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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Financial Markets Euro Sovereign Debt Fears Linger

Stock-Markets / Financial Markets 2010 May 17, 2010 - 05:06 PM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleNasty end to a rollercoaster week as sovereign debt worries continued to trump some decent US economic data Friday. Crude oil slipped below $70bn and the Euro slumps sub 1.23 versus the USD as investors realize the solutions to the current fiscal crisis are all growth negative. I’d thought Friday would be a relatively quiet holiday thinned session but it pretty much all ended in tears. To kick off we’d some ill timed & ill judged comments from Deutsche Bank’s top man Ackerman that Greek debt RESTRUCTURING is still a possibility (there are things you think but don’t say in a position such as his).

Then there was the story that Sarkozy had threatened that la belle France would exit the euro if Germany didn’t aid Greece. One can’t expect markets to remain calm with this as a backdrop. The sheen is certainly wearing off of the €750bn package to stabilize the PIIGS. There is an increasing credibly gap & clear lack of unity of purpose. The bailout threw liquidity at a problem of excessive debt & solvency. Not the right tools for the job in many folks opinion.

The brand new week has started but the risk market remained under elevated pressure without any positive news to appease the market uneasiness over the Euro area’s fiscal problem and its after effect in the regional economy and currency. Asian stock markets sank sharply by 2-3%, oil prices once broke below $70/barrel for the first time in three moths and EUR/USD persistently made its way down the hill. The decline in EUR/USD seemed unstoppable as the pair breached below 1.23 to touch 1.2234, the lowest level in more than four years and is currently trading in upper-1.22s. The most notable mover among the G-10 currencies however was GBP, which dropped over 1.5% against USD possibly spurred by a series of articles over the weekend that reminded the market of the fiscal problem the UK faces. The UK Times carried a piece saying that the Labour government pursued a scorched earth policy before the general election, leaving behind billions of pounds of previously hidden spending commitments. The FT featured an article on the IMF report that warned the UK remains on course for one of the biggest rises in debt over the next 20 years of any of the wealthiest economies; the IMF said the UK could raise revenue equal to about 3.3% of GDP by improving collection of VAT and eliminating exemptions.

Today’s Market Moving Stories

•Overnight Asia, the poor relation of late had another torrid session. Chinese A-Shares shedding 5% and H-Shares close behind at -3%. Asian names with European exposure were sold aggressively and A-Shares came under pressure due to the fact that 24% of Chinese exports head to Europe. In Europe today, volumes are light but the market edges higher. Airlines are underperforming after more airport closures due to volcanic ash cloud, and Sir Stelios Haji-Ioannou resigning his position on Easyjet’s board. Hedge fund Man Group is also weak following the announcement of a $1.6bn acquisition of GLG, at a 55% premium to Friday’s close. BP is 2% better after saying that it is making progress in controlling the oil leak in the Gulf. In fixed income today peripherals PIIGS bond spreads are wider on the day with ECB buying slowing down and street still only seeing one-way selling of Greece.
•Money markets are showing rising levels of mistrust between Europe’s banks on concern an almost $1 trillion bailout package won’t prevent a sovereign debt default that might trigger a breakup of the euro. Royal Bank of Scotland Group Plc and Barclays Plc led financial firms punished by rising borrowing costs, British Bankers’ Association data show. The cost to hedge against losses on European bank bonds is 63 percent higher than a month ago.
•The new UK Chancellor George Osborne today confirmed that the new coalition government will publish its emergency Budget on Tuesday 22 June. Mr Osborne also announced that he would be setting out details regarding the £6bn of additional spending cuts next week, and reiterated that a “great majority” of the coalition’s planned £6bn in cuts will be used towards reducing the projected fiscal deficit. In a press conference this morning, Osborne officially announced the creation of the independent Office for Budget Responsibility, and will produce its first set of forecasts prior to the emergency Budget on 22 June.
•German Chancellor Angela Merkel said on Sunday that a $1 trillion EU rescue plan had only bought the euro zone time to tackle its fundamental problem — a yawning gap between its strongest and weakest economies. Merkel denounced what she called speculation in the past week against the euro currency. But Europe’s leaders could calm the situation only by sorting out the big economic divergence among the 16 countries which use the common currency. Germany’s budget deficit last year amounted to 3.3 percent of its gross domestic product compared with 13.6 percent in Greece, which can no longer borrow on international markets.
•ECB president Jean-Claude Trichet “There is a need for a quantum leap in the governance of the EUR area … We have bought time, nothing more”. He added that “It is not an attack on the EUR … It is clear that it is the primary responsibility of the Europeans to take the appropriate measures in order to counter the present severe tensions which have erupted in Europe”.
•EU Economic and Monetary Affairs Commissioner Olli Rehn said “This [bailout] mechanism must be made so unattractive that no leader of any (EU) country is voluntarily tempted to resort to this system … Just ask (Greek Prime Minister) George Papandreou if he is voluntarily willing to resort to this kind of system in the coming term”.
•French Finance Minister Christine Lagarde rebuffs reports that President Sarkozy threatened to remove France from EMU but states “What happened on Friday should not be overestimated … What we saw on Friday was what they call in the bourse a ‘consolidation’”. She added “Everyone is on board and all 16 (countries) want to defend their currency. It is our common good”. Lagarde added that “There can be no stowaways in the EUR boat. Everyone has to row”.
•A poll published in the FT states that 53% of French respondents ‘expect’France’s government to default within 10 years.
•Italian Economy Minister, Giulio Tremonti is quoted, by Il Corriere della Sera, as saying that a deficit cutting package worth EUR 27.6 Bn over two years, will include measures similar to those announced by other European nations.
•Today the New York Fed’s Empire State Manufacturing Survey recorded a sharp drop in May, with its headline index falling from +31.86 to +19.11, the lowest reading since January. Economists had expected only a slight dip, to +30.00. Expectations for six months out dropped from +55.70 to +42.11.

UK House Prices In Modest Gains.

U.K. house prices rose modestly in the weeks running up to the May 6 general election, although an increase in the supply of homes for sale coupled with a scarcity of mortgage finance means further gains may be limited, property website Rightmove said Monday. According to its monthly survey, prices demanded by sellers between April 11 and May 8 were up 0.7% on the corresponding period late March and early April, and were up 4.3% on the same period in 2009.

Company / Equity News

•Euro autos: EU April auto sales were down 7% on the prior year with the diverging trends in automotive markets reflective of the timing of incentive schemes. Germany was down 31% and Italy down 15% whilst France (+2%), UK (+11%) and Spain (+39%) are all still experiencing some tailwind. Central and Eastern European markets remains depressed whilst non-auto incentive Western European markets have generally bounced back from the lows of last year. Market share performance also reflects geographic mix impacts to some extent, but Renault remains the out-performer, whilst VW share has held steady. Fiat’s share in April was badly dented by the weaker Italian and German markets, whilst both Daimler and BMW continued their rebound. Ford, which had been a strong performer in the Euro market to date, lost share which, as was separately noted (Bloomberg), related to lower incentive levels compared to competitors VW and Opel suggesting that the government incentive plans are now being replaced with industry net price cuts. This remains a big variable for manufacturers as they try to stabilise Euro demand for 2010.
•Deutsche bank & UBS have both put out research notes advising clients to buy German equities reasoning that the DAV is more geared to a global growth story. Meanwhile Credit Suisse today recommended investors to increase their holding of European stocks after recent selloffs & Morgan Stanley reiterated its previous (mistimed) advise to be “overweight” European equities.
•Prudential Plc, Britain’s biggest insurer, is preparing to start a $21 billion rights offer today after a delay by U.K.’s Financial Services Authority, the Financial Times reported. The company and its advisers plan to watch the Asian markets today before fully committing to the start date, the London-based paper today quoted an unidentified person as saying. Prudential is selling the shares to help fund a $35.5 billion purchase of the main Asian life unit of American International Group Inc., the biggest acquisition in the insurer’s history. The FSA’s move to delay the start of the sale earlier this month raised speculation among investors and analysts that the purchase might falter. Prudential is expected to offer shareholders four new shares for each existing share they own at 135 pence to 140 pence each, similar to the terms outlined almost two weeks ago, the FT said. Yet it is likely to price the offer toward the bottom of the range now, after Prudential’s shares slid 16 pence since the issue’s delay to close at 542.5 pence on May 14.
•American Express has teamed up with UK private equity house Permira to bid for Royal Bank of Scotland’s payment processing division, as buy-out groups bring in commercial partners for the £2.5bn auction, reports the FT. Atos Origin, the French IT services group, meanwhile, has joined the buy-out consortium of CVC and Welsh Carson Anderson & Stowe to bid for RBS’s Global Merchant Services division. Global Merchant Services is centred on the WorldPay payments business and incorporates the Streamline cards operation that dominates in the UK. RBS – 70% owned by the UK government – must sell the unit under a European Commission state aid ruling. And Spain’s second-largest bank held talks with National Australia Bank Ltd. about creating a joint venture in the U.K. to buy branches being sold by Royal Bank of Scotland Group Plc, the Sunday Times said.
•GlaxoSmithKline Plc plans to double revenue from India and China by 2015 as the drugmaker cuts prices to catch up to Pfizer Inc., Sanofi-Aventis SA and Novartis AG in emerging markets. Glaxo aims to beat the industry’s 12 percent to 14 percent growth in developing-country sales, said Abbas Hussain, the president for emerging markets at the London-based company. Worldwide, drug revenue will increase at least 5 percent a year through 2014, according to IMS Health , which tracks pharmaceutical sales. The difference underscores the importance of winning business in emerging markets, Hussain said.
•Bank of Ireland of Ireland has announced a 3 for 2 rights issue at a price of 55c. The rights issuance is for 3.14 billion new ordinary shares to raise a target of €1.7 billion. This comes in addition to the €1.8 billion already raised from the placing, the conversion of Government preference shares and the bond exchange program. The total number of shares outstanding at the bank after the transaction will be 5.35 billion. The rights price represents a 64% discount to the closing price on Friday.
•The key Irish event for Ireland Inc. outside the Bank of Ireland rights transaction this week will be NTMA bond auction tomorrow. The auction is planned to raise between €1 billion and €1.5 billion. With Irish spreads ticking back out to 180 bps over Germany on 10 year debt, from 150-160bps after the ECB intervention, the read through from the bond markets will be a significantly importance to the outlook for the Irish market.
•Tullow Oil has signed a Heads of Agreement with the Surinam state oil company. This will ultimately lead to a PSA (Production Sharing Agreement) covering a licence agreement for Block 47 in the deepwater sector of the Suriname offshore. Tullow will hold an initial 100% stake in the licence during the exploration phase. The licence acquisition fits neatly with its existing South American holding offshore Guyana and French Guiana and is part of the Atlantic Twin exploration strategy borne out of its West African exploration success.
•Home improvement retailer Lowe’s said Monday its fiscal first-quarter profit rose to $489 million, or 34 cents a share, from $476 million, or 32 cents a share, in the year-ago period. Analysts polled by FactSet Research were looking for earnings of 31 cents a share, on average.
•Sirius XM Radio /quotes/comstock/15*!siri/quotes/nls/siriannounced Monday it’s lifting its 2010 adjusted sale target to $2.75 billion. The satellite radio company now expects net subscriber additions for the full year to be approximately 750,000

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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