Written by Charlie Menegatos

Friday, Jan 29, 2010

RECESSION IS FINALLY OVER. BUT WHAT COMES NEXT?

It may have been only 0.1 percent GDP growth over the last quarter of 2009, but it meant everything to the UK economy and the Government in terms of the ONS’s first take on the likely end of recession. However, the stock market had clearly decided that this is the type of news where it is better to travel than to arrive. Ironically, the big negative on the week was trcontinued fears over how much China would apply the fiscal brakes to slow down an economy where the problem is not recession, but a bubble. As far as company news was concerned Tullow Oil’s GBP925m share placing and Vedanta’s soaring productivity led the newsflow.

A Zero Sum Game

What was interesting about the Q4 2009 GDP number was the way that the announcement on January 26th of an exit from one of the longest recessions of recent times had been taken so much for granted. As far as any statistic could be hyped this one was, particularly given the way that the UK has the distinction of being one of the last major world economies to emerge from the economic downturn of the past two-and-a-half years. In the end the 0.1 percent rise in growth was probably a number that could have gone either side of the zero figure. The Treasury and the Government as a whole must have breathed a collective sigh of relief that we would not have to wait yet another three months for growth to return. While monetary policy committee “external” member Andrew Sentance may have insisted after the data was released that the economy is really doing better than the ONS figure suggests, it would appear that so far we are in danger of not being able to deliver the bounce from the worst levels that defines a double-dip recession. With the General Election now less than six months away it will be interesting to see how policymakers negotiate the window-dressing period for the electorate, or even if they bother to do so.

Trading Strategy:

After a relatively clear run for over nine months since the stock market’s March recovery, it was inevitable that the situation would become rather more fraught for CFD traders, if only on the basis that the bulk of the low hanging fruit/undervalued companies in the market have already been picked. It is also the case that after a 50 percent rise in leading shares, there will be some companies who have been rewarded too highly as recovery plays with a degree of rerating overdue. There is also the issue of whether the buy trend of the recent past is finally over and, just as important, which button traders should be pressing? Are we still to buy the dips such as the current move to 5200, or is the concept of selling into strength now the governing one? Unfortunately just as no one rings a bell at the top or bottom of the market, which way traders should be facing at the moment is as much a question of personal judgement as anything else. Everyone will have their own line in the sand, and perhaps the best one for now is a technical one - the last December low for the FTSE 100 at 5175. It is hard to believe that if the FTSE trades below this zone for a sustained period it will be able to resume the bull/recovery run.

Commodities and FX View:

Perhaps it was relatively predictable that with a strong dollar and weak equity markets the appetite to buy risky commodities remained subdued at best. That said, as gold is normally linked very highly to the level of the euro/dollar, and with the cross falling towards $1.40 its lowest level in months, for the metal to hold near the $1,100 an ounce level could be seen as quite a result. The fact that for much of the period the market has been spooked by fears of China tightening fiscal policy, and thus reducing demand for commodities, does mean that gold and leading industrial metals have not perhaps fallen as much as they might have been expected to do. Crude oil also continued its recent slide, losing the $75 a barrel level on the March contract after the latest EIA data revealed a 2m barrel rise in gasoline inventories. The initial reaction to the disappointing Q4 GDP rise for sterling was a predictable one cent decline versus the dollar and 0.5p off versus the euro on the day. However, Andrew Sentance’s view that the real GDP result was probably stronger than +0.1 percent meant that the UK currency was well supported and actually started to gain on levels prior to the announcement, towards $1.62 and 86.5p on the euro. This was even though a well-received Greek Government bond sale took some of the heat out of the nation’s sovereign debt crisis, at least for the time being. Crude oil was sidelined in terms of price action by the capping effect of a strong dollar and remained around the 50-day moving average zone of $78 a barrel. With US supplies forecast to rise it appeared that the market was more concerned by this short term drag on prices rather than OPEC’s view this week that global demand will rise by 20,000 barrels to 85.15 million barrels a day.

Company Reporting Focus:

The big corporate splash this week was undoubtedly the revelation from the oil explorer Tullow (TLW) of a share placing to raise GBP925m. That sent the group’s share price down 5 percent on the day as the market mulled over yet another cash-raising effort by a leading FTSE100 company. Another blue chip in focus was miner Vedanta Resources (VED) where there was a sharp rise in revenue off the back of soaring production levels, especially in zinc and lead. However, the falling share price trend in the sector meant that Vedanta stock fell as did that of sector counterparts Rio Tinto (RIO) and BHP Billiton (BLT), which were hurt by the announcement of an EU probe into their iron ore joint venture in Western Australia. The company results’ focus tended to be on the second liners with soft drinks group Britvic (BVIC) putting some fizz into its latest quarterly update. Indeed, the shares rose 7 percent on the day that the company announced a robust trading performance. Mezzanine finance provider Intermediate Capital (ICP) surprised the market with its resilient performance. Here a combination of improving financial markets, and the realisation of gains on investments, led to a capital gain of GBP71m. However, the going was also easy for accountancy software group Sage (SGE) as it remains one of the few leading companies to confess that conditions are not proving tough in its markets. Nevertheless, it said the loyalty of its customer base and reduction of debt provided for an inline trading result.

The Economy Angle:

Apart from assuring us that the 0.1 percent rise in GDP was possibly an understatement, outside member of the monetary policy committee of the Bank of England Andrew Sentance managed to curb any enthusiasm generated by this bullish comment, with the warning that any recovery in the UK is clouded by uncertainty. Indeed, it was banks that were in progress in one way or another, with Bank of England Governor Mervyn King suggesting that the banking sector needs radical reform. Indeed, it was not surprising that Mr King suggested this given that at the start of the week City Minister Lord Myners and G7 officials had been meeting to discuss how to prevent a future banking crisis. But it appeared that as well as the clouds on the economic horizon, those bearing snow appeared to be a major factor as on the economic front earlier this month, a point backed up by the way that the latest CBI survey on retail sales revealed a -8 percent balance. This was weaker than expected, undoubtedly not helped by the adverse weather conditions during the survey period in the first half of this month. However, not everything was negative, with the British Bankers Association revealing that there had been a rush to take out mortgages in December ahead of the stamp duty reduction deadline in the New Year. Gross mortgage lending was up to GBP10.2bn from GBP9.6bn in November. This sat well with the latest revelations from online estate agent Rightmove (RMV) showing that house price confidence surged at the end of the year, with 53 percent of respondents believing that prices will rise in 2010 as opposed to just 10 percent the same time last year

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