ZAK WAS THE WEEK THAT WAS: ENDING JULY 27th 2013: UK GDP DOUBLES (Honest!)

In general, those writing about financial markets come from a journalistic background.  They are usually as well suited to writing about the opening of a local supermarket as they are to covering the movements of Cable! This said, I do try to read pieces written by those who have worked or traded successfully in the area they cover, even if the content is not fully “professional”.

Interestingly, someone I do rate, one of the very, very few, is CityAM’s Allistair Heath. This week, ahead of the “doubling” of UK GDP growth from 0.3% to 0.6%, he questioned the nature of this “growth”.  Whether the improvement for Q2 2013 was derived from “debt financed bridges” or “viable entrepreneurial firms”, five years into the Financial Crisis a 0.6% growth rate is woeful…  For the Chancellor, or indeed anyone else to claim this was somehow a victory is simply embarrassing. Only when we have successfully seen consistent growth of 3% pa for a few years can we even start to consider making up for half a decade in the economic wilderness.

The other key issue of the week, and one which has dominated Spreadbet Magazine itself, is whether we have once again arrived at a stock market top?

At the start of the week the case for a market top seemed pretty clear cut from both a fundamental and technical standpoint.  However, as the week progressed, the bearish case weakened after a succession of positive economic and corporate datasets. First, there was Britain’s “fantastically” upgraded GDP figure (ha ha!), but this was followed by ‘soaring’ (supposedly) U.S. durable goods orders and a significant uptick in US consumer sentiment. The earnings story on both sides of the Atlantic was equally encouraging as Facebook blew away expectations and Rolls Royce (a company which actually makes and sells very big ticket items) put in a strong performance.  All in all these events are bound to have caused the bears out there some worries.

True, the end of QE may be upon us, along with rising interest rates, but until the bell tolls (possibly months away) the lemmings will continue to buy shares and bears could get burnt. Indeed, it was notable that over the week, the FTSE 100 did not really want to trade much below its 10 day moving average, currently at 6,595, suggesting the primary trend for British blue chips is still in place – and that is up. Perhaps more tellingly, the U.S. benchmarks (the Dow and  S&P500) appeared to find support only just below their May resistance. When resistance turns to support this is usually a very bullish signal.  If we are set for a meltdown, the disguise is a very good one indeed. At this stage, only a shock from the Non Farm Payrolls on Friday – sub 100,000 looks as though it would blow away the “house of cards.” or more hawkish noises (doubtful) from the FOMC meeting this week.

KEY MARKET DRIVING NEWS:

UK GDP hit +0.6% versus the previous +0.3% for Q1, with the preliminary year on year number +1.4% – as expected.

It was apparently rather better to travel than arrive as far as Prime Minister Shinzo Abe’s Upper House Election victory last weekend was concerned given the retracement in the Nikkei index. Indeed, although  “Super Abe” intends to use the win to deliver a “third arrow” to Abenomic reforms, Dollar/Yen struggled below 100 Yen.  See Standout Situation below.

The final reading of the University of Michigan Index of Consumer Sentiment came in at a 6 year high at 85.1 for July and compared to projections of 84.0. Higher property and stock prices backed the feel good factor.

U.S. Durable Goods orders for June soared to 4.2% versus the consensus 3.7% as civil aviation demand was rampant and, perhaps more importantly, businesses appeared keener to get out their chequebooks.

The German IFO Business Climate Survey came in at 106.2, just beating the 106.1 the market was looking for.  The index has now risen consecutively for three months, shaking off a late 2012 dip for Europe’s largest economy.

MAJOR MARKETS ACTION:

U.S. equity markets wobbled and were indeed called lower by the ‘smart’ money. However, they remained above May resistance. As of writing, just over half of the S&P500’s companies have delivered their Q2 earnings.

Bond yields remained towards the high end of their recent range with the 10 Year Bond hitting 2.63% after strong durable goods and new homes sales in the U.S.

Gold delivered on last week’s Buy Gold Standout Situation I posted here – hitting, and then exceeding the $1,330 target as China unveiled a mini stimulus package midweek after poor manufacturing data. It was also the case that traders and central banks backed the metal after the Federal Reserve backtracked on the expiry date for QE.

Sterling/Dollar was in consolidation mode, albeit at the higher levels of July towards $1.54. It remains buoyed by the apparent end to any near term QE campaign from new BoE Governor Mark Carney. Set against this is the run up to the next Inflation Report on August 7, and the apparent ruling out of any near term rate hikes.

The Euro reached a one month high of $1.3300 versus the U.S. Dollar as the key German Ifo survey hit 106.2 versus the 105.9 expected, with even Spanish unemployment dropping for the first time in two years.

Crude Oil continues to come off the boil, dropping from its July peak of about $109.50 with concerns of a Chinese “hard landing” offsetting generally robust U.S. data. It is worth mentioning that China’s HSBC manufacturing PMI falling to 47.7 could well outweigh even positive U.S. data/QE developments in the near term.

MAIN STOCKS ACTION:

Financial Times owner and general pay wall irritation provider Pearson (PSON) surprised on revenues and saw its shares soar to a 2 year high. Progress in digital and emerging markets offset restructuring costs.

Pay TV BSkyB (BSY) effectively moved to butter up shareholders wavering between it and new pay TV upstart BT Group (BT.A) by offering a bumper dividend payout. The catalyst here was the increasing take up off of mobile viewing / on-demand.

Boom conditions in civil aerospace meant that jet engine maker Rolls Royce revealed a 27% rise in revenues for the year – shaking off the scare regarding the business practices of its intermediaries.

IPhone maker Apple (NASDAQ:AAPL) proved that the mobile phone remains its star turn with 31m units shipped versus 27m expected. That said, the IPad no longer walks on water with an actual year on year fall in sales.

Mark Zuckerberg enjoyed an overnight $3.8bn hike in his net worth as shares of social media group Facebook rose by a quarter to$34. Having sold off since it first came to market last year, the bluff of the bears was called as mobile ad revenues now make up nearly half total revenues.

KEY POINTERS FOR NEXT WEEK:

Although the monthly U.S. nonfarm payrolls data can be erratic, it is often subject to great revisions, and although it is usually a trailing indicator (at best) it is still one of the most major market movers in the economic calendar. For those who like a flutter on the markets, the time to tune into a data feed near you is 1.30pm Friday August 2^nd where the expectation is for 184,000 new jobs in July versus 195,000 in June. The previous day sees the ECB and BoE interest rate decisions, with the latter of particular interest given the way that if there is no more UK QE. What are Mark Carney and his friends now going to do to stimulate the economy?

In terms of UK companies reporting this week, we have excessive bonuses/Libor trading specialist Barclays (BARC) reporting on conditions now that it has shaken off its Middle Eastern benefactor.  Pizza delivery group Domino’s (DOM) will also reveal whether, even after all the European expansion of its cholesterol rich fare, it has become an ex growth story?  We will also get the latest earnings from car part group GKN (GKN), which at the start of the year warned of a slowdown in Europe, even as it  raised profits 19%. However, bid speculation surrounding the company may overshadow its results this quarter.

Finally, there is the latest from rehabilitated tour operator Thomas Cook where apparently the internet did not destroy the business model after all. But, it will be interesting to see whether after all the smoke and mirrors debt restructuring, and a massive bear squeeze in the stock, we shall see genuine renewed momentum on the fundamental front?

STANDOUT  SITUATION:  SELL DOLLAR / YEN,  RISK UP  TO 101 FOR A 92.50 TARGET

RECOMMENDATION  SUMMARY 

One of the trades of last year was to buy Dollar / Yen in the run up to the return of Prime Minister Abe’s new Government in December as he promised to break the mould of the past 20 years and stimulate the Japanese economy by inducing inflation, and hopefully growth, by massively weakening the Yen via QE. This mission was successful going into the New Year and led to a 20% rise in the Yen and a massive spike in the Nikkei. While it may be too early to suggest that this rally for Dollar / Yen is over, it may be that at least for the near term, there could be a cooling off, especially as the new upper house victory for Abe has not resulted in a fresh rally.

The charting position for this market is an intriguing one in that since April we have been treated to what approximates as a head & shoulders reversal. In fact, it could be more accurately described as a head with two pairs of shoulders. The right hand shoulder resistance has been up to 101.22, with a break below the 50 day moving average this week at 99.21 the key level to watch out for. The message is therefore at least while July resistance blocks the cross, that we could see a retest of the 200 day moving average zone at 92.51, even if this market resumes the 6 month plus recovery trend after that.

SIGNIFICANT NEWS

July 26^th  Disappointing Japanese corporate earnings, rising consumer prices and the growing consensus that the Federal Reserve will signal no change in its QE programme all combined to encourage currency speculators to buy into the Yen.  This was reinforced by the fall in Japanese stocks.

July 23^rd  Rising U.S. bond yields made the U.S. Dollar more attractive, with yields over 2.5%, while yields  on JGB’s fell to 0.77%, the lowest for over two months. This came in the aftermath  of  existing home sales in the U.S. falling 1.2 percent in June to a 5.08million annualized rate, versus expectations of 5.26million.

July 21^st Japan’s ruling coalition won 76 seats in the upper house elections, and now has 115 seats in total to give it a decent majority – enough to allow the instigation of fresh reforms. Part of this process will continue to be Prime Minister Abe’s mission to eradicate deflation and hence boost the economy. 

FUNDAMENTALS   

The run up to the election of Prime Minister Shinzo Abe in December delivered one of the most obvious, and arguably easiest, trades ever in financial markets. Indeed, it was so easy that it was reminiscent of the shorting opportunity on Sterling in the bungled attempt at joining the ERM in 1992. On that occasion, hedge fund legend George Soros netted himself a haul of over $1bn, and at the end of last year on the journey from 80 to 100 Yen he actually repeated the trick!

The rationale behind this week’s sell call on Dollar / Yen is that ironically, in the wake of the latest upper house victory for Prime Minister Abe’s coalition government, this might encourage profit taking and possibly even a situation where the strong Japanese Government actually inadvertantly starts to strengthen the Japanese currency.  This would of course be extremely counterproductive to the Abe strategy.

Admittedly, this is not a fashionable view, but after over 20 years of repeated attempts to introduce inflation to this Far Eastern economy, it was hardly a done deal that Abe or anyone else could get the Yen through 100 versus the Dollar. The run up to next week’s U.S. nonfarm payrolls, Tuesday’s BoJ Governor speech and a knockback from 100 Yen could all contribute to near term Yen strength towards the 200 day moving average level of 92.5.