Preview from Europe: Two Day Bounce Doesn't Materialize as Markets Slump

I was sceptical about how durable the improvement in risk appetite on the back of Bernanke’s testimony on Tuesday would prove. I suppose it’s asking a bit much for stocks to rally two days in a row! There was clearly relief among shareholders of banks that Bernanke had downplayed the likelihood of nationalisation, but it never really felt broad-based in nature nor did it argue for a wider gain in risk appetite. A repeat performance from the Fed Chairman yesterday therefore failed to provide any additional impetus. Any euphoria that the diminished nationalisation threat may have fostered dissipated alongside a shockingly weak US existing home sales number.

Today’s Market Moving Stories

Yet another big slide in UK house prices where the Nationwide house price index fell the most since 1991, when this data series began, down 17.6% in the last year. The Guardian is also reporting today that UK home rents have declined by as much as 25%. So much for the buy to let market!

• The CBI service sector survey reports that jobs are being lost at the fastest rate in over ten years as companies suffer ever sharper falls in volumes and profitability and rein back investment.
• RBS (RBS) have just unveiled a heavily flagged loss of 2008 of £24.1bn. There had been whispers of a higher number but this was just their PR Dept methinks. More importantly, they are availing of the UK government loan insurance scheme for a modest 2% fee. RBS has committed to increase lending by £25bn in 2009, of which £9bn will be mortgage lending and £16bn business loans. We can expect similar news and treatment from Lloyds (LYG) later in the week. It doesn’t look great value for the British taxpayer at this stage. These subsidies are allowing UK banking stocks to lead European bourses higher at the open. RBS is up 30%+.
• The DAX this morning will be burdened by worse than expected results from insurance giant Allianz (AZ) (Q4 net loss of €3.11bn) and BASF (BASF.PK) (Q4 loss €313mln).
• And what of the newly announced US banking stress tests? Essentially, they are assessing how banks will perform under more pessimistic macroeconomic assumptions than we see currently over the next two years. Only banks with over $100bn in assets are required to participate. Assessments include forecasts of revenue, expenses and loan losses and banks in a weaker position would be required to boost capital ratios to maintain adequate solvency. In such cases, the bank would be given six months to raise private equity and if unsuccessful would get convertible preferred capital from the CAP (new name for TARP). Existing TARP money can be repaid and replaced with CAP preference shares. The stress test will be completed by end of April.
• A nice periodic set of doomsday economic charts.

Equity News

• Man United sponsors and public enemy No. 1 AIG (AIG) is up about 75% in US after hours trading on a story that they are in talks to split in three units (black holes?)
• A Citibank deal is said to be imminent.
• UBS has cut its price target on Microsoft (MSFT) to $21 a share from $23.
• Bank of Ireland yesterday named Richie Boucher as its new chief executive in place of the departing Brian Goggin. Boucher joined BOI in 2003 from RBS, where he was MD of corporate banking. He has also previously worked for Ulster Bank. Mmmmmmm, another insider who knows where the bodies are buried. Will we ever learn?
• Élan (ELN) yesterday announced its intention to cut 230 jobs in the US and Ireland to reduce costs and to boost overall finances. Élan expects the cuts to reduce operating expenses by between $30 million and $35 million in 2009 and $50 million in a full year. The group also reiterated its guidance of double-digit growth for 09.

The Vulnerable Japanese Stock Market
The slew of awful economic data from Japan has seen foreign investors in the Nikkei head for the exits with alarming haste. Overseas investors have offloaded more than $12.4bn of shares since the start of this year, to add to the $42.3bn or so they dumped during the second half of 2008. This foreign exodus is especially important because overseas investors are such key players in the Japanese market. The most recent annual survey put the share of foreign ownership at 27.6% in 2007. Compare that to the heady days of 1989, when foreigners were just a drop in the ocean, accounting for just 4.2% of the market.

Earlier this month, the Bank of Japan announced its intention to buy up to $10.3bn in shares from banks in an attempt to stabilise the market. But $10.3bn is small beer in a market with a total capitalisation in excess of $2704bn at the end of this January. The government is now also reportedly considering getting involved. But again, the volume of shares purchased with public funds would have to be chunky to make a difference.

The bottom line is that the performance of the Japanese stock market is likely to depend heavily on whether foreigners stop fleeing as the domestic economy is under huge pressure from a strong yen and the collapse in global trade.

More Awful US Housing Numbers
The drop back in the number of existing US home sales in January dashes hopes that housing activity had found a floor. The fall from 4,740,000 in December to 4,490,000 took existing sales down to a new cycle low. Sales are now about 40% below their peak and 8.2% below the level seen this time last year. It appears that the inventory overhang that is pulling down prices is still rising. The hope expressed by Bernanke that the recession may run out in 2009 stands on shaky legs.

Data And Earnings Today
From the US, we have durable goods orders (consensus -2.5%) and weekly jobless claims (625k) at 13.30 GMT and new home sales (324k) at 15.00 GMT.

Earnings today from Cablevision (CVC) (expected EPS $0.33), Gap, Inc. (GPS) ($0.32), Kohl’s (KSS) ($1.03), Novell (NOV) ($0.06) and RBC (ROLL) ($0.83).

Disclosures: None

Comments

[theobannion:]

Great cartoon. I'm glad you had the good sense & perspicacity to name your witness "dogdirt."

SOB.

Feb 26 08:10 AM