By Patrick Butler
In a Nutshell: The FTSE100 sold off sharply last week, giving up almost half of this year’s gains.
Sterling strength, jitters before next week’s budget and the election in May, further weakness in oil and profit-taking all serve to explain the down-draught, which contrasts starkly with the performance of the German index.
The DAX30 was up 3.04% last week (more, now, than the FTSE’s entire gain so far this year), and has seen a staggering 21.8% rise so far this year. As predicted, much of the new money generated through quantitative easing is finding its way into financial assets – in particular – the stock market. $35.6bn has flowed into European equity funds in 2015 so far breaking all previous records.
The Euro’s fall (which finds its cause in the ECB’s easy money policies) has given the entire corporate sector a shot in the arm. It is not just exporters which benefit. Domestic producers are able to squeeze out foreign competition from the likes of the UK (with its relatively high sterling costs) through import substitution.
In the US, watch out this week for the Empire State Index (on Monday) and the Philadelphia Fed index (on Thursday). We expect to see modest increases in both cases. Industrial production for February, released on Monday will probably see a 0.2% to 0.3% rise, held back by poor weather.
More important than the data releases is the Federal Open Market Committee meeting on Wednesday.
The big question is whether the FOMC decides to drop the word “patience” to describe its stance towards monetary policy normalisation. If it does not, a hike in the next couple of months will almost certainly be off the agenda.
Given, though, the clear underlying strength of the US economy, the word probably will be dropped, though the balance of probabilities is relatively even. If the word is omitted, expect a knee-jerk sell-off of the US indices.
In Europe, the ZEW economic surveys should show continuing recovery which will further fuel stock market strength across the continent. As so often, any negative news is likely to emanate from Greece, where the government has been siphoning off public pension funds to meet current payments on civil servants’ salaries.
Revived talk of war reparations from the Germans, raised once again by Prime Minister Tsipras, has served only to alienate further the Eurozone’s paymaster. What is disturbing is that the Greeks appear to be in desperate short-term financial straits little more than a week after the ECB increased emergency funding to Greek banks by EUR 600 million.
The weakening euro is a shot in the arm for corporates. Photo: iStock
On the corporate front, Sainsbury's makes a trading statement on Tuesday when we expect to learn that fourth quarter like-for-like sales fell by over 2%. More important than the absolute numbers will be the trend; are there signs of the country’s third biggest supermarket chain turning the tide?
North Sea oil producers, among them Shell, Premier Oil and BP are likely to benefit on Wednesday from measures which we believe will be announced in the budget to increase investment allowances and reduce the overall tax rates on production.
Keep an eye on the battle developing at Alliance Trust where an activist investor, fed up with the lacklustre performance of the funds, is looking to inject new management at board level. Signs of a shake-up could energise the share price.
Astra’s shares are likely to rally on Monday after Saturday’s announcement that Brilinta, its blood-thinning drug, has been shown in intensive tests to reduce the risk of a recurrence of heart attacks. The company has forecast that annual sales of the drug could reach $3.5bn, so the importance of this development is difficult to overstate.
Among the stocks we believe worth watching in the coming days are Rio Tinto and BHP Billiton, which are both proving adept at countering the weaker commodity price environment through cost cutting, and which have the staying power to weather the tougher times while smaller competitors are squeezed out.
What is more, both are benefiting from the stabilisation in commodity prices (with the exception of gold, which is not their focus) albeit at lower levels.
Tesco, one of our March tips which, thus far, has proven relatively disappointing (though the past three months have seen a recovery overall) is, we believe on the right track and this will be increasingly recognised in the share price. We continue to like Inchcape, the high-end car sales company, and have started to favour Lookers for similar reasons.
Key Statistics and events:
UK corporate earnings announcements: Interim Result PureCircle Ltd (PURE), Final Result Frutarom Industries (FRUT) Petards Group PLC (PEG) Smart Metering Systems (SMS) Brady PLC (BRY) Global Ports Investments Plc Gdr (each Repr 3 Ord) (144a) (80GM) Tribal Group PLC (TRB).
UK corporate earnings announcements: Interim Results Regenersis PLC (RGS) Gfinity Plc Ord 0.1p (GFIN), Final Result Mears Group PLC (MER) KBC Advanced Technologies PLC (KBC) Safecharge International Group (SCH) WANdisco (WAND) Good Energy Group Plc (GOOD) Pennant International Group PLC (PEN) Just Eat (JE.) French Connection Group PLC (FCCN) Zotefoams PLC (ZTF) Antofagasta PLC (ANTO) Gem Diamonds Ltd (GEMD), Trading Statement IG Group Holdings PLC (IGG) Sainsbury (J) PLC (SBRY).
UK corporate earnings announcements: Interim Result Smiths Group PLC (SMIN), Final Result Burford Capital Ltd (BUR) Stilo International PLC (STL) UTV Media PLC (UTV) Hochschild Mining PLC (HOC) Cape PLC (CIU) Accesso Technology Group (ACSO), Trading Statement Imagination Technologies Group PLC (IMG).
UK corporate earnings announcements: Final Result Ted Baker Plc (TED) Savills PLC (SVS) EnQuest Plc (ENQ) Lamprell PLC (LAM) Alpha Bank A E (01NX) Xaar PLC (XAR) Next PLC (NXT) Ophir Energy (OPHR) EMIS Group PLC (EMIS) Jimmy Choo Plc Premier Farnell PLC (PFL).
UK corporate earnings announcements: Interim Result CVS Group PLC (CVSG), Final Result JKX Oil & Gas PLC (JKX) Gamma Communications Plc Ord 0.25p (GAMA), Trading Statement Berkeley Group Holdings (The) PLC (BKG) Investec (INVR).
— Edited by Oliver Morrison
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