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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.
- 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.
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by Gavin Lumsden on Oct 28, 2016 at 16:26