ZAK WAS THE WEEK THAT WAS: ENDING JULY 19th 2013: “NO PRE-SET COURSE”

The markets are always keen to teach us lessons, even lessons we thought we already knew. For instance, divorce is expensive. Given the 2 million shares just sold by trendy fashion retailer Supergroup (SGP) founder James Holder at £10, it really does make one wonder why anyone other than the most poverty stricken would chose to walk down the aisle (just don’t tell Mrs Mir!!)?

We also found out that while we are supposed to be suffering from the Death of the High Street, all the moaning and groaning may not be due to cash strapped consumers, or even adverse weather conditions, but simply the wrong items offered at the wrong price. This observation comes in the wake of chav fashion retailer Sports Direct (SPD) reportedly paying out an Olympics driven profits bonus bonanza to its staff with up to £100,000 cheques sent to those earning £20,000 a year. Presumably all this makes “colourful” Sports Direct founder and Newcastle United owner a little less “colourful” than before? And also perhaps has some jobseekers who would otherwise have previously gone into Investment Banking contemplating working out the chav outfit?!

However, all this paled into insignificance in the wake of the revelation that Barclays (BARC) Abu Dhabi benefactor Sheikh Mansour bin Zayed Al Nahyan has sold out of the £3.5bn stake he bought to help the bank avoid a UK Government bailout, help it rig LIBOR, and ensure that management bonuses continued at 7 figure levels… In fact, as things turned out it could have continued with the rigging and the bonuses even with UK taxpayer money as we have seen with Lloyds (LLOY) and RBS (RBS)! The upside for the Sheikh is that the profits from his bank shares can continue to prop up loss making Manchester City where, unlike Barclays, there may never be a happy ending as far as his investment is concerned.

Back in the real world this week, if Ben “Helicopter” Bernanke and the Federal Reserve can be described as being in touch with reality (yeah, right!), the markets finally got what they wished for – or more exactly, what they did not wish for. There is still no fixed date or more accurately, pre set course, as far as the end of QE is concerned. While it is widely expected to be tapered from December, so far this is one example, perhaps the only one, where uncertainty / ignorance is regarded as a plus point for equities.

In contrast, in the UK, the new saviour of the UK economy Mark Carney seems to be ensuring that there will not be any more QE again, completely contrary to initial expectations of his tenure, with the BoE minutes showing a 9-0 vote against any such moves. However, with QE off the table and annual GDP growth remaining well under 1%, what measures are there left for the policy makers? Letting nature take its course and hovering up an £874,000 salary seems to be the way forward for Carney at the moment.

KEY MARKET DRIVING NEWS:

Federal Reserve Chairman Ben Bernanke continued with his tapering backtrack, stating that quantitative easing (QE) is ‘by no means on a pre-set course’ and that the route still depends on how the economic recovery plays out. Bernanke reiterated that the central bank still expects to begin tapering QE later this year (with a view to end the programme in mid-2014) but he said nothing was predetermined and the plan may change if the economic outlook turned for the worse.

Minutes from this month’s Monetary Policy Committee meeting showed a surprising unanimous vote to leave the Bank of England’s bond-buying programme unchanged; economists had largely expected at least three policymakers to vote in favour of ramping up the programme.

The annual rate of Chinese gross domestic product (GDP) growth fell from 7.7% to 7.5% in the second quarter, better than the 7.0% the Finance Minister warned on and in line with China’s 7.5% target. China announced a liberalisation of interest rate policy involving removing the floor on lending rates

UK retail sales increased in June rose 0.2% from May, and 2.2% year on year as compared to a 1.7% consensus. The Ernst & Young Item Club said the economy will grow 1.1% this year, revising up from the April estimate of 0.6%.

The UK annual consumer price index (CPI)  hit 2.9% in June, up from 2.7% in May, and just below the 3.0% consensus.

MAJOR MARKETS ACTION:

U.S. equity markets once again climbed on diminishing QE Tapering fears as the markets continued to climb the “wall of worry” to hit fresh new highs for the year. The markets were helped along by the likes of Goldman Sachs (GS) who reported that its profits had doubled, while the edge was taken off the rally by leading tech stocks like Microsoft (MSFT) and Google (GOOG) missing earnings forecasts at the end of the week. There was however enough of a lead for the FTSE 100 to hit 7 week highs, with the UK index also being helped by a better performance by mining stocks, especially upbeat reports from Rio Tinto (RIO) and Fresnillo (FRES).

There was a mild “risk on” element to both Gold and certain currencies, helped along by Ben Bernanke not naming the day that QE will end. That said, he did become something of a pundit with regard to the metal by suggesting that its recent weakness is due to less of a perceived need for “disaster insurance”. This left Gold towards the top of its recent range near $1,300, boosted by reports of increased physical demand from both China and Japan.

Sterling / Dollar ended the week on a firm note, helped by the prospect of no fresh QE from Mark Carney’s new Bank of England. The early July price action below $1.50  now appears to be a cruel bear trap.

The Yen was under pressure, especially against the Euro, as hedge funds were reported to have sold the currency before Japanese upper house elections. Prime Minister Shinzo Abe’s looks set to underpin his already strong position, with further monetary easing and government spending expected.

Crude Oil rose sharply again this week topping $108 for the September contract, despite  data released on Wednesday which revealed that U.S. housing starts declined 9.9% in June and Building permits, fell by 7.5%. The explanation continues to be that Middle East tensions, especially in Egypt are causing the commodity to squeeze higher.

MAIN STOCKS ACTION:

Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan, also the owner of Manchester City football club, who invested £3.5 billion into Barclays (BARC)  in 2008 was revealed to have sold his 7 per cent stake Speculation in the market is that the Sheikh could have made 60% on his holding.

James Holder, co-founder and brand and design director of fashion retailer SuperGroup (SGP) was revealed to have sold 2m shares at 1011p in the wake of recent divorce proceedings. He still has 9.85m shares, representing 12.24 per cent of the equity.

2,000 staff at Sports Direct (SPD) were set for a bonus payout whereby those on £20,000 a year would be receiving payouts upto £100,000 each. Full-year revenues at the sports retailer were up 20.9% to £2.2bn, boosting pre-tax profits by 40% to £207m.

Vodafone reported a drop in second quarter revenue, with group service revenue down 3.5% year-on-year to £10.1bn in the three months to end of June. The drag on performance was once again pointed to woes in the PIIGS nations.

Exchange operator London Stock Exchange  (LSE) revealed a 39% increase in first-quarter revenue, boosted by the early 2013 stock market rally – which saw the benchmark FTSE 100 index easily beat the key 6,000 resistance zone.

KEY POINTERS FOR NEXT WEEK:

At this weekend´s G20 meeting in Moscow, world leaders are expected to focus on uncertainty regarding the tapering of US quantitative easing – although this “talking shop” rarely delivers any significant market moving aspects.

As far as more focused activity is concerned for the coming week, traders will be looking forward to Thursday’s Q2 Preliminary Estimate of GDP Quarterly Flash Estimate which is expected to show a  +0.3% rise, while the yearly measure should hit +0.6%. Gross Mortgage Lending is expected at £8.5bn. In the U.S. June Existing Home Sales are called at 5.2m – just above the previous month’s level, while New Home Sales are set to reach 482,000.

On the stocks front, it will be interesting to see whether shares of chip designer ARM Holdings (ARM) can repeat their recent trick of jumping 5% or more on the day of its trading update – in this case quarterly earnings on Tuesday. This is the same day we get a Q2 update from drugs giant GlaxoSmithkline (GSK) in the wake of its China scandal news, while B&Q owner Kingfisher (KGF) may offer insight into Barbeque sales in the wake of the heat wave as part of its pre Close Update.  Telecoms giant BT Group (BT.A) has recently been going head to head with pay TV rival BSkyB (BSY) and its Q1 2013 earnings release is on tap for Thursday.

STANDOUT  SITUATION: BUY GOLD,  RISK DOWN TO $1,265 FOR A $1,330-$1370 TARGET

RECOMMENDATION  SUMMARY  100 + 100

While it may be a case of once bitten, twice shy, but multiplied several times over in the past couple of years as far as bargain hunting in  Gold is concerned (!), it is clear that the lower the metal goes, the greater the chance of a lasting revival. But, as is often the case in such “one way” markets, the best strategy tends to be to try and pick off an intermediate move, rather than go for the hero trade which called the low. In the case of this metal currently, the fact that the QE door in the U.S. has been left ajar for now would suggest that from present levels it will be difficult for bears to gain lasting traction beyond the existing $1,200 an ounce 2013 support.

What is evident for the charting position of Gold, as revealed by the hourly chart below, is the way that July served up a higher low versus June, above $1,200, with support coming in over the latter  part of this month well above the initial July resistance at $1,261 as well as previous support on the way down at $1,269. The implication is that at least while above $1,269, that we should be treated to a break of July resistance at $1,298 and  a journey during August towards the 50 day moving average at $1,333 currently.

SIGNIFICANT NEWS

July 18^th  Gold biased hedge fund manager John Paulson defended his continued investment in both gold and gold mining producers, “People who bought gold in anticipation of inflation have lost their patience” Paulson was reported as saying in the Wall Street Journal.

July 5^th  Gold fell below $1,220 per ounce after the release of June’s US non-farm payrolls data. Non-farm payrolls had been expected to show growth of 165,000 jobs for last month, but the official figure came in at 195,000.

June 25^th Gold rebounded from the sub $1,200 zone as the Federal Reserve backtracked on QE tapering and The People’s Bank of China said today it has lent short-term money to some institutions after short-term rates in Shanghai broke above 10%.

FUNDAMENTALS

It should be the case that at least in the near term, we are looking at a bullish backdrop for Gold on the fundamental front, with this theory helped along by the way June Non Farm Payrolls came in better than expected and so would have expected to be negative for gold,  but yet did not lead to a new low below $1,200 for this market. This shows a divergence between price and newsflow, suggesting that for the time being at least the negatives are factored in, or perhaps even over discounted.

It is also likely that assurances by the Federal Reserve Chairman Ben Bernanke that there is no preset course for an exit to QE could cause a price squeeze here. This is especially so after the China move to liberalise interest rates – particularly given that this country is one of the larger physical buyers of the metal. Perhaps the key to it all, over and above, any short term drivers such as QE tapering delay, is the way that the pullback in the metal will have cut back fresh exploration projects, something which will start to kick  in as far as term of putting a floor in this market with the industry beginning to discount this new supply/demand dynamic.