Trump, ECB spook markets

Trump spooks the markets, as Sainsbury’s shares tank

There is a risk off tone to markets in Europe on Tuesday. Sainsbury’s share price has tanked after it reported weak non-food sales, political risks, and concerns that central banks won’t cut rates this summer, as some expected, are starting to bite.

Sainsbury’s update: food sales the only bright spot

The start of earnings season is upon us, and first up was Sainsbury’s. The UK supermarket chain reported a fiscal Q1 sales update on Tuesday, which reported sales growth of 2.4%, just beating the estimate of 2.39%. The star performer was grocery, the grocery sector saw sales rise by 4.8% in fiscal Q1, it also grew its market share in food sales, faster than any of its rivals. However, the share price is currently down more than 3% and it is one of the weaker performers on the FTSE 100, it is also acting as a drag on the consumer discretionary sector, which is lower by more than 1.1% on Tuesday.

Argos weighs heavily on Sainsbury’s non-food business

The picture was ugly for Sainsbury’s non-food business, where sales of general merchandise and clothing fell by 4.3%, sales at Argos were even worse, and were lower by 6%. It will be interesting to see if this is a sign of a weaker UK consumer, and whether the summer months and better weather can boost sales in their non-food divisions in the coming months. We will also be watching its rivals in this area, such as M&S, to see if they have bucked Sainsbury’s fate.

Why Sainsbury’s share price is falling, even though shareholder returns are set to rise

The news in this update was not all bad. There was a sweetener thrown in for shareholders, the supermarket chain said that it would return £250mn to shareholders once the sale of Sainsbury’s banking business to NatWest was complete. This comes on top of the £200mn share buyback that is currently underway. The outlook was also positive, Sainsbury’s confirmed its full year profit guidance for this year and expects it to be between £1.01bnand £1.06bn, analysts had expected £1.01bn. However, if Sainsbury’s higher margin non-food sales continue to decline, this forecast could be in doubt, which is weighing on the share price.

UK Retail price inflation falls to 2021 levels

Sainsbury’s flagged that it has managed to maintain strong food sales volume growth even as food price inflation has slowed, which fell to 2.5% in June, down from 3.2% in May, which is the lowest level since December 2021.

The decline in inflation is helping to boost consumer sentiment, and Sainsbury’s reported that food sales growth was strong even though the weather was terrible. However, the wet weather possibly hurt their non-food sales, which is weighing on investor sentiment towards the stock. All hopes will now be with the BOE.  Consumers could be given an even bigger boost later this quarter, if the Bank of England cuts rates in August. The market is currently pricing in a 61% chance of a cut on 1^st August. Sainsbury’s will have to wait and see if that can boost the sales of its non-food range.

The next trading update to watch out for this week is Friday, when Shell reports its Q2 numbers. We, of course, doubt that the UK’s biggest oil company has any bad news to bury, but if Shell wanted to bury bad news, the day after the general election would be the day to do it!

ECB dents rate cut hopes

Christine Lagarde was also a ‘buzz kill’ for the market on Tuesday. She opened the ECB’s central bankers conference by saying that she doesn’t have enough evidence to prove that inflation in the currency bloc has passed. Likewise, the ECB chief economist has also said that the June inflation report, which comes out later today, will not give the ECB enough information on the trajectory of service prices. Bond yields in the currency bloc are mostly stable on Tuesday, but the market has reduced expectations for a September rate cut, which is now below 70%. It is worth noting that there are no BOE speakers at this conference due to the UK’s general election on Thursday. So far, the euro isn’t benefiting from this hawkish turn from the ECB.

Trump spooks the markets

The other issue weighing on markets are concerns about what a Trump Presidency could mean for the US economy and the sustainability of the US debt load. US veteran Pollster Nate Silver gave Trump more than 68% chance of winning the US Presidential election in November against President Biden. Silver has also predicted that Trump would win the popular vote. This spooked the markets and put upward pressure on US Treasuries at the start of the week. However, the US 10-year yield, which rose 10 basis points on Monday, is a touch lower at the start of trading on Tuesday, suggesting that the market is not convinced that the world’s biggest economy and reserve currency is likely to have a debt crisis any time soon.

Stocks across Europe are a sea of red and the Cac 40 is also lower, partly erasing a recovery rally on Monday. Interestingly, bond yields are mostly flat to lower in Europe, which does not suggest that a broad-based sell-off is upon us, although there are still some acute political risks coming up.

French political risks could still bite

France’s second round of voting for the parliamentary election will take place next Sunday, a mixture of high turnout and political electioneering makes the outcome difficult to decipher, which may limit how much French stocks can recover in the near term. Added to this, the French – German bond yield spread is a touch higher on Tuesday, and we do not expect this to return to pre-election levels until the new government is formed and we know what their policies will be.

Traditionally, if a party wins a third of votes in the first round, then they typically go on to win the second round and form the French government. Although the far-right National Rally party fell short of getting enough votes for a majority in the first round, if Le Pen’s party can maintain her vote share, then it is likely she will be able to gather a few friendly parties to make a coalition and place her protégé Jordan Bardella into the position of Prime Minister of France. The far right in France are now on the precipice of being elected to office, for the first time. If this happens, then investors may need to trust that the bond market will keep their fiscal policies in check, as we doubt Marine Le Pen wants to have the same legacy as Liz Truss.