• US debt ceiling talks in focus amid political gridlock in Washington.
• UK Banking sector calmed by First Republic Bank purchase and HSBC profits.
• Ongoing concerns linger about banks’ exposure to commercial real estate.
• Brent crude below $80 a barrel as global growth worries linger.
• German retail sales fall ahead of ECB interest rate decision this week.
• Wagamama chain and rural pubs help the restaurant group regain its mojo.
By Susannah Streeter, head of money and markets, Hargreaves Lansdown:
Nerves are rising about the debt ceiling standoff in the US, with the prospect that a default could shake the global economy, just as worries about further banking repercussions have been calmed for now. With congressional leaders summoned by President Biden, the focus is now switching to how the US government will be able to pay its bills amid gridlock in Washington. But there is at least relief that federal regulators won’t be on the hook for immediate emergency bank funding, having done the deal to sell First Republic Bank.
JP Morgan may have swallowed up the ailing lender, with wealthy depositors now insulated, but the US banking sector is still suffering a small bout of indigestion, as investors fret that there could be more unpalatable problems lurking. However, the drop in share prices in US regional banks was lower than expected and the takeover helped calm any nerves for London listed lenders with Barclays and Lloyds given a leg-up by the surge in profits at HSBC.
The rescue is aimed at creating stability but the collapse of such a big bank inevitably will sustain some nervousness. The boss of JP Morgan, Jamie Dimon, has been trying to calm nerves indicating that this purchase has helped bring the banking crisis to an end. Certainly, there are no large banks teetering on a precipice like First Republic was after the huge scale of the deposit flight became clear. The concern remains that a tide of worry could rise up again surrounding other parts of bank portfolios such as commercial real estate, which are under stress because of sharply higher interest rates with many billions of dollars of loans coming up for renewal.
There is a safety valve of the Fed’s lending programmes to rely on and funding is still being heavily tapped. Demand for liquidity from the Fed’s discount window and the Federal Home Loan Banks scheme is continuing as lenders adopt defensive strategies. Banks are having to work harder to attract customers, given higher returns on offer elsewhere. The worry remains that dwindling deposits could lead to some banks becoming more conservative in their lending, which will act as a fresh drag on growth in the US economy and knock-on effects around the world. Brent crude is still trading below $80 a barrel as traders assess the prospects for slowing demand as fresh interest rate hikes are expected. It had been hoped that China would drive demand lost elsewhere but the unexpected contraction in manufacturing activity in April is adding to a picture of uneven economic recovery.
Retail sales in Germany have not halted their downwards slide, as consumers become more budget conscious, bracing for yet another interest rate hike from the European Central Bank this week. Retailers struggled by more than expected in March, with sales falling 2.4%. Faced with soaring prices shoppers are becoming much tighter with the purse strings, saving where they can on food, amid punishing price hikes.
Although competition for casual dining is fierce, and The Restaurant Group has been forced to close a raft of Frankie and Benny and Chiquito outlets, its Wagamama chain of restaurants is firing on all cylinders. It demonstrates that if the menu and ambiance is right, customers will still come. The company revealed strong like for like sales in the first quarter and for the first four weeks of April, leading to an upgrade in underlying profits for the year.
Wagamama sales grew 9% in the first few months of the year and now more openings are planned for next year, as the brand proves increasingly popular. The group’s pubs put in an even stronger showing, with Brunning and Price establishments in rural spots proving a draw, with sales up 10%. Although consumers are increasingly cost-conscious, it’s clear that they are still willing to ringfence budgets for treats and eating out, and by catering for more specific sets of diners, The Restaurant Group is starting to regain its lost mojo.
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