US equities closed weaker Tuesday, losing 1.6% to close at 1095. This is a significant fall but there could be worse to come. My technical analysts chums assure me that unless the S&P500 closes above 1126 tonight, the 50 day moving average will stab through the 100dma from above. If you believe in such things, and there are many who do, this is a rare bearish stocks signal (last happened in 2008). Even if it doesn’t happen tonight, unless S&P climbs at least 200 points it is inevitable by Thursday night they say.Overnight Asian equities followed and risk appetite fell with it with the Nikkei -1.9% (dropping back below the psychological 10000 level). Food for the bears:
- weaker US home sales (the market clearly didn’t expect demise of the home-buyer tax credit could have such an impact)
- Credit Agricole wrote down €400m on its Greek subsidiary (and nerves already frayed after downgrade of BNP Paribas on Monday). They also more than doubled their Greek subsidiary’s forecast net loss to €750m for 2010.
- the upcoming expiry of the ECB’s 12-month tender (worth €442bn) in just over a week – which will raise more funding concerns for Eurozone banks
- 3month EURIBOR money market rates still rising suggesting increased fears about interbank lendin
- ECB’s marginal lending facility (akin to the Fed’s discount window for emergency loans) sees uptick in usage. It’s now at a 6-week high, although nothing to get alarmed about yet
- Credit Agricole wrote down €400m on its Greek subsidiary (and nerves already frayed after downgrade of BNP Paribas on Monday). They also more than doubled their Greek subsidiary’s forecast net loss to €750m for 2010.
- the upcoming expiry of the ECB’s 12-month tender (worth €442bn) in just over a week – which will raise more funding concerns for Eurozone banks
- 3month EURIBOR money market rates still rising suggesting increased fears about interbank lendin
- ECB’s marginal lending facility (akin to the Fed’s discount window for emergency loans) sees uptick in usage. It’s now at a 6-week high, although nothing to get alarmed about yet
Greece
Today we have a fresh blowout in Greek bond spreads versus Germany (indeed against everyone) due to the fact that at month end because of the various multi notch downgrades of their credit ratings their sovereign bonds are being ejected or dropped from most bond indices which fund managers slavishly follow. This means that they are forced sellers of whatever remaining Greek bonds they still hold at fire sale prices. Most have chosen today it seems to front run the month end changes. But better news for the UK (and Gilts) as Moody’s have just said that the budget is “supportive” of the current AAA rating.
UK Outlook / MPC Minutes
Learn to spread bet the financial marketsJune’s UK BoE MPC minutes show that a divide is opening up on the MPC. Most members still seem to believe that spare capacity will bring inflation down from its recent high rates. Against this, Andrew Sentence’s vote to raise rates by 25bps was unexpected but not a complete surprise given his recent hawkish comments in the press. Some other members also thought that the balance of risks to inflation had moved to the upside, but others thought that recent market developments meant that risks had shifted to the downside.
News since the meeting should have calmed inflation nerves somewhat. For a start, CPI inflation itself fell from 3.7% to 3.4% in May. Meanwhile, the fact that the VAT rise is delayed until next year avoids a further spike in inflation in the near-term, and hence reduces the risk of a rise in inflation expectations. And lastly, the large tightening in the Budget will, other things equal, pull down the MPC’s inflation forecast (which was still based on the previous fiscal plans). Overall, it’s obviously a testing time for the Committee – but for now, most members appear to be holding their nerve.
The US FoMC Meeting Tonight: What to Watch For…There is no doubt that the Fed will today confirm the target range for Fed funds at 0.00%-0.25% tonight at 19.10. The market will focus on the wording of the statement. The Fed will not alter the by now famous phrase that economic conditions warrant an “exceptionally low level” of fed funds rate for an “extended period”. It is less certain what the Fed will do with the following observations of the April statement:
1. “labour market is beginning to improve”. The May employment report was however disappointing, and claims remain on an elevated level.
2. “household spending has picked up”. Most recent retail sales data were weak.
3. “housing starts have edged up”. That was before the May slump of starts.
2. “household spending has picked up”. Most recent retail sales data were weak.
3. “housing starts have edged up”. That was before the May slump of starts.
The Fed will probably delete the reference to a pick-up of housing starts, and possibly qualify the observation of an improving labour market and stronger consumer spending. As for inflation, the April statement read “inflation is likely to be subdued for some time”. There is a possibility (which we judge to be less than 50%) that the Fed will also mention downside risks for inflation. One year ago, the FOMC statement contained the phrase “the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability”.
All in all, the tone of the statement will probably be less upbeat than the April communiqué. The FOMC will however not perform a U-turn in its assessment of the economy. The changes will probably be more gradual. A first rate hike is currently a rather distant prospect (much to the chagrin of Mr Hoenig who will probably again cast a dissenting voice).
Today’s Market Moving Stories
- European governments will consider a imposing a charge on bond sales by countries that violate debt rules in the wake of the Greece-driven fiscal crisis, a draft document showed. Countries that flout debt-reduction pledges could face “a levy in the form of a predefined percentage (number of basis points)_on any issuance of government debt,” according to a European Commission proposal obtained by Bloomberg News.
- Spain will “definitely not” need to tap the European Union’s rescue fund, Handelsblatt reported, citing the country’s finance minister Elena Salgado. Salgado said the refinancing of about 24 billion euros in bonds due next month is causing “no concerns”.
- The U.S. real estate market threatens to undercut the Obama administration’s stimulus-driven economic recovery as home sales resume their record slide following the end of the federal homebuyer tax credit. Sales of previously owned homes unexpectedly fell 2.2% in May, the National Association of Realtors said yesterday, even as mortgage rates remained near an all-time low. New-home sales tumbled 19 percent last month, the biggest drop in 16 years.
- Germany, France and the U.K. jointly called for levies on banks’ balance sheets in an attempt to overcome opposition to the proposal by other members of the Group of 20 nations before this week’s summit. U.K. Prime Minister David Cameron’s government yesterday announced a bank levy as part of his deficit reduction efforts. France and Germany are also finalizing details of their own bank taxes, according to a joint statement issued by the German government.
- Three of the five U.S. banks that dominate swaps trading already perform most transactions outside their depository institutions and would face minimal disruption from a congressional proposal to reorder the derivatives business, financial statements and banking records show. However JPMorgan Chase & Co. and Citigroup Inc. would be hit hardest by the proposal.
Company / Equity News- Stateside Roundup: On Tuesday Alcoa , Caterpillar and Home Depot all fell more than 2.5% after the National Association of Realtors said sales of previously owned homes decreased 2.2% in May. Halliburton Co. dropped 3.9 percent as the Obama administration said it will appeal a judge’s decision to lift the White House’s deep-water drilling ban. FedEx Corp. shed 3% as transportation stocks retreated the most of 24 S&P 500 groups. So its “RISK OFF” mode in global markets again – and one wonders at this stage if the entire summer will be like this: one day the sun is shining – the next it is raining.
- Stateside Today: Philip Morris is looking perky pre market after raising its EPS forecast for 2010 while IBM is predicting faster than expected growth in Latin American markets of Chile, Colombia & Peru
- Europe stocks catching the eye: Cement giant Holcim (off 1.5%) on a broker downgrade by Morgan Stanley to “underweight” from “equalweight” while catering giant Sodexo suffered a similar fate at BofA Merrill Lynch being cut to “underperform” from “neutral”. The stock is off 2.5%. To the upside is Europe’s 3rd largest eletronics retailer, Kesa (up 2.6%) after reporting a 18% rise in pretax profits.
- The earlier slump amongst basic resources & mining names has been reversed on news from Australia that PM Kevin Rudd is possibly to face a leadership challenge from Julia Gilard amongst discontent about the snail like progress of the proposed 40% Resource Super Profit Tax and a slump at the polls. To add to Ozzie woes I note that a major broker (Melbourne based Sonray) has collapsed resulted in 3,000 frozen client accounts and the appointment of administrators
- Citibank opine today that global equities have peaked.
- While over at UBS they recommend buying UK, North European exporters and EM stocks.
- It was confirmed yesterday that the Polish Government will support PKO’s bid for Bank Zachodni WBK. PKO is 51% owned by the Polish state. BNP, Soc Gen, Sberbank Intesa and Bank Pekao have all been reported as potential bidders in the media.
- Adobe Systems, the biggest maker of graphic-design programs, released forecast sales that topped analysts’ estimates. Revenue in the third quarter will be $950 million to $1 billion, Adobe said. Analysts on average estimated $962 million in sales.
- Staying with all things tech Apple said it sold 3 million iPads in the 80 days since the device went on the sale in the U.S., adding to evidence CEO Steve Jobs is building demand for tablet-style computers.
- BP’s American assets could be seized by the courts if it tries to use loopholes in British or international law to escape liability for the Gulf of Mexico spill, under legislation being drafted by members of Congress, The Times said.
- British Airways has agreed not to make dividend payments to the holding company to be created following its planned merger with Iberia until the next valuation of its pension assets, the Financial Times reported, citing Chief Financial Officer Keith Williams. The next valuation is due by the end of 2012, the newspaper said.
- Separately the Telegraph today reports British Airways has moved a step closer to sealing its planned £4.5bn merger with Iberia after agreeing a plan with pension trustees to cut the £3.7bn deficit in its two final salary schemes. Iberia has three months to decide whether to accept the plan.- Insurance group Aegon is to cut hundreds of jobs in the UK as part of a plan to reduce costs by 25%, according to the Telegraph
- Air-France-KLM is eyeing a huge order for up to 100 new planes and expects to receive competing proposals from Airbus and Boeing Co. by the end of the year, a senior executive said Tuesday.
- Arsenal’s sponsor Emirates, the biggest international airline, is rattling rivals in Europe and Asia with a growth splurge that may be as game-changing for long-haul carriers as the expansion of Ryanair and Southwest Airlines. The 25-year-old company is building up a fleet of 90 Airbus SAS A380 aircraft with 45,000 seats and operating costs the manufacturer says are 12 percent lower than Boeing Co.’s latest 747. That poses a threat to European carriers that specialize in the same long-distance transfer traffic, British Airways CEO Willie Walsh said in an interview.
- Stagecoach FY results came in ahead of expectations, with operating profit falling 15.7% to GBP192m on revenues up 2.9%.
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