This week saw MRW, SBRY, TESO and MKS report. Accordingly, let’s take a look at the ‘state of play’ for British supermarkets.
First and foremost, the updates were without doubt bullish. Buoyed by growing UK retail sales, all four reported like-for-like sales growth. Moreover, Tesco (LON:TSCO) increased its market share for the first time in 5 years and Marks and Spencer saw growth in its clothing business for the first time in nearly 2 years.
However for faraday, these weren’t the major talking points. Nor was it that here was another raft of data defying the doomsday, post-Brexit predictions.
Instead, it was the acknowledgement that the vicious and seemingly ever ongoing sterling selloff will soon start to bite. As an importer of inflation, it won’t be long until the UK sees inflation rising on the back of a weaker pound.
With the sector currently in the midst of a pricing war, the prospect of further margin squeezes is the last thing supermarkets want. To this point, demand elasticity (i.e. demand sensitivity to prices) is clearly playing on management and investor minds' and we are seeing it in the price charts.
As the chart highlights, a clear resistance zone has formed since October. On several occasions, prices have rallied to this zone only to rollover -- the failures to break this zone is an indicator of the significance of the level.
Focusing on the here-and-now, we note that recent price action has seen the index burst through this zone only to retrace back lower. However, with prices still hovering just below this key level, we are not looking to trade the false break as of yet.
Of course, were prices to subsequently break and hold above this zone in the coming sessions, it would undeniably represent a change in market structure. However, it looks more like the resistance will hold. Furthermore, with Teresa May talking about Brexit on Tuesday, we also have a clear, potential catalyst for further sterling weakness.