Report from Europe: See-Sawing on Mixed Data

The U.S. equity market snapped a three-day losing streak overnight, buoyed by takeover activity in the drug and technology sectors (although the financials, with a 3.4% gain, were the strongest sector on the day). Strong gains were also seen throughout Europe, especially in Germany following the outcome of the weekend’s election. The DAX rose 2.8% to close above the prior high seen on September 17. So a busy start to what promises to be a very busy week, climaxing in U.S. non-farm payrolls on Friday as stability in the jobs market and gains in income are essential if consumption is to recover.

Today the S&P Case-Shiller US Composite 20-City Index for July outperformed expectations. It rose 1.26% month-over-month in seasonally adjusted terms, the biggest monthly gain since October 2005 and the second straight monthly increase, signalling the housing slump might be over or at the very least on its way to being over. This still leaves prices down 13.3% year-over-year, or 27.4% off their 2007 peak, but is a good sign nevertheless. With the notable exception of a sizeable 1.8% price drop in Las Vegas (where prices are off 55.2% from their peak) prices were up pretty much everywhere. Needless to say builders -- including Beazer (BZH) and Hovnanian (HOV) -- are up. However, a weaker than expected read on the U.S. Consumer Confidence number (53.1 versus expected 57) has seen stocks dip back into the red.

Stocks to watch include Polo Ralph Lauren (RL), which may be bid on a Goldman Sachs upgrade to a buy, and soft drink companies Coca-Cola (KO) and Dr Pepper Snapple (DPS), which were both rated a buy at Citicorp. Citibank (C) is also bid after influential banking analyst Richard Bove raised his price estimate on the stock, and Walgreen (WAG) is flying on earnings that easily topped analysts estimates. To the downside today is Sequenom (SQNM) which collapsed 44% in early New York trading. The company dismissed its chief executive officer officer and a senior research executive after finding it mishandled test results for its Down syndrome blood test.

Today’s Market Moving Stories

• Overnight Japan’s CPI for August showed that deflation continued, with core prices down a record 2.4% over the past year.
• Note interesting predictions from a researcher at COSCO (CICOF.PK) (a Chinese marine freight transportation services company) that the Baltic Dry Index is set to rise by 80% in Q4 on massive iron imports from China. The company may be talking its book up, but this is something we will need to watch as a threat to our bullish bond and bearish inflation breakeven views.
• The International Council of Shopping Centers is predicting the best holiday shopping season in the U.S. in three years (albeit from depressed levels).
• It appears that the poor U.K. current account release for Q2 on Tuesday was discarded by the markets. However, I think it is an important release in that it points to the ongoing structural deterioration of the U.K.’s external position. Even if the revisions (considerable improvements to the Q1 figures) are considered, the H1 results are over £2bn worse than expected. The services and income balance deteriorated badly. The drop in the income surplus is particularly worrisome as it had been one of the key supports keeping a lid on a wider current account deficit in the past.
• In light of this, it is no surprise that U.K. officials welcome a weaker GBP. The trade balance will have to improve significantly if it is to make up for the deterioration in the other current account components. And of course, in a world of scarce financing, the constraint on external deficits is all the more binding. This adds further to the argument for GBP weakness.
• Rumours / leaks of comments made at the Bank of England this morning at the QE Seminar, whereby the Bank said it had considered reducing the reserve rate but thought the impact on lending would be minimal and, therefore, considered it to be a secondary issue in the monetary policy armoury. This has led to the embattled British Peso getting a bid.

A Closed Mouth Gathers No Feet

They say “love comes when manipulation stops,” but for financial markets the two words are even more closely intertwined as players and policymakers alike simply love to manipulate. Yet the difficulty is that the results of that manipulation are not quite as expected. History has shown that attempting to micro-manage a currency is a fraught process, prone to overshoots and susceptible to the manipulation of others. At the moment, one could argue that the JPY is in danger of being the next example, but Japanese policymakers are not alone in their efforts to massage their currency, and others may find themselves suffering too from too much of a good thing.

The new government in Japan has been keen to emphasize its pro-consumer stance, sometimes at the cost of the powerful export lobby. But in citing its tolerance for a stronger JPY at a time when the currency typically suffers from that other bi-annual manipulation story of repatriation flows, the risk of overshoot is growing. The theory that a rising currency will boost spending power is all well and good, but one suspects that Japanese consumers are more worried about jobs and wages. Economic revival is what many feel will rejuvenate spending, and the export rather than the consumer sector has typically been the initial swing factor. Excessive JPY strength will not necessarily be a welcome start for the new government. It is no great surprise that the new Finance Minister has already tempered his language, micro-manipulating again to the point of possible confusion, but the market has the bit between its teeth and looks likely to test the tolerance with a USD/JPY grind towards 87.11, a natural target.

Companies Making News Today

• In a sign that capital markets are loosening up further to the Ireland Inc, Bank of Ireland (IRE) is in the market with a 3.5 year unsecured deal today.
• Élan (ELN) announced this morning that it intends to offer $600m of senior debt with a 2016 expiry. This news comes after Élan concluded the $885m deal with Johnson & Johnson (JNJ) for an 18.4% equity stake and access to Elan’s Alzheimer’s program. Further deleveraging of the group’s balance sheet is to be expected as the investment from the J&J deal is realised.
• Independent News & Media [LON:INM] has reached an agreement with its bondholders on the repayment of its €200m senior bond, plus interest, which matured last May. The deal comprises a debt-for-equity swap of €123m, which would give creditors an equity stake of approximately 46% in the group. There will also be a heavily discounted rights issue aimed at raising up to €94m for the remainder of the amount outstanding. This will be at a price of 5c share, which represents an 81% discount to yesterday’s close. If all existing shareholders exercise their rights, the bondholders would take control of approximately 46% of the group. However, if shareholders fail to exercise their rights, the creditors would take control of 76% of the group. The shares are off about 13% today.
• After the post election rally yesterday, stocks on the DAX were more subdued today with engineering group Siemens (SI) off 2.3% after CFO Joe Kaeser told investors that fourth-quarter orders will fall about 20%. Salzgitter [DUS:SZG] slid 2.5% as Germany’s second-biggest steelmaker announced a convertible-bond sale.
• BNP Paribas (BNP) bucked the trend and added 3% over on the CAC after it announced a €4.3bn rights offer to help repay government funds. This will pressure other French banks (Societe Generale (SCGLY.PK) and Calyon) to follow suit.
• In the U.K., Credit Suisse (CS) advised investors to cut back holdings in property related companies because of the U.K.’s debt levels. Shares in Hammerson [LON:HMSO], British Land [LON:BLND], Sergo and Land Securities [LON:LAND] saw some selling on the back of this. In contrast the insurance sector is stronger today with Legal & General [LON:LGEN] (on speculation is will ward of Clive Cowdery’s Resolution approach) and Aviva (AIVAF.PK) leading the gains.

Disclosures: None

Comments

[spald_fr:]

[To the downside today is Sequenom (SQNM) which collapsed 44% in early New York trading. The company dismissed its chief executive officer officer and a senior research executive after finding it mishandled test results for its Down syndrome blood test.]

"Mishandled" is quite a civil word. Hard to believe such behavior associated with this disease. Jail time for the VP R&D?

Sep 30 10:21 AM