Market opening: Markets are expected to open higher on positive Chinese PMI data. FTSE futures were trading 5.0 points higher at 7:00 am UK time.
New York: The S&P closed almost flat (up 0.4%) Friday, ending its best quarter since 1998. The rally was fuelled by increasing confidence about the US recovery.
Asia: Better than expected Chinese manufacturing data aided markets. The Nikkei closed 0.3% higher, while the Hang Seng was trading 0.5% lower at 7:00 am.
Continental Europe: Markets rallied on Friday after a three-day losing run as investors welcomed an agreement to temporarily boost the Eurozone's rescue fund. The first quarter has also been good for European markets, which posted their best quarterly gain since 2006. The German DAX and French CAC 40 rose 1.0% and 1.3%, respectively.
UK small caps: The FTSE AIM All-Share index gained 1.1% on Friday.
China's official PMI shows economic activity expanding
The official Purchasing Managers' Index (PMI) that captures activity in large factories rose to an 11-month high of 53.1 in March, bettering February's 51.0. The PMI rebounded as domestic demand supported an increase in new orders (the related sub-index rose to 55.1 in March from 51 in February). The new export orders index, too, edged up to 51.9 from 51.1, although indicating subdued growth. On the contrary, the PMI compiled by HSBC, which focuses on activity in smaller factories, fell to 48.3 (flash reading 48.1) in March from 49.6 in February, indicating a marked slowdown in production.
Eurozone's firewall stretched to €700bn
Eurozone finance ministers temporarily expanded the combined lending capacity of their rescue funds, EFSF and ESM, to €700bn from €500bn. Of this, €500bn will come from the ESM, while the remaining €200bn is what the funds have already committed to the bailout of Greece, Ireland and Portugal.
Electrocomponents issued a pre-close trading update for the year ending 31st March 2012. Top line growth in Q4 2012 shrank to 1% from 14% reported in Q1 2012. Sales at the international business grew 2%, while sales in the UK were flat. For the year ending 31st March, sales could rise around 7% to more than £1.2bn, supported by a 9% increase in international sales and 3% improvement in UK sales. The management expects FY2012 pre-tax profit to be in line with expectations.
Our view: The decline in global manufacturing due to the unstable economic environment affected sales growth in Q4 2012. Though the economic outlook for the US is improving, forecasts of global growth remain subdued. Given the current economic conditions, the company's heavy weighting in Europe and little scope for consensus upgrades, we believe the stock could struggle to outperform.
LSE Group (LON:LSE)
On Friday, the London Stock Exchange Group released a pre-close trading update for the eleven months to 29th February 2012. The company said performance during the period was good and supports the expectations of a strong performance for the year. Average daily equity trading value in the UK shrank 2% while equity trading volumes on the Italian exchange increased 2%. New listings on the exchanges declined to 144 from 167 in the previous year and funds raised in the market dropped 7.5% to £34.6m. Net treasury income increased in Q4 2012 compared to the £33.5m in Q3 2012.
Our view: LSE's deal to acquire up to a 60% share in the LCH.Clearnet, the London-based clearing house, faces a crucial shareholders vote Tuesday. The acquisition, if successful, could give LSE an edge over competition, by controlling the clearing house operations inherent to the functioning of the financial markets. The acquisition is also critical as LSE stands to benefit from the regulatory changes being considered in the US and Europe that could see trading of over-the-counter derivative shift to exchanges. However, winning regulatory approval for acquisitions in this sector is an uphill task. Recently, NYSE Euronext's merger with Germany's Deutsche B rse was blocked by the European Commission. We prefer adopting a wait and see approach until the uncertainty surrounding the acquisition ceases and trading volume starts to improve.
Tate & Lyle (LON:TATE)
Tate & Lyle released a pre-close trading update for FY2011 ending 31st March 2012 on Friday. The management said performance is in line with expectations. The speciality food ingredients division registered sales and volumes growth. However, considering that activity has returned to more normal levels after an extraordinary H1 2012 and that costs associated with the restart of Splenda sucralose factory in McIntosh, Alabama, would be accounted for in the second half of 2012, profits for the period are likely to be affected. Margins at the bulk ingredients division in Europe could improve supported by a rise in sugar and starch prices. The management further said that in anticipation of tight supply of corn before the commencement of the harvest season, they've decided to stock on corn, leading to increased working capital demands.
Our view: Tate & Lyle's refocused strategy and an opportune movement in corn prices has afforded the company an impressive year. The company also saw the introduction of new products and capacity expansion during the period. However, the share price has appreciated more than 20% recently, which we believe factors-in most of these positives.
In a pre-close trading update delivered on Friday, Qinetiq confirmed performance for the year ending 31st March 2012 would be in line with expectations as the company reaps the benefits of the self-help programme, which increases productivity and competiveness. The company will receive a one-off payment of £65m in the next financial year from the UK Ministry of Defence (MOD) in settlement of liabilities that would otherwise be recovered through revenues over the next ten years. The MOD has also agreed to give up its right to veto the company's transactions and activities, subject to shareholder approval. This will be replaced by a compliance system similar to the ones applicable to peers operating in the aerospace and defence space. However, the management warned that revenue visibility remained low.
Our view: The restructuring plan has helped boost the bottom-line despite pressures on the top-line as governments in the UK and US cut defence spending. The removal of MOD's veto rights could give the company more flexibility in choosing clients, increase competitiveness, open new avenues of growth and makes the company available for structural deals in the industry. We remain buyers of the stock.
German retail sales
Retail sales in Germany dropped 1.1% m-o-m, but advanced 1.7% y-o-y in February, the federal statistics office reported on Friday. The sales for January were revised up to -1.2% m-o-m and a gain of 1.7% y-o-y from the 1.6% m-o-m decline and 1.6 y-o-y rise reported previously.
Our view: The drop in retail sales confounds economists' expectations of a 1.1% m-o-m rise and punctures hopes of a meaningful contribution from consumer spending to Q1 2012 GDP growth. The fall in retail sales (a highly volatile and frequently revised indicator) suggests the increasingly positive labour market is yet to induce a significant change in consumption among Germans.
Inflation in the Eurozone eased to 2.6% in March from 2.7% in February, Eurostat reported on Friday.
Our view: Economists had expected inflation to slow to 2.5%, however higher fuel costs seem to mount upward pressure on general commodity prices. Earlier, the European Central Bank (ECB) raised its annual inflation forecast to 2.0%-2.4%. Also, though inflation has come down from last years' peak of 3%, it remains stubbornly above the ECB's long term price stability target of 'below but close to 2%' dousing hopes of an interest rate cut during the its monthly meeting next week.
US personal income
The personal income of Americans increased 0.2% in February after rising by a similar amount in January, the US Department of Commerce said on Friday. Personal spending rose 0.8%. However, core personal consumption expenditure, which excludes food and energy, increased 0.1% m-o-m. Consequently, the personal savings rate declined to 3.7% in February from 4.3% in the previous month.
Our view: Economists expected personal income to increase 0.4%. Though the higher spending may seem to be a positive sign, it was largely because consumers spent more on fuels and dipped into savings to fund the increase.
US University of Michigan consumer confidence
The final reading of the Thomson Reuters/University of Michigan s consumer confidence index came in at 76.2 in March compared to 75.3 in February. The sub-index of current economic conditions rose to 86.0 from 83.0 in February, beating the preliminary estimate of 84.2. The consumers expectations index edged up to 69.8 in March from the preliminary reading of 68.0, but was below February s 70.3.
Our view: The final reading beat expectations of the index rising to 74.5. Richard Curtin, Director of the survey, said that the uptrend in income and jobs was helping offset the impact of higher energy prices. Upbeat confidence generally precedes an increase in consumer spending. As consumer spending constitutes about 70% of the GDP in the US, growing consumer confidence bodes well for the economy.
UK GfK consumer confidence
GfK's measure of consumer confidence shrank to -31.0 in March from -29.0 in February, contradicting economists' expectations of the measure remaining unchanged. The gauge of expectations for the economy one year from now slipped to -30.0 from -29.0 in the previous month. The measure of consumers' assessment of whether now was a good time for big ticket purchases decreased sharply to -31.0 from -27.0 in February. The index measuring personal finances over the past twelve months slid to -25.0 from -21.0. However, consumers' opinion about the economy over this period edged up to -59.0 from -60.0 in the previous month.
US Chicago PMI
The Chicago PMI fell to 62.2 in March from 64.0 in February, the Institute for Supply Management-Chicago said on Friday. The retreat suggests a deceleration in production. However, the reading is above 50, indicating activity is still expanding. The employment sub-index slid to 56.3 from 64.2, while the new orders index fell to 63.3 in March from 69.2 in February. Economists expected the headline index to stand at 63.0.