A week in advance 4th - 8th August 2008
By Keith Bowman | 01 Aug, 2008
This coming week sees a continuation of the UK corporate second quarter/half year results season, whilst the economic calendar sees attention turn back to interest rate policy. Over in the USA, the corporate second quarter results season also continues, whilst the economic focus also turns to interest rate policy.
Economics
In the UK, one announcement clearly stands out above the rest – the Bank of England’s (BoE) decision on interest rate policy, scheduled for midday Thursday. The BoE is currently balancing a deteriorating economy – economic growth measured by gross domestic product declined to +0.2pc during Q2 2008 (+0.3pc Q1 2008) – against an inflation rate which is currently 90pc (3.8pc in June) above its government denoted target of 2.0pc.
The debate and uncertainty which this is causing for the BoE’s Monetary Policy Committee was evident at its last interest rate policy meeting (10th July), where votes in favour of all three actions – leave unchanged, raise and cut – were cast. For now, given the level of uncertainty and with the majority of members in July voting to leave rates unchanged, a similar outcome looks likely for August – which would leave the UK Bank Base rate at 5.0pc.
On the continent, the European Central Bank (ECB) is also due to pronounce on interest rate policy on Thursday. With the ECB having raised rates (+1/4pc) to 4.25pc as of its July (2008) policy meeting – given its overriding concerns for inflation – consensus expectations are for a ‘no change’ decision.
Finally and over in the USA, the US Central Bank also commences its latest meeting in relation to interest rate policy (decision due on Tuesday). Recent comments from the head of the US Central Bank, Ben Bernanke, appeared to suggest that downside concerns in relation to the health of US economy had subsided, with the rising trend of global and US inflation now taking priority. Investors have broadly interpreted this as suggesting that further cuts to US interest rates are unlikely, whilst increases going forward could now be on the agenda. The situation is further complicated by the pending US Presidential election due in November 2008. Historically, the US Central Bank has been reluctant to move interest rates close to an election taking place. Overall, consensus opinion also suggests a ‘no change’ decision.
Companies
On the corporate front, results from the banking sector remain at the forefront of investors’ thoughts. On Thursday, Barclays is due to report its second quarter/half year results. Whilst the bank’s recent fund raising exercise received a relatively poor response from existing qualifying shareholders - less than one fifth of investors (19pc) decided to subscribe for the new shares - the remaining 1.14 billion shares were successfully sold to a series of institutional investors, with the result that the company’s capital cushion has been bolstered.
Despite having announced net write-downs to credit market investments held of over £1.5 billion back at its full year 2007 results in February, more recent trading updates suggest that management remained relatively relaxed in relation to the group’s ongoing position. Comments accompanying the fund raising (open offer) back in late June saw management noting ‘resilient trading, with profits in May well ahead of the monthly run rate of last year’. Furthermore, management highlighted its intention to maintain the coming half year dividend payment at the prior year level of 11.5 pence in cash. As for the expected figures, one broker’s estimate for half year pre-tax profits point towards the £2.3 billion mark (£4.1 billion – H1 2007) down 44pc over last year.
The following day, owner of such brands as NatWest, Coutts, DirectLine and Ulster bank, Royal Bank of Scotland (RBS), is due to report its half year figures. Like Barclays, RBS has also recently bolstered its capital adequacy cushion via a significant fund raising exercise (£12 billion), although unlike Barclays, the issue of new shares was heavily taken-up by the group’s existing shareholders (95.1pc accepted).
Write-downs to credit related investments to date surpassed the £5.5 billion mark, although the group’s trading statement back in mid June suggested that trading remained ‘satisfactory’, if somewhat muted by the ongoing credit squeeze. Furthermore, the ABN (Dutch Bank) acquisition and integration was also described as ‘proceeding slightly ahead of plan’. However, potentially counterbalancing / offsetting positive news in relation to ABN Bank could be the delay in announcing the successful sale of the group’s insurance divisions - an issue which continues to cast a shadow, given the additional boost to capital which this could generate. As for the expected figures, one recent broker’s estimate for half year pre-tax profits suggest a loss of around £1.4 billion (+£5.2 billion – H1 2007) down 125pc over last year.
Other corporate announcements expected over the course of the week include results and trading updates from the UK’s biggest bank HSBC Holdings, major life insurance group Legal & General and television and media group ITV.
Week Ahead Diary
Half Year Results
Monday – HSBC Holdings
Tuesday – Legal & General Group, Drax Group, GKN
Wednesday – ITV, Liberty International, Old Mutual, Xstrata
Thursday – Barclays, Friends Provident, Hammerson, International Power, RSA Insurance Group, Smith & Nephew, Standard Chartered,
Friday – Royal Bank of Scotland (RBS), Schroders
Economic Diary
Monday – n/a
Tuesday – US Central Bank interest rate policy announcement
Wednesday – n/a
Thursday –Bank of England interest rate policy announcement, European Central Bank interest rate policy announcement
Friday – n/a
Note: This list represents what we believe are the highlights of the coming week and is not an exhaustive list of company announcements or economic events. Source: Digital Look.
