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Galvan's Week Ahead

Welcome to the Galvan Week ahead report with content supplied exclusively by Galvan. Here we preview the week’s events – both economic and corporate – drawing on the work of the broker’s experienced research and trading teams. It is a mix of fundamental data and technical analysis designed to provide Proactive readers an at a glance guide to what will unfold on the markets over the next five trading days.

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Galvan Week Ahead: UK interest rates ‘could rise sharply’, as housebuilders clean up .

April 19 2014, 7:00am

This Week in the Markets:

UK interest rates will rise sharply next year, according to a Treasury survey of City economists, with some predicting they could more than triple to 1.75%. Higher rates could benefit millions of pensioners who have seen their savings shrink in value, but could be bad news for families with significant mortgages. 

The UK unemployment rate fell to its lowest in five years, according to the latest data from the Office for National Statistics (ONS). Last Wednesday, ONS labour market data showed average earnings had risen 1.7% in the three months to February compared with a year earlier, up from 1.4% last month. According to the Financial Times, earnings growth in the UK has risen to match inflation for the first time since 2010. 

In corporate news, supermarket giant Tesco (LON:TSCO) announced a 6% fall in annual profits to £3.3bn as it continues to lose market share to discount rivals. Tesco said like-for-like sales, which strip out the effect of new store openings, also fell by 1.4%, and also announced a £734m loss of value in its European business, which has been hit by the Eurozone crisis. However the fall wasn’t as bad as many analysts had expected, with some expecting profits to fall by as much as 10% to £3bn. Indeed, Galvan’s own Head of Trading Ed Woolfitt published a buy note for Tesco after the results last Wednesday morning.

The UK’s second largest house builder Persimmon (LON:PSN) published an interim statement, which revealed it had sold 7,200 homes for 2014, a 38% advance on last year. The average selling price rose by 3% to £200,400, visitor levels rose 10%, while cancellations on purchases remain at historic lows. It has also been a winner from HM Government’s ‘Help to Buy’ scheme, accruing 5,000 home sales in the first year of the government-backed mortgage subsidy scheme. Persimmon also welcomed the decision to extend the scheme by four years to the end of the decade. 

Persimmon rival Taylor Wimpey (LON:TW.) went one better, increasing its average selling price by a massive 22% over the year, boosted again by the housing bubble, government schemes and the availability of affordable mortgages. A solid first quarter saw the order book up 13% on a year ago and the value of that order book up by 33%

Key Companies Reporting April 21st – April 25th 

Monday – Finals: PuriCore (LON:PURI), Sports Stars Media (LON:SPSM).

Tuesday – Interims: Magnit Ojsc (LON:50XD). Trading Statement: Dragon Oil (LON:DGO), Genel Energy (LON:GENL).

Wednesday – Finals: Mobile Tornado Group (LON:MBT), Phaunos Timber Fund (LON:PTF). Interims: Associated British Foods (LON:ABF), ARM Holdings (LON:ARM), Avacta Group (LON:AVCT), Fenner (LON:FENR), Smiths News (LON:NWS). Trading Statement: AMEC (LON:AMEC), Biome Technologies (LON:BIOM), Carpetright (LON:CPR), Creston (LON:CRE), Hammerson (LON:HMSO), Moneysupermarket.com Group (LON:MONY), Petra Diamonds (LON:PDL), Record (LON:REC), Reed Elsevier (LON:REL), Sports Direct International (LON:SPD), Spirent Communications (LON:SPT), STV Group (LON:STVG).

Thursday – Finals: Camellia (LON:CAM), PuriCore (LON:PURI), Trap Oil Group (LON:TRAP). Interims: African Barrick Gold (LON:ABG), AstraZeneca (LON:AZN), Premier Foods (LON:PFD), Unilever (LON:ULVR). Trading Statement: Anglo American (LON:AAL), AZ Electronic Materials SA (LON:AZEM), Berendsen (LON:BRSN), Computacenter (LON:CCC), Cobham (LON:COB), Croda International (LON:CRDA), Elementis (LON:ELM), Henderson Group (LON:HGG), International Ferro Metals (LON:IFL), Kenmare Resources (LON:KMR), Mecom Group (LON:MEC), Premier Foods (LON:PFD), Pace (LON:PIC), Senior (LON:SNR), Travis Perkins (LON:TPK).

Friday – Finals: Harvey Nash Group (LON:HVN). Interims: Egdon Resources (LON:EDR). Trading Statement: Rotork (LON:ROR), COLT Telecom Group SA (LON:COLT), Spectris (LON:SXS), William Hill (LON:WMH), WPP group (LON:WPP).

Despite the Easter break, a number of major companies have scheduled reports this week. On Wednesday, UK chip maker ARM Holdings (LON:ARM) reports interims. Despite the recent collapse of the tech-driven Nasdaq on April 11th, (the index lost 3.1% of its value taking with it many UK tech stocks with it) Swiss broker Credit Suisse remains upbeat about ARM. It hiked its target price from 1,050p to 1,200p and reiterated its ‘outperform’ rating ahead of the company’s first-quarter results. Credit Suisse thinks that ARM’s revenue and earnings will increase at compound annual growth rates (CAGRs) of 15% and 23% over 2013-2016, respectively. This growth will be driven by the “rising level of content in smartphones/tablets, limited market share loss, and increasing traction in Networking”. Analysts will no doubt be scrutinising Wednesday’s statement for evidence of this.

Sports retailer, Sports Direct International (LON:SPD) and carpet retailer, Carpetright (CPR) also release trading statements on Wednesday. Observers will be poring over the latest figures from Sports Direct after Mike Ashley bought and sold a stake in ailing UK department store Debenhams (LON:DEB). US broker, Bank of America Merrill Lynch (Bofa) raised its near-term forecasts for the sporting goods retailer and lifted its target price for the shares from 1,000p to 1,070p, saying that the market is underestimating the company’s international and online growth prospects. They said this in a research report: “Our market share analysis suggests that there is potential for Sports Direct to grow its top line at a compound annual growth rate of 7% over the next 10 years, driven by online sales and expansion into Europe.”

Carpetright on the other hand is not in a good way. It issued its third profit warning in six months at the end of March. The UK’s largest floor-covering retailer also said it had been hit by “extremely difficult economic conditions” in the Netherlands, where it has 15% of its 620 stores. Pre-tax profit for the year ending 26 April is expected to be £3.5m-£5.5m, the company said in a trading statement – well below analysts’ forecasts of £7.8m. Although shares have delivered a substantial recovery this year, there is little room for any further disappointment.

Major Economic Data April 21st – April 25th 

Monday – No economic data scheduled.

Tuesday – UK: Public Sector Net Borrowing. EU: Consumer Confidence. US: HPI, Existing Home Sales, Richmond Manufacturing Index.

Wednesday – UK: MPC Asset Purchase Facility Votes, MPC Official Bank Rate Votes. EU: Italian Retail Sales. US: New Home Sales.

Thursday – UK: Retail Sales, BBA Mortgage Approvals, CBI Realized Sales. EU: Spanish Unemployment Rate, French Flash Services PMI, French Flash Manufacturing PMI, German Flash Manufacturing PMI, German Flash Services PMI, Flash Services PMI, Flash Manufacturing PMI, German Ifo Business Climate, Belgian NBB Business Climate. US: Core Durable Goods Orders, Unemployment Claims, Durable Goods Orders, Flash Services PMI, Flash Manufacturing PMI.

Friday – UK: Nationwide HPI. US: Revised UoM Consumer Sentiment, Revised UoM Inflation Expectations.

With US and UK economic data relatively thin this week, all eyes will be on the Monetary Policy Committee (MPC) vote on Wednesday. Bank of England Governor Mark Carney, will definitely be under pressure to raise UK interest rates after the recent UK unemployment figures. On Friday, UK building society Nationwide will release its House Price Index survey data. In March, UK house prices increased by 0.4%, 9.5% higher than in March 2013, according to Nationwide.

In the US, New Home Sales data will be released on Wednesday. Last week, US housing starts reportedly rose less than expected and building permits fell sharply in March. Privately-owned housing starts rose 2.8% to a seasonally-adjusted annual rate of 946,000 last month. This was higher than the upwardly revised 920,000 rate in February but well under the 970,000 consensus forecast.

FTSE 100:

The ongoing Ukraine crisis continued to weigh on the UK’s leading benchmark FTSE100 index to start the week. However, by mid-week it recovered losses to rise by over 40 points last Wednesday to close at 6,580, and at time of publishing on Thursday, had pulled back into the black from an early dip. 

Technically, a clear triangle formation is in place for the FTSE, bounded by 6,550-6,700. Bulls can probably take heart more than Bears at present, given resilience of the index at this level, even though the RSI is at 45, well below neutral 50. Indeed, the oscillator is useful as a positive force given the uptrend line in this window since February, and while it may be right to be short of this market up to 6,700 and the top of the triangle, there is an early cue to bargain hunt above 6,550.

Sterling/Dollar:

Sterling performed well against the dollar last Wednesday after UK unemployment fell to below 7%. 

According to Brenda Kelly, Chief Market Strategist at IG, the cross “has run straight into the $1.68 level where previous short-term rallies have stalled.” She adds that the longer-term trend direction is still up, and “while the immediate price action may be on the downside as we drop back from $1.68, heightened expectations of a UK rate hike will most likely put further upward impetus into the GBP/USD rally.”

Gold:

The Gold “safe haven” appeal continues to erode, most recently due to the strength of US retail sales data and the US dollar; coupled with tension in the Ukraine. Last Tuesday, the precious metal fell almost 2%, falling from recent three-week highs. 

“Gold was hit by profit-taking as the rally to $1,330 on Fed minutes appeared overdone. The break below 200-day moving average and $1,300 level also triggered tons of sell-stops,” said Thomas Capalbo, precious metals trader at brokerage Newedge.

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