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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Bears Remain In Charge

Stock-Markets / Financial Markets 2010 May 24, 2010 - 09:40 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticlePick a cliché, tin hat time, carnage , capitulation, get some tinned food for the bunker as the market blew a collective fuse Thursday. Yes the week long rout in stocks deepened, with U.S. benchmark indexes losing the most in more than a year, as economic reports cast doubts about the strength of the economic recovery and European leaders struggled in vain to contain the region’s debt crisis.

Commodities plunged and US Treasuries and German Bunds soared. The Standard & Poor’s 500 Index plunged 3.9 percent its biggest drop since April 2009 and closing below its 200 day moving average for the first time since July 2009. The Stoxx Europe 600 Index lost 2.2 percent and the S&P GSCI Index of commodities tumbled to the lowest since October. The losses accelerated even as the euro rallied as much as 1.5 percent to $1.2598 after earlier flirting with a four-year low after a bear squeeze courtesy of the Swiss National Bank buying Eur / CHF and rumoured ECB intervention.

Today’s Market Moving Stories

•There were some positive developments overnight. Messrs Merkel and Sarkozy are pledging unity here and agreed to coordinate efforts to support the eurozone. Dominique Strauss-Kahn ruled out a collapse of the euro , though quite a number of articles are now speculating on it.
•Both houses of the German parliament have today approved the EU rescue bill.
•Spain revised its forecast for its public deficit in 2012 down to 4.4% of gross domestic product from a previous estimate of 5.3%, according to a government document on Thursday.
•US Treasury Secretary Geithner will make stops in Britain and Germany next week to discuss troubled economic conditions there en route home from China, the Treasury department said. This is potentially very significant as when folks start losing money on equities the administration tends to get out a bazooka rather than a European water pistol.
•Other developments were also positive in a way. Portugal said it was launching a programme to raise cash from domestic savers. Other governments (Greece, Ireland …) have taken similar action this year.
•In other news the U.S. Senate approved a historic & sweeping overhaul of Wall Street regulation that would create a consumer protection agency, strengthen oversight of derivative trading and ban proprietary trading at banks. The Senate’s 59-39 vote yesterday sends the legislation into negotiations designed to reconcile differences with the House bill approved in December. “When this bill becomes law, the joyride on Wall Street will come to a screeching halt,” Senate Majority Leader Harry Reid, a Nevada Democrat, said after the vote. The bill contains measures that would have a profound impact on the U.S. financial industry, creating a mechanism for liquidating large failing financial firms and a council of regulators to monitor companies for threats to the economy. Among the strongest provisions is a plan to force banks to wall off their derivatives-trading operations, the subject of fierce lobbying by the industry and opposition from regulators including Federal Reserve Chairman Ben S. Bernanke.
•The legislation passed by the Senate yesterday would reshape the U.S. financial industry and its regulators with a sweep unseen since the aftermath of the Great Depression. It would change the way banks manage their balance sheets, hedge their interest-rate bets and invest their proceeds. It would chip away at the secrecy of the Federal Reserve, create a council of regulators and make it easier for investors to sue credit raters. It would cut the fees debit-card issuers collect from merchants. Wall Street view. The Senate bill’s provisions could cut the profits of the largest U.S. banks by 13 percent, Goldman Sachs said in a May 17 report. The biggest impact would come from stricter rules on derivatives and the powers of a new consumer agency to write regulations affecting mortgage fees and other financial products. Each of those provisions would hurt bank incomes by 4 percent, Goldman analysts estimated.
•Korean Peninsula: South Korean President Lee Myung-bak states that the sinking of the Cheonan corvette, which is being blamed on the North, “… was a military provocation and violation of the UN Charter and the truce agreement … since this case is very serious and has a grave importance, we cannot afford to have a slightest mistake and will be very prudent in all response measures we take”. Defence Minister Kim Tae-young said Seoul would work with the international community to come up with non-military sanctions.
•The North’s colourfully named “Committee for the Peaceful Reunification of the Fatherland” said “From this time on, we will regard the situation as a phase of war and will be responding resolutely to all problems in North-South relations … If the South puppet group comes out with ‘response’ and ‘retaliation’, we will respond strongly with ruthless punishment including the total shutdown of North-South ties, abrogation of the North-South agreement on non-aggression and abolition of all North-South cooperation projects.”
•Japan: Finance minister Naoto Kan said “The EUR is falling. Currency levels should be set by markets. But close watch is needed so that JPY rises do not become excessive … Markets in principle should determine foreign exchange rates, but I think we must closely watch (markets) and ensure that there won’t be any excessive JPY rises”.
•As widely expected, the BoJ left monetary policy unchanged today but upgraded its assessment of the economy.
•The key German Ifo business climate index declined slightly from 101.6 to 101.5. Business expectations were down from 104.0 to 103.7.
•The May PMI release suggests that the peak of the eurozone manufacturing cycle is behind us, while services activity keeps expanding at a decent pace.
•UK business investment rises by 6.0% q/q in Q1, an outturn that was significantly stronger than the market had expected
•And UK public sector net borrowing totals £10.0bn in April in spite of boost in receipts due to bank payroll tax broadly in line with consensus expectations (consensus: £10.9bn).
•The U.K. has about 50 billion pounds of troubled bank loans made against commercial property following the slump in real estate values from the market’s peak, the Financial Times reported, citing a study to be published by De Montfort University today. Of the 228.3 billion pounds of total outstanding property loans, about a fifth are in default or in breach of terms, the newspaper said.

Politicians Are Not Market Experts.

Two Quotes from yesterday that tells exactly what I think – how wrong can you be ?
“As a German citizen, I wish to apologise for the stupidity of my government”….Hans Redeker, Chief Currency Strategist at BNP Paribas.
Merkel says “Politicians are no Financial Market Experts”.

That is probably one of the few things Merkel did get right this week – how wrong can you be, because Merkel just wanted to “calm” markets .

Markets were almost back to normality – until the BAFIN announcement hit the wires Tuesday night. A move that all can now see was a shallow ill conceived domestic political ploy that backfired big time. Politicians don’t get it – they think stock markets will rally if they “ban” short selling – I can only say that S&P is down almost 8% since the announcement – DAX down 6% as well – and higher yielding currencies has been hammered . Essentially, everything that has gone up in the markets is now going down and everything that has gone down is now going up. This is typical as investors run for cover and unwind positions. You get a ‘flight to liquidity’ and a ‘flight to safety’, so investors put their funds in US and German bonds and flee emerging markets, cash-in any profits they have made in the stock market and bale out of long positions in commodities (that have been on a rip over the past year or so).

Seemingly perversely, currencies like the yen and Swiss franc go up but this is because leveraged investors like hedge funds who have borrowed in these low yielding currencies are forced by the meltdown to repay their borrowings. Why has the euro gone up (admittedly a minor recovery against the dollar so far)? It is only because traders are unwinding record short positions in the euro and record long positions in the dollar. I do not expect any recovery to be sustained and a longer-term decline in the euro looks probable given all the problems in the Eurozone.

So what happens next? Markets will remain jittery until there is a better policy response from the G7 and G20. But historically there is nothing quite a like a good old fashioned stock market crash to concentrate the minds of policymakers so don’t be surprised if we see plans/measures to help soothe investor confidence over the weekend. Mind you I fancied a short cover squeeze today & how wrong I was.

Company / Equity News

•Dell., the world’s third-largest personal-computer maker, reported first quartergross margins that missed some analysts’ estimates after rising component costs eroded the benefit of a rebound in corporate demand.
•Vodafone is in early-stage talks about selling its controlling stake in Vodafone Egypt, the country’s second-largest mobile phone operator, in a deal that could be worth £3bn, reports the FT. Telecom Egypt, the country’s leading fixed-line phone company, has approached Vodafone about buying the UK group’s 55% stake in Vodafone Egypt. People close to the matter said the talks began about one month ago, but Telecom Egypt said it was ‘not aware’ of the talks.
•The results of the German auction were announced yesterday with Telefonica emerging as the winner of the third tranche of 800 megahertz spectrum alongside DT and Vodafone. Each of these three paid Euro 1.3-1.4Bn for their spectrum whilst KPN paid Euro 0.3Bn for much less sought after bandwidth. Overall the results should be something of a relief for the sector given the inflated Indian auction which finished the day before.
•Google introduced software that puts Web content on television to persuade more consumers to use the Internet in their living rooms and view dvertisements that generate revenue. The new tool, Google TV, will work with Intel Corp. chips in products by Sony Corp. and Logitech International SA, Google said today at a conference in San Francisco.

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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