Hopes have been dashed for the two key things investors desperately wanted – an end to the Iran war and interest rates not to go up.
Investors have been on the edge of their seat waiting for a breakthrough in Middle East negotiations. Renewed fighting between Iran and Israel has thrown cold water on the prospect of a resolution any time soon, meaning the focus shifts back to worries about oil supplies and what that means for inflation.
Brent crude oil jumped 4.4% to $97.21 per barrel, much to the annoyance of businesses and consumers around the world. Oil staying higher for longer will push up energy and transport costs, which in turn could lead to a pullback in economic activity.
Central banks would normally raise rates to fight inflation, and there have been market expectations for a hike ever since the Iran war began. In theory, a sustained inflation shock could hurt the economy and central banks would eventually cut rates to stimulate spending. That could be a story for another day though, particularly as the latest jobs data from the US would suggest the Middle East conflict has yet to cause economic disruption given a strong labour market.
The market was taken aback by the robust US jobs data last Friday and that’s once again changed interest rate expectations. Markets are now pricing in a greater chance of a Fed rate hike this year.
Higher rates are negative for long-duration assets such as technology stocks. Tech valuations are typically based on expectations of large earnings growth in the future. When interest rates rise, the discount rate in valuation models goes up, and that lowers the present-day value of those earnings.
Higher interest rates also make it more expensive for companies to borrow money, and that matters because we’re in the middle of a huge wave of tech spending, and increasingly this isn’t being funded purely from cash flow generated by operations.
It’s no wonder semiconductor-related companies were among the biggest losers on the US market at the end of last week, and in Asia on Monday. The PHLX Semiconductor, or SOX, index is made up of chip-related companies and fell by 10.3% last Friday.
When markets get jittery, investors often race to lock in profits on stocks that have already done well. The tech sector certainly fits the bill. The market sell-off creates a more challenging IPO backdrop for AI companies Anthropic and OpenAI which are expected to float on the US stock market soon. However, futures prices imply a rebound for the US stock market when Wall Street opens later today. A solid showing from the tech-heavy Nasdaq index could help to lift investor sentiment and banish any thoughts we’re on the cusp of a market correction.
The FTSE 100 dipped 0.1% to 10,355 as tech fears were cushioned by a big rebound in energy stocks thanks to the higher oil price. British American Tobacco was also in demand as investors popped some defensive-style names into their portfolio in a ‘just in case’ scenario should markets weaken further.
Tate & lyle
The UK stock market has been shrinking thanks to companies moving to pastures new and a wave of takeovers. Another one of its stalwarts is now on the chopping block.
Ingredients business Tate & Lyle’s time as a public company looks to be up. Having secured the agreement of the board, a cash bid at a chunky premium from US rival Ingredion looks like it could be enough to get a deal over the line.
Tate exited its eponymous sugar business more than 15 years ago and might now go out with a whimper. Shareholders might be relieved to exit after a disappointing period affected by weak demand, mounting costs and the impact of weight-loss drugs.
A successful takeover represents another loss to the London market as it struggles to attract substantial new listings to replace the names which are steadily disappearing from its ranks.
Audioboom
While a takeover offer was firmed up for Tate & Lyle, another UK name has rejected bid interest and decided to go it alone.
Podcast publisher Audioboom put itself up for sale last year by conducting a strategic review. Three interested parties made proposals to buy Audioboom, but all were rejected on valuation grounds.
Investors appear unhappy as the shares dropped by 17% as the takeover upside has now been erased.
Debenhams
Boohoo-owner Debenhams, fresh from an encouraging trading update which helped it put a good face on for the market, has announced an exclusive licensing partnership with Revolution Beauty.
The deal helps to boost the company’s footprint in cosmetics – traditionally an area which is seen as holding up well during periods of economic turmoil.
Having led the business out of its post-pandemic nadir, CEO Dan Finley is finally allowing shareholders to look forward with some optimism, though there will be remaining trepidation about the difficult consumer backdrop.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
