It appears that market participants are finally starting to take note of the diverging monetary policies of the FOMC and the ECB. Risk on is back in vogue with European equity indices pushing higher ahead of the ECB rate decision later this afternoon. This has been aided and abetted by the weaker euro which dipped through the $1.09 and the 70p level this morning.
Yellen’s comments on potential tightening offered no real clarity except that the current climate indicates that we may well see a rate hike before the year is out. The key here is slow and gradual and the sooner we start, the more gradual it can be.
We’re clearly not expecting any change to the status quo from Mario Draghi today but some questions will need to be asked. Clearly Greece will be a relevant topic and the focus will be on future ELA for the beleaguered banks. The current QE programme will also be on the radar. Given that the single currency has been exceptionally resilient up till now, particularly against the greenback, any signals that the ECB will ramp up the current programme will likely see the euro complex decline rapidly.
The FTSE is presently up 3.4% year to date and at current levels seems slightly toppy. The same can be said for the broader European market so we will certainly be looking to Draghi as the catalyst for any near term upside gains. Auto sales are indicating that the recovery is beginning to take hold in the EU. Demand for mid-market brands and luxury autos pushed growth of new car sales in Europe to the highest monthly rate in five and a half years in June
A write-off of around $4bn in its H1 results was necessary for Anglo American (LONDON:AAL) owing to the slide in iron ore and coal prices. We may expect a cut to its dividend in the near term.
This is the second time this year that Anglo has had to write down as a result of the rout in commodities. Iron ore output at Kumba in South Africa fell by 9% in the second quarter year-on-year to 10.4m tonnes due to mining feedstock issues. Anglo shares are now down 27% year to date."
The recent merger is evidently working well for Dixons Carphone (LONDON:DC) and with the recent agreement with Sprint Corp (NYSE:S) and the expansion in the US, its little wonder the majority of brokers are bullish on the stock. The UK’s biggest electrical retailer delivered a 21% rise in pre-tax profits to £381m on strong performances in its Greek, Nordic and UK businesses. Big ticket items were clearly a way for the Greeks to protect capital by hook or by crook. The recent merger is evidently working well and with the recent agreement with Sprint and the expansion in the US, its little wonder the majority of brokers are bullish on the stock. Trading close to all-time highs already, the average target price is 527p.
The UK government has reduced its stake in Lloyds (LONDON:LLOY) to below 15%. We now move that bit closer to full privatisation – expected to be complete by next year. The stock is up on the day and indeed has registered gains over the past number of days. The 90p marker has been a barrier to upside but most brokers are upbeat on the prospects. The average target price is 92.29p.
Due to report its FY results on 29th July, St. James’ Place is already upbeat about its prospects. With products including pensions, offshore products and mortgage advisory services, the company has increased its funds under-management by 22% over the last 12 months. The group’s expansion into Asia where it could benefit from the country’s growing middle class and the improving UK economy has sent the shares to 993p this morning. Average broker price target is 1029p.
Philly Fed manufacturing and unemployment claims are all on the US agenda today. The former is expected to show some weakness versus the previous print but claims are expected to decline feeding into Yellen’s plan.
We are calling the Dow 80 points higher to 18130.
Swiss retail sales tank, Swatch Group (SIX:UHR) miss earnings estimate
The yearly 1.8% contraction in Swiss retail sales in May has been a little surprise given that the Swiss economy is having a serious hard time curbing the economic slowdown after the SNB abandoned the euro-franc floor on January 15.
A quarter ago, we called for an improvement in the second half of the year, now we revise down our optimism and voice scepticism regarding Swiss economy’s performance in the second half of this year for several reasons.
First, the unexpected prolongation in the Greek saga has been an important delay in Eurozone’s recovery prospects. As the Eurozone stands for circa 60% of Switzerland’s total trades, the sorrow Eurozone fundamentals should continue tempering the revenue flow into the Swiss economy. Even more as the expensive franc is a natural incentive to avoid Swiss products and services at the times of economic crisis.
Second, the slowdown in Chinese economy weighs on Swiss luxury goods exports and the expensive franc squeezes the profit margins in francs at a time when it is certainly the most needed. We note that the franc’s strength has little to play in this configuration as the luxury goods have high price elasticity. Nevertheless, the contraction in Chinese purchasing power is a concern for the Swiss exporters currently marketing 17% of their products to the Chinese market, thanks to bilateral trade agreements that opened the heavy Chinese doors to Swiss producers. Given that the exports to China were less than 5% in 2010, the potential for expansion in China has been a dream becoming true over the past five years. Nowadays, concerns on Chinese slowdown could be another hit for Swiss exporters.
Third, the structural rigidities in Swiss jobs market is a barrier to salary/cost adjustment to the expensive franc. As the negative rates keep weighing on pension fund performances, as household savings melt in bank accounts and as the anxiety on job security increases, convincing Swiss households to spend their money will be a harder task.
Is Swatch Group AG (OTC:SWGAY) too optimistic about the second half results?
Even if the Swatch Group sales beat the market estimates, the group missed its earnings estimate (9.95 vs 10.64 forecast) which dropped 18% year-over-year and confirmed our suspicions that the profit margins continue tanking for the Swiss company. While the Swiss watchmaker expects a better second half, relying on higher Chinese demand and ‘further positive growth in local currency’, the gloomy economic outlook in China may be an important drag to this optimism.
Swatch Group share price gapped above 400 fr. in Zurich this morning. As January 15th currency shock is believed to be mostly digested, there is room for further recovery toward 450 fr., Fibonacci’s 38.2% retrace on Dec’13 – Jul’15 drop. Yet an extension back above the 500 mark is very much uncertain.