Stock Market Cheer From The Jobless Numbers

By: PaddyPowerTrader

So auf wiedersehen Deutschland it is Core (Netherlands) vs PIIGS (Spain) in the World Cup final this Sunday so one thing is clear we will have a new World Champion the 8th after Argentina, Brazil, Germany, France, Italy, Uruguay and England.

S&P500 had its best session in 6 weeks closing up a whopping +3.13% closing at key technical resistance at 1065 with the Vix much more relaxed: 26.84 (prev. 29.65). Asia followed through with the Nikkei +2.6% while the very rosy Australia employment report provided another boost.

You’ll be hard pressed to find a single catalyst for the sudden Pamplonian like Bull Run in US, but with no economic data to dampen the animal spirits, a combination of State Street’s good numbers helped financials (There’s a lesson in this for how influential start of earnings season next week could be), talk of a Mircosoft bid for Nokia, news from the early publication of the Council of Shopping Centres trade group June report which said US retailers’ sales are growing at the fastest pace in 4 years. In addition, the IMF raised its global economic growth forecast and the Street started to believe the results of hope that the EU bank stress test won’t be as bad as previously feared.

Datawise today from the US, we’ve seen initial jobless claims nudge down (though they are still remain uncomfortably elevated) while there was a larger than expected fall in continuing claims.

This morning in Europe no one wants to miss a continuing move higher, but neither do they want to buy on the highs only to see the market fade. The fact the rally has been on low volumes has lead to questions and skepticism over the sustainability of the move.

Sector wise auto’s and parts names are struggling after broker downgrades and we’re seeing some rotate out of crowded trades. Recruitment agency Hays, AB Foods and quoted hedge fund Man Group all trade better after numbers before the open this morning. FirstGroup has gone better since releasing an AGM statement mid-morning, trading is in line, guidance is unchanged and disposal of Railfreight reduces net debt. The Bank of England announcement was as expected, the MPC decided to leave the policy rate unchanged at 0.5% and their stock of asset purchases unchanged at £200 billion. The UK’s Industrial Production data was better than expected in May, rising 0.7% (0.4E); however, the previous month was revised to -0.7 (-0.4P) and the YoY drops to 2.6 (3.1E) due to these downward revisions . Earlier, Halifax house prices were lower than expected at -0.6 (+0.2E, -0.5P) and weighed down on GBP.

Today’s Market Moving Stories

•A Stellar Aussie employment report for June, with employment growth coming in three times stronger than the consensus expectation of all 22 economists surveyed. The unemployment rate also beat 5.1% (cons. 5.2%). In fairness to the consensus, they would have been nearly bang on target if part-time jobs hadn’t surged. Part-timers were +27.5k after 4 months of declines. totally unexpected.
•The International Monetary Fund raised its forecast for global growth this year, reflecting a stronger than expected first half, while warning that financial market turmoil has increased the risks to the recovery. The world economy will expand 4.6% in 2010, the biggest gain since 2007, compared with an April projection of 4.2%, the Washington-based fund said in revisions yesterday to its World Economic Outlook. Growth next year is projected to be 4.3%, unchanged from the April forecast. Canada and the U.S. are leading advanced economies out of the worst recession since World War II, trailed by euro area countries that need additional measures to boost confidence in their banks. Faster expansions in Brazil, China and India are helping to protect the global recovery as a sovereign-debt crisis weighs on Europe, the IMF said.
•But the IMF revises Spanish growth forecasts downwards. El Pais has the story that the IMF forecasts a 2011 growth rate of only 0.6%, down from a forecast of 0.9% in April, and less than half of the forecast of the Spanish government, of 1.3%. El Pais says Spain comes out worst of the major industrial nations, in the IMF’s latest forecast. For the world economy the Fund has raised its forecast from 4.3% to 4.6%, mostly as a result of higher growth in emerging markets. But the IMF has also warned about higher risks to the recovery.
•Continuing the run of recent impressive Teutonic data figures released today show German industrial production grew by a much stronger than expected 2.6% MoM in May, with the April increase revised to +1.2% (from 0.9% MoM). Manufacturing output grew by 3.4% MoM in May, after a 1.1% rise in April (revised from 0.6% m/m), while construction output retraced with a 2.3% drop after a gain of 2.5% in April.
•More than 127,000 U.K. companies owing £69.5 billion in liabilities were at risk of default in the second quarter of 2010 a 26% increase from the first quarter in the amount of liabilities at risk, a survey from corporate recovery and insolvency specialists Begbies Traynor showed. The survey, called the Red Flag Alert, which monitors the warning signs of companies in distress, found the average size of the debt owed by troubled companies is £545,000, which is a 60% increase from the average size of company debt seen in the first quarter. Begbies Traynor said this suggests that larger companies are now experiencing difficulties, implying that the post recession stress is migrating out of the small and medium enterprise sector to more significant businesses, potentially threatening greater job losses.
•Japanese machinery orders fell the most since August 2008, a sign that any rebound in business investment may be too weak to drive an economic recovery that is showing signs of losing momentum. Orders, an indicator of future capital spending, slid 9.1 percent in May from April, the Cabinet Office said today in Tokyo. It was the first decline in three months, and exceeded the median 3 percent drop in a Bloomberg News survey.
Banking Stress Tests

The long awaited Official stress test details emerged last night.

They will include 91 banks in the eurozone, accounting for some 65% of all banking assets. There will be three scenarios; the ECB’s forecast growth scenario, an economic downturn, and higher risk surcharges for government bonds. Among those there are 19 Spanish banks, and 14 German. The test results will be published on July 23 Bloomberg writes that the stress tests would include a 3% haircut on Spanish, and a 17% haircut on Greek debt. This is less then investors expected, at least according to recovery swaps, which are trading at rates that imply investors would get back about 40% in a Greek default or debt restructuring.

Germany’s banking regulator considers a legal trick to force publication under the German banking laws, the banks are not required to publish the stress test information, and several are still reluctant to do so. Germany’s banking regulator Bafin is considering using stock exchange laws to force publication, which applies to any bank that has its shares or preference shares listed on an exchange. Under those rules, the banks are required to forward any information that has a bearing on the stock price. FT Deutschland, which has the story, quotes legal experts as saying that it this is a legal grey area.

Company / Equity News

•Sky news is reporting that HSBC are in the early stages of possibly preparing a bid for OldMut’s Nedbank. Although it won’t necessarily actually make a bid the story is certainly credible if HSBC is following the strategy of Standard Chartered and enlarging its global footprint to S Africa. For OldMut, this would be good news and more positive for bonds (which have already been on an upward trajectory in recent months) and from its perspective would not really matter if it was Standard Chartered or HSBC acquiring Nedbank. From HSBC’s perspective, it is well capitalised and could probably acquire Nedbank with relatively less stress than Standard Chartered.
•Market reports in the press are claiming that the Abu Dhabi Investment Authority (ADIA) has agreed to buy Ontario Teachers’ 26.8% stake in Northumbrian Water, and plan make a full bid for the company valuing Northumbrian at GBP2.1bn. I am not convinced of this story, as Northumbrian Water is a very attractive asset for a pension fund, and previous comments from Ontario Teachers confirmed that they were happy with their existing stake. Of potentially more significance however is the read across for the other two listed names, Severn Trent and UU plc. With the regulatory review out of the way, and LBO financing being contemplated for Abertis in Spain, it seems inevitable that these two companies will come under fresh bid speculation.
•Latest indications suggest that BP is less than 300ft from intercepting the ruptured Macondo well in the Gulf of Mexico. Drilling of the relief has progressed well so far with no interruptions from storms which typify the weather in the area during this time of the year. This news has led to reports that the BP has internally set the 27th of July as the date for capping the well. This would coincide with the company’s Q2 results and would provide a positive catalyst for the major. Meanwhile, BP CEO continues to visit partners and potential strategic investors in the Middle East. Hayward met with the Crown Prince of Abu Dhabi yesterday describing the discussions as “very good”.
•Galliford Try, a UK House builder and construction company, released its FY10 trading update this morning. Galliford’s house building division has increased Average Selling Prices (ASP) by 10% YoY, while volumes spiked strongly in H2. Management has reported a 25% increase in housing sales carried forward, while cancellation rates remain at historical lows of 14%. This positive momentum has lead management to guide full year PBT to come in at the top end of analyst expectations for the year. Of relevance for Abbey is the progress Galliford has made on the land acquisition front. The land bank has increased by 23% YoY and management now estimate that 56% of the land bank was secured at current market values (up from 36% at H1), which bodes well for margin development. Abbey report its FY10 numbers next Thursday.

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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