Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 05 January 2015 at 11:15 GMT

The Week Ahead: Volatility amid unpredictability

Chief Executive / Prime Wealth Group
United Kingdom
  • 2014 a bad year for supermarkets, miners and oil companies
  • Airlines had a great run and look set for further gains in 2015
  • Overall environment plagued by UK election and Russia fears
By Patrick Butler

Happy New Year to all our clients and readers!

The FTSE100 ended 2014 just over 2% down on the last twelve months. The overall trend masked large differences between individual performances. The supermarkets in general and Tesco in particular had a dreadful time (the latter down around 45% over the year) and the miners and oil companies suffered as commodity prices fell. 

Airlines, especially, IAG and easyJet, on the other hand, performed strongly and are likely to continue on a bull run into 2015. Companies like Bunzl, supplying a wide range of consumable products such as food packaging, disposable tableware and catering equipment to wholesalers did well, as did the suppliers of rental construction equipment, Ashtead.

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Expect Tesco and other supermarkets to write down their property portfolios, which may well have a knock-on effect on REITS active in the commercial property market. Expect oil price softness to continue, benefiting transportation companies and high energy consumers, especially airlines.

We anticipate a volatile week and month, as traders and investors navigate the cross-currents in an increasingly unpredictable environment, both at home and abroad. In the United Kingdom the jockeying has already begun between the political parties to position themselves for the general election on May 7 this year. The result is wide open – which means that uncertainty will overhang the market – for the next four months or so, at the very least. 

While the UK is in a better position than many other European economies, the size of the budget and current account deficits is a cause of major concern and, if left unchecked or exacerbated by irresponsible policy, could trigger a crisis of confidence. Right now, though, the UK is considered a relative haven of stability and turbulence is more likely to be precipitated by events overseas.

Russia is a major source of worry. Putin has overextended himself and needs continuous foreign distraction to divert attention from problems at home. Foreign currency reserves were down almost 25% over 2014 and now stand at $388.5bn. Over the christmas and New Year period the state had to inject capital into major banks such as VTB and Gazprombank. Most foreign investors with liquid assets have already exited a country where governance – particularly as it relates to foreign investors – appears to be deteriorating. The scale of outflows demonstrates that Russians who can are also sending their money abroad. Recession is now a certainly.

In the Eurozone, European Central Bank governor Mario Draghi is still struggling to gain sufficiently broad support on the ECB governing council for a substantial programme of quantitative easing. We expect a major announcement to be made in January. Incredibly, the ECB’s balance sheet actually shrank over 2014, contributing to the sense of drift and stagnation infecting much of the Eurozone. 

Germany’s competitive success, based on a mercantilist “export at all costs and buy German at home” attitude, is steadily strangling its neighbours, who are desperate for a monetary stimulus, which the Germans are equally keen to limit as they may end up bankrolling the exercise. (What happens if the ECB buys government bonds of member states which have to be restructured?)

ECB balance sheet
Source :

Watch out on Wednesday this week for Sainsbury’s third quarter trading statement and Persimmon’s trading statement for the year ended 31 December 2014. We expect that Sainsbury’s will have had a slightly better third quarter than anticipated and Persimmon will have had an excellent year, though the company will give the usual warnings about uncertain times ahead. 

On Thursday Tesco will make a statement on third quarter earnings. At present, a turnaround seems as elusive as the £10.00 a bottle champagne which the supermarket advertised in November but which none of us managed to buy in the store. Marks and Spencer are also due to make a trading statement. We think the marginal progress which became apparent in November will have been maintained; the market will probably, on balance, like what it hears from M&S.

Key statistics and events:

Monday, January 5

UK corporate earnings announcements: McBride PLC Trading Statement Release for the six months ending 31 December 2014.

Tuesday, January 6
Wednesday, January  7

UK corporate earnings announcements: Q1 2015 Topps Tiles PLC Interim Management Statement Release,Robert Walters Plc Q4 2014 Robert Walters Plc Trading Update, J Sainsbury PLC Q3 2014-15 J Sainsbury PLC Trading Statement Release, Persimmon PLC Persimmon PLC Trading Statement Release for the year ended 31 December 2014, Galliford Try PLC Q2 2015 Trading Statement Release.

Thursday, January 8

UK corporate earnings announcements: Interserve PLC Interserve PLC Trading Statement Release, Tesco PLC Q3 2014/15 Tesco PLC Interim Management Statement Release, Dunelm Group PLC Q2 2015 Dunelm Group PLC Interim Management Statement Release, MKS.L Marks and Spencer Group PLC Q3 2014 Marks and Spencer Group PLC Interim Management Statement.

Friday, January 9
 – Edited by Clare MacCarthy

Patrick Butler is chief executive of the Prime Wealth Group

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