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Day ahead: Rolls-Royce, Next and Alibaba in the spotlight ahead of BoE decision

Last updated: 15:08 04 Aug 2022 AEST, First published: 00:08 04 Aug 2022 AEST

Rolls-Royce Holdings PLC -

Ahead of another expected interest rate rise from the Bank of England on Thursday, results from Rolls-Royce Holdings PLC (LSE:RR.) will be among the most anticipated among the raft of company news earlier in the day.

The engine maker’s shares became a favourite of bargain-hunting investors during the pandemic but sank to an 18-month low below 80p in the leadup to its first-quarter numbers back in May. 

They have slowly crept up since then, with the announcement of a new chief executive last month and news that the £2bn sale of its ITP Aero subsidiary can be completed in coming weeks providing a small boost this week, but pay negotiations with staff proving a drag.

Problems for airlines and airports have meant the expected rebound air travel in 2022 has been slower to materialise than many hoped, though traffic figures from some airlines for July have shown a big step up that could be encouraging.

Away from air travel, the company has made some strides in its power systems business, though it warned a month ago that UK government approval was not coming fast enough.

In the retail sector, Next PLC (LSE:NXT) is also reporting numbers, though investors are aware that it often under-promises and over-delivers.

The FTSE 100 clothing chain maintained full-year profit guidance in the first quarter, with sales boosted by the re-opening of stores as COVID restrictions ended, albeit this was at a lowered range of £795mln to £895mln.

Deutsche Bank analysts have been less optimistic about Next, recently downgrading the shares to 'hold' from 'buy' and cutting the target price to 6,250p from 7,850p. The analysts believe the company is one of many retailers that are currently too optimistic about the impact of the cost of living crisis, with consumers set to really feel the squeeze.

Looking overseas, Chinese tech behemoth Alibaba Group (NYSE:BABA) Holding Ltd is forecast to post its first-ever fall in quarterly sales early on Thursday.

Battling regulatory pressure from Beijing and with pandemic problems hitting consumers, its second-quarter revenues are predicted to drop 1.2% to CNY 203.4bn ($30bn).

According to Bloomberg, its cloud computing arm is expected to report its second-lowest revenue growth in six years, of 14.3%.

Fellow tech colossus Tencent is due to report later in the month.

Both are big holdings of FTSE 100 favourite Scottish Mortgage Investment Trust PLC (LSE:SMT), though Alibaba has fallen out of its top 10 holdings in recent months.  

Bumper rate hike predicted

At noon, the Bank of England's monetary policy committee (MPC) is certain to hike interest rates for the sixth time in as many meetings - but the question is by how much.

At its last meeting, in June, the MPC raised interest rates to 1.25% from 1%, though the committee was split 6-3 in favour.

The Bank said it would act “forcefully” on inflation if necessary and expecting consumer price inflation to peak at 11% by year end, up from its previous forecast of 10%.

But with the US Federal Reserve having ratcheted rates up by 75 basis points (bps) last week, the pressure is on for their Threadneedle Street counterparts to follow with at least a hike to 1.75%.

This would be the first 50bps since the Bank of England was given its independence and looks likely given recent comments from Governor Andrew Bailey that put a hike of this size on the table.

This week the MPC will also publish its new economic projections, which come a day after thinktank NIESR predicted the UK economy will enter recession in the third quarter of 2022 "and remain there until the first quarter of 2023".

Like the MPC, NIESR forecasts CPI inflation will peak close to 11% in the fourth quarter of 2022, returning to around 3% a year later.

"The MPC will need to continue to be cautious as it walks a fine line between tightening policy too quickly, worsening the recession, and too slowly, increasing the risk of high inflation becoming embedded in expectations," said the thinktank. 

Economists at ING, who were among those predicting a 50 basis-point rate hike, said even such a hike is "unlikely to lift the pound, nor arrest the decline in market rates".

"We’ve argued that the Bank is probably nearing the end of its tightening cycle. But even if that’s the prevailing view on the committee, we doubt they will say so this week.

"Partly that's just because everything is so uncertain right now. But also because the hawks in particular won’t want to see UK-US rate differentials widen materially at this stage, amid concerns about adding to recent sterling weakness. We therefore think the Bank will repeat its guidance that it’s prepared to act ‘forcefully’ where needed.

"Nevertheless, expect the Bank to hint that market pricing on the path of rate hikes is still too aggressive."

 

Significant announcements on Thursday 4 August 2022

Finals: Revolution Beauty Group plc

Interims: ConvaTec Group PLC (LSE:CTEC) (ConvaTec Group PLC (LSE:CTEC)), Evraz PLC (LSE:EVR) (Evraz PLC (LSE:EVR)), Glencore PLC (LSE:GLEN) (Glencore PLC (LSE:GLEN)), Gym Group plc, Hikma Pharmaceuticals, Mears Group PLC (AIM:MER) (Mears Group PLC (AIM:MER)), Mondi PLC (LSE:MNDI) (Mondi PLC (LSE:MNDI)), Morgan Sindall Group PLC (LSE:MGNS) (Morgan Sindall Group PLC (LSE:MGNS)), Spirent Communications (LSE:SPT) (Spirent Communications (LSE:SPT)) plc, Rolls-Royce, Hikma, Serco, and Meggitt

Trading announcements: Next PLC (LSE:NXT), Sanderson Design Group Plc

AGMs: Clontarf Energy (AIM:CLON) (Clontarf Energy (AIM:CLON)) plc, Investec PLC (LSE:INVP) (Investec PLC (LSE:INVP)), Starcrest Education Ltd, STM Group PLC (AIM:STM) (STM Group PLC (AIM:STM))

Economic announcements: BoE interest rate decision, Monetary Policy Summary, BoE’s governor speech, UK construction PMI

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