Odour of dead cat emanating from the bounce

UK would better get used to the idea of a stronger pound
By Ipek Ozkardeskaya

The UK’s gross domestic product grew 0.7% on quarter according to second quarter advance read released in London this morning, on yearly basis the UK is expected to secure a 2.6% growth, a slightly lower than 2.9% printed previously. Still, the strong GDP read only supports the view that the UK is on a faster run to recovery compared to subdued economic performances from the US and the Europe.

Despite the raising voices against the stronger pound, and its negative impacts on the UK manufactural and industrial exports, the UK exports remain well in line with their mid-long term average.

The UK businesses would better get used to the idea of a stronger pound, because all indicators point to the decisive BoE step into the monetary policy normalisation. Indeed, the BoE is perhaps in a better to position to start rising its rate compared to the US, where the economy may be suffering from a slow growth and even worse, from contraction.

GBPUSD rebounded from 1.5528 as a knee-jerk reaction to the GDP read in line with market estimates. The 1.55 mark is still where the GBP-bulls continue outweighing the bears. The key support remains at 1.5500/1.5460 (Jul-8 to-date ascending base / Fib 61.8% retrace on Jul 8 – Jul 14 hike) for a potential bounce back to 1.5670/75 – monthly resistance.

Odour of dead cat emanating from the bounce
By Brenda Kelly

The relief in the FTSE this morning can only be viewed with suspicion. Having wiped out all its gains year to date and following five days of consecutive losses, there is a distinct odour of dead cat emanating from the bounce. It’s clear that the Chinese economy is slowing but taken in context, it is still growing and certainly still managing to outperform other western economies with gusto. Market participants have, in all fairness, take the Shanghai Composite rout in their stride, with most feeling that it merely offers more opportunity for the PBOC to embark on a looser monetary policy. Essentially, we have the bad news equating to good news mode swiftly moving to Asia from the UK in respect of central bank intervention.

This week’s macro calendar includes the both the US and UK GDP releases as well as a two day FOMC meeting will also imbue caution amongst investors with both respective central banks beginning to make inroads to tighter monetary policy

The better UK GDP coupled with the initial quarterly rise has been favourable for the pound and sets the scene for greater speculation on when the MPC will make its move towards rate normalisation. Certainly today’s buoyancy has been helped by M&A activity and some better than expected earnings form individual constituents.

RSA Insurance (10.3%) The potential takeover bid by Zurich Insurance Group is underpinning this stock today. As yet, there are firm offers in place but this would be the largest takeover by the group in 15 years. Attracted by the various synergies that would come with the tie-up, there may be other potential suitors for RSA in the near term.

ITV plc (+3.4%) A solid set of first half numbers from ITV. Despite a drop in audience share to 22.1%, the company has tempered this with an increase in advertising profits. Having secured joint rights to the Six Nations Rugby, the outlook for additional revenue in the coming months looks strong. The average broker price target of 281p looks doable.

Royal Mail (-2.86%) It was practically inevitable that Ofcom would issue a Statement of Objections against Royal Mail following the complaint by Whistl relating to bulk mail delivery charges. Investors have been fairly cautious on the stock recently with the share price unable to climb above the 527p mark following several attempts since May. For now, despite protestations form RMG that they will appeal the ruling, additional downside seems likely.

Hikma Pharmaceuticals (6.59%) The wave of M&A activity and takeovers in the pharma sector continues. Hikma Pharmaceuticals has agreed to buy Boehringer Ingelheim for $2.65bn in cash and stock. This will make the combined companies the 6th largest supplied of generic medicines in the UK. The deal is expected to close in the latter half of the year and will certainly boost earnings in the non-injectables business division.

Next plc (+1.93%) Next can seemingly do no wrong. An increase in its outlook for FY sales and profit aided and abetted by the extremely short spell of hot weather this year. Up 13% YTD, the share price is again nearing its 52 week high. The majority of brokers have a hold rating on the stock. We may witness some profit taking in the near term before any breach of the 7640p level.