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Investor Focus Has Apple At Its Core

Published 07/21/2015, 06:24 AM
Updated 04/25/2018, 04:10 AM

European equity markets are trading flat to higher this morning. This follows a broadly upbeat Asian market overnight with mainland China outperforming. The Nikkei and the ASX are higher; the former is close to all-time highs and there were no real surprises out of BoJ or RBA minutes. US equities finished up on Monday too with the S&P500 back in record territory and US Treasuries look a little weaker. The dollar continues to garner strength, up almost 5% on the month on a trade weighted basis – this is the central focus of capital markets at the moment and is certainly doing little to help the current commodity rout. The lack of optimism in the basic resources sector has taken some of the heat out of the FTSE upside which has now relinquished the 6800 level.

Stateside, there is and will continue to be a big focus on tech earnings; post-close, IBM (NYSE:IBM) missed on Q2 revenues. Today’s post-close line-up includes Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO). A decent set of numbers from Apple could send the S&P500 to new highs. But there is a distinct lack of breadth, only 57% of stocks are trading above their 200 DMA.

Expectations for Apple are high with an average target price of $149 amongst 55 brokers polled. Shares are up 40% in the past year, with 6% of that added in the past week alone. iPhone sales will be critical, China, which accounted for 29% of revenue in the prior quarter will also be an important driver. Consumer spending there may well have taken a hit in the past few months. It’s probably a little too early to judge the success of the Apple Watch, released in the US in mid-June. But judging by some of the guys in this office; it is the gadget to own.

For the moment, it’s all about buying risk, the greenback and maintaining a bearish stance on resources. To say this is a relief rally in the aftermath of the volatility caused by the Greek debt crisis would be an understatement. The volatility or fear index is also trading at its lowest level since December

Insurance giant Admiral is taking on an extra 130 people in its Newport office as well as 50 additional jobs in Cardiff and 100 in Swansea. Despite a 16% drop in the share price since mid-April, bargain hunting investors have stepped in. A drive through the 1500p marker is needed to get back on course but with the majority looking for a decline to 1407p, this may be a short-lived bounce.

The forthcoming review from Ofcom will likely weigh on the share price in the near term. September 11 is the consultation close date and the prospect of price caps amidst a lack of competition in the industry would be negative. Another fall in letter deliveries, this time by 5%, has dragged revenues for the group division lower by 4%. The outlook for this area is also forecast to decline. Parcel deliveries, on the other hand were up 3% in the three months to June 28. European delivery network GLS fared better; volumes grew by 9% and revenue by 8%. The focus is now on expanding the parcel delivery division by remaining open at weekends.

Yet another rumour that Pearson (LONDON:PSON) may be about to offload the FT saw the share price rise 5% yesterday before closing 1.6% lower. The company is apparently sounding out bidders for the paper which is valued at around £1bn. Given the hefty pensions associated with the FT, and the fact that no formal process is even in place yet, we may well see the shares retrace these upside moves in the near term.

With little on the macro calendar today, the focus will be entirely on the corporate picture.

We are calling the Dow lower today by 25 points to 18074.

What if the BoE overtakes the Fed?

The pound gained against all of its G10 peers except the US dollar over the past week as the BoE Governor Carney surprised the market with an early hint at a policy normalisation in the UK. The Conservative-led government emphasize on living wages has certainly played big in the recent hawkish shift we heard in Carney’s stance

Improvement in wages could easily boost inflationary pressures and leave the Bank of England short of time before taking back the control on consumer prices. The risk is perhaps not worth taking even if the inflation is perfectly flat in the UK at this time of the year. The rout in commodities is also likely to hamper any hawkish inflation expectations in the near term.

Due tomorrow, the BoE minutes will certainly show at least two out of the nine Committee members voicing a sharper view in favour of an early rate hike. Moreover, Governor Mark Carney is expected to join the hawkish team – David Miles, Ian McCafferty and Martin Waele –and run for majority vote for the first rate hike as early as November, if not in February 2016 as the BoE releases the Quarterly Inflation Report.

The BoE’s divergence from the leading G10 policy makers, particularly from the ECB, BoJ and commodity sensitive BoC, RBA and RBNZ, could be read via sterling’s outperformance since Tories took over the government. Since May this year, the pound outperformed the kiwi by 14.7%, the loonie by 9.0 % and the euro by 5.8%. There is no reason for the appreciation in pound to halt at the current levels. On trade weighted basis, British pound recovered two thirds since it fell from its 2007 pick, there is 30% more to go before reaching the pre-crisis levels.

Path to US presidential election could be too narrow for Yellen to power up the rate hike engine

Against the US dollar, the view is fairly balanced. As the Fed urges to hike the federal funds rate before the end of the year, the ‘social’ pressure on US’ shoulder, as the world’s strongest economy, could refrain Yellen from making the first move. IMF recommendation to wait until the first quarter of 2016, combined to contraction in the US first quarter GDP just over a year before the US presidential election in November 2016, could realistically pull back Yellen from taking the first step, even the first step will be nothing than a signal to the market, or at least keep the Fed on a loose normalisation path as the path to November 2008 could be too narrow for both presidential campaigns and hiking rates.

The convergence between the Fed and the BoE policies could therefore keep the pound ranged in 1.55/1.62 zone against the US dollar (Fibonacci’s 38.2% and 61.8% retracement respectively on Jul’14 – Apr’15, or simple since Carney had dropped his forecast on wages growth and stepped to loose stance last year).

This being said, there is a building conviction that the BoE would even go past the Fed within the coming 12 months.

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