TODAY’S FAYRE – CHINESE GDP, OIL & MARKETS

TODAY’S FAYRE – Tuesday, 19th January 2016
“To see a World in a Grain of

Sand And a Heaven in a Wild Flower,

Hold Infinity in the palm of your hand

And Eternity in an hour.

 

A Robin Red breast in a Cage

Puts all Heaven in a Rage.

A dove house fill’d with doves & Pigeons Shudders

Hell thro’ all its regions.

A dog starv’d at his Master’s Gate

Predicts the ruin of the State.

A Horse misus’d upon the Road

Calls to Heaven for Human blood.

Each outcry of the hunted Hare

A fibre from the Brain does tear.

A Skylark wounded in the wing,

A Cherubim does cease to sing.

The Game Cock clipp’d and arm’d for fight

Does the Rising Sun affright.

Every Wolf’s & Lion’s howl

Raises from Hell a Human Soul.”

 

 William Blake – poet and painter – 1757-1827

 

I have always enjoyed CNN’s Richard Quest’s infectious enthusiasm for life, his commentary and his interaction with interviewees. His personality comes across very strongly in his article written for CityAM on the forthcoming WEF meeting in Davos, which starts tomorrow. He tells us that Klaus Schwab, WEF’S founder wants delegates to consider a fourth industrial revolution built around technology. Firstly technology in 2016 is about innovative as the wheel was 2 million years ago! Give me a break!

Secondly the WEF is just an unacceptable ‘bun fight’ – a corporate jolly for the good and the great! – A wonderful opportunity to quaff some Cristal/DP in a snow bound picturesque skiing resort. If the world’s captains of industry want to meet the leading politicians of the day to ‘talk about the birds and the bees’, then I suggest they book dates in their respective diaries at weekends, rather than waste taxpayers and shareholders’ money.

 

So there was a little respite from the recent onslaught in global equity markets yesterday, thanks to New York being closed for Martha Luther King day. Even the slaughter in Beijing and Shanghai temporarily abated. This ‘semi-cease-fire’ allowed the teenage scribblers to mass their troops; many of them willing a bear market on, with all their might.

 

 

It is hard to argue against that possibility, but my colleague Simon French, Panmure’s Chief Economist, in concert with Olivier Blanchard, the former IMF economist, suggests that ‘Trading these oversold conditions right now is likely to be a more profitable venture than concluding that “hidden macro factors” are about to explode in our face. Housing bubbles, growth of auto loans and Chinese corporate credit are not the same fundamental market risks as securitisation, opaque risk pricing and reliance on wholesale markets that typified the 2007-09 crisis and the sharp contraction of credit that accompanied it.’

 

 

The big news of the day, if you can call it that, was confirmation that China’s economy (GDP) grew by 6.8% last year against estimations of 6.9% – down from 7.3% in 2014.  Also that was the lowest figure in 25 years. So the Chinese authorities will have to consider both monetary and fiscal initiatives in an attempt to reignite growth.  Call me a cynic, but I suspect 6.8% is an economy of the truth – try 4-5% as the correct level – still way ahead of most other mature economies. I suspect that the reason for so much disruption in equity and foreign exchange is the rather ham-fisted and unsophisticated manner that markets been manipulated and stimulated. It is as well to remember that the market is always right!  Respect it or ‘chickens will come home to roost!’ Anyway the market was happy to lap up the GDP news in good faith and the Shanghai Composite put its best foot forward in adding 3.25% in the early afternoon, with the Hang Seng staying on the periphery of the party adding just 1.4% with the NIKKEI closing up 0.6%.

 

 

As to oil, it staggered above the $28 threshold yesterday. Everyone assumes that Iran, with sanctions largely lifted, is expected to flood the market with as much as an extra 400k barrels a day with almost immediate effect, up to a million barrels in a year’s time. I am told by Panmure’s oil guru Colin Smith to treat that figure with a pinch of salt.  It is possible that if half those numbers were achieved that would be nearer the mark. As to oil prices in general, it will be the banks and more to the point their regulators, that eventually decide the price of oil, coupled with the fact that demand in greater this year than last. At $29 a barrel oil production becomes uneconomical for a sustained period.  Banks are heavily lent to the energy sector.  Now that exploration and development plans have largely come to a grinding halt, regulators and banks will lose patience and will start to pull the plug. This will galvanise oil producers including OPEC to reconsider their positions and to cease playing dangerous political gains. Colin Smith would not be remotely surprised if oil reached $60 a barrel by the end of the year.

 

The FTSE experienced a prolific ‘dead-cat-bounce’ this morning – +110 points at 5890 at 8.10am, thanks to a decent fillip from Asia as mentioned above and the market looking over-sold.  Markets never head only in one direction. They pause and regroup.  Unilever (+1.9%) posted a decent increase in turnover – +10%.  British Land (+2.2%) posted an encouraging update.  IG (+0.3%) saw a 35% increase in new clients and Rio Tinto (+5%), Johnston Press (+8%) and Prudential (+3.3%) posted upbeat outlooks. Let’s be circumspect – ‘one swallow does not make a summer!’  The Street of Dreams may follow suit this AM, but it’s not all over ‘til the fat lady sings!’ She has just about got to her feet!

 

 

Aspiring challenger banks will be disappointed that the Clydesdale Bank’s IPO is likely to be a snip in terms of valuation.  An issue price of between 175-235p valuing this bank at between £1.5bn and £2bn is likely to rock the aspirations of Metro Bank. It will be interesting to see whether Metro puts its IPO on the back burner until sentiment improves.  In regards to the very sad redundancies made by Tata at Port Talbot’s steel plant – with sad the loss of 1000 jobs on top of Scunthorpe and Scotland – I make two observations.  There is not enough long term planning by government and owners to cope with ‘the whips and scorns of time!’ The likes of China flooding the market with cheap steel, is inevitable. It’s called supply and demand. In the same breath business and manufacturing are not philanthropic societies. Profit is not a dirty word!

 

 

UK Companies posting results this week – Tuesday – UNILEVER, IG GROUP, BHP BILLITON, CAIRN ENERGY, RIO TINTO, JOHNSTON PRESS, PRUDENTIAL  Wednesday – PETS-AT-HOME, GENEL, JD WETHERSPOON, WH SMITH Thursday – NCC. ST JAMES’S PLACE, BRITISH LAND, HALFORDS, LAND SECURITIES, SAB MILLER, ROYAL MAIL, MONEYSUPERMARKET, Friday – COMPUTACENTER, CLOSE BROTHERS.

                                                                                                                   

US Companies posting interim results this week – Tuesday – BANK OF AMERICA, UNITED HEALTHCARE, CHARLES SCHWAB, MORGAN STANLEY, TIFFANY’S, NETFLIX, IBM Wednesday – GOLDMAN SACHS, XILINX, Thursday – VERIZON, BANK OF NEW YORK MELLON, AMERICAN EXPRESS, STARBUCKS, SCHLUMBERGER, Friday – CITIZENS

 

 

David Buik

 

Market Commentator – Panmure Gordon & Co 

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