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Markets Morning Briefing by Finyear - February 05, 2014

Markets Morning Briefing by Finyear | Daily updates from our Markets Team in London & Paris. Mises à jour quotidiennes par nos experts marchés à Londres & Paris. Finyear, the Financial Year - L'exercice financier.

Markets Morning Briefing by Finyear - February 05, 2014
10:00 AM

Good Morning Finyear Readers!

European shares are trading little changed this morning despite Asian markets having managed to recoup only a fraction of the losses suffered during the previous trading session.
Lending some support early on are better than expected Service PMI data out of Italy and Spain pointing towards a strengthening of their economic recovery. While sentiment might be a touch less negative compared to the day before where huge overnight losses in Asia were pointing towards a major sell off in Europe which in the end never materialised there are concerns that today’s US ADP employment figure could come in sharply below expectations resulting in a renewed sell-off later today.
Furthermore traders are starting to shift their focus onto tomorrow’s ECB meeting, where not only the ECB might be cutting rates again but also where ECB chief Draghi might use his monthly press conference as an opportunity to bring some calm back into markets.
Consequently it wouldn’t come as too much of a surprise if stocks would start to settle into a range as neither shorts nor longs are necessarily eager to build up or increase their positions ahead of crucial employment data out today and on Friday and also as mentioned ahead of tomorrow’s ECB meeting while at the same time also traders continue to keep a close eye on emerging markets and further declines of their currencies.

Thank you.
Kind regards

Markus Huber | Senior Sales-Trader/Senior Analyst
Peregrine & Black


2:00 PM

Initial read of GlaxoSmithKline numbers; just had a quick read of GlaxoSmithKline FY numbers; slightly better than expected with EPS at 31.1p versus estimates of 30.8p – markets were looking for flat EPS. Revenues in at £26.51billion, in line with estimates, up 1% on the year. Q4 revs better than expectations at 6.91billion versus expectations of £6.84b. Good news is the company is targeting share repurchases of £1-£2billion this year and the dividend increases by 5% in 2013 to 78p.

Now given that GSK is an alpha value play with a divi yield of around 5.2%, that’s going to cheer many in the market with long positions in GSK, from pension funds to asset managers. In Q4, GSK EM and Asia Pacific turnover was £176billion, lower than expected with China being the problem following the bribery scandal last year in which £320million was allegedly paid in bribes. In China, Pharmaceuticals and Vaccines sales were down 18%, driven primarily by declines in Respiratory and Hepatitis products.

The scandal certainly drove those losses but it seems GSK is now looking to put that episode behind them but investors will continue to express their hesitancy until litigation cases are brought forward and GSK officially moves past the incident and restores reputational damage. Back to the figures, GSK’s European business seems to have performed better than expected by some in the market but the standout winner is the US market in which Avair Q4 sales are up 9%. GSK says its focus is to improve cash generation by converting it to earnings but FX headwinds, especially due to stronger sterling versus eroding EM currencies pose a downside risk. Biggest bright spot for GSK is the 10 new products in late stage clinical trials this year, fuelling optimism about the product pipeline.

Last year, 27 drugs were passed by the FDA which was good news in the face the uncertainty surrounding the scandal. GSK has around 40 names in phase II and phase III clinical development so product pipeline beyond 2015 could be impressive too. Big cost savings also announced to the tune of around £400million with a similar amount expected in 2014 which will go some way in further debt reduction. And, the group has encouragingly raised £2.5billion through divesting businesses such as Ribena and Lucozade and other business as the group re-structures its portfolio. So in summary, decent figures, better than expected; good cash generation; US looks solid but Europe and Asia still slow gear with plenty of risks; product pipeline the bright spot. As I said, 5.2% on the divi yield so a sought after alpha play for many in the market despite expensive valuation around 13x forward earnings.

On to markets; equities have a slightly better day after the three-day losing streak – selling pressure easing but equity indices in the region are still soft on the whole. Wall Street’s recovery last night and Asian markets had a bit of a relief rally but that faded during the session as investors didn’t want to take any chances with sentiment surrounding EM assets still distressing the market – India’s services PMI remained well below the 50 mark. Japanese equities rebounded after the significant falls in the previous sessions this week which left the market fearful that Asian indices are in for a huge correction amid the continued turmoil in the EM space, driven by Fed tapering and slowing Chinese growth together with structural problems in many EM nations.

Closer to home, European financial markets were somewhat steadier – PMI services and composite PMI indicators were revised a touch lower from prelim estimates, down to 52.9 from 53.4 on the month, but still pointing to a recovery and the strongest reading since June 2011. Hot off the heels of the stronger PMI manufacturing numbers from the euro zone earlier this week, today’s report is likely to see the ECB stand pat on policies despite calls to cut the refi-rate. Within the numbers, Spain’s services sector increased at its fastest rate in six and half years, encouraging investors over the steady progress in the country’s manufacturing and services industry following last year’s near-financial collapse – unemployment remains stubbornly high in Spain and austerity continues to bite but the country is behaving itself at the moment and the market is rewarding it by buying Spanish debt which keeps yields for bonds low, allowing the country to borrow cheaply than before.

Germany meanwhile, the powerhouse of the euro zone, also recorded strong growth in its services sector but the pace was the slowest rise in three months. That being said, Germany continues to drive the strongest growth in the region, fuelling hopes that it can be the saviour of the region by placing it on the path to sustainable growth. EMU retail sales were not as robust as some had though – falling in December by a 1.6% which was worse than expected; retail activity is a weak spot, as highlighted by retail indicators out of Germany and France in recent weeks. High unemployment and constrained household income mean consumers are not spending which again places pressure on inflation as consumers wait for prices to drop before buying. That’s a worrying prospect for the ECB- deflation is a downside risk to the euro zone recovery; in the words of IMF head Christine Lagarde, deflation is the ogre.

ECB will have to address the market about deflationary fears and if inflation continues to decline, there’s no doubt the ECB will have to resort to using stimulus tools to battle deflation. UK services PMIs were out too which showed continued growth in the sector but at a slower rate thanks to weather conditions such as the heavy rainfall last month. A slight easing was expected so many investors were quick to ignore it and latched onto the brighter spot of the report; business confidence in the UK has hit its highest level since March 2010. BOE should be more enthused by this tomorrow but will most likely stay hush with no change to policies and wait until next week to rehash forward guidance with fresh thresholds at the Inflation Report. Moving onto the US session, we are expecting a soft start on Wall Street as US stock futures have just turned lower on general trepidation ahead of the US ADP jobs report and the ISM services report. ADP is expected to show 238k jobs created by US last month, an ambitious figure after last month’s disgusting number of 74k jobs only created by the US in December. Unemployment rate did drop to 6.7% but much of the weakness in the report was attributed to the severe weather conditions and lower participation rate – that’s unlikely to change with the Polar Vortex continuing in January so ADP’s number later will be highly scrutinised. ISM services expected to expand at a faster rate but again, markets need to factor the weather impact which could be detrimental.

Ishaq Siddiqi
Market Strategist
ETX Capital


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