Stock Markets Focused on Stress Tests And Options Expiry

By: PaddyPowerTrader

While the negative news flow from Europe finally looks like dying down for a while, the U.S. economy has now taken up the mantle of doom-and-gloom provider. Thursday’s Philly Fed Index was weak at 8 versus the 20 Read predicted, along with a positive creep in new and existing jobless claims. Inflation figures remain low, and housing data are very disappointing.

Despite this U.S. stocks surprised me yesterday with their resilience with benchmark indexes turning positive for the year, as a late-day technology share rally helped the market overcome the early slump. Apple rose 1.7% to a record price to pace gains in computer companies on optimism over the new version of its iPhone and First Solar, the world’s largest maker of thin-film solar power modules, rallied 3.9% to lead industrial companies higher on a Credit Suisse recommendation to buy the shares.

Note that price swings and trading volume may be greater than average today because futures and options contracts on indexes and individual stocks are due to expire. So-called quadruple witching occurs once every three months. And with a clear calendar economic data wise for the US session it could turn out to be one of those rumour driven Friday session.

This morning as I’ve been predicting for a couple of days, Spanish banking stocks are well bid particularly the big two BBVA & Santander, but drug makers and healthcare stocks are the notable laggards in Europe today. Roche is down 3%. The Swiss drug maker expects a delay to taspoglutide of at least 12 to 18 months because it’s introducing a “risk mitigation plan” to trials after patients showed hypersensitivity to the medicine. Ipsen, from whom Roche licensed the once-weekly shot in 2006, has lost 14% today. Novo Nordisk , whose Victoza drug would face competition from taspoglutide, benefited to the tune of 4.6%.Sanofi is down 5%, its biggest drop in almost a year, on concern that the French drug maker’s Lantus diabetes treatment may be linked to an increased risk of cancer. A study published this week in the journal Diabetes Care linked insulin glargine, as Lantus also is known, to an increased risk of cancer, according to a note today from Hobart Capital Markets, a London brokerage. Sanofi said the recent Lantus study is “unclear” and “lacks precision” and that previous studies showed results in favour of Lantus. That said I’ve read that a much larger analysis was carried out only yesterday by American Diabetes Association which refuted any link but in such a fragile market.

But better news for William Hill, the U.K.’s largest bookmaker by number of outlets, climbed 2.4% after having its recommendation raised to “buy” from “neutral” at UBS

Today’s Market Moving Stories.

•Data and news events have been minimal during the session. GBP has received a lift following better than expected public sector borrowing numbers and an increase in mortgage approvals provided by major banks. The PSNB is lower than expected at £16bn. Major banks mortgage approvals rise more than expected to 51k. GBP has subsequently performed reasonably well though the coming week presents a key hurdle in the shape of the 22 June UK emergency Budget. Markets will keenly await the extent to which the government can put a dent in the UK budget deficit and potentially any comments from the ratings agencies following.
•Spain has conducted its own stress tests on all its banks and Cajas and will publish the results. Press reports in Spain have already disclosed that Santander and BBVA scored the 1st and 2nd highest rating respectively in the wider EU version. Both names are well-capitalised and the key is how well provisioned the banks are in order to, and Santander certainly was able to add significant provisions for future loan write-offs (EUR9.5bn at end 09 added to cover 2010 and 2011 loan losses). If the stress test results are stringent enough to demonstrate real strength (or weakness) it could help the big two banks in their attempt to disassociate themselves from the wider Spanish association leaving the 2nd tier and Cajas behind
•Fitch Ratings has warned that it may take massive asset purchases by the European Central Bank to prevent Europe’s sovereign debt crisis escalating out of control. Brian Coulton, the agency’s head of sovereign ratings, said German members of the ECB appeared to be blocking the sort of muscular intervention in southern European bond markets needed to restore the shattered confidence of investors. “There has been an unwillingness to follow through, and markets are going to want to see the ECB’s money. It will require hundreds of billions in my opinion,” he told a global banking conference. The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU’s `shock and awe’ package, known as the European Financial Stability Facility. Total purchases so far have been €47bn. It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer. ECB council member Jose Manuel Gonzalez-Paramo said it was “not entirely correct” to assume that the ECB was the sole buyer of the debt. “We will continue buying bonds until the situation has stabilized,” he said.
•A joint IMF/EU/ECB mission concluded that Greece is on track to meet its fiscal and structural reform targets. The mission sees a chance that the recession may be less bad than feared and that Greece’s fiscal position may improve more than projected. Greek public and private sector unions will hold a general 24-hour strike on June 29. Greek unemployment jumped to a 10-year high in Q1 2010 to 11.7% from 10.3% in Q4 2009.

Stressed Free Banking?

Yesterday’s news was filled with stress test headlines which culminated in an agreement by the EU to publish the stress test results on 25 major banks in Europe (includes 5 UK banks). These will be published in the second half of July. Greater transparency on the big names will be provided but we won’t be any the wiser on smaller names such as the savings banks and the Landesbanks in Germany also come to mind. The Spanish have done a separate stress test on all the fins institutions including Cajas (savings banks) and these will also be published. There are some concerns about the destabilising impact of revealing weak/insolvent banks but there is a pledge within the agreement to show flexibility in terms of limiting government aid to banks and as such it would make sense to see any intervention in the form of state aid to be forthcoming and available immediately for a bank failing the test. Level of detail to be disclosed still needs to be decided on and what exactly the tests were testing is not really clear yet other than to assess the impact on banks in the “most adverse scenarios” (Barrosso words) I read potential double-dip here. I assume sovereign debt holdings will also be looked at considering the Greece & Co story this year. In addition, the EU is recommending the general banking levy and the global transaction tax to the G-20 summit in Toronto. Merkel said yesterday that if G-20 countries resist, the EU will enact these levies on its own.

Company / Equity News

•Communication Workers Union Deputy General Secretary Andy Kerr said he is confident that CWU members who work for BT Group will vote in favour of a strike over pay, the Financial Times reported, citing an interview. The union is prepared for “quite a period of time of industrial action,” the newspaper cited Kerr as saying.
•STMicroelectronics expects the depreciation in the euro will help boost earnings, Chief Financial Officer Carlo Ferro said in a briefing in Hong Kong today. Each 1 percent drop in the euro’s value will generate between $8 million to $10 million of additional operating profit per quarter, Ferro said.
•BP ’s $20 billion oil spill fund, established at the request of U.S. President Barack Obama, may not stop more than 230 lawsuits filed by people and businesses harmed by the worst environmental disaster in U.S. history, a judge said. U.S. District Judge Carl Barbier said while BP’s new fund is a welcome step, he believes some spill damage claims won’t be resolved through either the interim-claims process BP has set up under the Oil Pollution Act of 1990 or by the panel of mediators, led by Ken Feinberg, appointed by Obama to administer the fund. The shares were up about 5% in early trading but US rating agency Moody’s have just downgraded their credit rating 3 notches to A2 so this may take some of the steam out of the rally.
•Key components of Australia’s planned “super profits” tax on mining companies will be dumped by the government, the West Australian said, without citing sources. The government, intent on keeping a 40% tax rate for the resource super profits tax and applying it to existing projects, is poised to axe the idea of underwriting losses in failed mining ventures, the West said. The government is planning to “significantly” lift the threshold at which the 40 percent tax kicks in, from a planned 6% now, it said. The government is also considering whether the threshold could vary according to the mineral, the paper said. It may allow mining companies to write-off capital expenditure before it applied, it said.
•French food company Danone said Friday it is merging its fresh dairy product businesses in Russia with those of local company Unimilk, creating an entity with about EUR1.5 billion of annual sales that will be 57.5% controlled by Danone. Danone said in a press release that the transaction will be carried out principally through a contribution of assets, supplemented with a cash purchase of shares by Danone. As a result, Danone’s net financial debt will increase by EUR1.3 billion principally as a result of the value of the put options that will be granted to the current shareholders of Unimilk. These options will allow them to dispose part or all of their shares in the new entity, with Danone being able to hold 100% of these shares in 2022. The operation will be accretive to Danone earnings per share starting in 2011.
•Volkswagen and Daimler are the winners of the latest weighting in the DAX
index, market participants say, noting Volkswagen’s weighting could increase “significantly” to around 25% due to a capital hike when the changes come into effect at the end of trade Friday. Siemens and Deutsche Telekom are seen as the losers, as Siemens is to be capped at 10% from the current 10.6% and Telekom’s weighting will fall to around 6% following a low dividend payment, traders say.
•Separately Porsche said it expects a full- year loss of less than 1 bn euros, which is an improvement on the company’s previous forecast, it said in a statement on its website.
•Rupert Murdoch’s News Corp. says the £7.8 bn bid for British Sky Broadcasting is “full and fair.” Investors and analysts say even a 14 percent increase would be the “bare minimum.” BSkyB, the U.K.’s biggest pay-TV operator, this week rejected the 700 pence a share offer and said it wanted at least 800p. Faced with pressure from News Corp. to buy the 61 percent it doesn’t already own, investors should fight for a higher bid, according to Singer Capital Markets analyst Johnathan Barrett.
•Santander’s interest in M&T Bank, through its unit Sovereign Bank, is reported to have been confirmed by the Spanish bank’s vice chairman Matias Rodriguez Inciarte. Inciarte would not elaborate on the nature of the talks, but this would potentially indicate that there is a very live prospect for the AIB’s M&T stake.

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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