UK PMI Heralds positive surprise

Brenda Kelly

With a week heavy on both macro and corporate data, it’s all about PMI readings today and so far the manufacturing sector has not exactly given much to cheer about. In China, the manufacturing PMI fell to 49.4 in January, its lowest since August 2012 and a sixth consecutive reading below the 50 marker, but new orders sub-index improved to the highest in 7 months according to Caixin. Shanghai’s Composite fell by 1.78%.

German manufacturing has also cooled dropping to 52.3 from 53.2 in December. Slightly better than expected and with a small bright spot in that some panellists reported that the weaker euro had helped secure new demand from the US which positively affected new export orders.

UK manufacturers have been struggling with the strong pound but UK PMI surprised to the upside coming in at 52.9 in January against an expectation for 51.6. Much can be attributed to an increase in domestic demand. Despite the fact that EURGBP stands around 0.7600, issues remain with Eurozone trade flows.

10 year gilts have extended their decline on the back of this – the yield now stands at 1.6%. The pound has pushed through the $1.43 against the dollar but it’s now a matter of whether it can stay there as the potential for dollar strength increases as equity markets continue to look soft.

The FTSE started well but has run out of steam at 6100 led by the energy sector as oil, despite a 33% gain from last month’s lows and 5 consecutive days of gains, once again flounders. This is in spite of the fact that net long contracts in WTI have jumped higher with bullish oil bets increasing by the most since 2010 according to the CFTC. We await more news from OPEC members, but sources have stated that ‘’everyone must co-operate’’ when it comes to production cutting.

Equity highlights:

AstraZeneca (-1.16%) shares have lost 9% over the past 12 months and is set to report earnings later this week. Consensus expects a 24% rise in EPS for Q4. The strong dollar is likely to weigh however.

Barclays (+1.18%) may agree to $70million fine for US 'dark pool' misdemeanours. The UK-based bank has been accused of not making it clear to its clients that particularly aggressive traders, known as high-frequency traders, were using the private platform.

Ryanair +1.02% :The airline doubled fiscal third quarter earnings and will return some €800m to investors via a share buyback programme. Profit before tax was €103m in the 3 months to end December 31 – somewhat short of the €118.2m expected. The buyback commences on Feb 5th and will span 9 months.

Premier Oil (+100%) resumed trading today and gained over 100% in early trade. Initially suspended from trading when the company said it had agreed to buy the North Sea assets from Eon, the group has agreed to ‘’reduce the completion adjustment to $15 million and the aggregate consideration for the transaction payable by Premier to $135 million. This is a result of an increase of the dividend paid to E.ON prior to completion. The sale and purchase agreement has been amended to reflect the revised agreement.’’

Intercontinental Hotels (1.48%) Set to announce a $1bn share buyback at annual results next month according to the Sunday Times.

BP plc (-1.08%) said to sell Australian NW shelf. Price target reduced by research analysts at Deutsche Bank from 450p to 445p.

Sky (+0.65%) raised to add v reduce at Alphavalue.

BT (+1.35%) Profit tops estimates. Profit before tax £862m, and year to date profit up 18% to £2.14bn. Good customer growth in broadband, TV and mobile helped to grow ARPU by 7%.

Later this afternoon sees US ISM Manufacturing PMI released. In contraction and expectations are not great but are expected to build slightly on last month’s 48.2 print.

Janet Yellen’s favourite metric the Core PCE Price Index is unlikely to be the reason for any additional monetary tightening. It’s expected to rise 0.1% on the month.

Despite the fact that EURUSD has been trading in a fairly uneventful range for the past while, many will be eager to hear what Mario Draghi has to say as he testifies about the 2015 ECB Annual Report before the European Parliament, in Strasbourg at 4pm.

The FOMC’s Fischer is also due to speak about the US economy and monetary policy at the Council on Foreign Relations, in New York at 6pm.

We call the Dow lower to 86 points lower to 16380.


AUD-bulls on sidelines pre-RBA

Ipek Ozkardeskaya

The Reserve Bank of Australia is preparing to give this year’s first policy verdict. Australian policymakers are expected to maintain the cash rate target unchanged at 2% but will likely deliver a fairly dovish statement in the light of the negative developments in the global macro picture led by a considerable sell-off in the Chinese market.

Although the global rout in commodity prices and the slow-down in global commodity demand weighed on Australian economy over the past years, a cheaper exchange rate helped enhancing exports, acknowledged the RBA and pulled the unemployment rate to two year lows.

On a trade weighted basis, the Aussie lost the two-thirds of gains accumulated from 2008 dip to 2013 peak and is no more considered as damageable overvalued.

Nevertheless, the RBA is facing a global shift toward a softer monetary policy era as the ECB hinted at more action by March, the BoJ unexpectedly stepped in negative territory zone and the conviction on Fed tightening visibly faded through the first month of the year.

To stay in the race and to defend its position, the RBA may have to consider an additional rate action. A quick glance to market implied policy rates, the possibility of a 25 basis point cut within the next six months is already being factored in

The Australian 10-year yield headed down to the lowest in three-months, yet despite the narrowing yield, the rate-differential remains fairly profitable from a carry perspective. Should the RBA fail to curb the carry appetite tomorrow, the Aussie bulls could gather enough power to take over the 0.7150 hurdle, where 100 and 200-day moving averages have been successful to cap last week’s rally.

Quick glance on technicals

Although the iron ore rallied past 4% in Asia, the AUDUSD lacked power to challenge 0.7149/52 zone (100 and 50 day moving averages respectively) pre-RBA. Technically, the AUDUSD is considered in a positive trend above 0.7022 (major 38.2% on Jan 20 –to-date rise), while a break below this level should signal a short-term bearish reversal for a deeper downside correction to 0.6985 (Fib 50%) before 0.6919 (Jan 26 low).

Mid-term critical resistance remains at 0.7380 (Fib 38.2%). Below 0.7380, the mid-term bias remains negative and we see opportunity in selling the rallies.

This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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