Report from Europe: Bulls to Take a Breather Ahead of Long Weekend?

Yesterday saw a trifecta of better than expected earnings, encouraging weekly jobless and continuing claims numbers and news that chain store sales (yes, you guesses it) beat expectations. This all helped US equity indices to a 0.6%-0.7% gain. Homebuilders rallied as Congress mulls a possible extension of the $8,000 first-time homebuyer’s tax credit, which is set to expire on Nov. 30.

Of the results to have trickled out so far (31 of the S&P 500 companies) 74% have beaten “consensus” (fire the analysts, I say). Early days perhaps, but nonetheless consistent, with the bulls forecast for another positive earnings season that supports risk and chips away at the dollar. All is not plain sailing of course, and Japanese machinery orders data overnight provided another reminder that global manufacturing data is losing momentum (+0.5% actual vs. +2.1% consensus). Risk markets are thus caught between two countervailing forces at present – “earnings” vs. mixed and patchy economic data. Concern that economic growth is relapsing will moderate the extent of the risk rally. As for today, early indications are that players are looking to book a little profit and take some money off the table. With the Columbus Day weekend coming up in the US expect volumes to drop off a cliff come mid-afternoon.

Today’s Market Moving News

• While not as startling in terms of the outright number (when compared to say the stellar jobs news from Australia) the US jobless claims figures were a lot better than expected. The decline to 521k for the week ending October 3 was the lowest reading since January 3. What’s more, the drop in the 4-week moving average to 540k took it to the lowest level since January 17. The 4-week moving average is now close to 220k below the level it peaked in the week ending April 4. Also of note was the 72k fall in continuing claims. This pushed the insured rate of unemployment to 4.5%, the lowest reading since April 4. This series does track the unemployment rate and suggests we should see a peak in unemployment sometime within the next 6 months.
• Japanese core machinery orders edged up only slightly in August from a record low the previous month, suggesting stagnant capital spending will weigh on Japan’s tentative economic recovery. The 0.5% rise in orders, a volatile figure seen as a leading gauge of capital spending, was smaller than a median market forecast for a 2.1% increase. The Bank of Japan’s closely watched tankan survey this month showed that large firms plan to cut their capital expenditure by 10.8% in the year to March. The weak orders come as the Bank of Japan debates whether to phase out its unconventional measures supporting corporate finance, including some purchases of corporate debt. The BOJ is due to hold a two-day policy board meeting on Oct 13-14.
• China’s services sector paused for breath last month but remained firmly in expansionary territory according to the China Federation of Logistics and Purchasing. Its non-manufacturing business activity index fell to 58.9 in September from 59.9 in August. “Non-manufacturing business activity is still vibrant,” said Cai Jin, deputy head of the logistics federation. It is the seventh month in a row that the index has been above the 50-point watershed.
• Lots of Fedspeak on the wires over the last 12 hours. Chairman Ben Bernanke said that “accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.” Kansas City President Thomas Hoenig said “I don’t believe tight policy is the right policy” for the current economy, but an “indefinite” period of the current stance of zero percent interest rates “is not in the best interest of the country.” He also notes that the USD will remain the top reserve currency in the world as long as the US follows policies that keep the economy strong and open.
• US presidential adviser Lawrence Summers notes that Treasury Secretary Geithner has made “very clear our awareness of the responsibilities we have given the special role of the USD in the international system and I think he’s made it very clear that our commitment is to a strong USD based on strong fundamentals.” He adds, “any idea that nations can devalue their way to prosperity is one that economic experience very much belies.”
• In a research piece entitled “Dealing in Sterling,” RBS analysts highlighted the potential for foreign takeovers of FTSE companies due to the weakness of Sterling. They make the point that the FTSE 350 looks inexpensive relative to the DJ Eurostoxx. Their top potential targets are ARM [LON:ARM], Burberry (BRBY), CSR [LON:CSR], ITV [LON:ITV}, PV Crystalox [LON:PVCS], Victrex [LON:VCT] and Wellstream [LON:WSM]. Their shares prices would surely sky rocket with any takeover bid.
• BT (BT) is looking to expand the fiber-to-the-home portion of its super fast broadband plan to 2.5 million homes from one million homes at no additional cost. This reflects BT’s assessment that the cost of running fiber to the home is lower in some cases than originally planned, but the overall reach of the super fast broadband plan will remain unchanged at 10 million homes (there will therefore be a corresponding reduction in the number receiving fiber-to-the-cabinet to 7.5M from 9M). Fiber-to-the-home offers superior speeds of up to 100mbps, compared to 40mbps for fiber-to-the-cabinet, and is therefore a positive increment for BT’s market position relative to cable operators.

What Of The Embattled Greenback?
Since just prior to the G20 meeting there has been a notable rise in the number of finance officials bemoaning the reciprocal strengthening of their respective currencies due to broad-based USD weakness. However, other finance ministries and central banks have resorted to more than just verbal salvos to address their concerns as the number of newswire reports highlighting FX intervention of late appears to have grown steadily (the central banks of Thailand, Hong Kong, South Korea and Indonesia amongst others were reportedly active Thursday).

Yet, with the aforementioned meeting in Pittsburgh seemingly reinforcing the status quo that has consigned the USD index to within shouting distance of the all-time lows, the pressure that has obligated this reaction is only going to increase. At this point, it is worth taking a look at changes in recent central bank currency reserve data. Indeed, nothing more readily highlights the strength of forces now at play in the foreign exchange market than the sheer scale of USD reserve accumulation by central banks resolute in their will to avert any decline in their export competitiveness in a world short of demand.

China’s reserves grew by $42 billion in June. A smaller increase, admittedly, than the previous month’s rise of $80 billion, but above the monthly average going back to 2007 of $35 billion per month. Having grown by $5.5 billion in September (up from $4.9 billion in August), Brazil’s reserves are now growing at double the average monthly pace year-to-date. South Korea, Taiwan, Hong Kong and India’s reserves are also growing significantly.

With USD reserve accumulation now back to rates that characterized the heady growth years prior to the crisis, the pressure on central banks to maintain a semblance of stability in the ratios of their holdings is relentless once more. In other words, the motivation for reserve managers to actively diversify the fresh inflows of USDs into their coffers is as great as it has been at any time in the past few years.

Pantomime Season In Ireland Kicks Off Early
Tomorrow will see the Green Party vote on the new program for government while it will also vote on whether or not it approves of NAMA. These votes are crucial as without Green support Fianna Fail would not have sufficient votes to maintain a Dail majority and we could see a general election. It has to be said that the likelihood of the Greens not supporting the program is low, particularly as they have reportedly secured the introduction of a bank levy in the NAMA legislation.

The Green Party is unusual in that it puts such important votes to its membership. To carry such votes, a two-thirds majority is required. Political sources suggest that the first vote (’The Green Party will continue to participate in government on the basis of the new program for government presented to this meeting’) is key and that if this motion is passed then it is likely that the NAMA vote will also carry.

Note that a number of traditional Green activists have left the party over its decision to go into government, which should make it slightly easier to carry the party. However, a substantial number of animal rights campaigners have joined the party in the meantime as a new fringe group and they claim to number as many as 100, out of maybe 800, that may turn up to vote on the day. They are offering to side with party policy on the NAMA motion if they get a ban on fur-farming in the new program for government. I wonder how much fur-farming goes on in Offaly. You really couldn’t make this stuff up.

And Finally… The Gordon Brown Song

Disclosures: None