Markets
Europe
The FTSE-100 finished yesterday's session 1.59% higher at 6,740.16, whilst the FTSE AIM All-Share index closed 0.57% better-off at 761.66. In continental Europe, markets ended in the green as the Bank of England (BoE)'s decision to cut UK interest rates and expand the quantitative easing program created optimism amongst investors. France's CAC 40 and Germany's DAX rose 0.6% each.
Wall Street
Wall Street ended broadly flat despite a rally in oil prices as investors awaited key jobs report to be released today. Investors also digested a mixed set of economic data released yesterday. The S&P 500 remained unchanged at closing, with the information technology sector leading four sectors and the financial sector declining the most.
Asia
Equities are trading higher, taking positive cues from improvement in oil prices and an interest rate cut in the UK. Investors are looking forward to US jobs report data. The Nikkei 225 ended flat, and the Hang Seng was trading 1.4% up at 7:00 am.
Oil
Yesterday, Brent oil prices increased 2.8% to US$44.29 per barrel and WTI prices rose 2.7% to US$41.93 per barrel.
Headlines
Bank of England cuts interest rates to 0.25%
The Bank of England (BoE) has cut UK interest rates to a record low of 0.25% from 0.50%, marking the first cut since 2009. BoE reduced its growth forecast for 2017 to 0.8% from the previous estimate of 2.3%, primarily due to the negative impact of Brexit on growth prospects. The Bank expanded its quantitative easing program, and plans to buy £60bn worth of UK government bonds and £10bn worth of corporate bonds. Additionally, the Bank announced further measures to fuel the UK economy, including a £100bn scheme to drive banks to offer low interest rates to households and businesses.
Company news
Savannah Resources (LON:SAV, 3.88p) – Speculative Buy
Savannah Resources, the diversified mining group focused on exploration and development of mineral sands in Mozambique and copper-gold projects in Oman, announced yesterday a drilling update over its highly prospective Block 4 and 5 properties in the Sultanate of Oman. Savannah owns a 65% shareholding in Al Fairuz Mining, the owner of the Block 5 licence and is earning a 65% shareholding in Al Thuraya LLC, the owner of Block 4, both are highly prospective for copper and gold. Six diamond drill holes Totalling 797m have been completed at Maqail South (Block 5), Dog's Bone (Block 4) and Bayda (Block 4). Savannah is targeting an increase and upgrade in the overall resource potential at Maqail South and Mahab 4, which have a current resource of 1.7Mt grading 2.2% Cu. Dog's Bone and Bayda were previously Cu producing mines and the current drill program is aimed at defining additional resources. Assay results from two of the six holes have been received. Drill hole 16B5DD002 intercepted 2m grading 6.84% Cu and 0.3g/t Au from 47.5m at Maqail South and drill hole 16B4DD001 returned 5.75m grading 1.84% Cu and 0.8g/t Au from 109.3m at Dog's Bone. A revised mineral resources estimate for Maqail South and Maqail 4 is expected in Q4 2016.
Our view: The initial results from the current drill programme are very encouraging particularly at Maqail South where high-grade copper has been intercepted at shallow depths. We also note the decent ore grades returned from the past producing Aarja deposit that can be accessed through the existing portal and decline. We look forward to additional drill results from Maqail South and Bayda as well as the revised geological interpretation of Dog's Bone and Aarja. We also look forward to the updated mineral resource estimated for both Maqail South and Mahab 4 to be released in Q4 2016. In the meantime, we maintain a Speculative Buy rating on the stock.
Beaufort Securities acts as a corporate broker to Savannah Resources Plc
Aviva (LON:AV., 410.80p) - Buy
Aviva declared results for the half year ended 30th June 2016 (H1 2016). During the period, gross written premiums increased to £12.6bn from £11.1bn in H1 2015. Operating profit rose 13% y-o-y to £1.3bn. Operating EPS increased 1% to 22.4p (H1 2015: 22.1p). IFRS profit after tax declined to £201m from £545m in H1 2015, mainly due to non-cash variances, including a revaluation of Euro-denominated and other debt obligations at a lower exchange rate. Consequently, EPS dropped to 2.5p as compared with 12.8p in H1 2015. Solvency II capital surplus stood at £9.5bn (31st December 2015: £9.7bn). Solvency II coverage ratio dropped to 174% from 180% as at 31st December 2015. IFRS net asset value per share increased to 412p (FY 2015: 390p). The group's combined operating ratio (COR) worsened by 3.1% to 96.2%. Cash remittances for H1 2016 amounted to £752m (H1 2016: £495m). On the operational front, Aviva remains on track for integration of Friends Life. The group declared an interim dividend of 7.42p, 10% higher than that in H1 2015.
Our view: Aviva performed robustly in H1 2016, with increased gross premiums and higher operating profit. Aviva's Life insurance business led the growth, recording a 20% increase in operating profit to £1.2bn, boosted by Friends Life. Fund management operating profit soared 48% to £49m. Assets under management in its UK life platform rose 23% to £10.3bn. The group enjoys a strong solvency ratio, towards the upper end of its working range. Aviva remains committed to shareholders as it increased the dividends payable and remains on track to achieve a dividend payout ratio to 50% of operating EPS by end 2017. The group boasts of a strong balance sheet, with low sensitivity to market stress, and has tripled the economic capital surplus over the past four years. Aviva has a diversified business, with 42% of its earnings sourced from outside the UK. The group's robust financial position and diverse business shields it from external events. Therefore, we maintain a Buy rating on the stock.
easyJet (LON:EZJ, 1,008.0p) - Buy
easyJet released passenger statistics for July 2016. During the month, passenger traffic rose 6.7% y-o-y to 7,506,939, while load factor rose 1.5 percentage points to 95.8%. On a rolling basis for the past 12 months, passenger traffic rose 6.8% to 72.3 million customers and the load factor improved 0.3 percentage points to 91.7%. In July, there were 350 cancellations as compared with 318 in July 2015.
Our view: easyJet delivered good performance in July 2016, with increased passenger traffic and improved load factor. This was despite the concerns of rising international terrorism, cancellations and the French ATC strikes. easyJet's performance in Q3 FY 2016 was not that promising following a significant number of disruptions ranging from the terrorist attack in the Brussels, the crash of EgyptAir, a series of ATC strikes (mainly French), severe weather conditions as also to runway closures and congestion at London's Gatwick Airport. Furthermore, uncertainty surrounding Brexit hurt consumer confidence. However, easyJet has bounced back in July 2016 and reported strong results. The company's business model remains robust, with a strong cash position, solid balance sheet and a flexible fleet plan. We believe easyJet would navigate through the tough times and continue to perform well. Therefore, we upgrade the rating to Buy from Hold.
RSA Insurance (LON:RSA, 505.0p) - Buy
RSA Insurance (RSA) declared its results for the half year ended 30th June 2016 (H1 2016). Total core group's net written premiums increased to £3.0bn from £2.9bn in H1 2015. Operating profit rose 20% to £312m. Pre-tax profit decreased to £148m from £288m, as H1 2015 results were impacted due to disposal gains. Consequently, EPS dropped to 7.9p from 20.4p in H1 2015. The group's underwriting profit rose 72% to £174m. Underlying EPS rose to 17.8p as compared with 13.8p in H1 2015. RSA's Core Group combined operating ratio stood at 94.3% (H1 2015: 96.4%). Solvency II coverage ratio stood at 158% (31st December 2015: 143%). Solvency II surplus increased to £1.1bn from £0.9bn as at 31st December 2015. Net asset value increased to £4.1bn from £3.6bn as at 31st December 2015, while net asset value per share rose to 394p. Return on tangible equity (annualised) stood at 5.7% (H1 2015: 14.3%). Underlying return on opening tangible equity was 12.8% annualised (H1 2015: 9.7%). RSA declared an interim dividend of 5.0p, 43% higher than that in H1 2015.
Our view: RSA delivered good performance in H1 2015. The group recorded a sharp rise in operating profits, well supported by higher net written premiums across most of the regions in which it operates. Premiums were strong in both personal and commercial lines, driven by strong rate increases. The group has improved performance under Stephen Hester (Chief Executive), who has streamlined the business to focus on markets in Britain, Ireland, Scandinavia and Canada. RSA successfully completed the disposal of businesses in Latin America and Russia, taking it closer to its principal disposal programme (total proceeds £1.2bn 2014–16). The group's cost reduction programme remains on track to deliver over £350m gross annualised savings by 2018. RSA is progressing well on various performance initiatives, including customer service, sales effectiveness, pricing and underwriting improvements, and technology improvements. Return on tangible equity remains within the medium-term target of 12–15%, a year ahead of its expectations. Solvency II coverage ratio remains towards the upper end of its target range of 130–160%. The group continued on its medium-term policy of ordinary dividend pay-outs of 40–50%. We note the uncertainty in the market after Brexit. However, RSA is well-placed with the majority of its earnings in foreign currencies to mitigate the challenges. Therefore, we maintain a Buy rating on the stock.
Economic news
US initial jobless claims
Initial jobless claims in the US increased 3,000 to a seasonally adjusted 269,000 for the week ended 30th July, the Labor Department reported yesterday. Economists expected the claims to drop to 265,000. The four-week moving average rose 3,750 to 260,250 last week.
US factory orders
US factory orders dropped 1.5% m-o-m in June after a revised decline of 1.2% in May, the US Department of Commerce said yesterday. The markets expected a 1.9% drop in orders. Excluding orders for transportation equipment, factory orders increased 0.4% in June, after a 0.2% rise in May.
US durable goods orders
US durable goods orders slipped 3.9% m-o-m in June, following a 4.0% drop in May, the Commerce Department said yesterday. The markets expected a 4.0% fall in orders.