Stock Market Wall Of Worry For Wednesday

By: PaddyPowerTrader

A disappointed close on Tuesday saw US equities shed most of their early gains. Initially well received bond auctions & syndicated deals from Austria & Spain boosted sentiment post US holidays. The most interesting snippet from the Spanish deal was that the Chinese Central Bank are reported to have been in for Eur 540m. This is potentially very significant as Asian accounts have been big sellers of European peripheral bond markets. This may mark a turning point in sentiment & could result in significant spread tightening as Asian accounts tend to hunt in packs

However later on yesterday a weak non-manufacturing ISM report yesterday maintained the recent trend of tepid US economic data, giving the double dippers more ammo and the investors another excuse to sell into rallies. What’s more, those hunting for regional macro weakness were not disappointed overnight as Australia posted a much weaker than expected construction index.

Today stocks have started soft on worries that the US’s modest recovery may be petering out & that we are headed for the dreaded double dip

In Europe, equity markets continue the weak trend. Main movers today are BP and Sainsbury (see below), both up c.4% on unsubstantiated Bloomberg reports of deals with Middle Eastern funds, while Novartis is also outperforming today following a Morgan Stanley upgrade to overweight last night.

Today’s Market Moving Stories

Greek Stress Tests
The EC/IMF mission to Greece has a “positive” overall assessment; Greek central bank governor said that Greece will publish stress-test results for the larger banks, “and I believe that things will go smoothly”

According to Market News, an unofficial report published by the recent EC/ECB/IMF mission to Greece concluded that the “overall assessment was positive, with programme implementation being broadly on track”, though “a number of pressure points and areas were identified, with the authorities expressing their commitment to address them.” The mission report stated that the Greek economy was developing in line with expectations (other than a higher outturn for inflation), with “fiscal consolidation” being “broadly in line with plans”, though concerns remained about the economic outlook, the lack of detailed fiscal data, and health of the banking system.

Meanwhile, Greek central bank Governor Provopoulos said in a TV interview yesterday that Greece would not need additional austerity measures this year. While there had been “a certain shortfall” in revenues in H1 10 vs. the full year target, he noted that this was because certain taxation measures had not yet taken full effect, and that the growth rate of revenues would improve. He also said, concerning the banking sector stress tests, that “Greek banks have no problem” while “All EU countries will publish their stress test in the next fifteen days. We have the intention to announce the results of the larger banks, which are the core of our banking system, and I believe that things will go smoothly”.

German Banks And The Stress Tests
On Monday, 16 German banks agreed to take part in stress tests, Handelsblatt reported. Yesterday, the Bundesbank sent formulas to 16 banks, which are to be returned on Monday next week. In Europe, 100 banks are expected to participate in the exercise. Tests assume, for instance, “double digit” writeoffs of Greek government bond holdings. If banks fail the tests, Germany’s bank rescue fund SoFFin would stand ready, the paper notes. SoFFin’s funding capacity is currently about EUR50bn (from an original EUR80bn, EUR30bn was paid out as equity support to Commerzbank, Hype Real Estate and WestLB). This Monday, the EU Commissioner O Rehn was reported as saying that banks, which would fail the stress tests, could take recourse to the funds in the EUR750bn euro rescue package if needed.

Separately, a spokeswoman for CEBS (the London-based Committee of European Banking Supervisors) said that a decision had not been officially made to publish any information on the EU stress tests ahead of the official release of the tests on July 23. The UK’s Times had reported that the names of the banks undergoing the tests would be released today. Last month CEBS said that the stress tests would cover over 60% of EU banking sector by assets.

Breaking News: a Reuters story (extract shown below) on the EU bank stress tests.
A source says the stress haircut on peripheral government bonds will be in the “double-digit” percentages. A fear is that for political reasons the ECB/CEBS might not be willing to impose a strong enough stress test on sovereign debt, especially one that implies default/large losses when the politicians have been vehement that no countries will default. If this Retuers story is correct, the stress test results would indeed be more credible, and more credible than the simple flat 3% loss that Wolfgang Munchau opined that we might get in his FT column on Monday

“The stress tests for European banks will not include a haircut on German sovereign bonds, two banking sources in Germany told Reuters on Wednesday. “Bunds will not be stressed,” one of the sources said, adding that French sovereign bonds “if at all, will be stressed to a very limited extent”.

Sovereign bonds of the troubled PIIGS states — Portugal, Italy, Ireland, Greece and Spain — will however see significant stress tests, the sources said. “For some PIIGS states there will be a double-digit haircut,” one of the two sources said, adding this would not be as drastic as expected by some financial analysts ….

Markets are so far unconvinced the stress tests, whose results are due to be published on July 23, will be credible.

Q2 Investment Bank Earnings Will Be Weak
The FT says earnings are “expected to drop sharply for the second quarter after brutally tough market conditions saw trading commissions dry up and the market for takeovers and initial public offerings freeze.” It speculates that European banks could see drop of -50% y/y in sales, trading and advisory revenues. It cites the sovereign debt crisis, US financial regulation, and worries over sustainability of recovery as reasons why trading volumes should be lower. If true, risk appetite should be hit next week. Q2 earning season kicks off Monday. Most financials report the week after, but we get JPMorgan on Thursday 15th, and Citibank and BoA on Fri 14th.

Japanese Election On Sunday Could Push USD/JPY Higher
It’s an Upper house election only, not the significantly more powerful lower house. But still worth watching this as it could push the USD / JPY cross higher Thurs and Friday on the political uncertainty as the election approaches. Also a bad result for government could mean further Yen losses on Monday.

Why all the fuss?:
(1) The Upper house has a lot of power, and can block draft laws outright (although note that the lower house has full control over the budget, and the decision on who the PM should be).
(2) The ruling coalition’s majority in the upper house is currently paper thin. Only 2 seats wide. Opinion polls say election result is too close to call. So the slender majority could be lost.

Consequences for PM? If the election is lost PM Kan could:
(1) Find other allies in the upper house and invite them to join the coalition. He would have to surrender some influence on policy as a reward to partners.
(2) Carry-on regardless and face several years of slow lawmaking.

Consequences for yen? I doubt the yen will be as badly affected by election uncertainty as it was when Hatoyama stepped down in April because) fiscal/yen policy is unlikely to change much near-term unless the coalition is unexpectedly massacred at the polls. Rather, the risks will come in September, when the DPJ party faithful decide on whether Kan gets to keep his job as DPJ party leader. If PM Kan presides over a defeat this weekend, his chances of surviving the party vote in September will be reduced, and if he fails, we could get (another) new PM in September. Then the issue of strong-yen/weak-yen debate would have to be held all over again

Also, for the moment, the yen is the new dollar. That trumps political uncertainty. If you think a double-dip is coming, and will be centred around the US, and you’re risk averse and need a safe haven, who are you gonna call?

Company / Equity News

•CRH today issued a trading update for the six months to June 2010. Like-for-like revenues declined by a disappointing 10% in H1 (most analysts were expecting a 5% decline) while EBITDA is expected to be 20% lower (versus the consensus of -15%). Most of the shortfall was in the Americas Materials division with a combination of lower revenues (-10%) and margins resulting in a 45% decline in profits year-on-year (yoy). In terms of outlook, management sounds a note of caution in the statement, indicating that while the rate of decline in revenue growth in H2 is likely to improve, the full-year decline in revenues is ‘now likely to be somewhat greater than expected’. The stock is off a full 10% today and has had knock on effects for the wider building materials sector with Holcim the world’s second-biggest cement maker is down 3.5% and HeidelbergCement, the third-largest, dropping 5.8%
•DS Smith, a UK peer of Smurfit Kappa, has submitted a binding offer of 247m for the proposed acquisition of Otor, a leading corrugated packaging company in France. The offer is equivalent to 8.97 per share, which represents a 73% premium to yesterday’s closing price of 5.17.
•Tullow Oil has this morning released an RNS confirming government approval for the purchase of Heritage Oil’s assets in Uganda’s Lake Albert. This announcement had been well flagged by management at yesterday’s trading update. However, confirmation today means that Tullow Oil can now start the farmdown of its share to Total and CNOOC. Management have guided that this will take place over the next 2 weeks.
•ESB Ireland has agreed to buy Northern Ireland Electricity (NIE) the owner of the regulated electricity transmission and distribution network in Northern Ireland, from Arcapita Bank-owned Viridian Group for £1,034m.
•The FT, Telegraph, Guardian and the Daily Mail all carried stories in their market report sections that QIA were considering resuscitating their bid interest in Sainsbury. The QIA already holds a 26% interest following an aborted bid 3 years ago. The stake was diluted by last year’s rights issue, which they didn’t participate in, which suggested their interest in the Group had waned. Substantial barriers remain in the form of the pension fund (which will likely require a GBP1bn plus injection) and family opposition. Meanwhile any kind of engineering with the property transaction will be fraught with problems – trying to find demand for a single tenant which, as a result of the transaction, would be non investment grade will be difficult. Further, a superstore group which does not have control of a majority of its property portfolio is a potential recipe for problems. I suspect there is no story here.
•M&S Q1 like for like sales were up 3.6%, ahead of the 2.3% expected but below the 5.1% reported in Q4 2009/10. The timing of Easter however suppressed Q1 by 0.4% and added 1.3% to the previous quarter. General Merchandise (clothing & home) was the key outperformer with LFL sales up 6.0%, albeit down from the 9.1% reported in Q4 2009/10. LFL Food sales were up 1.5%, against 1.8% in the previous quarter, which is not surprising given the backdrop of a sector slowdown and slowing/no inflation.
•According to Les Echos the French car manufacturer PSA Peorgot Citreon could relaunch its investment project in India.
•Hexagon has rallied 9.5% today on news that the world’s biggest maker of measuring instruments has agreed to buy U.S.-based Intergraph Corp. for $2.13 billion to add software that helps companies visualize complex data and design factories, ships and oilrigs.
•Catering giant Sodexo announced Q3 sales which demonstrated a noticeable improvement. Nine month organic sales rose 1.9%, against a 0.4% advance in H1 (3 month figures not disclosed).

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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