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Stock losses continue after Target warns over profit margins

by Matthew Upton
June 7, 2022
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Stock losses continue after Target warns over profit margins
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Stocks turned lower on Tuesday after US retailer Target slashed its profit outlook for the second time in weeks, intensifying concerns about an economic slowdown driven by soaring inflation and rising interest rates.

Wall Street’s blue-chip S&P 500 share index, which has registered weekly losses for eight of the last nine weeks, lost 0.9 per cent in early New York dealings, with retailers sustaining some of the heaviest falls.

Shares in Target dropped more than 5 per cent after the group warned it would have to shift excess stock with deeper discounts, in a move that was expected to lower its second-quarter operating margin to about 2 per cent. The group last month estimated this rate at around 5.3 per cent.

The warning spooked investors, who have been watching for signs from US businesses that inflation, rising mortgage costs and plans by the Federal Reserve to aggressively increase interest rates will hit consumer spending and ultimately push the world’s largest economy into a recession.

“It’s possible that consumer spending holds up and inflation recedes quickly enough to keep the US economy going,” said Joost van Leenders, equity strategist at Kempen Capital Management.

“Equally, there’s a possible story that inflation remains high, the Fed has to do more and there is a recession,” he added.

US inflation data on Friday are expected to show consumer prices in the world’s largest economy rose at an annual rate of 8.3 per cent in May, the same as the previous month. Money markets anticipate the Fed raising its main funds rate by half a percentage point at its June and July meetings, with some policymakers signalling the run of increases will extend into September.

Target’s warning dragged rival Walmart’s shares 2.5 per cent lower, and caused reverberations in Europe, with German fashion group Zalando down almost 6 per cent and UK department store group Marks and Spencer losing 5 per cent.

Following a shortlived rally on Monday driven by China loosening some Covid-19 restrictions, Europe’s regional Stoxx 600 share index lost 0.7 per cent.

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The FTSE All-World index of global stocks has dropped more than 14 per cent this year as central banks worldwide have lifted borrowing costs to battle inflationary trends that began with coronavirus-related supply chain glitches and were exacerbated by commodity price rises caused by Russia’s invasion of Ukraine.

“We have priced what we know so far, and we need to be ready to price an improvement, or a lack of one,” said Marco Pirondini, head of US equities at Amundi. “By the end of the summer, if we are still in a regime of high inflation and [oil] sanctions against Russia, then the market has further to correct.”

In government debt markets, Germany’s 10-year Bund yield, a benchmark for borrowing costs in the eurozone, dropped 0.03 percentage points to 1.3 per cent.

The move came ahead of the European Central Bank’s monetary policy meeting on Thursday, at which it is expected to signal plans to lift borrowing costs while warning of the economic effects of inflation and the Ukraine war.

“We foresee significant volatility in bond markets around the ECB meeting this week as the communication challenge of the policy strategy is formidable,” said Andreas Billmeier, European economist at Western Asset.

The 10-year US Treasury yield fell 0.04 percentage point to 3 per cent as recession fears drove traders into the haven asset. The dollar index, which measures the US currency against six others, added 0.2 per cent.

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