- Oil-price fall continues to provide backdrop to global economy
- Institutionalisation of volatility as ever larger sums channeled via few funds
- Housebuilder Wimpey Taylor among those with Q4 results this week
By Patrick Butler
In a Nutshell:
“We anticipate a volatile week and month,” we said last week and the chart below demonstrates just how right we were. The market is being pulled in both directions by competing trends and events.
On Wednesday, the release of last month’s Fed Minutes suggesting that there will be no rate rise in the US until April at the earliest was taken positively. On the other hand, the continuing weakness in the oil price and feeble numbers out of the Eurozone (German year-on-year industrial production, down 0.5% in November, for instance) weighed on sentiment.
The oil price-fall
is increasingly being seen as a symptom not just of plentiful supply, but of weak demand, and the deflationary implications are causing deep concern.
FTSE 100 performance – last 5 business days. Source CNNMoney.Com
Volatility is exacerbated by the reality that regulatory changes over recent years have discouraged the holding of significant inventories by financial institutions for market-making purposes.
On the other hand, ever larger investment sums are channelled to a relatively small number of asset managers who must move enormous quantities of stock materially to change the composition of their portfolios. The “plumbing” of the market is simply no longer adequate to absorb these large flows without sharp and substantial price swings.
In other words, volatility is structurally pre-programmed.
Last week various trading statements sparked major specific trading movements. The most significant, perhaps were Tesco and Marks and Spencer.
The former rallied over 10% when “Drastic” Dave Lewis and his management team announced a serious of decisive steps to tackle costs and rebuild the balance sheet including the canning of the defined benefits pension scheme, the scrapping of this year’s dividend and the closure of 43 of the least profitable stores. What is more, the company was able to report that sales over the holiday period were down just 0.3% on the year before, and up 0.1% if fuel sales are included.
Investors were impressed with the clarity and scale of the steps being taken to stop the rot and are prepared to believe that this is the start of a long recovery programme which will restore the value of their stock. The one negative – which comes as no surprise – was the downgrading of Tesco’s debt to Ba1 - junk status - by Moody’s last week, which will increase borrowing costs.
Marks and Spencer, on the other hand, failed to impress with like-for-like down during the Christmas period and the third quarter. Problems with the website continue to plague the retailer, but it is hard to escape the impression that the product mix is also holding back sales.
The only silver-lining is the maintenance of profit margins – but confidence in Marc Bolland’s ability to achieve a turnaround, after four years of declining like for like sales – is wearing thin.
This week, watch out for Taylor Wimpey’s trading statement on Monday. The house-builder, which has 24 regional businesses across the UK and operations in Spain, will update the market on its full-year performance in 2014 and may comment on prospects for business in a housing market which has come off the boil and in which mortgage advances have recently been declining.
Last year will, we believe, have lived up to bullish expectations. The real questions relate to business prospects in 2015. Demand for new houses in the UK remains as strong as ever; the big question mark is over affordability.
At a time when average earnings are rising by about 1.6% annually, house price growth of 8% or so is unsustainable. Assuming no bust, though, the main concern for Taylor Wimpey is less the absolute level of prices; more, the level of sales.
If buyers start to delay their purchases, this could have a significant impact on volumes and profitability moving forward.
Housebuilder Taylor Wimpey results are due Monday. Photo: Thinkstock
On Tuesday, Morrisons gives us its trading update. The supermarket group has embarked on a three-year restructuring plan to save £1 billion, and in June announced 2,600 job cuts. But despite price cutting the Group has thus far failed to stem the sales decline caused largely by “leakage” to the German discounters.
Investors, who are currently enjoying a yield of 6% on their holdings (as Morrison has not only held, but increased its dividend for the last year) will want to see sign that this haemorrhage has been stopped to ensure that the yield only decreases through share price rises – not through future dividend cuts!
UK corporate earnings announcements and trading statements:- APC Technology, Ashley House PLC, Intandem Films. Taylor Wimpey, trading statement.
UK corporate earnings announcements and trading statements: - Debenhams Interim Management Statement, Synety Group Trading Statement, WM Morrisons Supermarkets Trading Statement, Rathbone Brothers Trading Statement.
Also: SIG 2014 Trading Statement, Ashmore Group Q2 Trading Statement, Carrs Milling Industries Interim Management Statement, Mears Group Trading Statemen,t Michael Page International Q4 Trading Statement.
Also: Spirit Pub Company Interim Management Statement, ASOS Christmas press statement, IDOX Full Year Results, Greggs Trading Statement, Cairn Energy Operational Update, UK Mail Group Q3 Interim Management Statement.
UK corporate earnings announcements and trading statements: Tungsten Corporation Half Year Results, Barratt Developments Trading Statement, Burberry Group Q3 Trading Statement, Fenner Q1 Interim Management Statement.
Also: Jupiter Fund Management Q4 Trading Statement, Connect Group Interim Management Statement, Games Workshop Group Half Year Results, Ocado Group Christmas Trading Update, Premier Oil Trading Statement, Cineworld Group Trading Statement, Shoe Zone Full Year Results.
UK corporate earnings announcements and trading statements: Mothercare Q3 Trading Statement, Tullow Oil Trading Statement, Associated British Foods Q1 Interim Management Statement, Booker Group Q3 Interim Management Statement.
Also: Bovis Homes Trading Statement, Experian Q3 Interim Management Statement, Home Retail Group Q3 Interim Management Statement, Lavendon Group Trading Statement, Game Digital Christmas Trading Update.
Additionally: D Sports Fashion Trading Statement, MoneySupermarket.com Trading Statement, Braemar Shipping Services Interim Management Statement, Record Q3 Trading Statement, Spectris Trading Statement.
-- Edited by Martin O'Rourke
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