Stocks plunged around the globe, with the MSCI World Index dropping the most in four months, and commodities tumbled on concern an unexpected increase in US jobless claims and growing sovereign debt will derail the economic recovery. The Euro slid to the lowest level since May. Investors have fled from risky bets amid new signs that Europe’s governments are struggling to pay their debts (In practical terms Greece has over €20 billion of debt maturing in April and May alone that needs to be refinanced. Similarly, Portugal has €9.4 billion of debt maturities and coupon payments to make in the second quarter). America’s employment picture may not be improving as much as expected combined with fresh fears that economic data in even “improving economies” like Germany, Australia, New Zealand has be softening noticeably of late.
Bank of America (BAC) (which agreed to pay $150 million and strengthen its corporate governance and disclosure practices to settle SEC charges related to deal with Merrill Lynch) and Alcoa (AA) lost more than 4% to lead losses in 29 of 30 Dow Jones Industrial Average stocks. MasterCard (MA), Kellogg (K) and Monster Worldwide (MWW) all fell after results trailed analyst estimates. Exxon Mobil (XOM) slumped 2.8% as crude oil tumbled the most in six months. So a very ugly day for risk yesterday and not for the faint hearted. The market was in the mood to sell and ask questions later.
There was no really new catalyst for today’s move in Europe – a continuation of the same themes we’ve seen of late. Spain got killed despite some decent figures out of Santander (-9%) as sovereign debt spreads blew out. Interestingly Wednesday night Moody’s denied they were looking to downgrade Spain’s debt rating. Seems there was outright panic in the Sovereign CDS market too. EUR/USD weakened on flight to quality fears.
Today of course we faced the lottery of US non farm payrolls and the outcome was a loss of 20k jobs in January compared to expectations of a 15k gain in employment (with some fairly nasty revisions to previous data). But the unemployment rate actually declined from 10% to 9.7% as more people (770K more people!) are dropping out of the workforce for the dubious delights of American daytime TV. US Dow futures have pared their losses on the “news” though I’m not sure why.
Today’s Market Moving Stories
- US President Obama’s “Volcker Rule” to ban proprietary trading at US banks may not survive in Congress, hampered by criticism that the administration waited too long and offered too few details. The proposal’s timing is viewed by some as “transparently political and not substantive,” Senate Banking Committee Chairman Christopher Dodd said. It was “airdropped” into the Senate debate on legislation to overhaul U.S. financial rules, said Senator Richard Shelby, the panel’s top Republican.
- China will levy initial anti-dumping duties ranging from 43.1% to 105.4% on US chicken products exported to China, the Commerce Ministry said, in a move likely to further aggravate trade ties. The duties begin on February 13, or Chinese New Year’s Eve, thus helping ensure that prices of the popular delicacies do not rise in a Chinese market that already faces vegetable inflation.
Treasury Secretary Timothy Geithner said that “I think it’s actually quite likely (China) will move [on the CNY]. I think they recognise it’s important to them, in their interest as well … and it’s an important part of what we’re trying to do generally to try to make sure that the world is growing … And that requires a level playing field for American exporters generally and we’re going to work very hard to encourage those changes”.
- The front-page headline of today’s China Daily states “Nation won't fold on RMB.” It argues that China has urged the US to “objectively and rationally” consider its CNY exchange rate and cites economists who say that the country is not likely to bow to US pressure to hasten its appreciation.
- Negative comments from China’s Banking Regulatory Commission stating that Chinese non-performing loans could triple. This will probably dampen the “China bid story.”
- Input UK PPI rose to 8.4% YoY from an upwardly revised 7.4% in December, much higher than expected. Output PPI rose 3.8% to 3.5% YoY, slightly above forecasts.
- German industrial production for December was significantly weaker than expected, down 2.6% MoM. In Q4, industrial production rose by 0.4% QoQ, compared to 3.4% in Q3 and -0.4% in Q2. Industrial output continues to expand but a decelerating pace.
- Citing market research, Telegraph columnist, arch euroskeptic and master of melodrama Ambrose Evans-Pritchard, writes that the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt which “If not contained … could result in a `Lehman-style’ tsunami spreading across much of the EU.”
- Meanwhile, in Ireland yesterday the Finance Bill was released by the Department of Finance and contained few surprises. Brian Lenihan, Minister of Finance, importantly reiterated the government’s commitment to continued implementation of spending cuts and ECB President JC Trichet referring to this commitment as “very impressive” in his post ECB meeting press conference.
US Fed Speak
William Dudley, president of the Federal Reserve Bank of New York, said that, “I think we do have a sustainable economic recovery.” But he added that “I’m less confident how strong that recovery will be.” The odds that the economy will fall back into recession “are low, but not zero,” he said. To energise the recovery, the Fed has pledged to hold interest rates at record lows for an “extended period,” which some analysts say means at least six months. Dudley said that with unemployment high and factories operating well below capacity, the Fed can be “quite patient” before reversing course and raising rates.
Kansas City Fed President Thomas Hoenig said he dissented from the Fed’s last policy decision because promising to keep rates low for an “extended period” isn’t appropriate as the crisis fades. “I didn’t dissent on rates. I dissented on the language.” Hoenig’s dissent, the first by a policy maker in a year, is adding impetus to the debate over when to exit the most aggressive monetary policy in the central bank’s history.
Chicago Fed chief Charles Evans states that 3.5% expected GDP growth would be “an unbelievably modest growth rate on the heels of the contraction we just had” and that 4% was “not outside the realm of possibility.” He added that “I cannot fathom that inflation is going to take off, short of some deficit catastrophe [and therefore] There’s going to be no strong urgency to recalibrate monetary policy.”
The PIG Ugly Club Med Roundup
Portugal has lurched toward a political crisis as its finance minister last night appealed to opposition parties not to defeat the minority Socialist government over a regional finance bill that he said would undermine the country’s international credibility. In a televised address, Fernando Teixeira dos Santos said opposition proposals to allow the Portuguese islands of Madeira and the Azores to increase their debt would have “grave consequences for Portugal’s public accounts” and send “the worst possible message” to financial markets.
Meanwhile the Spanish finance minister, Elena Salgado, yesterday criticized Joaquin Almunia for appearing to equate the situations in Greece, Portugal and Spain. She said those comments were a great oversimplication of the situation, since Spain had done its homework. (Salgado comments are also indicative of the complacency that investors are now sensing in every country in the euro area. If Spain believes that it had done its homework, the chances of a major crisis approach certainty. The Spanish political class is still in denial of the need for labour reforms that would facilitate a (downward) adjustment in wages. It is inconceivable that Spain and Portugal can get out of this mess with the reforms that the leaders in both countries shy away from).
While over in Greece, strikes escalate. In Athens, customs and tax officials launched a 48-hour strike that shut down ports and border crossings, amid a sign of a trade union backlash against the government’s austerity programme. The protests are against an across-the-board wage freeze for public sector workers, and a 10% cut in allowances. The total sums to a pay cut of 4%. The walkout by tax and customs officials will be repeated twice this month again, and is likely to emulated by other unions. A civil servants union has already announced a 24-hour strike next week.
Crisis, what crisis? But Jean-Claude Juncker’s leadership during this crisis is taking on increasingly tragic-comedic traits. Regarding the stability of the euro area, he was quoted by Kathimerini, “there is no threat, there is no danger.” Writing in the Financial Times, Gillian Tett makes the observation that the crisis is in part a consequence of the central banks’ exit strategies, which are now exposing the weakest sovereigns. In particular, with regard to Greece, the ECB’s exit strategy could mean that Greek bonds may no longer be acceptable as eligible collateral at ECB refinance operations.
Technical View For The Day
The renewed sell-off in risk markets is almost a logical consequence of the key-reversals we have seen in major-stock market indices last month as such strong reversal signals almost never fail to generate follow-up in form of new lows afterwards. The more exciting question arising now is whether decisive T-junctions at 1043 in the S&P 500, at 5025 in the FTSE 100, at 5494 in the Dax, at 1.3735 in EUR/USD or at 1.5709 in GBP/USD can be defended. A failure to do so would more or less open Pandora’s Box as it would rip the downside wide open for a broad consolidation based on the whole accumulation phase starting in March last year. That said the 50 % retracement in stock market indices (i.e. 909 in S&P 500) would be the next bigger target whereas EUR/USD would face a decline into the 1.31 handle and GBP/USD into 1.5275 once the mentioned key-supports would give way. Today could really turn out to be judgment day for risk markets.
Company News
News on AIB’s (AIB) M&T stake adds another leg to the recapitalization story, with reports that Toronto Dominion (TD), Canada’s second largest bank, has expressed interest in expanding its presence in the US. The Canadian bank’s CEO highlighted that there was a preference for a smaller deal in the North Eastern US. The combined sale of M&T and potentially Poland would add a significant to AIB capital base, potentially up to €1.8 billion.
Infosys Technologies (INFY) has announced that it will design and implement the Research Informatics System for Élan (ELN). The technology is an effort to accelerate discovery research through knowledge collaboration and the sharing of data quickly throughout the company. It is hoped that the technology will allow Élan and its partners to quickly share information which could “realise significant gains in research productivity."
A bad morning for brokers in Europe as shares of ICAP (IAPLY.PK) dropped 18%, its biggest drop since April 2009, after the broker lowered its full-year forecast for pretax profit, its preferred measure of performance, to between £295 million and £315 million. That compares to a previous forecast of £309 million to £354 million.
BG Group shed 5% after reporting a 38% drop in profits, but catering company Compass has rallied 5% after saying that a decline in sales slowed in Q1 2010.
Deutsche Telekom (DT) is considering an initial public offering for T-Mobile USA to appease shareholders and help fund the US wireless unit’s network buildout. The company, Europe’s largest phone carrier, has held discussions with banks, including Deutsche Bank (DB), about managing an IPO. A spinoff would reward Deutsche Telekom investors, who have watched share prices decline 10% this year. The company spent almost $3 billion in the first three quarters of last year building out its U.S. high speed third-generation wireless network to stem customer losses to larger rivals AT&T (T) and Verizon (VZ) Wireless.
The white Times market report reports that there was bid speculation surrounding Tate & Lyle (TATYY.PK), although this seems to be centered upon Harbinger selling down their 9.2% stake to fund a bid for Inmarsat.
Air Products and Chemicals offered to buy Airgas for about $7 billion in equity and debt.
And Finally…Walt Mossberg Interviews Steve Jobs, Well, Sort Of
