Q.Dear Josh, does Barclays’ stellar results for 2009 mean that RBS and Lloyds will follow suit this week?
A.My first thoughts are to be careful as this is not a straightforward trading strategy. While there is always some form of a correlation between companies that are in the same sector, stocks can become very volatile around an earnings season, particularly if a competitor has announced stellar results and its peers are expected to deliver something similar. So, after Barclays’ earnings, expectations for those of Lloyds and RBS have grown, which could make things interesting if either bank disappoints this week.
Having said that, Citigroup said last week that it believed Lloyds and RBS were both trading at considerable discounts to the European banking sector average. The broker went on to say that it feels the UK banks are staging a good recovery in terms of bad debts and margins after the turmoil of the economic downturn.
A recent example of where this trading strategy worked was when both BP and Royal Dutch Shell announced results that missed expectations. This caused shares in BP to fall nearly 5 per cent. Shell announced results two days later and its share prices also fell by nearly 3 per cent.
I would err on the side of caution before using this tactic and would consider using a guaranteed stop loss to protect your capital just in case either company disappoints.
Q.Dear Josh, the US dollar was trashed in 2009. Why has it recovered in 2010?
A.I wouldn’t say it has completely recovered just yet although the strength that it has shown of late has certainly gathered momentum. On Friday the dollar reached a new nine-month high against both the euro and the pound, which gives you an indication of how strongly the dollar has performed in recent weeks.
There are a number of reasons for this. Investors have started to diversify some of their equity holdings into the US dollar as a defence against falling equity markets. Also, recent macroeconomic evidence has pointed to the potential for a strong US economic recovery. The surprise move by the Fed last Thursday to raise the bank lending rate by 25 basis points to 0.75 per cent is also positive for the dollar. One thing to keep an eye out on would be if the uncertainty over Greek debt continues, as this has been one of the key drivers of euro-dollar.
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