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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's Week-Ahead: Sovereign Debt Issues and Dominque Strauss-Kahn

May 21 2011, 10:00am

 

Galvan's Week-Ahead:  Sovereign Debt Issues and Dominque Strauss-Kahn   

This Week in the Markets:

A week has been famously described as being a long time in politics, but seemingly in the financial world even a weekend can be transformational. The aftermath of the scandal involving the Managing Director of the International Monetary Fund, Dominque Strauss-Kahn has put a previously rather obscure institution firmly in the public eye, and of course further plays on the issue and uncertainty surrounding Greece’s second bailout. Although there is no doubt we are now in the middle of PIIGS nation bailout round 2, thus far the Euro hasn’t had the mauling that one might have expected - the fall from $1.49 to $1.41 so far this month notwithstanding.  Ironically, in the build up to Greece Crisis MkII, from intense behind the scenes meetings of EU financial ministers running into the Strauss-Kahn arrest, many were suggesting that anything above parity for the Euro versus the U.S. Dollar could be seen as excessive. This view had merit, right up to the point that the financial plight of the U.S. was put into perspective. 

The revelation that the world’s number one economy is in danger of breaching its $14.3 trillion debt ceiling has thrown up all types of scenarios, from the loss of the U.S. Dollar as reserve currency via soaring commodities prices and of course the kind of default on Treasury Bonds that would make the current situation look like a walk in the park. As the Treasury Secretary Timothy Geithner pointed out, the U.S. should ideally get its deficit below 3% of gross domestic product, from 10.9% of GDP currently. The main challenge of course, is how to do this without undermining GDP growth itself. Adding to the general angst has been news that China, the largest holder of T Bonds has reduced its holding in March, although it still remains the top holder.

There was rather less drama in the UK, but drama still came, and this time on the inflation front as the latest CPI for April hit 4.5% - a 0.5% rise on the previous month. Presumably the fall in Sterling this week in the wake of the CPI spike was partly due to the contents of the latest letter from the Governor of the Bank of England Mervyn King to Chancellor of the Exchequer George Osborne. Mervyn blamed high inflation on rises in VAT and commodities / imports prices, but he expects there will be a fall in prices over 2012 / 2013. In the meantime interest rates remain on hold for the good of manufacturing output, and this will apparently remain so whatever level the CPI hits

The Week Ahead: May 23rd – 27th

Monday – Finals British Land (LON:BLND), Mitie Group (LON:MTO)

Tuesday– Finals Big Yellow Group (LON:BYG), Cable & Wireless Worldwide (LON:CW.), De La Rue (LON:DLAR), Pennon Group (LON:PNN) Interims Paragon Group (LON:PAG).

Wednesday – Finals Cable & Wireless Communications (LON:CWC), BTG (LON:BGC), Telecom Plus (LON:TEP) Interims Britvic (LON:BVIC)

Thursday– Finals Burberry (LON:BRBY), QinetiQ (LON:QQ.), United Utilities Group (LON:UU.) Interims Daily Mail (LON:DMGT) Q1 Antofagasta (LON:ANTO)

Friday –  Finals Electrocomponents (LON:ECM), Severn Trent (LON:SVT).

Although the two companies formerly known as Cable & Wireless split to improve their respective fortunes, the situation has still continued to deteriorate. In share price terms the combined figure is now scraping 100p vs. nearly 150p just before the split, and investors appear as unenthused over the fundamentals as ever. For C&W Worldwide (LON:CW.) the big setback in both share price terms and newsflow came in March as it cut its 2012 earnings guidance. A raft of broker downgrades followed, and now after two profit warnings and the FD’s departure less than 12 months after demerger, the forthcoming finals will have to be very positive indeed to reverse the downward momentum. 

For fixed line telecoms group Cable & Wireless Communications (LON:CWC), the recent past has been somewhat less fraught than its demerged partner. Following the sale of its Bermuda business in February, CWC announced a $100m share buyback, but even so the stock is back where it was at the start of the year, not helped by the RBS hold rating on the company. 

One of the brighter spots in the retail space since the financial crisis began has been that of the niche players. In this regard luxury accessories group Burberry (LON:BRBY) is leading from the front both in terms of growth and it’s entry into the FTSE100. Its main attraction to investors apart from the value of the brand and distinctive chequered pattern has been it’s apparent immunity to the consumer downturn. In fact, it did come down to earth in the Spanish market, but has thrived in emerging economies such as China and Japan. The only real fundamental question mark is whether the earthquake and nuclear accident in Japan will have a lasting impact on one of Burberry’s key markets.

Major Economic Data: May 23rd – 27th

Monday –   EU Flash PMI U.S. Chicago Fed National Activity Index

Tuesday –EU German GDP U.S. New Home Sales

Wednesday – UK CBI Quarterly Distributive Trades Survey, GDP  U.S. Durable Goods, FHFA House Price Index

Thursday – UK Retail Sales, CBI Industrial Trends Survey U.S. GDP, Jobless Claims, Fed Balance, Money Supply

Friday – UK Nationwide House Price Index EU M3 Money Supply, German CPI U.S. Consumer Sentiment, Pending Home Sales Index

GDP is the metric in focus across all leading Western economies this week, with the latest from Germany coming in after a better than expected number for the EU as a whole earlier in the month. In the U.S. there will be updates from the ailing housing market with New Home Sales and the Pending Home Sales Index. Friday will also deliver an update on the UK housing market, on this occasion from Nationwide. In what is a relatively low key week on the economic calendar, it will be Jobless Claims and Durable Goods from the U.S. which will dominate alongside the budget deficit wrangling and of course developing bailout news from Greece which should reach its conclusion.

Main Markets Outlook: 

FTSE100: 

Currently, the price action of the FTSE100 does seem to be ranging from mysterious to sometimes downright confusing. There is a rangebound consolidation for the index between 5,850 and 5,950, with erratic price action between these points to start May. Of course, the bulls can point to the fact that this activity is taking place well above the rising 200-day moving average – a standard measure of trend. This currently lies at 5,772, and the implication is that at least while above this technical feature on the daily chart, the 2 year uptrend can be adjudged intact even if at the present time it is difficult to see an uptrend higher than the 2011 resistance zone, so far at just over 6,100. Those waiting for a fresh momentum buy signal would probably choose sustained price action back above the recent cap on leading UK stocks, which has been the 50-day moving average now at 5,950. 

Sterling / Dollar: 

The irrational U.S. Dollar strength has this month pushed Sterling back towards the $1.60 support zone, plus the currency has also taken a battering from the latest minutes from the Bank of England MPC, with a 6-3 vote against an interest rate rise at the May meeting. While this meeting occurred before the latest shock jump for CPI, it underlined the BoE’s reluctance to raise interest rates anytime soon. Prices will have to be significantly higher than they are now before there is any move back above 0.5%. This leaves the charting position of Sterling looking particularly vulnerable after this week’s three-day failure below the 50-day moving average now running through $1,63. Indeed, while below the 50-day line on an end of day close basis it is difficult to see how this market can avoid a test of the 200-day moving average now running at $1.5924, even though this would take the cross back to February support. 

Gold: 

Certainly the consensus and more importantly the reality for the multiyear Gold bull rally should be to buy any dips in this market. Even so, diving in after a $100 retracement does require a degree of application, considering the rapid decline from the initial May peak and all time record at $1,576 to the low point of the month so far at $1,476. And this movement coming in the wake of the death of Bin Laden could actually have resulted in a longer lasting pullback than just a couple of weeks. But the inflationary prospect of another Greece bailout by the EU, the U.S. heading for a debt disaster and speculative interest in physical purchases from India and the Middle East have all kept the metal on track to resume its uptrend. This is likely to remain the case for the rest of this month, especially while there is no end of day close back below the 50 day moving average at $1,473.

 

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