russ Mould.

“There will be a test of the central bankers’ sanguine attitude today and tomorrow as US producer prices and US consumer prices data is released. Producer prices are often a leading indicator of increases in the cost of consumer goods and therefore are a canary in the coal mine for any resurgence in inflationary pressures.

“Reports China is thinking about piling investment into the construction sector to revive its ailing economy helped set the tone in Asia, where strong results from Samsung overnight helped push South Korean stocks sharply higher.

“In difficult times people are much less likely to be on the move, sticking with the relative security of the job they are in, and this, combined with employers hiring less staff, adds up to a tricky combination for recruiters. That’s reflected in a downbeat trading update from Page Group. The fact the company is reducing its cost base feels particularly telling on where it sees the market going in the short term.”

LVMH

“Yesterday’s weaker-than-expected results from LVMH were putting significant pressure on the stock today and, given the huge weighting afforded to the luxury goods firm, this acted as a drag on European markets.

“The luxury sector is often seen as being relatively insulated from fluctuations in the economy but expectations and valuations had become very elevated. A big issue is the failure of Chinese demand to return in the way which was anticipated after the country eased its zero-Covid restrictions.”

GSK

“Pharmaceutical firm GSK continues to address the litigation issues arising from claims linking Zantac heartburn medication to cancer.

“Agreeing a settlement to prevent a high-profile case going to court is the latest step in what increasingly feels like a tidying up exercise rather than a huge threat to the business.”

Travis Perkins / Forterra

“Cracks in the housing market continue to cause problems among suppliers to the sector. Builders’ merchant Travis Perkins and brick maker Forterra have both issued profit warnings as activity weakens.

“After two years of companies moaning about inflationary pressures, we’re now seeing deflation and some businesses are being caught out by a sudden drop in market prices. Among them is Travis Perkins which has found it has to sell existing stock for less to stay competitive, which in turn is hurting its margins.

“Weakness in the housing market has caused major ripples. A slowdown in new build housing means reduced demand for the products stocked on Travis Perkins’ shelves and Forterra’s bricks.

“Travis Perkins has also been hit by fewer people buying and selling existing properties. Moving home is typically a key driver to spend money on making the property look nice if you’re a seller or making upgrades if you’re a buyer. When activity in this area slows down, tradesmen find their work dries up and so there are fewer visits to Travis Perkins’ depots.

“The only way Travis Perkins can keep the tills ringing is to slash prices and make sure it is offering superior service. The former implies lower profit margins and the latter suggests it might need more workers on the shop floor, pushing up costs. In this situation, Travis Perkins probably has no choice but to take a hit on margins – good for customers but bad for its financial results.

“One potential saviour is the fact that we’re heading towards a general election year. Political parties have long used the housing market as a way to dangle a carrot in front of the public and creating initiatives to solve the country’s housing crisis could be one way to win votes. Any action on that front could quickly improve the landscape for Travis Perkins and Forterra.”

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