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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Markets Set For A Risky Wednesday

Stock-Markets / Stock Markets 2010 Jun 09, 2010 - 09:43 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleU.S. stocks rose Tuesday, pushing the Standard & Poor’s 500 Index up 1.1% after another rollercoaster ride of a day. The index had swung between gains and losses at least 13 times, as a rally in commodity markets boosted oil and metals producers and overshadowed losses in semiconductor companies

Overnight in Asia was all about Chinese whispers. The region was heading for yet another dull drift – talk was that Friday’s CPI will come in at 3.1% (vs 2.8% prior) which has raises the chance of another sneaky RRR interest rate hikelike the one we had ahead of Chinese New Year. However the picture changed shortly before 2pm when China started to run on a new collection of rumours. Firstly the banking sector moved as Citic Bank traded limit up on talk of an asset injection from the parent company. This was swiftly followed by a Reuters story that tomorrow’s May export data will show a 50% increase rather than the 32% gain expected (miners like BHP Bilition & Rio Tinto are up on this story). But the Nikkei showed a notable underperformance, despite a stronger than expected increase in April machinery orders. TheYomiuri Newspaper’s report on Japan’s new national strategy minister Arai facing false accounting allegations may be at least partially responsible for this, as the report suggests Japan’s fresh new Cabinet already facing trouble. The stronger Yen is also weighing on exporters.

The Action So Far
European markets opened higher today on the back of a strong close in the US and in China. Numbers from Inditex (Zara), Elekta and online clothing retailer ASOS all came in better than expectations while Remy Cointreau disappointed. BP traded lower on an FT Alphaville story that 42 members of Congress have sent a letter to Tony Hayward demanding the dividend be suspended until the spill in the Gulf is cleaned up. Utilities also underperformed: National Grid weighed on the sector as investors speculate Monday’s rump placing will be larger than expected. Misys, +18.5%, is the top performing name in the FTSE 250 after announcing it would sell its majority stake in Allscripts business for ~$1.3bn. Travel and Leisure names outperform with Intercontinental +2.6% after the Marriot Chief Operating Officer said Q2 revenue per available room was up 7.3% versus guidance of 7%. Euro sovereign country debt spreads are a tad tighter today indicative of a more risk-on mood which should bode well for equities for the rest of the day

Today’s Market Moving Stories
The day after the markets gave a thumbs down to the EFSF the FT’s Lex column puts up a question that’s been hanging in the markets for a couple of weeks – how can the EU’s EFSF gain and hold onto a AAA rating given its structure? Most immediately, the FT points out, only six of the contributor nations (and only two of the top four owners) has a AAA status of their own, and one – Germany – might yet be legally prevented from participating. Lex comments ‘However, the danger is that its structure proves too cumbersome in a crisis or collapses under the weight of its central contradiction: that one group of financially stretched countries should be expected to bail out another.’ The most striking aspect of the plan is that funding bonds will not be issued until after an aid request has been made. But from a practical perspective, this looks bad: were a member state (other than Greece) request aid then it would necessarily be close to default and the bond markets would already be in a mess.

German Chancellor Merkel and French president Sarkozy have written to the EU Commission to request an examination of an EU wide ban on naked short selling. They propose that a ban is extended on all shares, sovereign bonds and sovereign CDS. In their letter, they claimed ‘Taking into account the markets’ recent evolutions, we believe there is an urgent need that the Commission accelerates its work regarding framing sovereign CDS and naked short selling, and presents ahead of the July EcoFin all of the possible actions.’ Interesting to see France now behind this action as well. Up to now Germany’s decision to ban such activity has been generally frowned upon as unwise. Banning activity does not fix the problem – especially given London is the centre of much of this activity.

FOMC hawk Hoenig was back with another call for the Fed to get on and raise interest rates to 1% by the end of the summer. Having dissented at the last few meetings with regard to the language, it looks increasingly likely Hoenig will use the June 23rd FOMC to formalise his call for an actual interest rate hike. His last few speeches have all included that call for rates to be jacked up. More widely, Hoenig said the US economy had stabilised with the crisis, for the most part, having passed. He stressed that 1% wasn’t a true tightening – policy would still remain extremely accommodative, but at least it would be closer to neutral given economic circumstances.

The British Retail Consortium reported overall shop prices rose 1.8% yoy in May, a slowdown from April’s 2.0% pace. Food prices accelerated to 2.2% from 2.0%, but non-food prices slowed to 1.6% from 2.0%. Clothes and electrical goods were noted as being under particular downward pressure.

The US budget strategy is under increasingly scrutiny as President Obama looks to be stuck out on his own in borrowing his way out of difficulties. In 2009 it was the done thing, but as Europe has found, the markets will only tolerate that behaviour for a very short period. The NY Times reports today that the political mood in the US has turned against Obama’s fiscal stimulus and instead towards a more austere outlook. The job creation programs, for instance, are under threat. This is all the more problematic for Obama as most observers, including Fed chairman Bernanke, warn that unemployment will remain high for some time. The NY Times point out that while the White House talks of the need to control spending, its actual policies remain expansionary. This is an issue that’s raised attention among headline economists – Paul Krugman suggested that reining in spending now would be a mistake and would choke off the economy. Expansionary policy leading to improve d GDP growth would be the better way forward. He said he could not under stand the motivations of European leaders to tighten their budgets so aggressively. Bernanke’s take on all this has been more mainstream – that the US needs to get its house in order. He speaks to the budget committee later today and is likely to get his opinion across clearly.

Japan’s core machinery orders rose more than expected in April, suggesting solid exports to Asia will prompt companies to gradually increase capital spending. The rise underscores the view that Japan’s economy is on course for a moderate recovery. But many economists say the outlook is not strong as companies still face excess capacity and may become wary of spending due to market jitters over the European debt crisis.

Bank credit-default swaps surged near to a record on concern Spanish lenders will have to raise $60 billion to shore up capital as lawmakers struggle to finance a swollen budget deficit. The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed as much as 14 basis points to 208, approaching the all-time closing high of 210 basis points set in March 2009. Banco Santander SA, Spain’s biggest bank, increased 23 basis points to a record 258, according to CMA DataVision. Spanish lenders need as much as 50 billion euros ($60 billion) of capital, according to Banco Bilbao Vizcaya Argentaria SA, as they face mounting writedowns triggered by a housing market collapse and losses on government bond holdings. Civil servants went on strike today to protest at Prime Minister Jose Luis Rodriguez Zapatero’s efforts to tame the euro area’s third-largest deficit.

UBS have a very interesting piece of FX research out today in which they postulate that the Swiss France is set to as a proxy for the old Deutschmark . Investors want a hard currency alternative to the Dollar, so the Eurozone debt crisis has resulted in strong demand for the Swiss franc. This mega-trend is likely to continue through 2010-2020 as investors increasingly hold the currency as a substitute for the old German mark. The Swiss franc already is a good proxy for Germany’s economy. Twenty per cent of Swiss exports go to Switzerland’s northern neighbour. As Germany’s own exporters benefit from the weakness of the euro globally over the next few years, German demand for Swiss exports will rise. This will boost Switzerland’s trade balance and the value of the franc.In addition, the massive increase in the Swiss National Bank’s reserves over the past year has resulted in the central bank holding foreign assets far exceeding most other European institutions. This will support confidence in the franc – just as the Bundesbank’s reserves in the past bolstered the Deutschemark.

Company / Equity News

•Royal Bank of Scotland has accelerated its asset sell-off programme, drawing up shortlists for two key businesses that are expected to fetch about £4bn for the government-backed bank, reports the FT. Morgan Stanley and Jefferies are among final bidders for RBS Sempra Commodities’ North America business, which could reach a total value of $2bn, and has also narrowed down the bidders for its £2.5bn payment processing arm to two US buy-out consortiums.
•UBS upped France Telecom to Neutral, from Sell; HSBC cut Santander to Neutral, from Overweight; Morgan Stanley upped Corio, Unibail-Rodamco to Overweight, from Equalweight;
•K+S AG, Europe’s biggest potash producer, is considering selling its Compo home-and-garden fertilizer unit to focus on potash and salt.
•Spain’s Inditex , the fast growing owner of the Zara retail chain, Wednesday reported a 64% jump in first-quarter net profit, as shoppers snapped up its chic yet cheap spring and summer garments, and it continued global expansion. The clothing giant, the biggest in the world by revenue, said net profit for the fiscal first quarter ended April. 30 rose to EUR301 million from EUR184 million a year earlier. A Dow Jones Newswires survey of 16 analysts on average expected net profit of EUR251.5 million.
•Texas Instruments , the second- biggest U.S. chipmaker, said sales and profit will be at the upper end of earlier targets, buoyed by demand for industrial machinery. Second-quarter profit will be 60 cents to 64 cents on sales of at least $3.45 billion, the Dallas-based company said today in a statement. That compares with April predictions of 56 cents to 64 cents a share on revenue of at least $3.31 billion. Texas Instruments is the biggest producer of analog chips, which go into everything from automobiles to digital cameras, making its earnings an indicator of demand for electronics.
•Tullow Oil announced this morning that the Mahogany-5 appraisal well offshore Ghana was successful. In the short-term, the next catalyst for the stock is news from the Owo-1 well on the deep water Tano block which is expected to spud over the next month.
•Bank of Ireland announced that it received 94.6% take up for its EUR 1.7bn rights issue that will bolster its capital which was higher than market expectations. The good results of BoI’s right issue will pave the way for Allied Irish Banks and Irish Life & Permanent, which are expected to come to the market in the near term. Bank of Ireland also announced the final tender results of its debt to equity exchange offer.

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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