News Column

MARKET COMMENT: Barclays Lifts FTSE As Markets Await Central Banks

May 8, 2014

Jon Darby



LONDON (Alliance News) - The FTSE 100 has made a strong start Thursday, erasing all the losses it has made this week so far, as Barclays leads stocks higher after announcing its much-anticipated strategic review and as investors await the latest policy announcements from both the Bank of England and the European Central Bank.


By mid-morning Thursday the FTSE 100 is up 0.5% at 6,827.46, and the FTSE 250 is up 0.5% at 15,966.32, while the AIM All-Share is underperforming, down 0.1% at 810.17.


Company updates have been the main driver of equities Thursday morning, with Barclays grabbing the headlines after announcing its plans for dealing with plunging profitability within its investment banking division. Much like RBS, Barclays has decided to create an internal "bad-bank", which will house about GBP115 billion in assets, roughly a quarter of the group's total.


While management is running down the balance sheet of the "bad-bank" to GBP50 billion by 2016, it also will make redundancies, with plans announced Thursday to cut 7,000 jobs in the investment bank, raising total group-wide redundancies by 2016 to 20,000.


"Barclays may soon resemble the Emirates Stadium with 20 minutes left to play - there will be over 20,000 empty seats," says Investec analyst Ian Gordon".


While labelling assets as "core" or "non-core", or putting them into a "bad-bank" or not may be purely cosmetic in terms of the overall group performance, analysts argue that it provides greater visibility of group structure. Moreover, Barclays has committed to reducing its underlying costs to GBP16.3 billion by 2015, from the 2013 level of GBP18.5 billion.


Investors have reacted positively to the review, sending the stock up nearly 6% to the top of the FTSE 100. The FTSE 350 Banks sector as a whole is performing well, currently up 1.3%.


BT Group is also providing a boost to the leading index. Share are up 3.2% after the telecommunications company raised its total annual dividend to 10.9 pence from 9.5 pence, beat expectations for pretax profit and revenue, and promised further dividend growth over the next two years.


Sage Group leads the FTSE 100 fallers, down 5.7%. Despite announcing that it swing back to a pretax profit of GBP164.5 million in its first half, as well as raising its interim dividend to 4.12 pence from 3.88 pence, investors have reacted negatively to the news that Chief Executive Guy Berruyer has stepped down.


Centrica shares are also lower, down 3.0% after the gas company cut its earnings outlook for the full-year as market conditions remain challenging, overshadowed by an "unprecedented focus on the energy sector" by politicians in the UK. Centrica has reduced its outlook for earnings in 2014, with full-year adjusted earnings per share expected to be in the range 22-23 pence. The firm said earnings growth is expected to return in 2015.


The latest Halifax house price index has shown a slight softening in UK house price inflation, with prices dropping 0.2% month-on-month in March, missing economists expectations for a rise of 0.9%. On a yearly basis, prices for the three months to March rose by 8.5%, also slower than the 9.1% that economists had expected.


"There have been a couple of wobbles in the Halifax Index," notes Berenberg chief UK economist Rob Wood. "The data are not beating consensus every month anymore, but they remain strong."


While the apparent cooling of the rampant house-price inflation may be welcome news to members of the Bank of England'sMonetary Policy Committee ahead of their latest policy decision announcement later Thursday, analyst say that the central bank still needs to remain vigilant for a housing bubble, while the market is currently digesting the impact of the introduction of stricter mortgage-lending rules that came into effect two weeks ago.


"So-called macroprudential policy tools can buy the central bank time, but ultimately they will need to raise interest rates to cool this building housing boom", says Wood.


The Bank of England interest rate decision is due at 1100 GMT, with a consensus expectation of no change to policy at this stage.


The ECB policy decision follows at 1230 GMT, where the consensus is also for no change, although opinion is more divided, and President Mario Draghi's press conference will likely provide the main focus of the afternoon.


"Consensus forecasts suggest Mario Draghi and company will opt against introducing additional stimulus despite lingering disinflation fears," says DailyFX Currency Strategist Ilya Spivak. "Recent comments from the ECB President attempting to talk down the Euro suggest further jawboning may in store however," the strategist says.


Societe Generale currency strategist Kit Jukes, however, says in a morning note to clients that "the ECB is likely to end the sterilisation of asset purchases under the Securities Market Programme".


The SMP involves the central bank intervening in markets to buy assets in the same way that the US and UK central banks have done. However, unlike the BoE and the Federal Reserve, the ECB "sterilises" the effect of this by taking out deposits equal to their asset purchases, thus balancing the supply of money. To stop this sterilisation process has long been an option suggested by analysts for the ECB and would effectively be the start of European quantitative easing.


Also still to come Thursday, US initial jobless claims at 1230 GMT are expected to have fallen to 325,000 in the week ended May 2 from 344,000 in the previous week.


There are also a number of speakers from the Federal Reserve, starting with Chicago President Charles Evans at 1125 GMT, followed by Governor Daniel Tarullo at 1130 GMT, finishing with the most important - Chair Janet Yellen at 1330 GMT.


Ahead of the central bank announcements, both the pound and the euro remain well supported against the dollar, trading at USD1.3945 and USD1.6960 respectively.


The US futures markets currently indicate a broadly flat open on Wall Street.







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Source: Alliance News


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