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By Dave Evans of Binary.com
The final session of the UK Parliament took place on Thursday 26th March, marking a five week run-up to the general election.
At the time of writing, the outcome is almost impossible to predict, with bookmaker odds giving a Labour minority government a 29% implied probability and a Conservative minority government a 25% probability. A conservative majority has a current probability of 18.2%, and continuation of the current coalition is given a likelihood of 13.3%.
If this were a horse race, it would be one that punters and bookmakers would try to avoid like the plague. Financial markets are also unsure of what to do, with a hung parliament the most likely outcome and a market unfriendly Labour victory on the cards.
More than anything, financial markets despise uncertainty. Sometimes, uncertainty can have a more damaging effect than outright negative news: at least with the latter the markets know what they are facing.
GBP/USD Daily Chart
The GBP/USD has been declining steadily since Q4 2014, though most of this decrease has been down to the pervasive strength of the US dollar.
Against the euro, we can see the impact of the election uncertainty with a bit more clarity as the EUR/GBP has risen since the beginning of March.
EUR/GBP Daily Chart
Part of this recent upwards trend is down to the quietening of the Greek crisis. There have been various Greek reform proposals mooted since the Merkel/Tsipras summit, but these mostly appear to be window dressing and a repetition of ideas already put forward. Broad structural reform still seems like it is being kicked into the long grass, but for now markets appear placated.
The EUR/GBP did nip back on Thursday and Friday thanks to comments from Bank of England Governor Carney that the next moves in UK interest rates is likely to be higher. This is not exactly a revelation but nevertheless calmed some of the speculators putting outside bets on a rate cut or at least a delay in rate hikes.
This pullback could prove to be short lived though as election uncertainty seeps more into the nation’s (and traders’ consciousness). The Bank of England is unlikely to make any firm decisions until after the general election, so the chance of an upside shock for the pound has to be less than the chance of a downside shock.
With Europe still able throw up a good crisis, it is hard to bet on the EUR/GBP just yet though, even with the UK election uncertainty. A better vehicle could be the GBP/JPY.
GBP/JPY Daily Chart
The yen pairs have enjoyed the US dollar backing off recently, with the GBP/JPY selling off heavily since the beginning of March. Support does loom in the 176.00 region but should this break, there is much room for significant downside.
A good way to play this is a LOWER trade predicting that the GBP/JPY will close BELOW 176.00 in 33 days time, which could return 170% if successful. Alternatively, put another way, betting that the GBP/JPY will drop and close below 176.00 on April 29th could return £27.07 from every £10 put at risk.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice, and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.
Given the way that the FTSE 100 finally managed to go “over the top” this month – reaching the dizzy heights of 7,000 plus before fading yet again, one might have thought there would be a spring in the step of many blue chips plays. This is, alas, not quite the case. It would appear that the UK index really managed to hit the heights due to an intermediate rebound in resources stocks, which have been holding it back rather painfully as compared to many other leading indices. What is interesting from the technical stocks sweep below is that none of the winners over March have actually been in this space. Instead, we have a rather mixed bag of sectors represented.
The horrific Germanwings tragedy of this week delivered at least a temporary wobble to some airline stocks, although in the case of International Consolidated (IAG) it can be seen that the overall uptrend, and much of the gains, are still very much intact. Nevertheless, there is the first hint at a bearish rising wedge formation, one which could be flagging the idea of at least a temporary pullback. However, such a scenario is contingent on at least an end of day close back below the 20 day moving average at 475p. Despite the latest weakness for the shares it would probably be wrong for even the most keen of bears to press the sell button unless or until there was a breakdown below this zone.
ITV (ITV) has been something of a personal favourite of mine on both a technical and a fundamental basis, even though I have never watched Downton Abbey. From a technical perspective it can be seen how a July unfilled gap to the upside here was the big momentum trigger. The only spanner in the works, and arguably quite a large one, was the way that the move higher after the charting buy signal took so long. But at least there was a fresh bite at the cherry for the bulls with the October bear trap rebound from just below the 200 day moving average. This subsequently delivered around 60p upside at best, which for most traders would be regarded as quite sufficient. The ideal scenario now would be that there is a retracement back towards the 50 day moving average at 236p. At least while there is no end of day close back below the 50 day line, the prospect of a retest of the best levels of the year towards 260p is a realistic one over the next 1-2 months.
While it may not quite be the joker in the pack of today’s trio, the situation as far as Standard Chartered (STAN) is concerned is that we are looking at a recovery situation on price action grounds, even if the fundamentals can be described as being somewhat opaque at the moment from a bullish perspective. The daily chart did not of course make pleasant viewing until late February when the neckline resistance zone post November towards 1,000p was finally broken. The position now is that we would expect a retest of the 200 day moving average, now at 1,070p, as new support. Under the best case scenario there would not be sustained price action below the 200 day line ahead of a journey towards the top of an October price channel top target at 1,300p. The timeframe on such a move is the next 1-2 months.
By Robert Sutherland Smith
Markets are too intertwiningly complex for simple rationalisation; so one does not rush get involved with the intellectual challenge of trying to understand and explain them every day. No man is an island unto himself and nor is any market.
In the age of globalization and digital technology, economic, financial, political and psychological facts and factors move through markets like quick silver. And there are many of them; heading from and towards all directions along the thoroughfares of investment and trading life. There is too much information and data coming from too many directions to be able to construct a useful, predictive model.
However, thanks to our hunter gatherer ancestors, we have a capacity for instinct and feeling. One may not know a thing but an instinct may lead us towards it. There is also the assistance of human custom and practice, precedent and folklore; a timeless human method for trying to impose coherence on chaos. It was the latter, prompted by some seasonal instinct that caused me to think about the UK equity market. We are in the last days of March, and May will soon be less than four weeks away.
As we know from market folklore one should sell in May and go away. In other words we are approaching spring and the summer season when volumes thin and markets often weaken or fall - although not always. In markets, it is the exceptions that prove the rules. If markets are less predictable than physical nature, it is in part because they are the stuff of human activity and human psychology. As for that, Will Shakespeare put it neatly when he said that we are the stuff that dreams are made of - a bit less tangible than the stuff that geology is made of.
Last May was not one of those to sell and go away years, simply because we were in the throes of US economic recovery and no sensible shareholder wanted to be absent from that. The question concerning the US this year is whether or not the US economy will continue to grow when interest rates are set to rise. In the market’s summer doldrums fears tend to get exaggerated in my experience. Summer markets seem made for bear stories and beliefs. US inflation needs to get to 2%; that is the Fed’s mandate. Inflation is still below that and, it appears common sense to me, inflation is unlikely to take off like a rocket. If that is so, then the Fed rate will not need to increase by a lot. That makes me think that GDP growth and lending rates are likely to be compatible for some time. So I have a bullish instinct about the US in 2015.
After an excruciatingly long pregnancy, European goose has laid an egg with the words ‘quantitative easing’ stamped on it. It has started auspiciously. The Euro is up not down. That seems to imply that foreign exchange markets think that it will induce economic activity and eventually some much needed inflation. In any event, there are some green shoots of seemingly economic recovery in parts of ‘Euroland’ including Greece; the latest German business confidence survey was described as “robust”. For its next trick, Europe needs to get on with a Eurozone fiscal and banking system to transfer surpluses to deficit areas of the zone. Then it will start to look like an economic union to match the existing and economically premature currency union. That has been another long pregnancy and there has to be a hopeful chance that this second egg will appear sooner rather than later.
China is more of a conundrum. It is more opaque than Western economies and no one trusts the official economic data. There has clearly been a lot of domestic lending and observers question how long that can go on without producing not an egg but an explosive device, blowing up the Mandarin duck. On the other hand, China has economic levers which western countries lack; they include no effective separation of constitutional powers of executive government, legislation and justice; a perpetual one party government with eloquent powers of direction including the police and frequent executions and imprisonment for malefactors, discontents and critics. It is clearly trying to shift the economy from an overwhelming dependence on infrastructure, construction, manufacturing and exports to greater domestic consumption. Although the market gets hysterical when any monthly GDP number is slightly below 7.5% and can’t get over the increasingly historic fact that China’s economy has long ceased to grow at 10% p.a. – which means that it was doubling about every seven years. With domestic Wages and earnings rising, some expect exports and growth to be helped by a weakening yen exchange rate.
My instinct is to still feel on balance bullish about the US, Europe and China. However, we also have a seemingly religious civil war between Sunni and Shia Islam in Yemen, with Saudis on one side and the Iranians on the other, which has pushed up the price of crude oil despite the recent oversupply of the stuff. More peripherally, ‘Bibi’ Netanyahu has stoked the frustration of the Palestinians by declaring that they will never have what they are told by the Obama Administration they can achieve through peaceful negotiation - the long awaited two state solution. I have no means of evaluating the risk of such Middle Eastern Gordian knots except to say that it may be potentially more explosive than a mandarin duck egg.
As for the UK economy and currency, we all know that we face the certainty of an uncertain political resolution at the forthcoming UK General Election with a minority government and a constitutional predicament with the SNP potentially holding the balance. It looks like a ‘win-win’ situation for Alex Salmond. No doubt foreign investors will get a bit edgy at the uncertainty of it all. However, we have had minority governments before. Similarly, a successful UKIP electoral performance would not be good for business or economic prospects either. The Election probably means that May could come a month earlier this year. As the poet said, “Oh to be in England now that April’s there”.
As the FTSE 100 continues to play games with the bulls, having crossed 7,000 briefly this month, we are left wondering whether leading UK stocks are really going to be able to sustain record levels this side of the General Election. If you add in the uncertainties associated with the effects of 0% inflation, it may be argued that only the brave may be entirely happy with the idea of pursuing blue chips to record levels.
But of course, such issues are not necessarily such a big issue further down the market capitalisation scale. Typically FTSE 250 stocks/mid caps are not so much geopolitically affected and hence it is domestic factors which are the most important. At the very least this will ensure imported volatility from war zones and crumbling economies such as Greece will make less of an impression in this particular part of the market. Indeed, just as the FTSE 100 was diving again this week back below 6,900, we have been treated to quite spritely performances from some quite high profile mid cap names.
First in line is Card Factory (CARD), one of the few in any part of the stock market which is a new chart to me. What can be seen in recent months is that the stock has managed to progress well within a rising trend channel from August, with an uptrend line in the RSI window from January running at the 50 level. They should provide the momentum for further gains with the notional stop loss an end of day close back below the 20 day moving average at 283p. Above this should lead to the 2014 price channel top at 325p over the next 1-2 months.
Next up is Just East (JE.) where there would appear to have been quite a battle between the bulls and bears since the company came to market. The case for the shorts is that this is something of a bubble play, with too much hype in the valuation. From my perspective this is too negative a view, something which is borne out by the way that we have been witnessing an acceleration to the upside for the share price within a rising trend channel from July. This channel currently has its floor running towards the 50 day moving average at 356p. But the likelihood is that support in the first instance will come in towards the former February 380p resistance. The message is that provided there is no break back blow the floor of last month, we are looking to a 2014 resistance line projection target as high as 450p over the next 2- 4 weeks.
Ophir Energy (OPHR) has to be regarded as one of the more challenging mid caps from both a charting and a fundamental perspective, a point which has of course been underlined by the way that the stock has suffered in the wake of the Crude Oil plunge since the autumn. However, the present setup does provide some cause for optimism. This is because there has been a bear trap gap reversal for March versus January from below 120p. The implication now is that provided there is no end of day close back below the 50 day moving average at 135p, we can expect a top of December rising trend channel target as high as 160p by the end of next month. That said, even if 160p is hit the overall downtrend here could still be in place and resume, but traders will have an initial buying opportunity.
The Bank of England’s Financial Policy Committee has said that UK markets could be destabilised by a slowdown in China or the ongoing Greek crisis crisis in its latest quarterly report. The body also said that its annual stress tests for the banking sector would focus on such international factors. The board wrote that “these risks could trigger abrupt shifts in global risk appetite that in turn might lead to a sudden reappraisal of underlying vulnerabilities in highly indebted economies, or sharp adjustments in financial markets”.
At the London close the Dow Jones had decreased by 22.83 points to 17,695.71 and the Nasdaq fell by 12.85 points to 4,316.44.
In London the FTSE 100 closed down by 95.64 points at 6,895.33 and the FTSE 250 fell by 246.09 points to 17,256.22. The FTSE All Share had decreased by 52.72 points to 3,795.61 while the FTSE AIM Index shrank by 0.43 points to 716.97.
Numis Securities has rated solid state battery manufacturer Ilika (IKA) as a “buy” after the firm ran a pilot test of its production process. The broker finds this progress encouraging and believes that Ilika should be able to release samples to commercial partners during 2015 and puts the business on track to benefit from increased demand for solid state power sources in the near future. The shares grew by 7p to 79.5p.
Sterling Energy (SEY) has retained its “buy” rating and 31p target price from Westhouse Securities despite the oil producer booking a $12.3 million (£8.2 million) loss for 2014 due to impairments and experiencing little exploratory success over the year. Westhouse says that its position is based on the firm’s incredibly strong cash position and limited obligations. Sterling shares rose by 0.75p to 17.75p.
Beaufort Securities recommended a “buy” on housebuilder Bellway (BWY) after the publication of a positive set of half year results showing enhanced profitability and a healthy order book and land bank. The broker believes that stronger wage growth and low inflation will allow the firm to maintain growth despite the general cooling of the UK housing market in recent months. The shares fell by 19p to 2,040p.
Budget airline easyJet (EZJ) has revised guidance for the six months to 31st March upwards and management now believe that the firm may make a profit of up to £10 million pounds for the period. Income per seat rose faster than expected, as did passenger capacity on the company’s routes. A favourable shift in interest rates contributed to the improved incomes. The shares dropped by 53p to 1,837p.
Engineering and design outfit Amec Foster Wheeler (AMFW) has published its first set of results since AMEC acquired a 95.3% controlling interest in Foster Wheeler in November. Revenues for 2014 (including 7 weeks of trading by Foster Wheeler) were slightly up on the prior year and management believe that it will benefit from shifting to a multi-market model during 2015. The shares fell by 22.5p to 950.5p.
Shares in ADVFN (AFN) fell by 6.5p to 116p in reaction to the financial website owner releasing a dire set of interims after market close last night. While sales grew by 7.8% to £4.8 million in the six months to December operating losses soared by 89% to £647,000. More ammunition then for Mr Zack Keinan, the firm’s 25.7% shareholder who has requested a general meeting to remove the board.
IT services provider Scisys (SSY) increased operating profits by 88% to £3.2 million over the course of 2014 after it purchased Xibis and secured a number of new contracts. Operating margins improved by 70 basis points and profits before taxation doubled to £3 million from £1.4 million in the prior year. Management remain cautious about 2015 guidance despite the fresh deals. Shares in the firm declined by 9.5p to 84p.
Specialised industrial and ruggedised computer and electronic components designer Solid State (SOLI) announced that its Steatite division has been granted £1.1 million in funding to develop the next generation of Lithium based batteries for deep sea use as part of a consortium including cell manufacturer OXIS and underwater technology experts MSubs and National Oceanography Centre. The shares dropped by 17.5p to 622.5p.
Employee benefits and financial services firm Personal Group (PGH) recorded revenues of £47 million in 2014, a 65% increase over the prior year as the company expanded by buying Let’s Connect in March. Statutory profits before tax were up by almost 150% to 9.2 million pounds. The board is confident that 2015 will be a strong year. The shares grew by 12.5p to 560p.
Crop nutrition specialist Plant Impact (PIM) more than doubled revenues to £2.5 million in the six months ended 31st January following the first commercial season after its Veritas line was made available in Brazil. The company also tipped into operating profits, after it made a loss of £0.6 million in the comparative period of 2013. Plant Impact shares fell by 0.5p to 50p.
Corero Network Security (CNS) launched its Smartwall defense system last year and secured a number of large orders, but annual revenues slipped to $7.5 million (£5 million). The company’s loss before taxation was $10.1 million (£6.8 million), a substantial fall from the $8.2 million (5.5 million) profit recorded a year earlier. The board expect orders to improve as organisations become more of DDoS attacks. The shares fell by 1.12p to 11.38p.