Briefing – Vodafone turnaround rings true; UK wilts
Ken Odeluga July 22, 2016 4:50 PM
<p>It’s turned into a UK focused morning. Perhaps even a Brexit one, as well. All eyes are on the first major set of post-referendum economic data from a reliable source released a short while ago. They weren’t pretty.</p>
- It’s turned into a UK focused morning. Perhaps even a Brexit one, as well. All eyes are on the first major set of post-referendum economic data from a reliable source released a short while ago, purchasing managers indices (PMI) for both services and manufacturing sectors. They weren’t pretty. They’ve pricked the thin illusion created by a string of stronger than expected readings which were mostly gathered before 23rd June.
- Whilst the Bank of England will still require more empirical evidence from several more sources to conclude that its first suspicions about the economic impact were correct, we think the pace of the decline shown by Markit’s surveys will strengthen the governor Mark Carney’s hand considerably.
- Markit calculates that the GDP impact would be 0.4%, suggesting a decline of the kind not seen since the financial crisis. Furthermore, the balance of costs and benefits from sterling’s collapse has not, so far, been positive overall, according to Markit. Manufacturing exports have expanded the fastest in about two years, but energy and materials costs jumped at a rate not seen since 2011.
- With the pound just 3% higher from late-June lows, the BoE might well decide that another hit to sterling from easing is the lesser of two evils. We believe the Bank’s next set of agents’ reports will be pivotal, given that the last set played a big part in staying the MPC’s hand in July. The Bank will presumably have access to the agents’ report before its next meeting on 4th August, and ahead of the Agents’ Summary of Business Conditions due on 10th August. It would be remarkable if agents are as sanguine then, as they seemed to be in this week’s report.
- It was left to Vodafone, the world’s Number 2 mobile operator, whose biggest markets are ironically in Europe—particularly Germany—to provide the cheer over UK stocks on Friday. It reported a 2.2% rise in key organic service revenues in its first quarter, the eighth-consecutive quarterly advance. Analysts expected a 1.9% uptick, after underlying sales edged 1.8% higher in the final quarter of 2015/16. Spain and Vodafone’s biggest operating country, Germany, were behind the strength, offsetting persistently weak sales in the UK.
- VOD switched to reporting in EUR accounting from the last quarter, saving some 10 percentage points on its sales, given that the single currency slipped 4% against the dollar since 24th June compared to sterling’s 13%. The group has predictably confirmed its outlook for the full year. That’s after its important European markets—which only returned to growth in the final quarter of 2015/2016—rose 0.3% year-to-year in Q1 (vs. consensus for zero growth) despite the impact of roaming charge cuts.
- So Vodafone is sitting pretty at the top of the FTSE 100, which was slipping by its usual 0.2%-0.4% rate of the last few days before rising at its usual 0.2%-0.4% rate of the last few days, helped by the weakening pound, after the UK data.
- Asian markets saw a less fortunate currency effect and slid even further overnight; Japan the most, as the yen has been showing signs of ending a consolidation against the dollar that saw the greenback arc all the way back up to 106s following yen highs of around 100 per dollar just a week ago. Japan’s currency gave up the ghost though later, as the dollar pushed ahead on the back of the weak British data.
- Even so, traders do seem determined to test the resolve of the Bank of Japan and Ministry of Finance, from which have emitted over the last 24 hours a potential stimulus package of even greater size than heard in earlier talk. Now, the joint fiscal and monetary measures could be as big as ¥2 trillion.
- Nikkei closed another 1.3% lower (Nintendo check: it’s stopped giving back gains that totalled 140% in just days, after the Pokémon GO craze was finally launched in Japan itself. The stock closed 0.8% higher.)
Global markets just before online time:
|Name||Last||Pct. Chng.||Net Chng.||Close|
|DJ INDU AVERAGE||18517.23||-0.42||-77.8||18595.03|
|BRENT CRUDE Futures||46.27||0.15||0.07||46.2|
Next up, Canadian inflation and Retail Sales at 1.30pm London time, and a Flash Manufacturing PMI for the States at 2.45pm. The Baker-Hughes Rig Count tally will also be interesting as it looks like traders of US oil are becoming far less relaxed about the dollar’s grind higher. WTI is 13% lower than 2016 highs on 9th June above $51.67.
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