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Reflect & Prepare

Reflect and Prepare

Fri, 8th Sep 2017 - Author: Reflect & Prepare

A week of central bank rate decisions drove the financial markets this week. RBA (Australian), RBC (Canadian) and the ECB (Eurozone) central banks all met and it was a real mix bag, in Australia the key rate remained unchanged although the sentiment was slightly on the hawkish side as RBA's Lowe hinted the next move if any would be up. In Sydney a booming housing market is causing concern despite tightening lending conditions a rate increase could put pressure on household finances. Lowe stated “Housing prices have been rising briskly in some markets, although there are signs that conditions are easing, especially in Sydney. In some other markets, prices are declining.” this gives us an indication that if the data improves he may be willing to move on rates.

The RBC increased rates to 1% sending the Canadian Dollar soaring, it was 55% priced in, but the markets felt the strong CAD and weak USD could prompt the RBC to reconsider. The oil price has improved which should help the cause, but inflation remains very low so a move of this magnitude in interesting indeed. 

The ECB downgraded inflation projections due to the stronger EUR, Mario Draghi kept the key rate and QE unchanged and there were some interesting statements in the accompanying press conference. Draghi stated that he will not move on rates until the end of QE, which he said the ECB will provide some clarity on in Oct. He also stated a 1.18 EURUSD exchange rate is what the ECB base their forecasts on and he didn't know the current exchange rate.  To talk down the EUR Draghi also stated the ECB are looking at increasing or extending QE since then there have been source reports that the ECB are looking at four QE scenarios and agreed next step is to cut stimulus and should be done with broadest possible consensus. There has been some suggestion that this will be done by reducing the size of QE but increasing the duration again but we will have to wait and see.

Next week the Bank of England has its turn, policy is expected to remain unchanged along with rates. All traders and investors seem to be looking at is inflation and wage inflation. Inflation is still above the 2% target due to the fall in GBP after the referendum, but stagnation in wages is the key. In the US Trump looks like he may have found a cure by cutting the business tax rate, in the UK that does not look like it can be the solution due the GDP not being as large as in the US. If we reduce immigration this will be a problem for some time as productivity and competitiveness will fall leaving the BoE with a conundrum. 


Big corporate stories this week:

Bovis Homes traded at its highest level since August 2015 as the Co. reported a 31% drop in first-half pre-tax profit but the shares rallied as investors welcomed a hike to the dividend, a special dividend and healthy margins, also Barratt Developments which released its full-year results on Wednesday, also gained ground after the Bovis numbers but overall the price looks to be stalling around the 600p area. Barratt Developments fell 4% earlier in the week despite posting record annual profit, better than forecast revenue and a 39% hike to its dividend. Berkeley Group reported in-line trading but warned that uncertainty around Brexit, stamp duty and mortgage interest deductibility continued to weigh on the key London market.

Shares in Capita gapped down this week as the group unveiled a drop in guidance as new accounting practices take shape.  Shares in the group rebounded of the 600p mark to end the week near 620p lower than the closest value area of 650p.

Petrofac rose 44p this week after saying it has been awarded a contract worth more than $700m by Sakhalin Energy Investment Company for its onshore processing facility on Sakhalin Island.

Finally this week Aveva agreed a merger with the software arm of France's Schneider Electric where the UK Company’s existing shareholders will own 40% of the business. Share rose a massive 29% off the news and consolidated near the 2476p mark.


Next week:

Earnings: JD Sports, Ashtead, Dunelm, Galliford Try, Next, Morrison and JD Wetherspoon


Data: BoE rate decision, UK inflation, UK earnings and unemployment, Chinese Industrial production, UK Retail sales, US inflation, US retail sales and Chinese CPI (this weekend)


Have a great weekend 


The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.


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