TODAY’S FAYRE – Sunday, 7th February 2016
“Sow seed, — but let no tyrant reap;
Find wealth, — let no imposter heap;
Weave robes, — let not the idle wear;
Forge arms, in your defence to bear.
Shrink to your cellars, holes, and cells;
In halls ye deck another dwells.
Why shake the chains ye wrought?
Ye see The steel ye tempered glance on ye.
With plough and spade and hoe and loom,
Trace your grave, and build your tomb,
And weave your winding-sheet, till fair
England be your sepulchre!”
Percy Bysshe Shelley – poet – 1792-1822
Persuading the UK electorate to remain in the EU was always going to be a very a prickly, opaque and emotive subject for David Cameron to sell with any degree of confidence that could result in a decent majority to remain ‘in’ at a referendum. Persuading 27 members to rewrite their rule book on an array of subjects definitively and without ambiguity at the behest of one nation is a task of Herculean proportions. His task was not helped by the fact that the documentation cobbled together for Donald Tusk to sell to all EU member countries was at best flaky.
There was an excellent and very interesting article by James Forsyth in last week’s ‘Speccy’, suggesting that a few Eurosceptic Cabinet members have decided to support the PM in his quest to remain in the EU, as they do want the UK to be held responsible for triggering the inevitable demise of the EU. Regardless of an ‘IN’ or ‘OUT’ majority the EU will, without doubt, implode. The whole system is unworkable and without having any acceptable democratic process in place.
I note with interest in today’s Sunday Telegraph that Baroness Thatcher’s chief advisor Lord Charlie Powell believes that the former British Prime Minister would have voted to stay in the EU. I doubt that if she knew what a shambles the EU is today that she would have given the ‘IN’ brigade the ‘thumbs up!’
There was no respite last week in any of the global markets. Uncertainty prevailed in spades and there was more than just a touch of concern expressed about growth right across the world. The fact that the messages from the FED and then the BOE in its inflation report on Thursday were dovish, would have added credence to the momentum of negative sentiment, which has been gathering pace since the start of the year. The Price of oil bobbed around like a cork in a bath. Between Wednesday and Thursday it added 8% to circa $34, thanks to an unsubstantiated rumour that Russia might be happy to sit down with OPEC and discuss a cut in production. The price eased back at the end of the week. Also with many commodity based operations having seen their share prices trashed by 70% in the last 2 years, many seem less than upbeat about the immediate future. Many in the sector seemed shameless in suggesting that another world recession was on the agenda.
The fact that the bond markets has brooked the possibility of any rate rises in Western economies for the foreseeable future saw the Dollar soften, resulting in oil and commodity prices becoming exceptionally volatile throughout most of the week. The performance of the likes of Anglo American and Glencore at the end of the week beggared belief. In the case of Anglo it added 25% in value on Thursday, admittedly from a very low base and then surrendered 14% on Friday! Ten-year Government bond yields fell substantially – Japan 0.02%, Germany 0.29%, UK 1.56%, US 1.84% and Greece 9.33%. Apart from the Hellenic tragedy, these are the kind of yields that in days gone by might have intimated a whiff of recession in the air. The week also saw gold gain in popularity, as an attractive alternative asset class or a haven of comfort – up $40 on the week to $1157 an ounce.
By the end of the week there was little evidence that this equity ‘sell-off’ was coming to an end. However there has been one bizarre characteristic in the pattern of behaviour unlike in previous years and that is that ‘selling’ has been controlled rather than frenetic. However many are also concerned about dividend yields being cut going forward – particularly the mining, oil and banking sectors. There is a question mark over liquidity of bond markets in the longer end. Mind you what other liquid asset classes are available? Once the dust had settled on Friday evening, only equity cynics would have been happy with the outcome. Carnage might be an exaggeration but a dispiriting sentiment certainly prevailed. The S&P 500 closed the week down 2.9%, the FTSE 100 had its flags lowered by 3.87%, European stocks fell an average by 4.82% and Japan’s Nikkei was well out of sorts – down 3.98%. The Shanghai Composite and the Hang Seng ended the week relatively calmly ahead of next week which is Chinese New Year (The Monkey) – Chinese markets will be closed for much of that week.
The Street of Dreams suffered in silence. Banks were clattered as they were in the UK, Europe, Japan and Australia. From Deutsche Bank which has lost over 39% this year to Barclays down 21%, JP Morgan Chase 17%, Wells Fargo 12.5% and Lloyds 14.5%, it was a very unnerving battle field. Since the financial crisis capital requirements for banks have become increasingly onerous. Also with the relative collapse of emerging market economies and the quality of their respective debts, these have put added pressure on banks’ balance sheets. Needless to say despite an attempt to rally energy stocks and retail had a torrid week. Friday’s Non-Farm payrolls sent out mixed messages. The unemployment rate dropping to 4.9% was encouraging but the fact that only 151k jobs were created in January was below consensus expectations of 190k – weather or lack of skilled workers? Who knows? The NASDAQ has surrendered 14% in value so far this year with Linkedin a real casualty on Friday – down 41% and 69% in the last year.
The content of the BOE Inflation, though not uplifting was not disastrous. Growth was lowered for the next 2 years, with 2016 being cut from 2.5% to 2.2%. Many suspect that with Mark Carney’s comments remaining quite guarded that interest rates will remain unchanged this year after a 9-0 vote to keep the status quo on Thursday. Rates have been at 0.5% since March 2009. In London, BP posted unappetising numbers and lost 8.9% in value on Tuesday. Prudential also had a dire day losing 8% thanks to exaggerated Chinese regulatory controls. Their shares were unfairly trashed. Shell posted better than expected numbers on Thursday, despite an 80% drop in annual profits – +6.5%. Rolls Royce posts numbers this coming Friday. CEO Warren East may announce a 6th profits warning in 2 years. Profits may fall by £320 million to £1.3 billion and that profits for 2016 may be halved. The dividend (£400m) could be cut and a £1 billion rights issue may be required. The market looks forward to being updated as to cost cutting – £200-£300m. Warren East is certainly under the cosh.
The Clydesdale IPO on Wednesday was very successful with shares rising from issue price of 180p to 205p. CMC Markets were not quite so successful ending Friday’s session just below the Plimsoll line. The market remains in turmoil and with the relative uncertainty that prevails no one can be surprised that the IPO pipeline has temporarily dried up. That does not mean that M&A is dead. M&A will be necessary to increase market penetration and to deliver shareholder value. Finally rumours abound that Stuart Gulliver and Douglas Flint of HSBC will tell the market this week about the bank’s future domicile. It is thought that the board may have decided to remain in situ, now that the government has sorted the bank levy situation out to a more agreeable level.
U.K. earnings this week – Monday – RANDGOLD, REGENSIS, Tuesday – TUI, REDROQ, ICAP, Wednesday – TULLOW, GW PHARMACEUTICALS, ARM HOLDINGS, DUNELM, ELLWAY, WS ATKINS, Thursday – SHIRE, ASHMORE, RIO TINTO, PENNON, SAB MILLER (TS), C&W COMMS (TS), IMPERIAL TOBACCO (TS), THOS COOK (TS), ENTERPRISE INNS (TS), Friday – ROLLS ROYCE, MONITISE
US Earnings posted this week – Monday – GAP, HASBRO, Tuesday – VIACOM, Wednesday – HUMANA, TWITTER, EXPEDIA, ZYNGA, Thursday – CONAGRA, CBS
Economic data this week – Tuesday – BRC RETAIL SALES, UK TRADE BALANCES, Wednesday – RICS HOUSE PRICES, UK INDUSTRIAL PRODUCTION, US FEDERAL BUDGET, Thursday – US JOBLESS CLAIMS, Friday – UK CONSTRUCTION, US RETAIL SALES
Market Commentator – Panmure Gordon & Co