FTSE 100 falls 2.5% as recession fears weigh on markets – business live

Sri Lanka has fallen into default for the first time in its history, as its economic crisis deepens and inflation surges higher.

Sri Lanka’s central bank confirmed today it had missed a deadline for $78m of foreign debt repayments on two sovereign bonds, as a 30-day grace period expired.

Spiralling food and fuel costs, shortages and rolling power blackouts have led to nationwide protests and a plunging currency, with Sri Lanka short of the foreign currency reserves it needed to pay for imports.

Last month, the government said it would halt payments on its foreign debt to preserve cash for essential goods, and seek a debt restucture.

This is Sri Lanka’s first sovereign debt default since it gained independence from Britain in 1948. According to Moody’s, it is the first sovereign default in the Asia-Pacific region this century.

On Monday, Sri Lanka’s new prime minister, Ranil Wickremesinghe, has warned that the financial crisis engulfing the country will get worse and “the next couple of months will be the most difficult ones of our lives”.

In his first address to the country on Monday, Wickremesinghe described the conditions of the country’s finances as “extremely precarious”.

“In November 2019, our foreign exchange reserves were at $7.5bn. However, today, it is a challenge for the Treasury to find $1m.”

Central bank governor Nandalal Weerasinghe predicted today that inflation could accelerate to 40% in coming months.

Many other low- and middle-income countries are struggling with a three-pronged crisis: the pandemic, the rising cost of their debt, and the increase in food and fuel prices caused by Russia’s invasion of neighbouring Ukraine.

Our economics editor Larry Elliott explained earlier this month that Sri Lanka is unlikely to be the last to buckle.

Back in the City, the FTSE 100 index has now tumbled 2.5% today, as a global stocks rout deepened.

The blue-chip index is currently down 183 points or 2.5% at 7254 points, on track for its worst day since early March, when the Ukraine war spooked markets.

Bloomberg explains that bets that robust earnings can help investors weather this year’s turbulence were thrown in doubt after US consumer titans Target and Walmart signaled that high inflation was hitting profit margins and consumer spending.

“We are pricing in a growth scare,” Lori Calvasina, the head of US equity strategy at RBC Capital Markets, told Bloomberg TV.

“There is a lot of uncertainty in this market right now about whether or not that recession is going to come through or if it’s going to be another near-death experience.”

Close Brothers Asset Management’s chief investment officer Robert Alster said growth concerns were rising:

“Target and Walmart coming out with disappointing numbers has really, really spooked people,”

“We are going to see a raft of downgrades to U.S. GDP (forecasts) now… it really looks like we are running into a faster slowdown than we expected.”

(via Reuters)

Confidence among UK manufacturers has fallen, despite new orders growth running at record levels.

The CBI’s latest Industrial Trends survey shows that confidence declined in the last quarter, with investment plans for buildings and plant and machinery dropping.

Encouragingly, UK manufacturing output grew at its fastest pace in ten months over the three months to May, with new order growth matching the record high seen in March.

But the number of firms planning to lift prices rose too, close to March’s record high. That will add to the cost of living squeeze, as companies pass on rising costs to consumers.

Anna Leach, CBI deputy chief economist, said:

Manufacturers have reported output growth and order books improving in May. But cost pressures remain acute and are pushing manufacturers to raise prices. Sentiment among manufacturers has fallen in recent months as the outlook has deteriorated following Russia’s invasion of Ukraine, and investment plans are being scaled back.

Rising costs are hitting consumers and businesses alike, and the Government can and must take action now to support the economy through the challenging months ahead. Putting pounds in the pockets of people already struggling should not be delayed, and must be coupled with action to support firms’ cashflow and to stimulate investment.”

The blue-chip FTSE 100 is now down 2.2%, with every share in the red.

Royal Mail is still leading the selloff, now down 0ver 10%, after missing profit forecasts and warning about rising inflation and slowing growth.

Investment group 3i (-8.3%), distribution group Bunzl (-5.6%) and technology investor Scottish Mortgage (-5%) are following.

Retailers Kingfisher (-4.8%) and Tesco (-4.8%), and consumer goods maker Unilever (-4.7%) are also being pummelled by concerns that consumers will cut spending as their incomes are squeezed by inflation.

AJ Bell investment director Russ Mould says the warnings of rising costs from US retailers Target and Walmart this week have hit market confidence.

“After the Walmart wobble on Tuesday, Target struck terror into the hearts of the US retail sector and was a big contributing factor behind the worst day for US markets since 2020 on Wednesday.

“The extent of the impact of inflation on these giants of American retailing has woken investors up, once again, to the huge impact surging prices are having on every facet of the economy.

“Combine this with hints from the US Federal Reserve about more aggressive interest rate hikes and it’s little wonder that stagflation fears – a slowing economy combined with inflation running hot – are stalking the markets once more.

European stock markets are all sharply lower, as investors grow increasingly nervous that economies are set to fall into recession.

The FTSE 100 index is now down 148 points, or 2%, with 96 of its one hundred members falling this morning.

Consumer goods and services firms, energy companies, banks and industrial stocks are the worst-performing sectors.

Germany’s DAX has shed 2%, with France’s CAC 1.9% lower, as European markets slide following Wall Street’s worst day since 2020.

Europen food and beverage company stocks have dropped 2.5% to a two-month low, on concerns that cash-strapped consumers will be forced to cut back in the face of soaring inflation, and rising interest raters.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says those disappointing results from US retailers have spooked markets.

The slide was sparked by the US retail giant Target warning that customers were already buying fewer high ticket items like furniture and electronics, with higher fuel prices and supply chain costs also eating into margins. It comes hot on the heels of Walmart’s.

With consumer spending power expected to be eroded further through interest rate rises, the worry is that Target’s pain is a precursor for yet more struggles to come for retailers. A trend also seems to be emerging of people wanting to save their dollars to spend on experiences like holidays rather than homewares with luggage at Target selling fast.

Consumers are showing more caution but after the pandemic lockdowns there is clearly pent up demand for travel with airlines like easyJet ramping up capacity to meet demand and bookings at restaurants surging. So while goods price inflation may fall, it may be hard to keep a lid on the price of services, particularly with higher wage costs amid the fight for labour also being passed onto customers.

Royal Mail is planning to slash costs and lift prices after being hit by rising inflation, as the postal operator misses City forecasts.

Royal Mail reported that pre-tax profits fell 8.8% in the last year to £662m in the year to 27 March, as its parcels business normalised as pandemic restrictions were eased, and the boom in online shopping slowed. Adjusted profits rose 8%, though, to £758m.

Revenues fell 1.6% year on year, with domestic parcel volumes dropping 7% despite growth in deliveries of Covid-19 test kits.

Non-executive chair Keith Williams says Royal Mail now faces ‘clear headwinds’, such as weakening GDP and growing inflationary pressures, which it plans to address through price increases and growth initiatives.

Royal Mail has already already increased domestic prices of our letter services by an average of 7%, and parcel prices by an average of 4%, in addition to the fuel surcharge.

The company says:

Inflation rose throughout the second half of the year.

Wage inflation in tight labour markets, sharp increases in energy and fuel costs, exacerbated by the war in Ukraine, and a cost of living squeeze in many countries are resulting in an uncertain outlook for GDP and consumer spending, creating significant headwinds as we enter 2022-23.

Royal Mail says it has identified cost savings in excess of £350m to mitigate macro-economic pressures.

Budget airline easyJet says it “faces summer 2022 with optimism”, after narrowing its losses due to strong bookings despite the cost of living squeeze.

Easyjet told shareholders that bookings in the last 10 weeks have been consistently above the same period in 2019, as demand after travel restrictions were lifted.

It reports:

• · Forward bookings for the third quarter are 76% sold and 36% sold for the fourth quarter.
• · In the last 10 weeks, bookings have been 6% above the same period in 2019
• · Easter holidays saw load factors of 90%

The disruption caused by Omicron pushed easyJet into a pre-tax loss of £545m in the six months to the end of March, compared with a £701m loss a year earlier.

EasyJet was hit by staff sickness this year, leading to a wave of flight cancellations in the Easter period.

And despite the pick-up in bookings, easyJet says it still faces short-term uncertainty, so won’t provide any further financial guidance for the 2022 financial year.

Customers are booking closer to departure and visibility remains limited.

Johan Lundgren, easyJet chief executive said the airline had ‘transformed’ during the pandemic:

“easyJet has reduced its losses year on year, at the better end of guidance. The pent-up demand and removal of travel restrictions provided for a strong and sustained recovery in trading which has been further boosted as result of our actions.

These include the radical reallocation of aircraft which has seen more than 1.5m seats moved to the best performing markets and the step-change in our ancillary products delivering increased revenue – both of which have contributed to our total yield increasing by 9% compared to the same period in FY19. All of this is not only delivering now but with more to come in the future as even more passengers take to the skies.

Shares have opened almost 1% higher.

Ukraine invasion could cause global food crisis, UN warns

Martin Farrer

The United Nations has warned that the war in Ukraine has helped to stoke a global food crisis that could last years if it goes unchecked, as the World Bank announced an additional $12bn in funding to mitigate its “devastating effects”.

UN secretary general António Guterres said shortages of grain and fertiliser caused by the war, warming temperatures and pandemic-driven supply problems threaten to “tip tens of millions of people over the edge into food insecurity”, as financial markets saw share prices fall heavily again on fears of inflation and a worldwide recession.

Speaking at a UN meeting in New York on global food security, he said what could follow would be “malnutrition, mass hunger and famine, in a crisis that could last for years”, as he and others urged Russia to release Ukrainian grain exports.

He said he was in “intense contact” with Russia and other countries to try to find a solution.

“The complex security, economic and financial implications require goodwill on all sides for a package deal to be reached,” he said of his discussions with Moscow, Ukraine, Turkey, the US, the European Union and others.

“I will not go into details because public statements could undermine the chances of success.”

Dominic Rushe

The wild ride on the US stock markets continued on Wednesday with the Dow Jones Industrial Average sinking more than 1,100 points as investors worried about a looming recession.

All of the major US markets fell sharply, with the S&P closing down 4%, its largest fall since June 2020, and the tech-heavy Nasdaq losing 4.7%.

On Tuesday markets had rallied following positive news about consumer spending and signs that China was relaxing its strict Covid-19 lockdowns. Just a day later concerns about an economic slowdown triggered a wide-ranging sell-off.

The sell-off began after Target said supply chain costs and inflationary pressures had cut into its profits and customers were buying fewer higher-margin items such as kitchen appliances, televisions and furniture. More here:

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Recession fears are swirling through the markets again, as rising inflation and snarled supply chains hit economies, driving up the cost of living and hitting some company profits.

Last night, US stocks posted the biggest daily drop in almost two years, on concerns that economic growth will falter as central bankers look to raise interest rates to stem the surge in inflation.

Fed chair Jerome Powell’s determination to keep lifting borrowing costs until inflation falls meaningfully has rattled Wall Street, and is likely to push European markets lower today too.

The S&P500 fell more than 4% lower yesterday, Nasdaq slumped more than 5% and the Dow slid more than 3.5%.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

Powell said this week that the Federal Reserve would go beyond what could be a neutral rate to tame inflation.

But at this point, no one knows where the neutral rate is, even the central bankers don’t have a clue.

The main catalyzers behind the move are always the same: the worry of high inflation, tighter Fed to fight the sky-high inflation, and the fear of recession.

Tech stocks, which had benefitted from ultra-loose monetary policy in 2020 and 2021, were hammered again – sending the Nasdaq Composite down nearly 28% so far this year. Apple lost 5%, while Amazon shed 7%.

The benchmark S&P 500 share index saw its biggest loss since June 2020 too, with traders spooked by retailer Target. Its stock plunged 27% after it cut its profit forecast and warned costs were mounting.

Walmart had made a similar warning on Tuesday, as it grappled with surging inflation on food and fuel.

Data showing a drop in US housing starts, and building permits, added to concerns that the US economy could be slowing.

Jim Reid of Deutsche Bank explains:

There wasn’t a single catalyst behind the slump, but weak housing data out of the US along with Target’s move to cut its profit outlook helped feed investor concern that the consumer might not be in as strong a position as previously thought.

And that’s on top of all the other worries of late that the global economy is heading in a stagflationary direction amidst various supply-chain issues, alongside the prospect that tighter central bank policy is going to further dent growth and risks tipping various economies into recession.

That could include the UK, which looks vulnerable to a downturn after inflation hit a 40-year high of 9% yesterday.

The agenda

• 9.30am BST: Latest UK economic and business activity report from the ONS
• 11am BST: CBI industrial trends report
• 12.30pm BST: ECB Monetary Policy Meeting Accounts
• 1.30pm BST: US weekly jobless figures
• 3pm BST: US home sales