Preview from Europe: Stocks Choose to Ignore Dire Jobs Data

 |  Includes: AA, HSBC, IBM, JAVA, JSAIY, RBS
by: The Mole

Stocks shrugged their shoulders and laughed in the face of another atrocious jobs report Friday and forged ahead Stateside. Overnight, Asia continued the firm tone despite those pesky North Koreans in the hermit kingdom firing a missile over the Sea of Japan.

Today’s Market Moving Stories

  • A survey of UK credit conditions undertaken by the CBI showed that companies were less negative about the availability of new credit in March than in February. This followed the BoE’s quarterly survey last week which also hinted at muted signs of improvement, at least in the forward indicators.
  • The IMF has raised the possibility of Eastern EU states adopting the euro without joining the Eurozone.
  • Japan aims to unveil a new stimulus package on April 10 worth more than 2% of GDP.
  • UK Chancellor Darling tried to temper some of the euphoria coming out of the G20, warning that it would take some time for households to feel the benefits of enacted measures. Meanwhile, the Telegraph cites senior cabinet ministers as suggesting that the UK should not be ashamed of taking money from the IMF.
  • Eurozone finance ministers have agreed that Ireland and Greece must take steps to correct their budget deficits this year or face the possibility of EU fines.
  • US bank recapitalisation is likely to be even slower after the latest Geithner initiative, popular no doubt, is to force bank board members, whose banks will receive government money, to step down. This means that the decision-makers in banks have even less incentive to accept state recapitalisation than otherwise. The Germans did a similar thing by imposing a €500,000 salary cap.
  • Willem Buiter has a post on the decision by the FASB to relax the mark-to-market accounting rules. He says the entire US establishment is pandering to the vested interested of bank managers and their unsecured creditors. The decision constitutes another fig leaf behind which banks can hide their losses. He writes this “continues and prolongs the zombification of most Wall Street banks.” It thus prolongs the crisis.
  • The Irish banks have proposed a hybrid solution to the government to tackle the bad loans problem. The big two Irish banks want some of the €56bn in problem loans to be insured while other loans to be out into a bad bank/asset management company. A ‘broad outline’ of the government’s proposals is expected alongside the emergency Budget tomorrow. However, a report in the Irish Times suggests that it will be short on detail. Note the spread on Irish government bonds over where Germany trades has narrowed almost 1/2% in the last three weeks as international investors have become more hopeful that tomorrow’s budget will put the country back on a credible road to fiscal consolidation.
  • released its Q1 house price report this morning and reported that asking prices in March 2009 are 16% lower than they were in March 2008. In Dublin’s city centre prices are down 10% this quarter alone. But more positively, the rate of decline of asking prices has fallen with prices only down 4% in the first three months of 2009, compared to 6% in the last quarter of 2008. In addition, the total stock of homes for sale has fallen for the sixth consecutive month.
  • Is the REAL unemployment rate in the U.S. 15.6%?

Signs That A Bottom May Have Been Formed
Taking a step back from the noise, there are some telltale signs that investors are for the moment prepared to favour risky assets. These tea leaves include a drop in the value of the Japanese yen, a fall in the price of gold, a drop in VIX (volatility is back below its 200 day moving average) and some of Obama’s infectious enthusiasm may see an uptick in consumer sentiment. The question remains - are we forming a bottom or merely flat lining for an extended period?

The glass half full argument is that there are definite chinks of light shining out in these very dark days. Importantly, the newspaper headlines appear to be jumping upon these chinks of light and this will affect sentiment and then the economy. We can imagine that the coming weeks will show additional improvements in business and consumer sentiment indicators and even though the economy is bad, the depression threat is becoming more distant. Furthermore the speed of decline in global output seems to be slowing. Two key cyclical indicators — business confidence and auto sales — are showing signs of stabilisation.

Eurozone Probably Hitting Its Low Now
Being export-sensitive, the euro area was hard hit in Q4. The latest data point to the risk of an even larger drag on GDP from net trade in Q1. There are some tentative indications that the export slump could be bottoming out. Though it remains at a very low level, the global manufacturing PMI, a good indicator of global activity, rose in March for the third consecutive month.

However, the positive news for the euro area is at risk of being neutered by the euro exchange rate. Competitive devaluations elsewhere are pushing the EUR higher. According to ECB elasticities, a sustained 5% appreciation could reduce GDP by 0.5-0.9% after a year. Q1 will probably mark the low point of the euro area economic cycle, i.e. the point of maximum GDP contraction. A revival of external demand is a prerequisite for a general euro area economic recovery. We are seeing the first signs of stabilisation, but this may yet prove fragile.

Financial FantasylandEquities

  • HSBC’s (HBC) rights issue received 97% acceptance. The bank said the net proceeds amount to $17.7bn which will raise the T1 ratio to 9.8% and the core T1 ratio to 8.5% as at the end of December. The shares were up 4.3% in Hong Kong trading.
  • RBS has said it will need between 3 and 5 years to recover from the acquisition of ABN Amro. Recall they paid in cash! The comments were made by CEO Stephen Hester at the banks AGM on Friday and relate to the exotic ABN assets which were instrumental in damaging the banks balance sheet. Insufficient risk controls, short term profit focus and poor strategy were among the reasons given for the large decline seen in RBS. Chairman Philip Hampton commented that an end should be brought to the “public flogging” in the industry to ensure the return to success of institutions.
  • Food retailer Sainbury’s (OTCQX:JSAIY) have been put on JP Morgan’s buy list and may feel the tailwind.
  • A new earnings reporting season kicks off this week with the quarterly report from Alcoa (NYSE:AA), the first Dow Jones industrial to report. The aluminium producer is expected to report a loss for the quarter of $0.57 per share, compared to a loss of $0.28 per share in the previous quarter, and down from a profit of $0.44 per share in the first quarter of last year. The share price has been boosted recently on speculation that it may be a takeover target.
  • IBM’s acquisition of Sun Microsystems (JAVA) is on the brink of collapse. And staying with big tech, Google (NASDAQ:GOOG) is looking into partnership with Twitter.

Data Today
Ahead of this week’s Easter holiday, the data calendar turns quiet.

Today, the market expects Eurozone retail sales (ex-cars) to have declined 0.6% MOM in February. Judging from retail and consumer surveys, the outlook remains gloomy. Also out today, Eurozone PPI probably fell 0.4% MOM in February, with the yearly rate dipping further into negative territory at -1.5%. A further easing is expected in the coming months.

And Finally… I Hate Banks

Disclosures: None