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Monday brought some respite, as hopes of a reappointment for Bernanke grew and Greece managed to ‘successfully’ launch its 5-year bond. Are risk takers out of the woods then? The jury is still out. Asian equities sold off overnight again, on yet more fears about tighter policy in China (see below). Greece, of course, managed to raise €8 billion, with the book even reaching €25 billion. This comes as a relief, suggesting the country is still able to fund itself. However, such success has a price – Greece had to pay mid swap +350bp, or 30bp more than the price of its exiting July 2015 issue. Still, this should help calm fears of a Greek default.

But stocks have been hit quite hard overnight by a variety of news stories. The equity-negative stories include news that Obama is to propose a three-year freeze on federal spending (although there a number of carve-outs which will mean spending will only be $10-15 billion lower than otherwise in 2011); news that the US Treasury’s special inspector general Barofksy is to investigate the New York Fed over whether details of the AIG (NYSE:AIG) bailout were improperly withheld; news that China is to tighten bank reserve requirements as mooted last week; S&P’s announcement that it has changed the outlook on Japan’s AA rating to negative; and comments from the ECB’s Nowotny about asset bubbles in emerging markets. On the policy front, all market attention was riveted to the Bank of Japan rate announcement, where both the policy rate and funds-supplying operation were kept unchanged as expected.

The US morning kicked off today with the some house price data in the form of the Case-Shiller 20 city home price index with news that will disappoint the housing bulls, as the index dipped 0.2% on a sequential basis. A year-over-year decline of 5.3% was worse than the 5% analysts had been looking for, putting downward pressure on the S&P 500 futures after some decent enough earnings reports from Johnson & Johnson (NYSE:JNJ) (see below) had cheered markets earlier.

Australia Day

Today’s Market Moving Stories

  • News reports from China are continuously fuelling market insecurity. Press releases are stating that mortgage rate discounts for first time home buyers are being reduced from 30% to 15%, and regulations for second home buyers could tighten going forward. Should these announcements prove official, then developers in lower tier cities could see the most negative impact. Additionally, reports that banks in first tier cities have ceased or reduced new mortgage loans for the month of January are causing concern as well.
  • And the Chinese central bank, the PBOC, gives with one hand and takes away with the other. The PBOC maintained the yield unchanged at 1.9264% at its weekly 1-year bill auction today. This was a surprise, as the market was expecting yield increases similar to those over the past two weeks, and following a 50bp increase in the banking sector reserve requirement ratio (RRR) effective on January 18. On the other hand, according to Reuters, the PBOC ordered two large Chinese banks to increase their RRR by an additional 50 basis points, effective today, in an apparent effort to curb loan growth at these institutions in particular.
  • The Bank of Japan (BoJ) disappointed (meagre) hopes of further quantitative easing by leaving its policies unchanged with the overnight call rate at 0.1%. The BoJ also slightly upgraded its economic outlook for growth and inflation over the next two fiscal years. However, it maintained a forecast of mild deflation, implying that the BoJ does not intend to hike rates over the next 24 months.
  • In a relatively unsurprising move given the recent fiscal deterioration, S&P’s announced a revision of the long-term outlook of Japan’s AA sovereign ratings to negative from neutral. The agency notes that net government debt-to-GDP will peak at over 115% as government policies imply a slower pace of fiscal consolidation. On the other hand S&P made a downgrade conditional on economic growth and a lack of measures to boost medium-term growth.
  • Press reports are indicating that US President Obama will propose a multi-year spending freeze as part of his State of the Union Address on Wednesday. However, this spending freeze does not apply across the board (sadly is on everything EXCEPT the stuff they spend mega bucks on like defense, security, healthcare, etc) and wouldn’t begin until full year 2011. The bottom line is that if such a freeze is enacted by Congress (a big “if”), I would be inclined to reduce my federal spending estimate by $10 billion to $20 billion for each of the next few years relative to a current law baseline. In other words, it’s a drop in the bucket.
  • US lawmakers are set to consider a jobs-stimulus package worth about $80 billion that would provide tax credits to small and medium-sized businesses that hire new workers. The plan, to be presented today to Senate Democrats, would include aid to state governments to prevent layoffs and additional funding for infrastructure projects, said the senator, who asked not be identified. The package also will likely include energy-related provisions such as incentives to weatherise homes.
  • On UK property valuations, Standard Life Investments Property Income Trust announced the sale of Capital Court Uxbridge for £19.2 million. The sale price is 12.9% ahead of the December 30 valuation. This is helpful for the loans books of the Irish banks in the UK and also shows both demand and price competition is very healthy in the commercial property market.
  • And the UK has emerged from recession, but only on the most pedantic, technical definition (0.1% is equivalent to a rounding error). On any reasonable interpretation of the data, Q4 saw a negligible improvement on Q3. Headline GDP growth of 0.1% was disappointing, but the detail of the data give rise to more fundamental concerns, principally the stagnation in key areas of the private sector. The distribution sector growth in Q4 was probably flattered by expenditure having been brought forward ahead of the January VAT hike, and this pace of expansion is unlikely to be sustained given the fiscal outlook and a waning boost from lower mortgage payments. Nor can the bloated public sector provide a basis for sustained growth. The UK has had de facto 0% policy rates for almost a year, £200 billion of quantitative easing, fiscal deficits heading for 12% of GDP and a competitively-valued currency… and all the economy can muster is 0.1%.
  • Mercantalism Rules. It seems that no one wants a strong currency judging by this mornings’ headlines – “Darling Says Manufacturing Is Benefiting From Fall In Pound” and “ ECB’s Nowotny: Sustained Recovery Conditional On No Further Appreciation Of The Euro Vis-A-Vis Either The U.S. Dollar, Asian Currencies”.
  • Austria’s Financial Market Authority expects banks to write-off more bad credit and boost capital reserves in 2010. “We expect that massive write-offs will be needed in the next 12 months,” said Helmut Ettl, co-chairman of the financial-market regulator.
  • Dubai’s standing in financial markets took another hit on Monday after S&P withdrew its credit rating on an investment vehicle owned by the emirate’s ruler. S&P said “insufficient” information had been provided about Dubai Holding Commercial Operations Group, controlled by Sheikh Mohammed bin Rashid Al Maktoum, and said its cash flow position was “likely to be materially weaker” than previously thought. DHCOG includes hotel chain Jumeirah and Dubai Properties.
  • Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said investors should seek “less levered” countries like China, India and Brazil that are “less easily prone to bubbling.” “Go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high and where trade surpluses promise to generate additional reserves for years to come,” Gross wrote in a monthly investment outlook. Among developed countries, Gross recommended Canada and Germany. The UK is “a must to avoid,” he wrote. “Its gilts are resting on a bed of nitroglycerine.”
  • The Church of England has suffered a £40 million loss on a disastrous investment in a New York apartment complex acquired by a consortium in 2006 for $5.4 billion – the biggest single US residential property deal. A spokesman for the Church Commissioners said it had written off the entire value of its investment and added that the commissioners were “looking carefully” at lessons to be learnt from the transaction.

Obama And Wall Street

German Data Not So Bad
Key data this morning showed that fears of the demise of the German recovery may have been overstated. Disappointing industrial production and orders data for October and November had raised questions about the durability of Germany’s production-based recovery. For sure, the consumer side of the economy remains in the doldrums. Retail sales have been contracting and consumer confidence has deteriorated, and this despite repeated upside surprises from the labour market. But Germany’s production-export nexus remains in place. The January IFO business confidence survey showed the 10th consecutive rise, with expectations continuing to perk up (Indeed, the 4 consecutive declines in the ZEW expectations balance makes financial analyst expectations seem well off the mark). Within the details of IFO, it is the manufacturing sector in particular pushing sentiment higher. The split between externally-sensitive manufacturing and domestically-sensitive services chimes with the last German PMI data, where manufacturing was still rising in January but services was down and the level of the manufacturing output index was much higher than services (58.43 versus 51.19). Confidence that the production-export nexus is holding up should also have been boosted by the upward revisions to the German November orders report, where the originally disappointing 0.2% MoM gain has been revised to a 2.8% rise, with a complete turnaround in foreign orders. IFO talk of a “significant” improvement in exports and the euro exchange rate being “supportive”.

Company News

  • Standard & Poor’s have just taken the knife to AIB (AIB) and Bank of Ireland’s (NYSE:IRE) credit ratings cutting them both to A- (but leaving AIB with the dreaded negative watch still dangling above their head as they view them to potentially have greater trouble raising much needed capital).
  • Novartis (NYSE:NVS), as well as reporting full year results that were in line with the consensus of brokers’ forecasts, has announced a rejig of its senior management team, with incumbent CEO and Chairman Daniel Vasella to step down from the CEO role on February 1, 2010 (he has held the dual positions for the past 14 years). The new CEO will be Joe Jiminez, current head Novartis’ pharma operations which the market believes will be regarded as a safe pair of hands.
  • Continental was upgraded to buy from neutral at UBS, which said the oil company’s shares have fallen 15% this month even as management increased its production growth outlook and rig count forecasts.
  • Reporting before the bell Johnson & Johnson came in with Q4 2009 net income of $2.21 billion, or 79 cents a share, compared with $2.71 billion, or 97 cents a share for the 2008 period. Sales increased 9% to $16.6 billion. A poll of analysts pegged J&J at earnings of 97 cents a share, on revenue of $15.71 billion. J&J also said it now sees the company posting 2010 adjusted earnings of between $4.85 and $4.95 a share.
  • Verizon Communications (NYSE:VZ) swung to a fourth-quarter loss as the company incurred a onetime charge for workforce reductions of 13,000 (ouch), raised spending to attract wireless subscribers and lost more customers in its traditional wire line business. The net loss attributable to Verizon shareholders totalled $653 million, or 23 cents a share. That was down from net income of $1.24 billion, or 43 cents a share, in the year-ago quarter. Revenue climbed 9.9% to $27.1 billion, though sales rose a much smaller 0.2% if adjusted for acquisitions.
  • BHP Billiton (NYSE:BHP) and Rio Tinto (RTP) face a European Union investigation into whether their Australian iron-ore joint venture curbs competition. Regulators with the European Commission, the EU antitrust authority in Brussels, will probe whether the deal between the world’s second- and third-largest iron-ore producers is a restrictive business agreement. It didn’t give a deadline to complete the investigation.
  • China National Offshore Oil Corp wants to partner Tullow Oil (TUWLY.PK) in developing Uganda’s oil industry. Cnooc (NYSE:CEO) and Tullow officials held joint talks with Ugandan President Yoweri Museveni yesterday.
  • Apple (NASDAQ:AAPL) reported a 50% jump in first-quarter profit, buoyed by holiday orders for the Macintosh and iPhone. The shares rose in extended trading. Net income advanced to $3.38 billion, or $3.67 a share. Sales increased 32% to $15.7 billion. Investors say they’re already looking ahead to a product unveiling this week, when analysts expect the company to introduce a multimedia tablet. Jobs said today to expect a “major new product.”
  • Amgen (NASDAQ:AMGN), the world’s largest biotechnology company, said annual revenue will rise by as much as 6% in 2010, boosting shares. Amgen reported quarterly net income of $931 million, or 92 cents a share, a 1% rise from $925 million, or 87 cents a share, a year ago. The company said fourth-quarter earnings excluding some items were $1.05 a share, missing the $1.13 average analyst estimate.
  • Siemens (SI) posted a 23% rise in its first-quarter net profit, clearly beating analysts’ expectations as cost-cutting mitigated the impact of declining sales, and the company Net profit for the quarter ended December 31 rose to €1.48 billion from €1.2 billion a year earlier. Siemens reiterated it expects sales to decline by a mid-single-digit percentage and its operating profit of its main sectors to come in a range between €6 billion and €6.5 billion in fiscal 2010, which ends September 30.
  • Google (NASDAQ:GOOG) fell on the Nasdaq after the company’s founders filed to sell about 5 million shares each. Founders Larry Page and Sergey Brin adopted a five-year trading plan that would reduce their combined ownership of stock outstanding to 15% from 18%. Based on that day’s closing price, each would get about $2.75 billion from selling the shares.

And Finally… George Carlin ‘We Like War’

Disclosures: None