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Global stocks pushed ahead with the FTSE 100 hitting a fresh 15-year high as investors largely shrugged off the failure of talks over the terms of Greece’s international bail-out.
The European Central Bank approved a €3.3 billion increase in emergency support for Greek banks giving both parties more time to compromise on an agreement. Markets remained relatively sanguine about the prospects for a deal with little contagion seen in other peripheral bond yields.
Some investors argue that the Eurozone would be a stronger economic region without Greece. Growth in Europe has been improving in recent weeks Germany is thriving and the ECB has implemented quantitative easing so perhaps the timing for a Grexit might be opportune.
German investor sentiment climbed in February for a fourth consecutive month to its highest level in a year helped by the ECB’s QE programme. Meanwhile the low-Euro facilitated a larger than expected trade surplus in December with exports surging 8% on the year and imports edged 1% higher.
In New York the S&P 500 closed at a record high earlier this week as minutes from the Federal Reserve’s January policy meeting were more dovish than expected. The transcripts showed members of the Fed’s Open Market Committee were concerned that a premature rise in interest rates could damage US economic growth and the recovery in the labour market. The focus will now shift to Fed Chairwoman Janet Yellen’s semi-annual testimony on the economy to Congress next week.
Strong domestic data supported equities as consumer price inflation fell to its lowest level since records began in 1989. Consumer price inflation fell to 0.3% in January and looks set to fall further still boosting disposable income after years of weak wage growth. The drop in oil prices also benefitted the manufacturing sector as lower operating costs enabled factory orders to grow at the fastest pace in six month in February.
The Bank of England's monetary policy committee voted unanimously to hold the interest rate at 0.5% when it met last although one member supported Mark Carney’s comments earlier in the week that the next move could be a cut. Minutes of the MPC's meeting in early February showed the committee's hawks Martin Weale and Ian McCafferty who have both previously voted in favour of a rate rise were back in favour of holding rates again.
Technical analysis of the FTSE 100 illustrates the blue-chips fleeting break-above the 15-year high of 6905 although a failure to close above this level highlights its significance. The bearish divergence evident from the oscillators suggests a dearth in momentum although new highs on the German and US markets could filter across to the UK. Support is seen at 6800 6750 and 6645 although a close above 6905 could trigger a move beyond 7000.
In conclusion supportive central banks continue to reinforce equities although the lifeless technical oscillators demonstrate the lack of conviction across the market. Headwinds from Greece and Russia combined with slowing Chinese growth and the prospect of rising interest rates in the US could impact at any stage hence the markets hesitation to penetrate to fresh highs.
The gas water and multi-utility companies have been the worst performing sector over the past month as good economic data heightened the likelihood of US interest rates rising earlier than previously anticipated.
() the UK’s largest listed utility company has benefitted from record low interest rates on its debt pile while steady inflation allows it to push through price increases on customers. Unlike many of its UK peers the company’s natural monopoly generates stable revenue. owns and operates the gas and electricity distribution networks in the UK and some parts of the US and then charges for use of those networks.
Utility companies typically have high debt levels because they can borrow cheaply against their valuable assets that deliver predictable revenue. Last year the value of ’s assets increased in value by £1 billion to more than £39 billion while total borrowings stood at £25.6 billion and net debt of £21.7 billion. Almost 60% of this debt is fixed at low interest rates while the remainder is RPI linked.
The US economy is set to record its best performance in a decade this year as a rapidly strengthening labour market buoys domestic demand giving the Federal Reserve the confidence to start tightening monetary policy. As a result the benchmark 10-year treasury yield moved sharply higher and due to the close correlation with utility shares has fallen 9% as higher interest rates mean lower returns for utility shareholders as debt becomes more expensive.
It is however worth pointing out that although interest rates in the US are set to increase later this year their rise is unlikely to be hasty. Expectations for a hike in UK rates has been delayed until next year while uncertainty in Europe and China is likely to ensure the rate of any increase in rates is likely to be modest.
offers a growing 4.9% yield and the company aims to increase the amount it pays to shareholders by at least as much as inflation over the medium term which is appealing in the current low-interest rate environment.
UK utility shares have received much interest from global investors with the likes of Thames Water and Northumbrian water taken-over by private equity. During the post privatisation period in 1995 there were 29 listed utilities however there are now just seven left and has often been muted as a target for the likes of GE Capital.
The chart of illustrates the fantastic returns generated over recent years with the shares following a five year upward trend. Recent interest rate related fears have pulled the shares 9% lower dragging the oscillators into acutely oversold territory but after bottoming-out momentum appears to be improving.
continues to offer exciting investment potential with a growing 4.9% dividend and I believe the recent weakness presents another opportunity to buy the shares. At the time of writing the share price is 891.1p but traders might consider buying the shares below 880p. Near-term targets are seen at 915.2p 950.4p and 1021p while a stop-loss below support at 853.6p would minimise risk.
This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in but client accounts may. The material in this report has come from SI Capital’s internal data sources Simply Charts and ’s corporate website.
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