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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Goldman And The PIIGS Keep Stock Market Jittery

Stock-Markets / Stock Markets 2010 Apr 28, 2010 - 08:54 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleThe price action and news headlines Tuesday were dominated by US rating agency Standard and Poor’s decision to downgrade the sovereign ratings of Greece and Portugal to BB+ (by a savage and unprecedented three notches) and A- (down two notches) respectively. This saw a dramatic further significant ballooning in bond spreads and CDS to fresh highs whilst the domestic equity markets were down 6% and 5% respectively. With the downgrade of Greek sovereign ratings, the fate of Greek depends on ratings action by the other two major rating agencies Moody’s and Fitch.

Downgrades from these agencies seem imminent, meaning that the ECB would have to address the eligibility of Greek banks to access current refinancing facilities via REPO. This all proved too much for the major European bourses to take with the EuroStoxx 600 shedding 3.1%. And the S&P 500 closed poorly after breaking out of what had been a close to three-month uptrend to be down 2.3%. Financials led the way lower – Goldman Sachs bucking the trend even as some of its brass necked key executives testified before a Senate subcommittee – but the decline was broad-based. The flight to quality bid lifted Treasuries and the Dollar. Certainly events yesterday should help concentrate the attention of EU leaders as they seek to tie down the details of Greece’s aid package.

Stateside yesterday Alcoa and Caterpillar led declines in all but two of the 30 shares in the Dow. Ford fell 6.2% from a five-year high as an analyst said first-quarter results were “unsustainable”.

Today earnings both from European corporates as well as from financials continue to surprise on the upside, with DSM, Royal Dutch Shell and Iberdrola reporting earnings ahead of expectations this morning. In financials earnings published by BBVA, Nordea Bank, Svenska Handelsbanken and SEB also beat analysts’ expectations, with BBVA reporting a stabilising bad loans rate. However, all the positive momentum that could have been created by this is completely offset by the persistently deteriorating sovereign debt concerns. Europe really needs to see an unreserved and magnanimous package very soon from the IMF/EU, otherwise soon the shorts shall be proved right, that following Bear and Lehmans, if you keep chipping away in this market, then any dam will eventually burst.

In the New York session, the FOMC will announce their decision on monetary policy. I expect the statement to signal more optimism on growth but dovishness on inflation, a combination which would warrant no change in the Fed’s extended period language. The market may also focus on whether any decision on asset sales will be made or not. I think that it’s unlikely at this stage. So on balance, I believe that the impact from the FOMC should be limited. Today pre market the Dow future has shrugged off the latest PIIGS bond bloodbath in Europe. And I do expect some concrete practical proposals to come out of the various chin wags between mesers Merkel, the ECB’s Trichet, the IMF’s Strauss Kahn the German finance minister as they are drinking at the last chance saloon. But the latest is that Germany “may vote” (on the Greek aid package) “on May 3rd”.

Today’s Market Moving Stories

•The Greek securities regulator announces that, effective April 28th to June 28th, there will be a ban on short-selling in Greek shares.
•The FT writes that the IMF is looking at raising its share of Greece’s financial rescue package by €10bn “amid fears that the planned €45bn bail-out will fail to prevent the country’s debt crisis from spiralling out of control”.
•Holders of Greek bonds may lose as much as €200 billion should the government default, according to Standard and Poor’s. Bondholders may recover only 30% and 50% for their investments if the nation fails to make debt payments. Europe’s most-indebted country relative to the size of its economy has about €296 billion of bonds outstanding.
•During a visit to Tokyo, EU President Herman Van Rompuy comments that Euro-zone heads of state will meet around May 10th and that “Negotiations [between the EU, ECB and IMF] are going on, they are well on track, and no question about restructuring of the debt”.
•Telegraph writer Ambrose Evans-Pritchard writes that ‘the ECB may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy’. He notes that ‘the issue of the ECB buying bonds is a political minefield… and the start of a slippery slope towards in an “inflation union”’ but adds that ‘the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way’.
•Overnight Japan’s retail sales rose at the fastest pace in 13 years, adding to evidence that the nation’s export-led recovery is benefiting consumers. Sales advanced 4.7% from a year earlier, the Trade Ministry said. The median forecast of 15 economists was for a 3.6% gain. Accelerating growth overseas has revived Japan’s exports and factory output, bolstering paychecks and stabilizing unemployment. The gains are supporting the consumer spending rebound, helping offset price declines.
•US manufacturers will fill fewer than 30% of 2 million lost factory jobs as the economy recovers over the next six years, according to David Huether, chief economist for the National Association of Manufacturers. Most of the hiring will come in 2011 and 2012.
•This morning, the ECB published the Bank Lending Survey for the first quarter of 2010. For corporates, the net percentage of banks reporting a tightening of credit standards for loans to enterprises remained unchanged at 3%, thus interrupting the steady improvement recorded in the previous quarters. As for expectations, banks keep seeing a net tightening in the second quarter, albeit slightly improving from the previous one (from 4% to 2%).
•Europe’s air transport sector lost as much as €2.5bn as a result of the Icelandic volcanic eruption, according to a preliminary assessment from the European Commission that is expected to set the stage for an industry bail-out. Europe’s transport commissioner said the Commission was inclined to approve state aid for carriers based on the extraordinary nature of the week-long event.

Greece Looking Similar To Iceland
Germany is prepared to support Greece with a ‘law to maintain the stability of the monetary union’, according to a draft paper prepared for the German parliament. Trichet and Strauss-Kahn will today try to convince German lawmakers to make up their minds and overcome domestic concerns about aid to Greece. Following conclusion of IMF/ECB/Eurogroup talks on 2 May, there will be another vote on austerity measures in Greece by 7 May and ratification of the aid package by Eurozone governments before 10 May. This will provide sufficient time for funds to reach Greece prior to the €8.5bn 19 May redemption. It is believed that the IMF and Eurogroup are prepared to offer more funds and over a longer period, at least €100bn over 2-3 years, rather than €45bn over one year. The downgrade of Greece to BB+ (Negative outlook) by S&P makes it the first Eurozone Sovereign to carry a sub-investment grade rating since the introduction of the single currency.

The 5-year CDS on Greek debt hit 893bp. By way of comparison, the equivalent CDS on Ukranian debt stood at 547bp while for Venezuela the cost would have been 846bp. Even more tellingly though, the Greek CDS continued to perform in an eerily similar fashion to that of Iceland during the 2008 crisis. As noted on Friday, in the days running up to the Icelandic crisis, the sequential closing prices of the 5-year CDS were 350bp, 350bp, 500bp, 600bp, 700bp, 1000bp. The closing prices so far this week for the 5-year Greek CDS have been 463bp, 460bp, 490bp, 612bp, 642bp, 768bp and 893bp.

In the same way that it became apparent during the week of September 8th 2008 that a resolution of some kind would need to be found that weekend to the unfolding Lehman saga, the message that has emerging from the markets this week is that a resolution to the Greek crisis needs to be found in the next few days. Although Greece itself may well be able to survive until May 19th, a failure to resolve the issue runs the risk of sparking contagion through southern Europe (as yesterday’s bill auction in Italy and the widening spreads on Portuguese debt suggest).

Back in the days of the ERM, the simple answer to a crisis of this kind (one that, almost invariably, would be sparked by German intransigence) would have been for the nation in trouble to simply leave the system (even if only temporarily). Not only would the pressures elsewhere in Europe rapidly dissipate but, more importantly, domestic asset markets would stage a very healthy recovery (EG as in the UK in 1992). Unfortunately, this no longer remains an option for nations such as Greece. Even if it were legally possible for Athens to reintroduce the Drachma, Greece would be left encumbered with a debt burden that was still denominated in EURs, thereby effectively increasing the scale of the problem (assuming that the drachma plunged in value in the aftermath of its reintroduction). As such, unless there is a marked change in message from Germany (which goes against the history of the past 20 years) or a dramatic move by the ECB, it is difficult to see how this ends in a constructive manner. What I do feel certain of, however, is that we will find out how it ends quickly.

Company News

•Prudential had a meeting with Capital World Investors about its largest shareholder’s potential plan for a break-up of the company. Capital investment manager Patrice Collette was at the meeting along with other Capital fund managers, the newspaper said. Collette has gauged the interest of Aviva, Resolution and an unknown party about a group bid to split up Prudential.
•Semiconductor maker Infineon Technologies swung to a second quarter net profit on growing demand for its logic chips, and further raised its full year guidance. Net profit for the fiscal second quarter was €79 million. That compares with a net loss of €258 million a year ago, when its bottom line was hit by a €106 million net loss from discontinued operations at memory chip unit Qimonda.
•Royal Dutch Shell, which competes with BP as Europe’s biggest oil company, posted a 57% increase in first-quarter profit on a rebound in crude prices and improved refining margins. Net income rose to $5.48 billion from $3.49 billion a year earlier. Chief Executive Officer Peter Voser is cutting thousands of jobs and seeking to sell refineries to close a performance gap withBP. Shell’s earnings were expected to rise 36% to $4.03 billion, according to the median estimate of analysts.
•Pharmaceutical and chemicals company Merck raised its full year outlook after it beat forecasts for the first quarter on its recovering liquid crystals business and on the absence of a charge that hit last year’s figure. Net profit for the quarter to end-March soared to €191.4 million, from €57 million a year earlier. The result solidly beat analysts’ estimates of €139 million.
•The range for the Amadeus (flight booking system) IPO has been refined to between €10.5 and €11.25, which should raise around €1.32bn for a 26.7% stake in the Company. Air France will receive around €210m as a result of the IPO, seeing their stake reduce from 23.14% to 15.2%.
•Renault, France’s second-largest carmaker said first-quarter revenue rose 28% to €9.07 billion, spurred by a new version of the best-selling Megane and the continuing impact of cash-for-clunkers incentives.
•Dow Chemical said its first-quarter profit climbed to $466 million, or 41 cents a share. Analysts expected earnings of 29 cents a share on sales of $12.86 billion. Synergies related to the acquisition of Rohm and Haas and structural cost reductions were $275 million in the quarter. The stock is up 1.5% pre market.
•Google’s mobile-phone alliance is showing signs of strain. After Verizon Wireless scrapped plans to offer Google’s Nexus One handset this week, Motorola said it opted for a mapping software other than Google’s version. Samsung has developed an alternative mobile-phone operating system, and HTC is considering follow suit. By shunning the Nexus One and adding rival applications to phones, the handset makers and carriers may loosen Google’s control over how customers use wireless devices. The company worked with partners three years ago to create Android, an operating system that the industry could share. Recent setbacks may hamper Google’s efforts to replicate the success of its Web search engine in the burgeoning mobile advertising market.
•Tyco reported fiscal second-quarter net income of $304 million, or 66 cents a share. Excluding special items, adjusted earnings were 64 cents a share. A survey of analysts produced a consensus forecast of 52 cents.

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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