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Pressure on Johnson As Tories Suffer Losses in UK Local Elections

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Boris Johnson faced renewed pressure on his leadership on Friday after his Conservative party shed more than 260 council seats and lost control of 11 authorities in local elections across the UK.

But gains by the opposition Labour party were overshadowed by an announcement by Durham Police that it was investigating “potential breaches” of Covid-19 regulations during a gathering in April 2021 involving leader Sir Keir Starmer.

Labour seized the prime minister’s two flagship London councils: Westminster, a Conservative stronghold since 1964, and Wandsworth, beloved of former prime minister Margaret Thatcher and run by the Tories since 1978.

While Starmer’s party also won the borough of Barnet, it made less progress in traditional “red wall” areas in the north of England, offering Johnson some respite.

Elections expert Sir John Curtice told the BBC the results were not good enough for Labour to suggest Starmer was heading for a majority at the next general election and that outside London Labour’s vote was “actually down slightly” on its performance in the same council elections in 2018.

Elsewhere, the Conservatives lost ground to the Liberal Democrats, who have opened up a second front against Johnson in some of the more affluent “blue wall” seats across southern England, while the Tories were braced for heavy losses in Scotland.

Local Tory leaders turned on Johnson as the results came in. John Mallinson, Tory leader of Carlisle council, said after Labour won the new Cumberland authority: “I just don’t feel people any longer have the confidence that the prime minister can be relied upon to tell the truth.”

After weeks of campaigning, many Conservatives were frustrated that national events — including the “partygate” scandal and reports of sexual misconduct by Tory MPs — had cost them votes.

Almost 150 councils held votes across England on Thursday, including all 32 boroughs in London. Council seats were also contested in Scotland and Wales, while there were crucial elections to the Northern Ireland assembly, with the first results expected later on Friday.

Tory MPs will pore over the results for any signs that Johnson, who has been sharply criticised over partygate and his handling of the cost of living crisis, has been permanently damaged as party leader. Several MPs urged the prime minister to raise his game.

On Friday, Johnson said it had been a “mixed set of results” but stressed he wanted to focus on issues such as building new infrastructure, increasing renewable energy and hiring more nurses.

“This has been a tough night for Conservatives in some parts of the country and in other parts of the country we are actually moving forward,” he told Sky News.

“I think the lesson that I take . . . we’ve got to get on with the stuff that matters and keep delivering on our agenda.”

Johnson was among dozens of government figures fined by police for gatherings held during Covid-19 lockdowns, prompting calls by Starmer to resign.

Yet on Friday Starmer found himself in the spotlight after Durham Constabulary issued a press statement saying it had received “significant new information” about a Labour gathering in Durham on April 30, 2021.

Campaigners including Starmer ordered beer and curry to their offices at 10pm that evening, although the leader has insisted that it was just a short work break.

“At the time it was concluded that no offence had been established,” the force said on Friday afternoon. “Now, following the conclusion of the pre-election period, we can confirm that an investigation into potential breaches of Covid-19 regulations relating to this gathering is now being conducted.”

Although Tory peer Lord Gavin Barwell called the results in London “a catastrophe”, Labour’s relatively poor performance outside the capital will give Johnson some political breathing space.

The elections were a big test for Starmer, who needs to show that Labour is regaining ground from the Tories in the north, and wants to overtake the Conservatives as the main opposition to the SNP in Scotland.

Shabana Mahmood, Labour’s campaign chief, said: “This is a turning point. After the disastrous results of 2019, these early results are showing the progress we have made thanks to Keir’s leadership.”

With about half of all results in, the Lib Dems were on course for sizeable gains. Sir Ed Davey’s party seized the northern city of Hull from Labour and took control of the new unitary Somerset council. The Greens were also making gains across the country.

Sinn Féin appeared on course to pull off predictions of a historic victory in Northern Ireland’s elections in what would mark the first time the nationalist party committed to Irish reunification has outperformed unionists in the region’s century-old existence.

The centrist Alliance party was also confident it had delivered a strong showing, underscoring the fact that many voters no longer accept Northern Ireland’s traditional tribal unionist and nationalist divisions. Full results are expected to trickle in throughout Friday and into the weekend.

If pre-election opinion polls are correct, a Sinn Féin win would relegate the Democratic Unionist party, the largest force committed to preserving the region’s place as part of the UK, to a humiliating second place behind a party long associated with the republican paramilitary IRA.

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Iceland Announces 10 Percent Discount Off Weekly Food Shops – Are You Eligible?

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ICELAND is the first supermarket to announce a special discount for customers aged 60 or above.

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How Retail Stocks Went From ‘recessionary Playbook’ to Market Casualty

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Richard Thalheimer remembers the last time inflation was proving so challenging to US retailers: it was when he was trying to get The Sharper Image off the ground in the late 1970s and 1980s. 

In 2006 he left the consumer gadgets chain he founded, selling his stake before its 2008 bankruptcy. Ever since, he has been investing the proceeds of the watches, massage chairs, iPods and Razor scooters he sold, building a portfolio worth up to $350mn with stocks including Amazon, RH and Home Depot.

“It’s been so much fun,” he said. “Until this year”. 

As inflation races at levels last seen four decades ago, the retail sector that made Thalheimer wealthy is now making other investors poorer and stoking recession fears. This week, unexpectedly bad earnings announcements from Walmart and Target, two of its largest constituents, led to their steepest stock market falls since Black Monday in 1987.

Days earlier, analysts had been touting such companies as defensive shelters from the storm in tech stocks that had slashed the valuations of companies from Amazon to Netflix. Early this week, Baird named Walmart its top “recessionary playbook” idea.

But the shockwaves from Walmart and Target rippled through the wider retail sector and gave market bears a new concern: that inflation may now be biting consumers even before the Federal Reserve starts raising interest rates more aggressively.

Retailers were the biggest drivers of a broad market rout on Wednesday that pushed the S&P 500 stock index to its worst one-day fall in almost two years.

Until this week, the S&P 500’s consumer staples sub-index, which includes “big box” retailers such as Walmart along with businesses like pharmacies and food manufacturers, was still roughly unchanged for the year. The only other parts of the index that had avoided declines were energy and utility stocks, which had benefited from surging energy prices.

By the close of Thursday, however, the sub-index had fallen almost 9 per cent and was on track for its worst week since the start of the coronavirus pandemic in March 2020.

The retailers’ earnings flagged up not just one cause for concern, but three: that price increases may have reached the limit of what consumers will tolerate, that retailers are struggling to contain their own costs, and that unpredictable demand and new supply disruptions are forcing them to build up inventories.

The first of those three is being most closely watched for its broader economic resonance. “You’ve got a consumer that is starting to pull back,” said Steve Rogers, head of Deloitte’s consumer industry centre, whose surveys suggest that 81 per cent of Americans are concerned about rising prices.

Americans’ bank accounts may not have changed dramatically since last year, he said, but headlines about inflation have shaken their confidence. Some are trading down or holding off big purchases as a result, he added, particularly in discretionary categories such as clothing, personal care and home furnishings.

Walmart, long seen as a bellwether of the US consumer, noted that high inflation in food prices “pulled more dollars away from [general merchandise] than we expected as customers needed to pay for the inflation in food”. 

Rogers and others, however, see retailers’ own cost pressures as a clearer driver of their changed fortunes than consumer pullback. At Walmart, for example, US fuel costs last quarter were over $160mn higher than it had expected — more than it could pass through to customers.

“We did not anticipate that transportation and freight costs would soar the way they have,” echoed Target’s chief executive Brian Cornell. Higher wages and costs for containers and warehouses are also weighing on retailers’ profit margins.

Some of those higher costs stem from the third force at work: a disrupted global supply chain that has left retailers scrambling to secure stock at a moment when demand for it is uncertain. “Their inventories are exploding,” Cathie Wood, chief investment officer at Ark Invest, wrote in a Twitter post on Walmart and Target.

The reason for carrying more inventory than usual is that “they lived through the stock-outs of the past two years and know what that cost them”, said Rogers.

Walmart chief executive Doug McMillon indicated that some of the build-up was deliberate, saying: “We like the fact that our inventory is up because so much of it is needed to be in stock.” Still, he admitted, “a 32 per cent increase is higher than we want”. 

Target’s inventories rose even further, up 43 per cent from a year earlier, and it conceded that it had failed to anticipate consumer spending shifts in categories from televisions to toys.

“We aren’t where we want to be right now, for sure,” said Target chief operating officer John Mulligan, adding that “slowness in the supply chain” had forced it to carry more stock as a precaution.

Wayne Wicker, chief investment officer at pension plan manager MissionSquare Retirement, said it should not be surprising to see signs of consumers reining in some spending, but said this week’s results were nonetheless a “wake-up call” for some investors because many companies had until recently claimed they were handling inflation challenges well.

Walmart and Target both provided upbeat forecasts in their previous quarterly update, and did not pre-announce any changes before this week’s reports.

“Part of the price decline was reflecting the fact that the management of these large companies didn’t provide any indication that they were going to have such a miss,” Wicker said.

For Denise Chisholm, Fidelity’s director of quantitative strategy, this week’s reports did not provide convincing evidence that the economy is in trouble, but they spooked investors who were already nervous after earlier sell-offs.

Despite the visceral market reaction to Target’s results, for example, its new lower forecasts would only return profit margins to pre-pandemic levels.

“If there’s any differentiating factor compared with [previous bear markets], it has been the strength of earnings, so any kind of concern over earnings gives more volatility from a near-term perspective,” Chisholm said. But, she added, “despite a lot of the concern in the market, it is hard to reach an empirical conclusion that says recession is any more likely given what we’ve seen”.

Thalheimer, whose portfolio is down by about $50mn from its peak, thinks markets overreacted this week and is already wondering when it will be time to consider snapping up beaten-down retail stocks.

“During most of the big sell-offs of my lifetime — 2009, the [bust following the] dotcom bubble or 1987 — almost every one of these times within two years you [saw] very strong recoveries,” he said.

That will happen again, he believes, but with the combined uncertainties around supply chains, the war in Ukraine and historic inflation, “there are going to be some choppy waters ahead”.

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Investors Spooked As Gloom Grips Markets

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One of the more annoying things that investors do when they have been in the game for a really long time is to pooh-pooh market skirmishes.

“You think this is bad? Pah! You should have seen Black Monday/Soros taking down sterling/the dotcom crash,” etc. If this happens to you, my advice is to change the subject at precisely this point, before the segue into how much more fun markets were “back in my day” and how young people nowadays “know nothing”.

The veterans do have a point: a generation of traders and fund managers have never seen full-blown inflation and are accustomed to the mantra that stocks only go up (or to central banks saving the day if they stumble). But even the old-timers accept that right now we are at a historic juncture.

In part, that is because of the sheer scale of some of the market moves. The S&P 500 benchmark index of blue-chip US stocks has fallen by 19 per cent already this year. This pace may not continue. But if it does, it will be heading towards 2008’s 38 per cent fall. More tech-heavy indices like the Nasdaq Composite have fared even worse — it is down 27 per cent. Pass the smelling salts.

Individual stocks are taking a beating, particularly when companies release iffy numbers. Pandemic lockdown-era favourites such as Peloton have gone into meltdown. The manufacturer of domestic perspiration is down 90 per cent over the past year. Coinbase, Robinhood . . . take your pick. It is a mess.

But what has really spooked investors now is US retailer Target, which suffered a 25 per cent cratering in its share price just in one day this week when it said profits had halved in the first quarter and warned that profits in future quarters would suffer as a result of rising costs. 

Fellow retailer Walmart had sounded a similar alarm on the previous day, driving its shares down by 11 per cent — not to be sniffed at. Still, for some reason Target cut through. Suddenly investors accept that the slide in asset prices triggered by the US Federal Reserve’s arguably belated response to soaring inflation will prove deep and broad.

Possibly most alarming, though, is the nature of the reckoning. Hedge fund group Man wrote this week that since 1960, there have been 44 times when the S&P 500 has fallen for five or more consecutive weeks. US government bonds, meanwhile, have dropped in the same way just 31 times since 1973.

“Yet these prolonged sell-offs had never coincided — until the start of May,” number crunchers at the Man Institute wrote. Adherents to the classic portfolio split — 60 per cent stocks, 40 per cent bonds — have not had it so bad in half a century. So now what? “As it has never happened before, we cannot look back for historical guides to what happens next,” Man said. Oh.

This is seriously unsettling stuff. Bank of America described the mood in its latest monthly investor survey as “extremely bearish”. It found the highest allocations to cash — the ultimate hiding place from trouble — since 9/11 and the biggest negative view on big tech stocks since August 2006, beyond what was seen in the financial crisis or the height of the pandemic. Fund managers also reported their biggest underweight position on equities since May 2020. 

“The challenge for us is not one sector but the change in market regime,” said Hendrik du Toit, chief executive at asset manager NinetyOne, this week. “It’s so volatile right now . . . that it’s very difficult to apply a systematic process and get an expected result.”

He added: “I think with central banks being behind, we are in for quite a painful period and that means . . . the little bubbles that existed all over the place are going to be squeezed out brutally.” Crypto is just the start here, he suggests.

For investors with a mandate that allows them to do it, one of the few mainstream ways to avoid a battering is commodities, an asset class that has lain unloved for years. In part, that is because returns have been drab. But avoiding commodity stocks or bets on the direction of fossil fuels or metals also has been an easy way to burnish sustainable investment credentials.

Now we are seeing some verbal acrobatics, along the lines that there’s no point buying stocks in electric vehicle makers while refusing to buy the miners that get the metals those carmakers need. This sounds bonkers but does make sense. 

In any case, driven desperate by inflation, investors do appear willing to jettison or tweak their principles and jump in. Commodity specialists who have barely been able to get asset allocators to take their calls for the past decade are suddenly in demand. “Performance has been really bad for the last 10 years. We didn’t raise a dime in the asset class,” says Hakan Kaya, a senior portfolio manager focused on commodities at Neuberger Berman. Now he’s seeing lots of interest, from investors as diverse as pension funds and wealthy individuals.

“We are not living in a nice period like 2008 to 2020 where stocks and bonds are doing fine,” he says. “Instead they are doing badly because inflation is resurfacing. No surprise there, right? People are looking for buffers against inflation.”

katie.martin@ft.com

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