Within 48 hours the turmoil around the downgrading of Greece, Portugal and Spain dissolved and markets returned to their risk-positive trading behavior as if nothing had happened. The European markets, which are naturally underperforming under given circumstances, are lagging behind but are being dragged by the US markets which are still in good shape with key-support in the S&P500 at 1169 untouched so far.
European markets felt significantly happier yesterday, shrugging off Wednesday’s late Spanish debt downgrade with relative ease. Spain’s IBEX was the outperformer today (+2.7%) – partly on short covering, partly on some great results out of index heavy-weight Santander (+3.9%). Focus was on the EU’s Commissioner Rehn saying that talks were within days of a conclusion on a large package to buy Greece time. Details were thin on the ground but it seems that the speed of decision pleased the market. Better than expected German unemployment also helped.
Out of the US, Exxon (XOM) numbers were a little disappointing, along with the initial jobless inline (448K v 445K). BP (BP) (-6.5%) was the big focus of the afternoon after the market wiped $10bln off its market cap. It seems as though the environmental effect of the Gulf of Mexico Oil Slick has a lot of people nervous, particularly since the Louisiana Shrimpers have started filing law suits. The U.S. Coast Guard said that the oil well in the Gulf of Mexico is leaking five times faster than previous estimates. A lot of finger pointing going on (Cameron fitted the pipes, Transocean’s rig etc). But BP has the environmental clean up costs (Insurers picking up $1.6bln bill – $560m for the rig, $950m for liability) as well as the reputational risk.
Stateside U.S. stocks rallied, sending benchmark indexes up the most since at least March, as better-than-estimated earnings at companies from Motorola (MOT) to Starwood Hotels & Resorts Worldwide (HOT) added to evidence the economy is strengthening. Motorola, the largest U.S. mobile-phone maker, advanced 3.5% after reporting an unexpected profit, and Starwood rose 5.7 percent. Palm (PALM) surged 26% as Hewlett-Packard (HPQ) agreed to buy the maker of Pre phones for about $1.2 billion.
Today’s Market Moving Stories
- The Latest News on Greece: Savage cuts have been included in the EUR24bn package of new austerity measures drafted by Greece to make it easier for eurozone governments to approve aid, which will now be as much as EUR120bnThe key measures reportedly include:
-Two to three percentage points increase in value-added tax.
-Three-year public sector pay freeze; recruitment frozen; abolition of '13th and 14th monthly salary’ for public sector workers; 5% cut in allowances.
-No renewals for short-term public sector contracts. Closure of more than 800 out-dated state entities.
-Opening up of more than 60 ‘closed-shop’ professions.
-Overhaul of pension system: raising average retirement age to 67 for men and women; cutting state corporation pensions.
-Privatization: sales of state corporations; flotations on Athens stock exchange; sales and leasing of state-owned properties.
- Moody’s may still downgrade! Moody’s has warned that it may downgrade Greece from A3 by more than one notch shortly, depending on the contents of the 3-year adjustment program and the country’s ability to implement it.
- SPD gives green light to fast-track procedure. The German SPD (opposition party) has agreed to a fast-track procedure to get the Greek aid bill through parliament next week. However, the SPD will apparently support the bill only if German banks bear part of the financial burden. Some German media report that government leaders will meet bank representatives over the weekend to discuss ways in which the banks can contribute. This is to be done without a forced restructuring of Greek debt (no CDS event). Meanwhile, chancellor Merkel and Bundesbank’s Weber have started to publicly advocate aid to Greece.
- What’s Next?
-IMF/EU to conclude negotiations with Greece this weekend (or today).
-EU Commission and ECB to endorse the result almost immediately.
-IMF and national approval processes in Europe, where still required, to run over the course of next week.
-German cabinet to endorse result on May 3 and introduce a bill for the German share of the package into parliament.
-Final vote in German upper house on 7 May after lower house vote.
-EU/Euro summit to formally authorise disbursement of funds on 10 May.
- Key event: the vote in the German lower house. I expect parliament to approve the package despite serious misgivings by many lawmakers.
In other developments the German government will ask the country’s banks to increase investment in Greek bonds to help underpin aid for Greece, the Handelsblatt newspaper reported Finance Minister Schaeuble is planning to discuss this with executives as soon as an aid package has been decided, Handelsblatt said, without saying where it obtained the Banks’ help will be voluntarily, according to Handelsblatt.
Is a European banking crisis next?
This has the potential for developing into the next crisis: The FT reports that “many European banks have become shut out of the international lending markets because of continuing concerns over Greece, sparking fears that some could collapse as they run out of cash. Greek and Portuguese banks cannot borrow in the international money markets, while weaker European banks are also struggling to raise money as fears of counterparty risk have grown sharply.” Even French and German banks have difficulties because of their massive exposures to Greek debt. German, French and Spanish banks have had to pay higher premiums for short-term debt.
There is news on the wires this morning that Ireland’s debt agency the NTMA says that it is considering postponing the May auction of debt given the market turmoil. This is a no-brainer for the NTMA given that the Irish spread moves could reverse to a large extent and especially because they have done 63.5% of the total annual issuance (€20 bn) already, which itself represents an overfund for the year. Only Belgium gets close to this metric with 52% of 2010 issuance completed. The most remarkable aspect of Irish funding arithmetic is the high level of cash balances. At the end of Q1-10 this amounted to €27.152 bn. That’s a big number, and equivalent to 17% of GDP. This is worth the accumulated deficits of both 2011 and 2012. As long as Greece does not restructure then Irish paper remains very good value with Greek budget concerns likely to focus minds for another firm budget in 2011.
On a trade-weighted basis the British pound has rallied close to 5% from its low in early March. Yet this primarily reflects Greece driven EUR weakness, where the eurozone comprises over 50% in the GBP TWI. Investors should not be lulled into a false sense of security in GBP. I see 3-5% GBP losses. Recent GBP strength looks primarily driven by weakness of the EUR rather than a positive re-assessment of the UK story. Whichever political party wins the general election on 6 May, the UK economy will ultimately have to see tight fiscal and loose monetary policy – typically a bearish policy setting for currencies. All indications point to a hung parliament on May 6, which looks set to delay any fiscal adjustment.
With debt sustainability proving a key driver of FX trends, I feel it is only a matter of time before the market sells GBP again. The market will once again focus on whether the UK remains worthy of a AAA credit rating. That may be hard to maintain if UK budget deficits continue at 10% of GDP and the debt-to-GDP ratio pushes above 70%. The market estimate the loss of AAA status could see FX reserve managers take GBP20-30bn out of UK Gilt markets. GBP also faces a headwind from the financial sector. Policymakers remain intent on securing pay-back for aid offered through the financial crisis. New taxes will be on the agenda at the G-20 summit in June. We see GBP underperformance on a 3-6 month horizon. Look for GBP TWI to fall 3-5%, sending EUR/GBP to 0.90 and GBP/USD below 1.45
UK: The GfK NOP index of consumer confidence fell to -16 from -15 broadly as expected. The index remains well above its low of -27 in April last year.
In the UK General Election three instant-reaction polls showed Conservative leader Cameron won the final debate of the U.K. election campaign; YouGov Plc poll showed 41%, Comres Ltd. 35% and ICM Ltd. 35% of the viewers favoring Cameron.
Overnight in Japan, the BoJ leaves interest rates at 0.1% as expected but comments that it will "seek steps to help foster growth." The BOJ said in a statement that Governor Masaaki Shirakawa had instructed staff to examine ways to strengthen the foundations of economic growth through the banks and through fund supplies. Subsequently, the BoJ announced that its board members expect the core consumer price index to rise 0.1% in 2011/2012 compared with its previous forecast for a 0.2% fall. The Bank left its forecast for this year unchanged at -0.5%.
As expected, core consumer prices fell by 1.2% y/y in March – unchanged from February and the thirteenth consecutive month of decline. The so-called core-core index fell 1.1% y/y – also unchanged from a month earlier. The Tokyo CPI index fell 1.9% y/y in April following a 1.8% drop previously.
Industrial production rose 0.3% year-on-year in March – less than the consensus forecast for a 0.8% increase. Production fell 0.6% in February – which was the first fall in twelve months.
The Nomura/JMMA Japan manufacturing PMI rose to 53.5 in April from 52.4 in March, staying in expansionary territory for the 10th straight month. The index for new export orders, a leading indicator of Japanese exports, rose 2.5 points to 58.2 in April, the highest reading since the data was first compiled in October 2001.
The rate of unemployment nudged up to 5.0% in March from 4.9% previously. However, the jobs to applicants’ ratio rose to 0.49 from 0.47 – above the consensus forecast of 0.48.
Household spending rose 5.9% m/m in March following a 1.6% fall in February. This leaves spending up 4.4% from a year earlier after a 0.5% fall previously. The consensus forecast had anticipated a 0.6% annual increase.
- Bloxham’s reports that Irish drinks company C&C has sold its spirits and liqueurs business for €300m to William Grant & Sons. The consideration is a very large 19.6x February 2010 EBITDA and cuts C&C’s net debt to EBITDA to just 0.6x. Aside from being a very important financial transaction, this sale further clarifies C&C’s strategic position. It will now be the clear No 2 cider producer in the combined UK and Ireland market, and the No 1 beer producer in Scotland. This deal removes about 13% of projected FY Feb ’11 EBIT while cutting debt by over 75%. It leaves projected EV/EBITDA multiples at 9.5x while enhancing the strategic value of C&C to a global drinks company. The stock is up 6% today
- Bank Zachodni has recorded Q1 net income of 233m zloty, which represents a 96% increase year-on-year. Although it is down on the 261m zloty recorded in Q4 2009, this is a result of a higher tax charge, with profit before tax in Q1 of 348m zloty ahead of the 331m zloty recorded in Q1. The result is in-line with consensus expectations (Bloomberg) and is a positive for Allied Irish Banks (AIB), which is looking to dispose of its 70% stake to fill a large part of its €7.4bn capital raise requirement. On a conference call regarding potential suitors for the bank BZWBK management commented that they see the sale of AIB’s 70.4% stake according to the following timetable:
-Expressions of interest: June-July
-Talks in September
-Completion of sale in Q1, 20
- Davy’s believe that AIB will be able to dispose of BZ at a 20% premium to the market price. This would result in c.€2.8bn capital generation (including risk-weighted asset relief) towards the group’s required €7.4bn target. They reiterate that, as commented at its AGM this week, AIB will not be rushed into a sale of this prized asset at a fire-sale price – the group only needs to have a disposal agreement in place by year-end. AIB is up 5% today.
- There were poor numbers from Barclays (BCS) this morning particularly after some of the stellar numbers from the US investment banks. BARCAP (their investment banking arm) was the main culprit as revenues were down 29% on Q1 2009. Core Tier 1 capital was also noticeably weak coming in at 9.8% versus a forecast for 10.6%. When seen in the light of the numbers from perr group banks like Lloyds (LYG) and Santander, these are very disappointing results. The stock is off 6% today.
- In brief, Michelin (OTC:MCGFF) is up 2.5% after the tire maker said Q1 revenues rose 12% led by a strong bounce in sales to truck makers in Asia and South America.
- Rentokil (OTC:RTOKY) is down 4% after reporting a drop in revenues to £607.3m, but advertising giant WPP (WPPGY) is up 2.5% after the company said first half profitability will improve as the US leads a recovery for demand and sporting events spur spending