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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Markets Stressful Finish To The Week

Stock-Markets / Stock Markets 2010 Jul 23, 2010 - 11:43 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleOn a turn around Thursday markets staged a complete reversal with renewed risk appetite replacing the post Bernanke “unusual uncertainty” risk aversion. The day kicked off with some robust European data (better UK retail sales and German PMI) but it was a series of upside earnings surprises Stateside that proved the catalyst for the rebound U.S. stocks rose, with the Standard and Poor’s 500 Index gaining the most in two weeks, after companies as diverse as United Parcel Service to AT&T and Qualcomm all increased profit forecasts.

UPS jumped 5.2% as growing overseas demand and cost cutting improved the earnings outlook at the world’s largest package delivery company, while AT&T rose 2.4% as quarterly profit beat analysts’ estimates on demand for Apple’s iPhone and Qualcomm, the biggest maker of chips that run mobile phones, jumped the most since November 2008 as it predicted higher selling prices for devices based on its technology. Elsewhere Caterpillar came in with strong numbers , Reynolds America beat the Street consensus as did Philip Morris. 3M raise guidance as did Royal Caribbean. We also got some M&A to boot as GM announced they were buying Americredit at 24% premium. Only fly in the ointment was US jobless claims higher than expected (464K vs. 445k continuing claims lower though).

European equities opened flat this morning as the market awaits the release of the EU wide bank stress test which is designed to ascertain the ability of the EU banking sector to absorb further shocks. The view in the market is that results of the tests are less important than the actual methods used to complete them. Traders will be hoping to see evidence that The Committee of European Banking Supervisors were rigorous and intrusive in their practices as this is the only way the whole process will gain credence.

Stocks on the move today include Standard Chartered who have lost 2.1% after a broker downgrade at UB who cut the stock to “hold” from “buy”. ARM Holdings has jumped 7% after the company signed a licensing pact with Microsoft. Royal Bank of Scotland raised its recommendation for the shares to “buy” from “hold,” saying the company’s deal with Microsoft could be a “game changer.”

Pre market Stateside Ford is better by 3% after coming in with its largest H1 profit since 1998 and EPS of 68c which comfortably topped analysts’ expectations of a 41c print. Honeywell jumped nearly 9% in pre opening trade after the group said second quarter earnings rose to $468 mn, or 60 cents a share, on sales of $8.16 bn. Blue chip Verizon Communications said it had a second quarter net loss of $198 mn, or 7 cents a share, which included 65 cents a share in charges related to an employee severance plan. At $26.8 bn, revenue was just under Wall Street expectations. Lastly McDonald’s has beaten consensus Street EPS expectations by 1c with better revenues.

Today’s Market Moving Stories

•The key German Ifo business climate index unexpectedly jumped from 101.8 to 106.2 (Consensus forecast: 101.5). It was the strongest increase since reunification. The rise was driven by a massive increase not only in the current situation component from 101.1 to 106.8, but expectations were also up very strongly from 102.4 to 105.5, reversing two preceding declines and climbing to the highest level since October 1994. Export expectations were reported to have stabilized at last month’s high level. The strong improvement was broad based among sectors. Today’s Ifo survey and yesterday’s release of advance PMI data allow only for one comment: Wow! The German business model still remains in full swing at the beginning of the second half of the year. Driven by the recent very brisk demand from abroad, industry is recovering impressively from the preceding slump. Auto producers are currently even reporting that extra shifts are necessary to work off new orders, and order books in machinery appear already well filled for this year. The Ifo further highlighted that especially the beverage industry profited from the FIFA world cup and the hot spell. All in all, after the unanimously expected strong rebound of the economy in spring, the environment for the second half of the year looks more solid than initially expected. The tailwind still remains very strong. The German economy is likely to maintain a solid momentum for the rest of this year.
•UK GDP surprised to the upside in the second quarter, picking up 1.1% qoq. The breakdown shows that industrial production was up 1% qoq, services 0.9%, while construction marked the largest quarterly increase since 1963 (6.6% qoq). Most of the upside surprise came from the strong surge in construction activity plus a higher than expected surge in the retail, hotel and catering. These details, however, shows that the sectors which surprised to the upside were those mostly affected in 1Q by unfavourable one-off effects (bad whether and the restoration of the VAT early this year). Therefore the strong performance in 2Q looks like much more a technical rebound rather than a genuine upward trend. Another positive surprise came from a stong rise in government and other services, which I doubt might continue to perform strongly in coming quarters. Overall, while I acknowledge that upside risks to the markets 1.3% forecast for 2010 GDP have definitely risen after today’s strong outcome, I’d remain convinced that momentum will decelerate in 2H. Indications from different survey of economic activity both manufacturing and services sector activity has already started to signal a deceleration in growth momentum. On top of that the fiscal tightening outlined in the June emergency Budget will be a drag to economic activity, though not dramatically so, going forward.

The Eurovision Bank Stress Test Results Today

When? At 17.00 London time CEBS will release a summary report on the aggregated results on its website ( From 17.00 London time, the individual bank results will be published by banks and/or their national regulators. At 17.30 London time, CEBS will published a summary of the reports of the 91 banks on its website. At 19.00 London time, CEBS will hold a restricted press conference.

What is being assumed? There hasn’t been total clarity on the nature of the stress tests themselves, in particular in relation to the tests on sovereign debt holdings. The lack of clarity undermines the credibility of the tests in advance. To compensate for this, the test results will need to be transparent, detailing holdings of sovereign bonds and the splits between trading books and bank books. If both are stressed adequately, then given that a 3% cumulative adjustment in GDP in 2010/2011 implies quite a weak economic scenario (equivalent to a drop in EU growth of between 0.5 and 1.0% in 2011), markets could interpret this as quite a meaningful stress test.

What will the tests show? Investors have been expecting to see a handful of banks fail and for an aggregate recapitalisation requirement of about EUR100bn. At 1% of euro area GDP, that is fundamentally affordable. The costs would likely be geographically concentrated, with Germany and Spain likely shouldering the bulk. But there, should private recapitalisation not be an option, we still have about EUR51bn in unused Soffin commitments and EUR88bn in FROB commitments (albeit in both cases with the commitments to be financed by the state).

However, leaks and suggestions from various national policymakers over the last few days have made it seem that hardly any banks will fail the stress test. Even the Spanish Economy Minister said the tests will show that all Spanish banks are solvent. If the assumptions are good and the results are transparent, the results ought to be credible. If that is the case and virtually no institutions fail, it ought to be good news. Other rumours are that 5 and as many as 10 of the 91 banks tested failed some portion of the stress tests.

Company / Equity News

•Vodafone said today fiscal first-quarter organic service revenue increased 1.1% to £10.6 bn as the company started offering Apple’s iPhone handset in the U.K. and other markets. Analysts had estimated a decline of 0.4% after a drop of 0.2 % in the prior quarter. Vodafone commented in an e-mailed statement today. Separately the company has agreed to pay £1.25 bn to settle the U.K. CFC tax case. The settlement comprises £800 mn in the current financial year with the balance to be paid in instalments over the following five years, the company said in an e-mailed statement today.
•Microsoft posted its biggest sales gain in 2.5 years in the fourth quarter after customers purchased more personal computers running the Windows operating system. Net income climbed 48% to $4.52bn, or 51 cents a share.
•American Express said second-quarter profit tripled as consumers spent more and fewer borrowers defaulted. Net income from continuing operations climbed to $1.02 bn, or 84 cents a diluted share, from $342mn, or 9 cents.
•Capital One Financial, the most profitable U.S. credit card issuer last year, reported a higher than expected profit after a year earlier loss, as improving consumer repayments cut costs from overdue loans. The company had net income of $608 million, or $1.33 a share.
• forecast third quarter profit that missed analysts’estimates after it cut prices on the Kindle, its best selling product, and propelled capital spending to a record. Operating income in the current period will be between $210 million and $310 million, Amazon said in a statement today. Analysts surveyed by Bloomberg had forecast operating profit of $361.6 million. Amazon’s second-quarter per-share profit also missed analysts’ predictions. Shares tumbled in late trading. dropped 15% in late trading.
•Sporting goods maker Adidas posted Thursday second quarter results which the company said are “significantly above market expectations.” Reporting after markets closed in Europe Thursday, Adidas said net profit for the quarter ended June 30 soared to €126 million from €9 million a year earlier, when the company’s bottom line was weighed by a weak Russian ruble against the euro, a competitive market environment and high sourcing costs for new products. Sales for the latest period came in at €2.9 billion, representing a 19% increase in euro terms and a 11% increase on constant currency. Adidas gave no reasons for its performance, but said it will do so Aug. 4, when it unveils its full quarterly report. The stock is btter by 2.5% this morning
•Pernod Ricard, the maker of Absolut vodka and Chivas Regal whiskey raised its full-year profit forecast for the second time. Profit from recurring operations will rise 3 4% this year, up from a previous estimate of growth of about 3 %.

•AT&T Q2 results were ahead of expectations and the Group raised full year guidance on the back of a strong margin performance. This came on the back of a high number of iphone registrations, which usually dampens margin performance but offset by low churn levels good momentum in wireless ARPU levels (up 3.4%), and progress on wireline margins. AT&T updated the outlook to improved operating margin levels (from stable to improving operating margin levels) and better than 2008 cash flow levels (from equal to 2008) following the improvement in consolidated margins from 18% to 19.8%.

•A big miss from Ericsson whose Q2’s were 5% and 10% adrift of expectations on sales and operating margins respectively. Nevertheless, given the volatility of demand, Ericsson’s margins remained strong. Operating margins excluding JVs improved by one percentage point to 14% despite the 8% fall in sales and a 12% fall in network sales. The sales fall reflected some relatively stark changes in regional demand (in line with the sharp changes in Q1) which underscored the benefits of being a global market leader. Whilst North American sales were up a staggering 128%, Indian sales fell 63% whilst China and South East Asia were both down over 30%. This pattern is the reverse of last year’s trends and shows how the timing of investment decisions by telecom operators can have a substantial bearing on quarterly results. Net cash remained strong at SEK 36bn albeit slightly down on last quarter. The stock is down 6% today.

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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