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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.
Galvan Week Ahead: Lloyds could be next up in LIBOR rigging scandal
July 14 2012, 7:00am
This Week in the Markets
For ex Barclays CEO Bob Diamond, the continuing fallout from his now legendary grilling from the Treasury Select Committee has this week seen him graciously waive his £20m departure bonus and accept a paltry £2m.
Certainly his vilification has far exceeded that of comedian and HMRC fan, Jimmy Carr, but far from riding off into the sunset, the U.S. banker has now gone onto the offensive as he tries to clear his reputation.
Diamond argues that he was far removed from those who perpetrated the alleged wrongdoing in the Libor rigging scandal. As ever, the public will soon tire of Diamond bashing, but as the investigation continues it is becoming apparent that the likes of Lloyds Banking (LON:LLOY) and RBS (LON:RBS) could suffer fallout that makes the PPI episode look like a party.
It has been suggested that Lloyds could be on the receiving end of a £1.5bn claim against its alleged role in Libor, which could ultimately mean mortgage account holders will have their day in court.
After all is said and done though, when the dust settles it is more likely that the regulator – the FSA / SFO will carry the can, as to many observers their current approach of reacting to cure rather than acting to prevent problems arising in the first place is at the heart of the matter.
Moving to the problem of Eurozone debt contagion, for once it seems that after the €100bn bailout for Spanish banks, the fine print on the ‘deal’ is more than a token attempt to address the horrific budget issues faced by the nation. A €65bn package of savings measures largely aimed at the pen pushing part of the economy – civil servants grates, but so will the VAT increase to 21% rather than the original 18%. Given the increase was set to happen anyway, why didn’t the Spanish Government simply go for 25%?
The only positives to cool the burgeoning civil unrest in Spain was the ECB’s interest rate cut to 0.75% from 1%. Unfortunately, the rather obvious message is that banks that are starved of cash are not going to be lending at any %.
On the UK corporate front there were a couple of highlights, or rather low points to note. The first the manner in which M&S (MKS) clothing suddenly seems to have gone out of fashion, while a profits warning from soft drinks maker Britvic (BVIC) saw its share price lose some fizz off the back of its Fruit Shoot recall.
The Week Ahead
Key Companies Reporting: July 16th – 20th
Monday - Interims: SThree (LON:STHR).
Tuesday – Finals: IG Group Holdings (LON:IGG). Interims: Computacenter (LON:CCC). Trading Announcement: Rio Tinto (LON:RIO).
Wednesday – Trading Announcements: BHP Billiton (LON:BLT), Fresnillo (LON:FRES), LSE (LON:LSE), Severn Trent (LON:SVT).
Thursday– Finals: Sports Direct International (LON:SPD). Interims: Howden Joinery (LON:HWDN). Trading Announcement: Britvic (LON:BVIC), Halfords (LON:HFD), Kingfisher (LON:KGF) Mothercare (LON:MTC).
Friday– Interims: Beazley (LON:BEZ). Trading Announcement: Close Brothers Group (LON:CBG).
Amid thin summer pickings, at least the Wednesday Trading Announcement from mining giant BHP Billiton (LON:BLT) will provide short-term traders with some potential price action. The last major updates from the group came in April and June, with the former distinguished by a reduction in iron ore production due to bad weather and industrial action. Even so coal operations delivered new production records. Billiton added that the extent to which industrial action will continue to affect production, sales and unit costs remained difficult to predict. This uncertainty was to some degree offset in June as group promised to invest $845m investment on its coal operations in New South Wales, Australia.
B&Q owner Kingfisher (LON:KGF) reported a rain soaked first quarter at the end of May, which given the dire weather since then doesn’t bode well for the forthcoming update. But with the retailer's first quarter total sales in the 13 weeks to April 28th down 3.6%, (1.3% on a constant currency basis) and like-for-like sales down 4.8%, bulls will be hoping that in taking the red pens out recently, brokers may have overstated the downside risks, especially now with the stock down 15% off the best levels of the year at 270p.
Going into 2012, it wouldn’t be an exaggeration to say that many traders expected a volatility fest given the toxic combination of macro factors weighing on the markets. As things have transpired, perhaps too much of this potential excitement was factored into the valuation of spread betting giant IG Group (LON:IGG), particularly just prior to the March update when the company said that it had experienced a sales slowdown to start the year. Nevertheless, even as recently as June IG said it was looking forward to report profits growth of as much as 17% for the year to the end of May, which serves to remind us once again that it is rarely wrong to back a bookie.
Major Economic Data: July 16th – 20th
Monday – EU: June Harmonised Index of Consumer Prices. U.S.: June Retail Sales, July NY Empire State Manufacturing Index.
Tuesday – UK: June Consumer Price Index. EU: Germany July ZEW Economic Sentiment. U.S.: June Consumer Price Index, Industrial Production.
Wednesday – UK: May Employment Rate, July Bank of England Minutes. U.S.: June Building Permits, Housing Starts, July Beige Book.
Thursday – UK: June Retail Sales. U.S.: Weekly Jobless Claims, June Existing Home Sales, Conference Board Leading Indicators, July Philadelphia Fed Index.
Friday – EU: Germany June Producer Prices Index.
At home in the UK, breath will be held in the run up to the latest UK Employment data, after the last reading came in at 8.2%. This could still be overshadowed by the Bank of England minutes following the fresh £50bn QE delivered at the start of July, while June Retail Sales will tell us whether the Diamond Jubilee celebrations were enough to outweigh the dire weather over the early part of the summer.
Further afield, traders might be able to put aside jitters over Spain and Greece and decide whether the German June Producer Prices Index standing at 2.1% has any upward pressure, with the ZEW Economic Sentiment survey no less important after the -16.9 reading last time.
In the U.S. there were narrowly negative readings for the May Consumer Price Index and Industrial Production. Given that June Non Farm Payrolls came in lower than expected on July 6th, predictably expectations are low.
Main Markets Outlook
FTSE100:
Even with last Friday’s Non Farm Payrolls delivering the usual blip in terms of volatility, it has been a remarkably flat week in terms of price action.
Presumably most traders would regard the impasse as a show of weakness, suggesting that this market is topping out below the former May resistance zone at 5,800. But it is worth noting that support has come in well above the key 200-day moving average at 5,591, and while there is no sustained break below the 200-day line, the long awaited retest of the 2-month resistance at 5,800 plus could be seen well before the end of July.
Sterling / Dollar:
The Pound looks to be mired in bear trap mode vs. the U.S. Dollar on the basis of a break back above the late June support at $1.5485. Above this level on an end of day close basis, a ‘minimum’ retest of the former resistance of last month through $1.5800 looks likely. This may seem to be a modest target, but for an extended stay above the June high zone, this market has to attack and defeat resistance from the 200-day moving average, now running through $1.5748.
Indeed, while this feature caps the price of this cross it is hard to argue against a strategy of being a seller into strength, if only on the basis that the initial June lows under $1.54 could be tested if the UK’s double dip recession plan is seen to falter.
Gold:
It is almost incredible that after so many months since the all time September 2011 peak, there has been no fresh sustained show of strength by this market – apparently weighed down by the fact that India, the largest physical retail buyer is sitting on its hands.
Added to this, the losses for the Eurozone banking sector are likely to be so big, and the austerity cuts of such a magnitude that inflation doesn’t look likely any time soon. The technicals for Gold near term suggest that there is significant support down towards June intraday support at $1,548. At least while above this, the notional upside is back to the 200-day moving average at $1,659 – although admittedly this currently feels a long way away.
