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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Markets Gets Clarity as Greece Gets Some Breathing Space

Stock-Markets / Financial Markets 2010 Apr 12, 2010 - 09:54 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleFor some time now markets have been crying out for clarity over the size and price of the EU’s proposed aid package for Greece. Prompted by last week’s developments in the Greek bond market, that clarity has finally arrived. Risk sentiment rebounded on Friday as newswires reported that EU finance ministers would be holding a conference call on Sunday to hammer out the details of a package that would be substantial in order to get the attention of markets. The EU Commissioner for Economic and Monetary Affairs, Ollie Rehn, said that EU finance ministers had agreed that Greece would be provided with up to €30bn of three-year loans at an interest rate of around 5% (the actual rate will be 300bps over the relevant Euribor swap rate with an additional 50bps service charge).

As of Friday’s close, this is a full two percentage points below the prevailing yield on Greek 3-year bonds (even after Friday’s 52bps rally) and 365bps higher than the yield on German 3-year bonds. Officials from the European Commission, the Greek Government, the ECB and the IMF will meet later today to discuss the IMF’s involvement (it is still envisaged that the IMF will contribute one-third of the package, making for a €45bn package in total). European bourses closed higher across the board on Friday as news of the likely package came through but European bond markets weakened (EU nations will fund the package in accordance with each country’s share of the ECB). EUR/USD rose a bigger figure and a half and has risen the same again this morning now that the details of the package have been confirmed. US equities also posted solid gains on Friday with the Dow closing within a whisker of 11,000. The only US data point of note was the February wholesale sales report, which showed growth in shipments continuing to outpace growth in inventories.

The start of the US Earnings season will be a primary focus throughout the week for investors who will be looking for fresh signs of economic growth. Dow component Alcoa kicks of earnings season after the market closes Monday (consensus is for EPS of 11c). Intel, JPMorgan Chase, Bank of America, Google and General Electric all also report earnings this week.

Today’s Market Moving Stories

•The Chinese released a rate trade deficit on Saturday. This owes more to the timing of the Chinese New Year than the global economy but it helps the discussions that are ongoing about a revaluation of the renminbi. Everything points to a move, but a modest one – one that does not massively disrupt the global economy and allows recovery to continue while appeasing the US policymakers. The shift in the world economic order is not slowing down.
•In the UK, a busy weekend of opinion polls saw the Labour party with just over 30% of the vote, the Conservatives with just under 40% and an outright majority for anyone remains elusive. This week’s highlight (I suppose) will be the first of the televised debates between the party leaders on Thursday. The risk must be that no-one delivers a ‘knockout blow’ and markets get jittery. It doesn’t take much to look at how the Eurozone rallied around Greece and conclude that the UK does not have that kind of support – though it does have the ability to let its currency slip.
•A German finance ministry spokesman said that “the fact that there is now a fire-extinguisher hanging on the wall says nothing at all about the probability of whether it will be needed”. He noted that a Summit agreement would be needed to activate aid and that conditions “should not be automatic”. He also adds that the Bundestag “would have to be consulted on any emergency aid”.
•German exports are up. Exports rose by 5.1% MoM in February, which is not only more than the market expected, but the sharpest month-on-month increase since June. This brought exports to 14.5% above the lowest level reached during the recession, but still around 22% off the pre-crisis trend. Imports rose by 0.2% MoM and as a result the surplus widened to €12.6 billion from €8 billion in January; the current account surplus is €9.1 billion. This evidences the importance of the foreign sector as a driver of the recovery in this phase of the cycle. The recovery in global demand for exports is particularly significant for Germany, a country that is clearly oriented towards foreign trade. For example, at €71.270 billion per month, German exports exceed the total combined exports of France, Italy and Spain.
•Business sentiment and manufacturing output are on their way up in France. The Bank of France business sentiment index advanced one point in March to 103, with a 2-point increase (to 92) in the confidence in services component.
•UK producer prices rose sharply in March, due partly (not entirely) to higher energy prices. Basic materials prices rose by 3.6% MoM, and are now 10.1% higher than one year ago. Factory gate prices increased by 0.9% month-on-month, pushing inflation in producer prices to 5%. There were price hikes in eight of the ten main product categories. This appears to indicate that inflation moderation in terms of consumer prices, currently one point over the Bank of England’s target at 3%, is perhaps not as fully guaranteed as the bank’s last report suggested, and that we could see some volatility and surprises in price indicators over the next few months.

Reaction To Greek Bailout News
Well, the first reaction has been to welcome the deal. Short positions in Greek stocks and in the euro have been squeezed. That first reaction will, I am sure, give way to fresh concern in due course. This latest package solves Greece’s short-term funding problems and helps them get through the next six weeks of debt rollovers, but it is really just a further extension of the core theme of the last few years. Just as western governments have had to step in to bail out their banks (who borrowed far too much cheap money to lend to over-indebted consumers), so the European leaders have stepped in to bail out the Greeks, who also borrowed far too much money during the good days. This leaves two questions dangling.

The first is how will the fundamental problem of excess borrowing be tackled? And the second is where does the rest of Europe get the money from? The answer is, to some degree, the same in both instances. The need to tackle excess borrowing is going to result in a higher savings rate (in Greece, as in the UK) and slower growth in spending as a result. That will be offset by very low interest rates. And the money will come from even more government bond issuance at the heart of the Eurozone, where low rates, steep yield curves and a lack of inflation make it possible for Germany to continue issuing debt at under 1.5%, making the 5% they charge to Greece look like a reasonable return.

There are plenty of reasons to fear that shuffling the debt from over-borrowed consumers to banks, to government and on to bigger governments will end in disaster. However, before that happens the escape route remains the same as it has always been. As long as inflation remains low, interest rates can stay anchored and the higher equity prices rise, the more tempting it is for investors to buy government debt anyway. And if there is any threat of a buyers’ strike, then the debt can still be bought by the central bank as quantitative easing is ramped up again. So the Europeans have bought some time to let the Greeks get their fiscal house in order. The price, of course, is that fiscal policy will need to be tightened at a delicate point in the economic cycle. And the upshot, as far as I can see, is that for all the enthusiasm, with which markets may greet this latest deal, the ECB is on hold for even longer and the euro will have to take some of the strain by weakening further.

Company News

•As confirmed in its recent results, Bank of Ireland is expected to buy back the Government warrants attached to the €3.5bn preference shares, increasing the size of the fund raising at the group beyond the €2.7bn capital requirement outlined by the Financial Regulator. Reports over the weekend suggest that the warrant buy back would boost the size of the fund raising by circa €450-500m. I had previously outlined a funding mix of €500m from subordinate conversion, €1 to €1.5bn in a rights issue, and €1bn preference shares conversion, with the Government maintaining a minority shareholding. The bank is believed to be primed to move for a rights issue pending the approval of its business plan by the EU.
•On AIB, there is more speculation on the potential shape of the group’s operations after the execution of its disposal plan. BNP and Soc Gen are named as potential suitors for its Polish business, while the future of the UK business very much in focus, with the group examining the sale of its the business banking arm and Northern operations. AIB may also be expected to repurchase the Government warrants on its stock, boosting the potential size of its fund raising.
•Home Retail surged 5.2%, its biggest intraday gain since December, after the Mail on Sunday reported that Asda may be interested in making an offer for the owner of Argos stores.
•Palm rallied 13% on news the company is working with Goldman Sachs and Frank Quattrone’s Qatalyst Partners to find a buyer. Taiwan’s HTC and China’s Lenovo have looked at the company and may make offers.
•Clean Energy Fuels declined 3.3% in Germany on a story the company co-founded by billionaire T. Boone Pickens to provide natural gas for motor vehicles may fall as much as 30% because of a potential warrant exercise by Pickens by 2012.
•This morning, UBS pre-announced a Q1 10 pre-tax profit of at least CHF 2.5bn. The bank didn’t provide much additional info. It only said that net new money outflows in all businesses were substantially lower than in Q4 09.
•British Airways strike action reduced Heathrow’s March traffic by 180,000, but the airport still reported a 0.4% increase in traffic to 5.2m passenger for the month relative to March 2009. Without the BA strike action, Heathrow traffic would have been up 3.8%. Stansted continues to struggle with traffic down 4.7% for both March and the first three months of the year, and while the London airports together reported a 0.7% drop in March, the YTD figure is still a 0.2% increase, despite the effects of the weather and the BA strike.
•Bank of America, JPMorgan Chase and Wells Fargo may have to set aside an additional $30 billion to cover possible losses on home-equity loans, an amount almost equal to analysts’ estimates of profit at the three banks this year. Recognising the home-equity loan losses is unfinished business from the housing bubble. Potential write downs on the loans are casting a shadow over earnings, as analysts try to determine how much, and how quickly, loan-loss expenses will decline from the industry wide peak reached in June 2009.
•Apple’s move into mobile advertising shows the market is competitive and US regulators should permit Google to buy AdMob, Google Chief Executive Eric Schmidt said. Apple CEO Steve Jobs said April 8 that they will offer iAd, an advertising platform that would compete with AdMob, on a new operating system for its iPhone. The announcement escalated Apple’s rivalry with Google for customers and application developers as demand for smartphones climbs.
•Adobe Systems is getting ready to unveil one of its most important products in years, a major rewrite of its graphics software that is causing a buzz in Silicon Valley as well as friction with Apple. The company’s Creative Suite product line accounts for more than half of Adobe’s revenue. Adobe is counting on the new version it plans to announce Monday – Creative Suite 5, or CS5 for short — to help it rebound from one of its toughest years ever. But the product also contains a feature that has added to tension between Adobe and Apple, which once were close allies. The companies have been feuding because Apple has banned Flash from products including the iPhone and new iPad.
•BASF, the world’s biggest chemical producer, is preparing a bid for Cognis, a maker of lotions, cleaning products and shampoos, that may value the closely held company at about €3 billion.

And Finally… Ratigan Exposes The Federal Reserve Con

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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