TODAY’S FAYRE – FED, OSBORNE, VW & MARKETS

TODAY’S FAYRE – Tuesday, 22nd September 2015

 

 “So sweet love seemed that April morn,

When first we kissed beside the thorn,

So strangely sweet, it was not strange

We thought that love could never change.

 But I can tell–let truth be told–

That love will change in growing old;

Though day by day is naught to see,

So delicate his motions be.

 And in the end ’twill come to pass

Quite to forget what once he was,

Nor even in fancy to recall

The pleasure that was all in all.

 His little spring, that sweet we found,

So deep in summer floods is drowned,

I wonder, bathed in joy complete,

How love so young could be so sweet.” 

 

Robert Bridges – poet laureate – 1844-1930

  

We have had such a feast of sport in recent weeks, which puts the UK’S national game – football – well and truly in the shade for a few weeks! The start of the Rugby World Cup has been electric, spear-headed by Japan’s exhilarating and totally unexpected though deserved win over South Africa. No doubt there will be further upsets as the tournament progresses.  What an eclectic bunch the Japanese team was – Japanese, English, Kiwi, Samoan and Tongan! – Great stuff.  Though ‘lawners’ is not really my bag, we have to doff our ‘titfers’ to the Murray Brothers and the rest of the UK’S Davis Cup team for beating Australia, thus reaching the final for the first time since 1976 – an incredible achievement considering the talent of many other countries.  Beating Belgium in the final must be within the UK team’s grasp.

 

The Fed understandably feels that was caught between a ‘rock and a dark place.’ Yes, it has the IMF and the world at large pleading with it not to raise rates to prevent unnecessary damage for other debtors, who borrowed excessively, using dollars to save money. The Fed is also caught between domestic policy objectives that dictate they MUST raise rates of they will bankrupt countless pension funds and international operations, where emerging markets will go into default because commodities have collapsed and they have no way of paying off this debt that has risen to about 50% of the US national debt. The real problem markets have at present is getting the balance between genuine growth and asset bubbles.  The latter have exploded disproportionately in the past 5 years.

 

That conundrum probably has greater connotations than assessing the decline of growth in China. There is certainly dissent in the FED camp, highlighted by FED member James Bullard being unequivocal in say he felt rates should have started their ascent last week on US economic strength rather than be influenced by international anomalies. Lockhart also joined in the conversation suggested a symbolic increase of 25 basis points by the end of the year.

 

I smiled wryly at Tsipras’s and Syriza’s victory – though I suspect a Pyrrhic one.  That’s what we call in amateur football a ‘hospital pass.’ I just cannot see Greece delivering austerity in spades. Surely it is only a question of months before we revisit the bail-out route yet again.  I am amazed that in a matter of a few months the yield on 10 year Greek bonds has fallen from 13% to 7.9%. Amazing how influential and well as misleading ECB access can have and be!

 

Yesterday the Street of Dreams attempted to focus on the positive aspects of US economy rather than the FED’s indecisiveness on an interest rate hike. Consequently the DOW was up 0.77%, S&P +0.46% and the NASDAQ +0.04%. Time Warner’s shareholders approved the $55 billion takeover of Charter Communications. FTSE 100 took a knock courtesy of the Zurich Insurance pulling the plug on acquiring RSA, causing the UK insurer to fall 20% in value. The FTSE ended the session up 4 points at 6108, with the DAX up 0.3% and the CAC 1%. Asian investors started thinking China’s economy not as brittle as some think. This attitude resulted in the ASX adding 0.55%, The Shanghai Composite and the Hang Seng were up 1.2% at lunchtime. The Nikkei remains closed today for a public holiday.

 

On the domestic front UK manufacturing data may post some encouraging numbers. Also we should reflect on Chancellor George Osborne’s visit to China. He is absolutely ‘spot on the money’ to make up for lost time by setting down the UK’S trading and business stall for the future to court Chinese business. So the Government may well be underwriting a huge loan – a £2 billion, in isolation probably too much, to China – for its investment in a new nuclear plant at Hinckley in Somerset, but there will be method in Osborne’s madness. China will, going forward, be hopefully disposed to getting involved in other business initiatives such as a possible tie-up between the Shanghai Stock Exchange and the LSE. Now that would be a humungous deal with potentially brilliant benefits. For the LSE to be able to trade a growing number of Chinese stocks here in London, could only have a positive outcome. One obvious added benefit would be China’s need to expand their banking operations in London to complement its expanding presence in corporate finance.

 

 Yesterday’s news that Zurich Insurance had been forced to pull out of its £5.6 billion acquisition of RSA, due to disaster liabilities in China in the City of Tjanjin, which have affected Zurich balance sheet which could results in a loss this year of $275 million. RSA’s shares fell 20% and that fall was not the only potential shock wave. RSA CEO Stephen Hester was rumoured to be under consideration for the Barclays CEO job. If offered it, Hester may well take up the challenge, leaving RSA looking for a tough, talented and uncompromising successor.

 

Moving on; VW’S ‘emissions-fixing scandal’ which have come to light in the US, two days ago. These misdemeanours could cost the German operator $18 billion in fines etc. Two observations – firstly VW only exports 3.2% of its cars to the US.  China could be a worry – 40% of exports go to China.  There could also be ramifications for VW in Europe and the UK.  Secondly this scandal could extend to other companies and countries. VW’S shares fell 19% yesterday.

 

This morning there were excellent numbers from Card Factory and IG Group.  AA’s results failed to pass muster and fell 8%.  M&B are losing its CEO Alistair Darby and he will be replaced by Phil Urban.  The market was not impressed and shares fell by 3%.  At 9.30am the FTSE 100 was down 87 points at 6020. Credit Suisse downgraded the mining sector and BHP’s possible need of a bond issue may have exacerbated the situation. Glencore was down 9% at 108p on 31 million shares. Volumes in the market have been derisory.

 

UK companies posting results –  Tuesday – CLOSE BROTHERS, AA, CARD FACTORY, CARNIVAL, Wednesday – SMITHS GROUP, UNITED UTILITIES, Thursday – THOS COOK, EUROMONEY, SVG CAPITAL, DMGT, WS ATKINS, Friday – MJ GLEESON

US companies – Monday – LENNAR, RED HAT, Tuesday – DARDEN RESTAURANTS, CONAGRA, AUTOZONE, GENERAL MILLS, Thursday – JABIL CIRCUITS, NIKE 

Economic data – Tuesday – EU CONSUMER CONFIDENCE, UK PUBLIC SECTOR FINANCES, MANUFACTURING OUTPUT Wednesday – BBA MORTGAGE LENDING, Thursday – GERMANY Gfk CONSUMER CONFIDENCE, US INITIAL JOBLESS CLAIMS Friday – US GDP

 

 

David Buik – market commentator

 

 

Panmure Gordon & Co

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