Index creep, IPO magic, China concerns, UK banks, ARM - Accendo Markets Weekly Roundup - 25 Oct 2013

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Mike van Dulken, Head of Research at Accendo Markets, commented in his Weekly Roundup to clients,

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This week saw the UK’s FTSE100 Index add a further 100 points (1.5%) to revisit 6,700 as risk appetite remained supported by the US fiscal resolution (albeit short term, be prepared for a re-run), a welcome rebound in China Q3 GDP and PMI Manufacturing, continued recovery for UK GDP and – as strange as it sounds – the fallout from the government shutdown. Lost jobs, output and skewed data is likely to force the US Federal Reserve to delay plans to taper its QE3 stimulus programme until 2014 meaning continued easy monetary policy for longer.

So far, as we highlighted last week, disappointing data such as the delayed Non-Farm Payrolls (less jobs added, unemployment down but participation also down) are supporting the theory and the data that emerges through year end is unlikely to paint any clearer a picture on the world’s #1 economy failing to give the Fed any ammo to surprise markets with a tightening move. Markets are quite happy to run with the accommodative central banks for as long as they want to print and remain supportive of markets.

That’s not to say all was good this week. It would be churlish of me to ignore the negatives just because the markets advanced. We had mixed Q3 results from major US corps with the usual ‘surprise’ EPS beats but a fair few revenue misses and disappointing outlooks. Standouts were disappointments by Caterpillar, Dow Chemical and Texas Instruments, the first two adding to questions over China, the second to concerns in Tech. The US banks also remained under pressure after their results of the prior week and yet on more news of legal challenges/huge settlements. This had a bearing on UK banks and should be borne in mind ahead of them starting to report next week. In terms of upside results surprises look to Amazon, Ford, Microsoft, Verizon.

PMI data from Europe also failed to inspire while China saw property prices push dangerously higher, its banks triple loan write-offs and its money markets signal potential for a move into another liquidity crunch. Can the world’s #2 economy on which so much hope of a recovery is pinned, deliver 7.5% FY 2014 GDP growth? Many say guaranteed (massaged data, it’ll probably beat). Others say things genuinely picking up around the world even if things are getting a bit too hot domestically.

While the US S&P500 and German DAX trade around all-time highs our local FTSE 100 index has work to do. It’s still in the 3-week channel we spoke of last week having hit the near-term levels we had highlighted. Limited progress is a product of risk appetite being offset with natural profit taking (6.5% gains from 8 Oct). 6700 is holding well but we are watching the waning momentum and indicators saying overbought. We’d need a break below 6660 before turning bearish, while outright bullishness would need a break above the current 6735 high and an intersecting trendline from June’s low.

For now we remain cautiously optimistic of further gains noting that the aforementioned intersecting trendline is still rising and may simply slow up rather than scupper the existing ascent allowing further creeping towards May and even all-time highs, which would equate to a 10% gain from the Oct lows.

After the success of the Royal Mail IPO (36% pop on day 1, shares +20% since) we note interest in Merlin Entertainments (EU leading visitor attraction operator,#2 in world behind Disney; operates Alton Towers, Thorpe Park and Chessington world of Adventures in the UK Legoland, Sea Life and Madame Tussauds in the UK and abroad) which hopes to be the next big UK IPO with a £2-3bn valuation. Valuation using peers suggests this could be undervalued. After that it’s the big one, Twitter (7 Nov), where pricing of $11bn appears rather conservative (designed to avoid a Facebook-like face-plant?) and is well below levels in the grey market ($29bn). Could these two make it a trio of major IPO success? For details on both of these IPOs contact us for more details.

Before I go, note Apple reporting Q4 and FY results next week. It’s still a market darling and computer/tablet launches/updates this week added to the recent iPhone 5s and 5C which saw record sales. I say this because ARM Holdings (ARM; designs microchips) had a volatile ride this week (+3.9%, -7.7%) after its results beat expectations but disappointed on royalties (it earns a % of sale price of devices using its design) due to lower selling prices for devices, and despite Licensing sales being very strong.  Could an Apple read-across give the designer a boost and help revive its share price uptrend?

As always, have a pleasant weekend.

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