The FTSE 100 was down on Monday morning following a big selloff in AstraZeneca after the AstraZeneca board opted to reject an offer from Pfizer worth £55 a share. Given the shares traded at £37 a share prior to the bid, it’s likely the company will experience a slump in its share price over the coming week unless talks are re-opened, although Pfizer said this was their last offer unless AstraZeneca recommended the bid to shareholders- something they haven’t done.
There are a number of other announcements to look out for this week that may give the markets some kind of direction, although the FTSE 100 remains range bound between 6,500 and 6,900 having traded in this range for almost a year now.
Sideways walk: The FTSE 100 has struggled for any real direction over the last year. Will it push on to new highs or is a sell off lurking around the corner?
Monday 19th May, Unemployment rate for Sweden forecast to remain at 8.5 percent:
Unemployment in Sweden has been going against the trend of much of the developed world and rising over the last year. Having stood at 7.2 percent last July, 8.5 percent of Swedes are now unemployed.
This has coincided with a period in which its central bank- the Riksbank- has opted to hike interest rates with the result being that the country has slid in to deflation with CPI inflation for April actually showing a decrease in prices by 0.04 percent.
For all the gusto from the Bank of England about raising rates in the near future, it’s hard to believe they won’t be keeping an eye on the effect the rate hike has had in Sweden and the potential for such a rise to have an similar impact in the UK.
With both countries having high household debt to income ratios (around 130 percent of GDP in the UK, and 170 percent in Sweden) a rate rise could have a similar effect in the UK if it reduces the disposable income available to households.
Tuesday 20th May, UK April CPI inflation forecast at 1.7 percent (yr on yr) whilst RPI is forecast to rise by 2.6 percent for the year:
The gap between CPI inflation and RPI here is crucial. The last CPI measure of inflation was below average wage rises (at least when bonuses are included) which meant wages were rising in real terms if you followed the CPI measure. This isn’t really the measure that matters to most of us as consumers, however. RPI includes the cost of housing (such as mortgage payments, rent and council tax) and this is forecast to rise by 2.6 percent- well above current wage increases. Unless you either don’t live in a house or own your home outright with no outstanding debt secured against the property (which is very few people), it’s therefore likely that your real disposable income will have declined over the last year.
RPI and CPI are also calculated differently, the result being that RPI is typically around 1.2 percent higher than CPI.
Wednesday 21st May, US 30 year mortgage rate:
Having risen to 4.5 percent from 3.6 percent prior to the announcement by the Federal Reserve that it would be tapering its policy of monetary easing (Quantitative Easing), 30 year mortgage rates have now dropped back a little to 4.4 percent and seem to be remaining steady.
This is still significantly lower than the average rate of 6.5 percent between 2005 and 2008, however, and people complained then that lending policies were too easy and that monetary policy was partly to blame for the bubble and subsequent crash.
A huge drop in housing sales last month suggests that the reduction in affordability may be putting the brakes on new purchases. Across the pond in the UK, the Bank of England Governor Mark Carney has warned that the “UK housing market has deep problems” and “higher loan-to-income mortgages could store up bigger problems for the future.” The question is: will Central Banks be prepared to lance the boil and potentially induce a crash in property prices?
Thursday 22nd May, UK GDP figures 2nd release and UK net borrowing (forecast borrowing of £4.5 bn against £5.9 bn last year).
GDP figures for Q1 of 2014 are expected to be revised up to give year on year GDP growth of 3.1 percent, mainly due to a pickup in household spending (retail sales are expected to have risen by 5.2 percent). Public sector borrowing is also forecast to decline from last year, and will have been helped by growing tax receipts resulting from the pickup in consumer activity.
Friday 23rd May, US new home sales:
As already mentioned, US home sales in March fell off a cliff (down 14.5 percent). April’s figures are forecast to show a pick up from 384,000 in March to 425,000 for April, although another decline would represent the fourth monthly decline in a row and would lead to fears that the US housing market may be at risk of grinding to a halt. It’s hard to see what tools the Federal Reserve would have at their disposal to avert a drop in prices in this eventuality, which could result in another price crash.