Europe
Shares in Europe have once again rallied strongly as expectations of continued low rates and an improving US economy help underpin risk appetite. Investors continue to believe that yesterday’s weak CPI number will be enough to deliver some aggressive easing from the ECB later this month, while the latest Fed minutes appeared to point to a patient approach to tightening in the coming months, due to some concern over the outlook in Europe.
UK shares were rallying led by Tesco (LONDON:TSCO) which surged by over 10% after the supermarket announced a series of measures including store closures, a dividend-cut and asset sales. Sainsbury(J) (LONDON:SBRY)’s and Morrison(Wm.)Supermarkets (LONDON:MRW) rallied in sympathy with Tesco after its trading update offered a glimmer of hope for the big four supermarkets.
The Bank of England left interest rate policy on hold in its latest meeting as oil prices continue to drag down inflation in the UK, possibly pushing the timing for the first rate hike until late next year.
Tesco boss Dave Lewis appears to have impressed investors with the much-hyped January trading statement and turnaround plan. UK like-for-like sales fell only -2.9% in the last 19 weeks versus a -5.4% decline in Q2 and the company made substantial improvements in Christmas sales with a 50+% gain in online clothing sales.
Tesco will sell ‘Blinkbox’ and ‘Tesco Broadband’ to TalkTalk which plans to rebrand and integrate them into its own offering as early as possible. Tesco will close 43 unprofitable stores around half of which are Tesco Express and its Cheshunt HQ in 2016. Tesco have maintained profit guidance for 2014/2015 but the final dividend has been cut.
It’s hoped that the dividend cut by Tesco is pain today in order to bring pleasure tomorrow since the money saved can be put into the turnaround plan. The cut to the dividend is even a slight relief when compared to the prospect of a rights issue which has been avoided for now.
Marks & Spencer (LONDON:MKS) was a big faller after its trading update showed disappointing Christmas sales that were again pulled down by its general merchandise division. General merchandise/womenswear performance showed a decline of 5.4%, well below expectations.
Disruption at the company's distribution centre at Castle Donington impacted the online and general merchandise performance.
After all the investment poured into Marks and Spencer’s new high-tech distribution centre; and the new website the UK’s largest clothing retailer continues to frustrate. The problems which occurred over the Black Friday weekend, should really have been foreseen, while the inability to tackle the problems in its general merchandise division calls into question whether CEO Marc Bolland continues to deserve his place at the top, given that he is five years into his turnaround plan. His only saving grace is the food division which has once again bailed him out, but he shouldn’t still be having to explain away why general merchandise continues to disappoint. It remains to be seen how much longer investors will be prepared to wait for his vision of jam tomorrow.
Standard Chartered (LONDON:STAN) shares edged higher after it announced plans to axe its equities business and cut 4,000 jobs in retail banking. The bank has been suffering at the hands of weakness in emerging markets thanks to investment flows back into the US.
US
A stabilisation in oil prices has eased contagion fears and helped US markets open higher on Thursday after the FOMC minutes confirmed the Fed is taking a patient approach to the timing of its first rate hike.
Weekly jobless claims missed expectations but dipped from the prior month to 294K suggesting a tightening of the labour market leading into Friday’s NFP employment report.
The conclusion reached by the market following yesterday’s Fed minutes was that the Fed hasn’t decided when to move on rates and is happy to stay on hold while the oil-effect on inflation runs its course.
Uncertainty from the Fed which could be seen as worrying coming from the stewards of the US economy is being seen as favourable over a hawkish certainty that could bring with it an imminent rate hike.
FX
The US dollar is higher against most major currencies on Thursday with only commodity currencies gaining as oil prices stabilise.
Notably EUR/CHF is again trading dangerously close to the 1.20 peg instituted by the Swiss National Bank. A further drop may prompt further extraordinary measures by the SNB to dissuade speculators from holding Swiss francs, perhaps including a cut further into negative rates.
EUR/USD lost the 1.18 handle on Thursday and is now just over 100 pips from the November 2005 low at 1.1640 as expectations rise for Jan 22 move from the ECB towards QE.
AUD/USD has pulled slightly higher off a multi-year low formed in May 2010 at 0.807 as investors try to pick the bottom supported by the prospect of Chinese government stimulus creating Australian commodity demand.
Commodities
Oil prices are seeing slight gains for a second day as Brent crude appears to be forming a short-term base at $50 per barrel after a drop in US crude inventories. One data point doesn’t make for a trend but the drop in US oil inventories gives some temporary respite at the psychologically significant $50 per barrel.
The price of copper was slightly ahead before the release of CPI data in China at 1.30am GMT tomorrow.
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