A rather disappointing start to the Easter break as equity markets failed to hold the top end of the ranges once again. The FTSE 100’s performance was not helped by a down beat earnings report from the retailer Next. Next has resurrected itself like a phoenix from the ashes. The management has employed a simple model, strong cash generation used to retire equity, over the past five years by a compound rate of about 5% per year. There is much debate as to the merits of share buy backs, particularly when it is described as cash return to shareholders, but in Next case it has worked well for the investor. Next Shares have climbed from a low in 2008 of £10. Even after todays fall Next shares trade above £57. The shares took a sharp hit on Thursday as the company warned that this could be the most challenging time since the recession.
Next is seen as the bell weather retailer, and any words of caution investors could read as a warning sign for the strength of the broader economy. Alongside NeXT’s comments the latest official retail sales data out on Thursday, reported that retail sales did fall month on month, however less than had been expected after the bumper January. Retail sales have risen year on year in February by 3.6%, ahead of expectations of 3%.
Across the pond, members of the Federal Reserve appear to remain determined to confuse investors with mixed messages. Fed member Jamie Bullard floated the idea that April may see the next rate hike, after Janet Yellen appeared to rule the idea out earlier in the month. Her rational appeared based more on the strength of the global economy overall rather than the merits of the US economy itself.
Macro data will be important into the next Fed meeting and on Thursday the latest US durable goods orders reported a month on month fall of 2.8%. A fall of 2% was forecast after the previous stronger than expected January.
The pattern over the past few years has been the market to rise, the Federal Reserve float the idea of a rate hike, equity markets around the globe wobble and the Fed backs away. This pattern could easily be repeated in the lead up to April’s meeting.
It does not take much these days to get a bear coming out of the woods. On Thursday one confirmed bear, Allianz chief economic advisor Mohamed El-Erian, quoted on CNBC that equities could fall 5-10% in the coming months. What was rather unnerving was the large grin he was pictured with on CNBC as he said it.
I wish everyone a happy Easter