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Interest rate sensitivity increases ahead of central bank decisions

Differing reactions to growth data suggest investors are still sensitive to potential interest rate moves. European shares rallied after weaker French numbers, while US stocks dropped after GDP showed the US economy growing at better than 4% pa. Interest rate decisions from the US Federal Reserve, the Bank of Japan and the Bank of England this week could be driving the moves.

The US dollar strengthened around 0.5% against the Euro last week, reflecting better growth prospects. The Bank of England is the only central bank expected to lift rates this week, but all eyes are on the Bank of Japan’s Yield Curve Control policy and any moves to allow ten year bonds to trade higher from the current 0% target. Any news this week that speaks to growth, inflation or wages, and therefore central bank intentions, may see a stronger than usual market response.

Futures are pointing to a weak start for Asia Pacific share markets. However this week’s packed market calendar may moderate today’s action. China PMI’s, Australian construction data and Japanese industrial activity numbers headline the local releases. European investors will examine inflation indices and in the US the ongoing reporting season is capped by the release of non-farm payrolls on Friday night.

In Australia Rio is the first major to report, speaking to shareholders on Wednesday. On consensus analyst are looking for earnings of around US $2.50 per share. Resmed and Janus Hendersen will also release numbers ahead of the first full week of annual and semi-annul reports starting next Monday. The releases are particularly important given the Australia 200 index closed at ten year highs on Friday.

From Michael Hewson, Chief Market Analyst, CMC Markets UK:

  1. Bank of England meeting and inflation report– 02/08 – the Bank of England has a decision to make this week when it meets to decide on the outlook for the UK economy against a backdrop of a fairly decent rebound in Q2 and rising political uncertainty with respect to the Brexit talks. On data grounds a rate rise would seem justified after the weakness in Q1 proved to be temporary, however the uncertainty seen at the end of July might stay the banks hand. The lack of any pushback on market expectations from UK policymakers in contrast to last April, would suggest a rate rise could well happen, but any vote to raise rates may well not be unanimous. A failure to act could signal a sharp sell-off in the pound.
  2. Fed meeting 01/08 and US employment report – 03/08 – the US economy isn’t showing any signs of slowing with recent data surveys pointing to labour market shortages in certain areas, which has seen some long term unemployed return to the jobs market. The rise in the participation rate does suggest that there may be more slack in the US labour market than originally thought, which may explain why wages growth has stubbornly well below the 2.9% seen in January this year. Investors will be looking for evidence of rising wages as the labour market continues to tighten, while the latest Fed meeting due on Wednesday is likely to confirm the central bank is on course for a September rate rise. 
  3. Bank of Japan rate meeting – 31/07 – earlier this month there was some speculation that the Bank of Japan might be looking to tweak its bond buying program as its economy starts to show signs of higher prices. The Japanese central bank wouldn’t be alone in looking to rein back its stimulus policy in the coming months with the European Central Bank and the Bank of England also mulling the prospects of doing the same thing.
  4. Manufacturing and Services PMI’s – 01/08 – 03/08 – this week should give investors a decent insight into whether the recent rise in trade tensions is starting to filter down into the various global manufacturing and services PMI surveys. Early indications would suggest that manufacturing is starting to show signs of this rising uncertainty, and markets will be looking for evidence of this. Services on the other hand appear to be slightly more resilient with a pickup expected to be seen in the UK and France’s readings given the performance of both France and England in the recent World Cup.
  5. BP - H1 – 31/07 – at its last trading update BP reported a 71% rise in profits in the first quarter of the year, its best performance since 2014, while at the same time reporting a 6% rise in output. If it hadn’t been for another $1.6bn in respect of the Gulf of Mexico oil spill it would have been an even better performance. With a breakeven price below $50 a barrel and oil prices hitting $80 a barrel earlier this year, it would be very surprising if BP weren’t to show a significant improvement in Q2 as it reports on the first half of its financial year. That being said sector peer Shell managed to fall short of expectations last week so there is the potential for a downside surprise. Average prices in Q2 have been over $10 above where they were in Q1, and while the Gulf of Mexico spill is still likely to act as a drag this year and next, BP is running out of excuses to start reducing its debt which is now close to $40bn, particularly since it has a host of new projects coming on line which should add to the company’s overall output, while last week the company paid $10.5bn for BHP’s US shale assets.  
  6. Apple – Q3 – 31/07 – with little in the way of new products this week’s Apple numbers will focus on the usual suspects of iPhone X, the various iPhone 8 modes and iPad sales along with improvements in the company’s cloud based services, with the App Store, Apple Music, adding subscriptions at a decent clip. At its last trading update the company announced a $100bn buyback despite average selling prices for its phones showing signs of dropping, suggesting that perhaps consumers were opting for the cheaper models instead of the more expensively priced iPhone X. The biggest concern for Apple is a slowdown in China, and or an escalation in trade tension which could impact one of its largest markets.
  7. Capita - S1 – 01/08 – outsourcing companies have been front and centre this year with the collapse of Carillion earlier this year, as well as the concerns on the solvency of Capita and the restructuring of its business by new CEO Jonathan Lewis who was brought in to turn around the trouble business at the end of last year. His initial findings were both damning and alarming as he claimed the company was “too complex” and relied far too much on acquisitions to grow. On the plus side the willingness of the new CEO to take a hatchet to the problems surrounding the business has increased optimism that the company, which has the earned the unfortunate moniker of “Crapita”, would be able to get out of the hole it has found itself in. A £660mn rights issue in May was part was a crucial plank of this strategy, however the company isn’t out of the woods yet after the UK government changed its mind about a recent MoD contract win on the basis of a legal challenge that challenged the awarding of the contract. This week’s trading update will outline how much progress has been made in bolstering the balance sheet.    
  8. UK Banks S1 – 01/08 – Lloyds, Barclays 02/08, and RBS 03/08– it’s a big week for UK banks as we gear up for the latest trading updates for the first half of the year. On share price performance it’s been a disappointing last few months with the share prices of all three down over 5% year to date with RBS the worst performer. This underperformance is particularly puzzling give that all three banks have started to post some fairly decent numbers. Lloyds Banking Group in particular posted record profits last year, while in Q1 profits rose 23%, raising the prospect of a higher dividend. RBS appears to have drawn a line under its DoJ fine, however it still needs to make further provision from the final amount and still has a lot of brand problems over its GRG unit. Barclays also has issues around its investment bank with activist investors Edward Bramson looking to pressure management into offloading the underperforming division.

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