Preview from Europe: Have Markets Reached the Bernanke Top?

Stateside Bernanke gets an encore, the Case-Shiller shows house prices were up MoM, consumer confidence soared 6.7 points through the 50 level and yet stocks finished only marginally ahead. Is the fat lady about to sing on the overbought summer rally? Maybe it will be called the Bernanke top in years to come? This side of the pond in the UK the BBA reported that mortgage approvals rose in July to the highest level since February 2008. Meanwhile, the German GDP report was pleasing in as much as it confirmed the 0.3% QoQ increase in output with domestic demand proving stronger than expected, boding well for activity in the second half of this year. Later in the session the Belgian business confidence index rose slightly more than the market had expected to its higher level since last October.

Overnight News

• Asian stocks edged higher this morning, with thin summer trading volumes keeping prices choppy and centred on short-term chart targets. Japan’s Nikkei share average drifted up 0.6%, within reach of a 10-month high reached earlier in August.
• Japanese exports in July fell 1.3% MoM and 36.5% YoY. This compares to forecasts of a 38.6% YoY decline. Overall exports to China fell 26.5% YoY while exports to the United States fell 39.5% YoY.
• The WSJ quotes estimates that hedge funds managing close to $15bn have moved to Switzerland in the past year (with more possibly to come) in order to avoid the rise in the top personal tax rate to 51% and concerns over tighter European Union regulations. The paper also reports that the Swiss cantons of Zug and Zurich plan UK shows designed to lure businesses from London.
• Ba Shusong, a deputy director of the Chinese Development Research Centre (a think tank under the State Council) says that economic growth may exceed 10% in the first quarter of next year, with monetary policy likely to remain loose in the near term to support the economic recovery.
• The Federal Reserve must, for the first time, identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit.
• The White House new pro jections suggest that the budget deficit would be $2,000bn higher over the next 10 years than it had earlier predicted.
• The US ABC consumer comfort index improved 1 point to -45 points, a 14-week high.
• Toyota (TM) rose 1.5% on a report that the carmaker would cut global production capacity and post an operating profit in the 2010 financial year. However, while news of the output cut shored up the stock, it also reinforced worries about persistent weakness in global consumer demand, which is key to a solid recovery. A source also said that it is mulling halting a production line at its UK plant.
• It gets even more ridiculous. MSNBC’s “Morning Meeting” invited Larry Levine of “Wall St. Prison Consultants” on the show to offer advice to Madoff on what he can expect in prison.

Does The Fall In Chinese Markets Signal A Slide Around The World?
Recent volatility in Chinese shares has been keeping investors guessing. The Shanghai composite index is down 14% so far in August, on track for the biggest monthly decline since the darkest month of the financial crisis in October 2008. The precipitous move triggered questions on whether other high flying equity markets were due for a correction. However, to what extent a decline in the Chinese market, which is largely closed to foreign investors, matters for global market trends and perceptions of risk is an open question.

Gains in Asian stock markets have been limited due to continued uncertainty over the direction of China’s stock market. For the moment, Beijing seems content to use rhetoric and jaw boning to tone down the pace of asset price appreciation, rather than by actually altering monetary policy. With clarity on policy action likely to be cloudy in the near term, I believe that markets may also endure an especially volatile period, even if there is no real consolidation. The longer term question to answer is whether markets can endure a scenario where China tightens independently.

Do you remember when it was said that China was the key. They were the beacon of sentiment and if that prop gave way, the whole house of cards would come tumbling down. Now all of a sudden, they don’t seem to matter. Why is that? No idea. But did you hear Premier Wen Jiabao yesterday? Man is he bearish or what? According to the man who should know there is still great pressure on exports, the impact of short-term policies were weakening, and the economy faces many new difficulties. Okay, and guess what China is doing? They are tightening policy. Some are in denial on this, but when two large banks say they are only going to lend 25% of what they did in the first half, that is tightening.

Earnings This Morning
Lots of companies reporting this morning – a bit of a mixed bag thus far.

Irish Life & Permanent (ILPMF.PK) released results at the lower end of expectations due to a high impairment charge on the banking division, and negative variances in the Life side. The group sees operating results same for H2 as H1, and comments that restructuring vote is to happen in H2. With all attention focused on the de-merger, these results do not detract from the breakup argument.

Food group Glanbia’s (GLAPF.PK) interim results show a 21.5% decline in EPS as commodity market weakness ate into profitability. However, big picture, they can justifiably claim to have delivered a reasonable first-half result given the impact that global dairy markets had on its Irish dairy ingredient activity. Overall, Consumer Foods Ireland performed well in a very challenging environment.

Advertising giant WPP (WPPGY.PK) H1 results were substantially weaker than prior with headline operating profits down 25% including the impact of the TNS acquisition which occurred in the second half of 2008. Headline operating profits were £342M vs. a £419M expectation with margins squeezed by increased labour costs

Heineken (HINKY.PK) released Q2 results this morning that beat consensus expectations as higher prices and cost savings helped to offset the anticipated decline in volumes. Reported sales of €7.1bn were up by 11%, driven entirely by first time consolidations, as organic sales were marginally down (prices +6.2%; volumes -6.6%).

Data Ahead Today
This week’s European highlight is the IFO index at 09:00 BST (all times UK) and it looks as though it will grow sharply. There is a 97% correlation between the German PMI manufacturing index and the IFO and so it could be claimed that the improvement in the IFO is mostly in the price following the PMI’s rise from 45.7 to 49.0. That said, I think that Eurozone bond prices are rather elevated and have not really responded to the better economic data, nor the improvement in equity markets.

In the US, Durable Goods Orders for July will be released at 13:30. Look for overall durable goods orders to have jumped by 3.5%, with core durable goods orders likely to have advanced by around 1%.

At 15:00, New Home Sales may have slipped in July, perhaps to around 375,000.

And Finally… The Man Of The Moment And His Top 10 Failures

Disclosures: None

Comments

[Wizler:]

Interesting, are the markets really forward looking, or do they drive confidence that drives the economy (reflexive in Soros terms) or are we getting the dead cat bounce from huge gov stimulus.....going to be an interesting fall, let's see where the heavy volume leads, if any

Aug 26 07:12 AM

[doubleguns:]

Economy can not help but show signs of recovery with the billions upon billions dumped in by govt.
]
But still no jobs or even hope for a job.

Govt stimulus plans to sell cars, homes and washing machines will not re-inflate this bubble and they are only keeping a few jobs around a little longer.

Like musical chairs when the stimulus money stops there is not going to be enough chairs for everyone and it can only get uglier.

Aug 26 08:13 AM

[manya05:]

Watch that Bernanke video again and pay attention to what is called "qualified speech", something professors are VERY well versed at given that they need to get papers reviewed for publication and can always wiggle out of an argument by qualifying what they are saying. In that language that Bernanke, and other professors, use, absolute statements do not exist. EVERYTHING that could be interpreted as an absolute statement needs to be softened or qualified. This is the commonalty of academia (Bernanke) with politicians.

Watch the video and count the times he uses words like: seems, appears, should, likely...all softeners. he even catches himself having to erase a softener when he says "I am hopeful that..." and then he realizes that the statement needs to be absolute to inspire confidence among the sheeple (students) and he says "..in fact I am confident..."...which means that you know, the moment he gets off "qualified speech", that he is lying or hiding something.

What a character...four more years? four more years of that!!!?? :-)

Aug 26 08:49 AM

[optionsgirl:]

FYI- The Federal Reserve has the option to appeal Judge Preska's decision. If that happens, they won't be disclosing information for some time, if ever.

Aug 26 10:57 AM

[spald_fr:]

It is a pleasure to return to the USA, after an extended trip to Brazil, and read your well-written column once again.

Aug 26 06:49 PM