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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

US Stocks Trading At 18 Month Highs

Stock-Markets / Financial Markets 2010 Mar 30, 2010 - 10:23 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleThe tone across markets is again generally positive with commodities leading the market higher (copper is up 4% and oil up over 2%). This has filtered through to equity markets, with the S&P 500 managing a 0.6% gain to an 18 month high Monday. Schlumberger, Exxon Mobil and Alcoa paced gains in commodity shares as crude oil and metals prices rallied. Boeing jumped 2.1% after saying stress tests of its Dreamliner wings were “positive”.

Meanwhile the DAX managed to close at its highest level since late September 2008. In currency markets the AUD/USD and AUD/JPY jumped, benefiting from both the general strength seen in commodity prices and an overnight article by the much-followed Terry McCrann in which he suggested that yesterday’s appearance by RBA Governor Stevens on breakfast television “confirmed” that the Bank will be lifting the cash rate again when the Board next meets after the Easter break.

The positive tone in markets owed in part to Greece’s success in raising €5bn in a 7-year syndicated bond offering, albeit at a yield of 6.001% – some 3.4% over the German equivalent. In addition, Fitch Ratings noted that it would probably not be revising Greece’s sovereign rating this year. Meanwhile, the general sense of increasing normality in markets was further promoted by the US Treasury Department’s confirmation that it intends to dispose of its 27% stake in Citigroup over the course of 2010 using a ‘pre-arranged trading plan”. Credit spreads have thus tightened somewhat overnight.

US data today was basically a mixed, flat report from US S&P Case-Shiller survey of house prices in 20 cities. The 10-city composite was basically flat. The 20-city index was off 0.7%. Both are basically at expectations, but provide no cheer for the bulls. As S&P’s David Blitzer said – “the rebounding in housing prices seen last fall is fading.”

Today’s Market Moving Stories

•IMF Managing Director Dominique Strauss-Kahn stated that the IMF is working in “perfect harmony” with the EU over the Greek debt crisis, but notes that Athens may not need external help to resolve its problems, stating that “we will move and we will say something only when Greece asks us.” He added that “the problem today is that most big decisions on economic policy in the euro zone are taken by governments looking at their own interests and their own people… That cannot work in a single currency zone”.
•Newly appointed Chinese PBOC advisor, Li Daokui, stated that “one way of relieving pressures on the CNY exchange rate is to make an adjustment on China’s own initiative”. He added that China should change its CNY policy before September because the debate could become a more heated political issue ahead of the mid-term elections in the United States in November.
•Another newly appointed PBOC advisor, Xia Bin, said that “(China) should resume the pre-crisis managed floating exchange rate as quickly as possible”.
•The Japanese government is to set incremental goals to reduce its reliance on debt in its June fiscal strategy. The ultimate goal is a steady reduction in the ratio of government debt to GDP, with intermediate steps of halving the primary balance deficit, reducing it to zero, and achieving a surplus. Dates have yet to be set for any of the targets.
•The UK’s Nationwide Building Society reported house prices rose 0.7% mom in March for a 9% gain in the year. That followed February’s -0.8% mom and +9.2% yoy reading. Nationwide said the last two months together pointed to a relatively flat situation for house prices, in line with the recent drop off in buyer enquiries.
•The UK banking system is far from being in the clear, at least as far as its property exposure is concerned. The WSJ picks up on research from DTZ that suggests 56% of the European property debt funding gap (existing debt and that available to replace it) is faced by only two countries: the UK and Spain. For the UK alone, the property debt funding requirement comes to a massive €42bn over the next two years. DTZ noted that property owners are reluctant to sell assets in order to avoid the debt roll as prices are rock bottom and hence want to avoid realising an outright loss.
•Fed member Evans comments that current policy remains appropriate and that inflationary concerns are minimal. Recall that Evans suggested a few weeks ago that extended period refers to about 6 months or so. A long while before he is ready to think about a policy switch then.
•US Treasury Secretary Geithner gave notice of the regulatory reforms that are coming (eventually). He said he’s getting close to gaining regulatory ability to shut down large, failing firms. He also pointed to the Volcker rule by which institutions that play a critical role in US markets must be subject to tougher rules on risk taking. He warned that commercial real estate remains a problem.
•Crude oil pared gains in New York after Japan posted a drop in industrial output (0.9%mom) for the first time in a year, raising concern that fuel demand in developed nations will be slow to recover. The country is the world’s third-largest crude user. The International Energy Agency on March 12 raised its 2010 demand forecast, with China accounting for almost a third of global consumption growth.
•Britain’s next nuclear power station will be built on Anglesey, North Wales, under a £7.5 billion plan being drawn up by E.ON and RWE. The 232-hectare plot would be due to enter service in 2020.

Inflation Worries To Resurface
Bank of England (BoE) chief economist Dale reported that inflation has responded much less to economic slack than the Bank’s models would have suggested. “The experience of many countries thus far is that inflation appears to be more resilient than our models would suggest. Inflation responds less to measures of slack”.

This is important stuff as central banks have used the extent of the output gap as the off-set to their extremely lax monetary policy. The BoE, Fed and ECB have all pointed to spare capacity as a reason why inflation won’t take off in the future. However, while this may be the central, public, face of the debate, the internal debate is less confident. At the BoE, Paul Tucker has previously warned against a reliance on the output gap to guard against inflation, while in the US the regional Fed’s have warned that the models used to make assumptions on inflation and the output gap are flawed and that the linkage might not be all that secure. This has huge implications for policy, especially if central banks continue with lower-for-longer at the same time as capacity is either destroyed or is made obsolete by advancement or simple moth balling.

Company News

•Stocks on the move today include Amec, the UK-based oil services provider, which rallied 3.5% after Collins Stewart analysts said the acquisition was “sensible” and consistent with the use of the company’s cash pile, according to an email to clients. “Amec now offers the best risk/reward balance in our services coverage.”
•Rensburg Sheppards surged 41% after Investec, the South African investment and private bank, said it agreed an all-share offer for the 53% of investment manager.
•UBS is up 4.2%, it’s the biggest gain since October, as people with knowledge of the situation said the bank generated about $2.3 billion of revenue at its fixed-income division in the first quarter as it rebuilt the unit following record losses. UBS may have revenue of almost $1 billion from credit alone, said the people, who declined to be identified because the figures haven’t been publicly released. UBS, in a statement today, said the $2.3 billion figure is “slightly higher” than its current estimate for the period.
•Carphone Warehouse rallied 8%, extending yesterday’s 7.3% increase as Morgan Stanley initiated coverage of the shares with an “overweight” recommendation after the mobile-phone retailer split into two companies.
•Royal Bank of Scotland has received close to 10 bids for the European arm of its private equity portfolio ahead of this week’s deadline for buyers to express their interest. Buyers including Lexington Partners, AlpInvest Partners and Credit Suisse may pay about €250 million for the unit.
•Vivendi and its competitors must extend the reach of content such as video games and music into emerging markets to remain global media leaders, CEO Jean-Bernard Levy said. “We can’t stay in a situation where the content companies make almost all of their money out of 10 countries” in the developed world. “You cannot say you are a global content company if in some way or other you do not properly address a few billion out of these emerging countries’ populations.” Vivendi may use cash from the $5.8 billion sale of its stake in NBC Universal for emerging-market purchases, or to buy out minority investors in some of its units.
•France’s Vinci will be awarded a contract worth over €7.2 billion for the construction and concession of a French high speed railway. “The battle was between Vinci and Bouygues and Vinci won it due to the price it managed to offer,” La Tribune reports.
•BHP Billiton has agreed with its Asian customers to change the pricing on its iron ore contracts from being priced annually to being priced on a shorter term basis, more closely reflecting the spot price. Rio Tinto has yet to confirm whether it has also managed to change its pricing terms, although I expect it to achieve a similar result, and there is a positive read across for the miners as a whole. The impact on the steelmakers is harder to gauge, and will be dependant on their ability to pass on higher input cost into higher steel prices, although with potentially 60% self sufficiency in iron ore by the end of 2010, ArcelorMittal looks better placed than ThyssenKrupp, with the latter exposed to long term contracts on the sales side.
•McInerney today released preliminary results for 2009 showing a pre exceptional loss of €25m on stronger than expected revenues of €300m. The group has completed 744 houses in 2009 (1352 in 2008) with a split of 582 in the UK and just 131 in Ireland. The UK operations are seeing increased levels of demand in 2010, driven by strong interest in social housing. Ireland however is still seeing price.
•IFG today released preliminary results showing revenues of €93m (€105.1m 2008) behind estimates of €98m. Revenues were impacted by the Irish property business to the tune of €7.6m as volumes in the Irish mortgage lending book fell to just 20% of the peak. Although management have taken a very conservative tone with regards to 2010 guidance (18c-20c), current consensus implies 17% growth in the year.
•The Daily Telegraph reported this morning that Vodafone was examining a merger with Verizon and had hired banks and accountants to review a potential transaction. This is a perennial rumour, and whilst possible in particular given the shared ownership of Verizon Wireless, valuations of the two businesses are likely to prove controversial, whilst Verizon’s appetite for a merger at this point is unknown. If it were to go ahead it would be a positive for Vodafone in ratings terms, but I would put the chances at considerably less than 50%.

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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