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This Week in the Markets:
On any other year, the U.S. Debt Ceiling deal that was finally squared away on early August 1st would surely have been the annual tour de force for the markets especially as the initial rally and euphoria that followed took the stock market back towards the best levels of the year. But instead, there was more of a coup de grace, as the markets turned tail into a near vertical decline as the fine print of the deal was read. Not that the lack of $4tln of spending cuts could be described as a minor affair. The end figure of around $2tln agreed after Republicans and Democrats finished their playground antics was something which credit ratings agency S&P picked upon when it reduced the rating of the U.S. from AAA to AAa on Saturday 6th.
In many ways this is not a big change. China for instance has the same credit rating, but for the U.S. after sitting with a pristine AAA rating since 1917 there was a mix of egg on face, psychological and sentimental damage, and perhaps rather simply the end of an era to be faced up to by the Americans and the markets. Stocks initially reacted by pushing even lower to start the second week of August, with the benchmark levels for many leading indices falling to 2011 lows or 20% down from their 2011 peaks, thereby qualifying for official bear market status.
Of course, apart from the stock market the reaction from the U.S. Dollar and Treasury Bonds on August 8th – the first trading day after the S&P move were very telling. Ironically, when faced with the loss of its reserve currency status, the greenback stayed stable and T Bonds rallied to their best levels of the year. This was either the market suggesting that it disagreed with the Credit Rating agency’s downgrade, or vain hopes that the Federal Reserve interest rate announcement on August 9th would deliver a magical QE3 stimulus. In the end Ben Bernanke and friends promised to hold rates at record low levels until mid 2013, but in the end even this may prove to be a promise too far for the central bank.
That is not to say that all the action this week has been Stateside. An unspoken truth post financial crisis for most Western Governments and indeed Middle Eastern nations in the wake of the Arab Spring is that public spending is probably the most important route to maintaining social stability. What might happen if the cash runs out has been well illustrated in London and some of the UK’s major cities with looting, rioting and violence. So far Sterling may have been weakened only marginally, but these criminal events may yet have a hand in tipping quarterly UK GDP growth below the zero line.
The Week Ahead: August 15th – 19th
Monday – Interims: Michael Page International (LON:MPI).
Tuesday– Interims: Mears Group (LON:MER), Resolution (LON:RSL).
Wednesday – Interims: Balfour Beatty (LON:BBY), Eurasian Natural Resources (LON:ENRC), Henderson Group (LON:HGG), Talvivaara Mining (LON:TALV).
Thursday– Trading Announcement: Holidaybreak (LON:HBR).
Friday – Interims: Gem Diamonds (LON:GEMD), Jupiter Fund Management (LON:JUP).
Life assurance consolidator Resolution (RSL) will update the markets on progress and how well its mission of finding under rated peers has been going over the past 3 years. The only problem is that some of this aversion to the sector seems to have rubbed off on Resolution itself, as shares have fallen by over 20% since the June peak and the announcement at the beginning of that month that it was to return £500m to shareholders. Broker Citi recently rated the shares a buy, so the immediate aftermath of the forthcoming update should be worth watching, especially after the recent sell off in the market.
The start of the summer saw some of the speculation over Kazakhstan focused FTSE 100 miner Eurasian Natural Resources (LON:ENRC) die down, as sector rival Glencore (LON:GLEN) moved to dampen bid speculation that it was interested in taking over the group. But despite this at the beginning of July Credit Suisse judged the sum of part valuation of the group as £11 plus. This was a decent premium when the shares of ENRC were hanging near the £8 level at the start of the month, but could be even more tantalising now that the stock is trading south of £6.
For diamond miner Gem Diamonds (LON:GEMD) the name of the game over the past quarter has been to regroup fundamentally after the merger talks with Canadian counterpart Lucara broke down in May. Part of this fundamental regrouping came with an extra trading update at the end of last month in which it outlined price increases and record average realised prices of over $3,000 a carat. Fans of the miner will be hoping the forthcoming interims will show more of the same.
Major Economic Data: August 15th – 19th
Monday – No Significant Economic Data.
Tuesday – EU German / EU Yearly / Quarterly GDP, UK Yearly / Monthly Core / CPI. Monthly / Yearly RPI. U.S. July Monthly / Yearly Housing Starts, Building permits, Industrial Production.
Wednesday – UK Bank of England Minutes, Claimant Count, 3 Month Unemployment Rate, EU July Core / CPI, U.S July PPI, Existing Home Sales, Leading Indicators.
Thursday – UK July Retail Sales U.S July CPI, Leading Indicators.
Friday – UK July Public Sector Net Borrowing EU German Yearly. July Producer Prices.
Given this week’s exhaustive Bank of England Inflation Report press conference, following the imminent minutes of the August meeting we should be fully familiar with the views of the central bank. These minutes could however be superseded by the Inflation Report, forthcoming CPI / RPI numbers and the latest from the Fed on its two year flat line plan for interest rates. Unemployment data, especially the claimant count and three month unemployment rate will provide an insight into how many inner city vandals are in the pool. And continental Europe will provide plenty of fresh information on the German economy with quarterly and yearly GDP numbers. With the France AAA rating wobbling, all eyes are on Germany to prove that it can afford to bankroll the Euro dream. In the U.S. with banks such as Bank of America (BAC) crumbling under the pressure of mortgage lending, observers will be looking for any improvement in real estate. PPI for July will also be important as the Federal Reserve’s low and long dated interest rate policy relies on flat or falling prices.
Main Markets Outlook:
FTSE100:
The big quandary after the 20% fall peak to trough for the FTSE 100 from August 1st to August 8th is whether it was a dead cat bounce or genuine buying opportunity? The sheer force of the vertical decline suggests that unless a very pleasant surprise is on its way, there will be more downside to come. Ideally the worst in this respect will be a retest of the sub 4,800 intraday support of the month so far. The problem is that while there may be more than a 50/50 chance of the 4,800 zone holding and the recent nightmare ending, chart wise below the key 4,790 July 2010 support there is no significant support for blue chips this side of 4,000. Therefore the issue is whether after what is likely to be quite a battle between the bottom fishers and the bears near 5,000, the initial sell impulse of the start of the month will have follow through.
Sterling / Dollar:
Ahead of the London Olympics, Sterling has not had a great PR year - we have seen widespread rioting in London spreading to other major UK cities, the retail sector hit hard, all adding to another poor trade deficit number and a growth downgrade from the Bank of England for the UK for 2011 from 1.8% to 1.4%. It is perhaps fortunate that on the other side of the cross is the U.S. Dollar, hit by some of the most destabilising newsflow in a lifetime. The resulting price action stalemate just leaves the massive falls in the stock market to pull Sterling lower towards $1.60. Chart wise, a January support line runs through $1.62, although major support from the 200-day moving average is still rising at $1.6085. While there is no weekly close back below this feature, the bull argument should get the benefit of the doubt and an eventual $1.65 target on a 1 month timeframe, if only on the flat U.S. interest rate outlook.
Gold:
The new record intraday highs for Gold every other day stand sharply at odds with the incredible volatility of stock and bond markets. While over $1,770, a retracement of $100 or more is arguably overdue, but recent pullbacks have been increasingly shallow and in the end many traders could find themselves panicking into this market at too high a price for fear of missing out. Near term though, has the U.S. downgrade, stock market collapse and EU uncertainties pushed this market too high, or as has happened previously will there be instances of dumping of Gold long positions (a French bank is rumoured to be doing this currently) to offset losses in other instruments? At this stage, only sustained price action back below the initial August high at $1,682 would really imply a lasting rally break here
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