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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 / 02 February 2015 at 11:00 GMT

Week Ahead: Expect more volatility on US data

Chief Executive / Prime Wealth Group
United Kingdom
  • Heavy US data week could spark market volatility
  • Greek 10-year bond yields rise but no contagion yet
  • BP and BG results Tuesday likely to feel force of global oil price collapse

By Patrick Butler

In a Nutshell:


As this blog has repeatedly pointed out, the mechanics of the market these days (with professional market-makers only running small, if any, positions) mean that relatively small flows lead to significant volatility. So it was last week. 

Negative factors – fears of dislocation in the Eurozone following Syriza’s election success, an escalation of hostilities in Ukraine, a slowdown in the US and the UK economies - competed with a positive trading statement from easyJet (and an upgrade in Barclays’ assessment of the stock) and other encouraging corporate results. 

In the end, the FTSE 100 closed down 1.22% on the week.
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FTSE100 performance over the past week – Source: CNNMoney.com

As we edge closer to UK general election day on May 7, expect jitters – and volatility – to increase.

This coming week, there is a succession of important US data announcements. On Monday the ISM manufacturing index will, we believe, come in at around 54.5, damping fears of a slowdown in the industrial sector sparked by weaker orders numbers last week. 

On Wednesday, the ISM non-manufacturing index will follow. The latter should remain above 55 points and would underscore the robust growth outlook for the first half of the year. 

As for the monthly labour market report released on Friday, there is no reason to anticipate a major change from the strength of recent months. 

The next Fed interest rate meeting (then followed by a press conference) will not be held until March 18, though the first interest rate hike is unlikely to come before June at the earliest. 

No contagion...yet

In the Eurozone, statistics will, in general, underscore a slight improvement in economic growth, though it remains painfully slow. While Greek ten-year bond yields have risen above 11%, signs of contagion to other peripheral states have been limited (though we did see bond yield rises towards the end of last week in countries such as Italy, Portugal, and Spain). 

Given that the European Central Bank is buying Eurozone government bonds, the immediate risk of other countries effectively being priced out of borrowing is very small. 

The effects of quantitative easing are also being seen in the equity markets where $5.1 billion in weekly inflows into western European share funds in the seven days to Wednesday, were reportedly the largest cash amount since December 2013. 

What is more, the private sector now only holds a relatively small proportion of Greek debt, the bulk being owned by public institutions such as the IMF and The EFSF (European Financial Stability Facility), so private sector international institutional investors are unlikely to show such sensitivity to the outcome of negotiations with Greece as they did last time round. 

But should the negotiations break down, the Germans will be in no mood to smooth the path of a Grexit, lest other current Eurozone members be tempted to follow a similar route. They will be well aware that tens of thousands of Podemos supporters (a radical left wing party in Spain which believes in an end to “austerity”), marched through Madrid on Saturday. 

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A tense standoff continues between newly-elected Syriza and Brussels over Greek debt 
as the prospect of a Grexit remains ever-present in the background. Photo: istock


  • On the corporate front: BP and BG report their annual results on Tuesday. Expect major reductions in profit before tax owing to the slump in the oil price. In BP’s case, the company is unlikely to achieve even half of the $30 plus billion earned in 2014. The main instrument these companies have to restore their fortunes in the short run is cost-cutting and in both cases we foresee a series of measures dramatically to reduce both capital and operating expenditure. 

  • The telecoms shake-up continues with Hutchison Whampoa buying O2 and merging it with the Three Network. The Sunday Times reports that sovereign wealth funds are lining up to buy a stake if and when 30% of the enlarged company is sold to new investors.

  • Standard and Poor’s is reportedly in the final stages of reviewing the BBB debt rating of mining conglomerate Anglo American. The likelihood is that the miner will be downgraded by at least one notch, given the probable need to write down holding and the reduction in profitability in the face of commodity price falls. More than one notch would take the company’s debt into “junk” territory, increasing borrowing cost as certain lenders are forced to reduce or eliminate their facilities.

  • Smith and Nephew, the global medical technology business specialising in orthopaedic reconstruction, advanced wound management and sports medicine reports its full year results on Thursday. We expect a strong PbT of just over $1 billion. 

Key statistics and events

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UK corporate earnings announcements: Final Result Amino Technologies PLC (AMO) RM PLC (RM.) Damac Real Estate Development Limited Gdr (each Repr 3 Ord) (144a) (DMCA)

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UK corporate earnings announcements: Interim Result Alumasc Group PLC (ALU), Final Result Torchmark Corporation (TMK) St Modwen Properties PLC (SMP), BP PLC (BP), BG Group PLC (BG)

image4
UK corporate earnings announcements: Interim Result British Sky Broadcasting Group Plc Ord 50p (SKY) Hargreaves Lansdown PLC (HL.) GW Pharmaceuticals PLC (GWP)  
image5
 UK corporate earnings announcements: Interim Result Avanti Communications Group PLC (AVN), Final Result Fusionex International (FXI) Smith & Nephew PLC (SN.)
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-- Edited by Martin O'Rourke

Patrick Butler is chief executive of the Prime Wealth Group

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