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FTSE succumbs to summer somnolence as oil slumps

MARKET BLOG: Markets slightly higher as Germany's Merkel eases euro concerns. Oil price drops amid US reserves release report.

 
FTSE succumbs to summer somnolence as oil slumps
  • Markets slightly higher as Germany's Merkel eases concerns over a euro break-up: FTSE at 5,845
  • Lonmin shares suffer amid South African bloodshed
  • Lloyds shares downgraded by Investec
  • Oil price lower on contract rollover and report of US reserve release plans

16.24: After a summer's week of thin share trading and low volatility, a soporific FTSE 100 has barely moved, though the blue chip index looks set to make a modest gain today, trading at 5,846.

With little economic news, markets around the world have let German chancellor Angela Merkel guide them gently higher as she gave her support to European Central Bank president Mario Draghi’s pledge to ‘do whatever it takes’ to save the euro (see first blog post).

Much of the rest of the week has seen markets chase stimulus with any weak economic readings only serving to convince investors that the US Federal Reserve, ECB or Chinese authorities will be more likely to act sooner.

Today’s small portion of economic news – US consumer confidence measured higher than expected at the start of August – elicited a muted response, providing little insight into the US Fed’s next move. US markets were subsequently flat.

Commodity markets have, however, provided some interest, with the oil price dropping sharply – Brent crude futures are now down 1.7% at $113 – as the US government reportedly considers tapping oil reserves (see earlier blog post). Platinum prices continue to march in the opposite direction, up 1.5% at $1,462, after the violence at Lonmin’s South African mine.

Lloyds investors told 'you've had your chips'

14.15: Lloyds (LLOY.L) investors' luck was out from 2007 to 2012, but they’ve had it good this year, with the bank’s share price up 20% so far.

Now, however, ‘you’ve had your chips!’ says Investec analyst Ian Gordon:

‘Lloyds’ shareholders can take satisfaction from the stock’s YTD outperformance against all other UK banks. The medium term outlook still offers some further recovery with group NIM [net interest margin] at a tipping point, balance sheet metrics improving, and this week’s £1bn private equity disposal within existing marks indicative of a resilient impairment performance despite some deteriorating property-based metrics. However, the outlook for RoE [return on equity] recovery remains painfully slow, with scope for negative surprise. Downgrade to Hold.’

Lloyds recently declared an unexpected £439 million loss in the first six months of the year, as it set aside an additional £700 million to compensate customers who had been mis-sold payment protection insurance (PPI).

But in general analysts have been warming to the bank, and it’s still a 'buy' for many of them, owing to its restructuring and decent positioning in the face of regulatory reform. It’ll also benefit most from government bank aid (Funding for Lending), bank watchers reckon.

And Gordon isn’t giving up on 39% state-owned Lloyds either. Though not as upbeat as Goldman Sachs – which recently predicted the bank’s share price could more than double in the coming year – and though stripping the shares of their ‘buy’ rating, he expects 'more attractive entry levels to emerge in the months ahead'.

And on this fine August day, investors certainly weren’t heeding Gordon’s advice not to buy: alongside other banks, the shares are near the top of the FTSE 100, up 3% at 33.9. 

Oil price takes a break

10.55: The surging oil price has dropped off today after a report that the US government is considering a release of oil reserves to cap damagingly high gasoline prices.

The release would also prevent high oil prices from undermining sanctions against Iran, according to Reuters, which published the news based on a source, but without details of the amount of reserves that would be released.

Such reports regularly surface when oil prices are rising. In March, when crude oil futures hit a $126 a barrel, US president Barack Obama and David Cameron discussed joint action to release oil stock reserves and bring down the price. And oil reserves were tapped last year to ease shortages triggered by the civil war in Libya, but this only had a temporary effect.

Having fallen after the March high, oil prices have been rising since mid-June, and today Brent crude futures are priced at just under $114, having dropped 1.1% on the report about the release of US reserves, as well as the rollover of contracts. A combination of growing tensions in the Middle East, supply risks in the North Sea and hopes of monetary policy stimulus have all supported the price of oil in the past two months.

Brent crude oil price dips (source Reuters 3000)

 

Commenting on the reports that the US government may be considering releasing reserves, Carsten Fritsch of Commerzbank said: ‘This rumour could prompt speculative financial investors to sell long positions and put the oil price under pressure. Thus oil prices may well have reached their peak for the time being.

‘That said, supply shortfalls in the North Sea and geopolitical tensions in the Middle East will preclude any sharp decrease in prices.'

Lonmin shares suffer amid South African bloodshed

09.20: Shares in platinum miner Lonmin (LMI.L) have fallen to lows not seen since December 2008 as the death toll grows – and production stalls – at South Africa's Marikana mine, where police have clashed with striking workers.

Amid what has been described as one of the bloodiest police operations since the end of apartheid in South Africa – with more than 30 miners reportedly killed by the police – Lonmin was yesterday forced to concede that it won’t meet this year’s production targets, having lost six days of work so far.

‘It is unlikely that Lonmin will meet its full-year guidance of 750,000 saleable ounces of platinum, although the extent of the variation from guidance will depend on the timing and speed with which normal operations can safely resume,’ Lonmin stated.

Within a few minutes of the production update yesterday afternoon the company also announced that chief executive Ian Farmer had been diagnosed with a ‘serious illness’ and was in hospital.

The company also warned about the pressure the Marikana disruption put on its bank covenants, something that has investors worried.

 

‘Although we would expect LMI to be able to find a way to get through the 2012 covenant test… the longer the strike continues clearly the harder this will become,’ commented analysts at Nomura this morning. They also described Farmer’s illness as ‘another big blow to Lonmin’.

Societe Generale’s Abhi Shukla today downgraded his target price for Lonmin shares from 255p to 145p. As well as concerns that South African unions are getting increasingly militant, and the threat the company will breach its covenants, Shukla reckons platinum prices will need to rise around 23% for Lonmin to stop losing cash. ‘Sell’, the Societe Generale team say – and investors have taken heed, pushing the shares down another 5.6% today to 611p.

Markets edge higher as Merkel eases euro fears

08.10: European markets have taken their cue from US and Asian shares, edging lazily higher in thin August trade after German chancellor Angela Merkel gave her support to European Central Bank president Mario Draghi’s pledge to ‘do whatever it takes’ to save the euro.

On a visit to Canada yesterday, Merkel said Draghi's July vow to defend the euro was ‘completely in line’ with what European leaders have been saying. The statement was seen as a sign that Germany may be drawing closer to backing purchases of sovereign bonds of troubled European nations such as Spain.

Merkel again pushed hard for political union. ‘I made clear once again that we need a long-term, sustainable solution,’ Merkel said in a press conference. ‘It is a question of taking the steps that weren't taken when the currency union was created, namely a political union.’

The FTSE is 0.2% higher at 5,846, while the Eurofirst 300 is up 0.26%, as delicate market sentiment seems to have received a small boost from Merkel's comments at the start of what is expected to be another thinly traded August day with little economic news to sway markets.

Marc Ostwald of Monument Securities commented that investors would probably continue to put 'an optimistic spin' on Merkel's comments into next week, when the economic data schedule is again 'rather thin gruel'. But for today 'for most markets it is likely to be a case of winding down for the weekend as quickly as possible'.

The European move higher follows gains overnight on Japanese and other major Asian indices. In the US, the S&P 500 Index rose to its highest level since early April, adding 0.7%, to 1,416. The Dow Jones Industrial Average rose 0.7%, to 13,250.

15 comments so far. Why not have your say?

Harry Brooks

Aug 17, 2012 at 08:36

But what does she mean by 'political union'? Everybody giving up their sovereignty? Or everybody except Germany giving up their sovereignty? Or everybody except Germany and France giving up their sovereignty?... And, even if they ALL did, where would the debt go? How would the competitive imbalances be evened out? Who would be in charge? I can just see the Bundestag saying 'OK, fine, we'll be governed by some transcontinental body based in Brussels. No problem. Bring it on...'

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Fred via mobile

Aug 17, 2012 at 12:34

Britain should leave the EC now.

Our future is to save the millions per day wasted on the EC and to escape the drive towards a fourth Reich

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Anonymous 1 needed this 'off the record'

Aug 17, 2012 at 13:17

Sure Fred, leave the EU and put 4 or 5 million more out of work. What do you do then, cut the old age pension or abolish the NHS? Why do you think that every PM including Margaret T when they realise the implications of leaving the EU pulls back and modifies their rhetoric? Leaving the EU isn't a realistic option - talking about it is just a way for some politicians to get votes from those whose grasp of economics is weak, of which this country has far too many, but even if UKIP won the next general election we would still be in the EU 5 years later.

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Jim Dedicoat

Aug 17, 2012 at 15:32

Why is petrol still in the 130p+ range

This year brent crude prices were around 130-140 but have dropped to around 100 for a long time and even lower. Why isn't [petrol back to a much lower price, and, this time, you can't blame the chancellor.

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Chris MG

Aug 17, 2012 at 15:56

Anonymous 1 - leaving the EU would NOT put 4 or 5 million more out of work! We would become a free state on the edge of a huge monolithic bloc, and we would prosper. If you don't believe that, then just look at Hong Kong which until the British handed it over, was a free place on the edge of a huge monolithic bloc, and it prospered mightily. We all know that. Like us it even has an offshore tax haven. For us it is the Channel Islands, but for Hong kong it is Nauru.

Oh, and just imagine the benefits of the savings we would enjoy by not having the burden of our contributions to the EU, only a fraction of which come back via EU grants. The prosperity from leaving the EU just has to be taken, although for some, I guess the courage needed to grasp the future would be too much to take.

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Ryan McC

Aug 17, 2012 at 17:00

Jim, i made a similar comment recently on another blog. It is pure f***ing GREED!!!!!!!!

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Simon Taylor

Aug 17, 2012 at 17:05

Anonymous

On what factual basis do you make your assertion that a UK withdrawal from the EU would result in 4-5 million job losses?

I can see why our MEPs would lose their jobs, and Cathy Ashton would have to find new work in a UK based quango somewhere, but who else will lose their job?

This is a myth peddled by the political class who need the EU for their tax free, expense enriched lifestyle. They either don't understand, or don't wish to understand, that countries will continue to trade with one another without a huge, expensive bureaucracy acting as an arbiter as to what is and what is not allowed.

The fact is, the EU is a socialist experiment in wealth distribution which no longer sits with the globalised world in which we now operate. The market will redistribute the wealth of the rich western European nations but not in the way the EU's founders envisaged.

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D G Stonebanks

Aug 17, 2012 at 20:11

My vote is with Simon Taylor

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snoekie

Aug 17, 2012 at 21:13

Harry, you missed the most important aspect, who is dictating, even from behind the scenes.

I think we all know, but let us have it in the open so we do not have Brussels functionaries doing whatever whilst they yell "ZU BEVEL"

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James B. Johnson

Aug 17, 2012 at 22:36

So...the EU is now a socialist experiment is it??

Socialists think that it is a capitalist club!!

Both can't be right.

The truth is that it is neither.

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fatcat

Aug 18, 2012 at 07:54

It is a complete waste of money though and the sooner we are rid of it the better!

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Brian Martin

Aug 18, 2012 at 13:03

I am proud to be English and do not wish for our future generations being governed by a collection of faceless bureaucrats

We need to get back to having a COMMON MARKET not a Federal Union.

If this is not possible then God help us all because this Union is not working and the leaders of our countries just seen not to be able to solve this unsolverbal problem but they all seem willing to drag us all down the drain

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D G Stonebanks

Aug 18, 2012 at 13:36

Many of you would enjoy reading John Mauldin's views. It's free - see www.mauldineconomics.com

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normski 2nd

Aug 18, 2012 at 21:56

Trade is : price and quality, nothing more nothing less

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keith fowler

Aug 19, 2012 at 07:29

Why did not our home heating oil prices and petrol prices go down in proportion to the barrel prices earlier this year ? The prices go up very quickly when barrel prices rise! This seems a very uneven cost of life ! I thought that we elected a govement to look after its people but they appear to ignore these dealings and just collect the extra revenue generated by the ever increasing fuel tax!

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