Today's edition features:
"The absence of a more hawkish stance within Fed Chair Janet Yellen's comments in her semi-annual monetary policy testimony to Congress yesterday was taken well by both US and international equity markets. By stating that low inflation is still a cause of uncertainty, traders consider policy tightening will now come later rather than sooner; although there was no suggestion that the Fed target of three hikes during 2017 has been abandoned, it seems realistic now to expect the final move of the year to fall into the fourth quarter. The three US major averages rose strongly on high volumes, taking the Dow Jones Industrial to a new record high, while the US$ fell and Treasuries rallied taking the 10-year benchmark yield down 3.7 basis points to 2.325%. Somewhat less surprising, the Fed Chief also said the Central Bank is likely to begin a program to normalize the size of its US$4.5tr balance sheet this year, assuming the continuation of a strong labour market and firming economic activity. Today's Jobless Claims data may provide more support for this view, while yesterday's Beige Book stating it was seeing a 'pace of growth ranging from slight to moderate' also appeared consistent. Most sectors found good buying, with Oils in particular remining firm during the US session, after its EIA report detailed larger than expected US drawdowns and reports leaked out that OPEC leaders were planning a 'special meeting' for 17th July, although crude went on to weaken fractionally first thing this morning; Techs were also well supported with the S&P-500 IT index ending up 1.3% and Airline stocks were in demand pushing the Arca sector up 2.28% to a new 15-year high. The rally extended to Asia this morning, with all regional markets getting involved. The Nikkei was the least enthusiastic, falling back to only slightly above unchanged shortly ahead of the close due to a firming Yen. Elsewhere, the Fed Chair's comments were seen to raise the risk appetite, with the Hang Seng Index approaching a new two-year high, while South Korea's Kospi saw strong demand for its tech-weighted index helped by the Bank of Korea leaving rates unchanged Thursday. The Shanghai Composite also participated as macro data confirmed the country's Foreign Direct Investment rose 2.3% on the year, while banking shares recovered enough to drive Australia's S&P/ASX 200 more than 1% higher. European markets started strongly yesterday, after learning of the Senate Republican leader's proposal for a fortnight delay in the August recess in order to agree proposed legislation and nominees, suggesting that finally significant progress was being made in moving the Trump's market friendly agenda forward, while Tuesday's API crude stocks data also boosted demand for energy companies. Helped further in the afternoon by the Fed Chair's comments, the STOXX Europe 600 closed 1.48% higher with all local bourses strongly up on the day. The UK's FTSE-100 was slightly less enthusiastic than its European counterparts, although a 1.2% gain was still its best move in nearly four months. The BoE's Deputy Governor Ben Broadbent was quoted in the press saying there are currently too many "imponderables" in the UK economy to raise interest rates, despite the unemployment rate falling to its lowest since 1975. Amongst the individual sectors, Mining stocks also benefited from higher base metals prices, taking the FTSE-350 Mining sector index up 1.6%, while Luxury Goods companies were boosted by Burberry's (BRBY.L) confident Q1 update, which also highlighted translational benefits it was accruing from Sterling's devaluation. Bears continued to circulate both Pearson (PSON.L) and Carillion (CLLN.L), although traders were starting to suggest selling pressure on the latter coming from index and income funds had now possibly pushed the shares down too far, considering its core strengths in the infrastructural services sector. Thursday will see the BoE publish its Credit Conditions Survey. Nothing is expected from the EU, although the US provides a good batch of numbers, including Producer Prices for June, weekly Initial Jobless Claims, EIA Natural Gas Storage Change and its June Monthly Budget Statement, while Janet Yellen is due to make the second part of her two-day Congressional Testimony at 15:00hrs BST. The FOMC's Lael Brainard is also due to make a speech. UK corporates scheduled to provide trading statements include ASOS (ASC.L), Babcock (BAB.L), ITE Group (ITE.L), SSP Group (SSPG.L), Premier Oil (PMO.L) and Telford Homes (TEF.L). Taking this morning's Asian gains on board, European equities are likely to lean modestly in the positive again during this morning's opening trade, with the FTSE-100 seen around 5 points firmer."
- Barry Gibb, Research Analyst
The FTSE-100 yesterday's session 1.19% higher at 7,416.93 whilst the FTSE AIM All-Share index was up 0.38% at 958.04. In continental Europe, the CAC-40 finished up 1.59% at 5,222.13 whilst the DAX finished 1.52% higher at 12,626.58.
In New York last night, the Dow Jones rose 0.57% to 21,532.14, the S&P-500 firmed 0.73% to 2,443.25 and the Nasdaq gained 1.1% to 6,261.17.
In Asian markets this morning, the Nikkei 225 had improved 0.04% to 20,106.8, while the Hang Seng firmed 1.08% to 26,326.19.
In early trade today, WTI crude was down 0.04% to $45.47/bbl and Brent was down 0.06% to $47.71/bbl.
Estate agents have lowest stock of homes for 40 years
The UK housing market is in a state of lethargy, according to property surveyors, with estate agents reporting the lowest stock of properties for nearly 40 years. In another gloomy survey, members of the Royal Institution of Chartered Surveyors (Rics) said the market might continue "flatlining" for a while. New instructions in June fell for the 16th month in a row. Most surveyors also saw further falls in the number of properties being sold. The average number of homes on the books of estate agents fell to 42.5 - the lowest number since the survey started in January 1978. "Political uncertainty" was given by 44% of surveyors as the main reason for the pessimism - nearly double the number who blamed Brexit. Simon Rubinsohn, Rics' chief economist, said that uncertainty seemed to be "exerting itself on transaction levels, which are flat-lining, and may continue to do so for a while, particularly given the ongoing challenge presented by the low level of stock on the market".
Source: BBC News
Barratt Developments (LON:BDEV, 589.50p) – Buy
The national housebuilders yesterday issued a trading update for the year ended 30 June 2017, ahead of publication of its annual results on 6 September 2017. Highlights included (i) Total completions including joint ventures ('JVs') at 17,395 (2016: 17,319), the highest level of completions in nine years; (ii) Profit before tax expected to increase to around £765m (2016: £682.3m), ahead of market expectations; (iii) Management confirming its expectation of delivering on financial targets set back in 2014, with return on capital employed for FY17 seen rising to around 29% (from 27.1% last year and against a targeted minimum hurdle of 25%): (iv) A year-end net cash balance of some £720m (30 June 2016: £592.0m), ahead of guidance, driven by strong performance and the timing of land and working capital payments
Our View: For now at least, the housebuilders continue to walk on water! Echoing the positives voiced by other major peers recently, Barratt management's confidence remains high, while also reminding investors that it can produce quite exceptional returns for shareholders amid what remain near ideal current trading conditions. Indeed, total average selling price on completions for the year increased by some 5.9% while private average selling price ('ASP') hiked by around 8.0%, as it benefitted from mix changes as well as some underlying house price inflation; the sales rate for FY17 also rose to 0.72 (2016: 0.69) net private reservations per active outlet per week in the full year and 0.76 (2016: 0.72) in the second half, having operated from an average of 377 active outlets including JV's (2016: 378). As a result, total forward sales (including JVs) as at end-June 2017 were an exceptionally strong £2,144.4m (2016: £1,762.0m), equating to 9,762 plots (2016: 8,724 plots); Barratt's wholly owned forward sales were up by 18.8% on the prior year to £1,909.2m (2016: £1,607.2m), equating to 8,953 plots (2016: 8,054 plots). All very positive indeed! But a background of declining consumer and investment confidence since the General Election combined with subsequently heightening Brexit-related political disarray, investors must remain concerned that current momentum on ASP and reservations will shortly start to decline. Indeed, management approving less new operational land purchases during the period and guiding shareholders for FY18 with the expectation of delivering only 'modest growth for wholly-owned completions year-on-year', suggests they might have the same though in mind. Now trading on a P/NAV of 1.85x (compared with a sector average of 1.94x) while offering a dividend yield of 7.1% (against the sector at 5.9%), nobody can say that Barratt is presently expensive, even though it has outperformed its peers so far this year. Beaufort retains its Buy recommendation on Barratt, but fearing a slightly more cautionary outlook emerging by the time of the Group's full year statement on 6th September, the price target has now been lowered to 650p/share (from 690p previously).
Burberry Group (LON:BRBY, 1,630.00p) – Buy
Burberry, a UK based international luxury fashion and beauty brand, yesterday provided its trading update for the 3 months ended 30 June 2017 ('Q1 FY2018'). During the period, retail revenue advanced by +3% to £478m on an underlying basis, and it increased by +13% on a reported currency basis, against the comparative period (Q1 FY2017). Like-for-like ('LFL') sales was up +4%, helped by mid single-digit percentage growth in Asia Pacific region and continuing high single-digit percentage growth in EMEIA region, partially offset by the ongoing low single-digit percentage decline in Americas. On the operational front, the Group said its Beauty business is on track to transition to strategic partnership with Coty in October. Burberry reiterated its commitment towards delivering cumulative cost savings of £50m and a share buyback of £300m in FY2018. Burberry's new CEO, Marco Gobbetti, commented "I am delighted to have started as Burberry CEO. We are pleased with our performance in the first quarter, while mindful of the work still to do. This is a time of great change for Burberry and the wider luxury industry. I look forward to building on the foundations Christopher and the team have put in place and creating new energy to drive growth".
Our View: The Q1 trading update from Burberry was upbeat. LFL sales growth of +4% was a clear acceleration from +2% achieved in Q4 FY2017. Asia Pacific was led by mid-teens percentage growth in Mainland China with continuing improvement in Hong Kong, although Korea remained challenging. EMEIA was driven by a strong UK, although the Group said this growth decelerated toward the end of the Q1, while weakness was seen in Italy and Middle East. In the Americas, strength of the US dollar encouraged US customers to shop abroad, while local demand from both tourist and domestic declined. Store footfall was weak, but this was mitigated by an improved online sales conversion. Looking ahead, the Group reiterated its FY2018 adjusted pre-tax profit guidance on a constant currency basis, while accounting for the adverse movement in reported adjusted pre-tax profit of around £25m (previously a hit of £30m) at 30 June exchange rates. The Retail division expects no material contribution from net new space this year. Performance for Wholesale in H1 FY2018 is now expected to be "broadly flat" (previously mid single-digit decline) as business disruption from Beauty turned out to be limited. For the H2 FY2018, the Group expects underlying wholesale revenue (excluding Beauty) to fall due to tighter brand control. Total underlying Licensing revenue for FY2018 is expected to increase by c.+20%, which includes contribution from new Beauty licence from October onwards. The shares are valued at FY2018E and FY2019E P/E multiple of 20.5x and 18.3x along with dividend yield of 2.5% and 2.7% respectively. Considering a slightly better overall outlook now expected for FY2018E, while it remains on track to deliver of targeted cost savings and share buybacks, Beaufort repeats its Buy rating on the shares with a price target of 1,920p.