Stock Markets End Flat After Up Down Battle

By: PaddyPowerTrader

Markets played a game of ping pong yesterday before finishing broadly flat. News from bellwether stock FedEx cast an early pall. Analysts were expecting revenue of $8.32bn this quarter but they reported only $7.85bn. Freight was down 28%, as producers can’t ship if producers aren’t ordering. Another green shoot gets snipped. Note also the lower than expected inflation numbers and the fall in mortgage applications (down 15.8%).

Techs had a better day, rallying on positive comments from Cisco’s John Chambers. But financials again weighed after Standard and Poor’s belatedly downgraded credit ratings of 22 US banks offsetting the news of the $68bn in TARP repayments and continuing worries about future heavy handed Federal regulatory oversight. Triple witching day (options expiry) is due Friday afternoon so, to be frank, the market could be very choppy ahead of this.

Today’s Market Moving Stories

• The World Bank, in its quarterly update, raised its forecast for 2009 Chinese GDP growth to 7.2% from 6.5% previously. The bank welcomed an unfolding surge in government-influenced investment although noted: “it is unlikely to lead to a rapid, broad-based recovery… given the current global environment and the subdued short-term prospects for market-based investment”. It reports that this may occur early next month.
• Japan’s Tankan’s main diffusion index for manufacturers improved 19 points in April to -50, an improvement from the record low of -78 in March. For non-manufacturers, the index rose to -31 from the previous low of -44.
• Citing analysts from the Japanese defence ministry, the Yomiuri newspaper reports that North Korea may launch a long range missile that passes over Japan’s Aomori prefecture.
• Mervyn King gave a sceptical assessment of the state of regulatory and supervisory reforms. King said it is important to prevent too-large-to-fail institutions, or force them to divest, but he said warnings such as these were habitually ignored. King also said it was too early to reverse extraordinary policy stimulus, but not too early to prepare the exit strategies. He reiterated the recovery could be protracted, while Darling opposed Brown’s calls for higher social spending. However, the bond market’s best friend, Blanchflower writes a typically downbeat article in the Telegraph.
• The British Chambers of Commerce forecasts a contraction of 3.8% in UK GDP this year and see only a muted recovery in 2010. The group notes that the worst of the recession is probably over and output would likely turn positive in the fourth quarter of this year, although “recovery was not guaranteed”.
• Robert Shiller has an interesting comment on house prices in his latest Project Syndicate column. “There is a lot of misunderstanding about home prices. Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates.” He says this is wrong. There is no shortage anywhere, and the sobering truth is that the crisis was substantially caused by speculators who misunderstood the factors causing the price increases.
• Comments from Irish PM Brian Cowen yesterday that the Dail vote on NAMA could be in September gave investors an excuse to engage in some profit-taking on Irish bank shares after a phenomenal run up. The market was previously working off the assumption that the vote would take place in July. This slippage in the proposed timetable is unhelpful as it delays the possible badly needed rights issues and introduces some element of political risk as the governments majority has recently been shaved by the loss of two by-elections.
• Stock in the news today. Cadbury shares are up after reaffirming its full year guidance. Xstrata are also up after broker upgrades from both Citigroup and Morgan Stanley (the stock was down 10% yesterday). Rio Tinto is under the kosh though after news that is plans a share sale to raise $15.2 billion via a discounted rights issue. Don’t you just hate being diluted.
• These guys personally are the US’s fourth largest creditor.
• And it’s good to know that all that stimulus money is being spent wisely. Not! Senator Coburn of Oklahoma produced a report about wasteful stimulus projects.

Chinese Whispers
For those of you fully signed up to the China reflation trade, look away now. It is not to say that the fiscal stimulus has not had a beneficial effect on Chinese activity this year. But Societe Generale’s proto bear Albert Edwards takes up the baton this week. What he and some other far sighted commentators question is the quaint notion the markets now seem to have that the Chinese economy can grow at a respectable rate when the rest of the world is in a deep recession. Whenever you look at Chinese statistics, you say is it incompetence, is it confusion, is it conspiracy? My own view is that to the extent that the renewed surge in commodities and the Metals and Mining sectors are based on the Chinese growth miracle, the markets are relying on a combination of hype, lies and wishful thinking. Just over a decade on from the World Bank publishing “Thailand’s Macroeconomic Miracle: Stable Adjustment and Sustained Growth”, that economy’s performance can be best described as unspectacular with an increasingly unstable and dangerous political backdrop. Personally I believe the bullish group take on China is just as vulnerable to massive disappointment as any other extreme of bubble nonsense I have seen over the last two decades.

Yet few dare to point out that the emperor’s clothes might be absent. When, for example, the International Energy Agency had the temerity, a few weeks back, to suggest that the Chinese authorities were inflating the data, they were met with a robust broadside from the Chinese National Bureau of Statistics (NBS). The NBS said on its website “it is regrettable that the point of view in the original article is groundless… We believe that, for an international organization, this approach lacks seriousness”. I think this is a case of me thinks thou doth protest too much.

Oil Technicals Suggest Recent Rally Is Stalling
The chart below shows that the recent gains in oil may be difficult to sustain. We’re approaching good medium term resistance and the 38.2% Fibonacci retracement of the July 2008 - Dec 2008 selloff at 76.28 with decent psychological resistance just ahead of there at 75.00. Recent new highs on oil have not been matched by RSI or momentum which has been travelling in the opposite direction. Initial target would be the 3rd of June low at 64.95 with below there opening up a look at the 55 day and 200 day moving averages, currently at 57.98 and 58.70. Comments in the last two days from mining giants Rio Tinto and BHP Billiton are not very supportive of further gains in commodities with both warning on the strength of demand and BHP Billiton CEO Markus Kloppers stating that he thinks that the Chinese restocking process has already run its course.

Data Ahead Today
At 09:30 May’s UK retail sales are out. I think that sales volumes will rise by a less-than-consensus 0.2%, with a risk of a flat-to-down result after the higher-than-expected inflation data. Note this series is notoriously unreliable and I seriously question the data collection and methodology. At the same time, UK public finances for May is released and there should be another massive deficit with the PSNB reaching £20bn, slightly more than consensus.

In the US at 13:30, weekly jobless claims should fall below the 600K mark for the first time since January. Also at 13:30 we have the US Philadelphia Fed index for June, which should be improving -17, and May’s US leading index, which should be up to 1.1%, driven by ISM vendor performance, the yield curve, stock prices, real money supply and consumer expectations.

After the close tonight we get results from Blackberry maker Research in Motion (expected EPS $0.94).

And Finally… General Motors Commercial Spoof

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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