With Super Thursday and the key US NFPs later this week, investors are understandably jittery. The prevailing headwinds from China are also doing little to help sentiment. While Eurozone indices seem like the better option in light of the monetary policy divergences, the resilience of the single currency is hampering this particular strategy this morning. The FTSE is outperforming its European counterparts with a mild bounce in the basic materials sector helping the index to forge a path above the 6700 level that has been a significant barrier to upside over recent days. The retracement of the Brent price back above the psychological $50 mark is also helping the energy complex to consolidate, but once again, there is a bent to the defensive sector with health care, utilities and consumer staples taking the most of the flow in early trade.
Financials remain under pressure with UK banks falling in sympathy with RBS (LONDON:RBS)
RBS (-1.24%) The share price has been in decline since last week where it hit a one month high of 370p. Now down 10.79% since then, there seems to be little appetite for RBS shares at current values. The government’s decision to sell its 5.2% stake at 330p, raising over £2bn, but still crystallising a loss of around £1bn for the tax payer is intended to be a positive outcome and the reduced proceeds are to be used to pay down debt. This will likely be a subject of controversy for a while akin to the Gordon Browne sale of UK gold reserves 15 years ago. Osborne’s comments that the sale should lead to a more competitive financial sector needs time to be borne out for sure. The bank has struggled of late to turn a profit that can be deemed sustainable and with PPI compensation something of a yoke around its proverbial neck, the bank has a long road ahead to regain any momentum.
Direct Line (LONDON:DLGD) (1.69%) reduced claims for major weather events has benefited the insurance company. Operating profit rose to £335.8m in H1. A special interim dividend has also added to investor appetite this morning. The focus on UK general insurance seems to be working well, with better client retention as a result.
Fresnillo (LONDON:FRES) (1.03%) A sales miss at $752m v estimates $764m, delays at San Julian and a cut in its capex are weighing slightly on the firm share price this morning. Much of this was already priced in given the decline in precious metals this year. The FTSE-100 miner declared an interim dividend of $0.021 a share, down 58% from 0.05 a share in the same period a year before. With the stock now down 26% YTD, there seems to be a little bargain hunting at current levels.
Standard Life (LONDON:SL) (-2.73%) group operating profit before tax rose to £290m in the first half of this year, from £274m a year earlier and the firm is to up its dividend by 7.5% to 6.02p per share. Pensions reforms in the UK have started to bite and contribution from annuity products are likely to reduce further. The group will need to offset this decline with alternative products.
UK construction output was slightly weaker than expected, coming in at 57.1 in July against an expectation of 58.5. It is still a strong print, but has pushed the pound below the $1.56 mark against the greenback. Markets are pricing in a 63% probability that the MPC will hike rates in September, while expectations are slightly higher for December at 70% and more in line with Carney’s ‘turn of the year’ guidance recently.
Following a 0.5% drop in yesterday’s session, the Dow looks set to open flat at 17598.
Brent en route to $40
The slide in energy and commodity prices continues. Brent fell below $50 for the first time since January, WTI tests $45.
Since the nuclear negotiations with Iran took a promising turn last month, the oil prices slid back into a bear market. Combined with looming manufacturing activity in China, Saudi’s efforts to expand its market share relying on its capacity to afford tighter profit margins and the heavy accumulation in stockpiles in the US - up to 470 million barrels in March – as reaction, the corrective attempts are left toothless even in the current oversold market conditions. In this environment of slowing demand and increasingly competitive supply, the bottom may be way more distant than could perceive the eye.
Between 2000 to 2004, Brent has been well ranged between $16.65 / 35.30 levels. The rapid surge of $100/barrel into July 2008 has been as aggressively written-down within five months as the subprime crisis hit the market, bringing the Brent price back to $36 levels. The recovery off 2008 lows has marked the beginning of a widening gap between WTI and Brent until Brent reached its relatively most expansive level in 2011. Nowadays, the gap narrows, although we are far from what we would call the norm before 2000.
The downtrend in oil prices will resume until the market absorbs the oversupply building higher in the market. While the increasing demand in the emerging markets will hold back the oil market from a plunge back to 2000/2004 range of $35/15, it is not impossible for Brent to test a bottom at $40/35 area.
At this price, some participants will be forced to the exit door in a ‘last-in-first-out’ order. High cost extraction, as Canada’s sand projects, will need to wait for a bounce back to $70/80 minimum.
Loonie under pressure
Cheap oil sent loonie to fresh 11-year lows against the USD. USD/CAD double topped at 1.3177, further upside is possible despite oversold Canadian dollar. In a three-six month period, we could be willing to buy US dollar up to 1.35/1.42 versus the CAD (Fibonacci’s 61.8% retrace on 2002-2007 drop / H2, 2013 high and 12-year high).