Wednesday is expected to bring what may be the biggest event of all for global markets this week, the expected signing of a ‘phase one’ trade deal between the US and China.
Uncertainty still remains over the time scale for completion of the next phase, said Deutsche Bank, though the first phase is bringing some relief to investors.
“Details of the trade deal are starting to emerge but there's still a lot we don't know. What has been leaked looks to heavily favour the US but as ever, the devil will be in the detail. We're also seeing the pre-signing gestures of goodwill, with the US going back on its decision to label China a currency manipulator in August”, said OANDA’s Craig Erlam.
“Ultimately, it all comes down to how sustainable the deal is. There's not much optimism out there at the minute that it's the first deal, rather likely the only deal. So it's even more important that it sticks, otherwise all of this effort and disruption has been in vain”, he added.
UK inflation in focus
Back in the UK, the latest batch of inflation data will be watched closely to help gauge that state of the economy and, more importantly, the possibility of interest rate cuts from the Bank of England.
Economists are split over whether UK consumer price inflation will remain at the 1.5% for the three months to December as seen in November and October.
Analysts at RBC Capital Markets, for one, forecast inflation will have picked up to 1.6% and will average around 1.7% for the first quarter of 2020, while those at Pantheon Macroeconomics and ING see it remaining at 1.5% for the fourth quarter of 2019 but picking up to 1.8% and 1.9% respectively in the new year, while all expect CPI to drop sharply in the middle of the current year to reflect regulatory price changes in energy and water.
If inflation doesn’t pick up it adds to evidence against the Bank of England’s expectation in recent years that domestic inflationary pressures “are likely to build” and follow outgoing governor Mark Carney’s comments in the past week about the BoE’s debate over the “relative merits of near term stimulus”.
Already the market is factoring in a 50% probability of a cut to interest rates in the first half of this year, leaping up from 35% following Carney's speech, though there may be strong arguments to wait until the first monetary policy meeting under new governor Andrew Bailey on 26 March.
Traders will also be hoping for inflation to paint a better picture than the listless GDP data from Monday, which reported that the UK economy had unexpectedly shrunk by 0.3% in November thanks to due a worse than predicted fall in the manufacturing and production sectors.
Housebuilder updates continue to stack up
Most of the sector’s analysts have been bumping up their ratings and share price targets for the companies and their peers, with Persimmon among the top picks for Berenberg.
“The weeks since that election result have been marked by optimistic comments from various estate agency and housing bodies, predicting a return to stronger house price growth and rebound in the UK property market”, Berenberg said, adding that there was “significant scope” for the sector to re-rate further if price growth began to accelerate.
Vistry, the new name for Bovis Homes after it acquired Galliford Try’s Linden Homes and social-housing focused Partnerships businesses, was upgraded to ‘buy’ from ‘neutral’ by analysts at Citi, who said there was still value in the sector, with Persimmon among its top picks too.
Citi believes the sector’s net assets are poised to grow circa 17% on an annualised basis over the next three years, supported by “modest volume growth, improving margin outlook and strong cash generation”.
Deutsche Bank also joined the optimistic chorus on Tuesday, highlighting a “post-election rebound in buyer confidence” ahead of the spring selling season which they say is likely to help bolster margins in the sector.
The bank is also expecting “heightened interest” in the government’s Help to Buy scheme form non-first time buyers before their access expires at the end of 2020.
For Persimmon, the recent focus has been on improving build quality and reconstructing its reputation since a swarm of customer complaints last year about shoddy workmanship in some of its new homes.
With December’s Home Builders Federation customer satisfaction survey making for happier reading, Nicholas Hyett at Hargreaves Lansdown said: “The group continued its move towards a coveted four-star rating in December’s release. All being well, we should see this confirmed in March’s full-year release for 2019.”
November’s third-quarter update showed boosts to quality have come at the expense of volume and profit, with forward sales retreating 3.8% to £950mln, 5% lower average active sales outlets and a 6% fall in completed sales volumes, with margins trimmed by extra investment in build quality.
How can Tullow follow-up bad decade's end?
Tullow Oil PLC (LON:TLW) shares lost more than three-quarters of their value in the weeks after drilling offshore Guyana showed oil discoveries there comprised lower-value, heavy oil, with a near-20% cut to production forecasts for 2020 onwards following close behind.
The severe reduction in cash flows is not what the debt-laden company needed in the slightest, leading to long-standing chief executive Paul McDade and exploration director Angus McCoss both resigning.
Chair Dorothy Thompson is overseeing a review of this year’s production performance issues and its potential implications.
Tullow has proven pre-development projects in Uganda and Kenya, neither of which the company really will want to fund themselves, meaning partial or total divestments are probable.
With management changes and a likely emphasis on cost-cutting, Tullow also has a decision to make on its minority stake in an adjoining Guyana licence operated by Repsol, where premium oil has been found but in a small pocket of the reservoir, requiring more drilling.
Looking back at the past two decades sees Tullow's shares soaring around 1,700% from 2000 to 2010, before reaching all-time highs above £15 in 2013, before the company ended the subsequent decade around an all-time low, falling to below 40p in early December.
Though the shares have rallied to 59p, analysts at JPMorgan see little upside from there, slashing their target price on the shares to 63p from 249p ahead of the update and said the “outlook deteriorated with its most recent update, and we suggest avoiding the shares in early 2020”.
Significant announcements expected for Wednesday January 15:
Trading announcements: Ashmore Group PLC (LON:ASHM), Diploma PLC (LON:DPLM), Hochschild Mining Plc (LON:HOC), Persimmon PLC (LON:PSN), Revolution Bars Group (LON:RBG), Ten Entertainment Group PLC (LON:TEG), Tullow Oil PLC (LON:TLW), Vistry Group PLC (LON:VTY)
Interims: Knights Group Holdings PLC (LON:KGH)
Economic data: UK inflation, US Empire State manufacturing index, US Beige Book