It’s been a surprising week for the markets. Firstly, the US tech giants did not impact the markets as a unified block with the market favouring Tesla’s results over those from Meta, which is on track to record a deep decline on Thursday. Second, M&A activity in the UK market, which is propelling the FTSE 100 back into the limelight after an age in the doldrums, and lastly, a weaker than expected US GDP report.
Looking at GDP first, the Q1 GDP growth rate was 1.6%, much lower than the 2.5% expected by analysts. The slowdown in the US economy was driven by weak trade. Weak exports vs. strong imports acted as a drag on the US economy and shaved more than 0.8% from quarterly GDP. Government spending, which has been a key support to growth, also slowed down compared to a year ago, which also limited the upside for GDP. Inventories were also lower while personal consumption also disappointed expectations, rising by 2.5% vs. 3% expected.
Why the US economy may not be as weak as GDP report suggests
While the headline figure in this report suggests that the US economy is levelling out, the drag from trade is actually a sign that economies outside of the US are slowing, and this is weighing on US exports, while the US consumer is still strong and buying up lots of imports. Added to this, government spending has been enormous in the US and has been a major pilar of growth. This was especially evident in 2023, however, this cannot last forever, and it is no surprise that government spending growth is slowing at the same time as concerns grow about the size of the US deficit.
US exceptional at generating inflation
The market impact of this report has weighed on equities, while bond yields are actually moving higher, the 10-year yield is up by 7 basis points and the 2-year yield is higher by 8 basis points, suggesting that Treasuries outperformance on Wednesday was a blip. The bond market is reacting more to the upside surprise in the core PCE price index for Q1, which rose by a much higher than expected 3.7%, vs. 3.4% expected. This could bring the sceptre of stagflation into view, which is negative for stocks and for market sentiment. The Fed’s preferred measure of inflation, the core PCE, rose to its highest level since June 2023, and has eroded the gains made in recent quarters back towards the Fed’s 2% target. In Q4, the core PCE quarterly rate was 2%, which opened the door to rate cuts this year, however, the sharp acceleration in the Q1 reading suggests that rate cuts are likely to remain off the table, even if growth is slowing. Friday’s core PCE report for March is likely to be higher than the 2.6% expected, which could also erode market sentiment. American exceptionalism had been focused in growth in recent months, however, now that it looks like growth is slowing, America looks exceptional at generating inflation, which is likely to cause a headache for the Fed ahead of its meeting next week.
Meta is shunned by investors
Meta is set for a heavy loss later today, after it reported strong Q1 earnings, but its forward revenue guidance disappointed expectations and its large increase in capex spend spooked investors. Meta’s share price had risen by 40% so far this year ahead of the Q1 earnings report and it is now being punished for not being wildly optimistic about its future profits. The market is not willing to pay up for companies that cannot deliver the bottom line. Whether or not the AI theme has run out of steam could depend on Microsoft earnings later on Thursday, as it is a bellwether of the AI world.
US stock market futures are pointing to a lower open, however, the sell off in the US is allowing the FTSE 100 to steal the limelight on Thursday. It is higher by 0.35%, eking out a gain in an otherwise sea of red for global equities. The UK is also performing better compared to European and US stocks for the past month, so is this the time for UK companies to play catch up?
UK stocks back in vogue
The market is taking a fancy to UK equities due to some strong earnings from the likes of Unilever, Sainsbury’s and Astra Zeneca. Barclays also delivered a strong set of results, although profits were lower than a year earlier. Astra is the leading performer in the FTSE 100 on Thursday, after it recorded stronger than expected profits. This earnings report shows that its recent acquisition spree is paying off. It biopharma and oncology businesses exceed $5bn in revenue last quarter, and the company also has a strong pipeline of drugs to keep profits higher down the line. The market liked what it heard, and did not even bat an eyelid at the Astra CEO’s massive pay packet that was passed by investors on the back of this earnings report.
Barclays stock price is also higher today by nearly 6%. It’s Q1 results suggest that its strategic revamp is partially working: investment banking is still a key driver of the business and equity trading was a notable performer, however costs are coming down. It also saw an increase in net interest income and a strong performance in the UK. The increase in deal volumes also bode well for future profits.
Anglo deal could see major company leave London
M&A was also on offer in the UK markets on Thursday. BHP made a $31bn offer for Anglo American , one of the UK’s biggest mining stocks. Anglo’s stock price is higher by 13%. The Anglo board said that they would review this offer, however, we expect some horse trading. BHP’s offer is roughly $25 per share, last year Anglo’s share price was $30, so we expect BHP may have to increase their offer to stand a chance of buying the UK mining giant. The attraction for BHP is Anglo’s vast copper reserves. If the world is moving towards a greener future, then copper is the new oil, and BHP wants a slice of this pie.
This deal is likely to come up against regulatory pressure, so it is not a given. However, if it does go ahead it would mean that Anglo would leave the FTSE 100, as BHP delisted from London two years ago. This would be a big loss, and highlights how low valuations for UK companies make them attractive takeover targets to the UK market’s detriment.
For now, the FTSE 100 is in vogue, and if it can continue to deliver strong earnings then the cheaper valuations of its stocks compared to the US, could finally make UK stocks attractive for global investors.
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