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Warm weather dries up sales at M&SOctober 25 2014, 7:00am
A glance at the above chart of the FTSE 100 shows how stocks have recovered as the prospect of further central bank policy accommodation, combined with some well-received corporate earnings, helped offset recent fears of slowing global growth.
Speculation that US interest rates could stay low for longer has been fuelled by dovish comments from Federal Reserve officials, suggesting the US central bank should consider postponing the end of its quantitative easing programme. Meanwhile, weak US inflation numbers should allow ample room to keep rates low for some time, while minutes from the Bank of England’s latest policy meeting, indicated rates would stay at a record low for the foreseeable future.
The ECB increased liquidity in markets by buying covered bonds, yet reports that the central bank was considering buying corporate bonds on the secondary market, perhaps as early as next year, fuelled demand for equities.
Wall Street gained ground from a generally positive earnings season, with almost 80% of S&P 500 companies reporting quarterly results this season exceeding profit projections, while 60% beat revenue estimates.
Evidence of improvement in the Chinese economy enabled Asian shares to recover some recent loses, after China’s gross national product expanded by 7.3% between July and September from a year earlier. This was above expectations, but slower than the 7.5% clocked in the second quarter. Other data showed the country’s vast factory sector grew a shade faster in October as firms drew more foreign and domestic orders, although fixed asset investment and retail sales were weaker than expected.
Data from the Eurozone continued to weigh on sentiment, with the Bundesbank’s gloomy assessment of the region’s largest economy, raising concerns about Europe’s largest economy. The central bank said in a forecast that it predicted little or no economic growth during the second half of the year, although strong PMI numbers indicated that a week currency may be helping demand.
Markit’s flash composite PMI, which tracks growth in the manufacturing and services sectors that account for more than two-thirds of the economy, climbed to 54.3 from 54.1 in September. This was considerably above the key 50 threshold, dividing growth from contraction, pointing to a slight improvement in momentum in both sectors. German consumer morale also picked up towards the end of October, following slight declines in the previous two months, suggesting consumers feel confident about their own incomes and are willing to spend even though Germany's economy is slowing.
On a domestic front, consumer confidence in Britain took its biggest tumble in four years, as job insecurity and poor wage growth left many looking ahead to the coming year with trepidation. The index compiled by YouGov and CEBR slid 2.9 points to 111.2, its lowest since January and its largest monthly contraction since October 2010.
Technical analysis of the FTSE 100 illustrates the bounce back up to initial resistance at 6420 after reaching its most oversold level for three years earlier this month. The next major target is seen at 6650, although the index appears more likely to re-test support at 6200 before moving higher.
In conclusion, there have been a number of factors that have provided some support for equities this week, with improved data from Germany, less military involvement in the Middle East, robust Chinese data and a stabilisation in oil, enabling the FTSE 100 to improve from a 15-month low. The goldilocks scenario continues to swing the argument in favour of further improvement in stocks, but to complete the technical outlook, a re-test of 6200 could be required before further improvement is seen.
Further negative news in the troubled retail sector came from Tesco and Debenhams, with the chairman of Tesco standing down after Britain's biggest retailer reported a 92% fall in pre-tax profits and revealed that the accounting black hole in its profits is larger than expected. Meanwhile, Debenhams, Britain's second largest department store, posted more than a 20% drop in annual profit on Thursday and said it was "cautious" about the future, as the spending power of British consumers remains under pressure.
Akin to UK-based retailer Next and John Lewis, Debenhams is the latest casualty of the unseasonably warm weather throughout September and October, with sales of winter goods floundering in the most important quarter of the retailers’ calendar. The news increases the chances that Marks & Spencer (Epic: MKS) may disappoint investors when they release interim results on 5th November.
In July, M&S reported its twelfth consecutive quarter of falling non-food sales, although analysts had expected November’s update to show signs of improvement after the company overhauled its winter clothing range.
According to research group Kantar Worldpanel, however, Britain's largest clothing retailer by sales suffered a 0.6% decline in its share of the clothing market in the 12 weeks to 31st August. Menswear suffered the greatest fall, losing 1.2%, while childrenswear and womenswear lost 0.2% and 0.5% respectively. Food sales are also expected to have suffered, impacted by the lack of industry inflation and price competition.
Fundamentally, M&S own many of its stores and trade in-line with the industry average on 12x earnings, yet the 4.3% dividend is marginally less than its peers Next and Debenhams, which pay 5.2% and 5.7% respectively. The company’s overseas markets have been a thorn in their side and the recent strength of sterling could further impact a struggling European market.
The chart of M&S depicts the recent improvement in the wider market, with the shares gaining 10% back up to previous support at 420p. This historic level is now likely to provide resistance, which combined with the oscillators starting to roll over in overbought territory, indicates the shares may move lower before an assault back up towards 440 can be instigated.
Longer-term the fundamentals of Marks & Spencer look solid and chief executive Marc Bolland is attempting to get the retailers clothing business back on track, yet short-term the shares are likely to come under pressure from a combination of a warm autumn, negative sentiment toward the retail sector and a weak technical outlook. At the time of writing the share price is 419.1p, which I believe is worth shorting with a tight stop-loss above resistance at 431.6p, while near-term targets are seen at 400.2p and 385.5p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Marks & Spencer, but client accounts may. The material in this report has come from Simple Investments internal data sources, Simply Charts and Marks & Spencer’s corporate website.