It’s a worrying sign if the third biggest retailer in the world issues a profits warning

13 January 2012  •  Source: Simon Denham, Capital Spreads

It’s a worrying sign if the third biggest retailer in the world issues a profits warning and it gave investors a stark warning that all is not well with the consumer. However, even though shoppers are reluctant to put their hands deep into their pockets, they are still going out to shop, simply not at Tesco. Other supermarkets haven’t had such bad numbers as a result of aggressive discounting so for Tesco’s investors they have to make a stark choice. Is their stalwart over stretched or is it going to remain the bellwether of European retailers? The company still pays an attractive dividend, even more so now that it has fallen substantially, but is it value at these levels? This morning’s action would suggest that the bulls are not piling back into the stock as the fear is that it could easily take another leg lower. When a move like the one yesterday happens there’s often another shake out of bulls in the following session and the question for the long term investors, in other words the pension funds, is do I want this stock in my portfolio now or will it get cheaper? Many of them dumped it yesterday as a result of their profit warning thinking that the international expansion leaves it too exposed to the wider global economy when it is so reliant on a flagging UK market, so for now it will take some time to restore the confidence in the stock.

The FTSE this morning is faring well considering after strength from the Dow in the latter part of its session last night which fed through to the Asian markets. Riskier equities continue to attract the buyers with miners doing well which gives you an indication that risk appetite is building. At the time of writing the FTSE is trading at 5700 and the index has that near term barrier to test around 5720.

Things are relatively quiet on the economic data front today with nothing like a non-farm payroll due but an Italian bond auction will be a focus following the success of yesterday’s Spanish auction. So far this year European debt has been bought and yields have been driven down so this is also helping to translate into a bit of fresh risk appetite amongst equity investors.

The euro was in good shape yesterday following the successful bond auctions in Spain and Italy. It was also buoyed by comments from ECB President that his flooding of the money markets with cheap funds has been making a material impact to credit. It’s hard to see when overnight deposits at the ECB continue to rise each week, but then maybe he knows more than most! The moment the bulls took control yesterday EUR/USD rallied back above 1.2800 and this morning we’re at 1.2860. The bears will feel that this move was move of a bear squeeze though and expect upside to be short lived since the downward trend remains firmly intact, the bulls on the other hand will point out that yesterday’s move formed a bullish engulfing candlestick and follows a couple of other weak bullish candlestick signals. A temporary bottom might have formed so key upside levels over the near term are 1.2900 and 1.2940 meanwhile support is seen at 1.2760 and 1.2725.

Gold saw a halt to its recent strength as it initially rallied but then pulled back in line with equity markets later in the day. The comments from ECB’s Draghi helped it to rally in line with the euro and for now the precious metal seems happy within the mid 1600 area as it trades at 1645 this morning. As we head into the Indian wedding season this could help support the price of gold and goes someway to show that even if it is expensive, people will buy it if they really want to for a special occasion.

Brent was mixed too almost tracking gold’s footsteps as it rallied then pulled back. The price of crude remains frothy with lots of geopolitical tension loaded into the price. Nigeria and Iran are playing their part in keeping the price elevated so for now the bulls seem to remain in control. At the time of writing Brent is at 111.80.

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