The Global Month Ahead – An insight into June 2011

Financial News

In our regular feature Seven Investment Management (7IM) look forward to what the month ahead might hold.

United Kingdom – Fixed Income

Outlook Key Issues
The Monetary Policy Committee’s forecasts are for inflation to gradually rise through to the end of the year and then fall back to 2% by 2013. Given the gloom on the high street and government cuts this view seems pessimistic, but with oil prices high, an uptick in inflation does seem likely.
To complicate the interest rate picture, wage growth data has surprised on the upside with growth faster than expected at 2.3% in May. The B of E is in a tough spot. If wage growth adds to inflationary pressures it may have to raise rates despite the weak economy.
In addition to the plethora of banking regulators, the new Financial Policy Committee will meet in June to consider risks in the UK banks sector. With so much regulatory uncertainty, it is unsurprising that lending is low as  banks keep cash in expectation of new capital and liquidity standards
One of the new regulatory requirements is that banks must hold more liquidity in the form of “risk free” government issued gilts. Some argue that the liquidity requirements are squeezing out the banks’ ability to finance industry by forcing them to finance government debt.
The Bank of England’s Financial Stability Report is due out, probably showing a gradual improvement, but highlighting the Euro crisis threat. It is frustrating that the banks keep finding new ways to lose money – the latest is the Euro crisis; rather like a circus clown repeatedly stepping on a garden rake.

United Kingdom – Equities

Outlook Key Issues
Many UK high street chains continue to be downbeat with Kesa (Comet’s owner) and HMV considering different ways to restructure. The pre-pack insolvency is a way to unload unwanted leases. Changing shopping habits could lead to a restructuring of the property market.
The London Stock Exchange’s bid for the Toronto Stock Exchange may be stymied by a local group, wrapping itself in the Maple Leaf flag. The British do the same when it suits (remember Cadbury). Consolidating IT costs for the LSE and TSE makes sense, but this deal may fall through.
BP’s deal to develop the Arctic Sea with Russian oil major, Rosneft, collapsed after opposition from TNK-BP, BP’s existing Russian partner. An opportunity lost for BP, but one gained for the Shell, Exxon or Total. BP may be at a strategic dead end: locked out of the US and now Russia?
Vodafone CEO, Vittorio Colao, has indicated that it is willing to buy rival European companies as the European markets consolidate. Oh joy! More deals. Vodafone, equity value today around £85Bn, has written off £50Bn since 2006, largely due to over-paying for European companies.
The Indian miner, Vedenta Resources, hopes to list its Zambian subsidiary, Konkola Copper Mines, in London valued at £4.5Bn. Not bad for a £160m initial outlay, showing the run up in copper assets and investor appetite for countries with minimal investor protections.
The FTSE 100 is due to rebalance, with companies coming in and out. We know Glencore is in: Schroders, Tui, Hargreaves Lansdown may go out.

North America

Outlook Key Issues
The Federal Reserve’s $600Bn round of quantitative easing (QE2) is scheduled to end in June, having run since November 2010. Financial markets have done very well since the start of QE2. Maybe a correction or maybe QE3 as the US economy seemingly enters a soft patch.
The US government has until the 2nd of August to raise its debt ceiling or close down its operations and potentially default on its debt. A deal could be done at any time by Congress and the President to cut spending/raise taxes, but uncertainly may hurt markets in the interim.
Microsoft made its biggest deal in its history with the $8.5Bn cash purchase of Skype, the on-line phone company, formerly owned by Ebay. $8.5Bn is only about 4 months’ free cashflow for Microsoft! Expect more deals as cash rich, but mature, companies seek to kick start Earnings Per Share growth.
Ford host an investor day in June. The US auto industry has had a solid turnaround, having shed of much of its heritage plant and work practices. Key areas of focus for Ford will be new products, passing on raw material costs and the restoration of its investment grade bond rating in 2012.
The US regulator is looking to industry not to use “conflict minerals” from the Congo, and its neighbours, which could be used to finance war. Regulating “conflict minerals”, including coltan, niobium, tantalum, and cassiterite, could add to the costs of items like mobile phones and cars.

Europe ex UK

Outlook Key Issues
Two major finance institutions may have new heads appointed in June – the ECB and the IMF. One vacancy was expected; one not. The Bank of Italy governor, Mario Draghi, seems a shoo-in at the ECB. The French finance minister, Christine Lagarde is the favourite at the IMF.

The Greek/Irish/Portuguese crisis grinds on, with June elections in Portugal to implement a rescue package. The ECB is owed €80Bn by these countries and a further €500Bn by the Greek/Irish/Portuguese banks.

The cost of procrastination is that when these countries finally default, or as some say, “re-profile”, the burden will fall largely on the ECB, and ultimately on the German and Finnish taxpayers, rather than on investors.

In addition, the Greek/Irish/Portuguese owe about £540Bn to the banks of Germany and France. The German Landesbanks are most exposed.

A restructuring or default could severely impact the German Landesbanks, who are undercapitalised, and could lead to a secondary banking crisis.
To raise money and make their economies more market orientated the Greeks and Spanish are privatising many state and local enterprises. The Greeks say they will sell 16% of OTE, the main telecom company in June and the Spanish may list some of their local banks – the Caja.
Mercedes has a product offensive in process with the new generation B, C, E, M, R Classes, smart, CLS, SLS and other derivatives due out over the rest of the year. New cars often boost car sales and share prices for the auto companies, which should be a positive for Daimler, all other things being equal.

Other markets

Outlook Key Issues
The main drive of emerging market interest rate policy has been to push growth over inflation to pull their economies out of a recession. However the inflation genie is beginning to get out of the bottle worldwide. India is amongst the first to say that “bringing down inflation, even at the cost of some growth, should take precedence”. Interest rates may move up further which will not be good for growth or maybe the stock market.
The G20 Agriculture ministers have their first ever meeting to discuss food and commodity security. Rising prices is a political issue now. This could mean greater overseas state interference in commodities’, which is not good for consumer nations like the British.
The dry weather in western Europe and wet weather in Canada is undermining forecasts that there will be a large wheat harvest this year. A small inflationary problem for the west, but a large political problem for many emerging markets, already under pressure from the weak dollar.
The E3 show is to be held in Los Angeles at the beginning of June. The show is “world’s premiere trade show for computer and video games”. We could see the new Nintendo Wii for the first time. Nintendo’s share price badly needs a boost after the disappointing sales of the latest 3D DS.
Clench your butt cheeks, OPEC meet in Vienna at the beginning of June. The Arabian autocrats will be looking for price rises to refill their coffers.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 8 & 9 June “One fine day” as the Chiffons once sang. Click here
US Federal Reserve 0% – 0.25% 21 & 22 June Low rates for a “prolonged period”. Click here
European Central Bank 1.25% 9 June Bias to raise rates further Click here

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