Stock Markets Cautious After A Big Up Day

By: PaddyPowerTrader

U.S. stocks rallied Thursday with the S&P 500 Index gaining the most in two weeks, as economic reports from China, Japan and Australia that surprised on the upside boosted optimism about the global economy. Caterpillar, the world’s largest maker of construction equipment, rose 5.5% and Alcoa, the biggest U.S. aluminum producer, climbed 4.2%. BP’s U.S. shares rebounded 12%, the most since October 2008 after earlier slumping to a 7 year low, as JPMorgan Chase said the rout in the stock has overshot the potential damage from the Gulf of Mexico oil spill. Goldman Sachs fell to the lowest in more than a year on reports of a fresh regulatory probe.

Asian equities opened higher following the strong rallies in US and European stock markets overnight, but have pared some of the sharp gains after the release of a series of monthly China data for May. The data showed a mixed result of both CPI and PPI overshooting expectation, while IP growth undershot expectation by 0.5%pt. While CPI over 3.0% hurdle could be seen as a trigger in PBoC’s rate hike cycle, Chinese policy makers seem to believe the near term moderate uptrend in CPI to be tolerable and be more concerned about the impact of European sovereign debt problem and their already implemented tightening measures on China’s economy.

Today in Europe English cricket team sponsor, Brit Insurances is the star performer (up a stonking 21%) after rejecting a takeover approach from private equity firm Apollo Global Management. Published Reed Elsevier is better by 2% on a broker upgrade by Morgan Stanley to “overweight” from “equal weight”. And outdoor advertising giant JCDecaux is ahead by 2.5% after the company said that it had renewed 11 street furniture contracts in the greater Paris region. But Dragon Oil is off 5% after news of disappointing test drilling results at its Dzheitune well in Turkmenistan which were said to be “well shy of expectations”

Today’s Market Moving Stories

•In Spain El Mundo reports that Caja Madrid and Bancaja have agreed to a merger which could create the largest savings bank in the country. Reuters sources indicated that the combined entity will request €4.5bn from the government FROB restructuring fund. PM Zapatero said he is confident labour reform will receive support from parliament. El Pais reports that the government would present the final reform document on Friday to unions and business leaders, but no changes will be allowed. Spain sold €3.9bn yesterday of a new 3yr bond at an average yield of 3.32%. The economy ministry denied reports that it had made a request for financial aid from the EU. May harmonised inflation was confirmed at the initial estimate of 1.8% yoy, up from 1.6% in April. Spanish equities have put in a strong performance today led by the big banking names BBVA , Bankinter & Santander.
•Staying in Spain, an economy ministry spokesperson tells Reuters that the government has not made a request for economic aid from the EU (this follows a report in FT Deutschland alleging this was the case). He said “This is lie. There’s no rescue. There’s nothing asked for, nor will there be, nothing, but nothing. I don’t know where they got this from”.
•China’s inflation accelerated in May to the quickest pace in 19 months, highlighting overheating risks in the fastest-growing major economy. Consumer prices rose 3.1% from a year earlier, the statistics bureau said in Beijing today. That was more than the median 3% estimate in a Bloomberg News survey of 32 economists and April’s 2.8% gain. Today’s data, combined with surging exports and near- record property-price gains, underscore U.S. arguments for a more flexible yuan ahead of a Group of 20 nations meeting in Toronto in two weeks’ time. U.S. Treasury Secretary Timothy F. Geithner told the Senate Finance Committee yesterday that a move could redress global economic “distortions” and help China cool prices.
•U.K. house prices fell in May for a third month as the prospect of higher taxes and the end of some disclosure rules prompted more homeowners to put their properties for sale, Acadametrics Ltd. said. The average cost of a home in England and Wales fell 0.2 percent to 220,352 pounds from April, the research group said in an estimate released by e-mail today. Previously reported house-price gains for March and April were revised to declines as more transaction data became available. Britain’s housing market rebound has shown signs of slowing this year as consumers brace for the spending squeeze and tax increases due in the emergency June 22 budget from Prime Minister David Cameron’s coalition government. While mortgage approvals rose to a four-month high in April, they remain at less than half the total at the housing-boom peak in 2007. The property market “is delicately poised and easily buffeted in one direction or another by slight changes in circumstances,” Acadametrics Chairman Peter Williams said in the report. “The question now is: ‘Will that decline continue through to the end of the year and beyond?’ There is much to suggest that it will.”
•US retail sales (released at 13.30 BST) unexpectedly slumped 1.2% in May. Building materials sales experienced the most pronounced decline (M/M -9.3%). This is probably a normalisation after two months with strong sales. And “normal” in building now days translates to “weak”. Motor vehicles also posted a decline (M/M -1.7%). The 3.3% decrease of gasoline sales should be ignored since it is due to falling gas prices. Private consumption is obviously slowing down in late spring/early summer. This might indicate that the US economy lost some of its dynamics. Still difficult labour markets will dampen personal spending for some time to come. And the reaction, well the Dow futures have swung around from a minor plus to -50.We could be in for a ropey thin profit taking afternoon as yesterdays big gains were on anemic volumes
•Yesterday the ECB’s Trichet was back in good shape after the last months freak show press conference, indicating ECB would do whatever it takes to anchor price stability, and stability of financial markets, and gave no hints of any immediate plans to stop the bond purchases. Furthermore ECB announced 3 unlimited fixed rate 3month tenders in July, Aug and Sep which helped the front end to rally and steepen up the curve. This is positive news because it delays ECB’s otherwise announced exit strategy, and it was good to hear that the decision had been taken unanimously. So even arch hawk Axel Weber agreed that EXIT strategy must wait till next year at least. Market was back in “RISK ON” mode on the day while PIIGS tried to fly.
•Le Monde picked up on Trichet’s comments on growth. He said that quarterly growth rates are expected to be irregular for the eurozone. The ECB growth forecast was revised downwards for 2011 from 1.5% to 1.2% (between 0.2% and 2.2%), taking into account the negative effects of the austerity programmes by several eurozone member countries. For this year, the forecast was revised slightly upwards from 0.8% to 1% (between 0.7% and 1.3%).
•UK industrial production came in much weaker than expected in April, declining 0.4% mom. Manufacturing production was also down 0.4% mom. Mining and quarrying output was flat, while electricity and gas production declined 0.6% mom. Today’s weak outcome is at odds with the positive message coming from different surveys of manufacturing activity which pointed to further acceleration in the monthly pace of industrial activity. The April setback might prove, therefore, to be a pause after two consecutive months of strong growth, and not the beginning of a downward trend.
•If you’re thinking about starting a Ponzi scheme, it’s probably not a good idea to forge the signatures of several judges on fake federal court documents. For Scott Rothstein, that move (and the fact that he defrauded some folks) landed him a 50 year sentence Thursday for running a $1.2 billion Ponzi scheme out of his South Florida law firm office.

Bad News For US Investment Banks

Bad news for US investment banks. U.S. lawmakers negotiating the final shape of the financial regulatory overhaul are likely to strengthen language banning banks from proprietary trading, said Representative Barney Frank, the leader of the talks. Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee, and Senate Banking Committee Chairman Christopher Dodd, also said today that negotiators will retain, with some changes, a provision imposing limits on debit card fees collected by the biggest banks. The so-called Volcker rule on proprietary trading, named after former Federal Reserve Chairman Paul Volcker, will probably be rewritten along the lines of an amendment offered unsuccessfully in the Senate by Democrats Jeff Merkley of Oregon and Carl Levin of Michigan, Frank said. Merkley and Levin wanted to eliminate what they see as wiggle room for regulators to change or eliminate the prohibition after a study of the issue. “You’re going to have a tough version of the Volcker rule,” said Frank, who is chairman of the House-Senate conference committee that is making the final changes in the bill. “The general direction Senators Merkley and Levin were moving in is a direction that a lot of people are supportive of in the final version you will see.” Dodd and Frank also said negotiators will retain language that would let the Fed impose limits on debit-card interchange, or “swipe,” fees that banks charge merchants.

Equity / Company News

•NBC, the broadcast network owned by General Electric Co., sold about $2.5 billion in advertising ahead of the television season that starts in September, according to a person familiar with the sales. The broadcast network sold ads across all day-parts including prime time, late night, news and Sunday Night Football, said the person, who asked not to be named because the figures aren’t public. NBC raised prices for prime-time ads by about 7% on average, and sold in the high 70% range of its prime-time inventory, the person said.
•BP , faced with U.S. political pressure and public anger over the explosion and subsequent oil pollution in a rig it leased in the Gulf of Mexico, is considering cutting or deferring its second quarter dividend payment, the Wall Street Journal reported, citing an interview with Chief Executive Officer Tony Hayward. The dividend is due to be announced on July 27, and BP’s board may cut it altogether, defer it, or pay all or part in scrip, effectively an IOU to investors; “we are considering all options on the dividend,” Hayward told the newspaper. White House adviser David Axelrod dismissed complaints from BP about the U.S. government’s pressure, saying in an interview Hayward should “spend less time on hyperbole, and a lot more time on trying to solve the problem,” the Journal said.
•Novartis (up 3.5% today) overnight won approval for Gilenia, the first oral treatment for multiple sclerosis. The FDA vote was 25-0 in favour of approval of a 0.5 mg dose and also voted in favour of approval as a first line treatment without overly strict monitoring requirements. Also notably the FDA commented that the risks seen in Gilenias trialing “aren’t as critical” as the need for alternatives to injectible therapies and allowed the study of a new potential safer dose of 0.25mg to happen while the drug is on the market in the higher dosage form. Testing of the lower dose could take up to five years. The implications for Elan are obvious, with a front line oral competitor having been approved in the same market as its headline drug Tysabri. The approval as a first line treatment is unexpected and should further boost the potential market grab of the drug and boost its estimated peak sales of $2bn. The impact on Tysabri may not be as immediately dramatic as would the case for front line treatments such as Biogen Idec’s Avonex and Teva Pharmaceuticals Copa due to Tysabris use as a second or sometimes third line treatment. However with Tysabri revenues already slowing in recent months today’s announcement will do little to boost investor sentiment in the stock and will lead to further cuts in projected future Tysabri revenues.
•The French travel company Club Med (up 9% today) is reporting a sharp rise in bookings over the past eight weeks that has pushed summer 2010 bookings ahead of 2009. While the trend has been most pronounced in the Americas Europe has seen positive momentum too. These comments tally with anecdotal feedback from Aer Lingus, easyJet and Ryanair, all of whom have noted a good recovery from ash related dampened demand in April and May

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”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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