Financial Market Research and Analysis

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Sterling Stutters as FTSE rises
Boris Johnson advocating that Britain leaves the EU doesn’t necessarily strengthen the case for that side but the effect is definitely most visible in the FX space. Sterling has shed 1.5% against the dollar this morning alone. While UK businesses, particularly those with international trade and exposure to currency movements have bemoaned the strength of the pound and the effect on profit margins, a weak currency based on a lack of confidence in the economy is not ideal and could present itself as a harbinger for economic softness. Certainly, today’s move can be attributed to Brexit, and possibly Boris Johnson putting his weight behind that outcome but the overall weakness in sterling lately has been down to a lack of hawkishness from the MPC as well as a fairly volatile backdrop in equity markets driving investors in to the safe haven of the German bund of late.

For the next four months we get to enjoy this great debate on whether Britain should remain in a reformed EU or simply go it alone. When it comes to certainty, the status quo is always seen as the safer option, in the ‘better the devil you know’ way. UK gilts seem unperturbed for the time being but it will take very little to bring about a change to present yields.

Market moves will be at the mercy of the various Brexit polls for the coming months and despite the fact that we should have learned by now that they’re fairly useless, the markets won’t necessarily adopt that logic.

German and French PMI data was for the most part mixed but with a marked slowdown in activity, particularly in manufacturing expansion. German services rose on the back of new orders which continue to increase. France, saw its private sector services activity actually contracted, dropping to 49.8 from 50.3 in January. This may give some substance to additional stimulus from the ECB next month but Mario Draghi will need to be more creative to satisfy these markets and he certainly won’t be thanking Boris Johnson for making his job that bit more difficult in respect of currency appreciation.

For the time being, European equities are giving the benefit of the doubt to Draghi but also taking their lead from a strong session in Asia. The Dax is up 1.34% while the FTSE adds 1.1%. Helping sentiment, the spectre of near term additional rate hikes from the FOMC seems to have dissipated as last week’s CFTC data indicates that speculative USD longs have returned to levels last seen in May 2014.

HSBC (-3.46%) reported profit before tax of $18.87 billion for 2015 against $18.7 billion the year before, below the average analysts' estimate of $21.8 billion, according to Thomson
Reuters data. On a quarterly basis, it reported a pre-tax loss of $858 million. , proposed to hike its dividend to $0.51 per ordinary share against $0.50 a year earlier.

ABF (1.35%) the weaker pound has acted as a tailwind for ABF and they can probably thank Boris for this continuing boost. It now sees only marginal decline in FY adjusted earnings per share. The company said it is reducing the £10m-£25m currency impact. Primark sales are likely to be up 7.5 per cent from the same period last year, ignoring currency impacts, and 4 per cent higher when including the impact of currency moves.

Bovis Homes (3.62%) reported a 20% increase in pre-tax profit for 2015. pre-tax profit reached £160.1m in the 12 months to the end of December, while revenue was up 17 per cent to £946.5m

Sainsbury (-1%) May match the Steinhoff bid for Home Retail. We await further details on this. Home Retail (+11%) has risen as the takeover of Argos has become interesting now that there are two potential suitors.

Anglo American (+5.52%) said to be mulling sale of De Beers London HQ. Having seen its debt downgraded to junk last week, Anglo now need to get creative. The site could, according to the Times, fetch £125m which might go some way to allay investors’ fears over debt. The rise of iron ore by 11% in the past week is also giving a reaosn to think we may be over the worst of the pessimism pertaining to miners. BHP Billiton (+3.7%) and Glencore (+3.63%) are also near the top of the index.

Randgold (-1.34%) and Fresnillo (+0.1%) are underperforming as gold prices move back towards $1200/oz and risk appetite improves. While above $1190, there is still some room for higher prices.

We call the Dow higher by 222 points to 16540.

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