Stocks soared at the off and stayed bid all day, as shorts were hastily covered in the wake of Intel’s (INTC) upside surprise (while choosing to ignore disappointments from Yum Brands (YUM), JB Hunt (JBHT) and Dell (DELL)). With risk appetite back, model-based accounts reportedly hungrily added to risk positive positions across the board – oil / gas/ gold / Baltic Dry Freight index are all up (the latter by a healthy 7.3%- its biggest gain since 2nd June). The index of fear, the VIX, made news lows for this cycle at 23.8 points.
The Fed FOMC minutes were on the optimistic side, with upgrade growth forecasts, but should be treated with some caution as their crystal ball has been about as reliable as Mystic Meg's of late. Confidence had been growing that the two huge blots on the landscape; the looming credit crises at CIT Group (CIT) (a lender to small and medium sized business) and the California budget mess, were close to resolution yesterday. However, last night, news broke that negotiations between the administration and the much troubled bank on extending some sort of lifeline had broken down. It seems that what was once the largest bank in the world may be headed for a date with Chapter 11, losing the US taxpayer their $2.3 billion “investment”. CIT Group’s outstanding debt is $63bn. Click here to see the press release.
Today’s Market Moving Stories
- A slew of data from China overnight. Firstly GDP for Q2 was leaked beforehand – annual growth accelerated to 7.9%, broadly matching expectations and up from a ten-year low of 6.1% while we also got news of industrial production for June. Output continued to improve, growing by 10.7% over the past year, which is broadly consistent with the improvement in GDP according to official figures. On the wholesale prices front PPI for June showed deflation at the factory gate accelerated with prices falling by 7.8% over the past year, which is a sharp turnaround from the 10% gains posted around the middle of 2008. On the inflation front CPI prices fell by 1.7% over the past year, which was more than expected and the biggest fall since the late 1990s. And finally retail sales. Annual growth in sales was broadly steady at 15%, down from a peak of 23% reached last year.
- Note that the Chinese stock market has now surpassed the Japanese Nikkei as the world's second largest by market capitalization. Chinese stocks are up a whopping 90% from their lows last year.
- The Reuters ‘Tankan’ index of manufacturer confidence improved to -43 in July from -50 in June – the fourth consecutive improvement buoyed by exports and output. However, the index for non-manufacturers fell back to a near record low of -38 from -31 previously (the index reached -44 in May).
- In an annual assessment of its economy, the IMF has said that there are signs of stabilization in Japan, but has warned that the outlook was still highly uncertain and hinged on global trade and financial conditions. It also noted that deflation is likely to persist until 2011, whilst maintaining its GDP forecast of -6.0% for this year, and +1.7% in 2010.
- Meanwhile, the good news on housing just keeps coming
The Travails of CIT Group
As Man United fans (from Surrey) used to taunt Manchester City fans by singing to the tune of Oasis’s Wonderwall…”Oh City(i) how come you're so sh***y”, so according to CNBC, CIT Group will file for bankruptcy before the weekend. Just before the close last night the stock was halted and then at 11pm (all times UK) the company released a statement saying that “there is no appreciable likelihood of additional government support being provided over the near term” and discussions with the Government had ended.
The US administration has essentially weighed up the moral hazard and the economic cost of supporting the 101 year old lender through restructuring and decided that its more than the $2.3bn of TARP preferences it’s going to lose. Sure, there is still time for a white knight but what is more likely is that the vultures will cherrypick various units / portfolios at material discounts from an administrator. While CIT group is not perceived to be systemically important enough to bail out, there is still something in the region of $28bn in unsecured losses on debt for the investor / trading community to take plus whatever CDS losses are out there!
Reuters reports that Rio Tinto (RTP) has evacuated staff in China involved in research of the iron ore and steel industry in response to the detention of some of its iron ore traders by state authorities, the Australian Financial Review reported on Thursday. The unsourced report from Shanghai also said other foreign groups were moving employees out of China until conditions there become more certain.
A Rio Tinto spokesman in Melbourne, Ian Head, said he could not immediately comment on the report, which said the unidentified number of staff were moved out on Wednesday. Stern Hu, Rio Tinto’s head of iron ore marketing in China, and three other members of the Shanghai-based iron ore team were detained in early July on suspicion of stealing state secrets. Hu, a Chinese-born Australian citizen, was accused of obtaining and passing on the Chinese industry’s negotiating position, sources with knowledge of the circumstances have said. Rio Tinto’s China team carry out some negotiations and manage operational details of term contracts for iron ore, a key ingredient in steel making, as well as tracking market information.
- European equities on the move this morning include Electrolux (OTC:ELUXF), who beat analysts' estimates. Swiss drug giant Novartis (NVS) should find support after it raised its sales forecast on the back of a strong performance by new products to treat blindness and and brittle bones.
- Irish stocks in the news: Elan (ELN) hosts its AGM today hot on the heels of the J&J (JNJ) agreement, other related product newsflow is emerging from the Q2 results season. It seems that Bank of Ireland (IRE) are facing strike action for 500 of their life assurance workers in persuit of a 5% pay hike. Staffing costs are a huge issue for the big 2 Irish domestic banks and account for 55-60% of all costs.
US weekly jobless claims come out at 13:30 (all times UK) today, and are expected to plunge to a below-consensus 490K on auto-related volatility.
Also, the US Philadelphia Fed survey for the month of July comes out later this afternoon at 15:00. It is tempting to think that the Philadelphia Fed will rise after the Empire State index soared in July, but a modest drop to -5 is more likely after a meteoric rise in June.
Nice informative video that asks the question – “Where did all those Toxic Assets go?”