Report from Europe: Trade Wars are Never Good News for Stocks

by: The Mole

The US equity market snapped a 5-day winning streak on Friday, with the S&P500 closing down an insignificant 0.1% after a modest pull-back in the financial sector (which may continue today on the back of the Stiglitz comments, see below and news of Three More Bank Closings Brings 2009 Total To 92 in what is becoming known as Failure Friday!)

The Treasury market closed essentially unchanged having failed to sustain the rally that took place earlier in the day. In FX, the Yen was the main mover, appreciating to levels last seen in February following a slew of better than expected Chinese economic reports. Conversely, the Yen may also have been helped by the US decision to slap large tariffs on China’s tires for the next three years, with the likelihood that China will retaliate with some measures of its own (whilst small in direct importance – and in my view unlikely to lead to a full-blown trade war – these measures will tend to add to already heavily negative Dollar sentiment).

Gold continues to perform well. It closed above $1,000 for the first time and the trend still appears to be up. A break through $1,020 would open the way for $1,300 according to our technical chums. Other commodity markets however are not performing well. Crude posted a bearish daily reversal on Friday. Watch the support level at $67.12. Copper is also struggling – watch the $264 point.

Today’s Market Moving Stories

  • Japan’s Nikkei average shed 2.5 percent as investors are fretting about how the yen’s surge against the dollar will hurt exporters still reeling from the currency’s record rise last year. Japanese exporters are likely to feel the pain of a stronger yen at levels below 95 to the dollar. The 95 level was roughly the average rate seen by large exporters in the Bank of Japan’s last quarterly tankan survey for the business year to March.
  • Nobel Prize winning economist, Joseph Stiglitz remarks to Bloomberg that the problems in the US banking sector are worse than they were in 2007, before the crisis erupted. He states that the US had failed to fix the underlying problems and noted that in the US and many other countries, the too-big-to-fail banks had become even bigger. Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman.
  • US/China: China’s government has announced that it may complain to the WTO about the US’s decision on Friday to impose 35% duty on Chinese-made tyres, which immediately prompted retaliatory anti-dumping investigations of motor vehicles and chicken products from the US. The International Business Daily (a Ministry of Commerce publication) said today: “Obama has undoubtedly chosen a dangerous gambit … The Chinese business world that has been wronged by this will not sit still on this, and even tougher contention between China and the United States may be looming.”
  • UK Trades Union Congress chief Brendan Barber said: “Public spending cuts will provoke a double-quick, double-dip recession … Today we are on a road towards recovery – but things are still fragile not automatic and the recovery needs to be nurtured”. He adds that: “You can’t fight recession without making the short-term deficit bigger. Going for recovery is the best way to tackle the deficit in the long term.”
  • In a sobering outlook for the UK housing market, Ernst and Young today released a report suggesting that UK house prices are set to dip in the first half of 2010 after which prices will stagnate for 2 years. The research group which uses the same economic model as the UK treasury said it sees mortgage finance continuing to “remain scarce and expensive” as banks continue to rebuild weak balance sheets. Senior economic advisor Hetal Mehta described the current stabilisation of the UK housing market as a “false dawn” and that the current “price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years”. Finally the report said house prices wont recover to the peak of 07 for another 5 years.
  • President Obama delivers a keynote speech at 17.00 BST Monday on regulatory reform, coinciding with the one year anniversary of the Lehman collapse. Speculation is growing that he may announce the withdrawal of some support measures from the financial sector. Whether financial markets are ready to welcome this remains to be seen.Out of the frying pan...

Stocks Making the News Today

  • Weekend media reports suggested that the revised terms of Elan’s collaboration agreement with J&J (NYSE:JNJ) could emerge over the coming days. Revisions were expected following the legal ruling that the terms of the Tysabri contingent financing clause were in breach of Elan’s agreement with Biogen Idec (NASDAQ:BIIB). According to the reports, a reduction of the overall cash injection from J&J looks the likely option, rather than increasing dilution or giving away rights to another piece of the Elan pipeline. The cited reduction of at least $100m would imply a drop of at least 6.7% on the original $1.5bn deal.
  • A report in the Sunday Telegraph suggests Deutsche Telekom (DT) has called in Deutsche Bank (NYSE:DB) to help advise it on whether to make a bid for Sprint Nextel, the US’s third largest mobile operator. DT owns the fourth largest operator in the US and has long faced the strategic dilemma of either increasing its scale through an acquisition or exiting the market. Hence, a report that DT is considering acquiring Sprint Nextel is not a complete surprise, and has even been speculated in the past. Sprint Nextel had a market cap of USD10.6bn as of close of business Friday, but also comes with USD17bn of debt. If DT were to make a bid there would have to be a high cash component given Sprint Nextel’s predominantly US based shareholders are unlikely to be keen to receive DT shares…
  • Cadbury (CBY) has published an open letter to Kraft (KFT) CEO Irene Rosenfeld from its Chairman Roger Carr outlining why it rejected the US company’s offer. In it Carr states that being “absorbed into Kraft’s low growth, conglomerate business model” is “an unappealing prospect” which contrasts sharply with Cadbury’s “pure play confectionery” strategy. These comments do not hint at an early capitulation by Cadbury’s management. Cadbury’s has played a strong hand in the early stages of this bid, which will put pressure on Kraft to significantly raise the cash component of their bid in order to be successful, a move which will stress Kraft’s intention to maintain an investment grade rating. The market continues to believe a Kraft takeover is the most likely outcome, but now think the chances of success have reduced marginally, say from 70% to 60%.
  • Spain’s Repsol has made the largest ever gas find in Venezuela, discovering a field in the Carbon IV block in the Gulf of Venezuela that could have between 7 and 8 trillion cubic feet of gas (to put this in context, that would be sufficient to meet Spain’s total gas demand for more than five years).
  • Mining giants BHP Billiton (NYSE:BHP) and Rio Tinto (RTP) saw selling in London as the price of copper, nickel and zinc retreated on the London Metal Exchange. Oil producer stocks such as BP and BG group also saw selling as crude fell for a second day as higher U.S. fuel stockpiles raised concern that gains in prices may have outpaced the recovery in the global economy.
  • Bloomberg news reports that fund managers at Rothschild and Cie Gestion, BlackRock Inc. and OppenheimerFunds Inc. are moving money out of stocks whose profits are more tied to economic growth into so-called defensive shares including phone companies, drugmakers and food producers.
  • NAMA: still loads of speculation, the latest being from the Sunday Business Post that the banks will take a 33% haircut overall on the real estate loans, with EUR90bn put into the scheme and receive EUR60bn in bonds back from Nama (with the vast majority being senior bonds). The article notes that details will finally be released on Wednesday. In conjunction with the Nama proposal, the newspaper implies that unless AIB completes some assets sales or a private sector capital raise then government ownership could hit 50% – obviously there’s the M&T stake (hence recent Canadian interest) but other private sector interest would be tricky.
  • According to the weekends media, Ulster Bank is considering whether to sell Liam Carroll’s 29% stake in Greencore. Ulster Bank is now effectively in control of the €100m stake in Greencore after recent court rulings. Greencore in anticipation of the potential sale is set to have contacted JP Morgan, Polaris, Artemis Capital and Millgate who are all said to be interested in buying at least part of the stake in an institutional placing. Carroll’s 29.25% stake in ICG is said to be more uncertain with AIB controlling the shares and reportedly in no rush to sell.

The Week in Prospect
There are no economic reports of note in the US Monday but there are a number of Fed speeches (including the San Francisco Fed’s ever thoughtful Janet Yellen speaking on the US economy). The key report this week is probably Tuesday’s Retail Sales report for August. We know that the headline will be strong on account of the cash-for-clunkers boost to auto sales (possibly printing 3.8% mom gain) but markets will be more interested in how ex-auto sales perform after the 0.6% mom pull-back seen last month.

Also on Tuesday, we will see the first of the major regional manufacturing surveys for September with the market expecting the NY Fed’s index to nudge up to +15, whilst Fed Chairman Bernanke will redeliver the speech he gave at Jackson Hole last month. On Wednesday I’ll be looking for a more solid increase in the NAHB homebuilders index in September than the 1pt rise expected by the market, a second consecutive modest rise in industrial production (for July) and a benign 0.1% mom increase in the core CPI (for August).

On Thursday I expect to see housing permits and starts nudge higher in August and an improvement in the Philly Fed’s manufacturing survey. The weekly jobless claims report will also be of interest given the decline in initial claims reported last week. The US diary is empty on Friday but a quadruple witching day (i.e. options expiry, so the VIX may spike) for the US stock futures market could yet see some volatility.