In 1997, well before he ‘sulked’ his way into Number 10, the then Chancellor of the Exchequer and resident of Number 11 Downing Street, one Mr Gordon Brown served up 5 conditions which had to be met if the UK was to join the Euro. They were in fact so stringent that even Germany would not have been able to get in, or perhaps even a camel pass through the eye of a needle!
16 years later and we are now running yet another example of ‘conditional’ economics under the stewardship of “rock” central banker Mark Carney, namely that interest rates will now only be raised if unemployment falls below a certain level. However, this is not an original UK sourced policy, but one that our new Bank of England Governor has borrowed from the Federal Reserve. The ball was started rolling on the QE Tapering trigger, with Fed Chairman Ben Bernanke suggesting that an unemployment rate improving towards 7% could be the cue for raising interest rates / taking away the $85bn a month bond buying punch bowl.
Seven is the “lucky” number!
Lo and behold, Mr Carney has come up with the same 7% rule on unemployment as the trigger for raising rates (and copying ideas from someone who will likely go down in history as the world’s worst central banker – ever – even worse than the bubble blower that was Greenspan is worth £800,000 a year – hell, I’ll apply for the job!!). There is in fact an important emanating from this. This is that if the idea was that an independent Bank of England was to mimic the policy of the Fed despite us having totally different economies, we might as well have joined the Eurozone – another totally different economy to the UK, saved on the Carney salary (I’ll work for half) and gone for the technocrat charms of ECB President Mario Draghi.
Away from the business of central banks preparing us for the day when policy has to tighten in the future, in the ‘real’ world there were plenty of indications that rather than indefinite near 0% interest rates, we would be lucky if such a state of affair was justified beyond the end of the summer. Indeed, the week started off with a firm services PMI from both Europe and China whilst in the UK our own, country lead the way for a change via a 6 year high for this metric in July. Perhaps the widely reported housing boom is having a trickle-down effect on other sectors across the economy? Indeed, such good news would normally be the cue for higher interest rates in just a few months…
That said, if this week was memorable for anything, it was perhaps just as much for there being yet another false alarm in term of a possible end to the great 2013 bull run on the stock market. Despite all the best efforts of bears of major stocks they did not see a lasting breakdown for major equities, just a temporary dip which, in the case of the FTSE 100, was no lower than 6,507 versus July’s low of 6,517.
KEY MARKET DRIVING NEWS:
Goldman Sachs predicted that the FTSE 100 could reach an all-time high of 7,500 within 12 months’ time. The figure to beat currently is the 6,930 all time high achieved in December 1999.
The President of the Atlanta Fed, Dennis Lockhart warned that Federal Reserve tapering of QE could be delivered as soon as September while the Fed’s Dallas Governor Richard Fisher said that the Federal Reserve is “now closer to execution mode” on the tapering front given the July Unemployment Rate fall.
In the Bank of England’s Quarterly Inflation Report, as part of the new so called “forward guidance” policy it said that the UK’s interest rate would stay at its record-low level of 0.5% and the current level of asset purchases would remain in place until at least the unemployment rate falls below 7.0%. Separately, the UK is expected to expand by 1.4% and 2.4% in 2013 and 2014, beating the old targets of 1.2% and 1.7% growth, respectively.
The UK services purchasing managers’ index (PMI) came in far better than expected – rising from 56.9 to 60.2 last month, the best reading in 6 years. Industrial production was also a consensus beating 1.1% month-on-month increase, as compared to the 0.6% rise analysts had been calling for.
In the U.S. the ISM non-manufacturing index was a stronger than forecast 56 – up from 52.2, and yet more data which made it that much easier to believe that the clock is ticking on QE.
Chinese exports rose at an annual rate of 5.1% in July, way ahead of the 2.0% rise expected, with imports up 10.9%, versus the +1.0% the market was looking for. Chinese industrial production jumped at an annual rate of 9.7% in July as compared to the 8.9% rise in June, whose level had been forecast again for last month.
MAJOR MARKETS ACTION:
The Dow finally succumbed to QE tapering fears with a six-week winning streak ending with a 1.5% loss as compared to the August 2nd close. There was also something of a hangover after the disappointing July Non Farm Payrolls which were not quite weak enough to justify QE continuing much longer contrary to the Fed’s assertions.
Gold looked to have delivered a “final” near term dip below the $1,300 an ounce level mid week as warnings of a September QE wind down led to a long overdue bear squeeze for the metal combining with a sell-off in the U.S. Dollar – something which was seen as supportive of the yellow metal. However, there appears to be quite tough resistance to crack still between $1,320 & $1340 – site of the key 50 day sma.
Sterling soared through the $1.55 level, giving the game away somewhat with regards to investors not really believing the Carney assurance on low interest rates investors instead looking at the GDP upgrade from the BoE instead. This brought forward market expectations of an interest rate rise sooner rather than later, in complete contrast to Carneys postulations, and even with the new 7% unemployment trigger.
The Reserve Bank of Australia lowered its benchmark interest rate to 2.5% from 2.75% after cutting its growth forecasts and warning on unemployment. Prime Minister Kevin Rudd also called a general election for September 7. The Australian Dollar spent most of the second part of this week after the rate cut move rebounding sharply – back above $0.90 as the short positioning in the “Aussie” reached extreme levels.
Crude Oil strengthened from below $103 at its lowest this week as OPEC said July production was going to be impacted by supply disruptions in Libya and Iraq. The International Energy Agency raised its forecast demand for OPEC oil by 200,000 barrels a day from its previous forecast to 29.8 million barrels.
MAIN STOCKS ACTION:
Aviva (AV.) saw its shares jump towards 400p as analysts’ H1 forecasts were easily beaten and the recovery at the insurer remains well entrenched. Operating profit was 5% better at £1,008m versus a consensus call of £933m, and with new business 17% better at £401m.
With re-privatisation fever ongoing for Lloyds Banking (LLOY), its CEO António Horta-Osório said the bank would start paying out up to 70% of earnings in dividends within three years. The shares ended the week near the best closing highs of recent years at 75p.
HSBC Holdings (HSBA) reported a 10% rise in half-year profits to $14.1bn, but this disappointed the market as earnings were less than $14.6bn forecast. Revenue of $34.4b was down 7.0% over the year as China cooled and many Western Economies flat lined.
Tesco (TSCO) revealed it was in talks to merge its Chinese retail operations with those of China Resources Enterprise, a move which would effectively end the use of the supermarket’s brand in the emerging economy.
Thomas Cook (TCG) benefitted as Citigroup raised its rating for the shares from ‘neutral’ to ‘buy’ on cost savings hopes while Panmure Gordon kept its ‘buy’ rating in the run up to a resumption of dividend payments in 2015.
KEY POINTERS FOR NEXT WEEK:
The latest Bank of England Monetary Policy’s meeting minutes due out on Wednesday 14th should provide insight as to not only the extent to which other members of the committee are behind the new approach of Mark Carney, but maybe even why he has simply copied the Fed’s unemployment anchored interest rate policy.
No doubt helping to spice up the conversation at September’s MPC meeting will be the latest UK Consumer Price Index for July which is called to come in at 2.8% versus the previous 2.8%. Other domestic figures of note include the June Unemployment Rate set to remain flat at 7.8% and July Retail Sales which should jump from 2.2% to 2.7% courtesy of the rare heat-wave.
Further afield across the Pond, and it is U.S. Retail Sales for July, called to stay flat at 0.4%, and Japanese GDP which is expected to drop to 0.9% from 1% despite all the ‘Abenomics’ since the turn of the year that will provide some potential market moving data.
As far as the UK companies reporting are concerned, we are to see a summer lull when compared to recent weeks. Of the heavyweights, we have Imperial Tobacco (IMT) leading the pack. This big dividend payer was recently able to boost organic sales by 4.0% and operating profit by 6.0% – even on declining volumes. Life insurer Resolution (RSL) should also be in focus after being highlighted by broker Nomura last month for its dividend yield attractions – currently at over 6%. The market will probably be interested also to see how what pest control group Rentokil (RTO) has to say for itself after the departure of Chief Executive Alan Brown at the start of August.
Presumably as far as Mecca Bingo owner Rank (RNK) is concerned, it will be interesting to see whether, having seen its business suffer due to the cool spring weather, the recent heat-wave will have reversed its fortunes. It may very well be that neither extreme suits this leisure group.
STANDOUT SITUATION: BUY FTSE 100 – ABOVE 6500 LEADS TO 7000
The secret of a good trade, or indeed, a good investment is not only if several unrelated boxes can be ticked to back the idea but, arguably, if the risk / reward is as attractive as possible. In the case of the FTSE 100, the risk currently would appear to be no more than 100 points to the downside in order to make 500 points. There is of course the added interest at the moment, that just as in the case of going long of say Euro / Dollar a few weeks ago near the $1.30 level (and as I recommended), the smart money is clearly of the view that the FTSE 100 and leading indices are going to crumble on interest rate / QE tapering uncertainties. Who will prevail “smart” money or the technicians
The charting position for the FTSE 100 ends this week in the form of a rebound off the floor of a November rising trend channel – currently at 6,507. This recent August low was a narrow bear trap buy signal from below the former July floor of 6,517. Seasoned observers of this market will have noted, and enjoyed, the way that we now have a typical bull setup here as this market loves to initiate new rallies off the back of a narrow overshoot of key support lines. The top of the November rising trend channel on the daily chart runs through 7,000 and is the 1-2 month target.
August 5th Goldman Sachs suggested that the FTSE 100 could reach an all-time high of 7,500 within 12 months’ time, ahead of its previous record of 6,930 reached in December 1999.
August 5th The UK services purchasing managers’ index (PMI) smashed forecasts, jumping from 56.9 to 60.2 last month – the highest level since December 2006.
August 7th The UK is expected to expand by 1.4% and 2.4% in 2013 and 2014, ahead of earlier estimates of 1.2% and 1.7% growth, respectively.
August 9th House prices in England and Wales reached an all-time peak in July, driven by strong demand in London although purchases by first-time buyers remain well below historic levels, a report showed on Friday. House prices rose 0.3% in July to a record £232,969, bolstered by a government housing scheme to subsidize purchases, according to the report by LSL Property Services and economics consultancy Acadametrics – Reuters
While it might be over egging the bull argument somewhat to suggest that Britain is booming, it would appear that courtesy of disparate factors such as PIIGS zone refugees fleeing to Prime London real estate and the effects of the ultra low interest rate policy by the Bank of England – designed to prop up the part nationalised banks, that we are now actually looking at a bona fide recovery situation for the economy!
This point was highlighted in the latest Bank of England Inflation Report as it upgraded its call on the UK economy. This of course happens at the same time as it attempted to reassure on interest rates remaining low, something which of course is unlikely to be the case given the dichotomous nature of the 2 standpoints… Nevertheless, the call here is that rates will remain low enough for long enough for the FTSE 100 to finally take out its old 1999 peak with the technical target of 7,000 being seen early in the autumn. This is a nod to the Goldman Sach prediction of a FTSE 100 target of 7,500 to be hit over the next year, and the view that while the markets may be fretting over the end of QE, the authorities are boxed into a corner between causing massive instability in the financial markets if the day is named that QE ends, or, on the other hand risking an asset bubble. The likelihood is that we shall see the latter before the day of reckoning which the bears are betting on currently.
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