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Stock Markets Calm Ahead of Bank Stress Test Results

Stock-Markets / Financial Markets 2009 May 06, 2009 - 04:56 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleMarkets paused for reflection and traded in a narrow range yesterday finishing neutral after their recent bout of bullish fireworks. The S&P 500 managed to just hold onto the 900 handle. Oil stocks struggled on a fall in crude prices while Disney shone on better than expected numbers. This was despite more upside data surprises this time from the services ISM and a cautiously upbeat testimony from Fed Chairman Bernanke. However news that Bank of America may require $35 billion in additional capital has futures in the red this morning.

Today’s Market Moving Stories

  • Bank of America has been deemed to need an additional $35bn in capital, according to the results of a government stress test, a source familiar with the results said on Tuesday. The FT reports U.S. regulators are set to impose tough conditions on banks that wish to repay TARP monies making them prove that they can issue debt without government banking / guarantees. This news will pressure European banks at the open. As I write I note both UBS and Barclays are down early doors. The Telegraph is reporting that Barclays are considering a rights issue. In contrast French bank BNP is up 8% at the off after topping analysts forecasts.
  • The most significant comments overnight were from San Francisco Fed President Janet Yellen, coming too late for the US close. She noted that the necessary inventory correction may be “quite far along” with recent “hints” of stabilisation in housing. Still, the recovery will be “frustratingly tepid” when it starts. She predicts that the ongoing deterioration in the US jobs market understates unemployment, noting that the “under-employment rate” has risen sharply. She continues to fear deflation is more likely than inflation, but it would not be a severe bout.
  • British consumer morale enjoyed its biggest monthly boost last month in two years as people sensed the worst of the recession may have passed. The Nationwide Building Society’s consumer confidence index rose to 50 last month from 42 in March. The eight-point rise was the most marked improvement in the index since May 2007 while the level was the highest since December. The figures tally with a GfK survey last week which found consumer confidence recovered in April to its highest level in a year.
  • Standard and Poor’s rating agency will downgrade all German Landesbanks by one notch today. The move is said to increase the political pressure for consolidation in the sector.
  • ECB sources this morning say a modest interest rate cut (1/4%) this Thursday may be flanked with a commitment to keep rates low for an extended period. The odds are low that the Council will agree on more controversial non-standard measures like the purchase of government bonds or private sector paper, given the difficulties involved and the lack of consensus so far.
  • Peer Steinbruck, Germany’s accident-prone finance minister, did it again. Yesterday in Brussels he launched another attack on tax havens by listing the tax shelters as follows: Luxemburg, Liechtenstein, Switzerland, Austria and Ougadougou. Unlike the former three the latter is not a country, but the capital of Burkina Faso, one of the poorest countries in the world. More importantly, the latter is not a tax haven. Steinbruck seems to be making the point that those small European countries are banana republics.
  • Some people are born to be customers! Brooklyn cab driver convinces you he is a hedge fund managers, steals $20 million.
  • The new game in town - Shoot the Banker.

Last Word On Those Annoying Stress Tests
I must start with a broad impression. This whole stress test exercise is probably the most ridiculous thing that the government has done through this entire crisis (and the field is crowded!) Let’s think about what exactly the government is doing here. Financial regulators oversaw the most colossal failure of regulatory policy in the history of the world in this decade. The entire financial system was allowed to run amok. And regulators stood by and watched. But now regulators have decided that banks should go from being far undercapitalised to far overcapitalised in the middle of an economic recession and financial crisis, i.e. at just the time when it is really expensive (if not impossible) to raise capital. In a deleveraging financial system, the notion of forcing banks to drastically increase their capital ratios at the bottom of a recession based on what could happen if the recession gets even worse is stupendously ill-advised in my view. If there are banks that are insolvent, then by all means have the FDIC take them over. But running this hypothetical exercise strikes me as a monumental waste of time and energy.

The stated purpose of the stress tests was to increase confidence in the banking system, but it feels like the end result has been the opposite. Financial conditions are getting better (having nothing to do with the stress tests, regardless of what Treasury might like you to believe). In any case, here we are, the regulators are delivering the final results to banks today, with a public release due out late Thursday afternoon. The latest leaks suggest that the number of banks that will be forced to raise capital has gone from 2 or 3 to 4 to 6 to now 10.

But the really important question is whether banks are going to be able to coerce private holders of preferred paper to convert to common equity or, better yet, whether banks might be able to raise new private money in the next six months. If the answer to both of those questions is no, then banks are going to be driven into an even tighter bear hug with Uncle Sam, and I can predict unequivocally that such a result would be bad news for the financial system and for the economy.


  • Luxury carmaker BMW has posted a smaller than expected loss of €152 million this morning.
  • Tullow Oil announced this morning that the Ngosa-1 well exploration well, which is located in the Butiaba region of Uganda, has encountered good quality Kasamene-type oil bearing reservoirs in a down-dip location at the oil water contact.
  • United Drug released first half results this morning and delivered a 6% increase in revenue on a constant currency basis to €850.9m, slightly below consensus estimates. Operating profit increased 5% yoy to €21.9m, with adjusted EPS slightly below expectations at 10.63c. The packaging business weighed on earnings as did Sterling. Management expect the group’s pre-tax profits for the year to September 2009 to at least be in line with the prior year.
  • CRH has issued an interim management statement indicating that poor weather conditions and a deteriorating economic environment impacted its performance in the first four months of the year. As a result, profits in the first half of the year are likely to be below previous expectations.

Data Ahead
There have been some signs in initial jobless claims data that the worst job losses are behind the US economy. Yet jobless claims represent the flow into the jobless pool. The ADP (13.15 today, consensus –645k) and nonfarm payroll reports include this flow in as well as the flow out. A slowing of job cuts comes well before the hiring begins and so even if the pace of job cuts is easing the payroll numbers will stay elevated for a while, even if the worst is over.

Earnings from Unilever, CBS, Nvidia.

And Finally… The Original Bankers Song

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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