Stock Markets Continue To Defy Gravity And Logic

By: PaddyPowerTrader

So when did the US market ever start caring about Europe where allegedly the recession is over. Odd that it sure doesn’t feel like a Renaissance on Main Street. US Retail sales (yes the US consumer is still approx 70% of the economy) were a total disaster, jobless claims jumped and foreclosures are a record high, but yet the market ended up because of “better than expected” earnings from Wal-Mart and legendary investor John Paulsen taking a stake in Bank of America and Regions Financial. Downright perverse. The decoupling of the market from the real economy seems to be at all time highs.

The S&P500 closed up 0.7% to post a new cyclical high, led by the building materials and financial sectors. Commodities, especially the base metals, also traded positively, with the price action there continuing to diverge from that suggested by the likes of the Baltic Dry Freight Index (now down for 10 sessions in a row).

Today’s Market Moving Stories

• Japan’s Nikkei share average rose to a 10-month high overnight. The Australian dollar surged to a 2009 peak as comments from the Reserve Bank of Australia chief caused markets to price in a greater chance of an interest rate rise before year end. Oil prices rose for the third straight day and copper prices extended their stunning rally as market hopes for a robust economic recovery. Stock market gains have slowed markedly in recent weeks, however, on fears that share prices have got too far ahead of economic fundamentals and look expensive when compared with weak company earnings forecasts.
• Some Bank of Japan (BoJ) policymakers signalled that the bank may end or revise unconventional steps aimed at easing credit strains when they expire in December if financial conditions improve further, minutes of the board’s July 14-15 meeting showed on Friday. But they also said the measures could be extended again if conditions do not improve enough. “It’s important to make a decision without having any predetermined view.”
• With China’s steel industry in turmoil over the Rio Tinto scandal, the government has instituted a three-year moratorium on applications to expand production or start new projects. China needs to have more say in the global iron ore trade, Industry and Information Technology Minister Li Yizhong said. Specifically, the country is reacting to the steel industry’s production overcapacity, the minister said. The government will continue backing the China Iron & Steel Association in iron ore price negotiations, but will stop the “chaotic situation” and disorderly competition among Chinese importers to address the continuous rising spot iron ore price. Li said he hoped the world’s major iron ore suppliers would consider both their own long-term interests and their long-term cooperation with China’s steel industry.
• More green shootery with news that Hong Kong pulled out of its deepest recession since the Asian financial crisis in the second quarter as GDP grew more than 2% QoQ. The source would not clarify whether gross domestic product growth had hit or exceeded 3%, but growth was well above analysts’ forecasts for a 1.1% expansion.
• In their latest filings, banks were required to list the fair value of their loan books next to their carrying value. No surprise, most banks are carrying loans at far above their fair value. The difference is enough to wipe out most of their capital.
• A Canadian bank is believed to have approached AIB in the past two weeks about taking a stake in the bank. The approach will happen only after AIB has moved its development loans to NAMA. Given that the last of the loans will not move to NAMA until June 2010, it is unclear if the September 16th assessment by NAMA of the potential “haircut” will be a trigger. So the candidates are Royal Bank Canada Toronto- Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank and National Imperial Bank.
• One of the best and most readable, RBS’s Bob Janjuah, is advising his clients to take the money and run.
• The New Bull Market Fallacy, prepared by Naufal Sanaullah is an impressive summary piece which I recommend highly.
• If you’ve 90 minutes to spare, watch William Black go in depth on the biggest theft in world history by Goldman Sachs.

Japanese Tankan Survey Points To Improving Economy
Japanese manufacturers were slightly less pessimistic in August but the pace of recovery slowed, the Reuters Tankan showed poll showed, suggesting that the effect of huge government stimulus spending is wearing off. Service-sector sentiment was flat as weak wages and rising unemployment hurt private consumption, which makes up about 60% of the economy. But both manufacturers and non-manufacturers expect conditions to improve in the next three months, reflecting their belief that Japan has put the worst of the global crisis behind it.

The manufacturers’ sentiment index rose one point to minus 42 in August, improving for the fifth straight month from a record low of minus 78 in March, thanks to a pick-up in exports and industrial output. The manufacturer confidence figure in the Tankan has around a 95% correlation with the Bank of Japan’s influential quarterly tankan survey.

Japan’s economy is expected to have grown 1.0% in April-June after four straight quarters of contraction due to a pick-up in exports and personal consumption spurred by stimulus spending at home and abroad. But economists warn that any recovery will be fragile because doubts about the sustainability of end demand remain with recent output gains driven mostly by government stimulus. GDP figures are due on Monday.

Data Ahead Today
From the US today, we have a host of economic reports. Kicking things off is CPI, for July at 13:30. Given the sharp decline in energy prices in the second half of 2008, the YoY change in the index should hit its nadir in late summer before climbing back into positive territory in November. I’d expect a read of -1.4% for the headline and +1.7% for the core readings. At 14:15 Industrial Production is out which may have increased in the period by perhaps 0.3%, marking the first monthly advance since October. Corresponding to the rebound in production, the operating rate could have ticked up in July, perhaps to around 68.3%. Then at 15:00 the week finishes off with a first stab at the University of Michigan Sentiment Survey for August. Overall, the data suggested that consumers believed that the worst of the downturn had passed, but they expected a slow, grinding recovery. I’d expect that consumer sentiment bounced somewhat in early August, perhaps to around 69.0.

And Finally… The Daily Show: MBA Ethics Oath

Disclosures = None

By The Mole
PaddyPowerTrader.com

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”.© 2009 Copyright PaddyPowerTrader - All Rights Reserved
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