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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: QE3, or a new leg down for the Eurozone.

September 24 2011, 10:00am
This Week in the Markets:
 
Back in the dark days of the Credit Crunch in 2007-8, it would have been reasonable for most in the financial markets to assume that the worst would be over by 2011 or even 2012. Unfortunately, rather than improving, it appears increasingly likely that the crisis could take a new leg down in coming months rather than offer any tangible improvement. Fear number one is the ever-present possibility of a Greek default leading to a Eurozone break up. Clearly once one nation is allowed to, or cannot be prevented from exiting, others will almost certainly follow – reversing the Euro birthing process at the end of the 1990s. So far the situation has been confused and fudged in terms of bailouts and postponements, but it does appear that changes to the structure or otherwise of the new Europe are imminent.
 
These changes will also affect the UK whether we like it or not. While Europhobes and sceptics have extolled the virtues of the UK’s apparent immunity from Eurozone problems, and the joys of having our own currency and central bank, it is a fact that no country so close to a continent in turmoil can wholly be isolated from the effects of the meltdown including £260bn of Eurozone banking risk. This was bought into sharp focus this week by the IMF, which warned that the economy here could be stalled by the ill effects of the Eurozone debt crisis, and downgraded its growth forecasts for the UK for the third time in 9 months to an annual 1.1%. It felt that the pace of spending cuts being exacted by the Coalition could actually force a policy U turn if GDP shrank any further – thus meaning that the UK’s comparative “safe haven” compared to many other Western economies could be lost. All this ensured the latest minutes of the September Bank of England MPC meeting were scrutinised even more closely than usual, as observers sought clues to the next phase of QE to get the economy and especially manufacturing back on its feet. However, such a move does seem likely to stall until the Federal Reserve makes its move on QE3.

Indeed, it is the Federal Reserve that the markets have been waiting on so keenly ever since the U.S. lost its AAA credit rating last month.  According to the very busy IMF, the U.S. is looking at a “lost decade” in terms of its economy – similar to the 1990s and beyond in Japan. Predictions are little better in the Eurozone where recession now seems to be odds on.

At least there was a fizz of excitement provided courtesy of some M&A action in the UK stock market, where traders toasted UK beverage giant SABMiller (LON:SAB) as it finally got its hands on Australia’s Foster’s for around A$9.9bln..

The Week Ahead:

Key Corporates Reporting:  September 26th – 30th  

Monday – Finals: Ricardo (LON:RCDO).

Tuesday– Finals: Close Brothers (LON:CBG). Interims: AG Barr (LON:BAG), Game Group (LON:GMG). Trading Announcement: Topps Tiles (LON:TPT).

Wednesday – Finals: Smiths Group (LON:SMIN). Trading Announcement: Man Group (LON:EMG).

Thursday– Finals: Helphire (LON:HHR). Interims: Ryanair (LON:RYA). Trading Announcements: Thomas Cook (LON:TCG).

Friday – No significant company reports.

Hedge fund group Man (LON:EMG) seems to be finally emerging from a post financial crisis induced negative sentiment cloud. The turnaround began at the end of May with a full year profits upside surprise figure of $600m, beating pre close trading statement estimates. Since then the FTSE 100 company has further soothed nerves by reporting record quarterly sales in July as well as transferring its Lehman exposure to its GLG subsidiary. When one adds the lingering M&A speculation that has surrounded the company in the recent past, it could very well be that the basing action in the shares from near 200p continues to deliver a recovery after the forthcoming trading announcement

Airport scanner group Smiths (LON:SMIN) started 2011 with a bang thanks to the £2.45bn takeover bid for its medical division in January. It eventually turned down the deal from Apax Partners, and in March the 20% plus half-year profits boost showed why. This has set a positive tone for the shares ever since, despite a blip associated with order delays at its Smiths Detection division. The company as a whole though bounced back after reporting a surge in industrial orders in June, more than offsetting the Smith Detection retracement. On this basis, the 30% decline for the shares since the early 2011 peaks look overdone, considering the ongoing performance and future prospects.

Travel agent Thomas Cook (LON:TCG) started 2011 in great shape, but after a succession of crises rocked the world in Spring, the middle part of 2011 has seen a share price meltdown. Although a renegotiation of a credit facility at a better rate capped further losses, the departure of the CEO at the beginning of August gave the impression of abandoning a sinking ship. There will need to be something very special in the latest trading announcement to wash away this impression.

Major Economic Data: September 26th – 30th:

Monday – EU: German IFO Business Climate, EU September ZEW Survey. U.S.: August New Home Sales.

Tuesday – UK: September Nationwide House Prices, September CBI Reported Retail Sales. U.S.: September Consumer Confidence.

Wednesday – EU: German August Import Prices, EU German October GfK Consumer Confidence Survey. U.S.: August Durable Goods Orders.

Thursday – UK: August Net Consumer Credit, Mortgage Approvals, UK September GfK Consumer Confidence Survey. EU: September Business Climate, Consumer Confidence, Economic Confidence. U.S.: Q2 GDP, August Pending Home Sales.

Friday – EU: Euro-Zone September Consumer Price Index Estimate, August Unemployment Rate. U.S.: August Personal Income / Spending, September University of Michigan Confidence.

Given the dire EU Sovereign Debt position and the summer dip in the French / German economies back towards flat and with contracting GDP growth, much attention will be focused on both the German and EU wide data. Heading the list over the next few days will be the German IFO Business Climate and ZEW surveys, neither of which are expected to make pleasant reading.  The same could also be said of Germany’s Consumer Confidence Survey as well as the EU wide update due out on Thursday. Across the pond, the key U.S. Confidence measure from the University of Michigan completes the week, vying with Durable Goods Orders and Q2 GDP. In the UK, the Nationwide House Prices gauge along with August House Prices from the Nationwide will tell us how much this market is finally succumbing to economic jitters.

Main Markets Outlook:

FTSE100:

The usual fall after the September futures expiry on the 16th for the FTSE 100 failed to materialise this year despite a classic squeeze of more than 200 points going into expiry and plenty of financial crisis scenarios doing the rounds the following week. At least initially the explanation was the run up to likely QE3 in the U.S., but as this has been in play for a month and more, plenty would argue that whatever the so called Twist was with long date interest rates delivered by the Fed on September 21st, it was probably factored in. Over here, a generally better-than-expected performance from retailers boosted the FTSE100, counteracting the negative effects of wild swings in banking stocks and a pullback for the basic resources complex. Technically, everything still rests on the 5,300 – 5,400 post August resistance zone, and the 1-month uptrend line from below 5,000 still holding at 5,100 for the rest of September.

Sterling / Dollar:

The U.S. Dollar Index has shown surprising resilience in late summer 2011, rebounding back towards 80, even with QE3 in the pipeline. Sterling initially fought to maintain the big $1.60 support zone and then July lows just below $1.58. Given this was broken easily, the level should now provide resistance, with doubts over UK GDP growth, collateral damage to UK banks from the EU meltdown and the prospect of the Bank of England finally doing something to stimulate the economy via QE2. The problem for the bull argument on Sterling following the loss of mid 2011 support is that there is little in the way of chart support before the December $1.5389 low. Below that and it would appear we have had a 2-year topping out towards $1.70 which needs to retrace back to the May 2010 low $1.40s area which accompanied the start of the Coalition Government.

Gold:

As ever, the future of Gold looks assured ahead of the Federal Reserve’s next move to stimulate the U.S. economy and the uncertainties accompanying the EU’s debt crisis. Arguably though, as a proxy for the risk averse and hedge against paper currency devaluation, Gold has been stretched too high and risks entering a bubble unless there is a period of consolidation. Technically a retracement is overdue back towards the 50-day moving average, (currently at $1,750) to unwind overbought conditions. So far the metal has dipped to the $1,760’s so a final dip for support looks about due, before fresh record highs can be delivered.

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