Shares Spreads Report

The Financial Markets - 22 October 09

• Overnight in Japan, exports fell 0.8% mom, the third straight decline, and 30.7% yoy in September (slightly worse than the consensus forecast for a 29.9% decline). So some signs that the strong Yen is beginning to bite.
  
  
• Goldilocks growth in China i.e. not too cold and not too hot, if you don’t believe the numbers are a fairytale of course. GDP grew by 8.9% yoy in Q3, as expected, and was up from 7.9% in Q2 and 6.1% in Q1. Li Xiaochao, the spokesman of the National Bureau of Statistics said that “we can say with certainty that achieving 8% GDP growth this year is completely assured. Without doubt”. He added that “according to my understanding, our policy won’t change at the moment”.
  
  
• Chen Daofu, an economist with the DRC think tank said that “maintaining the appropriately loose thrust, we should use monetary, regulatory and exchange rate tools to implement structural fine-tuning”. Meanwhile, QinXiao, who is the CEO of the sixth biggest Chinese bank, warned that China is developing a bubble economy, requiring immediate tightening of conditions.
  
  
• The Obama administrations proposed rules over executive remuneration include a 90% cut for top 25 earners at the seven largest institutions the Government has a big share in (Citi, BofA, GM, AIG, Chrysler etc) and a 50% drop for the next 175 unlucky souls.
  
  
• There’s chatter about new US FASB rules coming in 2010. That will squeeze scarce bank capital as the banks are forced to take off-balance-sheet instruments and put them back on the balance sheet; resulting in less lending.
  
  
• White House aide Lawrence Summers said that “there’s really no doubt that the third quarter registered growth, and growth at a nontrivial rate, and every expectation that the fourth quarter will do the same”. He added that “I think the USD… is going to be the world’s primary reserve currency for… the foreseeable future… I think the most important thing we can do for the USD is make sure that it rests on strong fundamentals.”
  
  
• Richmond Fed President Jeffrey Lacker anticipates GDP growth of between 2.5% and 3% in 2010 but notes that there are always risks on both sides of such a forecast. However, he said that “inflation seems like it’s in a pretty good place right now.”
  
  
• David Altig has made the observation that the percentage of employee separations labelled permanent is at a recorded high, and concludes from this fact that the odds of a jobless recovery are high. He notes that never in the six preceding recessions did permanent separations reach 45% of new unemployment. Now it is 56%. My view is that as employment is part of the Fed’s mandate, a permanent rise in unemployment is very likely to dampen any fast exit strategies.
  
  
• The US may lose its Aaa rating if the budget deficit isn’t cut within the next 3-4 years, according to Steven Hess, head US analyst for Moody’s. Hess said the country’s Aaa rating “is not guaranteed.”
  
  
• On the FX markets the EUR/USD cross pierced $1.50 with little fanfare yesterday, serving as a reminder that there is little policy makers can do about unless a) the Fed is ready to raise rates or b) the ECB is ready to cut rates.
  
  
• In the UK, according to HM Revenue & Customs, seasonally adjusted basis UK housing transactions (with a value of £40,000 and over) were 81,000 in September. This was 33% higher than September last year and well clear of the November 2008 low of 53,000 (although still circa 40% below the pre-2008 norm of 135,000 transactions per month). Housing transaction activity is an important lead indicator for builders merchants such as Travis Perkins.
  
  
• The Scotsman carries an interview with MPC’s Paul Tucker which has the conspiracy theorists twitching. On the economy, he said that if it was deemed necessary to increase quantitative easing beyond the £200 billion proposed under the current scheme then “it would be possible and it would happen” Interesting then that yesterdays BoE minutes confirmed QE at £175bil.
  
  

• Lloyds is now likely to get permission to exit APS and that would presupposes £26bn capital raise (combo of rights issue £11bn, sales £4bn and remainder pref to equity or brand new contingent capital conversion is my guess).
  
  
• Nestle’s Q3 trading statement contained few surprises with organic growth reported at 3.8%, up from 3.5% in H1. The full year outlook was unchanged, and whilst the 2009 share buyback was increased from CHF4bn to CHF7bn.
  
  
• Ericsson’s share price had a poor morning after reporting a deeper than expected 71% drop in Q3 profits as clients slashed spending, expensive joint ventures and fierce price competition from China.
  
  
• Mining giant Anglo American announced plans to further streamline its business by selling non-core assets with an aggregate of 11% of the group’s 2008 EBITDA, take-out a layer of management and create a more streamlined management structure of seven commodity business units. Anglo’s management structure has for a long time been considered cumbersome, and this shake up will be a welcome, if not unexpected change. Anglo remain vague about the use of these proceeds, although they do state that they want to further strengthen the balance sheet and this will help them focus on growing core mining activities. This move does beg questions, but I expected some positive action in response to the Xstrata approach.
  
  
• Pernod’s Ricard’s Q1 sales figures came in better than feared, with organic sales declining 4%. Expectations had weakened following Diageo’s disappointing 6% fall reported last week. The sales performance varied across divisions and categories. CEO Pierre Pringuet indicated in an interview that he was seeing signs of improvement in the global spirits market.