FTSE 100 Supported By Fading Financial Fears

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Choppy trading in oil and metals prices provided only limited net support to the FTSE index with and easing of immediate fears surrounding the financial sector having a more positive impact.

After a positive overnight trend on Wall Street, Asian equity markets were unable to make fresh headway on Wednesday.

There was, however, a very positive start in European equity markets with the tone boosted by German media reports that the government was preparing contingency plans to support Deutsche Bank if necessary.

As well as boosting European markets, the comments also increased confidence in the UK financial sector, which had an important positive impact on the UK market.

After opening little changed, the FTSE made strong progress in the first hour of trading with a peak above 6,870.

There were comments from Bank of England deputy Governor Shafik that further monetary easing was likely to be required in the future. Shafik also commented that the short-term economic outlook had been better than expected and any policy action would be data dependent.

There was further choppy trading in oil markets with crude prices securing net gains ahead of the US open following comments from Iran officials that it is working with OPEC to secure a supply management agreement.

US economic data had little impact with headline durable goods orders unchanged for August, which was slightly above expectations, while core orders declined 0.4% on the month, which was in line with expectations.

Fed Chair Yellen testified on regulatory and financial matters with no comments on monetary policy.

Crude prices briefly jumped again following a draw in the latest EIA inventories report, although Brent December futures hit selling interest on approach to the $47.50 level.

Gold prices tended to drift lower during the US session, which hampered the UK index to some extent, and US equities also moved lower after the open.

This combination of factors tended to drag the UK index lower in late trading. At the close, the FTSE index rose 41.71 points and 0.61% at 6,849.38.

Reaction to the OPEC talks and trends in oil prices will be monitored closely and the UK lending data will also be monitored on Thursday, although overall trends in global risk appetite are likely to dominate.

 

SOURCE: Economic Calendar

Stellar Rally Sends U.K.’s FTSE 100 Into Critical Technical Zone

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The FTSE 100 Index’s winning run has made the U.K. megacap gauge one of the best equity bets among developed markets this year. One technical sign is showing the rally might be at risk.

An 11 percent jump in 2016 has propelled the FTSE 100 into what technical analysts call overbought territory, implying that gains might have come too quickly to hold. The zone is reached when the resistance strength index surpasses 70, and a pullback from there could trigger declines. At nearly 74, the gauge of momentum is the highest it’s been since May 22, 2013, when the equity index hit a high before falling 12 percent in about a month.

A weaker pound and increased stimulus from the Bank of England in the wake of the country’s vote to leave the European Union have propelled U.K. shares to a more than one-year high. But this technical signal prompts some caution, according to Saxo Bank A/S trader Pierre Martin. He says the FTSE 100 could slide as much as 7 percent in the second half of the year.

“The FTSE is now in overbought territory, so we might be a little bit more cautious,” Martin said from London. “Even if we have seen a lot of good things, technically speaking, in all indices recently, the more we go in overbought territory, the more chances we have to see a small correction.”

Before that happens, Martin says there’s a chance the FTSE 100 will hit its 2015 high of 7,103.98 by the end of the summer, particularly if the pound remains weak and oil gains momentum. Those two factors are key for the index, which is mostly made up of multinational companies including energy producers, lenders and drugmakers. JPMorgan Chase & Co. estimates FTSE 100 members derive 72 percent of their revenue from abroad.

The U.S. bank reiterated its overweight rating on British shares on Monday, citing currency weakness, overseas sales exposure and cheap valuations. On a price-to-book basis, the gauge’s multiple of 1.9 is about 11 percent lower than for the MSCI All-Country World Index, data compiled by Bloomberg show.

The recent rallies in the S&P 500 Index, which has set nine fresh records in a month, as well as in Germany’s DAX Index, now in a bull market, are also lending support to the argument that the FTSE 100 will go higher before it starts its decline, according to Martin.

In technical analysis, investors and analysts study charts to identify trading patterns and forecast price changes. The RSI measures the magnitude of recent gains and losses for a given security. In May 2013, the FTSE 100’s RSI surpassed 80, one of its highest levels ever. The equity index reached an almost six-month low the following June as miners tumbled with metal prices on concern that a cash crunch in China would reduce demand.

 

SOURCE: Bloomberg

FTSE 100 posts worst weekly loss since mid-June

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Britain’s top shares index fell on Friday to post its worst weekly drop since mid-June as its earlier rally up to 14-month highs stalled, with mining stocks hit by weaker copper prices.

Britain’s FTSE 100 ended down 0.2 percent at 6,858.95 points, taking its total fall for the week to 0.8 percent. This marked its biggest weekly decline since mid-June, before Britain voted to leave the European Union.

Speculation that Britain could formally begin the process of leaving the European Union early next year also caused a brief wobble in the FTSE 100. A government spokeswoman said Prime Minister Theresa May would not invoke Article 50 – needed to trigger the process – before the end of this year.

“The less time the UK has to get things in order, the greater the market fears the fallout,” said ETX Capital analyst Neil Wilson.

Mining stocks such as Glencore were the worst performers, with the sector impacted by weaker copper prices.

Shares in oil majors BP and Royal Dutch Shell also dipped as oil prices retreated. [O/R]

EasyJet, however, rose 2.5 percent on the back of a media report of takeover interest in the budget airline.

The FTSE 100 has recovered from an initial slump after Britain’s shock “Brexit” vote in late June to quit the EU, thanks partly to the Bank of England’s decision to cut interest rates to a record low.

The record low rates have hit returns on bonds and cash, weakening sterling and giving a boost to exporters and the FTSE 100’s internationally-focused firms that earn revenues in U.S. dollars and typically benefit from weakness in the pound.

The FTSE 100 is up around 10 percent so far in 2016, although the value of UK shares in U.S. dollar terms has been hit by the pound’s fall on currency markets.

SOURCE: Reuters

FTSE 100 hits two-week low as investors withdraw record £3.5bn from UK investment funds post-Brexit

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Brexit resulted in the sharpest stock market fund sell-off by savers on record, new data shows, as experts say investors became “too emotional” over Britain’s vote to leave the EU.

Savers with money invested in stock market funds panic-sold a record £3.5bn from their portfolios in June, resulting in the largest exodus from investment funds in any single month since records began.

The data, published by the Investment Association, the trade body representing the fund management industry, showed the latest sell-off was three times greater than the next largest monthly spike, which occurred in January this year over fears that economic problems in China could hamper global growth.

Last night experts warned investors who sold funds in June may end up regretting their decision, as predictions that the vote would result in a market meltdown have so far been proved wrong.

The vote resulted in sharp falls from the FTSE 100, 250 and the FTSE All-Share in the days after the vote, but these indices have significantly recovered since. For example the FTSE All Share index, which tracks a basket of large and small UK-based firms, is 4pc up since the day of the referendum.

The en-masse sale is thought to have been driven by panic among DIY investors, including over 55s who accessed their pension funds under the new freedoms in record numbers, and wealth managers who exercised extreme caution on behalf of private clients.

Investment houses said investors were selling funds and moving money into cash in the run up to the referendum, with some “opportunist” investors buying up funds the days after the vote.

The Daily Telegraph understands as much as £800m of the total funds sold by retail investors in June was a direct result of one the UK’s biggest wealth managers, Rathbones, offloading the majority of its property fund holdings the day after the vote to leave the EU.

 

SOURCE: Telegraph

Where FTSE 100 is heading

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The UK market remains, amazingly, trading in a region where oomph above 6,740 now points at 6,892 next with secondary 6,913 points. We use the word “amazingly” because, with the most generous will, it would be hard to describe the last few weeks as interesting.

It seems the market surged upward sufficiently to indicate the Brexit vote was actually viewed favourably, then everyone took a holiday, losing interest.

It would be true to suggest the banks and the miners have contributed strongly to the lack of any interesting movements recently, as many members of these sectors have failed to act on upward pressures or downward pressures.

graph 1

The funny thing is, we generally expect August to be a bit (okay, a lot) boring, but for the markets to take a flat-line pill during the Scottish holiday period is just odd.

A situation still exists where a real uptrend has not appeared since the Brexit manipulated drop on 24 June, and we’re tending to suspect some excuse will make itself apparent for a drop, literally to define an uptrend.

Anything near term below 6,600 would raise an eyebrow as it injects weakness for 6,550 very neatly with secondary 6,482 points.

We would really prefer some sort of bounce to happen should 6,482 make an appearance. The danger if such a level breaks is of a sharp loss of a further 200 points or so.

 

SOURCE: Interactive Investor

Growing signs of unstable ground for equities

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The moves in oil have to be on the radar, as they are causing high yield credit to roll over and spreads to widen relative to US treasuries.

 

  • In terms of key leads, the Dow Jones fell 0.19%, while the S&P 500 lost 0.13%. The Dow has now fallen for 6 days in a row, but the aggregated fall is only 1.2% – such is the lack of volatility.
  • US July ISM manufacturing prints below expectations at 52.6, but still suggests Q3 GDP is set to rebound above 2%.
  • The big mover has been oil, with US crude down 4.1% from the ASX 200 cash close. Front month lost 24% from its 9 June high. Traders are pointing to the biggest increase in net short crude futures positions since 2006.
  • US crude is holding below the five-day moving average. As long at the sellers respect this level, then rallies will be sold and one can expect further downside.
  • If credit is the guide for equites, then the high yield corporate credit market suggests developed equity markets could be seeing lower levels – see Bloomberg chart below.
  • The default rate in the high yield space now stands at 4.5%. This sounds low, but it’s the highest since August 2010.
  • The ASX 200 is likely to see modest downside on open, with our call at 5578 (-0.1). BHP is likely to follow the oil price lower than take inspiration from a 4.9% gain in the iron ore price.
  • As a guide for local energy names, the S&P 500 energy sub-sector fell 3.3%.
  • The Reserve Bank of Australia (RBA) is front and centre with the market pricing a cut at a 66% probability.
  • With AUD/USD trading from $0.7610 at 16:00 (AEST) to $0.7534 the bigger reaction today clearly comes from a failure to cut.
  • Some weakness expected in Japanese equities on open, with focus on the details of the ¥28 trillion stimulus. In terms of genuine fiscal stimulus measures, the devil is in the detail.

Importantly, there has been no real stress in the Investment-Grade corporate bond market, but if equities always follow credit then we have to think that the near-term path of equity markets is now lower.

In the ASX 200, the market internals have been flashing red for a while, with the level of companies above their 20- and 50-day averages well above 80% and at levels where the market has tended to peak out over the past five years. We now have 24% of companies with an RSI (relative strength index) above 70, which highlights that we have seen broad participation in the recent rally higher. However, if we take Sir John Templeton’s classic quote of ‘bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria’, what we are trying to ascertain is whether we are in the ‘euphoria’ stage

The fact that the ASX 200 continues to hold above the five-day average is key for now (see the blue line on the daily chart below) and as long as it holds this level, then short positions are ill advised. However, we have seen clear indecision in the price action yesterday and the bears are seemingly wrestling back some sort of control. A close below 5546 would catch my attention as not only would the index close below the short-term average (for the first time since 7 July rally), but it would also print its first lower low.

One suspects few will be willing to trade too aggressively ahead of the 14:30 (AEST) Reserve Bank decision. Usually, the impact of the actions of the RBA are contained to the rates and FX market, but given the moves we have seen of late in higher yielding sectors and discretionary names, one suspects we could see a strong reaction if the RBA leave the cash rate at 1.75%. Stocks with positive earnings translation from a lower AUD effect will likely struggle, so traders should be aware of the event risk and adjust risk management accordingly. A failure to cut and a viscous spike higher in AUD/USD will likely ensue, although if the statement puts the onus on cutting in an upcoming meeting, then we could see sellers emerge not $0.7650 to $0.7700. I would stand aside though and wait for Europe and US traders to give the move their full consideration, but I side with market pricing and feel that, on balance, a cut is likely.

SOURCE: IG – Chris Weston

JPMorgan maintains ‘overweight’ on UK equities

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JPMorgan Cazenove said on Monday that it was maintaining its ‘overweight’ stance on UK equities, which it believes should continue to outperform even in the aftermath of the Brexit vote.

JPM said the UK is a defensive play with very high dividend yield and the FTSE 100 is one of the key plays on emerging markets.

In addition, it pointed out that the UK is a big beneficiary of the weaker pound, with 72% of FTSE 100 sales derived abroad. “UK earnings per share revisions are outright positive for the first time in four years, which is to a large extent the result of weakening GBP.”

JPM said UK equites have been underperforming global for a few years now, and the region is still under-owned, having seen outflows before the Brexit referendum.

“UK is cheap versus other regions, trading at a one standard deviation discount to the MSCI World on price-to-book relative,” it said.

The bank – which expresses its ‘overweight’ on UK stocks mainly through a long in in the FTSE 100 – said that while Brexit negotiations are unlikely to be all smooth sailing, if political uncertainty spikes again, continental equities stand to lose more than UK ones.

JPM recommended investors stay OW the FTSE 100 versus the 250.

“While FTSE250 has underperformed FTSE100 by 8% this year, this follows years of strong outperformance. FTSE250 valuations are unattractive in our view, and it has more cyclical and domestic composition than the FTSE100.”

In terms of sectors, the bank said its ‘overweight’ in energy was worth revisiting, as the sector has lost ground in the last month amid weaker oil prices. “This might be a good entry point into the year-end,” it said.

JPM said utilities should also regain leadership as the recent cyclical rotation fades, while financials are likely to struggle again.

 

Source: Digital Look

Two drivers of FTSE 100’s post-Brexit recovery

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The significant fall in sterling – and the potential for further weakness in the months ahead – has had a pronounced impact on UK equity market returns since June’s Brexit vote. In particular, two clear drivers of performance have emerged.

This first is dollarisation. International companies with low or no exposure to the UK and a business in dollars have received an instant upgrade to forecast earnings per share and dividend.

The second driver has been index-linking. Regulated utilities have benefited on anticipation of increased inflation as they will receive a substantial tariff increase due to the terms of their regulatory contract.

Given my focus on large-cap stable dividend-payers, the portfolios I manage have benefited from some of the related moves in markets, particularly in areas like consumer staples and utilities. The funds’ selective holdings in overseas stocks have also rallied on currency weakness.

Recession unlikely

However, the reverse side of this has been the significant underperformance of companies with exposure to the UK domestic economy, such as retailers, insurance companies and housing-related stocks.

Some domestically focused stocks are beginning to discount a significant further correction in sterling and a slump in the UK economy.

Although we will only begin to know how the economy has reacted to the referendum when the Bank of England produces its report in mid-August, I do not believe that a recession is imminent.

Ultimately, I expect investors to refocus and recognise the inherent value in these companies as these fears slowly subside.

In this regard, it is important to note that over the last 30 years recessions in the UK have been precipitated by interest rate rises to slow an overheating economy or, in the case of 2008, by a banking collapse.

There seems to be no risk of a repeat of the banking crisis of 2008 since there is plenty of liquidity.

Declines in business confidence are not enough to generate a recession without tangible negative events like interest rate rises, job losses and a credit crunch. None of these forces appears to be evident at present.

Instead, what has happened so far is a high-level political convulsion which I do not believe will affect the decisions of the bulk of the population.

A sterling recovery?

I am also unconvinced that we are in the midst of a long and pronounced period of sterling weakness and rising inflation.

The current dollar/sterling rate is $1.30, which is 8% below the average in 2015 of $1.53, and 10% below the average of the first half of 2016, which was $1.43.

If sterling does not recover, then it seems reasonable that inflation should rise from its present very low level of 0.5%.

Estimates of 4% or even over 5% in a year’s time have been made by some economists, but again this is not certain to occur at all.

The trade weighted index is only just below its range established in the 2008 to 2010 period, before sterling took off in 2011.

Since the inflationary wave is not likely to be sustained, it may be that bank rate remains low even through the short period of higher inflation.

This all suggests a continuation of the current low growth, low interest rate environment for some time to come.

I believe this supports the outlook for high-quality companies that can provide shareholders with good prospects for increased dividend payouts across a range of conditions.

 

SOURCE: Interactive Investor

HSBC’s profit drops almost 29%; warns on Panama Papers

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HSBC, one of Britain’s largest lenders, reported a year-on-year drop of almost 29 percent in first-half pre-tax profit, missing analysts’ expectations.

For the first six months of the year, HSBC logged a pre-tax profit of $9.71 billion, down 28.7 percent from $13.62 billion in the same period a year earlier and the $10 billion figure estimated by analysts in a Reuters poll.

Revenue in the first half was down 4 percent at $27.86 billion.

The bank reported $3.61 million in pre-tax profit for the second quarter, a sharp decline from the previous quarter’s $6.11 billion figure.

However, the bank also announced it would be conducting a share buy-back of up to $2.5 billion in the second half of 2016, adding that it would sustain its annual dividend at the current level for “the foreseeable future.”

Panama Papers

In its interim report, HSBC said it had received requests from “various regulatory and law enforcement authorities around the world” for information on Mossack Fonseca & Co, the Panama law firm whose data was leaked earlier this year.

HSBC was a major client of Mossack Fonseca, according to media reports, and has denied wrongdoing. It is alleged that banks and other entities used the law firm to help clients evade taxes.

The investigation into Mossack Fonseca was one of multiple legal proceedings the bank detailed in its results. Others included litigation relating to the Bernie Madoff Ponzi scheme, an investigation into loans sold by the bank to purchase mortgage securitizations before the global financial crisis and investigations into the alleged manipulation of Libor (London Interbank Offered Rate) and alleged non-compliance with anti-money laundering laws.

“Litigation remains a key risk for the banking sector, and HSBC’s report on the legal proceedings facing the bank reads like a barely trimmed-down version of ‘War and Peace.’ This includes a section on the Panama Papers, which states HSBC does not know at present what, if anything, the impact on the bank will be, but warns it could be significant,” Laith Khalaf, senior analyst at FTSE 100-listed financial services firm Hargreaves Lansdown, said in a note on Wednesday.

After the results were out, Hong Kong-listed shares of HSBC were down 1.7 percent, unchanged from levels before the release, but HSBC’s London-listed shares were up nearly 4 percent in early Wednesday trading on news of the buyback.

Chief executive Stuart Gulliver wrote in a statement that the bank had performed “reasonably well in the first half in the face of considerable uncertainty,” and that the reduction in profit reflected what had been a strong first half in 2015.

Investors will closely analyze the bank’s outlook following the historic Brexit vote in June, which saw the U.K. vote to exit the European Union (EU).

Brexit

Previously, HSBC said it may relocate staff to Paris should the Brexit vote go ahead, but Ivan Li of Tung Shing Securities didn’t believe that would happen.

“Maybe they will only move the department that deals with euro zone-related trade,” he told CNBC ahead of the earnings report.

In a statement issued the earnings release, HSBC’s chairman Douglas Flint said that the Brexit vote had brought about a “new era for the U.K. and U.K. business.” But he added that HSBC’s 150 years of experience in financing and facilitating trade had showed it the importance of an open trading relationship between the U.K. and the EU.

“Now is a time for calm consideration of all the issues at hand and careful assessment of how prosperity, growth and a dynamic economy for both the UK and the rest of Europe can be ensured following an orderly transition period,” Flint wrote.

On the Brexit issue, Gulliver said it was too soon to know which parts of the business may be impacted by the U.K.-EU divorce.

“There has been a period of volatility and uncertainty which is likely to continue for some time,” he wrote. “We are actively monitoring our portfolio to quickly identify any areas of stress, however it is still too early to tell which parts may be impacted and to what extent.”

Li expects the dividend to be safe this year but warned that it could be cut over the next three to five years.

With two-thirds of its revenue coming from Asia, HSBC is generally shielded from some of the issues that have hurt rivals Lloyds and Barclays, said Martin Smith, East & Partners markets analysis.

SOURCE: CNBC

Overextended FTSE requires cautious approach

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FTSE price action has continued in a positive trend, with the June rally (since the UK referendum) continuing to extend higher.
With the move approaching a key 78.6% Fibonacci retracement, there are further technical reasons to be wary on the gains.
As well as the Fib level, there is further resistance to consider, including the reverse trendline from the 2011-2014 swing lows, horizontal resistance (July 2015) and the MACD crossover into bearish momentum. There is evidence of an ending wedge formation, coupled with bearish divergence on the daily chart.
A break of the bottom of the wedge would trigger a sell signal, although we would prefer to see a close below this supportive trendline, or at least a break of 6660 before actively shorting. We would see this merely as a correction, as the reverse head-and-shoulders formation continues to play out.
Management and risk description

Initially, a tight stop can be placed on the 6660 trigger, and once a close below this level is confirmed, the hard stop can be introduced.
Price action previously formed a reverse head-and-shoulders formation, which is targeting 7400, so any corrections may be short-lived.
ParametersEntry: sell UK100.I on a break and close below 6660.

Stop: a break back above the recent highs (currently 6760).

Target: 6500 and 6360  (Fibonacci retracements and support levels).

Time horizon: 4-6 weeks.

Reverse trend line (weekly)

f1
Reverse head-and-shoulders formation (weekly)
f2
Ending wedge and bearish divergence
f3
Fibonacci retracements
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Charts source: Saxo Bank