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Financial Markets Weathering U.S. Payrolls Report

Stock-Markets / Financial Markets 2010 Mar 05, 2010 - 11:49 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleMarkets have really struggled for direction overnight, perhaps not surprising with the US non-farm payrolls report looming large. US equities closed modestly in the black but the commodity complex was generally a touch weaker, credit spreads a touch wider and the Dollar stronger. Walt Disney climbed 2.9% after Bank of America recommended the shares, while Coca-Cola and Boeing rose at least 1% as UBS lifted its ratings on the stocks. Abercrombie & Fitch surged 15% to lead gains in retailers on higher than estimated monthly sales.

Asian bourses were trading stronger today after the Nikkei newspaper suggested that the BoJ would consider further easing measures at its next meeting and Chinese Premier Wen’s confirmation for continuation of “appropriately easy monetary stance and active fiscal policy” at the National People’s Congress (NPC).

An hour before the NYSE open today, US Non Farm payrolls hits the wires at -36k (far better than I’d expected and oddly seemingly unaffected by the hard winter) Thus far the reaction has been surprisingly muted (with the Dow future up 48 at 14.15) given many analysts, traders and economists had been bracing themselves for a far worse number. Given the back positive revisions to the December and January numbers once the weather is factored away, one must conclude that the US is on the verge on NET job CREATION.

Today’s Market Moving Stories

•Despite ECB President Trichet describing Greece’s new austerity measures as being “very convincing” and the successful placement of a €5bn 10-year Greek bond, Greek bond rates (and a weaker Euro) suggest there remains some concern about the feasibility of implementing these measures (overnight there has been further news of protests and proposed strike action). And the interest rate the country has been forced to pay to attract investors is 6.25%, 2% more than Portugal and one of the highest since Greece joined the euro in 2001.
•The old adage about Greeks and gifts may well be wrong in the current circumstances. Indeed, the world economy arguably owes Greece a favour, for catalysing and focusing attention on fiscal positions Greece may very well have done everyone a favour. The financing crisis that began to materialise in December has served as a forceful reminder of the limits of investor patience for fiscally recalcitrant governments. In colloquial terms, it is fair to say that the Greek crisis demonstrated that the bond vigilantes now have the whip hand, although it would be wrong to suggest that further reminders may not be necessary in future. Public opinion has moved in a similar direction. Polls suggest that the majority of the Greek electorate is firmly behind the government’s budgetary plans.
•Similarly, UK polls express a broad acceptance of the need for reduced government spending, even if public opinion has yet to happily embrace the reductions that might affect it personally. Nonetheless, in the wake of the Greek experience, it is less plausible to suggest that a hung UK parliament (the most likely outcome according to current voting intentions) would be unwilling to address the fiscal issue. The markets have effectively cornered the political establishment and eliminated any theoretical wriggle room. A party or politician manoeuvring around fiscal policy for perceived electoral advantage would quickly face terminal accusations of encouraging a financial crisis, consequently facing annihilation in the next election. This should be clear to all politicians.
•The Conservative Party’s voter-preference lead has tightened to 2% over the governing Labour Party in 60 key marginal seats, YouGov poll said. The last time the poll was done, in February of 2009, the Conservatives held a 7-point lead.
•Chairman Jean-Claude Juncker told Deutschlandfunk radio (when asked whether German taxpayers will have to bail Greece out) that “there is no reason to have to expect that. Greece has presented an ambitious consolidation program.” He also says that there is no need for the International Monetary Fund to intervene.
•Greek Prime Minister George Papandreou told Frankfurter Allgemeine Zeitung that “we have not asked German taxpayers to pay for our pensions and holidays. That there is European support so that we can borrow money under better conditions. That is all we need.”
•The Bank of Japan is likely to debate easing monetary policy again this month. One source said that “the BOJ needs to make sure consumer price falls don’t hurt future inflation expectations. That’s something likely to be discussed in March and in April.”
•Finance Minister Naoto Kan told reporters after a cabinet meeting that “I haven’t heard directly from the BOJ about what it plans to do. But the BOJ governor and deputy governor have appeared regularly in parliamentary committees, where I’ve repeatedly said the government will do more to end deflation and that I hope the BOJ also does more. The BOJ could be responding to that.”
•Masahiro Sakane, chairman of Komatsu, the Japanese maker of construction and mining equipment, said that the company’s plant in north-east England will benefit from GBP’s sharp fall against the EUR when demand for its products starts to recover. He noted that “maybe a dozen years ago, a British ambassador had been good enough to visit us on several occasions and I kept asking him ‘when are you going to join the Eurozone’, because GBP was so high we were suffering. Today I am glad the UK chose not to join the EUR, with hindsight.”
•German industrial orders generated in January 2010 a big positive surprise. Industrial orders moved up by 4.3% MoM (expected 1.3% MoM). Taking into account the upward revision of the December 2009 figure to -1.6% (previously published data: -2.3% MoM) the year-on-year rate was pushed up to +19.7% in January 2010.
•Icelanders look set to reject a deal to repay the UK and the Netherlands for losses from the collapse of the Icesave bank, but Saturday’s a referendum could plunge the country deeper into crisis. A large majority of Icelanders are expected to vote “no” in the country’s first referendum since it achieved independence from Denmark in 1944. The latest poll suggested that three quarters of voters would spurn the Icesave deal. The legislation would see Iceland paying some €3.9 billion to the UK and the Netherlands to compensate for money they paid to some 340,000 of their citizens hit by the October 2008 collapse of online Icesave bank.

A Week In Greece Isn’t What It Used To Be
The script for this week appeared to have been clearly laid out by Monday morning. Although a number of different sources provided versions of an apparent agreement between Greece and other members of the EU over bailout terms, the most complete seemed to come from Greek newspaper Ta Nea. It quoted unnamed banking and official sources as saying that German state owned bank KfW would either buy Greek government bonds directly or provide guarantees for other banks to buy them (it also reported that France’s Caisse des Depots would be involved). In return, the Greek government had reportedly agreed to introduce additional austerity measures worth some €4bn.

By Wednesday of this week, everything appeared to be on track as the Greek government announced additional austerity measures worth €4.8bn (rather than €4bn). Having held up its part of the deal, Greece’s Prime Minister George Papandreou immediately began to drop heavy hints that now it was the turn of the nation’s partners within the Eurozone to step up to the plate. Indeed, even before full details of the new package had been announced leaks began to emerge from the cabinet meeting quoting the PM as saying that the time for EU help had now arrived and that Greece has done what it had to do with the new measures. To emphasise the urgency, he added that the EU needed to show its support immediately and (in what sounded like an implied threat) stated that if the EU would not help then Greece might go to the IMF. Subsequent recorded comments from the prime minister (“We have shown we can take difficult decisions. We are waiting for European support – the other side of the agreement” and “we are now justifiably expecting EU solidarity”) suggested that the leaks were probably fairly accurate.

Unfortunately (from Greece’s perspective) a number of key players began to veer away from the script at this point. Within a matter of hours German Chancellor Angela Merkel made it clear that she would offer no aid to Greece at her talks with Prime Minister Papandreou on Friday but welcomed his cabinet’s new austerity measures as an important step. This point was re-emphasised in a series of quotes published in the WSJ on Thursday morning ahead of the Friday meeting. In the face of a potentially disappointing meeting today between Chancellor Merkel and PM Papandreou, it therefore seems that Greek officials did the only thing they could do and decided to announce yesterday’s €5bn 10-year bond auction. Demand at the auction came in at a surprisingly robust €14bn, although the pricing remained at a tough 300bp over mid-swaps. Subsequently much was made of the fact that 95% of the auction went to real money accounts and that most were domiciled outside Greece.

In the aftermath of what appeared to have been a successful auction, Greece’s European partners seemed keen to distance themselves even further from the idea of a rescue plan for Greece. Around 20 minutes after the close of the auction French Finance Minister Christine Lagarde was quoted as saying that Franco-German aid was not on the agenda at the moment. Within the hour German Economics Minister Rainer Bruederle added his voice to the mix, reiterating that “we must stick to the principle: The rules are that each country must solve its problems. That’s the status.”

How Greece reacts to the apparent volte face from Germany and France remains to be seen. However, it seems reasonable to assume that the story is far from over, whatever positive spin officials may wish to place on the events of Wednesday and Thursday. Today’s meeting between George Papandreou and Angela Merkel will therefore bear watching closely. In particular, it will be interesting to see how the prime minister reacts should he not get the strong signal of support that he has so clearly been looking for all this week. This weekend could prove interesting.

Bank Of America / Merrill Lynch Did You Know

1.The market cap of Emerging Markets now exceeds that of the Eurozone by $600bn, the largest differential on record.
2.The most contrarian long trade last November, Japanese utilities, is the best performing global sector YTD.
3.The most contrarian longs today are German consumer discretionary stocks and Spanish financials.
4.There are plenty of companies with dividend yields well in excess of corporate or government bond yields: the UK & Eurozone telecoms, utility and energy sectors are yielding 5.0% to 6.5%; banks in Australia and Spain yield around 5%; and telecoms in the US yield 5.6%.
5.2010 EPS consensus forecasts for global cyclical stocks (43%) are 6X higher than forecasts for global defensive stocks (7%).

Company News

•WPP’s full year generated full year revenues of £8.7bn and operating profit at £1bn, both slightly ahead of expectations. The outlook is for stable like for like revenues and a 1% improvement in operating margin in 2010 to 12.7% with a further improvement to 13.2% forecast for 2011.
•Fyffes has reported an below consensus adjusted EPS of 5.19c for 2009. The group achieved the necessary increases in selling prices to offset the negative impact of higher costs and adverse exchange rate movements. The company is lowering its 2010 guidance to an adjusted EBITA range €14-18m, down from the €17-22m range issued in January. The poor weather, lower prices and adverse exchange rates are behind the change in guidance.
•Other stocks on the move today include miner Rio Tinto, up 2%, leading a measure of basic resource producers to the largest increase among 19 industry groups in the Stoxx 600. Xstrata Plc climbed 3.1% as copper prices rose in London, heading for a third weekly gain in four weeks, on speculation that demand may improve after metal stockpiles tracked by exchanges fell.
•On a quietish pre payrolls European morning Tate & Lyle climbed 1.3% after the stock was raised to “outperform” from “neutral” at Credit Suisse.
•United Business Media jumped 8% on news the company settled the capital-gains dispute with British tax authorities for £46.5m which was less than analysts’ projections of £80m.
•Staying in Germany, steelmaker Salzgitter declined 1.1% after the company posted a full-year net loss of €386.9 million as revenue declined. That missed the €239 million median of 10 analysts. Sales fell 37%.
•Veolia Environnement dropped 2.6%. The world’s biggest water company reported full-year net income of €584 million, missing analysts’ estimates of €616 million. Sales fell 3.4%.
•China Development Bank is reviewing its “ties” with Barclays, the Daily Telegraph reported, citing the bank’s President Jiang Chaoliang at a conference in Beijing. China Development Bank has a 2.1% in Barclays.
•Prudential said 30 additional lenders have agreed to underwrite its $20 billion rights offer to fund its biggest purchase on record. Credit Suisse, HSBC and JPMorgan Cazenove said the demand for primary underwriting is “well in excess” of the rights issue’s size.
•MetLife, the biggest US life insurer, may reach an agreement as early as this weekend to buy a unit of AIG after a tax decision cleared the way for the deal. The Internal Revenue Service decided that AIG, recipient of a $182.3 billion government bailout, doesn’t owe taxes on life insurance sold to non-US customers by an international division.
•Sony is developing a new line of handheld products to compete against Apple. The new products include a smart telephone that can download information and run PlayStation games.

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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