Morning Note: Market news and an update from BAE Systems.

Market News

The focus this week is on key US inflation data and talks between the US and China. President Biden’s priority for his summit with Xi on Wednesday is restoring military communications, National Security Advisor Jake Sullivan said.

The 10-year Treasury yield ticked up to 4.64%. Morgan Stanley sees the Fed making deep cuts over the next two years, taking the policy rate down to 2.375% by the end of 2025. Goldman on the other hand sees a reduction in the fourth quarter of 2024, followed by quarterly cuts through mid-2026, with rates settling at 3.5%-3.75%.

Moody’s cut the US credit outlook to negative, citing downside risks to its fiscal strength as well as political dysfunction. The US fiscal position is on an “unsustainable trajectory” due to a lack of political will at a time when debt costs are soaring, former NY Fed President Bill Dudley said. President Biden has wiped out $127bn in student loan debt by tweaking existing programs despite having his forgiveness plan stuck down by the Supreme Court.

This morning in Asia, markets were generally higher: Nikkei 225 (+0.1%); Hang Seng (+1.4%); Shanghai Composite (+0.3%). Japan’s wholesale inflation slowed sharply to below 1% for first time since February 2021 and the Yen hit new 2023 lows (151.75 against the dollar), putting traders on guard for possible currency intervention. The S&P futures currently predict a 0.3% fall at the open this afternoon. The FTSE 100 is currently trading 0.3% higher at 7,391. Gold moved up to $1,939 an ounce, while oil trades at $80.70 a barrel. The FT reports the UK plans to introduce a carbon border tax in 2026.

Jeremy Hunt is expected to extend a major tax break for businesses when he unveils his fiscal plan next week, people familiar said. The policy in question is one that offers 100% tax relief on capex. According to Rightmove, UK home asking prices posted their biggest November fall in five years. However, the 1.7% drop only left the average asking price at the lowest since the end of 2022. Sterling trades at $1.2236 and €1.1442.

Source: Bloomberg

Company News

BAE Systems has this morning released a reassuring trading update and confirmed its full-year guidance. In response, the shares are little changed in early trading.

BAE Systems is global supplier of advanced, technology-led defence, aerospace, and security solutions. The company generated £23bn of sales in 2022 from five divisions: electronic systems, platforms & services, air, maritime, and cyber security.

At a time of heighten geopolitical risk, BAE is exposed to structurally growing defence markets. With an international presence and diverse portfolio of products and services, the group is well placed to compete. In the US, for example, the President’s 2024 Budget Request increased the defence budget by over 3% above 2023 base levels to $842bn. BAE is well aligned to US National Defense Strategy priorities.

In today’s update, the group has confirmed its upgraded guidance issued at the time of its half-year results in August: sales growth up 5%-7%, underlying operating profit up 6%-8%, underlying EPS growth up 10%-12%, and free cash flow generation of more than £1.8bn.

The group’s strong order intake has been maintained, with c.£10bn booked since the half-year stage, taking the total to over £30bn booked year to date. These include order flow on new and existing programmes and renewals on incumbent positions. Recent notable awards have been £3.9bn of funding for the next phase of SSN-AUKUS submarine programme and $800m under multiple awards for Bradley fighting vehicles and upgrades. Many of the group’s contracts will be executed over many years providing long-term visibility over top-line growth.

Good operational performance and effective supply chain management has continued. The group continues to invest in the business to support its growth aspirations – plans are advanced for expanding UK submarines facilities and new investment in munitions manufacturing capacity is being undertaken.

The group is financially robust – net debt was £1.8bn at the half-year stage – and is currently undertaking a £1.5bn share buyback programme and has authorised another programme for the same amount. This is in addition to a growing dividend – the interim payout was increased by 11% at the half-year stage. This means that total cash returned to shareholders this year (including the 2022 final dividend) is expected to be c. £1.4bn (c. 4% of market cap).