“THAT WAS THE WEEK THAT WAS” BY ZAK MIR: ENDING JULY 12th 2013: QE Backtrack

OVERVIEW

Record highs for the U.S. stock market this week reminded us of two major factor affecting the financial markets – cowardice and confusion – both of which emanate from the Federal Reserve and are personified by its Chairman Ben Bernanke.

While this may sound like a personal attack, it is not. It is merely a reminder, in case we did not already know it, that the Fed has boxed itself into a corner from which there is apparently no way out. Keep QE and you have equities bubbling higher, prevent a bond collapse and maintain modest growth within a jobless recovery. Lose QE and you could have a stock market crash, you will have a bond crash and convert the U.S. economy into one that has all the allure of a PIIGS nation.

This provides me with the opportunity to provide an “I told you so” message regarding the perils of intervention in all aspects of the economy. From banks to bond buying, in the end, Government intervention delays whatever it is designed to prevent happening and usually makes the reckoning, whenever it arrives, that much worse. To mangle a cliché, the  best way of break something is to try and fix it. This is something we should reacquaint ourselves with in the UK as the market tries to factor in more QE from Bank of England Governor Mark Carney. We have learnt from the Americans that this is a strategy which does not actually have an end game and where we do not know the end consequences.

The follicularly “endowed” Nick Buckles

Speaking of end games, it appeared that after all the controversy, intrigue and name calling following the departure in May of the colourful CEO of G4S (GFS) Nick Buckles (and voluminous follicles!) that it would mark the start of a return to normality for the ill fated security group.  Instead, the allegation is that G4S, along with outsourcing giant Serco (SRP), delivered a merry dance on a tagging fiasco running to millions of Pounds of overcharging. At this stage, we would like to know more, but perhaps who was in charge of paying these myriad invoices as they came in would be a good starting point!

Hopefully, the Government, which it would appear could not even arrange an outsourced drinks party in a brewery, will make a better go of the proposed reprivatisation of its stake in Lloyds Banking (LLOY), where the breakeven level to the poor taxpayer is 61.2p. Although I personally would not pay more than this myself, it would appear that more than half of the issue could be allotted to retail investors – talk about paying twice for the same asset! The Government must think we are stupid? Either that or they are just not as fussy as institutions – who may get less than 10%.

With the shares currently at 67.73p it would appear that the market is happy to let the Government off the hook in terms of the shotgun marriage between a formerly first rate bank – Lloyds TSB, and the bank that should have been allowed to implode – HBOS. That said, those who are paying 61.2p plus a share should perhaps remember that once RBS and Lloyds are private again, many of the goalposts which have been moved in their favour over the past 5 years, may be moved back to where they were pre 2008. And hence they cycle repeats…

KEY MARKET DRIVING NEWS:

China’s Finance Minister Lou Jiwei suggested that GDP growth may only come in at 7% and not the Politburo’s 7.5% target.

Barclays forecast UK gross domestic product will expand at a 1.1% in 2013 (previous 0.9%) and 2.1% in 2014 (previous 1.8%).

The Royal Institution of Chartered Surveyors’ (RICS) seasonally adjusted house price balance increased to +21 in June from +5 in May, the best  balance for over three years.

German Industrial Production fell by 1% in May as opposed to expectations of a 0.5% decline, in the Eurozone the equivalent figure was -1.3%.

In the U.S. the University of Michigan Sentiment came in at 83.9 versus the consensus of 85.0.

MAJOR MARKETS ACTION:

Major U.S. stock markets S&P 500 & the Dow it record closing levels on Thursday and then again on Friday, after the  FOMC Minutes were released and the Federal Reserve revived its promise to keep ultra low interest rates until employment levels return to pre-crisis levels – hence indefinitely.  The FTSE 100 spiked towards 6,600 at its best levels in sympathy.

Gold and anti dollar currencies rally after Ben Bernanke backtracks on June’s tapering hints. However, the metal  peaks at $1,298, suggesting that this is still a market in intensive care despite the recovery of close to $100 & being the best weekly performance nearly 2 years. The Euro and Sterling hold key $1.30 and $1.50 levels.

The Australian Dollar suffered a mysterious decline around 10am on Friday, from around $0.9150 to $0.900, quite an achievement given the ability of commentators to offer the most creative explanations for price action normally and which had them scratching their head on this occassion.

Dollar Yen remained below 100 for much of the week, initially on the no change stance from the latest BoJ meeting and then on a  perceived split within the FOMC over QE.

An Iraqi pipeline fault and the ongoing turmoil in Egypt meant that it was set to be a third winning weak in a row for Crude Oil at just above the $105 a barrel level.

MAIN STOCKS ACTION:

Drugs giant GlaxoSmithkline (GSK) was rumoured to be the subject of a bribery investigation in China, which it denied, but which could threaten the multinational’s future in the emerging nation.

Security group G4S (GFS)  as well as outsourcer Serco (SRP) were in focus after being accused of overcharging for the electronic tags of criminals who had either died, left the country or were back in jail. Cynics might suggest that if the example of the Olympics fiasco was anything to go by this issue may very well be due just to gross incompetence.

After an extended courtship soft drinks group Britvic (BVIC) finally rejected the advances of Irn Bru maker, a merger deal that could have created a £1.9bn giant.

UK Engineering group Invensys (ISYS) was on the receiving end of a £3.3bn bid approach from France’s Schneider Electric- with  other likely bidders such as Siemens and Emerson likely to come out of the woodwork.

KEY POINTERS FOR NEXT WEEK:

While some traders may be tempted to go into summer mode, certainly given the extremely rare hot weather the UK has been experience with a now near 2 week long heat wave, if nothing else, it is clear to me that we shall be treated to an action packed next week from the financial markets. This is particularly the case given the way that yet more is likely to be revealed regarding everyone’s favourite topic – QE. Indeed, we will be back once more with Fed Chairman Ben Bernanke testifying in this respect  on Wednesday, the same  day that the latest Bank of England Minutes are revealed. These are of course the first set to be produced from new Governor Mark Carney and will be even more eagerly scrutinized than normally, as will the Bank of England Inflation letter released the day before.

As far as the key economic numbers due out are concerned, the German ZEW Economic survey for July is called to come in at 38.5 down from 39.6, while June’s UK Consumer Price Index is set to fall from 3% to 2.7%. Retail Sales in the UK are expected to have rebounded sharply in June from the previous monthly rise of just 0.2% to 2.1%. In the U.S. June Housing Starts may have fallen from 960,000 to 914,000.

Moving to UK companies in focus next week and mining sector masochists will have the latest production report from Hochschild (HOC) to mull over, as well as being able to remind themselves that the stock prices of such companies these days have very little to do with assets in the ground, or indeed how much is being extracted.

Otherwise we are looking to Land Securities (LAND) and its Q1 2013 Interim Management Statement which should remind us that the sector which has had the best Gold Rush of recent years has been real estate – especially in London.

It will also be worth noting from the London Stock Exchange’s (LSE) whether the early 2013 surge for the UK stock market and subsequent post May shakeout was good for business on the occasion of its Interim Management Statement.

Other key companies  in focus next week include recruitment specialist Michael Page International (MPI) which has become something of a financial  sector barometer and  electronics group Electrocomponents (ECM) where there may yet be further benefit from moves to improve operating margins.

STANDOUT  SITUATION: BUY EURO / STERLING TARGET 88p STOP LOSS 85.60p

RECOMMENDATION SUMMARY

Although Sterling is supposed to be a safe haven and has arguably packed a punch much greater than its economic weight since the financial crisis began, there are two issues that threaten the outlook. The first is any threat of “normality” returning to the Eurozone, and the second, more likely, the arrival of a “super” Dove in Threadneedle Street in the  form of Mark Carney – someone who is apparently unlikely to be content to preside over flat lining GDP as his predecessor was. On this basis, the holding pattern seen in Euro / Sterling since the start of the year is likely to give way to a fresh push towards 90p over the summer – bad news for holiday makers (probably just aswell the sun is shining in the UK!).

From a technical perspective, it can be seen that there has been a bounce for the cross off the floor of a rising January price channel / 20 day moving average at 85.60p over the course of July. This double support should be enough to deliver a fresh leg to the upside for the Euro towards the February resistance zone of 88p as a “minimum” and the 2013 resistance line projection at 91.50p as a possible target by the start of the autumn.

SIGNIFICANT NEWS

JULY 12 – Portugal’s PM  Pedro Passos Coelho promises to resolve Coalition differences to end the political crisis which has caused 10 Year Bonds yields to soar above the danger level of 7%.

JULY 4 – The conclusion of the Bank of England’s July Interest Rate / QE meeting delivers a more Dovish stance on policy than many in the market are expecting, especially with the new forward policy guidance delivered in concert with the ECB.

JULY 1 –Canadian Mark Carney starts his tenure as the Governor of the Bank of England. 

FUNDAMENTALS

While the financial headlines have focused on the  improvement in the housing market – our only real broad based “industry”, most other economic metrics have been either disappointing or erratic, something you could be forgiven for not being surprised at given that we have had an extended post banking collapse corrective period and that as seen in Scandinavia in the early 90’s can take several years to work their way through the system. This point was underlined by the way that after forecasts of positive numbers for both May Industrial and Manufacturing Production  actually disappointed, the latter falling 0.8%.

Whereas the troubles in the Eurozone have generally been the ‘get out of jail card’ for bulls of Sterling, even the  latest political meltdown in Portugal or Greece clearly being off course in meeting Troika requirements have upset the momentum behind the Euro. Unless the new Bank of England Governor decides to sit on his hands over the next few months – unlikely – the Pound is likely to weaken sharply, if only on the basis that no headway has been made when multiple factors were lined up in its favour earlier this year – price action v fundamentals that is worth paying heed of.

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