Some ECB Relief But US Jobs Disappoint

By: PaddyPowerTrader

Yesterday was marred by more doom & gloom; not a glimmer of light throughout the European day. It started with China being battered after some alarming downward revisions to the Conference Board’s leading index for China overnight. Other negatives (and take your pick) included:

•another strike in Greece on the Austerity plan
•German Presidential Election today
•concern (particularly amongst the Spanish) about the ECB LTRO roll coming off (I think not that big a deal as it’s being replaced by other, 3 month tenders)
•a collapse in US consumer confidence numbers
•10 year Treasury bond trading sub 3% yield. And 2 year Treasury yields at all time lows
•EUR / CHF falling to an all time low & the JPY on the rampage.

The current big debate is if austerity measures being implemented by Governments are going to derail the fragile economy. Well the double dippers /re-opening of QE camp were clearly winning the argument yesterday.

But late in the NY session we finally got some good news as the U.S. House of Representatives voted to give homebuyers who qualified for a federal tax credit more time to settle on their pending purchases. This allowed stocks to “bounce” modestly from the extreme intraday lows

Today’s wall of worry includes:

•It’s month-end; quarter end & half year end•Greek bonds to be expelled from bond indices
•It’s the End of ECB’s *covered* bond buying program (which started a year ago – this is *not* the same as the sovereign bond buying program which only started 6-7 weeks ago). There is a slim chance the ECB could extend this today as it breached the EUR 60bn ceiling on the facility yesterday. Probably bad for EUR if it is extended.
•Parlimentary vote in Germany on the next German President (although admittedly not a major market mover so far – but a possible defeat for Merkel’s candidate could change that)
•Yesterday an ECB auction failed. Not just any auction – it’s the auction that allows the ECB to say they’re not doing QE. So now ECB can’t make that claim anymore. Will likely be plastered all over headlines tomorrow. Euro negative, purely from a psychological “printing money” perspective, but has no practical significance.
•We still have lingering (unjustified I believe) concern over tomorrow’s withdrawal of ECB liquidity.
•Auction of 5yr Spanish bonds on Thursday
And it’s not just the recent soggy macro economic data that’s rattling equities. There’s been a run of warnings over the past three weeks, including some household names. Companies that have guided lower include Nike; Walgreen; Best Buy; Bed, Bath & Beyond; Dell; 3M; FedEx; Honeywell; Nucor, and United Technologies. Part of the problem, in my view, is that earnings expectations have been set too high.

It’s also worth noting that there is a lot of chat today about a large bearish option trade overnight – Someone sold July 800 SPX Calls and bought Aug 700 SPX Calls – notional US$6.5bn…he’s clearly looking for a pretty negative August!!

Today markets are getting (a temporary?) respite courtesy of the lower than consensus uptake at the ECB’s refinancing operation. This has cheered banking stocks with Barclays ahead by 4.1%, Lloyd’s better by 3.6%, Santander up 4.3% and Soc Gen advancing 3.2% but for me the jury is still out on this one. And the US ADP private sector employment number for June has undershot consensus forecasts coming in at a meagre +13k versus the expected +60k, so not a good omen for the key Non Farm Payrolls number due Friday and may see some economists & the markets paring back their expectations from the current -115k level. Note its negative as all those temps who got hired to do the census are being let go.

Today’s Market Moving Stories

EUR And Banking Stocks
EUR/USD and banking stocks had decent bounce this morning in the wake of the ECB’s three month liquidity injection (to a high of 1.2285). Banks bid for only EUR132bn of liquidity at the tender – below the general expectation of EUR250-300bn and well below the EUR442bn 12 month facility that expires tomorrow. That European banks are not desperate enough for liquidity to pay the ECB’s penal 1.0% fixed rate. This will be seen as a positive sign for the health of the banking sector..

US Senate Banking Bill
Overnight in what seems to me like another stonking victory for the US Banks (courtesy of intense lobbying) as the proposed USD19bn levy which would have offset the cost of the financial bill has been dropped. Its inclusion was threatening the votes of some key senate reps. The fee is being replaced with money generated by ending the USD700bn TARP programme early (original expiration date was Oct 2010) which would free USD11bn in some accounting adjustment and also by increasing the FDIC deposit insurance premium for banks with assets >USD10bn. The legislation completion deadline is July 4th so with the long weekend coming up the Senate either votes today or it will have to wait until after the holiday. Considering the abolition of a more global based tax and with UK and Germany already off the blocks with their own national bank levy I don’t think this move by the US will influence decisions across Europe.

European Bank Stress Tests
Lots more press leaks from the upcoming bank stress test publications. Firstly the three German banks, Deutsche, Commerzbank and BayernLB have been said to have passed the stress tests. This is a good news headline but in reality we cannot get comfortable until we know what the parameters were. Secondly, press reports are revealing that the tests are being expanded beyond the current 25 large banks and will include 70-120 banks. Also an expanded test to include additional criteria, notably sovereign debt exposure, is underway. It makes sense to see the position of the banking sector in both listed and unlisted names and you can’t help but feel that unless the Landesbanks and Spanish cajas are included, it won’t be a credible test. German Landesbanks are kicking up a fuss and object to the publication of stress tests but the German regulators are meeting the big lenders today to discuss amongst other things, the stress tests

UK Economics
The GfK NOP consumer confidence index dropped by one point to -19 in June – the fourth consecutive decrease to take the index to its lowest level since December 2009. Four of the five measures decreased this month, with confidence in personal finance over the next 12 months the only one to see a rise.

BOE monetary policy committee member Paul Fisher said “We need to be sensitive to the risk of tightening policy prematurely, stifling the nascent recovery … The risk of deflation … may have faded, but it hasn’t gone away.”

Broadly as expected, the Nationwide’s index of house prices rose 0.1% m/m in June following a 0.5% rise in May. This brought the year-on-year rate of increase down to 8.7% from 9.8% previously.

Japan
The Nomura/JMMA manufacturing PMI eased to 53.9 in June from 54.7 previously – the first pullback in the index in five months (from the highest level in almost four years). The index for new export orders fell for the second consecutive month to 56.9 in June from 57.5 in May. The output component declined to 55.9 from 57.2 in May, its first fall in three months.

Wage earners’ total cash earnings fell 0.2% y/y in May – the first decline in three months according to the labour ministry. Separate data show that housing starts fell 4.6% y/y in May – far off the consensus forecast for a 5.0% increase, following a 0.6% gain the previous month (which was the first annual gain in 17 months). In addition, orders received by 50 major construction companies in May rose 9.2% y/y, after a 25.0% drop previously.

Australia / Mining
The Australian Financial Review reports that top Australian government officials met with miners over the proposed ‘miners tax’ and comments that a compromise deal could be offered as early as today.

Warning Signs From The FX Markets
The following, by Simon Derrick at Bank Of NY Mellon (see here for original) is interesting. It’s also been picked up and discussed by FT Alphaville.

Pinpointing the start of the current crisis is easy enough. At the start of December 2009, Greece was formally put under EU supervision following an announcement by the new administration that the public deficit for 2007 was forecast to come in at 12.5% of GDP. Not only was this more than four times the permitted level for an EU state but it also stood in stark contrast to the 3.7% predicted in April by the previous administration. The reaction of the main ratings agencies to this news was swift. On December 8th Fitch Ratings downgraded Greece’s long-term foreign currency and local currency Issuer Default Ratings to ‘BBB+’ from ‘A-’ and moved the outlook to Negative (highlighting concerns about the lack of substantive structural policy measures). Both Standard & Poor’s and Moody’s followed this lead over the next few days, cutting their ratings for Greece while also issuing a series of warnings that further ratings downgrade might be in the pipeline. December 8th also proved the point that the EUR began its (understandable) collapse against a wide range of currencies and key commodities.

Identifying the overall winners since December 8th of last year is also straightforward enough. With the EUR down 25% against gold and 21% against oil, it is easy to see that with the collapse of the single currency as a store of value, investors were keen to seek credible alternatives. As such, hard assets such as commodities (or property in a variety of international locations) provided an understandable alternative home through much of the past six months. Equally, commodity backed currencies such as the CAD and the AUD sparkled with the EUR losing 17% against the former and 11.5% against the latter (the difference in performance being explained by the proposed “super profits” tax on commodity producers in Australia announced in May). Both the JPY and the USD put in performances not far short of that of the CAD (reflecting their status as store of value in times of trouble – as proved the case in H2 2008) while the CHF and GBP notably underperformed (the former due to the Swiss National Bank’s (SNB) intervention campaign and the latter due to concerns over the outcome of the General Election). Little wonder then that Russia has been openly discussing of late adding commodity currencies to the mix of its FX reserves.

It must be noted, however, that the past few weeks has seen a notable (and worrying) change in the patterns of behaviour. Since June 17th (the day that the SNB effectively stepped back from the currency markets), three currencies have stood out as the top performers amongst the majors: the CHF, JPY and GBP (with the EUR losing 3.7% against the first two currencies and 2.9% against the third). In contrast the EUR has fallen just 1.3% against the USD and has actually gained in value against both the CAD and AUD. In line with this it is noticeable that both gold and oil have also fallen in value against the European unit.

Although it is tempting to believe that the SNB’s move could be a significant factor here (or that China’s shift in currency policy might be a factor as well), its seems to me that the real key to understanding what is happening here is the sudden underperformance of key commodity prices (and commodity linked currencies). The reason why this matter is that this is exactly what happened in the last quarter of 2008 following the spread of the banking crisis from the US to Iceland, the UK and Europe. Between September 26th and the end of 2008 while EUR/JPY had collapsed by 18% and EUR/CHF by 6%, the single currency had actually managed to climb 13% against the CAD and 12.5% against the AUD. Over the same period gold held its value (but no more) against the EUR while oil had halved in value. In other words, when the centre of the storm hit investors had little interest in holding anything other than the safest of safe assets. Put another way, it seems to me that the recent and marked underperformance of commodities and commodity based currencies relative to both the CHF and the JPY could be an early warning signal that sentiment is taking a significant turn for the worse in an echo of the way it did in late 2008.

Company / Equity News

•The star of the show in Europe today is AstraZeneca, the U.K.’s second-biggest drugmaker, which soared 9% plus after a US District Judge ruled yesterday that a patent on the active ingredient in Crestor is valid and enforceable. “With the Crestor overhang and risk of significant downside removed, investment focus should shift to the potential upside from a buyback program,” wrote analysts at JPMorgan in a report today, upgrading their recommendation on the shares to “neutral” from “underweight.”
•Portugal Telecom has rallied strongly Wednesday after Telefonica increased its offer for the Portuguese company’s stake in Brazil’s largest mobile-phone operator to 7.15 billion Euro, sweetening its bid by 10% hours before shareholders of the Portuguese company vote on the deal. Portugal Telecom climbed 5.4% before the shares were suspended while the shareholder meeting takes place.
•But Verbund , Austria’s biggest utility, has sunk 5.6% after announcing it will sell shares worth as much as 1 billion euro today
•Siemens is up 1.5% after news that Europe’s largest engineering company plans to take a 49% stake in the offshore-wind installation unit of Denmark’s Dong Energy A/S for about 860 million kroner ($141 million). Separately Arques Industries, the German holding company that owns most of Siemens’s Gigaset cordless-phone operations, rallied 7.8% after saying it returned to profit in the first quarter.
•HMV released its full year results this morning for the 52 weeks ending 24th April. Total group sales grew 3.1% to in excess of £2bn, reflecting market share gains across all product categories. Despite continued weakness at its Waterstone’s bookstore chain, profit before tax was up 17% to £74.2m, in line with analysts’ expectations. Trading was strong in live venues, following its entry into the fast growing live music market through a joint venture with MAMA group. Management have reiterated its focus on transforming the business from a one dimensional retailer to a broader entertainment brand. The stock is up 6% today.
•The North Korean government has announced the tragic loss of their underachieving world cup squad in a boating accident next Tuesday

Worth a look: The Psychology Of Market Cycles

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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