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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Strengthening Chinese Economy And Commodities Cheer Stock Markets

Stock-Markets / Financial Markets 2009 Jun 02, 2009 - 04:38 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleSo, the old cliché that “what is good for GM is good for the USA” is yesteryear’s story. Risk appetite is back. Impressive Chinese PMI data lit the initial spark and the Far Eastern induced rally didn’t stop until the closing bell rang in New York. Oil & tech stocks were in the vanguard of the surge higher with semi conductors up 5%.

Oddly financials didn’t participate in the rally . More worrying was the massive spike in Treasury Bond yields. The stock market will not continue higher without the banks joining the party and there is little chance, the real economy can rebound, in the face of higher interest and mortgage rates. The market is also concerned by the mix of higher bond yields and higher oil prices, which will definitely do damage to the consumer, even if it also reflects recovery expectations.

One last oddity was the that VIX ticked 3% higher while stocks also rose. Could it be a sign that some smart money is buying some downside protection?

Market Moving Stories

  • Chinese officials are giving U.S. efforts to prime its ailing economy a vote of confidence and understand why higher budget deficits are necessary, US Treasury Secretary and chief bond salesman Timothy Geithner said on Tuesday. “I’ve actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy and I think a very sophisticated understanding of the steps we’re taking and why they’re so important, not just to the United States but to China and the rest of the world,” he told China state television. Geithner, on the second day of a two-day visit, said he had reassured Chinese leaders that huge US budget deficits were temporary and would be wound down as soon as a year-and-a-half-old recession eased.
  • Despite being laughed at yesterday, US Treasury Secretary Geithner’s China junket is getting a lot of air time.
  • Japan’s economy has already hit bottom but a full recovery may not come until spring next year, Japanese Finance Minister Kaoru Yosano said on Tuesday. “The first quarter very likely marks the bottom for the economy,” Yosano told a news conference after a cabinet meeting. “Since then, output for a few industries has started to rebound. However, we’ll probably start to see a complete recovery starting from the end of this year to spring next year.”
  • Chinese steel mills are to offer a new proposal in benchmark iron ore price talks, a top Chinese executive said on Tuesday, less than a week after their rivals in Japan and South Korea offered to pay more than expected. “We have decided on a new proposal for the negotiation, but I cannot tell you details,” Luo Bingsheng, vice chairman of the China Iron and Steel Association, told reporters on the sidelines of a conference. But the new proposal would not water down China’s demand for a drop of at least 40 percent in iron ore prices, winding the clock back to 2007, he said. “The iron ore price should fall to the 2007 level. This is still our main target in the negotiation,” Luo said. China has the world’s biggest steel sector and traditionally sets annual benchmark prices after months of talks with top iron ore suppliers Vale , Rio Tinto and BHP Billiton
  • Kingfisher LFL (think B&Q) reported this morning a sales decrease of 1.3%, but with group profit increasing 38%. The shares are up 7% in early trading
  • The US 30-year Bankrate mortgage rose to 5.32% yesterday, a gain of 9bp on the day and all the way up from 5.00% just a week ago. That’s the highest since the middle of February and well above the 4.84% seen at the end of April.
  • The Fed will say sometime next week (it didn’t say exactly which day) which of the 19 banks that were stress tested will be allowed to repay their TARP money. It said banks will need to be able to demonstrate their ability to standalone without those funds and without damaging their own business or the economic recovery. As such banks will need to show they can access the public equity markets and sell debt without FDIC guarantees behind them. The Fed said it will also consider the ability of a bank to foster onward lending without the government underneath it. With all that in mind, it was interesting to see JP Morgan and American Express straight out with surprise capital raising efforts - first in the queue to demonstrate their worthiness.

Car Trouble In Europe
In his FT column, Wolfgang Munchau notes that the Opel rescue is likely to lead to severe tensions within the EU, as the price of preserving Germany’s plants will be the closure of plants in other EU countries, including one plant in Belgium. The reason is the way the deal was negotiated, as the German government insisted that the winning bidder, Magna, preserves all four German Opel plants (which Magna had not intended to do in its original bid). The Opel rescue is the next nail in the coffin of Europe’s single market, which has been unravelling in banking and finance, public procurement, and now in cars.

Regulation Expectations In The UK
The task of maintaining financial stability in Britain should be removed from the Financial Services Authority and handed back to the Bank of England, a UK parliamentary committee said on Tuesday. The report from the House of Lords’ select committee on economic affairs said Britain’s “tripartite” system of the central bank, the FSA and finance ministry working together to supervise one of the world’s top banking centres left everyone unsure as to who was in charge. This contributed to a “collective failure” in the crisis. “The Bank of England should get quite unambiguous control over macro prudential supervision,” the committee’s chairman, Lord Vallance, told a news conference.

The report said Britain should not rule out an even more radical step known as the “twin peaks” model that would limit the FSA’s remit even further. This measure was recommended in a separate review commissioned by the Conservative Party which polls say will win the next general election. Failure by supervisors to spot the build-up of risks from banks before they destabilised the broader financial system is seen globally as a core lesson from the credit crunch. Policymakers hope that by monitoring risk better at all levels, speedier action can be taken to avoid governments having to use vast amounts of taxpayer money to rescue banks like Northern Rock and Bradford & Bingley in Britain. The European Central Bank is expected to play a core role in a pan-EU systemic risk monitoring body as is the Federal Reserve in the complexity and limitations of the risk assessment models used by banks. The watchdog took over prudential supervision tasks from the Bank in 1997.

“We welcome the report and will consider it carefully before responding in the summer,” a Treasury spokesman said, adding that the UK was leading the way internationally in reforming the banking system and would publish a paper setting out its latest thinking in the coming weeks. The FSA said it has already identified a need for intense, joint-working with the Bank of England. “However, how the formal character of the relationship between the two organisations is defined is a matter for wider debate,” the FSA said in a statement.

Flying Low At British Airways
British Airways is facing a “fight for survival,” its chief executive said. “It’s critical that we all recognise that the diagnosis for our airline is now critical,” Willie Walsh wrote in the airline’s staff newspaper. He said the crisis facing the aviation industry “has never been more serious.” “There has been a significant shift in consumer attitude, with people wanting more and paying less. And things are getting worse. We haven’t yet reached the bottom and everything points towards a protracted downturn,” he said. Walsh said some areas of the business had made progress on pay and productivity negotiations but elsewhere, change “has been slow.” He has set a deadline of June 30 to complete talks with unions. Last month, BA slumped to a record loss, cancelled its dividend and said tough market conditions made it impossible to give any guidance for the current period. Shares in BA, which have lost 28 percent of their value over the last year, closed Monday at 155.5 pence, valuing the business at 1.79 billion pounds

Abu Dhabi Looks To Sell Barclays Stake
International Petroleum Investment Corp, an investment vehicle of the Abu Dhabi royal family, is set to sell its stake in Barclays 7 months after its initial £3.5bn investment. The group has invited offers for its entire 1.3bn shares and the media reports suggest the shares could be placed at 260p-270p. This could potentially generate a profit of c. £1.4bn on its £2bn investment in convertibles. Barclays stock is off 13% on the news. Bank’s are generally soft early doors today while there is some noted strength in the autos sector (or what’s left of it) with VW, Porsche, Peugeot & Renault all up.

More From Elan-watch
According to recent Media speculation, a larger rival, Bristol Myers Squibb is considering the purchase of a strategic stake in Elan. This deal could be a pre-cursor to a full takeover, according to people familiar with the situation. Elan recently employed Citigroup to complete a strategic review of operations. UBS played down the deal and its analysts said that “BMY has confirmed to us that it is not currently in talks to buy a minority stake in Elan”.

Turbulence on Ryanair Profits

Ryanair’s net profit pre-exceptionals for FY2009 came in at €105m translating into a net loss of Eur 169 after taking a hit on their Aer lingus punt & fuel charges. This beat the company’s own guidance (€50-80m) and analyst estimates. These are good results in a sector context, and with the airline’s fuel costs up almost 60%. Ryanair continues to have a very strong balance sheet with cash of €2.3bn. Net debt was up to €120.2m. On financing, in its statement Ryanair mentions that it is now fully financed for the next 16 months, having recently completed the financing of 45 aircraft which will be delivered between October 2009 and September 2010 at very competitive rates. Initial FY2010 guidance of €200-300m net profit is very cautious. Ryanair has one of the best balance sheets in the industry and has by far the lowest cost base which should be down another 20% including fuel in FY2010. Ryanair will be the key winner from this recession. Nonetheless, the stock is soft this morning off 6%

Data Ahead Today

  • Figures pertaining to UK lending to individuals in Apr are out at 09:30. Net mortgage lending should rise by GBP1b, marginally below the recent trend.
  • US pending home sales figures for April are out this afternoon at 15:00. Sales should rise a further 0.5%.
  • US motor vehicle sales, May: Sales should rebound strongly in May to 10m units.

And finally…

Can I spend the TARP money on a new Merc?

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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