Market Commentary
Sunday 19 February 2012
Some sort of deal to bail-out Greece from its current financial plight will probably be announced early next week, regardless of whether Greece has the ability to repay its debt, sustain the interest payments or to invoke painful austerity measures, while attempting to grow its economy.
Markets have had the benefit of time in which to make contingency plans for the eventuality of Greece defaulting. Consequently investment decisions on global issues have been made despite Greece being a major irritant. It has become clear that economic data particularly in the US, is improving. Last week there was further evidence that manufacturing (Phili-Fed) and labour markets were improving and that housing was on the mend. Asia and India are far from dead in the water, though perhaps marginally off the boil. If Greece were to default, provided there was an orderly withdrawal from the Euro, the world’s economy may be in a much better position to take a sustainable hit than if it had happened 2 years ago, in the wake of the banking and credit crisis. Of course a ‘defaulting Greece’ might not be able to raise loans from capital markets, but a savagely devalued Drachma could well help their recovery process. GDP numbers from the EZ in the last quarter (-0.4%, Germany -0.2% and France +0.2%) were worrying, apart from France’s surprisingly robust effort and were very much down to sovereign debt issues. The amazing bull-market that equities have experienced since September/October 2011 of somewhere in excess of 20% - nearer 30% for the DAX - is down to better than expected results and the ECB’s 3-year loan of €600 billion at 1% to the banks. It looks like a dead-ringer to the QE that was introduced globally on 9th March 2009, when equities selected another gear. With the possibility of another tranche being offered by the ECB in the future, equities – selectively - may well be the place to be.
Retail sales in the UK in January looked surprisingly buoyant which was a little strange, given the nation's apparently diminished disposable income. However there is evidence of mortgages being repaid as quickly as possible or home owners downsizing and bank lending remains brittle. The Bank of England inflation report was cautiously optimistic, with inflation likely to fall from 3.6% to 2% by the end of the year. There may not be any more QE injected in to the economy after the recent injection of £75 billion, although wholesale money markets remain moribund.
Last week the DOW added 1.2%, the S&P 500 1.5%, the NASDAQ 1.7%, the FTSE 0.9%, European stocks just under 2% and the NIKKEI a phenomenal 4.8% thanks to the BOJ agreeing to renew asset purchasing. These gains were made despite dispiriting results from Societe Generale, BNP Paribas and AXA. Nestle excelled and Danone’s effort was not discouraging. In the UK INTERCONTINENTAL HOTELS, LADBROKES, REED ELSEVIER, ANGLO-AMERICAN and SEVERN TRENT posted admirable results. BAE Systems' profits were down and Yell continues to struggle.
In the US few key companies post results this week, though the following step up to the plate -Tuesday: SAKS, MEDTRONIC, RADIOSHACK, MACY’S, KRAFT FOODS, Wednesday: ZALE, TJX, CHICO’S FAS, DOLLAR TREE, TOLL BROTHERS, JACK-IN-THE-BOX, Thursday: KOHL’S, SAFEWAY, Friday: JC PENNEY, BGC PARTNERS. The economic data emanates from - Monday: US Presidents' Day Holiday (Markets Closed), Wednesday: US Existing Home Sales (Jan), Thursday: US Initial Jobless Claims (18th Feb), US FHFA House Prices (Dec), US FHFA House Prices (Q4), Friday: US Uni. of Mich. Consumer Confidence (Feb Final), US New Home Sales (Jan).
The 4th quarter earnings season in the UK is drawing to a close, but significant companies post results next week in particular RBS and Lloyds Banking Group. Monday: CSR, Tuesday: DRAX, AMEC, SEGRO, Wednesday: REXAM, LOGICA, BARRATT DEVELOPMENT, TRAVIS PERKINS, HAYS PLC, MILLENIUM & COPTHORNE, Thursday: MONDI, BATS, CENTRICA, CAPITA, RBS, Friday: LLOYDS BANKING GROUP, HAMMERSON, WILLIAM HILL. The economic data is provided as follows - Monday: UK Rightmove House Prices (Feb), Tuesday: UK Public Finances (Jan) PSNB ex. PSNCR, UK Speech by MPC member Charlie Bean, Wednesday: UK MPC Minutes (Feb), UK BoE Agents’ Scores (Feb), Thursday: UK BBA Mortgage Approvals (Jan), UK CBI Industrial Trends Survey (Feb), Friday: UK GDP (Q4 2nd Est.), UK Index of Services (Dec).
RBS’s bonus pool will be announced with annual results on Thursday and is expected to be circa £500 million, down from £1.3 billion last year. RBS may announce an overall loss of £1.5 billion, thanks to impairment charges for toxic loans. A trading profit of £2 billion may well have been achieved. With RBS being forced to disband or severely cut back its investment banking operation, this policy decision will extend the time frame for the repayment of the £45 billion owed to the taxpayer, perhaps by another 5-7 years. Downsizing RBS’s balance sheet from £2.2 billion to £1.4 billion must take priority. Lloyds Banking Group’s results on Friday are a different kettle of fish. A huge payment of about £3 billion for PPI miss-selling will have contributed to an estimated loss of £2.5 billion. Lloyds is the UK’s biggest high street operator and observers will be looking for encouraging comments from the CEO. RBS’s share price stands at 27.6p and Lloyds Banking Group’s at 35.46p. As a reminder, breakeven for the taxpayer is 47p and 70p respectively, so there is a long way to go.
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