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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Stock Markets Treading Water After a Big Up Day

Stock-Markets / Stock Markets 2010 Sep 02, 2010 - 07:59 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleA hump day rally sparked by strong Chinese PMI and Aussie GDP data was followed up by much better than expected US ISM and the sentiment was for sure “RISK-ON” this was also helped by WSJ article about further stimulus from Obama administration and rumours of massive $6bn asset reallocation trade out of German bunds (the bond bubble) into S&P 500 futures as it was the start of a new quarter.

But the contrarian read on yesterdays “surprisingly” upbeat ISM report is this. The survey will embolden the hawkish members of the Federal Reserve who do not want to resume quantitative easing, this is not stocks friendly and secondly, the data showed new orders barely exceed inventories now. This matters as the difference between new orders and stocks companies have in their warehouses has historically been a leading indicator of the US business cycle. The August ISM report showed this measure continues to fall, signalling weak growth as it correctly did before the double dip in the early 1980s. Note also last nights data which showed US auto sales at a 27 year low.

Today in Europe we’ve seen some mild profit taking as the markets await the weekly jobless claims numbers from the US at 13.30 BST (expected to be 475k) and the pending home sales numbers at 15.00 (consensus estimate read of 1% MOM).

Today’s Market Moving Stories

•The Obama administration, concerned about the weakening U.S. recovery, is pushing Congress to approve proposals to stimulate growth in the final two months before congressional elections. “The only sure fire ways for policy makers to substantially increase aggregate demand in the short run are for the government to spend more and tax less,” Christina Romer, the departing White House chief economist, said in a speech in Washington yesterday. “We should be moving forward on both fronts.” Romer’s comments as she leaves her post tomorrow as chair of the Council of Economic Advisers highlight the Obama administration’s worries about slowing growth and a jobless rate forecast to remain above 9% through midterm elections in November. She warned that a failure by Congress to do more to bolster hiring risked “making high unemployment permanent” as idled workers’ skills deteriorate.
•A lot of Fed speak overnight to catch up on. The head of the Federal Reserve’s Philadelphia branch told Reuters in an interview Wednesday that the U.S. central bank should engage in further monetary easing only if faced with a dangerous downward spiral in prices, or it may undermine its credibility. Charles Plosser, who said he doesn’t see a deflation risk at this time, warned that more monetary stimulus by the U.S. government wouldn’t be effective in tackling a “difficult and unpleasant” unemployment problem. “Moving around the interest rate on long term bonds by 10 or 20 or 30 basis points is not going to solve the unemployment problems and it is dangerous to think that it will,” Plosser said. If the Federal Reserve were to send a signal that it is trying to control the unemployment rate and then fails to do so, it could hurt its ability to act to ensure price stability, the Philadelphia bank president said. Plosser, who rotates into a voting spot on the Fed’s policy-making Federal Open Market Committee next year, said the U.S. economy has hit a soft patch but he still sees 2010 economic growth around 3%, with growth in 2011 between 3% and 3.5%.
•The Federal Reserve’s recent decision to stop shrinking its securities portfolio doesn’t necessarily mean that more quantitative easing is on the way, said Donald Kohn, speaking to CNBC Wednesday, his last day as the Fed’s vice chairman. “Certainly, there’s nothing automatic about that leading to further quantitative easing to come,” he said. “That doesn’t mean that those guys at the next meeting will definitely take another step. But Kohn said more quantitative easing is not guaranteed. “It’s not a signal of something to come. It is a signal that the outlook is not as good as it was in the spring,” he said.
•Federal Reserve Bank of Dallas President Richard Fisher said he’s reluctant to expand the Fed’s balance sheet to spur the economy unless there is less “uncertainty” on fiscal and regulatory policies impeding job growth. “I would be reluctant to do so unless or until fiscal and regulatory initiatives are aligned with the needs of job creators,” Fisher said today in a speech in Houston. “Otherwise, further accommodation might be pushing on a string” or result in higher inflation. Fisher’s comments suggest Chairman Ben S. Bernanke may have difficulty rallying some Fed presidents behind further monetary easing. Bernanke said last week the Fed “will do all that it can” to sustain the economic recovery, adding that more securities purchases by the central bank may be warranted if growth slows.
•London luxury-home prices increased last month by the smallest amount since January as a stronger pound deterred foreign buyers and more properties went on sale, Knight Frank LLP said. Prices of houses and apartments costing more than £1 million rose 16 % in August from a year earlier, the London-based real estate adviser said in an e- mailed report today. They fell 0.1 % from July, the second straight sequential decline after 15 months of gains.
•The August UK construction PMI indicated a further rise in activity. However, with the headline activity index falling to 52.1, from 54.1 in July, it indicated a third consecutive monthly slowdown. The outturn was also weaker than the consensus expectation of 53.2. The slowing expansion was driven by the housing and commercial sectors. Housing saw the sharpest slowdown, with the activity balance dropping to 51.1 from 57.0. This sector had been the first to return to growth last year and its sudden weakening will heighten fears that the housing market is entering a period of stagnation, if not outright contraction. Civil engineering activity accelerated on the month, however, and at a pace that was faster than its historical average. On the face of it, this sectoral configuration of outturns does not bode well for future construction output. Cuts in public investment seem likely to drive the civil engineering index lower over the coming months and I see few reasons to be upbeat about housing market prospects. The reported rise in sentiment in today’s survey the index relating to future business activity rising to 59.9 from 56.7 may therefore seem incongruous. However, put in a broader context, it seems more likely to me to be a “dead cat bounce” following a sizable previous drop (the index was above 70 in May) than a sign that construction firms are genuinely chipper.
•The renewed downturn in house prices signalled by today’s Nationwide index is unlikely to be short lived. Not only is the market still significantly overvalued on most measures, but the lack of mortgage credit and the weak economic outlook also point to prices falling through the remainder of this year and 2011. The Nationwide house price index fell by 0.9%mom in August, the second consecutive monthly decline. The annual rate of house price inflations lowed from 6.6%yoy in July to 3.9%yoy in August and has more than halved in the past two months. Prices are now just 1.3% higher than at the end of 2009.
•Greece, Italy, Japan and Portugal are the advanced economies hovering closest to unsustainable levels of government debt, International Monetary Fund staff said in a research note today. The four nations are most at risk of needing drastic budget cuts to avoiding facing uncontrollable increases in public debt because traditional budget cuts won’t suffice, IMF staff said in the paper. The U.S. and Spain are also constrained, the report said. Still, a separate IMF report said indicators of default risk by a wealthy economy reflect “some market overreaction.” “Since behaviour can change, a finding that a country has little or no fiscal space is not a prediction that public debt will explode or that the government will default history is not destiny but rather that something must change and fiscal policy cannot proceed on a ‘business as usual’ basis,” the economists wrote. “Specifically, fiscal policy will need to react more strongly to debt than past behaviour would suggest.”
•French bank Société Générale has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction Reuters In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private.

Company / Equity News

•Sony will start a video and music streaming service in five European countries this fall to challenge Apple Inc.’s iTunes store. Qriocity, pronounced “curiosity,” will start in France, Germany, Italy, Spain and the U.K., the Tokyo based company said yesterday. The service will be available via Sony’s Bravia TVs, the PlayStation 3 game console, Blu-ray DVD players and Vaio personal computers.
•Apple, building on its dominance in the music industry, unveiled new iPod media players, added social networking features to its iTunes software and introduced a service that lets users rent shows and movies. The company unveiled a lower priced Apple TV set top box that can offer high definition TV program rentals for 99 cents, Chief Executive Officer Steve Jobs said today at an event in San Francisco. The $99 device also will deliver first run movie rentals for $4.99 and work with Netflix Inc.’s online service.
•The world’s second-largest brewer, Heineken , anticipates weaker sales volumes in Central and Eastern Europe in the second half of this year but sees a return to growth in the first half of 2011, helped by an overall positive macroeconomic development, the company’s regional president told Dow Jones Newswires Wednesday. Netherlands-based Heineken said in its first-half 2010 financial-results report that while worldwide organic sales volumes fell 3.9% on average in the six-months period, sales volumes fell 15% in the Central and Eastern European region. The steep fall was ascribed partly to macroeconomic weaknesses in many of the region’s countries, not least Romania, Hungary and Greece, and partly to a hefty excise tax slapped on brewers in Russia. Nusmeier said the expected weak second-half environment should make a mark also on earnings in spite of continued cost cutting efforts.
•U.K. consumer services companies including bars and travel firms said sales unexpectedly fell in the last three months and scaled back expansion plans as they questioned the strength of the economic recovery, a Confederation of British Industry survey showed. The number of consumer-services firms saying sales volumes fell in the quarter through August exceeded those seeing gains by 5 percentage points.
•The WSJ reports that U.S. auto sales fell 21% in August compared with a very strong month a year ago, when the federal government’s “cash for clunkers” program sparked a surge in new car buying. General Motors Co., Toyota Motor Corp. and Honda Motor Co. all reported declines of 25% or more while Ford Motor Co. saw its sales drop 11%. The few gainers included Chrysler Group LLC, which reported a 6.9% rise, mainly because of higher sales to corporate fleets such as rental car concerns. Chrysler also is one of the few makers that didn’t see much of a lift from the clunkers program a year ago because its line up includes few small cars, which were big sellers under the rebates. Auto makers sold 997,968 light vehicles in August, down from 1,262,197 a year earlier, according to Autodata Corp. Augusts’ sales were down just 5% from July’s, Autodata said.
•German airline Deutsche Lufthansa Wednesday said it can’t absorb the cost of a government tax on passengers and plans to pass the higher costs on to customers through higher ticket prices. “Lufthansa still strictly rejects the planned airline passenger tax,” the company said. “Such individual national initiatives weaken Germany as an airline hub.” The German government said in June it plans to introduce a tax on air passengers, which is expected to contribute €1 billion a year to a package of austerity measures. The tax would see passengers charged €8 for the shortest flight routes, €25 for routes between 2,500 and 6,000 kilometers, and €40 for flights further than 6,000 kilometers.
•Pernod Ricard, the maker of such tipples as Chivas Regal whiskey and Absolut vodka, reported full year profit that missed analysts’ estimates as sales declines in western Europe more than offset revenue growth in China. Net income in the year through June 30 rose 0.6 % to €951m. Profit was less than the €987m average estimate of 13 analysts surveyed by Bloomberg.
Tullow this morning announced that it has signed agreements with Africa Oil Corp to gain a 50% interest in five licences; Blocks 10BB, 10A, 12A and 13T in Kenya and the South Omo Block in Ethiopia. The purchase sits well with Tullow’s expertise in rift basin geology and also its desire to build its African footprint. The blocks require a good deal of work, but even at this early stage the comparison with the Ugandan Lake Albert is compelling. We see the news as a very worthwhile build up of its African licence inventory and should be viewed positively by the market.

•Electronics retailer DSG International this morning reports an encouraging start to the first 12 weeks of its new financial year (2 May-24 July). Group like for like sales increased +3% which compares to a +2% rise reported for the full year ended 1 May 2010. In the UK & Ireland, like for like sales grew by +6% in the 12 week period (compared to -3% in y/e 2 May 2010). Performance in the UK & Ireland benefited from TV sales during the World Cup and DSGi’s exclusive UK launch of the iPad.

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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