The FTSE 100 is hovering on the cusp of the closing high it reached in late February, just before the war in the Middle East began, and investors will be looking to better-than-expected results from London Stock Exchange, Rolls-Royce and BAE Systems, alongside new share buybacks from Lloyds, Shell and London Stock Exchange (again) to give the index a lift.
This is not to say that all the news is good. Rentokil Initial is recoiling from an admission of softer trading in the American residential pest control market in June and July, to echo concerns expressed last week by New York-listed Rollins. Vanquis Banking’s shares took a battering as the challenger lender warned a slant in new customer wins in credit cards and more cautious borrowing from existing clients would weigh on profits this year and next, and geopolitics came back into focus after Washington and Tehran launched strikes and counter-strikes in the Middle East.
Fresh hostilities combined with some dissatisfaction with new US Federal Reserve chair Kevin Warsh’s first policy pronouncement in the job to drive down the headline US stock indices. Asian trading was also mixed, so London’s resilient start is notable, given the circumstances.
US Federal Reserve / Bank of England
Markets had put a one-in-three chance on the US Federal Reserve raising its target range for the headline Fed Funds from 3.75%, and in the end the 9-3 decision to stand pat surprised no-one in particular.
However, new chair Kevin Warsh got a spiky welcome from the US bond market. Despite his publicly expressed commitment to sound monetary policy and reining in the galloping expansion of the US central bank’s balance sheet, Mr Warsh failed to convince holders of US Treasuries of his inflation-fighting credentials. US 10- and 30-year bond yields rose after Mr Warsh’s comments, and he may need to move sooner rather than later if he is to convince bond vigilantes that he is doing no more than talking loudly and carrying a big stick.
US inflation has exceeded the Fed’s 2% target in every month bar one since March 2021, and that was October 2025 when the Bureau of Labor Statistics did not release a figure owing to a US government shutdown.
Inflation has not been transitory, whatever policy makers may argue, and this would normally be reason for the Fed to tighten policy. Mr Warsh may well be wary of acting, given President Trump’s calls for lower interest rates and cheaper credit, and the spiralling US federal deficit, but the bond market looks to be tightening policy for the central banker, and that is not a particularly good look.
The Bank of England’s Monetary Policy Committee has just the one mandate – to keep inflation around its 2% target – unlike the Fed, which is required to manage both the cost of living and employment, but the Old Lady of Threadneedle has not done a much better job. Inflation has exceeded the 2% target in every month bar two since April 2021.
Markets do not expect Governor Andrew Bailey and colleagues to sanction an interest rate increase at this meeting, but the vote on the nine-member MPC could give a guide as to the future trend. The balance last time was 7-2 in favour of no change, and a shift here could be telling. Investors are currently pricing in a single, one-quarter-point rate rise to 4.00% for this year and two more to 4.50% by this time next year.
Microsoft / Meta Platforms
Two of the so-called Magnificent Seven reported quarterly results last week, when Alphabet pleased and Tesla disappointed, and two more have also enjoyed contrasting fortunes this week. Microsoft’s shares shot higher by 9% in after-hours trading while those of Meta Platforms fell by 7%.
Microsoft pleased as its earnings were better than expected and chief executive Satya Nadella was able to point to a big jump in sales at the Azure operation, a provider of infrastructure and cloud services for the burgeoning Artificial Intelligence (AI) ecosystem, to help justify the company’s massive investment in data centres and its own AI offering.
Meta, meanwhile, is struggling to offer similar proof to conjure up bad memories of the company’s misadventures with its efforts to develop the Metaverse earlier this decade, which saw it pour nearly $90 billion down the drain and embark upon a cost-cutting programme to reassure nervous investors.
Meta’s revenue growth forecasts for the next quarter failed to inspire, especially as costs continue to motor higher, thanks to the ongoing investments in AI, where the company is yet to establish itself as a major player in infrastructure to rival Alphabet, Amazon or Microsoft, and where its large language models suffer from the perception that they trail Anthropic’s Claude and OpenAI’s ChatGPT, not to mention upstart Chinese rivals.
Despite the differing responses, there were some similarities between the numbers, too. Capital expenditure continued to surge at both, and free cash flow shrivelled. Those of a more forensic inclination will have also noted, with some suspicion, the capital gain booked by Microsoft on its AI-related investments, which gave the stated numbers a boost, and some subtle accounting changes, notably the rate at which data centres age and depreciate, and how leases are shown on the balance sheet.
Mondi
Shares in paper and packaging specialist Mondi have been put through the mill, more than halving in the past five years, a depressing trend which led to the company’s ejection from the hallowed ranks of the FTSE 100 in June.
Long-suffering shareholders will therefore be relieved to see both better-than-expected second-quarter results and a bounce in the share price, while the slashing reduction of the dividend is no worse than expected.
Price increases to offset higher input costs, notably wood and energy, are sticking, while management is trimming both capital expenditure and maintenance spending and volumes are finally showing some tentative signs of improvement. Plant closures will further cut the cost base and should play a role in rebalancing supply with demand across the industry, so some intrepid investors could be tempted to view Mondi as a deep-value turnaround play.
Mondi’s stock market capitalisation of £3.9 billion is below the £4.2 billion book value of the tangible assets on its balance sheet. It is also intriguing to note that the stated value of its production facilities and forests is £5.1 billion, so Mondi’s stock market valuation represents a discount to that, so there will be an even bigger gap between its price tag and the replacement cost of those assets.
The question, however, now is just how patient a would-be contrarian investor in Mondi needs to be. Management continues to argue that the rise (and rise and rise) of e-commerce and home shopping, coupled with a shift toward recyclable paper-based options and away from plastic packaging, will prove to be a positive for demand in the long term. The share price suggests that investors need more convincing, but at least the first-half results look like a step in the right direction.
Russ Mould: Investment Director
Russ Mould is AJ Bell's Investment Director. He has a Master's degree in Modern History from the University of Oxford and more than 30 years' experience of the capital markets.
He started out at Scottish...
