Financial Market Research and Analysis

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FTSE rises with Lloyds, UK GDP in focus
FTSE traded higher at the open, as UK’s big bank stocks boosted earlier gains on the back of encouraging results by Lloyds. Energy stocks (+0.25%) reinforced the FTSE 100 gains, as the barrel of WTI traded at $54.60.

Lloyds (+4.09%) printed a better-than-expected income in Q4, although the statutory pre-tax profit came in at £973 million versus £1.38 billion forecasted by analysts. Yet, excluding the one-off charges, the 2% profit rise in the Q4 topped analyst estimates. The bank increased the ordinary dividend by 13% and recommended the payment of special dividend of 0.5p/share following its agreement to buy Bank of America’s MBNA UK credit card business. The bank also expects the 2017 net interest margins to be greater than 2.70%.

Lloyds shares gained 40% after trading below £50 in July 2016. According to the latest Bloomberg survey, more than half of analysts recommend buying the stock with a twelve-month target price of 69.70p; 25% remain on hold, while 21% prefer selling at the current price.

Barclays’ (+0.93%) results are due on Thursday; Royal Bank of Scotland’s (+0.95%) results are due on Friday.

Pound to make or break on GDP data 

As expected, the Bank of England (BoE) Governor Mark Carney delivered a balanced testimony before the UK lawmakers on Tuesday. Carney refrained from giving any guidance on interest rates and said to be ‘neutral’ despite being pressured for more clarity on his monetary policy outlook.

The lack of details revived the BoE hawks, which would bet for an earlier than expected policy tightening due to the rising inflationary pressures after the BoE loosened the monetary conditions posterior to the Brexit vote.

The GBPUSD advanced past 1.25 regardless of the broad based US dollar appreciation. It is noteworthy remembering that Carney expects a cool down in inflationary pressures, as the upside pressures on wages would ease with the UK’s job market approaching a full-employment status. But of course, only the data would tell whether his theory stands or not.

As the pound gathers positive momentum, the UK’s fourth quarter GDP read will determine the mood in London. The UK’s fourth quarter preliminary GDP is expected to have grown at the steady pace of 0.6% quarter-on-quarter and 2.2% year-on-year. Flat or positive read could encourage further purchases in the pound toward the critical mid-term resistance, 1.2575 (minor 23.6% retracement on post-Brexit decline).

US stocks renew record, as volatility remains low 

The US stocks started the week by reaching new record highs; oil and energy stocks lead gains as the barrel of WTI advanced to $54.60. The S&P500 traded at $2366, as the Dow Jones climbed to $20757 for the first time, somewhat helped by the 3% rally in Wal-Mart shares after the world’s largest retailer posted solid forth quarter results to back up the reflation enthusiasm. The US’ financials lagged on the back of a lack of appetite following disappointing results from HSBC on Tuesday.

Despite warnings of drying liquidity for big investors, which increase the risk of potential headwinds, the VIX index (volatility index on S&P500 futures) remains steady at about its 100-day average of 11.80. Based on stats, there are no visible signs of stress in the US stock markets. Of course, a financial bubble cannot be predicted before it bursts.

Either way, the US equity futures traded in the green in Asia, hinting that it could be another day of record highs for the US stocks.

The US dollar traded soft in the early Asian session, yet started reversing weakness heading into the FOMC meeting minutes due later in the US session. The minutes are expected to back up the recent optimism regarding the improved retail sales, rising US inflation and encouraging expectations on corporate activities.

Although the minutes will unlikely reveal an additional hawkish surprise vis-à-vis the Federal Reserve’s (Fed) orthodox monetary policy outlook, the Fed members’ opinions and tendencies should content the Fed hawks and keep the USD-bulls in charge of the market. The pullbacks in the US dollar are expected to remain capped.

Quick follow-up on Kraft-Unilever no deal 

Kraft Heinz gave back 1.84% of its Friday gains as Warren Buffett walked away from the Unilever deal, which could’ve turned out to be an unfriendly deal. The billionaire is known or his reluctance for hostile takeovers. In a joint statement, Kraft Heinz announced to have ‘amicable agreed to withdraw its proposal for a combination of the two companies.’ Unilever shares recovered 1.09% after retreating more than 6% on Monday.

 For now, rumours appear to have brought both stock prices higher, which suggests that further downside correction/price normalisation is possible.

Euro in bears’ hands

François Fillon’s 3% recovery in the latest French elections polls decreased odds that Front National’s anti-European, anti-euro candidate Marine le Pen would win the presidential election this year and certainly helped easing the anti-European worries that have been weighing on the single currency nowadays.

Yet, the rising demand in US dollar gave little opportunity for the euro buyers to surge. The renewed US dollar appetite escorted the EURUSD down to 1.0502 on Wednesday.

As reminder, a scandal claiming that Fillon’s wife received some half a million euros over the last eight years as Parliamentary attaché without ever been seen in Parliament had shaken the polls weeks ago. The independent candidate Emmanuel Macron retreated by 5%.

The EURUSD is under a mounting selling pressure. Offers are eyed at 1.0566, the minor 23.6% retracement on post-Trump decline broken for the second time in two consecutive weeks. Solid 100-day moving average resistance is sliding lower (currently at 1.0662). As the negative trend gathers momentum, sellers are testing the 1.05 handle, if cleared could encourage a further sell-off to 1.0400/1.0380 area.

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