Any doubts that the ongoing Greek crisis was partly to blame for lack of upside in equity indices were utterly refuted yesterday as indices surged higher on news that Germany had been the first to blink. That been said, it merely looks like talks have ‘intensified’ which ultimately leaves us exactly where we were and makes one wonder whether Greece will manage to fudge a deal at this point at all. There is no deal just an agreement that a viable solution needs to be found. We can thus expect to be at the mercy of headlines again today.
Greece aside, better-than-expected industrial production from China has helped to boost sentiment this morning. Retail sales have also managed to keep pace on last month. One swallow does not a summer make, however and recent downward revisions to Chinese GDP by its own central bank could in some ways vindicate the widespread speculation that recent growth data has been overstated massively.
European indices are, for now, allowing the benefit of doubt and are consolidating yesterday’s gains. CRH (LONDON:CRH) is the top riser on the FTSE 100, up 2.5%. Sales growth in the building material company has continued to rise despite the enduring slowdown in Western Europe. Total revenue has kept pace, rising at an annual rate of 2.5% over the last four years. The share price may well challenge its late April high around 1900p in the near term but without a strong pick up in Eurozone growth it will be dependent on the US and Eastern Europe for the time being.
Home Retail Group Plc (LONDON:HOME) is also in demand this morning. The Argos and Homebase owner has seen its share price decline 32% from its January highs but seems to have been in demand over the past couple of days. Rising 2.13% in early morning trading and up from recent two year lows, the company still expects trading to remain challenging in Argos. Slowing demand for electrical goods and increasing competition in the online space saw like for like sales dropped 3.9% during the 13 weeks to May 30. Homebase paints a brighter picture – like for like sales rose 5.4% during the same period.
Languishing at the bottom of the UK benchmark, Royal Mail (LONDON:RMG) has fallen 3.85%. Reports that the government is to sell half of its remaining stake in Royal Mail has pushed the company to the bottom of the index in early trade today, falling below the valuation of 500p that is likely to be imposed. Given the recent paltry earnings and fairly cautious outlook from Royal Mail, it’s unlikely that we will see the same enthusiastic demand for Royal Mail shares as witnessed in the initial privatisation.
Yesterday’s triple digit move in the Dow akin to yesterdays has become a recurring theme. We are calling the index flat with futures pointing an opening level of 18,011.
Recent US data has been fairly upbeat and continued speculation puts the probability of a rate hike at around 70% in the coming months. The usual scenario, that bad news is good news will likely apply to the retail sales number. Last month’s release was disappointing, with no rise on the month. An increase of 1.2% in May is expected today.
Liquidity from Eurozone sovereigns flows into equity markets
The sell-off in Eurozone bonds continues today with German 10-Year yields sitting at 1 percent. The spread between the core and the periphery yields has widened as uncertainties regarding Greece continue to play a role. The correlation between the German-Spain 10-Year yield spread and the EUR/USD has turned negative since the beginning of June, when the market came to realise that Greece would, indeed, miss its IMF payment.
While investors may have been told to ‘get used to it’; the ECB’s bond purchases has injected nothing but volatility into the sovereign bond markets. The fading appetite for low yield, high risk sovereigns has pushed investors to seek fresh solutions. The stock indices offer good entry opportunities following the two week sell-off. The DAX rebounded from a four month low yesterday following talks that Germany may accept concessions for the Greek drama to end. No deal has been reached yet but the positive momentum already sent the DAX above the 200D MA (11345) in Frankfurt. Half of losses recorded since 26 May has been recovered and the way is now open to 11520 (Fibonacci 61.8% on the past two week sell-off).
Volkswagen (XETRA:VOWG) recovers to €220 euro
The euro strength is somewhat a barrier for the large exporters. The international giants are worried about a euro unwilling to weaken despite the ECB’s massive quantitative easing and the Grexit risks. The 30-day correlation between Volkswagen shares and the euro-dollar has averaged a negative 50% over the past two months; a stronger euro could therefore be a misfortune for Eurozone big caps.
Yesterday’s rush into the stock markets pulled Volkswagen back to €220 yet the fading demand from the emerging markets looks like the upside potential will remain limited. Volkswagen sold 2.48 million vehicles over the past 5-months; this represents an overall fall of 3% in car sales, led by an impressive 47.2% drop in Russia followed by 27.8% and 3.7% fall in Brazilian and Chinese demand. The EM liquidities would flow to the stock markets instead of being buried in a car. Despite the waning appetite for cars, the carmakers increase capacity due to favourable rate environment; the side industry of components is where the profits should be chased.