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Galvan's Week-Ahead: Clearly, the Credit Ratings agency Standard & Poors wanted to test the resilience of the equity markets on Friday 13th of all days
Galvan's Week-Ahead: The “Phoney Rally” of 2012 continues.
This Week in the Markets:
In spite of the warnings and doom-laden forecasts from many leading technical analysts and experts, the “phoney” rally of 2012 looks set to continue. Apparently hundreds of billions of Euros in outstanding Sovereign Debt may be in need of refinancing this year, but at least for now the antidote and current occupation for investors is seeking out consistency and more importantly the dividends of leading blue chips. This activity has been enough to drive the FTSE 100 back above its 200-day moving average at 5,600 this year – normally an event that would be taken as a sign that a bull market is about to begin.
Clearly, the Credit Ratings agency Standard & Poors wanted to test the resilience of the equity markets on Friday 13th of all days, when it removed France’s AAA rating and slashed at the ratings of several EU nations. However, if S&P were anticipating the same effect as the U.S. AAA downgrade last August when stock indices fell some 20% in a month, it will have been disappointed. This time round the U.S. benchmarks such as the Dow and S&P are maintaining 5-month highs. No finer example exists to illustrate the cliché of stocks climbing a wall of worry than the January 2012 rally. In addition, if the ‘January Effect’, another favoured phenomenon pans out, by the end of this month, we should be looking at an up year for stocks.
Back down to the realities of leading companies though, and it may be some time before UK investors get over the profits warning from number one supermarket Tesco (LON:TSCO). While it already looks as though the dip in the shares that accompanied the downbeat Christmas trading announcement may be one to buy into, the effect on sentiment could take longer to cure. Quite simply, logic dictates that if times are tough for a leading player, for lesser sector constituents, conditions could be described as mission impossible. Ironically now, with most of the post Christmas trading updates now out, the companies where genuine fears over the outcome have been to the fore in the form of an already depressed share price, invariably the results have been best. This was certainly the case for online grocer Ocado (LON:OCDO) where the stock jumped over 30% in a day, and even for Dixons (LON:DXNS) where the like for like sales drop was less bad than feared, with the shares up nearly 20% in a couple of days. If an illustration of how much expectation plays a part in the way the market treats corporates, we have seen some of the very best examples over recent days.
The Week Ahead:
Key Corporates Reporting: January 23rd – January 27th
Monday – Interims: City of London Investment Group (CLG).
Tuesday – Finals: Chemring (CHG). Interims: PZ Cussons (PZC).
Wednesday – Interims: Renishaw (RSW).
Thursday – Finals: Gem Diamonds (GEMD). Trading Announcements: Petropavlovsk (POG).
Friday – No significant corporate announcements due.
With most of the retail sector having reported on Christmas trading, there is something of a lull on the corporate front this week. Nevertheless, we have an interesting spread of sectors represented over the next few sessions, with the second liners largely in charge, and led by mining group Petropavlovsk (POG). While the share price was knocked with the rest of the sector following the September plunge for Gold, the picture brightened for the Russian focused miner as Rouble weakness and bumper production offset adverse precious metals prices. Added to this, the appointment of a new CEO at the end of December is an event that could kickstart a new era for the company.
Sticking with precious objects, Gem Diamonds (LON:GEMD) shares have suffered a rather wide and volatile range between 180p and 250p since the summer. Arguably the fundamentals don’t warrant this sort of white-knuckle ride even though the price of diamonds has fallen from the summer 2011 peak. In the November update, the group said it remained confident in the medium to long term, off the back of recovering 82,584 carats, a 20% rise on the previous year. It also helped that the grade per carat increased 39% to 1.63 carats per hundred tons and that the company is sitting on a cash pile of group of $128.4m.
Precision tools maker Renishaw (LON:RSW) has in its time experienced the full gamut of positive and adverse reactions to its trading updates. In July the share price collapsed despite the group reporting an 11% rise in full year profits and hiking its dividend. Perhaps on this basis it was only fair that in October when it admitted that Q1 revenues had missed their target the shares remained relatively stable and have since rebounded. Indeed, the problem going into the latest interims is that after a 20% rebound from November lows it may be difficult for traders to resist taking some profits regardless of what Renishaw reveals.
Major Economic Data – January 23rd – January 27th
Monday – No Significant Economic Data Due
Tuesday – EU: Nov New Industrial Orders, Jan Manufacturing PMI. EU: German Jan Services / Manufacturing PMI.
Wednesday – UK: Q4 GDP. EU: German Jan IFO Business Climate. U.S.: Nov House Price Index, Dec Pending Home Sales, Federal Reserve Interest Rate Decision.
Thursday – EU: German Feb Gfk Consumer Confidence, Dec Durable Goods, Conference Board Leading Indicators, New Home Sales.
Friday – EU: Dec M3 Money Supply. U.S.: Q4 GDP Price Deflator, Annualised Q4 GDP, Jan University of Michigan Consumer Sentiment.
A decent mix of economic data is on offer this week, although the highlight will be the result of the Jan FOMC meeting to decide on U.S. interest rates. No change is expected from the present 0.25% level, although as usual the wording of any statement accompanying the announcement will be eyed carefully. Also of importance Stateside is the final revision of the University of Michigan Consumer Sentiment reading, as well as the annualised Q4 GDP number. The latter is due to come in at 3% vs. 1.8% last time – so quite an improvement. In the UK we are also waiting on GDP data, this time for Q4 2011, with the consensus being a 0% / flat growth reading. Clearly a negative number, even by a fraction of a percentage point would be very damaging to the markets and the Government.
Main Markets Outlook:
FTSE100:
The plot thickens as regards the price action of the FTSE 100, particularly in regard to the direction it will take in the first part of 2012. While the fundamentals, and particularly the state of the EU instinctively suggest a short position, blue chips jumped out of the gate on January 3rd and have kept charging higher ever since. Indeed, with a successful test of the 200-day moving average at 5,600 under its belt, under almost any other circumstances we should be in bull market mode. So the fact that “leading” chartists and technical analysts are looking for the FTSE 100 to retest the December support zone sub 5,400 seems all the more strange given that the brief dip below 5,600 was a quick, “blink and you missed it” event. On the upside the most obvious destination is the former October peak at 5,747. Any sustained price action above this level could trigger accelerated gains.
Sterling / Dollar:
Rather against the odds, Sterling / Dollar touched a January intraday low of $1.5233, 39 pips below the former October intraday low as foreign exchange traders fretted over a larger than expected UK trade deficit. But as is often the case this dip was an example of a narrow bear trap on this cross, with a reasonable bounce since. Indeed, there has now been an end of day close back above the December support of $1.5362 – enough to suggest a further recovery is on its way for this market. While there is no end of day close back below December support, the 50-day moving average on the daily chart at $1.5581 makes for a reasonable end of January target, but only sustained price action above the 50-day line would suggest that the post November decline here is finally at an end.
Gold:
Gold finally made a technical breakthrough back above the rising 200-day moving average on its daily chart. This runs at $1,636, the support zone for this market in recent days – and a positive sign given that the 200-day line is rising. The technical view would be that the longer this market can sustain / consolidate at and above $1,636, the greater the chances of a resumption of the great bull run that paused so dramatically last September. An additional fundamental boost to this market has come off the back of talk that the International Monetary fund intends to boost it capacity for bailout facilities to distressed countries such as Greece. An apparent softening of Credit Agency Fitch’s attitude to Italy has also been seen as a boost.
