Brand New from Zak Mir – “That was the week that was” inaugural piece

CARNEYMANIA 

As the new editor of this magazine, and without wishing to take anything away from our prior “dear leader” (!) Mr Jennings who moves onto pastures new at Titan, heading up the fund management operation there, I introduce a new weekend round up especially for SBM readers in which I take a look back at the weeks major stories and market moving events and offer up a best idea for the week ahead. 

This will be available here on the blog for the next few weeks and then therafter by email receipt only so if you haven’t registered to receive the magazine yet, make sure to sign up on the right.

OVERVIEW

Given that good news is at a premium in the financial markets, even though we are five years on from the dark days of the banking sector collapse, it was interesting to read of “the vampire squid” Goldman Sachs’s view that the FTSE 100 could in fact 7100 by the end of the year. And so, on that sunny note in this bright July weekend, we have food for thought to start this new weekly review on a positively bullish note.

The start of the third quarter  has seen the UK index put in its best performance since January (up 2.4% in just 5 days), and so, during the typically moribund summer months, it is a potential harbinger that we could indeed finally take out the all time highs seen in the closing days of 1999 during 2013 – almost 14 full years later.

Following just five days in the hot seat (like me as editor of this publication), traders in the UK could be forgiven for asking Mervyn who (?) given the splash that the new Governor of the Bank of England Mark Carney has already made. Ironically, he seems to have already proved that just as being a football manager in the Premier League sometimes requires a little luck to stay in the job, it may be that the “multitalented” Canadian – according to George Osborne, and “the best central bank of his generation”, has arrived in the right place at the right time.

It was noticeable that going into his first BoE meeting that the Great and the Good of the City (as well as the economic analysts!) were falling over themselves to judge that the outcome of the first Carney led interest rate meeting was one which would likely offer no change in stance. Unfortunately, almost all the attempts to pin the tail on the fiscal policy donkey were wrong footed by the somewhat more dovish tone of the new look Bank of England. There had also clearly been some comparing of notes with the ECB in terms of the introduction of a forward policy guidance ahead of their press briefings and it was indeed this easy liquidity no change stance that set the markets alight this week.

It would appear that the idea behind the new policy guidance measure is to try and avoid the markets getting caught out as they were in June by the Federal Reserve, where an apparent change in bias caused bond yields to soar and stocks to tumble. This is the last thing that the European and UK economies really need right now. Of course, some cynics might indeed suggest that the low interest rate promise of a central banker is not worth the paper it is printed on (if you’ll excuse the pun!). However, there is little doubt that the July BoE / ECB offerings were well executed, and at least for the time being, stock markets look  to be underpinned, something which is all the more important given the ministerial resignations in Portugal and the regime change in Egypt.

In fact, it may be that Egypt poses the biggest influence on the markets over the summer given that over the past few days we have seen crude oil shoot back above the $100 a barrel level. Ironically, this was achieved just a couple of days after industry expert John Llewellyn said that the price of oil could halve within the next decade because of the coming shale revolution. John Llewellyn, former head of international forecasting at the OECD, said he believes most oil price predictions have underestimated the impact of new extraction techniques for shale oil and gas on supply. Presumably, our friends at Goldman Sachs would describe deem him just “muppet” given the 5% rise in the commodity this week..!

KEY MARKET DRIVING NEWS:

US ADP Jobs report   +188,000

Any doubts or suspense regarding the Non Farm Payrolls numbers later in the week were dissipated by the strong private sector data which came in well above the 160,000 expected and the 135,000 previously.

June Non Farm Payrolls +195,000

The better than expected Non Farm Payrolls number approaching 200,000 versus the 165,00 expected, re-cemented expectations of QE tapering stateside as the dollar soared, and T Bond yields rose on Friday, even as the Dow stretched up 1.5% for the week.

Portuguese 10 Year Bond Yield Hit 8%

The resignation of two senior ministers in the PIIGS nation sparked fears not only of a Government collapse, but also the prospect of another Eurozone bailout.

June UK House Prices Rise 0.6%

Helped by a combination of emerging market buyers continuing to park their money in London and so confirming its status as a “Super City”, and the continual flow of EU / PIIGS refugees, UK house prices rose more than expected last month. The Q2 rise of 2.9% was the biggest for 3 years.

Q3 2013 GDP Growth Predicted To Hit 0.6%

The British Chambers Of Commerce is looking for a Q3 jump in growth of 0.6% versus an earlier prediction of 0.9% for the whole year. It would appear that we have gone from fearing a triple dip, to cancelling a double dip recession, to a sharp economic rebound in just a few months!

MAJOR MARKETS ACTION:

Sterling struggles at a 3 month support line as new Bank of England Governor Mark Carney gets his feet under the desk on July 1st – this despite better than expected UK construction data falling to a 3 year low under $1.49 as Carney sets out a new Dovish agenda.

Yen breaks back above 100 as the Bank of Japan  is rumoured to be upgrading its view of the Japanese economy.

Gold rallies, but fails at its 10 day moving average of $1,242 despite another wave of “it is the bottom, really” analysis from alleged experts of the metal.

Dow holds 15,000 as QE tapering shock wears off, but 50 day moving average still blocks progress until the better than expected Non Farm Payrolls numbers hit the newswires on Friday.

Euro / Dollar dips below $1.30 on Portuguese finance minister resignation, fresh Italian political strife and the run up to Greece receiving (or not) the next tranche of Troika cash on the approach to the next Eurogroup meeting on July 8th.

MAIN STOCKS ACTION:

Housebuilder Persimmon (PSN) was boosted by the Government’s Help To Buy scheme, a situation which some might regard as adding petrol to the fire which is the London and Home Counties property market.

Gold miner / Egypt proxy Centamin (CEY) unsettled initially by political turmoil in Egypt but rallies sharply later in the week after the fall of President Morsi – even thought the situation in the Mid East country remains fluid to say the least.

Outsourcer Serco (SRP) rakes in $1.25bn of U.S. Department of Health contracts.

Barclays (BARC) was one of the European Banks downgraded by U.S. Credit Rating Agency S&P. Its rationale was largely based on the likelihood that progressively tighter regulation will threaten investment banking.

Jet engine maker Rolls Royce (RR.) was under fire by its employees for allegedly cutting corners with  regard to quality control. This adds to question marks over the alleged business practices of intermediaries at the  aerospace / defence group. 

KEY POINTERS FOR NEXT WEEK:

It may be wrong to suggest that there is much suspense associated with whether Greece will get the next tranche of bailout money at Monday’s Eurogroup meeting but, it is likely that there will be either a delay or even a break of the tranche into smaller pieces. Possibly of more immediate relevance as far as the fate of the Eurozone concerned, will be fresh developments regarding the stability or otherwise of the Portuguese situation.

However, it is evident to me that following the low interest rate assurance from the ECB president Draghi last week, steps have already been taken to ensure that we are not heading for a long hot summer of continental misery. Further afield,  the standout will be the latest FOMC minutes due out on Wednesday, coupled with a chance for the Fed Chairman Bernanke to set the record straight in terms of how great the threat of QE tapering really is going to be. Presumably, “Helicopter” Ben will not put his foot in it twice.

On the UK stocks reporting front, the highlights will be Marks & Spencer (MKS), which was recently, somewhat unbelievably, being touted as a potential bidder for online non profit making grocer Ocado (OCDO). Luxury goods group Burberry (BRBY) also unveils its figures and we are likely to see the British brand put a brave face on any concerns regarding the heat cooling off in its key Chinese market. Halfords (HFD) will likely paint a more positive picture of the consumer literally “getting on their bikes” in droves, although the profits momentum has started to wane quite significantly. A year end update from Barratt Developments (BDEV) may indicate whether the housing market really is starting to bubble out of control too. 

STANDOUT  SITUATION: BUY AFREN (AFR) TARGET 162p STOP LOSS 125p

RECOMMENDATION SUMMARY

In the case of Egypt focused Gold miner Centamin last week ahead of the regime change, it was interesting to note  how the shares “failed” to fall any further despite chaos in the country – another example of “the market always knows”. With Afren, we also have an example of divergence between share price and fundamentals in the sense that the stock, currently at 136p, is still well off its February 162p year high of the year to date. The latest commitment by the Africa focused oil & gas explorer to buy £20m of its shares could be the final catalyst for near term gains in the shares.

From a technical perspective, it can be seen that there has been a rebound for the stock off the floor of a wide rising trend channel in place on the daily chart since June last year. The floor of the channel runs at 127p – level with the 20 day moving average, and with the implication being that while there is no end of day close back below this double support that the upside here should be a retest of the former 2013 peak at 162p. This is expected as soon as the end of next month.

SIGNIFICANT NEWS

JULY 5 – Afren directors commit  to buying £20m worth of its shares after the group extended its interest in a Nigerian exploration licence by lifting its stake in local partner First Hydrocarbon Nigeria (FHN) to close 78 per cent.

JUNE 26 –Afren’s shares surged as the UK oil explorer said it discovered a better-than-expected oil section at an exploration well offshore Nigeria. The Ogo-1 exploration well on the OPL 310 licence revealed a “significant light oil accumulation”, encountering a hydrocarbon section of 524ft with 216ft of net stacked pay.

MAY 14 -Afren has delivered a ‘strong’ start to the year, with a year-on-year increase of 14 per cent in net production. The group, which said it remains on track to deliver full year net working interest production of between 40,000 to 47,000 barrels oil per day, achieved a five per cent first quarter profit before tax of $150m.

FUNDAMENTALS

It would appear that the stock market has not been keen to sing the tune of “always look on the bright side” as far as the fundamentals of Afren are concerned in the recent past. With 2013 seeing the group now firing on three separate fronts in it 2013 E&A programme: Okwok, offshore Nigeria, and Simrit in the Kurdistan region of Iraq, and drilling the West African Transform margin on OPL310 offshore Nigeria, we are looking at a potentially transformational time for  the group , and being underpinned by the  increased stake in its Nigerian partner FHN and the promise by the management to buy £20m worth of their own shares that should act as support for the stock.

Swen Lorenz: