Morning Note: Market News and an Update from Deere & Co.

Market News

Markets have reacted positively to signs reciprocal US tariffs may be weeks from coming into effect, raising the prospect for negotiations that could make them less punitive. Escalating peace talks also helped positive sentiment. Trump said he plans to meet with China and Russia to discuss denuclearisation and reduce military spending. The South Korean won and the yen strengthened, while a gauge of the dollar held near a two-month low. However, gold remained firm at $2,935 an ounce.

US equities rallied last night – S&P 500 (+1.0%); Nasdaq (+1.5%) – with a resurgence of big cap Tech strength. In Asia this morning, equities were also firm – Hang Seng (+3.2%); Shanghai Composite (+0.4%) – although the Nikkei 225 declined 0.8% on the back of the strong yen.

The FTSE 100 is currently 0.3% lower at 8,740. The UK is at risk of £24bn tariffs as Trump targets VAT. Donald Trump has vowed to impose tariffs on countries that charge VAT, leaving Britain at risk of a £24bn blow to its economy. 10-year Gilts currently yield 4.52%, while Sterling trades at $1.2580 and €1.2010.

The US is said to have told the UK and Europe that they should buy American arms to maintain the NATO alliance. Trump’s team also suggested it wanted Europe to purchase more US energy. Macron told the FT that Europe must respond to the Trump “electroshock” and invest in its own defence, economic and tech capabilities. Trump proposed a meeting with his Russian and Chinese counterparts to discuss cutting defence spending in half.

Results from Airbnb shows travel demand remains resilient even after an initial post-pandemic travel boom began tapering off over the summer last year.

Source: Bloomberg

Company News

Yesterday lunchtime, Deere & Company released results for the three months to 26 January 2025, the first quarter of its financial year to end-October 2025. Although earnings were ahead of market expectations, the industry outlook remains uncertain. In response, the shares were marked down by 2% in US trading hours.

Deere is a global agricultural and construction equipment company with annual sales of almost $52bn. The group has a strong track record of innovation, a comprehensive distribution infrastructure, and global after-market capability. The group’s strategic aim is to outpace industry growth and generate a mid-cycle operating margin of 15%.

The business is benefitting from broad trends based on population and income growth, especially in developing nations, which are driving agricultural output and infrastructure investment. In addition, technological advances and agricultural mechanisation are expanding existing markets and opening new ones by helping customers increase their productivity, profitability, and sustainability.

The company believes it has incremental addressable market opportunities of more than $150bn that can be targeted through engaging with more customers and increasing levels of connectivity. The focus is on helping customers manage higher costs and increasingly scarce inputs, while improving their yields, using Deere’s integrated technologies.

However, in the near term, conditions in the global agricultural and construction sectors have been challenging because of higher interest rates, squeezed farming incomes, and lower government support. More farmers have switch to renting tractors and other equipment and the results reflect progress in streamlining field inventory amidst uncertain market conditions.

During the latest quarter, worldwide net sales and revenue fell by 30% to $8.5bn, while net sales of equipment were down by 35% to $6.8bn, below the market expectation of $7.7bn. Net income fell by 50% to $869m, while EPS fell 49% to $3.19, slightly above the market forecast of $3.11.

The Production & Precision Agriculture segment includes large and certain mid-size tractors, combines, cotton pickers, sugarcane harvesters and loaders, and soil preparation, seeding, application and crop care equipment. During the latest quarter, sales fell by 37% to $3.1bn due to lower shipment volumes. Operating profit declined by 68% to $318m, mainly due to lower volumes partly offset by lower production costs. The margin slumped from 21.6% to 11.0%.

The Small Agriculture and Turf segment includes certain mid-size and small tractors, as well as hay and forage equipment, riding and commercial lawn equipment, golf course equipment, and utility vehicles. During the quarter, sales fell by 28% to $1,748m, with lower shipment volumes. Operating profit was down 62% to $124m, with the margin falling from 13.4% to 7.1%. Construction & Forestry sales fell by 38% to $1,994m, while operating profit fell 89% to $65m.

The group’s Financial Services division reported adjusted net income up 11% to $230m, due to a special item in the results. Stripping this out, net income decreased due to a higher provision for credit losses, partially offset by lower SA&G expenses.

Deere’s balance sheet is robust, with net debt of $57bn, a level consistent with supporting a credit rating that provides access to low cost and readily available funding. The group has a policy to raise its dividend “consistently and moderately”, targeting a 25%-35% payout ratio of mid-cycle earnings. The latest annual dividend was raised by 16% to $5.88 per share.

Looking forward, market conditions are expected to remain weak due to subdued farm incomes and inflationary pressures which will continue to impact demand for the company’s equipment. In response, Deere will continue to take steps to reduce costs and strategically align production with customer demands. The group reiterated its guidance for net earnings to fall from around $7.0bn to $5.0bn-$5.5bn. Operating cash flow of $4.5bn-$5.5bn is forecast. By division, net sales are now expected to decline by 15%-20% in Production & Precision Agriculture (vs. -15% previously), 10% in Small Agriculture and Turf, and 10%-15% in Construction & Forestry.

Source: Bloomberg