Equities Spread Trading

The Financial Markets - 05 November 09

• The Bank of England disappointed markets this morning by only increasing QE by a miserly additional £25bn as it seeks to wean the UK off the bottle of QE. The market had been expected £50bn more. Their accompanying statement spoke of improving global growth and financial market conditions, higher asset prices and a likely return to growth soon in the UK. But with balance sheet adjustments, leveraging, still required, the recovery is expected to be slow and protracted. Methinks the Bank may end up with a lot of egg on their face is they have to ramp this up again. A potential policy error.
  
  
• Roubini, Dr Doom, warned that the liquidity pools that have been created have simply driven equities and commodities too far, too fast and that as participants come to realise that the recovery is not ‘V’ shaped, the rally in those risk assets will end abruptly. He said while the party might keep going for another six months, it will eventually end and it will be messy. He also warned of the damage that could be done to the recovery is oil breaks above $100. He said while a partial recovery might be justified, there was no way global conditions supported the jump from $30 to $80.
  
  
• Pimco’s wise owl El-Erian warned that the Fed has given the markets the go ahead to extend the Dollar carry trade. He said the simple message from the Fed was that it doesn’t want to rock the boat. He said ‘I suspect many in the markets will interpret the Fed statement as a green light to pile onto momentum trade in risk markets’.
  
  
• Former BoE MPC member Blanchflower has a dig at the current policy committee, labelling a good section of the group as the ‘feeble six’. He said that while King, Miles and Besley all understood the need to push QE harder, the rest of the committee was ill informed and as a result of their inaction have allowed the Pound to fall over the last couple of months. Blanchflower singles out chief economist Dale for criticism and suggests that his recent statements have been ambiguous in their view of asset prices and risks. Blanchflower concluded that ‘the MPC needs to increase QE by at least £50bn at this meeting. Posen and Tucker seem likely to vote to do more. Why Sentance, Fisher, Barker and Bean voted against more QE remains unclear, as they haven’t told us. It’s time for them to shape up and do their jobs, and take out more insurance to prevent the economy dropping off a cliff. My guess is that King, Miles, Posen, Tucker and probably Barker at least will vote in favour.’
  
  
• September’s UK industrial production figures confirmed that the recovery in the industrial sector stalled in Q3 and hence did little to support suspicions that the overall economy is recovering more quickly than the GDP figures suggest. Although the 1.7% monthly rise in overall industrial production in September (manufacturing rose by 1.6%) was bigger than expected, it failed fully to reverse the steep drop in the previous month.
  
  
• Euro area retail sales continue to exhibit a declining trend, reflecting stagnant real disposable incomes. Euro area retail sales volumes (which exclude autos) fell more than expected, by 0.7% mom in September. The September decrease was somewhat more than the 0.5% mom fall in Germany, being pulled down by a 1.0% mom drop in Spain and a 2.0% mom drop in Portugal. So the pattern continues of a robust export sector but the consumer refusing to go shopping.
  
  
• Overnight in China, Guo Qingping, an assistant governor of the People’s Bank of China, says that the bank would stick to its “appropriately relaxed” monetary policy stance and ensure an appropriate amount of liquidity in the banking system. While Yao Jingyuan, the chief economist of the National Bureau of Statistics, tells Economic Information Daily that China must maintain “consistency and stability” in its macro-economic policies. However, he notes that China does not need a second stimulus package as economic growth this year will reach at least 8%.

1. Ain’t Gonna Happen, where she argues that “normalised” earnings for banks is a fallacy, that it’s more likely we will see protracted consumer deleveraging, fewer consumers who qualify for credit, and dramatic regulatory change, which will negatively impact earnings for a protracted period, and
   
   
2. The Great Exit: The Biggest Market & Bank Risk Over the Next Four Months, a long note on the importance of the Fed’s agency MBS purchase program, where she argues that uncertainty over when the program will end, now scheduled for end of Q1 2010, and who the substitute buyer for the Fed will be, means that “prices will go down meaningfully and rates will go up meaningfully.” She argues that it is possible the mortgage market will again shrink notably: “We believe this represents one of the larger risks to the banks and overall market over the next several months.”

• In brief, the insurance sector is under some selling pressure after both Zurich Financial and Munich Re missed analysts estimates, as did copper producer Vedanta Resources. Miners in general were weaker as copper, lead and tin prices declined on the LME. Maker of whirlpool appliances Invensys is down 6% after reported lower than expected sales and Germany’s Commerzbank is 4% down after predicting a difficult Q4 and reporting a Q3 loss of €1.05bn. Unilever also had a difficult morning dropping 3% after saying that is expects additional costs relating to its purchase of Sara Lee.
  
  
• The 25% bounce in Bank of Ireland shares yesterday more than recouped the losses recorded earlier this week, leaving them up 3% since last Friday. That operating profits are trending a bit better and impairment losses are no worse was greeted with relief on a positive day for markets generally. Improved liquidity metrics and the reiteration that the bank’s planned deleveraging plus NAMA will reduce its balance sheet size by almost 30% also helped. On the question of capital, the clear message coming from the bank is that there remains too much uncertainty to consider accessing markets in the near term.
  
  
• Gerry Keenan, chairman of the Irish Association of Investment Managers, expects to see a rights issue in both Bank of Ireland and AIB in the first half of 2010, which would be “well supported” according to reports. The IAIA represents institutional investors in Ireland and would have been heavily involved in the proposed “Eire Fund” in 2009, which was mooted as a potential funder of the banks in the face of competition from private equity. The support of institutional shareholders in any fund raising will be critical to the success of any deal.
  
  
• Davy’s has a bullish piece out on Smurfit Kappa this morning. While they have proved a laggard in the paper and packaging space, they cite three reasons why its now worth considering:
  
  
  1. Improving supply/demand dynamics will drive prices (and profits) higher.
     
     
  2. Industry consolidation positive for the sector in the long term.
     
     
  3. Smurfit Kappa could generate EBITDA of €1246m at the next peak.
     
     
• Cable & Wireless announced its demerger as widely rumoured this morning confirming that Worldwide will be spun off in an IPO. However, this is as far as the detail goes on the demerger process and the Group is expecting to hear more over the next month. Debt therefore will remain with the stronger International operation which is as expected. H1 results were broadly in line with expectations.
  
  
• Deutsche Telekom’s (DT) Q3 trading was ahead of fairly modest consensus, a fact reinforced by adjusted EBITDA being still 4.7% down in the first nine months. DT remains under some pressure in core markets, which increases the risk of M&A. The stock was up 3% this morning.
  
  
• In their Q3 Interim Management Statement, ITV indicated that it is expecting Net Advertising Revenue to be flat in Q4, with December currently looking as it will be up 4%. Given that there was a 15% decline in H1 this is a big turnaround, albeit against weaker comps. The Company stated that it had used some of the proceeds of the recent convertible to repay £75m of its £125m 2013 loan. The stock is up 6%.