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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stocks Mixed Ahead of the Earnings Season Kickoff

Stock-Markets / Stock Markets 2010 Jul 12, 2010 - 11:17 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleAfter the world cup fiesta, its time for the US earnings season to kickoff with Alcoa (after the bell tonight) and Intel, Google, Bank of America, JP Morgan among the big corporations due to communicate results to the market. Over the past 10 years there have been seven quarterly reporting seasons where more than 70% of S&P500 constituents have beaten consensus forecasts, and in six the market responded favourably posting an average gain of 6.3% over a three-month period.

The one exception is that in the past three months, Q1 results released in Q2 have failed to support the market. This is very much the exception and not the rule, and many analysts believe that with the macro risks already aggressively discounted, that we should see markets better reflecting corporate news flow. The strength of the most recent results season forced big, ex-post, upward revisions to Q1 earning numbers. However, Q2 forecasts were not adjusted accordingly. That looks inconsistent with the macro view (eg, in the euro area we expect a strong GDP growth of 0.8% qoq which compares with 0.2% qoq in Q1) and thus there is room for earnings to be a catalyst for a positive market reaction.

One interesting question in this reporting season is how exchange rate developments have affected companies’ earnings. Given the usual long-term hedging activities, the impact should be limited. However, surprises cannot be ruled out and especially at the beginning of the earnings season it will be interesting to see if a pattern emerges. In the coming weeks, there is a chance of a temporarily friendlier trend because of the concentration of the (positive) corporate reports on 2Q.

Stocks on the move this holiday thinned Monday in Europe include BP, which has rallied 7% on two stories. Firstly a speculative Sunday Times reported that Exxon has been told by the U.S. government it can look at a potential bid for the U.K. oil company (see below). And secondly a report that BP are in talks to sell assets to Apache Corp. for a price of less than $12 billion (more details below).

Volkswagen is ahead by 2% after news that thee biggest foreign carmaker in China boosted sales in the nation by an impressive 46% in the first half after introducing new models to attract consumers in the world’s largest vehicle market.

Today’s Market Moving Stories

•The NY Times has a good article (in fact quoting RBS economist Richard Barwell) about the USD5trn of bank refinancing to be done through 2012, USD2.6trn of this in Europe (US has a ‘mere’ USD1.3trn in comparison). Many quotes about it not being a problem since governments will do what is necessary (extend guarantees?), but this then has implications for sovereigns. As risk premia are rising, the question is, how much do the banks need to rollover and what does the rising debt service mean for their balance sheet.
•In the UK the ICAEW accountancy institute allege there is another £1.13trn black hole in the public finances. This is the same as the £1trn estimate we said in Friday’s weekly is regularly estimated as the debt hidden by past governments of public sector pensions and PFI. Given this govt is committed to be open, and has the OBR, one wonders if treatment of this may change.
•The U.K.’s youngest finance minister since 1886 said Sunday he’s “personally quite attracted” to a measure within U.S. financial overhaul plans that would curb proprietary trading by banks. During an interview on CNN’s “Fareed Zakaria GPS,” 39-year-old George Osborne, the U.K.’s Chancellor of the Exchequer, said it’s been his position for more than a year “that large-scale proprietary trading and large-scale internal hedge funds don’t sit totally easily alongside retail banking.” The measure, known as “the Volcker Rule,” as it was proposed by former Fed Chairman Paul Volcker, would curb propriety trading by the largest financial firms, though banks could make de minimus investments in hedge and private-equity funds. Those investments would be limited to 3% or less of a bank’s Tier 1 capital. Banks would be prohibited from bailing out a fund in which they are invested. In the context of the U.K., the Chancellor of the Exchequer said he’s asked economist John Vickers to chair an independent banking commission that’s made of consumer interest advocates and investment bankers.
•Germany and France are pressing ahead with their proposal for an EU wide tax on financial transactions, reports the FT, to be discussed at the Ecofin meeting this week. The initiative comes three weeks after they failed to get a global agreement about a transaction tax at the G20 meeting. The fate of the tax depends mainly on the UK, which is opposed to such a transaction cost tax and prefers an IMF style levy based on bank balance sheet and could also be interested in a tax on extra profits and remuneration. Despite the uncertainty, Germany has already budgeted €6bn revenues from the tax in its four-year budget plan.
•Handelsblatt reports that bank stress tests will be more rigorous than hitherto expected. For instance, the paper notes ECB Executive Board member J Stark, who is reported as saying “the [stress test] assumptions will be made in a way that the test results will be credible.” Also, a CEO of a large German bank is said to warn against overly optimistic expectations. He is reported as saying that 10-15% of the banks won’t pass the tests, which could imply one or two German banks, Handelsblatt notes. In the German case, the financial rescue fund SoFFin is expected to provide capital injections and/or guarantees if needed. Meanwhile, ECB President J C Trichet called upon banks to take funds from governments should an emergency arise. Further, Mr Trichet is considering the publication of the test results for individual banks as a step in the right direction for improving transparency, the paper wrote. The results are expected to be released on 23 July.
•UBS have an interesting research note out Monday detailing “seven reasons to sell sterling. First, the rest of the BOE Monetary Policy Committee is unlikely to join Andrew Sentance in voting for rate hikes. Second, the beneficial impact of last month’s Budget has now been priced into sterling. Third, the scale of the budget cuts forecast for the next four years will undermine growth. Fourth, exports can’t be relied upon to take up the slack Fifth, the MPC remains willing to resume quantitative easing if the economy weakens Sixth, tighter fiscal policy and looser monetary policy can result in a much weaker pound as occurred after the 1981 austerity budget. Seventh, other major currencies like the yen have also experienced prolonged weakness when fiscal policy has been tightened during times of economic weakness”
•Japan’s ruling party on Sunday suffered a serious setback in the first national election since it took power last summer, with the ruling coalition losing its overall majority in the upper house and the main opposition party making sharp gains to win the largest number of seats. Of the upper house’s 242 seats, 121 were up for grabs, including 48 through proportional representation. Seat winners will serve six-year terms ending 2016. Of the 29 key districts where a single seat was up for grabs, the LPJ, toppled from power in the 2009 lower house election, scored a sweeping victory by winning 21 seats, compared with only 8 for the DPJ.

BP’s Weekend News

BP is in talks with U.S. independent oil and gas producer Apache Corp.on a deal worth as much as $10 billion that could include stakes in BP’s vast Alaska operations, according to people familiar with the matter. A deal, which would go a long way to helping BP cope with the financial stress of paying for the clean-up of the Gulf oil spill, could be reached in the coming weeks, though there is no guarantee it will succeed, one of these people said. BP and Apache declined to comment. The Apache deal is believed to include stakes in Alaskan oil fields, where BP is the largest operator. It is one of a number of options the U.K. oil major is exploring to raise cash as it struggles to cope with a spill that has fouled huge sections of the Gulf coast. BP has already suspended its dividend and trimmed capital spending.

Separately Exxon Mobil has declined to comment on reports the company has received government approval to explore a bid for BP Plc. Exxon’s Alan Jeffers had no comment on the report today in the London-based Times newspaper. Max McGahan, a spokesman for London-based BP, also said he wouldn’t comment. BP is seeking funds to pay for the biggest U.S. oil spill in history. The company is in talks to sell some assets including its Alaska oil fields to Houston-based Apache Corp., two people familiar with the discussions said. The talks were first reported in the same story as the Exxon news in the Times. The Times reported that Exxon, based in Irving, Texas, has been told by the U.S. government it can look at a potential bid for BP. The newspaper cited oil-industry sources for the information. Wow now that would give the GBP a lift.

Company / Equity News

•Press reports emanating from Poland this morning indicate that AIB has asked bidders for its stake in Bank Zachodni WBK (BZW) to update their offers before it closes a shortlist and due diligence begins. The article indicates a limited numbers of offers, including from PKO, HSBC and BNP. At the current market valuation analysts estimate the sale of BZW would generate €1.9B of capital toward AIB’s €7.4B PCAR requirement.
•Morgan Stanley’s infrastructure unit, 3i Infrastructure Plc and Star Capital are close to buying U.K. train rolling-stock leasing operations owned by HSBC for about 1.7 billion pounds, the Sunday Times said, citing people with knowledge of the talks.
•Taylor Wimpey is negotiating with lenders over a refinancing package that would enable the UK’s second largest house builder to buy more land, reports the FT. The company is seeking to refinance its bonds and bank loans after completing a £1.55bn debt restructuring last year following the collapse of land asset values in the wake of the financial crisis. However the debt restructuring restricted its ability to buy new land.
•The number of U.K. companies missing sales and earnings targets may increase as the government’s spending cuts to reduce the budget deficit hit the “fragile” recovery, Ernst & Young said. While the number of companies issuing profit warnings fell to 45 in the second quarter, the lowest in seven years, from 54 in the previous three months, warnings may increase later this year, Ernst & Young said in a report released in London today. “The crunch year is 2011,” Ernst & Young said. “It is then that the first major wave of fiscal tightening will probably coincide with the first rises in interest rates. It’s then that we’ll find out how strong the recovery really is.”
•A Chinese credit ratings company issued sovereign ratings for 50 countries using its own standards in an attempt to break the monopoly of Western agencies, the China Daily reported. Dagong Global Credit Rating Co. gave U.S. government debt an AA rating with a negative outlook, saying the country, along with the U.K., France and other nations may have trouble raising more money if they allow fiscal risks to get out of control, the China Daily reported. The company, which gives a top rating of AAA, put China an AA+ rating for its yuan-denominated debt with a stable outlook, according to the report.
•Office rents in the City of London increased 12% in the second quarter to register a back to back quarterly advance according to commercial property agency NB Real Estate. The turnaround follows two and a half years of falling rents and reflects improving demand from corporate tenants. Year to date rents have increased by nearly 25% which is the strongest growth since records commenced in 1988. NB Real Estate estimate that the amount of available space in the City has fallen by 28% in the last 12 months. With demand showing good recovery and the supply of modern office space limited following a virtual halt to office construction in the past two years it would appear that a return to new development activity can be expected which would be a positive for Kingspan as a provider of access floors to office construction projects.

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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