US equities finished down yesterday as various pieces of bad news emerged. General Electric's (GE) giant financial arm GECC has been downgraded to negative by S&P. Also there’s a delay in the decision by the US administration whether to bail out US automakers although there is speculation that an announcement could come as early as today. On top of all of this was a further drop in oil prices below $36 per barrel (the low since June 2004) which weighed on energy stocks, despite the 2.46M barrel output cut by OPEC. So consumer joy in Dublin, Washington and London = panic in Moscow, Tehran and Caracas. The only good news for investors was the decline in equity volatility with the VIX index dropping to its lowest level since October 3rd.
Today’s Market Moving Stories
- For Ireland’s once star pupil, Anglo Irish Bank, it just doesn’t get any better. Anglo’s chairman and one of the non-exec directors have resigned. This was not because of the dismal share price performance of the bank, but because both had company loans that they switched to another bank just before the year end accounting dates. The chairman’s loan wasn’t exactly small at €87m. Anglo has issued a damage limitation. The statement doesn’t disclose the nature of the loan but if it was that easy to switch, you’d have to expect it was either unsecured or secured on something portable such as stocks. Anglo says the loan is not illegal but nonetheless this is damaging at a time when Anglo is trying to raise fresh capital and is being supported by state guarantees for its funding. The stock is understandably off on the open. Bond holders can only pray for a takeover, failing that, nationalisation.
- German PPI (producer prices) stats just released show the biggest drop since records began in 1949! Here comes that deflationary death spiral.
- It's quadruple witching today in the US with expiry at 15.00GMT. This can give rise to a massive spike in volatility particularly in thin, illiquid December markets. I’ll explain a bit more so. Quadruple witching is the day on which stock index, stock index options, stock options and single stock futures all expire. Incidentally, the Treasury future also expires today but people tend not to look at the boring old bond market. What it means is strange movements in equity markets as options gravitate to strikes with high open interest and flows that explode. It is Friday, six days before Xmas in the middle of a credit crunch and this will only amplify the movements.
- European markets are opening up on the soft side with oil and mining stocks off on the fall in commodities. Moody’s has cut Citibank’s (C) credit rating. HSBC (HBC.A) is under some pressure again this morning on the back of a report that it may need to raise a further $14bn in capital to cover increased bad loan provisions.
- Sheer genius from Credit Suisse (CS). They are giving their senior employees bonuses in the form of $5 billion of the toxic mortgage-backed assets that nobody wants.
The ECB Will Have To Cut Rates
Back in Euro winter wonderland the ECB (as predicted here yesterday) cut the depo rate they pay to banks that hoard cash in an attempt to get them to actually lend it on instead. This prompted the recent dramatic euro rally to come to a crashing end. To me, despite recent back peddling and down playing of rate cut expectations for their January rendezvous, I think that their hand will be forced by events and the actions of their sister central banks. Consider the evidence. On the economics side, the key German IFO sentiment has plummeted further with expectations of another record low. The trade weighted value of the euro has soared making exports uncompetitive. But even with the strong euro, imports are even falling as domestic demand is collapsing. Add to this the myriad of sister central banks who have slashed rates lately and the heat is back on the ECB to wake up and smell the pain. Fear and angst out there or else methinks they may cease to exist after the mess is sorted out.
Japan Announces Another Stimulus Package
The Japanese government approved an emergency stimulus package worth 43 trillion yen ($489 billion) to improve a worsening employment situation and ease financing worries in the corporate sector, according to a published media report Friday. Nearly half of the package, 20 trillion yen, will be for purchasing commercial banks’ equity holdings as part of efforts to improve the lenders’ liquidity. An additional 640 billion yen will be used to lower premiums charged under the government’s employment insurance program.
Some of the measures overlap with the 27 trillion yen emergency stimulus measures announced by the government in October. The October plan was to be financed by tapping into reserves that had been set aside in a special fiscal account dedicated to dealing with interest-rate fluctuations, with some analysts expecting the government to also issue new debt to cover its costs.
The baton in the relay race to ZIRP was passed to the Bank of Japan this morning which cut its key interest rate to 0.1% from 0.3%.
The data calendar is as bare as Mother Hubbard’s cupboard today.
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