An eerily quiet treading water day at the end of the Bush era, with the weakest U.S. ISM manufacturing report in 28 years derailing any chance of a rally. Note that there is a VERY strong correlation historically between this survey and future economic growth.
Today’s Market Moving Stories
On Melbourne Cup day, Australia’s central bank slashed interest rates a further ¾% overnight (a ½% had been expected). Hopefully, then, they have set the tone for the week. Can we hope for more than the ½% cuts from the Bank of England and European Central Bank on Thursday if this is being co-ordinated at the G8 level? As an aside, in a sign of the times, HSBC (HBC.B) went public and publicly stated that they would not be passing on the full extent of any rate cut to customers.
Bye bye Detroit. US auto sales came in at their lowest level in 25 years (down 32% yoy).
The Fed’s Dallas President Fisher (a former hawk) is not worried about reigning in inflation and sees NO economic growth. He said that the credit system is still blocked and that we are not out of the woods, even if LIBOR falls. What he’s alluding to is the credit spread (the difference between the rate the government issues debt at and the rate at which corporates can borrow) shows no sign of tightening. An even starker example of this is in Euro wonderland, where even the spread at which other governments have to pay over the benchmark German government bonds yields have skyrocketed. For example take Ireland, which still enjoys the highest credit ratings. At one stage the Emerald Isle could raise funds at as little as 1/20 of a percent (5 basis points) over Germany. Now it has blown out to a full 1% over (100 basis points). Italy and Greece have of course fared worse. Indeed, from an academic point of view these sovereign spreads are pricing in a non-trivial chance of a break-up in the euro currency due to the fiscal largesse of the euro club strugglers.
And corporate spreads are commensurately even wider. You simply cannot do profitable business at these spreads. Witness the madness with obdurate Barclays (NYSE:BCS) the other day, it ended up paying 14% for funding rather than accept the Queen’s schilling. In other UK banking news, Lloyds TSB (NYSE:LYG) is to write down a massive $16bn on a HBoS takeover and troubled Royal Bank of Scotland (NYSE:RBS) plans to try and raise £5bn in a rights issue to repay the governments preference share ASAP.
Echoing this very point, the stunning U.S. Fed Senior Lending Officer survey showed banks have tightened lending conditions considerably with about 84% of institutions saying that they have tightened standards for loans further since July for mid sized firms. This is a new record high from a survey which dates back to 1990. Further evidence (if we needed it) of the slow, grinding roll out of the credit crunch. I have said this many times before but it is worth repeating: a credit crunch is NOT a tsunami hitting the beach but a series of much smaller waves which wear away the foundations on which the financial system was built.
EU finance ministers have ruled out a joint stimulus package (so much for Mr Barroso’s grand plan), but vowed to coordinate national policies. So, everyman for himself then!
More holes than Swiss cheese in Swiss Re (OTC:SWCEY) (the worlds 2nd largest re-insurer). It posted its’ first loss in six years on wrong way bets on those pesky credit derivatives. Recall Warren Buffet’s words aeons ago in March 2003 that these were weapons of mass destruction; maybe Lehman (LEH) should have sold some to Saddam H! Meanwhile, fellow Swiss struggler, the once mighty UBS (NYSE:UBS), said in a profit warning they see “difficult market conditions continuing to be a drag on fee income in 2009”. In other equity news, M&S 1st half profit was down 43% (this is less than expected!) and BMW cut their full year forecasts. Their second downgrade this year. Chemicals king Clariant (CLRT) bucked the trend by posting much better than expected numbers and was up 5% early doors.
Two more German banks (the privately owned HSH Nordbank & West LB) have gone cap in hand for the German Federal rescue package deal. Spain has announced fresh measures to help hard pressed homeowners in the form of a 2 year moratorium for part of mortgage payments for the unemployed and self employed. The measure though is small beer and really a political points scoring exercise. Note Spanish job seekers rose by 193k (twice what was expected) in October.