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The Regular Update from The Mole and paddypowertrader.
The Financial Markets - 14 Januray 2010
Stocks rose Wednesday in the US on earnings optimism and analyst upgrades, while crude oil fell below $80 a barrel after a report showed a bigger-than-estimated gain in inventories.
Financials led the market higher after Bank of America and J.P. Morgan Chase turned positive during a US Congressional hearing at which their chief executives testified.
At the hearing, the executives acknowledged their missteps leading up to the financial crisis, aware of the public frustration over Wall Street profits and reports of sizable year-end bonuses to be paid to executives.
However, the executives were also quick to warn of any overreaction from policy makers that could hurt their businesses and the broader economy. UAL, parent of United Airlines, surged 9.9% after boosting fees.
Google’s share price slipped as the world’s most popular Internet search engine said it may shut its Chinese Web site following cyber attacks on e-mail accounts of human- rights activists.
Neither the restrictive measures taken in China nor the discussion around Greece seem to really worry risk markets to an extent that any of the significant chart supports are taken out.
That said, it would take a close below 1130 in the S&P 500 and a break below 5843 in the DAX, to also name a major European Index, in order to really spook a few investors.
If such breaks would occur though I’d have to handle risk markets with care as the setup of most stock market indices would easily allow for a 10 % setback.
Whether crucial supports for high risk currencies would hold under such circumstances is indeed questionable but as long as the first mentioned levels hold the general risk-rally is assumed to be still intact.
As for the USD/JPY, &Yen;94.24 remains the make or break point to watch, equivalent $1.4571/1.4626 in EUR/USD.
At the US open today we got the latest check up on the health of the US consumer in the form of the retails sales numbers for December and the prognosis is not good.
Against an expectation for a reading of +0.3% they came in at -0.2% and -0.3% ex autos (see below). Initial jobless claims also rose to 444k (consensus 437k).
European markets have erased earlier gains on this news. Note that tech bellwether Intel report after the close tonight.
US Retail Sales Disappoint
After rising strongly in October and November, US retail sales unexpectedly eased in December. One factor behind the decline was the 0.8% drop in car sales. This is completely at odds with industry reports, which have shown a 2.8% increase in unit car sales.
Two explanations for the difference, which did not occur for the first time, are huge price discounts or different seasonal adjustment methods. The decline in retail sales ex cars, the first since July, was a disappointment as well.
Sales of typical holiday gifts, such as electronics, clothing or general merchandise, fell sharply in December. One explanation might be that the severe snowstorm in the week before Christmas curtailed shopping more than thought.
Yesterday’s Beige Book stated that “reports of sales activity ranging from “through the roof” to dramatic declines.” And “several retailers estimated that they recouped sales lost on the weekend” by being “open for extended hours in the four days before Christmas.”
Today’s report, however, might show something different. And non-store retailers have certainly benefited from the adverse weather (cf. chart). The other explanation is, of course, that households remained cautious amid uncertain labour market prospects.
Again the Beige Book stated that “consumer spending in the recent 2009 holiday season was slightly greater than in 2008, but still far below 2007 levels.
Consumers were variously described as cautious, price sensitive, and focused on necessities, but sometimes willing to spend on discretionary purchases.”
My Big Fat Greek Farce Part 3
Greece’s plan to support the liquidity of companies and agricultural businesses is of “limited material scope” and may harm market liquidity, the European Central Bank said today.
“The proposed measures could have a negative impact on market liquidity, especially against the backdrop of the current adverse economic conditions in Greece,” the ECB said in a letter of opinion published Wednesday.
The Greek Economy Ministry asked the ECB on December 23 for an opinion on a draft law on the restructuring of business and professional debts owed to credit institutions, among other things.
Although the draft law, which is part of a broader plan to support Greece’s weak economy, didn’t involve public debt, it prompted a sell-off in Greek government bonds, pushing down the Euro.
EUR/USD broke below $1.45 following the ECB’s criticism. Credit default swaps on Greek debt rose 49 basis points to 328, the biggest one-day rise ever, after Moody’s warned that the Greek economy faces a “slow death” from deteriorating finances.
Moody’s says that Greece and Portugal must implement politically difficult fiscal retrenchment. Ironically, Portugal default swaps were little changed at 105bp.
Meanwhile Prime Minister Papandreou fought off speculation the country could be forced out of the Eurozone or made to seek assistance from the International Monetary Fund to rescue its battered economy.
And JC Trichet has just put the boot in at the ECB’s 13.30 press conference today by saying that the Central Bank “won’t change collateral rules for any country”. This implies of course that when the ECB “normalises” the rules for REPO transactions at some point in the future that Greek government bonds may well be ineligible. This would, of course, seriously lessen their end user value. Greek bonds spread (over Germany) are exploding on the news.
Jaw Jaw From The Fed
There’s been a lot of concerted US Fed comment over the last couple of weeks, and with it an apparent communication change. From the lower-for-longer emphasis of 2009 the Fed is very definitely playing up the beginnings of the recovery and the need to keep an eye on longer term inflationary pressures. It actually all started with Bernanke on the first weekend of the year and has continued pretty solidly since then.
The publication of the Fed’s anecdotal Beige Books last night was somewhat timely then as it nicely wrapped up the current views. It said while activity might be at low level, it was at least beginning to pick up.
The Beige Book reported the job market still weak, wage pressures moderate and price pressures only subdued.
Fed member Evans was cautious on the near term outlook for the US economy, but actually began to highlight the inflationary pressures that could build in the longer term. Evans said that tight credit and caution within both the business and household sectors are likely to restrain the recovery’s strength.
The key for the Fed will be to judge the right moment and pace to reduce accommodation. While NY Fed president Dudley provided an important piece of information – that extended period meant at least six months.
That’s a big comment for a couple of reasons – one for the straight clarification, and the other because Fed members of late have referred to disappointment the markets are preoccupied with Interest Rates.
Dudley’s comment should be sending signal to the markets that a change in the actual Fed funds target isn’t likely in the first half of this year and that there should be a greater focus on the other measures instead (in other words the unwind sequence).
More widely, Dudley said the US economy was in the ‘middle of the beginnings’ of its recovery and hoped there’d be job growth in the next few months. For now he said the economic recovery isn’t as strong as the Fed would like.
Bubble, Bubble
China’s property prices rose at the fastest pace in 18 months in December, highlighting the government’s struggle to rein in speculation while maintaining economic growth.
Residential and commercial real-estate prices in 70 cities climbed 7.8% from a year earlier, the National Development and Reform Commission said on its Web site today.
That topped a 5.75% gain in November. Rising prices signal the risk that asset bubbles may hamper the recovery of the world’s fastest growing major economy and stoke discontent among workers unable to afford homes.
Premier Wen Jiabao pledged December 27 to stabilise real-estate prices, crack down on speculation and keep housing affordable.
Company News
- Global personal-computer shipments rose more than expected in the fourth quarter, led by demand from U.S. consumers for low-priced portable machines, according to researcher IDC. Worldwide PC shipments increased 15%, while the US gained 24. Hewlett-Packard remained the world’s top PC seller, followed by Acer and Dell. Microsoft’s Windows 7 PC operating system, released in October, provided “moderate” help in luring buyers to stores.
- Several analysts cut their earnings forecasts for Royal Dutch Shell as an increasingly grim picture of the company’s refining and marketing operations emerged. Brokerage Evolution Securities reduced its full year clean earnings per share estimate for Shell by 12% to $1.91. Royal Bank of Scotland cut its fourth quarter earnings estimate for the company 19% to $2.9 billion, citing “extremely weak refining margins.” ING analyst Jason Kenney said he now expects a fourth quarter loss of $150 million in Shell’s refining and marketing division. Evolution expects Shell to post a 25% year-on-year fall in clean net profit to $2.91 billion for the fourth quarter of 2009, despite a 29% rise in the price of oil from year earlier levels.
- Bank of Ireland is transferring €16bn of total loans into NAMA. Nearly 50% of these total loans are outside Ireland. The bank still maintains that the haircut on the loans will not be greater than the 30%. As far as balance sheet impact, it will evidently reduce total loans and the subsequent impact to capital is a fall to 4.2%, 8.3%, 9.5% and 13.2% for equity, core, reg tier 1 and total capital respectively. The big gap between equity and core tier 1 is explained by the preference shares held by the Irish government. With respect to capital raising, the Chairman recognised the need to respond to the moving forward of capital requirements. If the most important component of Tier 1 is to be equity then an equity Tier 1 ratio of 4.2% post NAMA is low especially when set against its target of 7.25%. So where can Bank of Ireland go for capital – with limited scope to sell assets? The possibility of the government’s stake increasing to majority +50% from the current 25% is high.
- The FT provided more detail on the proposed us bank levy we heard about earlier in the week that’s to hit the 20 or so largest banks. It looks like the investment banks will bear the brunt of the levy as it will be calculated based on total assets minus deposits and shareholder equity. If the commercial banks like JP Morgan. Citi, Bank of America and Wells Fargo have large deposit bases this reduces their relative exposure to this levy leaving Goldman Sachs and Morgan Stanley as the primary bearers. This is meant to encourage the banks to take in more retail vs wholesale funding to stabilise the funding profile.
- Q4 bank earnings start this Friday with JP Morgan and will continue next week with the major banks reporting throughout the week. I think in general, major bank earnings (JPM, WFC, BAC, GS, MS) are going to be okay. Citi will also post a loss but continues to struggle with the weakest US banking franchise of the large banks, and has the longest road to recovery.
- DSG Q3 trading was superficially strong, with like for like sales rising 8% against 2-3% expectations, albeit admittedly against weak comps (-10%). The strong sales outturn was driven by good performances in UK and Irish Electricals, the Nordic Region, Italy and e-commerce. It is also consistent with the impressive weekly figures for Electrical sales released by John Lewis.
- The French government ordered Renault to keep its production of its new small car in France rather than shift it to Turkey. The government, which holds a 15% stake in Renault, is opposed to any plans to move production of the best-selling model to Turkey. Already last year Renault had promised to forego compulsory redundancies and plant closures in France in return for a €3bn loan from the government. Turkey will not like this, nor defenders of the Single market.
- Rio Tinto, the world’s third- largest mining company, said fourth quarter iron ore output rose 49% after Chinese steel mills bought record volumes. Production was 47.2 million metric tons in the three months ended December 31, from 31.8 million tons a year earlier. China, the world’s biggest buyer of iron ore, increased purchases 42% to a record last year, driving cash prices to the highest in more than a year. Steel and ore prices are rebounding as the global economy emerges from recession.
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The above comments do not constitute investment advice and neither paddypowertrader nor SpreadBets.org.uk accept any responsibility for any use that may be made of them.
"Spread Betting Markets" last update by The Mole, 14-Jan-2010
Warning: Financial spread betting carries a high level of risk. You can lose more than your initial investment or stake. Financial spread betting may not be suitable for all investors. Only trade with money that you can afford to lose. Make sure you fully understand the risk involved. If necessary, seek independent financial advice.
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