Financial market research and analysis

Bank stocks help Europe’s periphery

The minutes from the last Federal Reserve meeting didn’t throw up too many surprises allowing stock markets to keep an even keel. US stocks opened flat whilst European markets were mixed on Thursday.

Core markets in Germany and France underperformed the periphery. Ongoing investor interest in bank stocks favours the heavy weighting of Italy’s MIB index. US, European and Emerging market high yield credit spreads are at their 52-week lows. Assuming risk-on sentiment is kept alive, heading into elections this year, we favour equities in Europe’s periphery over its core.

The FTSE 100 hit a new record high on Thursday before giving up most of the gains. Data showing activity in the UK service sector at its strongest in nearly a year-and-a-half was well-received by the more domestically-focused FTSE 250. British blue chips were less emphatic about the endurance of the UK economy.  Well-received results from Persimmon saw housebuilders lead the gainers whilst retailers and insurers were amidst the biggest fallers. 

Persimmon earnings push homebuilders higher

Persimmon shares gained over 6% on Thursday, topping the blue chip leader board. Selling prices have risen more modestly but demand for new homes continues to expand. This helped sales at Persimmon rise 15% in the second half of 2016 from the same period in 2015.

Persimmon catering a lot of its building to first-time buyers puts it in the best place amongst the large homebuilders to benefit from the new government programs to expand the housing stock. Proposed planning system reforms from Communities Secretary Sajid Javid in a white paper reportedly to be published later this month could be a boon for homebuilders if approved.

Incredulity from BOE’s Haldane suggests dovish tilt

The UK economy continues to surprise on the upside but policymakers at the Bank of England remain incredulous. Activity in the UK service sector hit a 17-month high in December. The UK Services PMI for December rose to 56.2 from 55.2, easily beating estimates of a drop to 54.7. The Composite UK PMI for December stands at 56.7. The healthy UK economic data helped lift the pound off early lows to leave it flat against the dollar but down against the euro.

Chief economist of the Bank of England Andy Haldane, in remarks on Thursday, appeared to be seeing the glass half empty. Haldane expects growth to slow a little, with inflation picking up materially in 2017. He said the effect of hefty fall in the British pound is beginning to trickle through to UK prices giving him reasonable ground to believe 2017 will be tougher for consumers. Mr Haldane said he has a neutral bias on policy. There appears to be a pervasive belief at the Bank of England that policy should be kept accommodative because Brexit uncertainty means this is the best the economy can expect.

Chinese yuan moves outweigh Fed minutes

The US dollar was weaker across the board on Thursday despite the release of some of the more hawkish Federal Reserve minutes in recent times. The weak dollar in the last 24 hours is likely more a function of yuan strength than any change in expectations for US interest rates. The offshore Chinese yuan saw its biggest two-day move against the dollar on record in response to a Chinse government crackdown on currency outflows. Mixed US economic data had a neutral effect on the dollar. ADP private payrolls fell short of estimates while the service sector expanded faster than forecast in December.

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