Preview from Europe: Profiting from the China Growth Play

by: The Mole

Stocks pared losses as the Dow finished down 64 points yesterday having dipped to minus 142 points earlier as investors and traders took profits on the “China growth play” i.e. there was notable selling of commodity, metals, oil, & mining shares.

So we sit at major resistance levels after a 3 month government induced rally, (with the biggest fiscal stimulus packages and bailouts of all time and free money for banks) waiting on a new white knight or catalyst. Because of the earnings game, the stock market has turned into a “one quarter at a time” play. You might own the best stock in the world with the best long-term outlook, but if they miss and guide down you’re bleeding red. Until earnings ramp up in a few months it’s hard to find a good positive catalyst to cling onto.

Today’s Market Movers

  • Bernanke’s message in the testimony itself was orthodox. He recognises that the rises in rates “appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.” This suggests confidence that the monetary accommodation can be unwound in time, and that the Fed will not be tempted into monetising debt. But the Chairman could have been still more forceful. He will not have quelled market concerns much.
  • Despite the parade of the blondes over the weekend, little old Latvia remains mired in a deep depression and couldn’t even sell any bond debt yesterday. Inconsequential you may think, but a devaluation of the lat would weigh heavily on other Central, Baltic and Eastern European countries (particularly Hungary and Romania whose currencies are perceived to be overvalued) and put additional pressure on the banking systems in Sweden and Austria who have large exposures to these countries. With globalization read contagion.
  • Note that the European Stoxx 600 is now valued at 25.5 times earnings, its most expensive level since 2004. Contrast this with a very interesting Bloomberg news story that predicts European companies will reduce dividends over the next 18 months at the fastest rate since at least 1999 and you have reasons to be cautious at these lofty levels.
  • In exploration news, Dragon Oil (OTCPK:DRAGF) has reported that oil flowed at an initial rate of 3,554 bopd from a new development well on its license offshore of Turkmenistan. This rate is more or less in line with expectations. This is the second of eight development wells planned by Dragon for 2009. Management is targeting an annual average growth rate of 15% in daily production for the period 2009-2011
  • Meanwhile, UK food retailers Sainsbury (OTCQX:JSAIY) and Morrison’s (OTCPK:MRWSY) are up this morning after the latter posted a positive sales update and the former was upgraded by Morgan Stanley.

Tullow Steps Up The Search For A Partner
According to media sources, Tullow Oil (TUWLY.PK) is looking to sell 50% of its stake in the Ugandan Oil Fields in order to achieve optimum production. Chief Executive of Tullow, Aidan Heavey stated that Tullow was looking at bringing in a partner to fund the pipeline. He said exploration companies rarely take 100% of any license or interest and usually bring in partners. For Uganda, Tullow decided to keep full ownership in order to move quickly through the exploration phase. Tullow’s partner in Uganda, Heritage Oil said yesterday that it was in preliminary talks that may lead to a possible merger. If completed, the deal would be “treated as a reverse takeover.

Bank Of Ireland Gains Strenght
Bank of Ireland (NYSE:IRE), whose share price has tripled in the last five weeks, yesterday announced the completion of its tender offer for four separate securities, paying out a combined €520m for paper with a nominal value of €1.26bn. This will generate a gain of €740m pre-tax. When account is taken of likely gains on two further dollar-denominated securities, the bank is confident of generating an equity gain (i.e. after tax) of €1bn. The bank has more generally benefited from positive sentiment due to better capital levels and margins plus of course the receding threat on nationalization. There is even talk of a rights issue later in the year to repay the government.

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Data Ahead Today

  • Euro area retail sales, Apr (10:00 - all times UK): Sales should continue to shrink, down 0.2% in the month
  • BoE interest rate decision (at noon): Rates should be left at 0.5% and I do not expect further commitments on asset purchases.
  • The statement might emphasise bank lending and MPC perceptions that credit supply strains are intensifying would be taken as a signal of a further Quantitative Easing extension in subsequent months (up to the initial limit of GBP150b, with increased risk that the BoE asks Treasury to exceed the current cap).
  • ECB interest rate decision (12:45): Rates should remain on hold at 1%, with no decision on a refinancing floor.
  • The Covered Bond purchase programme should amount to EUR60b, probably commencing in the next few weeks, with the door kept open to future increases.
  • The ECB should announce the list of eligible bonds, but there’ll probably be no primary market purchases because they might conflict with the Treaty.
  • New forecasts should include a largely anticipated and significant downward revision for 2009 GDP.

And finally…one for the road

Disclosures: None