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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
Bank on HSBCDecember 07 2013, 7:00am
It has been a cautious week for equities, as encouraging data renewed speculation that the Federal Reserve could start scaling down its stimulus measures before the end of the year.
Monthly manufacturing surveys painted a generally positive picture of the global economy, with the Institute for Supply Management’s November’ manufacturing survey in the US rising ahead of expectations. The index rose to 57.3, its highest level since April 2011, from 56.4 a month earlier, indicating factories will be a source of strength for the economy heading into 2014. The median forecast in a Bloomberg survey of economists was 55.1.
Finer details of the report were also encouraging, with the production, new orders and employment sub-indices all improving. Six straight gains in the ISM measure represent the longest such stretch since the first 10 months of 2009, when the economy was emerging from recession. The gauge has averaged 56.6 over the past three months, the strongest since May 2011.
Improved housing and jobs data also fuelled investors’ fear of tapering, as sales of new single-family homes recorded its biggest increase for 33 years in October, suggesting the housing market recovery remains intact, despite higher mortgage rates. Better than expected jobs data was also evident from this week’s ADP report, which said that 215,000 private sector jobs were added last month, up from 130,000 in October and well above expectations of 178,000.
The Fed has said that the strength of the labour market would be a core factor in determining when the US economy is strong enough for the central bank to step back from its easy monetary policy, with the official US employment report for November due on Friday, scheduled to be this week’s key event.
Adding to the mood of optimism about the world economy was a reassuring manufacturing report from China. The HSBC/Markit PMI modestly beat expectations, while China’s service sector held near one-year highs in November, indicating the world’s second-largest economy continues to improve after a poor start to the year.
On a domestic front, Britain’s construction sector unexpectedly picked up speed in November, hitting its strongest levels of output and employment since August 2007, while the domestic manufacturing sector also grew quicker than forecasts. The Markit/CIPS construction PMI vaulted to 62.6 in November from 59.4 in October, considerably above forecasts of a slight fall to 59.0. Growth in Britain’s service sector, however, slowed a little last month, although Markit still predicts GDP growth will accelerate from 0.8% in the third quarter to more than 1.0% in the final three months of the year.
Technical analysis of the FTSE 100 illustrates the recent descent, with the FTSE 100 losing over 300 points since late October. Having been mid-range for some time, the oscillators have slid into acutely oversold territory, reaching their lowest levels since June, when the index fell to 6020. Support is likely to be seen from the 200-day moving average at 6470 and the historically significant 6400 level, while a move back above 6640 is needed to reinvigorate the bulls.
In conclusion, the markets delayed reaction to a period of strong US data suggests the possibility of tapering at the December 17-18 meeting is largely priced in, although Friday’s non-farm payrolls data will provide a more conclusive guide on the health of the labour market. The recent underperformance of the FTSE 100 has pushed the chart into acutely oversold territory, which combined with the supportive global data, indicates this could be a rewarding level to employ cash into the market.
December is traditionally the best month of the year for stocks, with equities on average rising 2.6% in December during the last 40 years. The market has only fallen four times in the past 30 years in December, with the FTSE 100 tending to outperform the S&P 500 during the month. Trading tends to be weak at the start of December, with the final two weeks of the month being especially strong.
The UK-listed banks have been one of the worst performing sectors this year, struggling to make much headway, while their US peers are up over 30% in 2013. The FTSE’s largest listed company by market capitalisation and arguably one of the most defensive banks listed in the UK is HSBA (Epic: HSBA).
The above chart of HSBC illustrates the trading range the shares have followed over the past nine months, between support at 660p and resistance at 760p. Currently back at the lower band of that range, the oscillators have slipped into acutely oversold territory and show signs of bottoming-out, with the fast stochastic intersecting the slower to the upside.
Third quarter results on 4th November indicated a healthy 28% rise in net profit as a three year restructuring program continued to bear fruit. Underlying revenue was broadly flat on the same quarter a year earlier at $15.6 billion, although net profit jumped to $3.2 billion from $2.5 billion a year earlier on the back of falling impairments and operating expenses.
Overall sentiment towards emerging markets has weighed on HSBC this year, although the bank sounded a positive note on China’s economic outlook. “Indications are that economic growth in mainland China is stabilising with positive implications for Hong Kong and the rest of Asia-Pacific,” the bank said in a statement. The groups Hong Kong business boosted profits 12% to $4.2 billion, while the remaining Asia Pacific business grew profits 16% to $5.1 billion.
Despite the more upbeat economic outlook, regulatory uncertainty still hangs over HSBC. The bank is collaborating with regulators probing allegations that traders clubbed together to attempt to manipulate foreign exchange markets, while further funds were put aside to cover PPI claims and miss-sold interest rate hedging products.
HSBC’s balance sheet remains one of the strongest of the global banks, with a 10.1% Basel III-basis capital ratio, which is comfortably ahead of requirements. Trading on 10.2x prospective earnings is competitive relative to peers, especially as the shares boast one of the best yields in the sector. Shareholders are offered a well-covered 5.1% dividend, which analysts expect to grow to 6.2% by 2015.
In light of our earlier analysis of the FTSE 100 combined with the strong fundamental and technical analysis discussed for HSBC, I believe the bank is well positioned to benefit from the recent improvement in global growth.
At the time of writing the share price is 656.4p and a long-trade, with a tight stop-loss below support at 636.7p offers an attractive risk / reward bias. Near term targets are seen at 685.9p, 708.9p and 757p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in HSBC, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and HSBC’s corporate website.