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Bank Stress Test Results To Lead Financial Markets

Stock-Markets / Financial Markets 2009 May 04, 2009 - 04:46 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleWith Japan closed until Thursday and many other stock exchanges closed today for a May bank holiday, we’re likely to get off to a slow start this week. But beware indices, FX, commodites and the U.S. equites are open as normal, but with the likely lower volumes, sharper movements in prices are a possibility.

The week ahead is laden with key economic reports (nonfarm payrolls and retail sales) and results of bank stress tests which will determine whether Wall Street is ready to rally further or take a sharp U-turn. As a lot of the recent rally is based on an improving banking climate, so the biggest threat to the rally is the possibility that the 19 largest U.S. banks performed badly in the government stress tests.

Today’s Market Moving Stories

  • China looks like its back on the mend. Manufacturing PMI this morning reached a nine month high of 50.1 in April vs 44.8 previous. GDP growth may reach 7% in Q2 according to the State Information Centre.
  • Japan has offered $100bn in financial assistance to Asian countries hit by the global financial crisis in a move that shores up its economic leadership in the region in spite of its own severe recession.
  • The US data releases at the close of last week’s business were generally better than forecast, with the final Michigan sentiment read soaring to 65.1 vs a preliminary reading of 61.5, its largest 1-month increase since Oct. 2006. The ISM manufacturing index reached 40.1 vs 38.5 forecast and extending the strong rebound from the 32.9 trough seen in December.
  • But it just keeps getting worse for housing as Australian house prices fell 2.2% vs expected 0.0%, which was the fastest pace in at least six years.
  • Germany will raise €300bn in new debt by 2013. Die Welt reports that the German economy will shrink 5.6% this year and 0.3% next year, citing an internal EU paper.
  • Going against ECB President Trichet, the Handelsblatt ECB shadow council sees no reason to set a floor of 1%. Of the 15 member Shadow ECB council, one argued in favour of a 100bp cut to 0.25%, five in favour of a cut by 75bp, seven in favour of a cut of 50bp and two for a 25bp cut.
  • Global semiconductor sales slumped 30% in March from a year earlier as the industry continues to suffer through its sharpest downturn in years.
  • According to the Irish Department of Enterprise Trade and Employment, there was an 154% increase in the number of redundancies in Ireland in the first four months of this year compared to the same period last year.
  • The odds compilers in Paddy Power have made AIB’s current Managing Director of Capital Markets, Colm Doherty, their 7/4 favourite to take over the top spot in AIB. But I think that the boys in AIB will try something different to the other Irish banks and appoint an external guy.
  • A bad start to the week for Italian Premier Silvio Berlusconi as his second wife is seeking a divorce, citing his reported flirtations with younger women. They have lived separate lives for years, but this will nevertheless be a hit to his considerable ego.

Buffett Tears Into Bank Stress Tests
Berkshire Hathaway Chairman Warren Buffett criticised the U.S. government’s stress tests of the nation’s largest banks, arguing that the health of large lenders can’t be judged by calculating ratios and adjusting loss expectations on broad asset classes such as home equity loans and credit card loans. The results of which are scheduled to be released this week and Berkshire owns large stakes in Wells Fargo and US Bancorp who are both involved in the stress tests. Buffett believes that his banks (he also owns a considerable stake in M&T Bank) don’t need more equity. Marking down the value of broad types of assets like credit card loans based on different economic scenarios doesn’t work, he went on to explain.

Buffett said that Berkshire has been buying securities since the end of the first quarter and remains willing to make big acquisitions if they make sense. Berkshire currently has just less than $20 billion in cash.

Berkshire Hathaway also reported their first-quarter earnings yesterday, where they announced that their profit fell slightly to $1.7 billion versus $1.9 billion a year ago as many of the company’s businesses suffered from the recession. Berkshire Hathaway has no outright currency positions currently, suggesting the company has closed a trade on the Brazilian real.

A Pattern In The Dow Jones - Gold Ratio
The chart below measures the number of ounces of gold it would take to buy the Dow Jones. So in 1980, for example, when the Dow sat around 800 and Gold was $800 an ounce, the ratio was 1:1. At the height of the tech bubble in 1999, it was 44:1. We’re currently at 9:1. If the ratio was to drop back to around 1:1 or 2:1, that could bring more carnage to the stock market.

So according to the maker of the chart, Byron King, “One way or another, we’ll see $5,000… either $5,000 gold or $5,000 Dow. Even if the Dow stays at the current 8,000, that implies, say, $4,000 gold at a 2-to-1 ratio.”


  • Irish and UK equity markets are closed today for the May bank holiday. Other European shares were mostly higher in early trading with utilities and financials firmer. Commerzbank opened up 1.4% and E.On rose 1.5%.
  • In Australia, the S&P/ASX 200 added 0.5% in this morning’s trading. Shares of BHP Billiton were among the bigger gainers, up 2.1%. Macquarie Group’s stock dropped 8%.
  • MAN reported a 44% slump in first-quarter net profit to €179 million as demand for new trucks collapsed.
  • Fiat, having already taken a stake in Chrysler, may spin off its automobile operations if it’s able to purchase General Motors’s European unit. The opportunistic Italian automaker is going to become a global powerhouse if CEO Sergio Marchionne has his way.
  • Sprint Nextel is in final negotiations to outsource management of its cellular network to Ericsson and transfer 5K to 7K U.S. employees to the equipment vendor in a cost-cutting move to help offset Sprint’s dwindling subscriber numbers.
  • Talks between The Boston Globe and its unions to prevent the newspaper from shutting down stopped this morning and it was unclear when they would resume.

Data Today
Earnings today from Sprint Nextel (expected EPS -$0.05), Loews Corp (-$0.62), EOG Resources ($0.59) and Chesapeake Energy (-$0.49).

It’s pretty light on the ground this morning in the economic calendar. There’s just the various Eurozone Markit PMIs.

Later at 15:00 in the US, there’s Construction Orders and Pending Home Sales. With many countries on holidays today, we could see some strange and big moves because of the low liquidity that will accompany these releases.

And Finally… Train Runs Through Bangkok Market

Disclosures = None

By The Mole

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

© 2009 Copyright PaddyPowerTrader - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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