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Galvan's Week-Ahead: Greece is the word (with Grexit the buzzword) for the financial markets
This Week in the Markets:
Now more than ever Greece is the word (with Grexit the buzzword) for the financial markets. Fears that the cash-strapped Southern European nation would exit from the Euro have been around for a few years since the first once and for all bailout, but now it looks as though things are coming to a head in rather dramatic fashion. The latest catalyst has of course been the indecisive election result earlier this month that left the politicians enjoying their days in the limelight, arguably at the expense of the financial plight of their citizens and their country. Currently, the only upside to emerge from the extended procrastination is that until the June 17th elections deliver a clear cut result (if indeed they do) the likelihood is that a caretaker Government will be able to tap the troika for any payments that are due in the meantime. Of course, if Greece eventually leaves the Euro it is likely that these loans will become parting gifts.
But in fairness to Greece, it has never really been a significant player in the financial markets, so any collateral damage to the Eurozone and the UK is likely to be limited, and indeed few expect a Greek exit if it actually happens to tip the world back into recession. What has taken the FTSE 100 and indeed, Gold and the Euro itself back to December 2011 lows and lower is the prospect of a domino effect, as a Greek Euro exit then raises the possibility that Spain, Italy and other PIIGS nations could follow. An infinitely larger sum of money will be required to fill the fiscal hole of either Spain or Italy, and the consequences here hardly bear thinking about. Perhaps it is worth taking note of comments from our very own Sage of Threadneedle Street, Mervyn King, the Governor of the Bank of England. He has observed that it is not a liquidity crisis that is being faced (the former Credit Crunch), but actually a solvency crisis.
In fact, Sir Mervyn has been busy in helping us understand the consequences of the forthcoming meltdown on the other side of the English Channel too. The result has been a downgrade of economic growth forecasts for 2012 and 2013 from 1.2% to 0.8% and 3% to 2% respectively. His big warning though, is that growth will not return to pre-crisis levels until 2014. Given that we still do not know the extent to which the Eurozone could unravel, making any call on growth in the near term is almost an impossible task..
The Week Ahead:
Key Corporates Reporting: May 21st - 25th
Monday- Finals: BTG (LON:BGC), Mitie Group (LON:MTO).
Tuesday- Finals: Big Yellow Group (LON:BYG), Intermediate Capital Group (LON:ICP) Vodafone (LON:VOD) Interims Paragon (LON:PAG).
Wednesday- Finals: Burberry (LON:BRBY).
Thursday – Finals: Asos (LON:ASC), Cable & Wireless Communications (LON:CW.), QinetiQ Group (LON:QQ,), SABMiller (LON:SAB), United Utilities (LON:UU.) Interims Daily Mail & General Trust (LON:DMGT).
Friday – No significant corporate announcements due.
The big UK corporate guns are out in force this week. Leading the way, (and certainly by way of market capitalisation) is mobile phone giant Vodafone (LON:VOD), one of the more attractive FTSE100 dividend plays. Recent fundamental highlights include a buy rating from broker Nomura in April, which said it expected a 100bp gain to 1.9% in Q4 reflecting reduced MTR (mobile termination rate) pressure in Germany, Netherlands, Portugal, Spain and even Greece. This is worth noting given that Vodafone itself is only counting on a 70-80bp gain. The good news could be extended with a bounce in Verizon Wireless in the U.S. in which Vodafone is a major shareholder, along with an update on the recently agreed £1bn takeover of bombed out telco Cable & Wireless Worldwide (LON:CW.).
Luxury goods group Burberry (LON:BRBY) remains something of a recession defying phenomenon, especially in the Far East, and as such this best of British brand has become something of a barometer for the health of China, the world’s second largest economy. The bull case received a boost in March as reports came from China that it would reduce taxes on luxury imported goods, something that caused the share price of Burberry to spike. However, there are still fears that the group’s valuation at £14 plus a share and on 23 times earnings is rather rich in the current climate. Much will depend on the forthcoming outlook from Burberry, although it is likely the retailer will find it tough to project continued outperformance for the rest of 2012.
In some ways it was curious that SABMiller (LON:SAB) decided to go for a multibillion purchase of Australia’s Fosters brand when the driver of growth in the past year has clearly been of the emerging markets variety, especially in Latin America. It will be interesting to see whether what looks like something of a trophy purchase can pay off near term? Observers will also be looking to see whether the Q4 metrics have been beaten by organic growth. Lager volumes were 3% ahead of the previous year for both the quarter and the year, with soft drinks volumes 7% higher year on year, and 12% up in the final quarter.
Major Economic Data: May 21st - 25th
Monday – No significant economic data due
Tuesday – UK: April Consumer Price Index. U.S.: April Existing Home Sales.
Wednesday – UK: May Bank of England Minutes. EU: March Industrial New Orders. U.S.: March FHFA House Price Index, April New Home Sales.
Thursday – UK: Q1 GDP, April Retail Sales. EU / Germany: May Services / Manufacturing PMI, German Ifo Business Climate. U.S.: April Durable Goods Orders.
Friday – U.S.: May University of Michigan Consumer Sentiment.
The latest UK Q1 GDP revision due out on Thursday will show whether or not we really are in a double dip recession. Just as important of course is what the policy makers may decide to do about our economic plight, something to be revealed in May’s MPC minutes. There are other important statistics to watch out for, in particular the April Consumer Price Index, which came in at 3.5% the previous month and April Retail Sales, which may have suffered due to record rain. Further afield the key German Ifo Business Climate number is due, (last at 109.9), and the U.S. May University of Michigan Consumer Sentiment figure expected to hit 77.8 and still very much on an upward path. April U.S. Durable Goods Orders are called to flip around as well with a 1% rise compared to the previous 4% decline.
Main Markets Outlook:
FTSE100:
The idea that the main 200-day moving average technical support on the FTSE 100 now at 5,550 would deliver the final rebound for leading UK stocks in May seems almost quaint given the events of recent days, and of course the price actions they have triggered in the financial markets. Hopes are now being entertained that too much pessimism over Greece and the EU crisis have been factored in, so key to this over the next week is whether the index can hold a line of support at 5,420 from August 2011, the last time the FTSE 100 went into a tailspin. So far the level has held on an end of day close basis, but if there is sustained sub 5,420 price action and we accelerate further south towards the November 5,075 intraday low, a very painful and very swift rout for this market will most likely ensue. All that stands between business as usual for the stock market and a return to the price action of the 2007 – 2008 crisis is the relatively tenuous zone between 5,420 and December’s 5,328 intraday low.
Sterling / Dollar:
Despite all the uncertainties over the UK economy for the first half of 2012, there were enough doubts over our EU partners to qualify Sterling and the UK as a “safe haven.” As a result Sterling / Dollar managed to reach the dizzy heights of $1.60 plus for much of April. But with the escalation of the Greek crisis this week, it appears that the safe haven status of the UK currency is giving way to the greater appeal of the U.S. Dollar, especially as this week will tell us whether or not the double dip recession was just a temporary aberration. Technically, a minimum test of the still falling 200-day moving average on the daily chart at $1.5825 looks likely, although only a weekly close below this feature is likely to rule out the prospect of a retest of the intraday resistance of 2012 to date at $1.63 plus.
Gold:
It now seems like an eternity since Gold took centre stage as the definitive one way bet off the back of EU zone uncertainties and a widespread rush towards competitive devaluation among developed economies. Adding insult to injury for the yellow metal, over the course of May the U.S. Dollar has assumed the mantle of the premier refuge against risk. The only real positive in this market was a higher low of $1,527 vs. the intraday low of December, something which when accompanied by the way oversold Relative Strength Index well below 30 / 100, which implies that a dead cat bounce is overdue. Even so, only sustained price action back above the former initial December intraday support of $1,560 will be enough to suggest a bear trap or lasting low is in place.
