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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

European Bourses in Red But U.S. Stocks Set For Rebound

Stock-Markets / Stock Markets 2010 Jun 02, 2010 - 03:56 PM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleTuesday saw another example of how nervous and jittery markets are prone to excesses, which result in exaggerated kneejerk reactions to the latest breaking news story. An AFP report that Lebanese forces had fired on Israeli warplanes triggering another late rush for the exit, leaving the Dow down 1.1%. Earlier in the day it had been buoyed by better than expected ISM (manufacturing) & constructing spending numbers.

Also yesterday, BP’ s continued failure to plug a leaking oil well dragged down energy producers with Transocean , Anadarko Petroleum and Halliburton all down more than 11%. Indeed the timeline now looks like they have abandoned attempts until August (with the hurricane season beckoning). The US administration has now instigated criminal & civil investigations into the fiasco. Analysts at Credit Suisse have put a total tag of $37bn on the potential total cost of the spill (BP to zero anyone?). I do recall saying ‘caveat emptor’ when I read that Morgan Stanley buy recommendation

The EURGBP broke the 0.84 level yesterday as we had been anticipating. The 0.84 level was technically quite significant and implies the potential for significant downside with 0.80 our initial target. Further strength in the Sterling would be a major positive for the export orientated “Ireland Inc” and for ISEQ listed companies with high UK exposure. One of the reasons behind the move was of course the market anticipating The Pru having to unwind cable hedges on the $20bn cash component of the now defunct deal with AIG.

Today’s Market Moving Stories
Stocks on the move this European morning include pharma giant Glaxosmithkline (up 2% today, its 5th straight day of gains) after a broker upgrade from Jeffries to a “buy” from a “hold” citing a “period of more sustainable earnings growth”. Another beneficiary of a broker upgrade today is Tate & Lyle (up 4%) after RBS upgraded the shares from a “hold” to a “buy”, seeing the current valuation as “an attractive entry point” Road & rail engineering company May Gurney Integrated Services is better by 3.5% after announcing a 7% increase in pretax profits. Advertising space buyer Aegis shed 3% on a Deutsche bank downgrade to “sell” from a “hold”. Telefonica have increased their bid for Portugal Tel’s Vivo this morning to €6.5bn from €5.7bn; Portugal Tel have called an EGM and 50% of shareholders need to vote in favour of the deal for it to go through. And lastly oil and gas exploration company Afren rallied 2.5% on the back of a Daily Mail story that BG Group are interested in the company.

Stateside, JP Morgan is up after an upgrade to a “buy” from “neutral” at UBS.

Drug company Amgen is ahead by 4.5% pre market after news that it’s bone strengthening denosumab injection will be the first treatment of its kind offered by primary doctors and not just specialists. And Goldman Sash’s upgrades are helping push two stocks higher today: mining equipment maker Joy Global and seeds company Monsanto.

Asian Activity
Overnight Asia seemed to shrug off the late US slide but optimism soon faded as China closed the morning session on the lows and dragged the region with it. Japan caught a bid in the morning session on news that the Prime Minister had resigned and been replaced by someone who is likely to strengthen ties with the US. Japan has now lost 5 Prime Ministers in 4 years, not even Real Madrid change their managers that often. But those early gains were erased on the re-open extending the China-led sell off across the region. Concern rose in China about the rise in labour costs after Foxconn and Honda raised wages in response to the strikes and suicides

Japan’s Prime Minister Yukio Hatoyama quit less than nine months after a landslide election victory as funding scandals and a broken promise to relocate U.S. troops cost him the support of four in five voters. Ichiro Ozawa, the party’s top campaign strategist, will also step down. The yen got smacked on the back of this today as it’s widely assumed that his successor (presumably Finance Minister Kan) will push for a weaker Yen

Weakening Euro
The exchange rate of the euro against the U.S. dollar stands at about a 10-year average and is not unusually low, French European Central Bank board member (and governor of the Bank of France) Christian Noyer said in a newspaper interview published today. So in code he’s saying that the ECB has no interest in a stronger euro at this time

This morning the Chinese state media Xinhua carried a story that Iran is selling in 3 stages their euro & Gold reserves for Dollars citing the Iranian Jaam-E-Jam newpaper. The amount mooted is some Euro 45bn. Hardly the kind of news the embattled currency needs!

Emerald Isle – Sparkle Returning?
A number of positive comments were published yesterday regarding the Irish economy. The OECD noted Irish exports will rise in 2010 for the first time since 2007, which will help Ireland pull out of the slump even as it continues to cut spending. The Wall Street journal commented that “Athens, Madrid, Lisbon, Rome and the rest have begun to follow (Ireland), finally having caught on that they can’t spend their way back to prosperity. The last year-and-a-half of Irish asceticism is now seen as Europe’s Ghost of Frugality Future, and politicians around Europe could do worse than to look at Ireland’s cuts as a model”.

Perhaps most interesting was US rating agency S&P’s comment that the house price slump may be “overdone” and that homes could be undervalued by about 12%, but that prices may fall another 10% before the market bottoms in 2011 as demand is likely to remain “very weak”. They note that the fundamentals driving the Irish market have “improved dramatically”.

Also two sentiment surveys published on Tuesday indicated that consumer confidence was steady in May and well above the lows of mid 2008, and that manufacturing PMI rose in May to 54.1 from 53.4 with underlying improvements in new orders and employment. In view of this improving sentiment and the greater scrutiny on (all) European sovereign’s ability to deliver austerity measures, end May Exchequer numbers due to be published by Ireland’s Department of Finance after the market close today take on growing importance. Finally I note Irish prime minister’s Brian Cowen’s comments to the Irish parliament that two preliminary reports into the country’s banking crisis may be published next week.

Other News
The latest UK household borrowing figures from the Bank of England suggest that housing market activity is still languishing at low levels. The number of mortgage approvals for new house purchase continued to edge up in April, but by less than 1,000. At 49,900, the level of approvals is still below the recent high of 60,000 seen last November and continues to suggest that the recent rise in house prices is unsustainable. What’s more, with consumer confidence weakening again, credit conditions slow to loosen and a fiscal squeeze looming, we still think that approvals will struggle to rise any more quickly than this. More encouraging was that the MPC’s preferred measure of broad money grew at a decent 6.6% three month annualised rate in April. But this is hardly a spectacular return on the £200bn of money the BoE has pumped into the economy and I still think that more QE later this year is on the cards.

The German government extending the ban on short selling is just typical of the bureaucratic mindset that is unable to understand that their own policies are the root cause of the problem. The joke doing the rounds in the City that Merkel intends to ban world cup teams scoring against Germany sums the mood up. As Spike Milligan said, the German sense of humour is no laughing matter.

In the UK, last weekend’s resignation of David Laws as Chief Secretary to the Treasury highlights the risk of ‘same old’ attitudes amongst the political masters. The fact is that he broke the rules on parliamentary expenses. For ordinary mortals, such misdeeds would carry stiffer penalties and the notion that he can return to the cabinet soon just shows the lack of a moral compass at the heart of government. His successor, Mr Alexander, does not impress my City chums and the new government is starting to look careless and amateurish. Its proposals on capital gains tax and pensions are misguided and need to be rescinded soon. The Chancellor, George Osborne, has his work cut out to convince the City that the upcoming Budget will do the job of tackling the deficit

According to Bloomberg, the biggest slump in commodities since Lehmans collapsed is undermining Wall Street forecasts for growth and higher prices. The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate 18 industrial materials including steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth. Commodities extended their slump yesterday, led by declines in industrial metals and energy prices, as separate reports showed manufacturing slowdowns last month in China, Europe and the U.S.

Greece has announced that it is to privatize the country’s rail & water systems.

This morning starts off with press very negative on global growth. The Wall
Street Journal seems to have overtaken Telegraph in being the gloomiest:

•For CMBS, ‘Worst Is Yet to Come’
•Fed’s Evans Signals Europe Crisis May Delay Rate Rise
•The Euro Zone Has Failed
•S&P: EU House Prices Could Dip Again
•Treasury Yields Drop, and No Bottom in Sight
And it continues – read the WSJ.COM if you feel the need for more gloom.

Company / Equity News

•Prudential said on Wednesday it is withdrawing from its effort to buy AIG’s Asian life insurer, an expected move by the U.K. group after AIG turned down a $30.4 billion offer for the company. As a result, Prudential said it will not proceed with a $21 billion rights offering in London and Hong Kong designed to raise money to finance the deal. Pru estimated the cost of the failed AIA transaction so far at about 450 million pounds ($659 million).
•Ian Smith, chief executive of Newcrest Mining (Australia’s biggest gold miner) industry voiced his confidence that miners and the government could resolve their fierce dispute over Canberra’s plans to slap the industry with a 40 percent profits tax.
•Banco Santander is considering selling its insurance business, which it valued at 4 billion euros in 2008. The bank could either sell the unit or seek a strategic partnership, and a formal sale process has not yet started, the newspaper said.
•Advanced Micro Devices., the second-biggest computer-processor maker,
will unveil the first working versions of its Fusion line of chips in a bid to offer graphics features that rival Intel Corp. can’t easily match.
•French building-to-broadcasting conglomerate Bouygues Tuesday said net profit rose 14% in the first quarter, helped by a financial gain, and notched up its sales guidance for the full year.
•Following confirmation of the contraction in the French car market last month (-11%) as the sales incentive programme winds down, Peugeot CEO Varin confirmed in an interview that higher end sales were compensating for the market decline.
•Quantas Airways low-cost offshoot, Jetstar, has formed an alliance with Air France-KLM, the companies said Wednesday. The two airlines will form an interline partnership encompassing all Jetstar ports, which total almost 60, the companies said in a joint statement.
Bloxham’s have an interesting piece on ICG this morning : they write
“Take a company with prodigious cashflows, strong market positions and proof that it can stay profitable in a recession. Now add a debt free balance sheet. These are the ingredients that make special dividends legitimate. Ryanair pulled the trigger on that policy yesterday so why can’t ICG do the same ? At it stands ICG is yielding 6.5% after recent stockmarket weakness. If we assume it pays a special dividend of €2 that will cost about €50m. With a debt free balance sheet by year end such a special payment will keep net debt to EBITDA to just 1x while ongoing regular dividends can continue. Moreover, if no use is found for cashflows in the ensuing two years, another €50m payout is plausible without harming the company’s finances. This adds up to big numbers. Two €2 special dividends and yearly €1 payments would generate €7 in the next three years, equivalent to 45% of today’s share price. Now that would show that ICG, like Ryanair, takes its equity investors very seriously”

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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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