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Stock-Markets / Financial Markets 2009 Jul 06, 2009 - 05:00 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleLast week was an abrupt reminder to those who oversubscribe to the wishful thinking of the green shoots theory. Another 467k people lost their jobs taking unemployment to a 26 year high. It’s now a three week slump for the Dow Jones as it finished last week off 1.6%. The German DAX also slid 1.6%, but the headline UK index, the FTSE 100, managed to eke out a 0.1% gain.

Brent Crude Oil finally broke out of its tight range, to the downside, losing 5.3%. After another struggle to get through 73 last Tuesday the bulls abandoned the commodity after reading worse than expected economic data. There was less movement from Gold which held steady around 930 for most of the week, finishing at 932. The negative nonfarm payrolls report benefited the ’safer’ USD as traders lost their appetite for risk. EUR/USD slipped 0.7% to 1.3976 and GBP/USD dropped 1.2% to 1.6324.

This week the focus returns once again the business of quarterly earnings with aluminium giant Alcoa kicking us off as usual on Wednesday. S&P are forecasting a 17% fall in second-quarter operating earnings for the S&P 500. A word of caution. We are now in full holiday mode which should suppress volumes and exacerbate moves.

Today’s Market Moving Stories

  • Central banks are pouring trillions of dollar and euro liquidity into the banking system, and yet banks are tightening credit policies. That’s entirely to be expected, argues Wolfgang Munchau. Banks are assessing the credit risk of their customers and find that the recession is so deep that many of their customers are no longer credit worthy. Trichet’s appeal to banks and Germany’s threats are unconvincing. What we need, and Europe in particular, are concrete bank resolution policies, both at EU and national level, to recapitalise the banks. Without it, they will be no recovery.
  • An example of this is in La Repubblica which has a story that Italian banks are not passing on the falls in Euribor for variable rate mortgages to a sufficient extent. While interest rates have to fallen to a level close to zero, the one-month rate is now at 0.7%. The banks have simply increased their spread by over 50% in some cases.
  • German Finance minister Peer Steinbruck said that the government would not allow a credit crunch to occur (it is occurring already even though this is not yet reflected in the official aggregate data), adding that the Bundesbank and the government would get together to do something. This is the latest in a serious of threats. Bundesbank president Axel Weber, who had previously opposed quantitative easing, now says that the central banks might circumvent the banks and lend to the corporate sector directly – through buying up commercial paper. It seems to me that German politicians are beginning to panic and feel the need to pass the blame as the September election nears. Peter Bofinger, a member of Germany’s Council of Economics Advisers, believes that forcing banks to issue more credit makes no sense. The government is currently trying to sort out the mess that stemmed from irresponsible lending. It would be counterproductive if one forced the banks into more irresponsible lending.
  • Sterling is getting a lift this morning from media reports suggesting that the Saudi Royal family, though investment group Jadwa Investment, are set to invest up to $1bn in UK commercial property. After repeated calls by commentators of a bottom in the UK market, Jadwa Investment currently sees commercial real estate along with natural resources as “an appealing investment opportunity”. The fund is set to invest up to $1bn in partnership with CIT, the European property investor.
  • A BDO report showed commercial property returns have improved in the UK from -5.27% in January to -0.9% currently, the highest level for more than a year. A further report by NB Real Estate has also shown office take up in London has improved begun to improve considerably, with 1.8m sq ft taken up in Q2, almost double the take-up level of Q1.
  • And the Chinese are getting really Bullish and tempting fate with their own “Wall Street bull”. Reminds me of “Dow 36,000”. Shame the Fed didn’t take away the punch bowl.
  • A rather neat summary of how we got into the mire.

An (Un)-Happy Anniversary
July marks the second anniversary of the credit crunch, although tremors were being felt in the US mortgage market earlier in 2007. The US has been in recession most of this time, officially rolling over late in 2007. A recession is defined as weakness across a range of indicators, but as a summary measure of where things stand, the unemployment rate is fast approaching the 10.8% peak reached in the early 1980s recession. The early 1980s were a watershed, marking the point at which the Fed broke the back of double-digit inflation with the highest unemployment rate since the Great Depression, when at the worst point one-in-four people were out of work.

At that time, CPI inflation fell from 11.5% to less than 4%, taking another step down during the early 1990s recession (core inflation followed a similar path). While research shows that inflation is much less sensitive to slack in the economy than it used to be, unemployment of 10% or more would have to place some downward pressure on inflation at a time when core inflation is running at less than 2%. This raises the risk of deflation, which together with the severe dysfunction in financial markets and the banking system, explains why the Fed was prepared to take rates to roughly zero.

With interest rates at zero and the Fed offering an array of liquidity facilities to banks, judging the stance of policy has become much harder and many analysts have dusted off measures of the money supply after many years of ignoring them. These show explosive growth over the past year, which raises the question of whether the fight-deflation strategy might unintentionally spark runaway inflation.

For example, the monetary base has more than doubled over the past year, although most of this growth is due to banks simply parking more money in reserves at the Fed rather than representing a doubling of the currency in circulation. Excluding these reserves, growth is 11%, similar to the experience of earlier this decade. These excess reserves can be exchanged at a future date for currency, at which time you would be more worried about growth in the money supply. But with private-sector debt broadly unchanged over the same period, disinflation/deflation seems more the issue given one-in-ten workers are unemployed and one-third of manufacturing capacity is idle.


  • Rio Tinto agreed to sell its Americas food-packaging assets for $1.2 billion to packaging group Bemis, raising yet more much-needed cash for the indebted miner. Rio Tinto, which only last week raised $15.2 billion in one of the worlds largest-ever rights issues, said it had sold the assets for $1 billion in cash with the rest potentially paid in the form of shares in US-listed Bemis. Rio Tinto shares were down 1.2% soon after the announcement, but they outperformed shares in its major mining rival, BHP Billiton, which were down 2%. The deal moves Rio Tinto closer to the day when it can draw a line under its near-disastrous 2007 acquisition of Alcan. Bought near the height of the commodities boom, Alcan left Rio Tinto with $38 billion in debt.
  • South Korea’s Samsung Electronics, the world’s top maker of memory chips and flat screen TVs, forecast second-quarter earnings well above market estimates, driving its shares up more than 4% on Monday. Technology companies around the world have seen their earnings and valuations hit by the global downturn, which has prompted consumers to cut back spending on electronics goods. Analysts said the guidance reflected Samsung’s strong market position and it was too soon to say the industry was on the mend.
  • Over on the Nikkei, car makers Honda and Nissan were under pressure overnight as the yen strengthened which could further pressure their auto sales in the US. The soft tone in Asian equities has carried over into Europe this morning and the US Dow Jones futures are currently (-76) pointing to a weak open.
  • Porsche may be active after being cut to a sell at UBS with a €38 euro price target on debt worries. RBS analysts have been active re rating UK building stocks with Bovis homes and Bellway both upped to a buy while Redrow was cut to a sell as they are taking a more sanguine neutral view on the British housing market. And over at Merrill Lynch, Tomkins, EADS and BASF have all been rated buys.

Data Today
The only economic data worth watching today is the US Services ISM at 15.00. The consensus forecast is a read of 46.

Don’t Quit Your Day Job Gordon Brown

And Finally… The Late MJ Wasn’t Just Booked To Play The Dome You Know… Hitler Finds Out Michael Jackson Has Died!

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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