Q4 starts with a wimper

The start of Q4: Powell pushes back on a 50bp rate cut, as Greggs sinks and Mulberry rejects Ashley’s advances.

Pinch and a punch, first day of the month. After a strong Q3 performance for global shares, European stocks are taking a breather on the first trading day of Q4. The Eurostoxx index is down slightly, while the FTSE 100 is slightly higher. US futures are pointing to a mildly lower open later today. The main drivers of markets on Tuesday include comments from the chair of the Federal Reserve, Jerome Powell, and news that Israel has started ground operations in Lebanon.

The market has not reacted to the latest escalation in tensions between Israel and Hezbollah. This was a well signalled next step, and it has not come as a shock to investors. The oil price is down a touch on Tuesday and Brent crude is trading around $71.30. The gold price is higher on this news and is higher by more than $10 per ounce this morning. We continue to think that fears about tensions in the Middle East will mostly play out in the gold market, with a limited impact elsewhere.

It is unclear how long Israeli forces will continue their ground incursion, however, Israel’s GDP has moderated sharply, and in Q3 the economy grew by 0.17% QoQ. Credit rating agencies have also lowered their rating for Israeli sovereign bonds, which may add to pressure on Israel to keep ground operations short.

So far, Iran has not retaliated and, as yet this conflict has not become a wider issue across the Middle East. This is why markets have remained mostly immune to the situation. Added to this, oil supply from outside of the US, along with expectations that oil demand will decline in the coming years, is also keeping a lid on oil prices. However, if Iran does retaliate or suggest that it will directly strike back at Israel, we expect the oil price to surge and this could rattle global markets.

Elsewhere, Q3, which is traditionally bad for risky assets, was a good quarter for stocks. Asian equities outperformed their European and US counterparts, after Chinese shares surged on the back of Beijing’s stimulus measures. Markets in China and Hong Kong are closed for their annual holiday, this will give investors time to take stock and decide if the rally in China shares has further to go.

Chart 1: Asian shares outperform Europe and the US (chart has been normalised to show how they move together).

Source: XTB and Bloomberg

We think that risk sentiment is in a strong position to continue to rally as we move into Q4. The momentum trade is high, the CBOE’s 3-month correlation index for the top 50 stocks on the S&P 500 is rising, and cross asset correlations are also increasing. Added to this, Fed chair Jerome Powell’s comments on Monday may sound slightly ‘hawkish’, he seemed to rule out another 50bp rate cut at the Fed’s next meeting in November, however, the market has absorbed this news well. There is currently 36bps of cuts expected at the November Fed meeting, and expectations of a 50bp rate cut have fallen to 36% from more than 50% on Monday. However, this has not spooked financial markets since US growth is strong. The Atlanta Fed GDPNow estimate of Q3 GDP is 3.1%. A strong economy combined with a measured pace of interest rate cuts is a goldilocks scenario for investors and sets up US stocks well as we move into Q4.

UK companies bat away unwelcome suitors

Another UK company has refused the offer of a suitor. Mulberry has rebuffed efforts from Mike Ashley’s Fraser’s group to take over the British luxury goods firm. Fraser’s Group made an £83mn offer for Mulberry, however, this was firmly rejected by Mulberry’s largest shareholder who said that the bid was too low, and they would not support it. Instead, they will press ahead with a £10mn share issue, which had sparked the ire of Mike Ashley and Fraser’s Group. This may not be the last that Mulberry hears from Ashley. Frasers Group already owns 37% of Mulberry and has until 28th October to make another offer or to walk away. The executive team at Mulberry have a tough battle ahead of them. The share price is lower by 13% YTD, although the interest in the company has caused the share price to surge by more than 4% on Tuesday.  The retail share sale could be a pre-emptive move from Mulberry. If Mike Ashley chooses to walk away from the deal and ditch his stake in Mulberry, then it gives the luxury handbag maker a wider share base to soak up his stake. Mulberry’s share price is higher by more than a fifth in the past month, as luxury stocks have been boosted by Chinese stimulus and hopes of a recovery for the sector. Thus, investors may have faith that Mulberry can go it alone.

Rightmove loses REA Group as suitor, but takeover premium remains

This is the second company in as many days to rebuff a takeover offer. REA Group, owned by Rupert Murdoch, said that it would not be pursuing another offer to buy Rightmove. Its share price dropped sharply on this news and fell 7% on Monday. However, interestingly, Rightmove is still higher by 12% in the past month. This suggests that Rightmove is still holding onto the ‘takeover’ premium, and it may be a sign that investors expect another suitor to come along with deeper pockets than REA group.

Appetite for Greggs starts to wane

Greggs shares have also fallen sharply on Tuesday, after it reported slower growth in Q3. Did the soggy weather weigh on the UK consumer’s appetite for baked goods? Trading momentum is strong but is levelling out after a surge in growth during the cost-of-living crisis. We believe that there are thematic headwinds ahead for Greggs’ sales growth. These include the moderation in the UK’s inflation rate that is making more expensive snack and lunch options more palatable. Added to this, a slowdown in rates of obesity in the UK may also weigh on demand for Gregg’s less healthy fare. The latter point is a long-term trend, but with a renewed focus on the health and weight of the nation, Greggs could see demand slowly decline in the coming years.