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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.
BG Group faces technical hurdleFebruary 28 2015, 7:00am
A glance at the above chart of the FTSE 100 shows equities rose to record highs as an extension to Greece’s financial bailout cleared a vital hurdle and Janet Yellen, chairwoman of the Federal Reserve, suggested the US central bank was in no hurry to hike interest rates.
The FTSE 100 closed at an all-time peak of 6950, while European bourses climbed to fresh seven year highs and US equities achieved record levels. Greece secured a four-month extension of its financial rescue, averting an imminent banking meltdown, although tough negotiations lie ahead over the country’s longer-term economic future.
It was, however, Janet Yellen’s testimony before the US senate that took centre stage, as she sought to prepare investors for the end of the Fed’s zero interest rate policy. The remarks provided a clear signal that the Fed’s forward guidance was evolving, although she indicated the Fed would not rush into raising rates.
Fears of an imminent rate hike weighed on US consumer confidence, as the Conference Board’s index of consumer attitudes fell to 96.4 from an upwardly revised 103.8 in January, its lowest level for five months, while new home sales dropped slightly.
Signs of improvement in China’s manufacturing sector supported the broadly optimistic mood in markets, as the flash HSBC/Markit Purchasing Managers Index inched up to 50.1, above the level that separates expansion from contraction and ahead of consensus estimates a reading of 49.5. Export orders, however, contracted at the fastest pace in almost two years, while input and output prices in the manufacturing sector remained in contraction.
Meanwhile, the prospect of the European Central Bank starting its programme of quantitative easing next month fuelled demand for equities, bolstered by expansion in the German economy. Stronger domestic demand drove growth in Europe’s largest economy in the fourth quarter, as gross domestic product rose by 0.7%, exceeding even its own estimates. A weak euro has buttressed Germany's already strong export industry and in the final quarter of last year, exports grew at a rate of 1.3%, 0.3% faster than imports.
British gross domestic product in the fourth quarter grew by 0.5%, slowing from 0.7% in the third quarter, the slowest quarterly growth rate in a year. The Bank of England, however, forecast earlier this month that Britain's economy will grow by 2.9% this year, its fastest growth in nearly a decade, as the plunge in oil prices puts more money in the pockets of consumers and businesses.
Technical analysis of the FTSE 100 illustrates the move to record highs, although the bearish divergence implied from the lacklustre oscillators, depicts why the index has failed to move notably higher. In theory the index could attempt to make an assault on 7000, although momentum is low, suggesting limited conviction behind the gradual uptick in equities. Additional support is seen at 6905, 6875 and 6745.
In conclusion, the Greek political can has been kicked down the road and the underlying strength evident across global indices is hard to ignore. Headwinds, however, remain from Greece, Russia, China and Brazil, which combined with the lacklustre technical outlook, makes it hard to ascertain the near term direction for equities. Other than central bank support it is unclear what the next catalyst would be for further upside, leaving equities vulnerable to a bout of profit taking.
The oil price has improved over the past six weeks, rallying almost 40% from its low of $45.16 a barrel to back over $60. Data this week, however, revealed US oil inventories rose to their highest level in at least 80 years, indicating oil storage is bursting at the seams amid a global glut of supply. High levels of production combined with vast quantities in storage may continue to suppress oil prices for the near term.
BG Group (LON:BG.), the third largest oil and gas group listed in the UK after Royal Dutch Shell and BP, has rallied 25% off its recent lows, despite disappointing full-year results. A trading statement on 2nd February revealed the company has taken an $8.9 billion hit on the value of its gas pipelines and oil rigs.
As a result, BG posted a full-year operating loss of $1.4 billion compared to $4.2 billion profit a year earlier, as production fell 4% to 606,000 barrels of oil equivalent. BG has been investing heavily to bring new gas fields in Brazil and Australia into production, but the oil and gas group has been struggling with a number of production issues and profit warnings in recent years.
The above chart of BG Group illustrates the significance of technical support at 1000p over the past five years, although once that level gave way in November last year the shares rapidly dropped below 800p. Support is now likely to become resistance and 1000p should prove a tough level to surpass, particularly given the oscillators are nearing overbought territory.
Since the update several brokers have downgraded their outlook, with Societe Generale last week downgrading BG Group’s rating to sell from buy on concerns about the upstream stock having no downstream hedge. The broker downgraded the company's earnings per share by 67% in 2016 and 57% in 2016, the biggest reduction Societe Generale has made to big oil, slashing its price target to 900p from 1275p.
At the time of writing the share price is 985p, which given the latest update combined with the near-term outlook for oil and the close proximity of technical resistance, could represent a good opportunity to short-sell the shares. A tight stop-loss above resistance at 1015p offers an attractive risk/reward bias with near-term targets seen at 946p, 906p and 837p.
This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in BG Group, but client accounts may. The material in this report has come from SI Capital’s internal data sources, Simply Charts and BG Group’s corporate website.