Daily market update: gilt yields, DFS, Landsec, PPHE Hotel Group

Wall Street gloom has spread across European and Asian markets like a contagious disease.

Markets are down across the board as investors fret about cracks in the narrative that’s driven the mother of all tech rallies over the past few years. Investors are worried about rich equity valuations and how billions of dollars are being spent on AI just at a time when the jobs market is looking fragile.

News that Michael Burry, the inspiration behind The Big Short film, is closing his hedge fund also troubled the market, leaving more questions than answers.

Despite the doom and gloom, the scale of the market pullback wasn’t severe enough to suggest widespread panic. A 1% decline in the FTSE 100 is not out of the ordinary for a one-day movement when markets are feeling grumpy.

Investors in the UK have their own issues to process, let alone whether there is a potential AI bubble waiting to burst. Speculation that Chancellor Rachel Reeves has ripped up part of her Budget plan only days before the big event has spooked the bond market.

Gilt yields moved higher on talk that the chancellor won’t raise income tax rates, leaving bond investors wondering which alternative path she might take to repair UK public finances. Bond markets should, in theory, want the government to take bold decisions rather than tinkering at the edges. For a while it looked as if this might happen, but the latest reports about a policy rethink would suggest otherwise.

Higher gilt yields can drive up fixed-term mortgage costs because they are used as a benchmark by lenders when pricing long-term products. The situation is bad news for mortgage lenders as pricier home loans could make it more challenging for certain people to get on the housing ladder. That explains the sell-off in banking shares including Lloyds and NatWest as well as housebuilders Berkeley, Barratt Redrow and Persimmon.

DFS

With considerable uncertainty over what the Budget might bring, and a weakening jobs market, one might have expected buying a sofa to be the last thing a consumer wants to do. DFS’ trading update implies otherwise.

It says the past 19 weeks have been good for the business, with growing orders against strong year-on-year comparative figures. DFS is clearly doing something right to show resilience in a tough market.

The big unknown is whether that positive momentum is derailed by the contents of the Budget. It’s possible that Chancellor Rachel Reeves will dish up some unpleasant news that weighs on the public in the near-term and causes people to seal their wallets shut. Buying a sofa is a discretionary purchase and it’s easy to throw a rug over a tatty three-piece to make it last longer than go and buy a new one.

DFS is at the mercy of the chancellor and might need to have a lie down on one of its products if family finances come under renewed pressure.

Landsec

Office and retail landlord Landsec might have expected a slap on the back rather than a slap in the face from the market after raising guidance in its first-half results.

The company is not helped by a negative backdrop for domestic-facing businesses as investors react badly to news Rachel Reeves is set to U-turn on an increase in income tax in the upcoming Budget.

The underlying picture for Landsec is positive with high occupancy, rent increases and material earnings growth. Having taken some pain while getting rid of the lower quality parts of its portfolio, Landsec will hope that over time it gets credit from the market for having a better collection of assets with more significant earnings potential.

PPHE Hotel Group

In the years running up to the pandemic PPHE was a solid stock market performer as the Park Plaza hotels brand, for which it is the master franchisee, resonated with travellers and underpinned strong growth for the business.

However, the intervention of the pandemic had a dramatic impact on PPHE, like it did many of its peers. Beyond an initial recovery, the shares have struggled to make much progress.

PPHE is something of an outlier in the sector as it owns most of its hotels outright rather than just operating them.

This is the context for reports its biggest shareholders are considering taking the company private. Founder Eli Papouchado and President Boris Ivesha collectively own around 44% of the hotel group. They’ve confirmed an intention to consider options, from putting more money into the business to selling down some of their investment.

If the business is failing to resonate with other investors, it will understandably provoke questions about the costs and complications of maintaining a stock market listing and whether PPHE might be better off taken private.