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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 – US Recovery Sluggish Despite GDP Rise, Mixed Fortunes At Barclays & Lloyds.

August 02 2014, 7:00am

This Week in the Markets:

The US Federal Reserve said on Wednesday that it would reduce its monthly asset purchase programme by a further $10bn to $25bn, but added that it would maintain a ‘highly accommodative’ policy stance for a ‘considerable time’ after the programme ended. In a statement in Washington, the Federal Open Market Committee (FOMC) pointed to a range of labour market indicators, saying that “they suggest there remains significant underutilisation of labour resources…The likelihood of inflation running persistently below 2% has diminished somewhat.”

Remaining Stateside, the US Commerce Department said that US Gross Domestic Product (GDP) had risen by 4% on annual basis, better than the 3% predicted by economists. Annual revisions showed the economy grew by 4% in the second half of 2013, its fastest pace of growth in a decade, but despite this good news, the economic recovery remains the weakest since the Second World War, with GDP up just 1% in the first six months of the year. The pick-up in the economy in late 2013 was wiped out by one of the harshest winters on record and even at 4% the pace of recovery remains sluggish.

In corporate news, one of the UK’s largest banks, Lloyds Banking Group (LON:LLOY) was hit with a £218m fine last Monday, for serious misconduct over some key interest rates set in London. Lloyds manipulated the London interbank offered rate (Libor) for yen and sterling and tried to rig the rate for yen, sterling and the US dollar. It also manipulated submissions for another short-term rate linked to the value of UK government debt. Bank of England (BOE) Governor Mark Carney branded the misconduct as “reprehensible.” The fines were issued by the UK-based Financial Conduct Authority (FCA) and a US-based trading commission. The bad news was mitigated somewhat on Thursday, when Lloyds reported a 32% increase in underlying first-half profit, which also helped it absorb an increase in the cost of compensating customers mis-sold loan insurance.

Still with banking, Barclays (LON:BARC) beat expectations, as half-year earnings after tax came in at £1.13bn in the six months to June, compared with £671m a year earlier. Net asset value per share decreased to 327p, but the reduction in investment banking income, was more than offset by profits in Personal & Corporate Banking and Barclaycard, which grew by 23% and 24% respectively.

Elsewhere, oil giant BP (LON:BP.) reported a rise in second quarter profits but warned that further sanctions against Russia could affect its business. BP said that it had not yet been affected by sanctions imposed over the Ukraine crisis, but it could well be in the future, particularly given that BP has a circa 20% stake in Russian energy giant Rosneft. Underlying replacement-cost-profit for the quarter of $3.6bn was higher than expectations of $3.4bn and 13% higher than the $3.2bn generated in the first quarter of 2014 as new projects start to ramp up.

Key Companies Reporting Aug 4th – Aug 8th 

Monday – Interims: Afren (LON:AFR), Alent (LON:ALNT), esure Group (LON:ESUR), Fidessa Group (LON:FDSA), HSBC Holdings (LON:HSBA), Intertek Group (LON:ITRK), Keller Group (LON:KLR), Senior (LON:SNR), Telecity Group (LON:TCY), Ultra Electronics Holdings (LON:ULE).

Tuesday – Finals: NWF Group (LON:NWF). Interims: Aggreko (LON:AGK), Avocet Mining (LON:AVM), Clarke (LON:call) (LON:CTO), Dragon Oil (LON:DGO), Fresnillo (LON:FRES), Genel Energy (LON:GENL), Hill & Smith Holdings (LON:HILS), InterContinental Hotels Group (LON:IHG), Inmarsat (LON:ISAT), LSL Property Services (LON:LSL), Meggitt (LON:MGGT), Novae Group (LON:NVA), Share (LON:SHRE), Standard Life (LON:SL.), Vernalis (LON:VER).

Wednesday – Interims: Friends Life Group Limited (LON:FLG), Ferrexpo (LON:FXPO), Interserve (LON:IRV), Johnston Press (LON:JPR), Legal & General Group (LON:LGEN), StatPro Group (LON:SOG), Standard Chartered (LON:STAN). Trading Statement: Grainger (LON:GRI).

Thursday – Interims: AMEC (LON:AMEC), Aviva (LON:AV.B), Coca-Cola HBC (LON:CCH), Cobham (LON:COB), Mondi (LON:MNDI), Old Mutual (LON:OML), Rio Tinto (LON:RIO), Randgold Resources (LON:RRS), RSA Insurance Group (LON:RSA), Spirax-Sarco Engineering (LON:SPX). Trading Statement: Enterprise Inns (LON:BC80), Hardy Oil & Gas (LON:HDY), Infinis (LON:INFI), UDG Healthcare (LON:UDG).

Friday – Trading Statement: Bellway (LON:BWYA). Interims: Catlin Group (LON:CGL).

In the wake of Barclays and Lloyds, the reporting focus this week is still with financial services, starting with HSBC (LON:HSBA) interims on Monday. Back in May the bank reported a 20% drop in first-quarter profits despite lower impairments and costs. Revenues fell in Asia and Latin America. Upbeat comments from ratings agency Fitch about the banking sector, lifted HSBC’s share price, and given the Barclays earnings beat, HSBC could yet surprise on the upside.  

Standard Life (LON:SL.) reports finals on Tuesday. At the beginning of July, the life insurer completed the £390m purchase of Ignis Asset Management from insurance peer Phoenix Group. The deal, which has now received approval from the Financial Conduct Authority (FCA), was first announced in March and was a move by Standard Life to bolster its investment management division. Prior to this news, Standard Life shares had suffered on reports that the UK will introduce collective pension plans, which could hurt revenue for insurers. 

One of the UK’s leading house builders Bellway (LON:BWYA) will release its trading statement on Friday. Broker Liberum has trimmed target prices across the UK house building sector but said it still sees upside for stocks despite concerns about a slowing down of the housing market. The broker said that fears about perceived threats to the industry have been overdone and the risks are “more benign than the market seems to think.” Bellway has been named as one of the top picks in the sector with a “Buy” rating by Liberum, along with several others. 

Global mining giants Rio Tinto (LON:RIO) and Randgold Resources (LON:RRS) will both report interim results on Thursday. Broker Jeffries recently raised its target price for Rio Tinto from 3900p to 4100p, maintaining a “Buy” recommendation, even though the mining giant has just agreed to sell coal assets it bought through a $4bn acquisition of Riversdale in 2011 for just $50m to an Indian joint venture. Rio is only retaining one of the assets it got from the Riversdale acquisition: the Zululand Anthracite Colliery, a small coal mine in South Africa.

Back in May, Africa-focused gold miner Randgold Resources beat analysts’ forecasts with higher profits in the first three months of the year, helped by another quarter of record output. The company said its projects had performed well during the period and guidance for costs and production over the full year remains unchanged. Nine brokers have issued hold ratings for the stock and eleven have assigned a buy rating. The consensus is currently “Buy”, although the average target price of 4,958p is still below the current price level.

Major Economic Data Aug 4th – Aug 8th   

Monday – UK: Construction PMI. EU: PPI.

Tuesday – UK: BRC Shop Price Index, Services PMI. EU: Spanish Services PMI, Italian Services PMI, Final Services PMI, Retail Sales. US: Final Services PMI, ISM Non-Manufacturing PMI, Factory Orders.

Wednesday – UK: BRC Retail Sales Monitor, RICS House Price Balance, Manufacturing Production, Industrial Production. EU: French Gov Budget Balance, French Trade Balance, German Factory Orders. US: Trade Balance, IBD/TIPP Economic Optimism,10-y Bond Auction.

Thursday – UK: Asset Purchase Facility, Official Bank Rate, NIESR GDP Estimate. EU: German Industrial Production, Minimum Bid Rate, ECB Press Conference. US: Unemployment Claims, Mortgage.Delinquencies, 30-y Bond Auction, Consumer Credit.

Friday – UK: Trade Balance. EU: German Trade Balance. US: Prelim Nonfarm Productivity, Prelim Unit Labor Costs, Wholesale Inventories.

There is raft of US and UK economic data scheduled this week. Highlights include, the UK BoE interest rate decision on Thursday, RICS House Price Balance on Wednesday and UK PMI figures on Monday and Tuesday. 

In Europe the European Central Bank (ECB) rate decision is also due Thursday

In the US, Unemployment Claims data is released on Thursday and Prelim Nonfarm Productivity figures on Friday.

FTSE 100:

The UK’s leading benchmark index remained subdued last week ahead of US GDP data and the Fed meeting. The FTSE 100 floated around the 6,800 level as caution over tensions in Syria, Gaza and the Ukraine prevailed. 

Technically, the FTSE 100 hit resistance on its daily chart from a line drawn at 6,830. This line has been in place since May, and is already quite a significant block on progress. Indeed, it may remain unbroken unless or until there is a strong fundamental driver to take leading UK stocks “over the top.” At the same time, with the RSI at 53, and just above neutral 50, the benefit of the doubt could still be given to the long argument and the idea of buying this market on dips towards the 20-day moving average (MA) at 6,772.

Sterling/Dollar:

The dollar hit 10-month highs against a number of currencies including Sterling after the release of the US GDP figures last Wednesday. “The risks are certainly there that the Fed becomes more hawkish, since the rebound in GDP was pretty substantial,” said Brian Daingerfield, currency strategist at the Royal Bank of Scotland in Stamford, Connecticut. Sterling has been drifting lower of later with the Bank of England (BOE) Deputy Governor Broadbent suggesting the currency is modestly overvalued while the International Monetary Fund (IMF) was more aggressive suggesting sterling appears to be 5-10% overvalued in their estimation that that this seems to be preventing the UK economy from rebalancing.

Technically, Actionforex.com are noting that the decline from $1.7190 continues, with intraday bias remaining on the downside. “Recovery should be limited below $1.7058 resistance and bring fall resumption.”

Gold:

Gold traded in a tight range last week ahead of the Wednesday Fed meeting last Wednesday. The precious metal was also pressured by the dollar, which hovered at a six-month high on expectations of strong economic data and a hawkish tone from the Fed. 

Technically, the precious metal is entrenched in a market that keeps us guessing over the near-term price action outlook. This is perhaps the reason that the favoured buy trigger here for momentum traders is no less than an end of day close back above the 20-day moving average (MA), currently at $1,311. At the same time, bottom fishers are keen to buy the metal towards the 200-day moving average (MA) level at $1,285 as this is currently the favoured range floor in the wake of this month’s consolidation either side of the key $1,300 level.

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