Stock Market Indices Brush Off More Dire Economic Data

By: PaddyPowerTrader

In the first real trading day of 2009 yesterday, stocks took a breather and headed modestly lower. This was despite truly woeful auto sales numbers and updates on Apple founder Steve Jobs ailing state of health. In short limited risk appetite seems to have returned with less daily volatility. There are now less defensive stocks outperforming and each additional dire piece of gloomy economic news seems to be having a diminishing marginal negative effect on equity markets, for the moment.

Today's Market Moving Stories

• The investment bible Barron's is warning of a bubble in U.S. Treasuries prices (government bond market) given the expected supply to finance Obama's package, the TARP and tax cuts i.e. price too high and yield too low. The world's biggest bond fund, Bill Gross's PIMCO, echoes this by saying that investors should buy ALMOST anything else. They recommend well rated corporate bonds whose yields have sky rocketed unfairly in the chaos of the last 16 months. Indeed this is seen as one of the big trades of 2009. Sadly however it is almost impossible for the average punter to transact on this side of the pond due to illiquidity and huge bid / offer spreads.
• A very readable article by the bold maverick and former MPC member Willem Henrick Buiter is generating a lot of chat this morning in which he predicts a global dumping of U.S. assets (dollar negative). The question is though, where would all that money find a home?
• The UK Financial Services Authority is still planning on lifting the ban on short-selling of financial shares in the UK on January 16, despite calls from MPs to keep it.
• Waterford Wedgwood slipped into administration yesterday after a long painful battle to keep out of it. But already, three US-based parties are in talks to save the Irish glass and china company.
• CRH's results just out came in line with expectations. Operating profit slid about 30% last year and annual profit fell to €1.23B, ending 15 years of earnings growth. “The outlook for 2009 is extremely challenging, given the severe impact of ongoing turmoil in financial markets,” CRH said in the statement. “However, there are a number of positives with lower energy costs, the recent step-up in interest rate reductions and increasing prospects for a significant U.S. infrastructure stimulus package.”
• Other names reporting and in the news this morning are Next whose results are in line and M&S who are believed to be about to shed 1,000 jobs (they report tomorrow). The back page of this morning's FT has reported that yesterday's 5% rise in Invensys' share price was down to speculation that Siemens could be interested in acquiring the UK engineering group.
• Some of our chartist chums are bullish on 10 sectors and some economists even see a recovery by summer '09 .
• Storm in a D cup. It seems demand for everything is deflated these days !

The Future Of The U.S. Auto Industry Looks Even Bleaker
Fears for the future of the U.S. auto “industry” were back in the spotlight yesterday in the wake of the horrible auto sales numbers. Bottom of the heap was Chrysler, down 51%. Why would you buy a car from a company you think is going bust? The warranty would be worthless. Indeed the car industry details look as bad as the housing industry did one year ago. Inventories of unsold cars are at record levels. Sales have plunged 18% in 2008, mostly domestically made and mainly light trucks, which are the industries most profitable. Even the export market, which was having a special renaissance in the past few years, finally gave in to the global recession. Manufacturers slashed output and employment in 2008 but not enough. Manufacturers also slashed prices, especially for SUVs, and then stopped investing in the industry. However it is still too big to engage in market justice. The bailout looks futile.

What Next For The Bank Of England Interest Rates?
On Thursday at high noon, we get the hotly debated knife edge BoE rate decision. For once I'm in line with market expectations as I only expect a 50bp rate cut. Whilst a recent Reuters poll suggests that is the favoured view of the majority of analysts, almost a third are looking for a larger easing.

This minority view will have been boosted by the UK Nationwide consumer confidence measure that showed sentiment dropping to a four year low of 47 in December. Half those questioned are expecting a worsening of the economic situation over the next six months. If we get a really nasty services PMI number from the UK this morning, the ever fickle market will be looking for a bolder BoE move straight away. And just to confuse matters the “shadow MPC” wants the BoE's MPC to stand pat !

Data Today
We know what a dire state global manufacturing is in but today the focus will be on the all important services sector purchasing managers surveys from the U.S., Eurozone and the U.K. We've seen many recent examples that bad economic news is so anticipated that the shock factor is missing. The manufacturing equivalent of the U.S. survey hit a new 28 year low and this did not prevent a big downward movement in bonds. The non-manufacturing side is already hitting the lowest ever levels in its 11 year history. The consensus is that non-manufacturing is going to hit another all-time low.

Today's big European release will be the December HICP (inflation) flash estimate. The consensus is 1.8%YoY but regional releases from the Eurozone members over the past few days have been so weak that a print of 1.6-1.7%YoY should be the real expectation in the market. This is well within the ECB's magical comfort level and should enable the rate cuts party to continue. The tricky bit will of course be if inflation rates fall below 1%. Then the deflation alarm bells will start to sound. Thus far the ECB are in denial that this could happen. But never say never is surely the lesson of 2008.

Later on at 19.15, the U.S. Federal Reserve FoMC minutes from the meeting at which they decided to 0.25% is released. The main focus here will be on the discussions that they had regarding the policy of buying their own bond market and steps towards quantitative easing . This is the next logical thing to do when rates are zero but that hasn't had the required effect on the economy.

And Finally… What Is Likely To Be The Buzzword Of 2009, Deflation

Disclosures = None

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”.

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