A glance at the above chart of the FTSE 100 shows it has been another mixed week for equities as markets were rattled by last Friday’s departure of ECB board member Jurgen Stark and the lack of any new growth initiatives from last weeks meeting of the group of seven finance ministers.
Stark’s shock resignation is alleged to be in protest to the Central Banks bond purchasing initiative, publically exposing a long-rumoured rift among policy makers that may further undermine its ability to act quickly in the future.
Fears over the prospect of a Greek default sent stocks in Europe to 27 month lows and credit insurance spreads for peripheral nations to record levels. A weak auction of Italian bonds also highlighted the fragile sentiment in credit markets, as the borrowing cost for Italy’s five-year debt reached Euro-era highs.
Economic data appeared to take a back seat amid the main European news, although retail sales from the US stalled as consumer confidence plunged in August. Meanwhile sales in the UK also fell 0.2% last month as consumers continued to rein in spending at a time of heightened economic uncertainty.
Moody’s, the credit ratings agency, created further weakness in the financial sector after downgrading the credit ratings of two French banks on Wednesday because of the exposure to Greek debt, indicating the growing risks to Europe’s banking sector from a deepening sovereign crisis.
Markets were however buoyed by renewed discussions over the issuance of a Eurobond, a measure seen by many as a possible solution to the debt crisis after European Commission President Jose Barroso pledged to deliver proposals for new Euro area bonds. Yet the politics of Europe’s monetary union suggest a decision is not going to happen for some time.
News from a conference call between Angela Merkel, German Chancellor and Nicolas Sarkozy, French President, stating they had agreed Greece would remain in the Eurozone, helped mitigate some of the fear among investors and enabled equities to trade higher.
Technical analysis suggests that trading is likely to remain rangebound and choppy. Last weeks strength failed to break-out above the recent high at 5449 and this weeks low was below that of last week, leading to no clear direction in the short-term. Support is seen at 5100 and 4791, while 5449 is the level the market needs to pass to facilitate further gains.
In conclusion, these are extremely uncertain times with no clear solution. Economic growth is slowing and investors are losing confidence in the policy maker’s ability to save Greece.
The mere hint that Eurobonds are back on the agenda caused an immediate improvement in risk appetite, even though many question its long-term effectiveness and the actual logistics look vague. Others, including myself, argue a controlled Greek default coupled with measures to secure other Eurozone nations is a better long-term solution, but contagion may cause investors to shift their focus over to Ireland and Portugal as the next countries to fail.
Given the fragile political framework a decision is likely to take some time to finalise and amid the frenzied speculative backdrop, I suspect the current volatility will continue between 5,000 and 5,400 as markets react to the next rumour.
Housebuilder, Barratt Developments (LON:BDEV) returned to profit for the full year and expects to make further progress despite the dormant housing market.
The country’s largest housebuilder by volume on Wednesday posted a pre-tax profit before exceptional items of £42.7 million, above market estimates, compared to a loss of £33 million last year.
Profits were boosted by a 7.4% increase in the average selling price to £198,900 despite total completions falling to 11,171 from 11,377 as the group focused on the buoyant London market and family homes as opposed to flats.
Net tangible asset value increased by 1.5% to £2,037.9 million, resulting in a net tangible asset per share of 211p, implying the shares are trading at a significant discount to the current value of the group’s property portfolio. Net debt also fell to £322 million, around £10 million lower than expectations, giving an improved gearing figure of 16%.
The shares are trading on a prospective earnings multiple of 10.8x, falling to 7.3x in 2013 and with over 65% earnings growth forecast next year, it puts them on an attractive PEG of 0.17. The group said it would return to paying a dividend when it sees a more certain outlook and the company is more profitable, with many analysts forecasting a 3% yield in 2013.
The governments FirstBuy scheme has helped stimulate demand and despite the housing market remaining constrained by restricted mortgage financing, the company saw average net private reservations for the first 11 weeks of the current financial year rise 10.2%.
As can be seen from the above chart of Barratt Developments the shares almost halved in the summer months before starting to recover recently. Support was found near last years low just below 70p and has begun to trend higher since. The RSI is also moving higher, suggesting an improvement in buying momentum.
At the time of writing the share price is 77p and near term targets are seen at 81.62p, 85.28p and 96.5p, with a stop-loss marginally below the recent low at 72.9p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Barratt Developments, but client accounts may. The material in this report has come from Simply Charts and Barratt Development’s corporate website.