Mexican Swine Flu Hits Stock Markets
Stock-Markets / Financial Markets 2009 Apr 27, 2009 - 04:03 AM GMTBy: PaddyPowerTrader
It’s just what we need now - a flu-pandemic scare in the midst of the biggest financial crisis since the Great Depression. Risk appetite was bubbling up a little late last week. The fall-out from the US bank stress test was seen to be confined to some of the regional banks and the economic data continued to show some “bottoming”. Ford’s share price jumped sharply on better-than-expected earnings and US home-builders rallied to their highest level since October.
Today’s Market Moving Stories
The G7/G20 weekend meeting brought little, with the statement suggesting the global economy should begin to recover later this year. In a Q&A session, Geithner made no mention of the stress test results but added he was encouraged by recent signs of improvement.
- ECB member Axel Weber was quoted in German press over the weekend saying the German economy was unlikely to return to growth until the second half of 2010. Elsewhere, the ECB’s Quaden said a moderate rate cut was likely at the 7 May meeting. Council member Wellink said they should discuss whether rates should go under 1%.
- Larry Summers, head of the White House economic council, said the US economy will continue shrinking for some time to come and that a recovery would not materialise for at least six months or more.
- Gold has jumped by 2% following news that China’s state holdings of the metal have been quietly raised by 76% since 2003. Rumours and speculation about Chinese buying have been rife for years, but this figure comes as a surprise on the upside. China is not only the world’s largest mine producer of gold, but also the fifth-largest individual country holder of gold with 1,054t. The most recent move, though, only takes China’s holdings of gold as a share of total foreign exchange reserves to about 1.5%, compared with a world average of over 10%. Given this, it seems very likely that China will continue buying gold, which would in large measure offset sales by European central banks (these are now in decline) and expected IMF disposal.
- There are reports that the German banking regulators are outraged after Sueddeutsche Zeitung published details of how bad the situation is among German banks. The paper cited an internal memo by the banking regulator that puts the total of bad assets in the German banking system at €817bn. The number includes toxic securitised assets, and also bad loans, and unlike previous lists, this one names and shames the banks. In one case, half of all assets of a particular Landesbank are classified as toxic. Commerzbank is also on the list with a huge depot of toxic waste.
- More pain to the economy. General Motors is poised to announce further cuts to its operations, which are widely expected to include more plant closures and the elimination of the carmaker’s 83-year-old Pontiac brand.
- Well worth thirty minutes of your time. The peerless Meredith Whitney spells out in plain English why they is more trouble brewing in banking.
- Some notes of caution about bank “profits” and more concern here too.
- Watch out for the next great bubble - the outlook for China.
De-stressing The Banks
The 19 US banks involved in the regulatory stress testing were given their individual results late Friday, but were warned in the strongest possible terms not to give anything away. Hence, the American press has very little to say so far about the results. The Wall Street Journal has the only real information - that some of the banks involved have an immediate need to raise more capital. Although it didn’t say which banks had the greatest problems, the Journal said its sources had indicated those with significant exposures to commercial real estate in the Midwest and the Southeast were singled out. It said at least three banks were in such a position. The Journal said regulators believe the banks could improve capital without turning directly to the TARP. Either private investors could be encouraged in or the government’s existing preference ownership could be converted to a new type of equity (the WSJ noted that the latter situation would, in fact, be near nationalisation for some).
Mexican Swine Flu Hurts Markets
The positive sentiment in the market has been badly hit by this flu scare. Mexico is the epicentre of the crisis and the Mexican Peso has fallen in thin Asian trading, with the threat of bigger falls ahead. The WSJ reported that Mexico City looked like a ghost town yesterday as residents stayed in doors and tourists, who are the third-largest source of foreign income in the country, did the same.
General risk aversion trading was apparent in the Asian session, where memories of SARS are relatively fresh. There is, as you would expect, more questions than answers at this stage (e.g. how infectious? how deadly?). These questions are unlikely to be answered quickly and the uncertainty itself will be damaging to investor confidence. As such, it would not surprise to see risk appetite wane further this week.
In a reprise of what happened with the SARS panic, airline and tourism stocks are under pressure in early European trading on fears that the swine flu pandemic will curtail travel.
Independent News & Media Bond Refinancing
The Sunday Times reported that Denis O’Brien and Anthony O’Reilly have personally agreed to invest at least €30m to buy out bondholders under a new proposal being put forward. Independent News & Media has twice delayed the publishing of results recently as it seeks to refinance a €200m bond, set to expire on May 19th. Under the new proposals bondholders are set to be asked to put 60%-70% of their original investments into a new bond at a higher interest rate. The rest of the €200m bond will be refinanced with the €30m cash and a bank bridging facility. Denis O’Brien also said this weekend that the bond discussions had only a 50-50 chance of succeeding. Further light on the subject should come out on Friday when Independent News & Media are set to report its Full Year 2008 results.
Data This Week
As for economic news, it might end up being dominated by what happens with the flu story, but the recovery in risk over recent weeks has been helped in part by less disastrous economic statistics. This week, the US has Q1 GDP, which the market thinks should be terrible.
Perhaps more importantly, the April ISM is due, which should show a slight improvement, such that conditions remain depressed, but are not as awful as they were at the end of last year. For its part, the market continues to give the data the benefit of the doubt and we can have a few more upside surprises before consensus expectations catch up with this mini-bounce in the cycle.
And Finally… West Side Story Laments About Our Financial Mess
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”.
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