US Spread Betting Update

The Financial Markets - 2 September 09

1. Increasing questions about the sustainability of the recovery: The inventory-led recovery of the manufacturing sector is welcome, but will not be sustainable unless the consumer takes the lead. There is a startling contrast and disconnect between US consumer and manufacturing trends. Unless real consumer spending surge to about 4% (annualised), it is hard to see how manufacturing trends can remain at current levels. Slowing US job losses will help, but will to a large extent be offset by a sharp softening in real wages over the next 6 months (as wage growth falls and headline CPI mechanically recovers). US consumer credit, down for 5 months in a row, will hardly give the consumer any firepower. The UK consumer credit numbers yesterday provided a painful wake-up call to those who have been dismissing deleveraging.
   
   
2. Risk asset valuations may be stretched. As some equity strategists point out returns are typically best before the ISM crosses the 50 threshold, with only 1/3 of returns made thereafter (the full cycle is measured from the bottom to the top of the ISM survey). The recent sharp rebound in cyclical stocks could well be running too far ahead of fundamentals. Indeed, earning expectations, at 20+% in both the US and Europe, look ambitious. In credit space too, the tightening in spreads – which had reached levels unseen since the fall of Lehman’s has stalled.
   
   
3. Fading (reversing?) policy action: For a long time I have stressed that policymakers – at least on the fiscal front – had very little room for manoeuvre now. Given the horrifying long-term fiscal picture, it is doubtful whether any future fiscal stimulus – if needed – would manage to support the economy. Worse, in some areas there are fears that policy will be reversed. For instance, fears that China will slow commodity imports have depressed the Baltic Dry index of late. Fears that the government will force a slowdown in lending trends seem to have been a key factor behind the Chinese equity market correction. And even in the western world, France and Germany are pressing for quick reforms towards tighter bank solvency ratios ahead of the G20 meeting. The press this morning is reporting wide concerns with the EU insurance sector on fears that Solvency II (due t apply from 2012 on) will cause a sharp increase in capital and reserves requirements. Policy concerns might be overdone, as governments and central banks will be wary of not getting in the way of the recovery.
   

• European equities in the news today include Alcatel Lucent whose shares were down in early trading following an announcement of plans to sell $1.23 billion of convertible bonds. UK Insurance names are again under pressure on a story that British insurers may be forced to raise as much as £70bn to conform with new EU regulations. European banks, Belgium’s KBC (-8%), Holland’s ING (-5%) and Spain’s Santander (-3%) and Italy’s Unicredit (-2%) are dragging the Stoxx 600 down in early trading, while UK banks RBS, Lloyds, Barclays are all off 4-5% following on from Wall Street lead where AIG , Citi, E Trade, CIT, Hartford, and Metlife got thrashed last night.
• To the upside today we have BP who have announced that they have mad a “giant” oil discovery at its Tiber Prospect in the deepwater area of the Gulf of Mexico.
• Nokia have entered into a tie-up with Facebook called “Lifecasting” and several new handsets that will allow users update their social networking account via their phone (if you must)