Is it safe to go back into the water?
The first trading day of Q4 2022 looked very different from the year to date, with a decent rally in most markets. The $ was a tad easier, and precious metals and oil were both very strong. The decision by the Australian central bank to only increase rates by 25 bps rather than the 50 expected encouraged the view that global pressure to raise rates is dissipating. Fed pivot watchers are getting excitable again.
The £ recovered further as the UK chancellor moved forward the debt funding statement from November 23rd. Maybe there is a plan after all?
Meanwhile, the temperature is rising in the post-event analysis of the LDI-driven BoE intervention in the gilt market from last week. Patrick Hoskins in the Times said: The awkward fact is that taxpayers are now underwriting the bailout of a financial institution they have been denied entry to for years. Most defined benefit schemes have been closed to new members for decades. Fewer than one million people continue to clock up benefits. The rescue is not about saving the pension fund members but the sponsors of these schemes. It is the employers behind these schemes which would have been the first port of call for extra funds. And it is the industry lifeboat, the Pension Protection Fund, which is funded by those sponsoring companies, which would have been the second one. In this context, Legal & General, a major LDI provider, issued a statement today reassuring investors that it is a middleman and doesn’t carry the unmatched liabilities that its products have created.
In the broader European context, there is increasing concern that Credit Suisse and Deutsche Bank are heading for difficulties in the rush to adjust to higher rates, weakening economies and higher credit risks. Smoke and fire come to mind, all a bit 2008/9 for comfort.
Greggs – Q3 Update – Total sales up 14.6% in Q3, with LFL sales in company-managed shops up 9.7% vs the same comparative period in 2021. They are maintaining guidance for cost inflation in 2022, c.9%. They are also maintaining full-year outcome expectations, i.e. flat PBT year on year. Impressive cost control, given the pressures. Trading down to lowest cost producer theme endorsed.
Legal & General – Update – L&G published a statement to reassure on its liquidity and financial strength after LDI volatility. Profit and capital generation targets for FY are unchanged, and the solvency ratio has jumped 23% points plus since H1, to between 235-240% as of end-Sept, due primarily to higher interest rates and capital generation. Nothing to see hear, it wasn’t our fault, the dividend yield is now 8%.
Watkin Jones – Warning – Underlying operating profit to be c.10% below current market expectations. The Group has seen some pricing and margin softness on sales concluded in H2, with purchasers facing increased funding costs. The recent market volatility has impacted two forward sales planned to close in September, which are now planned to transact in FY23. Interest rate increases & volatility of funding markets causing project delays shares marked down 25% at open.
NB Prices are as at the previous day’s close.
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