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Capital Flows May Favour The UK

The last week was one of the most eventful yet for the 15-year-old European Monetary Union. Two records were broken. Firstly, the ECB announced a large-scale quantitative easing programme, which had hitherto been unattempted, as such measures were considered illegal in the Eurozone. Secondly, we now have an extreme leftist party leading a Eurozone country for the first time, as Syriza secured 149 out of 300 possible seats over the weekend in the general election in Greece. In spite of the German filibustering against Draghi’s QE plans, and the constant warnings from European leaders against an anti-austerity backlash in Greece, the impossible happened! We now have QE and Syriza.

European Politics Undergoing a Face Lift

After having to endure more than 5 years of austerity measures without much success, it is unsurprising that the Greek people are demanding change. The EU austerity programme has engendered one of the worse and most prolonged economic recessions ever seen, with GDP now 25% below its 2008 level. Alexis Tsipras’ victory represents the beginning of a new cycle, not only for Greece but also for Europe in general, as “alternative” parties are gathering momentum in other countries as well.

However, even though many believe that Greece will have to give up the euro project and print its own money to pay salaries and other expenses, I don’t believe that is going to happen. But at the same time the threat that debt payment conditions are not renegotiable is also not credible. With a budget surplus of around €1.9 billion in 2014 and an expected €3.3 billion for the current year, Greece seems more than able to survive any EU threats, as pensions, salaries, and payments to suppliers are secured. The only ones under threat here are bondholders, which will suffer a haircut if the money left from the primary budget isn’t enough to pay them. But that is not in the best interests of either Greece or the EU and they will open a window of negotiation, granting some payment extensions and interest cuts to the country. I am not seeing much Greek drama here, nor much of a real effect on the euro.

The Large-Scale Asset Purchase Programme

But while I downplay the effects on the euro from any Greek drama, I believe the euro has much to suffer from QE. Last Thursday Mario Draghi announced a massive asset purchase programme in which the central bank is expected to spend €60 billion per month from March 2015 to September 2016. That amounts to more than €1 billion in asset purchases and surpasses even the most optimistic predictions. Draghi expects to push sovereign yields lower and with the help of the negative deposit facility rate convince banks to lend more money. At the same time, higher asset prices are expected to deliver a wealth effect and further stimulate the economy. But, as I mentioned in my last blog Here Comes The (Not So Big) Bazooka, the final result may fall short of its intentions, as it may already be too late for this kind of action, and the ECB lacks the most important ingredient of central bank intervention - the surprise factor.

More concerning from my point of view are the likely side effects of the ECB programme. As we have seen, even before the announcement, the Swiss National Bank removed its peg to the euro and cut its main rate to -0.75%, pushing many financial companies into trouble (just look at Alpari UK and FXCM as examples). When a central bank like the ECB makes such bold moves, it leads to significant capital flows that can change the world in a matter of hours. Greedy investors are always looking for the best yields and won’t leave their money parked in the Eurozone. As a consequence, just 90 minutes after Draghi’s announcement, the Danish National Bank cut its deposit rate from -0.20% to -0.35% - a record low - to prevent the appreciation of the Danish krona. The Bank of Sweden is expected to follow the same steps to keep the Swedish krona stable against the euro.

But will the game end here?

I think not. There is excess liquidity in Europe but a lack of investment opportunities. The EU policy has been directed towards reducing sovereign debt without any care for its consequences on employment and growth, which has dragged the bloc into stagnation. The new QE programme may drive some positive effects in attracting real investment, but at the cost of scaring away investors who will desperately seek for higher yields outside the Eurozone, in particular from neighbours with close ties with the currency bloc. Evidence of this can already be seen in the moves made by the Danish and the Swiss to refrain inflows of money. But those aren’t the only countries to where money can flow…

What about the UK? Isn’t it an even better destination?

With the main interest rate now sitting at 0.5% and many voices still urging for a rate hike this year, the UK seems like a great candidate for European money inflows. The 10-year Gilt is offering a 1.5% yield compared with 1.40% in Spain and 0.34% in Germany. I would never buy Spanish debt at 1.40% if I could buy a Gilt at the same yield. At the same time, the UK equity market seems attractive at current prices. While many equity indices are showing some overvaluation signs, the FTSE 100 appears relatively underpriced.

If we consider the last 25 months (since the beginning of 2013), the S&P 500 rose 43.9%, the DAX 39.9%, the French CAC 27.5%, whilst the FTSE 100 is up just a mild 15.9%. The modest gain makes the market even more attractive after a long six-year bullish period. At the same time, the prospects for a stronger pound relative to the euro are good and should help attract inflows. Many expect the euro to achieve parity against the dollar. If that happens and if the pound keeps relatively stable against the dollar, we may very well see the EUR/GBP at 0.6600 or below, which is an added incentive for the capital inflow to the UK. In my view, the Eurozone political changes, and the heavy pressure the QE programme will put on the euro for the foreseeable future, are good reasons to expect a bright future for the FTSE. I don’t know how Mark Carney will deal with this, but the pound, the FTSE, and London property could all rise on the back of the ECB’s move. This may be a good opportunity to go fishing in the UK. (See Zak Mir’s take on the best-positioned shares.)


Monday's Stock Market report featuring Carillion, Rolls Royce, Petra Diamonds and Colefax

The Markets

The Euro dropped to a fresh 11-year low of 1.1088 against the US dollar today following news that the anti-austerity Syriza Party will lead a new coalition Greek government. Senior ECB figures have warned incoming politicians from the left-wing movement that there is little support for a debt write off among EU policy makers. Yields on Greek bonds rose, but rates are still below the levels seen ahead of the announcement of the ECB’s stimulus measures last week.

Computing giant IBM plans to cut 110,000 jobs, over a quarter of its total workforce, according to a leaked report. The company recently announced its 11th straight quarter of falling revenues and profits, once again failing to hit analysts’ forecasts. It is believed that the cuts will be focused on global service operations at the once-ubiquitous manufacturer, which has struggled to adapt to changes in the market over recent years.

At the London close the Dow Jones had decreased by 15.99 points to 17,656.61 and the Nasdaq shrank by 11.93 points to 4,266.21.

In London the FTSE 100 closed up by 19.57 points at 6,852.40 and the FTSE 250 rose by 11.62 points to 16,470.52. The FTSE All Share increased by 8.57 points to 3,672.98 while the FTSE AIM Index fell by 1.33 points to 694.93.


Broker Notes

Northland Capital has rated Global Energy Development (GED) as a “buy” despite a steep reduction in proven and probable oil reserves in the firm’s holdings following the sales of its Llanos producing assets and poor results from Catalina shale tests. The broker was expecting a downgrade in this area after the recent oil price drop affected the viability of many current oil projects. The shares dropped by 5p to 37p.

Westhouse Securities reiterated its “buy” rating and 9p target price on Advanced Oncotherapy (AVO) after the company announced it had successfully manufactured the first coupled cavity linac modules, a key part in its LIGHT proton therapy system. The broker said that the investment case for Advanced Oncotherapy depends on it being able to come to market on schedule and that this represents a significant milestone in the process. The shares grew by 0.05p to 3.9p.

Beaufort Securities rated support services specialist Carillion (CLLN) as a “buy” with a target price of 348.4p after the company signed major contracts worth 200 million pounds over five years with the UK Ministry of Justice. The broker believes that these deals, coupled with a number of other recent wins, demonstrate that Carillion is well positioned for the medium-term. Shares in the company rose by 1.6p to 350p.

Blue Chips.

Energy firm SSE (SSE) has confirmed that results for the year ended 31st March 2014 will be in line with expectations laid out in its interim trading statement and that the firm is still committed to increasing the full year dividend by a minimum of the change in retail price inflation. SSE also said that it would cut UK household gas prices by 4.1% at the end of April and guaranteed to hold them at that level until 2016. Shares in the firm rose by 24p to 1,516p.

Automobile and engine manufacturer Rolls Royce (RR.) has received a major order from Chinese locomotive producer CNR Dalian with a value of around €100 million (74.8 million pounds) to supply around 232 of its most powerful locomotive engines, which will be used by CNR’s local consortium for freight trains in South Africa. The order will be fully delivered by the end of 2017. Rolls Royce shares climbed by 1.5p to 903p.


Mid Caps

Mining and exploration outfit Petra Diamonds (PDL) said that output for the six months to December fell by 2% to 1.6 million carats, leading the firm to revise its full year guidance downwards to 3.2 million carats. Petra also announced that it had adjusted its expectations regarding ore grades and diamond prices for the second half of its financial grades and warned that full year results may not meet market consensus. The shares fell by 15.3p to 165.2p.

IT specialist AVEVA (AVV) has said that results in the Engineering and Design Systems division for the period from the start of October to 23rd January are in line with expectations, with the transition to a recurring revenue model proceeding to plan. However, there are higher levels of uncertainty in the Oil & Gas sector due to the recent oil price fall. The shares dropped by 20p to 1,379p.

Infrastructure outfit Balfour Beatty (BBY) has been appointed as preferred bidder for a 120 million pound student accommodation project at the University of Sussex. the deal is to design, construct and manage a 2,000 bedroom facility for the next 50 years. Construction is expected to begin next year and would be one of 15 student housing projects in Balfour Beatty’s portfolio. The shares rose by 1.5p to 228.5p.

Small Caps

Furnishing fabrics and wallpaper firm Colefax (CFX) saw sales drop by 4% to 37.44 million pounds for the six months ended 31st October due to the negative effects of currency translation. Sales in the core Fabric arm were up by 4% on a constant currency basis, but pre-tax profits dropped by 6% for the period as the interior decorating business struggled. Colefax shares fell by 15p to 360p.

Bus transport provider Rotala (ROL) recorded pre-tax profits for the year ended 30th November slightly ahead of those from the prior period, despite a modest fall in revenues. The firm’s 2015 fuel requirements have been fully hedged in advance, so the recent falls in the oil price have had little to no effect on the company’s immediate prospects. Rotala shares declined by 1.25p to 57.5p.

Clinical equipment developer Sphere Medical Holdings (SPHR) said that its UK commercialisation activities for blood monitoring device Proxima 3 are proceeding according to plan, with over 20 solid prospects in the sales pipeline and ten on-site evaluations planned for the first quarter of 2015. Steps are underway to launch the product in Europe over the next six months. Shares in Sphere Medical closed flat at 23p.


Evil Knievil on Greece, Orosur, Oxus and the Oscars

This Greek thing is mildly comic with the dissembling Europhile liars out in full force. The fact is that the average Greek saw no point in paying off debts run up by the bent ministers of the past and, quite possibly, those to come. So he voted to get rid of the debt by refusing to pay it. That seems very sensible to me.

I came very close to this point of view after Gordon Brown was exposed for what he was - a feckless obsessive - with all his handiwork of deception and incompetence laid out around him. But once a nation elects not to pay its debts it has entered very sticky territory and therefore I am glad that we did not even think of going down that route. No end of a lesson though when deciding where to vote in a hundred days time.

I suppose the difference between current political lunacy in this country and that clocked up in Greece is that we know what our chaps are up to and that we elected them. Whereas the Greek government hired Goldman Sachs to advise on how to fiddle the Eurozone entry criteria and then got stuck into an outrageous personal theft programme.

The upshot of all this is that there is no hope of the Greeks paying and, that achieved, it takes very little persuasion elsewhere in the Eurozone for others to join the debt release bandwagon. It’ll be bad for the Euro.

Actually, I went long the Euro/USD on Friday since the hysteria seemed to have settled in excessively. So it was bit concerning to get the opportunity (I took it) to buy Euro/USD again earlier today at 1.1150. I closed at 1.1268 - for reasons readers already know.


I have also been topping up on Orosur (OMI) since there has been a staggering improvement in its costs and revenue. Off the top of my head it’s well over $6m p.a.


And ditto Oxus (OXS) at 2.35p. This is mainly a fidget trade but I’ll jump off Beachey Head if I miss out on the price quadrupling on the award announcement.


Finally, I see Birdman is 6/4 second favourite to win the Oscars best picture. I think the film should be retitled Birdbrain to reflect the leading character and to avoid prosecution under the Trades Descriptions Act. After each film that my wife and I attend she asks me How Many Points (out of ten)? It is rare to go below 7. But here I plumped for 2.5. If you doubt me see it yourself and prepare to yawn. An Oscar? Give me strength.


FTSE 100 to hit new highs? By Zak Mir

Over the past 15 years there have been plenty of times when the bulls could have justifiably sung victory regarding the prospect of the FTSE 100 getting above and staying above the 7,000. One of the more convincing near misses was in the summer of 2007, clearly not a great time to be going long of equities, or indeed, anything other than put options.

There was a close call once again last September – before both the Scottish Referendum, and the halving of the crude oil price. Presumably most of our friends will be just as relieved to have dodged the impact of cheap oil on “Scotland’s oil” in the North Sea by the choice to stay within Great Britain.

But the latest rally for the FTSE 100, to leave it through 6,800, is arguably the strongest ever seen.

This is because despite a modest revival for some large miners exposed to the price of gold, the current index level is missing the help of most of the resources plays. This is significant given how heavily weighted the FTSE 100 is to these sectors.

The good news is that the latest leg down for crude below $50 has not been accompanied by a decline for the likes of BP (BP.) and Royal Dutch Shell (RDSB). Whether this “positive divergence” continues remains to be seen if the underlying commodity goes on to break the 2009 support under $40. However, so far it would appear that the “smart money” does not expect the lowest levels we are seeing currently to be maintained for long.

So the question is what part of the stock market might be best placed for high beta gains should the UK index do what it has not been able to do since the end of the last century – make new highs.

The usual area of the market to do best are the insurers, and even though this could be the exception that proves the rule, it is logical that given how exposed the sector is to the fate of stocks, we should see a disproportionate bump to the upside even if any stay above 7,000 is only brief. After all, we have the Russia / Ukraine conflict brewing up again, and the Syriza / Grexit issue to handle.

Looking at perhaps the strongest insurer on a fundamental basis first, Prudential (PRU), it can be seen from the daily chart this elephant really has been able to gallop in recent sessions. From a technical perspective it is almost as if the two unfilled gaps to the upside last week indicate that the sudden realisation a new high could on tap for blue chips has caused buyers to panic into this situation. What is interesting now is the way that even though there have been sharp near term share price gains here the stock with a RSI at 69 is not quite overbought. This would suggest there may still be a decent amount of gas in the tank in terms of positive momentum. On this basis the expectation is while Prudential remains above the initial December resistance at 1,573p the upside here over the next 1-2 months could be as great as the October 2013 price channel top of 1,800p.

Finally, an alternative insurance play for those who do not wish to knowingly be “buying at the top” is RSA (RSA) where we have a stock which could be classed more in the recovery play space. That said, the latest unfilled gap to the upside through the 200 day moving average at 464p is as forthright a technical buy signal as one could wish to see. The suggestion now is that provided there is no end of day close back below the floor of the gap and the 50 day moving average at 547p, the shares could stretch as high as the December price channel top at 520p by the end of March.


Binary bet of the week: Draghi delivered, but will the politicians?

by Dave Evans of

It was a huge week for Mario Draghi’s ECB with high expectations for Thursday’s Quantitative Easing package. The general consensus is that he did not disappoint.

The much vaunted QE program came in slightly bigger than expected and so far, there are few holes that analysts have found to pick through. Those holes will no doubt get bigger over time, especially the issue of limited risk sharing, but for now, the markets are satisfied.

So where now for the euro?

Draghi has delivered on his part, but now it’s the politician’s turn. The ECB has done just about all it can with monetary policy in the circumstances, but structural reforms need to be made at the fiscal level. Difficult reforms need to be pushed through, especially in the labour market, but this will be an uphill struggle. Greece is on the verge of electing a left wing government that will block or at least delay such reforms, while other Eurozone regions have hardly been champing at the bit to reform their economies. The importance of these reforms cannot be overstated, especially as German Flash Manufacturing PMI dropped below expectations on Friday.

Draghi’s QE program has many aims, one of which is to weaken the euro and thereby make European exports more competitive. This goal at least has been successful. The euro has been dropping for months in anticipation of QE and has dropped further as the plans came in bigger than expected.

EUR/ USD daily chart

As the daily chart of the EUR/USD above shows, the pace of decline has accelerated following the QE announcement, but the question is whether the euro has further to fall?

EUR/ USD Monthly Chart

The monthly chart above, shows that the EUR/USD has much further to fall by historical standards and we’re far from the lowest levels we’ve ever seen for the pair.

This is curious when you consider that the Eurozone is struggling to grow, with inflation levels bordering on deflation. By contrast, the US is no bed of roses, but its trajectory is at least in the right direction, with early rate increases next year a possibility.

Even if the Eurozone simply stands still for the next year, the US economy alone could tip the EUR/USD balance even higher.

Dollar Top?

So is more EUR/USD downside inevitable?

The answer is no for two reasons…

Firstly, the mere prospect of Quantitative Easing has been enough to push the EUR/USD lower. It was the mere anticipation of this that has been behind the recent selling, as traders look to get ahead of the curve. The follow on selling on Thursday and Friday could therefore be seen as a catch up adjustment as QE came in bigger than people had been betting up until this point.
Now that the news is out in the open, there is an argument that the impact of future QE is already in the price and that from this point forward, the euro’s destiny is not guaranteed to be lower.

Secondly, for the EUR/USD to retreat further, we need the dollar index to back off.

Dollar Index daily chart

Looking at the daily chart of the dollar index, you have to think that the only way is up, but there are signs that speculators are over exposed to the dollar – a position that has preceded declines in the past.

Despite these potential concerns, the euro is hardly a screaming buy, especially with the full effects of the Swiss National Bank’s shock move still to be felt.

A better bet for playing a euro decline might be the EUR/JPY instead of the EUR/USD. The yen has picked up some momentum this month, with the USD/JPY dipping even as the dollar index reaches fresh highs. The Bank of Japan has already released its shock and awe program, while the political fault lines within the Eurozone could mean QE will only be partially successful.

EUR/ JPY monthly

A good way to play this is a LOWER trade predicting that the EUR/JPY will close below 130.00 in 90 days time for a potential return of 167% if successful. Or put another way, betting that the EUR/JPY will drop and close below 130.00 on the 23rd of April 2015 could return £26.53 for 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. accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.