By Jack Mendel
London’s FTSE 100 slipped substantially on Friday after, as mining stocks dropped and the UK economy stagnated with 0.0 per cent growth in the third quarter.
The capital’s premier blue-chip index dropped by 1.3 per cent before midday to 7,357.06, having started at the open about half a per cent down.
The more domestically focused FTSE 250 fell to 17,770.36, about 1.48 per cent down, which was a slight improvement on the -2.45 per cent after the open.
After the open on a sluggish morning with few corporate results, Diageo’s share price plummeted by more than 15 per cent. The drinks-maker shares dropped on Friday morning after it said it expects a slowdown in net sales growth in the first half of 2024, thanks to a performance downturn in Latin America and the Caribbean (LAC).
AJ Bell investment director Russ Mould said: “It’s a rarity to see Diageo issue bad news, yet no business is immune to setbacks and the drinks giant has confirmed that life is not going well.
“The last time Diageo issued a major profit warning was in February 2020 when it said the spread of Covid-19 in China. That situation was out of its hands and it simply had to muddle through what then became a global problem.”
Mould continued: “Diageo has now warned on profit again, blaming materially weaker performance in Latin America and the Caribbean. It also hasn’t helped that the post-Covid recovery in China is slower than expected.
“This shift in drinking habits is now being tested by a gloomier economic environment. Some people are trading down to cheaper products or are drinking less often, which means perceived ‘luxury’ companies like Diageo are finding life harder.”
“The idea that luxury goods companies are immune to an economic downturn isn’t stacking up. LVMH, Estee Lauder, Ralph Lauren and Watches of Switzerland have all talked about a slowdown in growth at various points this year, so perhaps Diageo falling into the same pit shouldn’t have been a surprise,” said the investment director.
On the premier index, BAE systems shares rose by about two per cent, as union members blockaded its UK office in Rochester, citing its manufacturing of arms for the Israeli army, amid the ongoing war in Gaza.
On the FTSE 250, housebuilder Redrow’s shares were down more than five per cent after its annual profit fell to the lower end of its guidance. This week, other housebuilders including Persimmon have issued results.
Precious metal miners lost 1.2 per cent while the industrial metal miners index dropped 0.9 per cent. Prices of most nonferrous metals fell after hawkish comments by US Federal Reserve officials signalled further rate hikes could be required to fight inflation, according to Reuters.
While some cheered the UK avoiding a dreaded recession, stagnating growth mixed with high inflation causes concerns of stagflation in the economy and could pose a problem for rate-setters at the Bank of England and Chancellor Jeremy Hunt.
This comes after comments made by Fed chair Jerome Powell yesterday, which signalled the US economy might not be done with its rate-hiking cycle yet.
US Federal Reserve officials “are not confident” that interest rates are high enough yet to finish the battle with inflation, and may be nearing the end of how much help they can expect in lowering price pressures from improvements in the supply of goods, services and labour, he said.
Powell said the Fed “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 per cent over time; We are not confident that we have achieved such a stance”.
After his comments, and this morning’s UK GDP figures, all eyes will be on firstly the Chancellor’s Autumn statement on 22 November, and then the next Bank of England decision on rates, next month.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: “The FTSE 100 has rocks in its shoes after markets around the world digest Jerome Powell’s speech yesterday, which suggested the US would hike interest rates again if needed. “
She added: “The battle to vanquish inflation could still need an extra pair of hands, and that’s upset an investor base that had grown increasingly optimistic that policymakers would stick to the hands-off approach.
“While the comments weren’t a warning of imminent increases, they do keep monetary tightening on the table. Early signs from the US and Europe show that markets are taking this news with pouted mouths. Treasury yields have also increased slightly and that’s another way to burst equity market bubbles as the risk-reward profile for investing in riskier assets becomes less palatable.”
Meanwhile, Mould said: “As US stocks snapped their recent winning streak overnight it was always likely European markets would follow their cue and, sure enough, the FTSE 100 and its counterparts on the continent were lower on Friday morning.
“Renewed caution came as Federal Reserve chair Jerome Powell pushed back against the narrative that had been building in the market that the rate hiking cycle was done and it was safe to begin thinking about when rates might start to be cut.”
“Despite GDP figures which showed some signs of resilience in the UK economy, the more domestic facing FTSE 250 was sharply lower – with weakness across a diverse range of stocks and sectors,” he added.
