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Stock Market Improving Risk Sentiment Despite Continuing Greek Debt Crisis

Stock-Markets / Financial Markets 2010 Mar 03, 2010 - 08:52 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleRisk sentiment has improved further over the past 24 hours. In part this reflects a further easing of concerns about the situation in Greece, with newswires reporting that the Greek government will today announce as much as EUR4.8bn of additional deficit cuts. New measures that will include higher tobacco, alcohol and sales taxes and deeper cuts in public workers’ bonus payments.

Overnight the yield on Greek 10-year bonds fell to the lowest level since 11 February. Bourses rose in both Europe and the US (although the latter closed well off intraday highs) and commodities have strengthened too.

SunTrust Banks and Fifth Third Bancorp rallied more than 3% to lead gains in banks as analyst Richard X. Bove said the industry is stabilizing. Terra Industries surged 11% as CF Industries Holdings. bid for the fertilizer maker.

Technology shares reversed earlier gains as Microsoft forecast an increase in operating expenses, sending shares of the largest software maker down 1.9%

All About Greece
Greek Prime Minister George Papandreou said his government is discovering “new holes” in the budget on a daily basis, evoking the age old strategy of blaming the previous guy.

The Greek government announced additional austerity measures worth EUR4.8bn in the European morning session. The measures were in line with the media leak and include a 2% hike in VAT, a cut in civil-servants bonus payments, and a freeze on pensions. If achieved, this would keep Greece on target to cut its deficit by 4% cut this year.

The bond market most explicitly welcomed this announcement with the Greek 10yr bond yield falling 13bp. The equity markets erased earlier losses post announcement and are currently trading flat.

The measures are moderately good news for EUR and the fact that the government has acted quickly to consider fresh cuts, as demanded by the EU, demonstrates that it appreciates the severity of the situation and the need to keep the rest of the euro area on board. Greece knows there is no prospect of unconditional support and is hence doing what it needs to secure the prospect of conditional support.

Greece is signing up to even greater austerity measures two days before Papandreou meets Germany’s Angela Merkel, and the effort may help the chancellor justify aiding Greece to her taxpayers and political allies.

The WSJ has a good 10-minute video on the Greek situation.

“Constructive ambiguity” is a term associated with former US secretary of state Henry Kissinger. It can be defined as “the deliberate use of ambiguous language on a sensitive issue in order to advance some political purpose”, and is perhaps the most apt way to describe the EU’s handling of Greece. The Greek authorities are kept guessing as to what support might be forthcoming in order to coax them into budget cuts, although this policy vexes both journalists and investors who are crying out for concrete detail.

The sequencing of events is now meant to go like this:
1) The Greek authorities announced a new round of austerity measures today, worth some €4.8bn. This gets Greece over the 16 March Ecofin test.
2) Then – though this is highly questionable in my view –Germany and France lead some kind of debt guarantee scheme. At best, it’d be heavily conditional, begging the thorny question of what happens if the conditions are not met (and indeed why needed if the conditions are to be met).
3) Finally, Greece crowns the play with a 10 year syndicated government bond deal / issue that will lead spreads much tighter.

For now, it does look likely that the news will favour an ongoing reduction of risk, even if stage two risks disappointing investors in terms of detail yet again. The risk now is that baby is thrown out with the bathwater. I note that Greek winter sales turnover was down 20% when VAT rates had yet to be raised (a measure announced today). This illustrates that while we can raise taxes and cut spending, at some stage the hoped for economies could prove illusory.

If all Greeks could be as generous as Nana Mouskouri, the world famous singer and former MEP, Greece would definitely be out of trouble. Realising in what dire straits her country is, she decided to dedicate her MEP pension to the Greek state as long as the crisis lasts. Luckily, she does not rely on her MEP pension. Nana Mouskouri was the second most successful female singer in the world, right after Madonna, selling 250 million records, writes Spiegel online.

Other Market Moving Stories

  • Although the Greek debt crisis is grabbing the headlines but the European Central Bank will likely focus on more mundane “exit strategies” from stimulus policy when top officials meet on Thursday, analysts say. “The two key items to watch will be the promised announcements on the exit strategy from the present liberal liquidity provisions as well as their new forecasts” for growth and inflation, Goldman Sachs economist Erik Nielsen said.
  • Though eurozone growth has faltered, ECB policymakers are determined to carefully unwind the unorthodox measures taken in 2008. “There is clearly a great desire to return to normality,” Nielsen said, which could mean reducing exceptional ECB loans over three months and starting to charge variable rates again rather than the fixed 1% at present. The ECB’s main interest rate will remain at that record low level and probably stay there throughout the year, most economists say.
  • Yi Gang, a vice governor of the People’s Bank of China and director of the State Administration of Foreign Exchange says (in the latest edition of China Finance magazine) that China will continue to improve the management of its foreign exchange reserves. He also reiterates that China will improve its strategy for currency and asset allocation.
  • Dallas Fed President Richard Fisher says (regarding the need to tighten rates): “I don’t think that’s going to happen for some time. We have an anaemic recovery.”
  • The WSJ reports that the US Justice Department has launched an investigation into whether hedge funds might have banded together to drive down the value of the EUR. The antitrust division “has opened an investigation into agreements among various hedge funds that trade EUR contracts,” including contracts to trade euros in the “cash or the derivatives market.”
  • GBP bounced today on worries that Prudential’s purchase of AIG’s Asian business may fall through after a 20% plunge in Prudential’s share price. Hedging for the deal worth USD35b is thought to have generated the large fall in GBP on Monday, and if the deal falls through this flow may need to be reversed. Such concerns hardly provide a reason for a sustained rebound in GBP.
  • The UK service sector PMI came in at a strong 58.4 in February after 54.5 in January. The forecast had been for a gain to 54.9. Also interesting is the breakdown shows that the positive trend can continue with the new business index at 57.5 compared to 53.4. The other components in the breakdown also show positive gains with employment at its highest since April 2008. The data confirms that the January weakness was weather impacted but more importantly, given the boost that the service sector gave to December and its impact on Q4 GDP, it also bodes well for the Q1 GDP report. A gain of around 0.8% q/q seems likely for Q1 GDP.
  • The British Retail Consortium says that shop prices rose 1.7%y/y in February compared to a 2.3% gain in January.
  • The Nationwide Building Society’s consumer confidence index rises 6 points to 80 in February, the highest level since January 2008.

Companies / Equity News

  • ITV Group generated full year sales of GBP 1.9Bn and operating profit of GBP 192M, both ahead of expectations, but down on the prior year. The adjusted EBITA of GBP202M remains a decent out-turn reflecting over achievement on the Group’s cost cutting programme (GBP 169M vs GBP 155M) given the 7% fall in revenue. The outlook for the first half of the year looks positive in the run up to the General Election with advertising revenue up 7% in the first quarter. However, Archie Norman has warned of likely reductions in government spending following the general election though, clouding the outlook for the second half of the year.
  • Irish Life & Permanent FY results are pretty weak but generally as guided towards, with 2010 remaining a challenge. It seems the potential merger talks will not be addressed until Q210. Onto the numbers. IL&P posted a net loss of EUR313m driven by loan impairment provisions of EUR376m (EUR82m in 2008) and lower volumes of business (for example only issued EUR1.2bn of new loans vs EUR7bn in 2008) as well as margin contraction (83bps in 2009 vs 105bps in 2008). It has maintained the deposit book though at EUR14.6bn (EUR14.1bnin 2008). No dividend is being paid unsurprisingly, but capital has been maintained with Tier 1 of 9.2%. This could do with a boost in view of future losses but this will be addressed with a govnt g’teed issue lined up.
  • Insurance business is also weaker and the outlook is challenging for 2010. Losses at the group level should be at their peak in 2009 although the losses in the bank will trigger losses at the group level in 2010. Other things to consider- IL&P has an ECB funding reliance. The group troughed at EUR7bn of ECB reliance during FY09, however as of 31st Dec. 09, this had risen to EUR9.8bn. IL&P also has EUR3bn of wholesale funding maturing in Sept 2010 (and EUR4.3bn for all of 2009) and it needs to lower its loan-to-deposit ratio which was 240%.
  • FBD announces its 2009 full year results this morning, with operating earnings coming in at 75c, at the lower end of the range of guidance. However, the results reflect a €13.5 million impact net of re-insurance for the unprecedented flood damage seen in November and December, which hits earnings for 35c. The group see earnings of 95c-100c for 2010
  • Holcim has reported Q4/FY09 results with final quarter sales of CHF 5.36m missing expectations at CHF 5.57bn. The group states that the early arrival of winter had a negative impact on activity in the fourth quarter. This is not positive for its Q1 outturn given that CRH yesterday also commented on a poor start to 2010 as a result of severe weather in Europe and North America during January and February. Holcim’s outlook statement is cautious with management citing high level of uncertainty, particularly in the developed markets of Europe and North America, but is more positive on prospects in emerging markets.
  • The 8.8-magnitude earthquake that killed more than 700 people in Chile
    last week may be the most expensive for insurers since 1994 and the second-costliest for the industry in history. The quake leveled buildings, knocked out power lines and damaged 1.5 million homes, officials said. The damage may cost insurers $2 billion to $8 billion, according to estimates from catastrophe-modelers AIR Worldwide and Eqecat Inc.
  • When Steve Jobs unveiled the iPhone in 2007, he said Apple had applied for more than 200 patents for the device and was ready to enforce them. Now, Apple is putting those words into action. Apple filed a patent-infringement complaint against Taiwan’s HTC Corp. yesterday, seeking to prevent U.S. imports of phones that run Google Inc.’s Android operating system. The decision signals that Apple wants to curb HTC’s market share gains as quickly as possible, said Lyle Vander Schaaf, a patent lawyer with Bryan Cave LLP in Washington
  • Novell , a seller of network software whose stock has slid 85% in the past
    decade, received an unsolicited takeover bid from shareholder Elliott Associates LP that values the company at about $2 billion. Novell’s shares jumped as much as 37 percent to $6.51 in extended trading, indicating that investors see the $5.75-a- share bid as too low.
  • Barclays Private Equity is set to announce on Wednesday the sale of Deb Group, the UK cleaning products maker, to Charterhouse in a deal worth £325m. The sale comes as the buy-out arm of UK bank Barclays prepares its next round of fundraising and plans to spin out as an independent house.
  • Standard Chartered , the British bank that makes more than 90% of pretax earnings in Asia, said full-year profit rose to a record on company lending. Net income rose to $3.38 billion from a restated $3.24 billion a year earlier. That missed the $3.5 billion estimate of 12 analysts surveyed by Bloomberg. The lender raised about 1 billion pounds in a share sale in August and said in the same month that it would hire 850 people in Asia to boost the private banking division.
  • Pfizer, the world’s biggest drugmaker, is bidding as much as €3bn for German generic-drug maker Ratiopharm and could make a presentation to Ratiopharm’s management this week, reports Bloomberg. Teva Pharmaceutical Industries of Israel and Iceland’s Actavis Group are also bidding.
  • Elan options trading jumped to the highest level in four months in U.S. trading surged on buyout speculation.
  • PSA Peugeot Citroen is in talks with Mitsubishi Motors toward forming an alliance that goes beyond their current strategic partnership. The French auto maker is to launch Europe’s first mass-model electric vehicles this year under the Peugeot and Citroen brands by tapping Mitsubishi Motors’ expertise.

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”.© 2010 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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