Equity markets finished down again last week with the Dow Jones off 1.2% and the FTSE 100 down 2.2%. World indices had been on the back foot from the very start of the week due to a bearish World Bank report where they downgraded their forecasts for global economic prospects. Wednesday’s US Federal Reserve interest rate decision caused little movement as they left the target rate at between 0 and 0.25% as expected. It was a high volume week with the economic data a shade better than expected on average. But consumers are saving the stimulus as the savings ratio has now climbed to a 15 year high, not good news when the consumer is 70% of the economy. Two of the big winners on the week were the car rental giants Hertz (NYSE:HTZ) and Avis (NASDAQ:CAR) after positive comments from Hertz CEO Mark Frissora who sees US and European demand stabilising and said that the outlook for summer bookings had improved.
Oil’s rally showed further signs of stalling as Brent Crude Oil slipped 0.8% to 69 (taking the bid out of energy stocks). Gold had a volatile week and ended up 0.5% at 940. The US dollar lost some ground as improving economic sentiment dented haven demand and traders moved into the seemingly riskier Euro. EURUSD rose 0.9% to back over 1.40 at 1.4067. GBPUSD gained 0.16%.
Today’s Market Moving Stories
- Japan’s industrial production rose 5.9% mom in May, the third monthly rise in a row, and the biggest rise since 1953. However, it was below +6.9% mom expected and still down 29.5% yoy. Retail sales fell 6.5% yoy in May, slightly up on -6.7% yoy in April, a bit weaker than -6.2% yoy expected.
- China’s Caijing Magazine quotes Yu Dongming, an NDRC industry department official, as saying that China has completed stockpiling metals with 590,000 metric tons of aluminium, 159,000 tons of zinc, 235,000 tons of copper, 30 tons of indium and 5,000 tons of titanium. This news could pressure commodities and miners.
- UK Hometrack Housing Survey showed that home prices were unchanged in June and the pace of decline slowed from -9.6% yoy to -8.7% yoy.
- President Barack Obama could discuss a second stimulus package to boost the economy if needed, but at the moment no more new money looks necessary, senior adviser David Axelrod said. “Let’s see in the fall where we are, but right now we believe what we have done is adequate to the task. If more is needed, we’ll have that discussion.”
- Looks like the heat and focus on the Greenback are set to ratchet up. China and Brazil are working on a currency arrangement to allow exporters and importers to settle deals in their local currencies, bypassing the US dollar, the countries’ central banks said. “It is agreed in principle,” a spokeswoman for the Brazilian central bank said. This comes after and on top of China, the world’s top holder of foreign exchange reserves, renewed its call for the creation of a super-sovereign reserve currency to reduce the dollar’s global domination, which it said had worsened the financial crisis. Russia, whose reserves are the world’s third largest, has also called for the world to become less dependent on the dollar.
- The Guardian has a preview of tomorrow’s Bank for International Settlements (BIS) annual report, which does not mince its words about the crisis resolution. The BIS, which has been an early and persistent voice of warning in the run-up to the crisis, said that the failure to sort out the banking system would threaten the global recovery. “The lack of progress threatens to prolong the crisis and delay the recovery because a dysfunctional financial system reduces the ability of monetary and fiscal actions to stimulate the economy.” The BIS said governments had not acted quickly enough to unload the toxic assets from bank balance sheets, while blanket guarantees of bank lending have exposed the taxpayer to potentially large losses.
- A number of news items this weekend related to the unsustainable path of the UK’s national debt. Standard and Poor’s warned that it would quadruple unless the Government takes drastic steps to address the pensions and aging crisis. Nothing very new there – the IMF in particular reported a daunting report on June 9 on long-term global public finances trends.
- For fans of financial conspiracy theories – the great American bubble machine and is Goldman Sachs the root of all evil?
- Beware the descent into credit card debt.
Preview To Q2 Earnings Season
A full fortnight before banks begin reporting Q2 results, the FT writes that buoyant capital markets activity underpinned US banks’ second-quarter earnings, with a boom in equity and debt issuance helping offset continued losses on toxic assets.
Reuters reported an interesting update on earning expectations. According to Thomson Reuters data, quarterly earnings (S&P 500 companies) are estimated to drop 34.5% yoy in Q2 and fall by 21.4% in Q3. Come Q4, however, the earnings growth rate is expected to hit +180.2%, thanks to some impressive optimism about firms selling discretionary consumer goods and material firms. For full-year 2010 earnings are expected to gain 26.3% after -11.2% this year. “Although analysts have been rather aggressive in downgrading their 2009 earnings outlooks, they appear to be predicting a sharp recovery in 2010.”
Looking For An Exit
Last Thursday, Congress berated Ben Bernanke and accused him of acting improperly in the Bank of America/Merrill Lynch (NYSE:BAC) merger. They accused Bernanke of abusing his powers (with one Congressman throwing in the suggestion of perjury for good measure), and attacked the central bank for an ad hoc approach to the financial crisis. The actions of the Federal Reserve during the crisis will undoubtedly be hotly debated in the years to come, but it seems that the Fed is becoming more comfortable with the idea that it has indeed accomplished something, namely stabilising the US economy and financial markets following the freefall that began last September. The clearest evidence of this was last week’s announcement that the Fed was making a number of changes to its liquidity programs, and its suggestion that it expected most of the programs would be wound down by February 2010. The big question is whether this week’s key data will further strengthen the Fed’s forecast of a gradual recovery in H2 2009.
Nonfarm Payrolls This Thursday
This is a shortened holiday week as the US markets will be looking forward to the July 4 weekend, but all eyes will, of course, be on Thursday’s June nonfarm payrolls report. The May nonfarm payrolls report, which showed a smaller-than-expected decline of 345,000, led to a huge sell-off in US Government Treasury bonds and raised expectations that the Fed would increase rates before year-end. This time around, the consensus expects a drop of 350,000 payrolls, and an unemployment rate of 9.6%. A result in line with the consensus would provide further evidence that, while the labour market remains weak, the worst of the economic contraction is behind us. Meanwhile, Wednesday sees the release of the ISM factory index, and the market is looking for a rise in that gauge to 44.5, which would be the best result since August 2008. Keep an eye on the new orders measure, which rose to 51.1 in May, the first time it exceeded breakeven since late 2007. Another increase in that gauge, or another reading above 50.0, would bolster the case for a gradual recovery into the second half of this year. Meanwhile, there are four Fed speeches lined up for this week with the most interesting for market participants may be St. Louis Fed president Bullard’s speech on Tuesday evening on “Fed Exit Strategies.”
- Daiwa (OTC:DSECY), Japan’s second largest brokerage, fell 12% overnight, on news that it plans a $2.5 billion rights issue. Markets hate dilution. Mizuho (NYSE:MFG) was also down on a story that it is considering a similar move.
- Vodafone (NASDAQ:VOD) is thinking of making a bid for T-Mobile UK, the wireless subsidiary of Deutsche Telekom (DT). The FT calls it an “audacious” move to create a dominant player in the UK mobile market. I wonder what the regulator would make of it?
- Lots of weekend chit chat about Anglo American (AAUK) who are building their defences against a £41 billion merger approach from Xstrata (OTC:XSRAF) by plotting talks about a major Chinese investment. They have opened talks with Aluminum Corp of China (NYSE:ACH) (aka Chinalco) and an unidentified Middle Eastern investor about a partnership to inject hundreds of millions of dollars into MMX, its Brazilian iron ore business. Anglo American has also reignited plans to appoint Sir John Parker as chairman and had made an attempt to recruit him in recent days. The Observer newspaper said South Africa’s National Union of Mineworkers, with 317,000 members, had intervened in the proposed merger saying it would lead to “unacceptable” job losses. A spokesman for Anglo American declined to comment on possible investment in the Brazilian iron ore business but said the process to appoint a new chairman was “progressing well”.
- Media reports over the weekend suggest that Novartis (NYSE:NVS) is in talks to buy parts of Élan (NYSE:ELN), including its MS drug Tysabri and its Alzheimer’s drug pipeline. Reports say talks are underway but the complexity of the deal makes any potential announcement a long way off. Élan has been actively looking for a merger or a takeover since Citigroup (NYSE:C) was hired in January to do a review of the group. Pfizer (NYSE:PFE), Lundbeck (OTC:HLUKY) and Bristol-Myers (NYSE:BMY) have also previously been mooted as buyers and a price of €8 per share has been mentioned in previous takeover talks.
Gordon Brown As Susan Boyle
And Finally… P.R.I.N.T. Money