Unfortunately I have not had much time to write the blog this week. The rally in the market whilst I have been away on holiday although welcome does present problems for short term trading. You would expect market rallies to present good opportunities, but with few signs of economic recovery any rally at the moment is built on very fragile foundations and could easily crumble away quickly turning positions into loss making situations. Conversely short positions in a market that is showing some signs of improvement are also heavily at risk in the current environment. Searching for a good trade this week was not easy, but we chose Imperial Tobacco on Tuesday which has underperformed the sector despite producing a bullish statement and the sector in general looking cheap. We always assess our downside risk and have our own internal estimates of where we feel the price could fall to in the very short term. With the shares under £16.30 on Tuesday the shares in our view had less than 3% downside risk with a good 1% plus upside .The call proved correct and we closed out the following day with a good 1% gain ungeared.

Choosing trades over the coming weeksn and months is going to be increasingly difficult as we still do not believe the foundations are in place for a sustainable rally. In addition, as 2010 starts to come into view there will be new concerns especially for the UK with a hike in the VAT rate due and a new Government which will undoubtedly make significant public spending cuts and tax hikes. At a time when any economic recovery will be in its infancy and very susceptible to any shocks there will be real risks for equities next year and the assumption of a return to growth and bull market conditions remains optimistic.

The CFD Trader is away on holiday until Monday 27th July.

The Week Ahead

Markets have had a poor week drifting lower in the absence of any major positive catalysts. The onset of the Q2 reporting season in the US is much anticipated and opinion remains divided as to whether this will result in fuel to drive markets higher or additional uncertainty over whether a real and sustainable recovery is under way.

We started last week with the ISM Non Manufacturing Index in the US which was broadly in line with market expectations at 47.0 in June compared to 44.0 in May. The service sector accounts for around 90% of the US economy. Whether the recovery in this index will continue is debatable, but at current levels it points to GDP growth hovering around the zero level which is a big improvement, but realistically this index needs to be closer to 60 if we are to see growth that actually creates a discernible recovery. Looking at the constituents of this index, the new orders level gained 4.2 points to 48.6 whilst the employment index improved by 4.4 points, but remains at a level consistent with ongoing large layoffs within the service sector. At the moment we can still only expect a very modest US economic recovery at best something which we believe will disappoint the market and expectations of a V shaped recovery will look increasingly wrong as we move into the autumn.

In the UK the Industrial Production figure for May showed a disappointing -0.5% drop compared to expectations of a 0.2% rise over the month. This left manufacturing output at its lowest level since 1992. It is difficult to see GDP having increased in the UK during Q2. The National Institute of Economic and Social Research produced its estimate for UK GDP growth in the 3 months to the end of June and this was -0.4%. They are generally quite accurate with their forecasts which suggests that the UK stagnated at best during Q2.

The other main news of the week was the announcement from the Bank of England of no change in policy with the interest rate held at 0.5% and no change to the quantitative easing plan with its £125bn asset purchase plan due to continue through to the end of July. After this the Bank can discontinue the asset purchase programme or continue for another month up to the level agreed with the Treasury of £150bn. It seems likely that they will eventually use all of the £150bn, but uncertainty remains as to whether QE will be extended any further and a great deal will depend upon what impact the current programme is having which at present is very difficult for the Bank of England to assess.

On Friday in the US the University of Michigan Consumer Sentiment number for June slipped from 70.8 to 64.6 in June, the lowest level since March. With unemployment still increasing at a rapid rate combined with falling house prices and increases in the price of gasoline sentiment has again been hit and this does demonstrate that any US economic recovery at this stage is built on very fragile foundations.

This week in the UK and Europe inflation will be the main headline grabber. Monday is quiet with no major news due to be announced, but on Tuesday we kick off with the UK CPI and RPI data for June. The CPI is expected to show a month on month increase of 0.2% bringing the year on year rate down to 1.8% which would bring the rate below the MPC’s target rate of 2%. The RPI is expected to fall to -1.6% year on year. Also on Tuesday the German ZEW economic sentiment survey is due to be announced and this is likely to show a further improvement in expectations with the consensus expecting the index to have risen to 47.8 from 44.8 the previous month. On Wednesday we get June CPI data for Italy and the second estimate for June CPI for the Eurozone which is unlikely to change from previous estimate of 0.1% month on month and an annual rate of 0%. Also on Wednesday we will see the publication of the UK unemployment figures for June with the claimant count expected to have increased by around 40,000. On Thursday we get the French CPI data for June and the Italian trade balance for May. Finally on Friday we get the Eurozone trade balance for May and construction output.
In the US this week we start with a quiet Monday and Tuesday brings retail sales data for June with the consensus anticipating a month on month improvement of 0.4. On the same day the Producer Price Index for June will be published with the consensus expecting a 0.8% month on month increase driven on by higher energy prices. Wednesday is the busiest day of the week in the economic calendar with the publication of the CPI data for June with the consensus expecting a 0.7% month on month increase with inflationary pressures coming from higher energy prices. We also get the Empire State Manufacturing index for July which is expected to improve from the level of -9.4 reported in June to -4.5 with more recent forward looking indicators presenting a case for improvement in this index. The Industrial Production data for June is also due to be reported with the consensus expecting a -0.6% month on month decline with production declines exacerbated by factory closures. Finally on Wednesday we get the minutes of the last FOMC interest rate meeting which will be in focus as market commentators look for an indication of where policy is heading and what the Fed’s latest growth forecasts are. Thursday brings the Philadelphia Fed Manufacturing survey for July which according to the consensus is expected to have deteriorated slightly to -5 from the previous level of -2.2 which would still leave the manufacturing sector in a state of contraction. Friday is very quiet in the US with just the housing starts data for June which is expected to have remained static at around an annualised rate of 530,000 units.

Please note that due to my annual vacation there will be no key economic data published on the 20th July. I am away from the 14th July through to the 27th July.

A week in which we have been focusing on the tobacco stocks for our next trade, but they have not moved back enough to provide sufficient room for a trade. We are always asked by clients why we don't trade more often than than the usual 5-10 times per month and the easy answer is that there are not that many very good trades out there where stocks have moved to a level where there is a buying opportunity at a time when other elements are also in place. We often buy and sell stocks only to see them return to a similar level of the previous purchase, but more often than not we won't buy again purely because the market is not moving as we would want. Short term trading consistently and successfully requires a huge amount of discipline. It is easy to pick stocks on a daily basis that are at attractive levels, but if the other elements are not in place it may still not be the right time to trade. For my own CFD portfolio if I can generate a 3-5% gain in one month and only take 4 trades to do it I am quite happy. If you can do that each month the returns can be very attractive.

The market this week has drifted lower and at the moment it is difficult to see what the catalyst will be to move the market higher at least in the very short term. Clearly the reporting season in the US will be very important, but I find it hard to believe we are going to see results that will drive the market higher. I think we will have to wait until October and the Q3 GDP figures for the major economies before we can think about the FTSE100 making a strong push through the 4500 level. Some respected data this week made an early estimate of a -0.4% decline in Q2 GDP for the UK which is not unexpected although a lot of commentators have been suggesting a positive figure. I believe we are in for a long hard slog back to trend growth and the strong recovery in world equity markets from earlier in the year will be very hard to build on in the short term.

Yesterday we managed a quick trade in Imperial Tobacco which is the first time we have traded this stock. Both BAT and Imperial have been range bound for some time and we have focused on BAT for our trades in this sector, but on Friday both stocks were outperforming and when the market opened in negative territory Monday morning it brought Imperial back to a level where it was clear a trade was available. We took only 1% out of it ungeared, but they all add up over the course of a month.

Week Ahead

Something of a roller coaster ride for equity markets last week which ultimately resulted in markets going nowhere. There was not a great deal of economic data to digest, but what there was did create volatility in both directions. We started the week with the announcement of the final estimate for Q1 UK GDP which came in considerably worse than what most were expecting. Growth was revised down from -1.9% to -2.4%. This was primarily due to a larger drop in construction output than initially estimated. The second quarter should be a good deal better, but is still likely to show a negative figure with the possibility of modest growth during the second half of the year.

The European Central Bank announced their interest rate decision last week and as expected there was no change from the current level of 1%. Jean Claude Trichet stated that he does not rule out a further reduction to the interest rate although it seems likely that they will hold fire until they can see what impact the current rate and the stimulus measures are having. We suspect that there will be no change in policy this year.

The US as always provided the big market moving news of the week. First up was Consumer Confidence for June which fell to 49.3 from 54.8 in May. The expectations component of the index fell by 6 points whilst inflation expectations increased. Also expectations for future employment and income growth deteriorated. After the initial burst of enthusiasm following the stock market rebound this is the first drop in this index since March, but it is not unexpected to see some consolidation in this index at this stage of the economic cycle.

The US Institute for Supply Management data for June rose for its 6 consecutive month to 44.8 from the May level of 42.8. Anything below 50 is consistent with contraction in the manufacturing sector, and the next month or so will be critical. A break in the trend with a move back towards the 40 level will not be taken well by the market. Looking at the individual constituents of this index, the production index rose to 52.5 which is the first time it has been above 50 since August of last year. The new orders component fell back to 49.2 from 51.1 in May, but remains within striking distance of 50. Overall, it is good to see this index improving, but we cannot escape the fact that the US manufacturing sector continues to contract.
Unemployment was the big news of the week. We started on Wednesday with the ADP Private Payrolls which came in with a decline in the number employed of -473,000 in June compared to expectations of -395,000. This led us into the Non Farm Payrolls on Thursday where expectations were running high that the decline would be less than 400,000 jobs lost especially after the much better than expected decline May of -345,000. However, the market was disappointed to learn that employment fell by 467,000 in June with job losses across the board in the government and private sector. On the plus side the unemployment rate ticked up to 9.5% against previous estimates of an increase to 9.6%.

In the US this week we start on Monday with what is likely to be the most significant data of the week with the publication of the US Non Manufacturing ISM data for June. The May index came out at 44.0 with the consensus anticipating a figure of 46.7. On Wednesday in the US we get consumer credit data for May whilst the usual initial jobless gains are due to be announced on Thursday. Friday in the US brings us the University of Michigan Consumer Confidence data.
In Europe the week starts relatively quietly with no major news due to be announced on Monday. On Tuesday we get UK Industrial/Manufacturing Production for May which is expected to show a modest month on month improvement although this is unlikely to have any impact on the market. On the same day we will also see the publication of German factory orders for May and the French trade balance for May. Also on Tuesday we get the UK Nationwide consumer confidence data for June. On Wednesday the final estimate for Euro zone Q1 GDP will be announced which is expected to remain at -2.5% quarter on quarter. It will be interesting to see if the figure is worse than anticipated following the significant downward revision to the equivalent UK figure last week. Also on Wednesday the German Industrial Production data for May will be published. On Thursday we get the Bank of England interest rate decision which will result in no change to the current rate of 0.5% and the main focus of attention will be whether they extend the quantitative easing programme. Finally, on Friday in the UK we get Producer Price Index Input and Output data for June. Both sets of data are expected to show a modest increase.

This week we will be updating our note on Marks and Spencer and we will be commencing coverage of Imperial Tobacco.

A quiet day of trading ahead with the US closed and Wimbledon taking most of the attention. The US payroll figures yesterday were bad, but not really that unexpected especially given the lay-offs within the manufacturing industry. The job losses are widespread spanning both government and the private sector and the pace of temporary job losses has also increased. On a mildly positive note the unemployment rate increased to 9.5% against expectations of 9.6%. Whilst the rate of job losses is undoubtedly declining it will be many months yet before unemployment starts to fall in the US. With increasing capacity in the US economy it is hard to see any inflationary pressures coming through for some time yet. US interest rates are likely to remain low well into 2010.

The ECB kept their rate at 1% yesterday and again it is a similar story with rates now likely to remain at this level into 2010. In the UK we had the downward revision to Q1 GDP from -1.9% to 2.4% which was quite a jump. Again the question of the output gap comes to mind with increasing unemployment inflation in the UK is likely to continue falling in the short term. Talk of an interest rate hike before the year is out is very premature and it does seem likely that the UK will see very low interest rates through most of 2010. With sub trend economic growth likely for the next 2/3 years it does raise the question of how long it will take for the UK interest rate to return back to more normalised levels. If you look at Japan they never have and it could well be the case that the MPC will find it difficult to raise rates very far without putting a brake on economic recovery especially given that the next government will have to increase taxation to have any chance of bringing the public finances back into line.

Overall the outlook for equity markets in my view remains very difficult. I think we will remain range bound until September/October and if the third quarter shows only very modest economic recovery around the world we may well see markets come under pressure. Conversely to that if as many are predicting we see a return to growth world markets may well rally into the year end. I suspect the former will occur, but hope that I am wrong. Either way there are always stocks that provide trading opportunities. During the course of the year we have traded Vodafone on many occasions and it is off our trade list until after their IMS statement on the 24th July. I am a little nervous about current trading especially given the pressure their revenue is under in the mature European markets. The recent euro weakness will not help their top line growth either. Once the trading statement is out of the way and as long as it is mildly positive we will start to trade Vodafone once again.

We took a quick profit today on a long Unilever holding after buying in yesterday after the shares drifted back below the £14.50 level. At the time we expected to be holding the shares for a week or more to get close to our price target, but the significant market move today was particularly beneficial for the shares along with the Euro clawing back some of the lost ground against the pound. A 2% return in a day or so seemed too much to leave especially given the possibility of some profit taking tomorrow.

The economic data over the last couple of days in the US has presented a mixed bad with the ADP private payroll data worse than expected along with a big drop in US consumer confidence. The manufacturing ISM data today was actually better than what many were expecting although it remains some way off the critical 50 level that would indicated expansion within this sector. The Non Farm Payrolls tomorrow will be the main market driver and with the US closed on Friday we can expect a quiet end to the week.