Commodities boosting equities- FTSE +0.78%
Once again the flip back to basic resources helped by a positive upgrade from Morgan Stanley (NYSE:MS) on a number of mining stocks is giving the UK benchmark a push northwards. The surge in oil prices and Brent crude finally managing to return to the $50/bbl marker is also boosting the cyclical sector despite the IMF’s rather negative global growth viewpoint.
The FTSE has finally pushed its way through the 6300 level for the first time since late August, this is more than a little bullish and tends to set the scene for a bigger move higher should the momentum carry. The FTSE is now down mere 3.4% year to date and while there are certainly some upside barriers from both a technical and fundamental perspective, the risk on attitude has removed some the recent downside bias. Breaking the 6400 level and a return to the levels last seen in August seems to be on the cards. The obvious correlation/causation to this more upbeat investor sentiment could well be attributed to the fact that Chinese stock markets have been closed much of this week. Ultimately a weekly close above the 6300 level is required for this optimism to remain.
Also supporting the miners is the precious metals complex, which is also starting to look a lot perkier with gold prices once again challenging $1150/oz and threatening to break out of a major downtrend in play since the end of January this year. Silver, in general rather volatile, is trading at $16 for the first time since June and may well present a bullish move through its 200 day moving average.
The weakness in the US dollar can in some ways explain some of the current upside, both in equities and most importantly commodities. The Fed’s failure to act in September and the weaker than expected jobs numbers last week have essentially pushed expectations for a rate hike to at least the end of Q1 2016, and even then, it’s precarious given the poor Q1 GDP growth we’ve come to expect from the US on the basis of bad weather.
Tesco (LONDON:TSCO) (-1.9%) Nobody was expecting anything all that positive from Tesco, but the fact that profits more than halved in H1 from £779m to £354m. Like for like sales were also down 1.1%, and there was a note of caution from management that trading conditions will continue to be challenging. Nevertheless, pre-tax profit was £74m, a great deal better than the £19m loss posted last year. The new national living wage is also set to pose a problem for the supermarket chain, costing £500m by 2020 and expected to put even more pressure on weak profit margins. Also, the company is not paying an interim dividend, which will likely put off some of the income investors.
Tesco’s peers are not doing much better with Morrison (LONDON:MRW) falling 0.5% and Sainsbury (LONDON:SBRY) shedding 0.9%.
Marks & Spencer (LONDON:MKS) (-2.41%) JPM downgrade . ‘’We expect another quarter of negative LFL performance from M&S in General Merchandise and are also concerned that LFL growth in the Food business is becoming harder to achieve. With our new TP of 550p (from 600p) offering only 6% upside to the current share price, we reduce our recommendation to Neutral."
SAB Miller (LONDON:SAB) (+2.5%) following yesterday’s refusal, Budweiser maker, Anheuser-Busch Inbev NV (NYSE:BUD) has now bid 42.15 pounds a share in cash. For now, it’s uncertain if this will be acceptable and investors, judging by the muted response in the share price this morning are cautious and probably more than a little dubious that this deal will go ahead. The transaction would be the biggest of 2015 and the fourth-largest takeover ever.
Anglo American (LONDON:AAL) (+4.55%) Raised to equal weight at Morgan Stanley.
Rio Tinto (NYSE:RIO) +5% Raised to overweight. Morgan Stanley state that stable data from China in the past few months has spurred this upgrade, potential uplift from stimulus policies increased conviction that the 19% commodity uplift by 2017 is achievable. Forcing supply disciple on the mining companies will also be an elevator to commodity prices.
Easyjet (LONDON:EZJ) (-3%) - some profit taking following yesterday’s upside. The pop higher in oil prices may also become a factor for the airline industry should the present move prove sustainable. U.S. crude closed at nearly a three-month high yesterday after a new U.S. forecast showed tighter oil supplies next year, while Russia, Saudi Arabia and other big producers hinted at further talks to support the market.
IAG (LONDON:ICAG) (– 2.98%)
Ryanair (NASDAQ:RYAAY) (-3.56%)
Standard Chartered (LONDON:STAN) (+1.92%) Heinz Hilger announced as new Germany head. Standard Chartered just launched a fintech accelerator programme to help companies crack the Asian market.
Old Mutual (LONDON:OML) (+2.72%) Underpriced and underrated according to Barclays- upgraded to Overweight
We are calling the Dow higher by 100 points to 16891
Pound surges on SAB rumours and improved industrial data
Cable made a bullish start in London on news that AB InBev revised offer to SAB Miller. Early gains were supported by a better-than-expected industrial and manufacturing data in the UK. Cable surged to 1.5309.
While the possibility of a deal keeps the pound upbeat against the US dollar and the euro, the activity on SAB Miller shares remains subdued. The company said InBev bid substantially undervalues the company and investors’ reluctance to buy the rumour could not suffice to support the early rally in pound. At this point, investors are holding their breath before jumping back in the field.
Thankfully the macro data is there to keep the sentiment in pound upbeat. In opposition to last month’s figures, the UK industrial activity expanded by a solid 1.0% in month of August, manufacturing activity picked up by 0.5% over the same month. This being said, the global rout in commodity and energy prices has a significant negative impact on entire sectors’ revenue margins. We already know that manufacturers are looking to adjust their capacity lower in order to adapt to sluggish exports and waning demand. The adjustment in capacity warns of a bumpy path ahead of us. A single data point is obviously not sufficient to assess a better outlook.
The BoE meets tomorrow and is broadly expected to maintain its bank rate at the historical low of 0.50%. Of course, the delay in Fed’s normalisation plans will not be directly mentioned, yet cold winds from China and the slowing signs in economic recovery will certainly keep the MPC members from sailing the open sea.