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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.
New management bring rights issue risk at Standard Chartered”March 21 2015, 7:00am
A glance at the above chart of the FTSE 100 shows equities staged a solid recovery as the dollar retreated ahead of a highly anticipated meeting of the Federal Reserve’s policy-setting Open Market Committee.
Signs of improvement in the US labour market have fuelled expectations that the Fed would raise interest rates, causing the dollar index to rise more than 10% since the start of the year and over 25% since last May.
The semi-annual testimony from Fed chairwoman Janet Yellen last month has prepared the market for a change in policy communication and as expected the central bank dropped its pledge to be “patient” in deciding when to lift borrowing costs. The Fed did, however, lower its forecast for growth and inflation and indicated that a June rate hike is unlikely, with most analysts now expecting the first hike to occur in September.
The latest US economic releases have missed expectations, as the strong dollar and threat of an imminent hike in rates, appear to be weighing on growth. Manufacturing activity in New York State slowed in March for a second month, as the pace of new orders contracted to its weakest level since November 2013. Meanwhile, housing starts plunged 17% from a month earlier, providing further evidence that the improvement enjoyed by the labour market was not being matched in other areas of the economy.
Asian equity investors were hopeful of further stimulus measures from China’s central bank, sending shares in Shanghai to a seven-year peak. The People’s Bank of China cut the seven-day repo rate and reportedly intervened in the currency markets to support the renminbi, while market participants felt a further 50 basis point cut in the bank reserve ratio requirement considered likely.
Energy stocks came under renewed pressure as oil prices suffered a further bout of weakness on oversupply concerns. Brent crude fell to $52.50 a barrel, 16% below its recent high, while US West Texas Intermediate dropped to a six-year low.
On a domestic front, the final Budget before May’s general election and the minutes of the Bank of England’s March policy meeting helped the FTSE 100 outperform its European peers. The announcement by Chancellor George Osborne of a cut in the supplementary charge levied on North Sea oil producers, combined with beneficial changes to the savings system, encouraged investors.
Technical analysis of the FTSE 100 illustrates the recent bounce off the 200-day moving average, pushing the blue-chip index back up towards the 15-years peak at 6975. A close above 7000 could trigger a further rally, with the MACD histogram and RSI suggesting there could be further short-term gains to come, although the faster stochastic is nearing overbought territory and the previous highs are likely to provide tough resistance.
In Conclusion, the Feds dovish policy statement defers an imminent headwind for equities, although the dollar is likely to remain strong, as other countries are still loosening monetary policy. Greece is still in dispute with its international creditors about the terms of an extension to its financial bailout, although relations between Brussels and Athens have soured dramatically. Meanwhile the build-up to the UK’s general election in May could prompt some profit taking among investors.
London listed Standard Chartered (Epic: STAN) has been among the top performers this month despite reporting a 31% fall in pre-tax profit in 2014. The global bank, which conducts most of its business in Asia, Africa and the Middle East, said pre-tax profit fell to $4.24 billion in 2014 from $6.06 billion in 2013, hit by lower operating income in key markets and higher impairments.
The results were preceded by a boardroom clear-out, with the chief executive, chairman, a director and three non-executive directors all standing down. Former JPMorgan Chase executive Bill Winters will succeed Peter Sands as chief executive in May, bringing a sense of recovery after a string of profit warnings and regulatory scuffles.
The emerging markets bank said its core tier-one ratio, a measure of financial strength, fell from 11.2% to 10.7% last year, an element that has prompted growing unease among shareholders. The outgoing management, however, were keen to point out that it is committed to strengthening the balance sheet without having to resort to a rescue rights issue and has even maintained the dividend, which currently yields 5.3% per annum.
Many analysts argued that the bank will need more than three years to reach the top end of its core tier-one ratio target of between 11-12% on its current dividend policy, citing a capital raise after Winters’ arrival in May as the strategy is “liable to further changes” and a kitchen-sink strategy is widely employed to facilitate a speedy recovery.
The graph of Standard Chartered demonstrates the downward spiral over the past two years, with the upper-band of the descending channel providing resistance. Recent news has seen an improvement in the moving averages, although the shares are nearing an inflection point at 1060p and the oscillators are nearing overbought territory.
Falling profits leave the dividend looking abnormally high compared to free cash flow, which combined with the costs associated with asset disposals, could weigh on earnings per share estimates. I favour continued downward pressure on the shares and believe a short-trade with a tight stop-loss above resistance at 1074p offers an attractive risk/reward bias. At the time of writing the share price is 1043p and near-term targets are seen at 1001p, 959p and 895p.
This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in Standard Chartered, but client accounts may. The material in this report has come from SI Capital internal data sources, Simply Charts and Standard Chartered’s corporate website.