Sovereign Debt Worries Return to Plague Stock Markets

By: PaddyPowerTrader

Away from the Footie which is rapidly looking like are run of World War 2 with French surrendering early, the American’s only showing up at the last minute and it’s left to the English to beat the Germans (again) it was another choppy session on Wall Street where stocks showed some reliance after the Federal Reserve acknowledged that the European sovereign debt and bank liquidity crisis may harm American growth and new home sales sank to a record 30 year low. General Electric, Chevron and Microsoft all retreated more than 1.7% after the Fed’s Open Market Committee statement said “financial conditions have become less supportive of economic growth on balance.” While Adobe Systems shed 7.3%, reaching the lowest price since July, after forecasting revenue that may miss the average analyst estimate.

Earlier during the European morning Wednesday we had a weak Portuguese bond auction, and unfounded rumours about a French sovereign credit downgrade (again) and Greek bonds spreads ballooning due to their ejection from indicies at month end which is leading to forced selling all adding to the nervous tone.

Today Stateside we’ve had a marginal miss on the durable good numbers and an equally slightly more positive print on the weekly jobless claims figures which should cancel each other out.

Today’s market Moving News

•In some market moving news for mining and basic resources stocks, the Australian Prime Minister, Kevin Rudd, stepped down and relinquished his leadership, handing power to his Deputy, Julia Gillard. In a press conference following the announcement, the new Prime Minister spoke on three key policy issues (industrial relations, climate change and Resource Super Profit Tax (RSPT)) that will now be under review ahead of the forthcoming election, and also pledged to restore the Federal Budget to surplus by 2013, as had her predecessor. Regarding RSPT, Gillard will likely dilute the RSPT in some shape or form. To reach a consensus between the government and the mining industry, the new PM intends to consult and negotiate with the mining sector in order to end the uncertainty surrounding the RSPT that has been hindering the Australian economy. Ms. Gillard suggested today that “in coming months” she would ask the Governor General to call an election. The latest possible date for the poll is April 16, 2011.
•Sterling still finding support after yesterday’s BoE minutes revealed Andrew Sentence “pulled a Hoenig”. He went on a solo run and voted for a policy rate hike at the June meeting. Moody’s comment expressing satisfaction with the UK budget also played its part, alleviating concerns over the Aaa rating and a dovish Fed also helping Cable higher. It touched 1.50, before retreating slightly. FX technical’s say 1.5054 is the key resistance.
•First China acts to reduce pressure in run up to G20 summit in Toronto on Friday-Sunday, now its Germany’s turn. Germany’s Schaeuble writes for FT. Merkel appears in WSJ. Schaeuble said “excessive budget deficits” were the cause of the Eurozone crisis. Says austerity measures will only weaken GDP by 0.5%, and will not start until next year. Automatic stabilisers in Europe will counteract and “some of those who are pointing fingers at Germany” hail from countries where such built-in mechanisms to tackle economic slowdowns are much weaker (he means USA).Steps are not only moderate in scale, but they are also economically sensible because they will increase incentives for the jobless to find work, reduce subsidies and trim the civil service. Says amounts to a “controlled and measured approach to reducing our deficit” and not “slamming on the brakes”. Germany must work harder at reducing deficits in the medium term than many others as Germans are getting older, and population also shrinking . This will make it harder for future generations to service debts and, in time, will reduce our growth potential to about 1.5 per cent a year. Whereas the US, with its more vital demographic trends, can hope to “grow” its way out of its public debt, this is not an avenue that is open to us.
•Overnight we learnt that Japan’s export growth slowed for a third month in May, signalling the pace of the economic recovery is likely to cool.
•Catastrophe bonds, used by investors to bet against natural disasters, have slumped the most since 2008 as forecasters predict a busier-than-usual Atlantic hurricane season. The Swiss Re Cat Bond Price Return Index fell 0.6 percent on June 18, the biggest drop in 20 months for the benchmark. This year’s hurricane season may be the most active since 2005, which was the worst on record with more than 1,500 U.S. deaths and $115 billion in damage, Moody’s Investors Service said this month. The season begins June 1 and ends Nov. 30.

Who Got All The ECB Money?

We now know the nationality of banks that have taken up the cash injected at ECB tenders. First time we’ve seen a breakdown, as ECB never releases this sensitive geographical info. So who got the cash? As you might expect the usual suspects. Since mid 2008, banks in Greece, Portugal, Ireland and Spain took 68% of the ECB’s extra liquidity injections, even though the countries themselves only account for 18% of Eurozone GDP. This won’t help to ease concerns about Eurozone banks today. Note in particular that borrowing by Portuguese banks from the ECB doubled in May to a record 35.8 billion euros ($48.03 billion), Bank of Portugal figures showed on Wednesday, highlighting bank reliance on ECB funds. A Bank of Portugal spokesman confirmed the borrowing was at record high, but said historical comparisons did not necessarily take the growth in the economy into account. How did data finally leak out? Well, ECB tenders are conducted in a decentralised way. Each national central bank is responsible for conducting the tender in its own jurisdiction, then demand is aggregated afterwards. So someone, in this case RBS, just phoned up all the national central banks and asked them directly, and then joined the dots. A cunning plan. Just so you have an idea of scale here, ECB has released so much cash into the banking system over the past 2 years that, even though it sometimes mops up liquidity, EUR 844 bn is still ‘out there’. But don’t forget EUR 442 bn (more than half) of this is due to be retired a week from today, July 1. Worries over the consequences not helping banks and EURIBOR still rising.

Company/Equity News

•First round bidding is expected to close on Monday for AIB’s 70% stake in Bank Zachodni according to reports this morning. The Polish Government confirmed yesterday that PKO, its 51% owned bank, would submit a bid for the bank, in an attempt to keep 5% of its banking market in domestic hands. Other potential suitors include Santander, BBVA, BNP, Soc Gen, Sberbank Intesa and Bank Pekao The sale could generate c€2.5 billion for AIB.
•England is through to the World Cup knockout stages, rainfall levels are down 40-60% since April in Ireland and the UK, and the weather is warm. Time to buy C&C? The drinks company generates about 60% of its annual profits during summer months and its exposure to the seasonally important cider and beer markets has been amplified by the purchase of Gaymers and Tennants since last summer. Moreover, the share price is 10% below recent highs despite selling its spirits business at an EV/EBITDA premium that was higher than the multiple used on acquisitions. With a clean balance sheet alongside cost and revenue synergies from recent purchases the group is well placed financially. A warm breeze and further progress by the England soccer would be a positive for the shares.
•Davy’s have a new research note out on insurance company FBD this morning, they note that “In line with the recovery in the domestic economy, FBD experienced a return to premium growth in Q1. Further rate hardening is expected, and FBD is well positioned to benefit from this top-line recovery. Continued expansion into urban markets and a more normal claims experience will result in organic revenue and earnings growth” But they do “not believe that FBD should consider the acquisition of the Quinn Insurance business.
•Axa, Europe’s second-biggest insurer, agreed to sell part of its U.K. Life insurance unit to Clive Cowdery’s Resolution Ltd. for 2.75 billion pounds. “We will focus on our U.K. wealth management business where we are among the leaders and plan to continue to grow fast. Proceeds from the sale will be used to develop the busines. Resolution, backed by U.K. institutional investors including Aviva Plc and Schroders Plc, is half way through its plan to buy as many as four insurers before merging them and selling them back to the market by 2013. The buyout firm is betting lower U.K. sales and regulatory changes will force insurers to exit the country or merge books of policies. The company will pay Axa 2.25 billion pounds in cash and about 500 million pounds in notes. Axa will have an exceptional capital loss of about 1.4 billion euros this year as a result of the sale.
•Dell, the world’s third largest personal computer maker, expects fiscal 2011 operating income, excluding some costs, to rise as much as 23% this year, returning to growth after a twoyear slump.
•Google’s Android mobile operating system is winning over an important group of allies in its fledgling rivalry with Apple Inc’s smartphone software: application developers. More than half the 2,733 developers surveyed by Appcelerator, a mobile-software tools provider, see Android as having the most long-term potential among operating systems.
•Nike , the world’s largest maker of athletic shoes reported fourth-quarter revenue of $5.08 billion, missing the average analyst estimate of $5.15 billion in a Bloomberg survey.
•General Motors is preparing for an initial public offering that may sell 20% of the Treasury’s stake in the automaker and reduce the U.S. to a minority owner, said two people familiar with the plan. The aim is to sell a fifth of the government’s 304 million shares, said the people, who asked not to be identified revealing private discussions. That would reduce the Treasury Department’s stake to less than 50% from 61% now. The sale will probably raise $10 billion to $15 billion, depending on the company’s performance, the strength of the economy and the health of the IPO market, the people said.
•Air France, a report in La Tribune suggested management is seeking 4,390 staff departures by March 2013, citing a document which is due to be presented to unions next month

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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