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.

Week Ahead

The economic data last week provided a somewhat mixed bag and the market certainly lacked direction. We seem to have reached a point where despite the overall picture is showing a slowdown in the rate of contraction the market is no longer responding well to this news and instead the expectation appears to have moved to a level where growth will need to be visible for the market to make any further progress. We feel that at this stage with the second quarter likely to continue showing negative GDP growth around the world the market may well start to lose the momentum and at best is likely to remain range bound. Some interesting data published last week showed that Executives at U.S. companies are taking advantage of the strong recovery in equity markets to sell their holdings at the fastest pace since credit markets seized up two years ago. S&P 500 Index Executives were net sellers for fourteen straight weeks, an indication at least that they don’t expect current prices to hold.

Last week started with the Purchasing Mangers Composite index for the Euro zone which improved slightly to 44.4 from 44.0 which was a little less than expected with the key expansion level of 50 still some way off. We are likely to see an overall decline in European GDP for the second quarter with most commentators expecting a contraction of between -0.5% and -1.5%. Interestingly the German Composite PMI for June actually deteriorated again from 44.0 to 43.4 which as the largest Euro zone economy demonstrates that if anything the Euro zone has some way to go before we can expect to see any real growth coming through. In the UK the services PMI is actually above 50 which suggests that the UK economy is recovering more quickly than the rest of Europe.

In the US existing home sales increased by 2.4% month on month in May to an annualised rate of 4.77m units. Existing stock of homes for sale stands at 9.6 months in May versus 10.1 in April. This is still some way off the level of around 6 months supply which would be consistent with price stability and it therefore looks highly likely that US home prices have further to fall.
Also in the US the Durable Goods orders were better than expected with a 1.8% month on month improvement in May which compared to consensus expectations of a decline of around -1.0%, and this initially provided a boost to markets on Wednesday. Later that same day the Federal Reserve interest rate decision of no change was accompanied by a slightly bearish statement from the Fed stating that economic activity is likely to remain weak for a time although they did acknowledge that the downturn in the economy appears to be slowing. The Fed also stated its intention to retain a low interest rate for an extended period of time which suggests low rates well into 2010.

This week we start with various confidence indices for Europe covering economic, consumer, industrial and services. Tuesday brings German unemployment data for June and the Euro zone CPI estimate for June which is expected to move from 0% year on year last month to a negative figure of -0.2% according to the consensus. Also on Tuesday we get the final estimate for Q1 GDP for the UK which is expected to remain unchanged at -1.9% quarter on quarter. On Wednesday we get the Manufacturing Purchasing Managers Index for Spain, Italy, France, Germany, Euro zone and the UK, all of which are expected to show a figure of below 50 indicating contraction. Thursday brings the May unemployment rate for the Euro zone which is expected to reach its highest level for 10 years. Also on Thursday we get the ECB interest rate decision with rates expected to remain at 1%. On Friday in Europe we get the Purchasing Managers Indices for Services in Italy, France, Germany, Euro zone and the UK with only the UK expected to achieve a figure of above 50 indicating expansion. Also in Europe, retail sales data for May will be announced with the consensus anticipating a modest decline of -0.1%.
In the US on Monday there is no major data scheduled whilst Tuesday is relatively quiet with the main economic announcement being the Conference Board consumer confidence data for June which the consensus is expecting to show a very modest improvement to around 55 from the 54.9 registered in May. However, after a strong rally in this index and the fact that long term mortgage rates in the US have been going up along with rising unemployment and an increase in gasoline prices it is not inconceivable that this index will drop over the month. On Wednesday we have the Institute for Supply Management Manufacturing Index for June. This index registered 42.8 in May and the consensus is expecting a further improvement to 45 for June. We believe this data could disappoint given that manufacturers are still in the process of de-stocking and with auto factory closures also likely to have an impact it may be a little while yet before we see this index close the gap towards the 50 level which would indicate expansion in the manufacturing sector.

Unemployment data will be in focus this week in the US and we get the ADP private employment data for June that is due to be announced on Wednesday. This figure is expected to show an improving trend with a decline over the month of around -375,000 compared to the May figure of -532,000. This leads us into the Non Farm Payroll report scheduled for release on Thursday. After showing a significant and unexpected improvement in May to a decline of -345,000 the market is looking for a similar figure for June. Anything worse than -450,000 is likely to upset the market. The unemployment rate is expected to move up to 9.6% from the level of 9.4% reported last month. Finally on Thursday we get Factory Order data for May which according to the consensus is expected to show an improvement of 1.4% following an increase of 0.8% in April. The US market is closed for Independence Day on Friday.
This week we will be updating our note on Tesco.

An unexceptional week and one that I am glad I missed. The market definitely lacks direction at present and is no longer reacting well to economic data which points to a slowdown in the rate of worldwide economic contraction. What it wants to see now is growth and there isn't going to be any real news on that for at least another quarter which leads me to believe the summer will see the market range bound or it may well drift lower. With this in mind trades need to be placed very carefully as you do not want to get stuck in positions until the market starts to get some direction. The defensive areas of the market still offer good trading opportunities and we are sticking to these sectors for the time being with a view to picking up good stocks on weak days.

Week Ahead

The CFD Trader is away until the 26th June.

Last week during a speech by Lucas Papademos, the ECB Vice President, he estimated that write-downs for the euro area banking sector over the rest of this year and into 2010 will reach somewhere in the region of $283bn which compares to their total estimate for losses of $649bn for the period 2007-2010. He felt that Euro banks are sufficiently well capitalised to withstand this and did not mention any need for a general bank stress test. Within the ECB’s semi annual Financial Stability Report which was released last week, there was acknowledgement that GDP growth for the euro area will only move back into positive territory from around mid 2010 onwards. The consensus seems to be moving toward the view that the Euro area is likely to lag the recovery in the rest of the world especially given the more substantial decline in GDP they have experienced. This is undoubtedly in part due to the ECB’s reluctance to cut rates during the early part of the credit crisis and recession and the resulting strength in the euro has hurt the Euro-zone during recent months.

The first economic data of last week was euro-zone unemployment for Q1 which was particularly bad with the number of people employed declining by -0.8% quarter on quarter with a downward revision to Q4 2008 from -0.3% to -0.4% quarter on quarter. The worst affected areas are Spain and Greece with the former seeing a -3.1% decline quarter on quarter whilst Greece experienced a -1.8% decline quarter on quarter. Spain is clearly seeing the aftermath of a massive property boom which has turned into a very significant bust and this has impacted heavily on the construction sector.
The German ZEW sentiment index showed a strong advance during June reaching a 3 year high. Given the poor state of the German economy it is hard to reconcile why expectations have risen quite so markedly and if you look back at the history of this index it does have a habit of getting ahead of the game and it is not a particularly good indicator of future economic performance.

In the US last week the housing starts data beat consensus expectations by a significant margin with a 17% month on month increase in May to an annualised rate of 532,000 units which compared to 454,000 in April. This jump was certainly encouraging, but we have to bear in mind that the annual rate is still substantially below the norm and with rising unemployment it is difficult to see demand pushing new starts much further ahead in the coming months.

The Producer Price Index PPI data in the US last week showed a distinct lack of inflation in goods and services and with growing capacity in the economy it is difficult to see much in the way of pricing pressure for some time to come. The US CPI month on month rate fell to +0.1% against expectations of a +0.3% gain and that brought the year on year rate down to a negative -1.3%. Given that unemployment is increasing at a significant rate and wage growth in the US is in decline it is hard to see end demand being anywhere near sufficient to bring inflation back onto the scene just yet.

In the UK the CPI data published last week showed that inflation is remaining quite stubborn and the year on year decline to 2.2% was above the consensus expectation of a decline to around 2%. Inflation has overshot the consensus on several occasions during the credit crunch and despite the ongoing recession it remains above the Bank of England target rate of 2%. Predictions of negative CPI now look very unlikely although we would still expect the year on year rate to continue declining especially given that sterling is now finding some strength which should reduce import prices.
Staying in the UK, unemployment data for May was not as bad as feared with a claimant count increase of 39,300 for May against consensus expectations of a 60,000 increase. However, given the rate at which unemployment tends to lag GDP growth it is unlikely that unemployment will stop rising until later in 2010. Finally, in the UK we had the minutes of the last Bank of England MPC meeting and not unexpectedly the vote was 9-0 in favour of keeping rates at 0.5% with an ongoing commitment to the quantitative easing policy.

We start the week with a very quiet Monday and the only data of note that is due for publication is the IFO business climate and expectations survey for Germany which is always of interest given that Germany is the largest economy in the Euro-zone. Tuesday brings Purchasing Managers Index data for Germany, France and the Euro-zone. This basically gives an assessment of business conditions within the manufacturing sector which represents around 25% of Euro-zone GDP. A figure of 50 or above would indicate expansion, but all three numbers are expected to remain below 50.

On Tuesday in the US we get existing home sales data which is expected to rise to 4.85m units on an annualised based from 4.68m the previous month. Attractive tax incentives are certainly increasing activity in the US housing market. However, the level of unsold inventory as reported last month at 10.2 months worth of stock is still far above a level consistent with stable prices.

The significant data of the week comes with the publication of the US Durable Goods orders for May. Having improved by 1.7% in April the consensus is anticipating a modest decline of -0.5% for May with lower demand for autos likely to hold orders back. Also on Wednesday in the US we get new home sales data which is expected to show an improvement to 365,000 on an annualised basis for May compared to the April figure of 352,000. Demand for existing home stock where distressed sales are creating the most interest is taking demand away from new home sales and this trend is likely to continue. Finally on Wednesday we get the results of the FOMC interest rate meeting. Interest rates are expected to remain as they are close to the targeted level of 0.25%, but the market will be looking at the accompanying statement for any guidance on when the Fed may start to raise the interest rate. There was a lot of speculation last week concerning the possibility of a hike in the interest rate before the end of this year especially with 10 year treasury yields jumping higher. This led to comments that perhaps the Fed will use the interest rate meeting this week to reduce expectations of Fed tightening before the end of the year.  In the UK the CBI retails sales data for June will be published on Wednesday.

On Thursday in the US we get the final estimate for Q1 GDP which is expected to remain unrevised at -5.7%. On Friday we get US personal income data for May which is expected to show a 0.4% improvement on the previous month boosted by one off social security payments although the underlying trend is likely to remain down whilst consumer spending may show a very modest increase over the month according to the consensus expectation of +0.3%. Finally on Friday in the US we get University of Michigan Consumer Sentiment data for June.

We have not been very active this week with the market showing little in the way of direction. It is always easier to trade on days with big market movements and Monday provided that. Our methodology is very different to that of our competitors in that we do not trade very frequently but instead focus on a few quality trades every month. So often we have clients come to us that have traded with brokers where they have literally traded every day and usually more than once per day. We take the view that a few trades each month that each generate a small return adds up to a large return over a long time frame and it does work. Of course you cannot get it right every time, but by focusing only on a few trades where the probabilities are far more in your favour can generate a very successful outcome. If you are going to trade day in day out it is far more difficult and dare I say almost impossible to find a high number of winning trades.

The market does now look to be range bound as to whether that will remain the case is difficult to tell, but I still feel there is more chance of a break on the downside than the upside at the moment. The key question is what can drive the market higher now that the financials have really had their recovery for the time being with most other big sectors having had a reasonable run. The miners are always the unknown and clearly any sign of an economic recovery that is starting to look sustainable could see this sector moving ahead strongly.

Apart from trading Unilever this week in my personal portfolio I also traded some National Grid. It was a holding that I actually bought a little too early last week as they moved back below £5.50, but a strong rally today left me with a comfortable profit and I decided to take it. National Grid certainly has good yield attractions which to my mind leaves limited downside at around the £5.30 level.

We are still focusing on the more defensive areas for our trading with particular interest in Unilever, BAT and Imperial Tobacco. Vodafone had a strong run this week and whilst we have actively traded it in the past I am a little concerned about the pressures they face within their mature European markets and with the Euro starting to fall back it is going to be very difficult for Vodafone to achieve top line growth which could result in some changes to forecasts over the coming months. There isn't much room for disappointment and although the focus is much more on free cash flow now where they are likely to make progress, it does depend to a certain extent on how successful they are with cutting costs.

The market certainly does not feel good today with the miners dragging us down and sentiment in general starting to feel more negative. With the FTSE100 now standing at 4278 we are a good 5% from the recent high and it will be interesting to see if we continue back towards the 4000 level. From a trading stand point having traded successfully in Unilever on Monday/Tuesday we are happy to watch and await developments.

This morning we have closed out long positions which we took in Unilever yesterday. The entry price yesterday morning was £14.55 and we made an exit this morning at £14.75, not a huge gain, but ungeared it is 1.1% after costs and a few of these type of trades soon add up to a good overall monthly return. We have reduced our target gains significantly during recent weeks given where the market currently stands.

Week Ahead

Whilst there was not a huge amount of economic data published last week, what there was continued to paint a picture of an improving outlook. We are certainly seeing less bearish comment at the moment and the debate seems to have moved from no sign of green shoots to a plethora of green shoots, but uncertainty as to whether the momentum can be sustained. We certainly remain sceptical that the momentum can be maintained. Given the amount of money being pumped into the world economy some form of recovery is inevitable, but for it to be sustained we need a consumer in good financial health and in the UK we are still far from that point given rising unemployment, high levels of debt, and a housing market that may yet have further to fall. At the moment a lot of the green shoots are attributable to industry restocking and restarting having run inventory down since the end of last year, but unless the end demand is there it is difficult to see a sustainable recovery and certainly sub-trend growth is the best we can hope for at present. The CBI today forecasted that a recovery will not begin until early next year and even then they are only forecasting growth of +0.7% for 2010. Their GDP forecast includes growth of -0.1% during Q3 2009 and 0% for Q4 2009 with Q1 2010 starting with +0.1% and Q2 2010 providing +0.3%. This kind of growth is close to recessionary conditions and the economy is unlikely to feel any discernible difference to conditions now. Without a V shaped recovery which many still expect we could easily see the market coming under further pressure later this year.

Last week in the UK the British Retail Consortium published retail sales data for May which was up 0.8%. This was primarily due to new space which added 1.6% in sales whilst like for like growth was down -0.8%. Within the non food data which was down -4% like for like it was interesting to see that clothing and footwear were the worst performing categories. The UK consumer in our eyes remains a significant risk to any sustainable recovery. At the moment data suggests that the UK consumer is still funding spending to a certain extent from increased credit. At some point we expect this trend to reverse as it has done in the US and 2010/11 could easily see much reduced consumer expenditure as debt is paid down and consumers start to save, which at some point they will have to do. As of yet we are not seeing any increase in the UK savings rate which compares to a significant increase that is happening in the US, and it is something that will have to happen in the UK at some point.

Also in the UK we had the RICS house price survey last week which showed that confidence is definitely improving. The balance of surveyors reporting that house prices increased in the last 3 months rose to -44% in May and this compares to -59% in April and -72% in March. Whilst the net balance remains negative, expectations for further house price falls appear to be diminishing and judging by sales at the moment it seems likely that we will move closer over the coming months to a point of price stability.

In the US, retails sales during the month of May improved by +0.5% whilst the core figure excluding auto sales and gasoline was flat over the month and this was broadly in line with the consensus. US consumer expenditure is likely to remain subdued for many months with rising unemployment and an increasing savings rate. The University of Michigan consumer confidence index reported last week increased to 69.0 from 68.7 the previous month which was a little less than what the market was expecting. Also in the US, business inventories fell by 1.1% in April with destocking very much an ongoing situation although the rate is expected to decline and ultimately reverse which should provide a boost to economic activity during the second half of 2009. Finally in the US, the release of the Beige Book provided a not unexpected view that economic activity across all of the Federal States remains subdued at best although expectations have increased for some improvement before the year end.

This week starts with employment data for the Euro zone on Monday and the US Empire State Manufacturing Index which is a monthly survey of manufacturers in New York. The latter increased to -4.6 in May from -14.7 in April and expectations are for a similar figure for June. Inflation data is very much on the agenda this week with May CPI data for the UK due to be published on Tuesday and the expectation is for a further decline in the year on year rate to 2.1% from the 2.3% registered in the previous month. The RPI seems to grab the headline having already moved to a negative year on year rate of -1.2% and is expected to decline a little further to -1.3%. On the same day we also get CPI data for Europe with the year on year rate expected to fall to close to 0% from the rate of 0.6% registered last month. Also Tuesday brings the German ZEW Consumer Sentiment Index which is expected to show an improvement for the month of June. On Tuesday in the US we get Industrial Production for May which the consensus is expecting to have declined by -1% during May after a -0.5% drop in April which will in part be due to ongoing reductions to auto production. Also in the US on Tuesday we get the Producer Price Index which the consensus is expecting to have increased by 0.7% during May with input prices being impacted by the higher oil price. Finally on Tuesday in the US we get the Housing Starts for May which is expected to show a modest improvement on the annualised rate of 458,000 registered last month.

On Wednesday in the UK we get unemployment data which is expected to show a further deterioration in the claimant count during May. The minutes of the last Bank of England MPC meeting will be published on Wednesday with another unanimous vote expected in favour of keeping rates at 0.5% with a commitment to continuing quantitative easing. In the US on Wednesday we get CPI data for May with a month on month increase expected by the consensus of +0.3%. Thursday brings us more UK retail sales data for May with a month on month decline of around -0.5% expected after a strong March and April. Also on Thursday the UK public sector finances will be in focus with publication of the debt requirement for May which is expected to show a sharp increase. On Thursday in the US we get the Leading Indicators data which is expected according to the consensus to show a 1% improvement during the month of May. The Philadelphia Fed manufacturing survey for June is due for publication on the same day which according to the consensus is expected to remain in negative territory at -15 compared to the previous figure of -22.6 for May which is still some way off a positive figure which would indicate expansion rather than contraction in the manufacturing sector. There is no major data scheduled for Friday.

This week we will be updating our note on Home Retail.