FTSE 100 slips as Powell pushes back on rates, FTSE 250 sharply lower, Diageo slumps on profit warning and Redrow says annual results to be at lower end of guidance

“As US stocks snapped their recent winning streak overnight it was always likely European markets would follow their cue and, sure enough, the FTSE 100 and its counterparts on the continent were lower on Friday morning,” says AJ Bell Investment Director Russ Mould.

“Renewed caution came as Federal Reserve chair Jerome Powell pushed back against the narrative that had been building in the market that the rate hiking cycle was done and it was safe to begin thinking about when rates might start to be cut.

“Powell offered a reminder that inflation is still some way above 2% and the central bank would act if appropriate to keep a lid on prices. As pushbacks go this was more of a mild shove than a body slam, but it was enough to temper some of the recent exuberance among investors.

“Despite GDP figures which showed some signs of resilience in the UK economy, the more domestic facing FTSE 250 was sharply lower – with weakness across a diverse range of stocks and sectors.”

Diageo

“It’s a rarity to see Diageo issue bad news, yet no business is immune to setbacks and the drinks giant has confirmed that life is not going well.

“The last time Diageo issued a major profit warning was in February 2020 when it said the spread of Covid-19 in China – an important sales region for the group – would hit earnings. That situation was out of its hands and it simply had to muddle through what then became a global problem.

“Diageo has now warned on profit again, blaming materially weaker performance in Latin America and the Caribbean. It also hasn’t helped that the post-Covid recovery in China is slower than expected.

“The company’s success over the past decade or so has been driven by sales of spirits. These generate a high margin and have created the means through which to invest not only in its business but also to make acquisitions to expand its brand estate.

“There has been a premiumisation trend among consumers in many parts of the world whereby people have been happy to spend more to get what they perceive to be a higher quality product. Diageo rode this tailwind with great success.

“This shift in drinking habits is now being tested by a gloomier economic environment. Some people are trading down to cheaper products or are drinking less often, which means perceived ‘luxury’ companies like Diageo are finding life harder.

“The idea that luxury goods companies are immune to an economic downturn isn’t stacking up. LVMH, Estee Lauder, Ralph Lauren and Watches of Switzerland have all talked about a slowdown in growth at various points this year, so perhaps Diageo falling into the same pit shouldn’t have been a surprise.”

Redrow

“We know the housing market is in a bad place so Redrow’s disappointing trading update can be seen in that context. Despite a slowly improving picture on borrowing costs, mortgages are still expensive, there are other pressures on people’s spending power and all of this is having an impact on demand.

“What paints things in a worse light for Redrow is several of its peer group have announced more solid performance over the last week or so and there have been some signs of stabilisation in property prices too.

“For Redrow to then come out and say annual profit will be at the lower end of its forecast range is unsurprisingly going to draw a negative response from investors. It may suggest that Redrow’s area of focus – larger homes typically aimed at second or third-time homeowners – is proving a tougher market.

“At the same time, inflationary pressures are proving stubborn. Redrow and its rivals will be hoping the outlook has improved significantly by the time of the usual spring selling season next year. For now, all they can do is hunker down and wait for green shoots of recovery to appear.”

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