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We’re back in full scale risk aversion mode. A weak crazy rumor-driven opening in Europe today with wild talk of French and Italian credit rating downgrades which I give really no credence to as rating agencies have to put countries on negative watch or outlook BEFORE they take the knife to the sovereign rating (neither are currently on watch or negative outlook). For me the it’s the rather glum ECB Financial Stability Review report released yesterday evening which is the main culprit as it predicts “sizeable” bank loans losses next year and expects these to be higher than 2009. A further €195bn (gulp) is the number they mention. This all goes to highlight the perception that European bank are still lagging the balance-sheet improvements already seen in the US/UK banks. Meanwhile comments from ECB members such as Weber only re-enforce the rumours of a Franco-German rift at the heart of the ECB: Weber’s weekend criticism of the ECB bond purchase program and warnings that the euozone must not become a fiscal transfer union come amidst stories that the decision to buy PIIG bonds was nothing less than a French coup designed specifically to assist French banks. Finally we’ve had a weak German retail sales figure which is adding to the gloom.

Post its spectacular “Top Kill” failure, BP (NYSE:BP) is the big fall guy today, off some 15% (making that bet with Paddy Power on the CEO, Tony Hayward losing his head look better by the day). But to the upside is insurance giant Prudential (NYSE:PUK) (up 3.5% today) on talk that the purchase of AIG’s (NYSE:AIG) Asian AIA unit won’t go ahead after AIG said that it “will adhere to the original terms of its previously announced agreement”. The Pru had been seeking a cut price deal over the last few days. GBP is bid on this news. Expect AIG to struggle this afternoon.

Today’s Market Moving Stories

  • Over night risk aversion mode drove the market trend in the Tuesday Asian session. The main catalysts were weak economic releases from China; May Chinese NBS manufacturing PMI declined to 53.9 from 55.7 in April (cons. 54.5) and May Market PMI declined to 52.7 from 55.4 in April. Although these figures stayed comfortably above the expansionary thresholds of 50, suggesting industrial activity has continued to expand steadily, these also suggest that the growth momentum has eased somewhat recently. The Shanghai index declined 1.0% partly due to the weak PMI figures and stocks in other Asian countries also posted declines (-0.6% to -1.0%).
  • China: The FT quotes Li Daokui, a member of the PBOC’s monetary policy committee, as saying, “China is running the risk or is on the verge of overheating” and that deposit rates should increase modestly because they were negative in real terms. Li also added that a gradual appreciation of the CNY would help companies prepare for an eventually much stronger currency.
  • In a reality check the official PMI eased to 53.9 in May from 55.7 in April. That was close to the consensus forecast of 54.0. A companion index compiled by Markit dropped to an 11-month low of 52.7 in May from a downwardly revised 55.2 in April.
  • On the subject of credit ratings agencies, ECB Council member Christian Noyer said, “They are not sending the signals at a certain point of time when it should be warranted but sending when it’s too late, and increasing problems … For us, it’s an enormous problem … Certainly I would consider the present situation as absolutely unsatisfactory.”
  • Greek finance minister George Papaconstantinou said “The (aid package) money is sufficient till the start of 2012 … We have short-term paper expiring, some of it in July, then we will be in the markets.”
  • In its financial stability review, the European Central Bank predicted €195bn in bank write downs in 2010 and 2011, and warns of dangerous financial contagion as a direct result of the sovereign debt crisis. Specifically, the ECB warned about “a number of hazardous contagion channels and adverse feed-back loops between financial systems and public finances.” The FT writes that the ECB’s gloominess could contribute to concerns over the euro area’s weak growth prospects.
  • Caja Madrid, Spain’s second largest savings bank has asked for government support to the tune of up to $3bn as it attempts to merge with several other smaller regional Spanish banks. Spain’s bond spreads are again under the kosh again today.
  • Unemployment in Germany continued its downtrend and dropped 45k (seasonally-adjusted) in May. Unemployment started to drop in July 2009. Since then, the German labor market confounded skeptics and performed much better than could been hoped for. The reasons for this seem to be significantly increased flexibility on the companies’ levels and also the German “Kurzarbeit”. This is a govt subsidy scheme which allows firms to hold on to their employees at much reduced working hours. We draw two conclusions: 1) Public budgets may get some relief from the improving labour market; 2) The German labour market trend could be another indication of widening divergences within EMU.
  • May’s UK CIPS/Markit report on manufacturing suggests that the industrial recovery is still going strong. Although the headline PMI only tracked sideways in May, it has risen sharply over the past few months. So by holding steady at 58, it stayed at its highest level in over 14 years. And although the output balance slid a touch, it still points to quarterly gains in manufacturing output of close to 2%. Admittedly, the survey has been a bit more optimistic than the official data. What’s more, industry makes up less than a fifth of the economy – and the CBI services survey released overnight suggested that the recovery in the much bigger services sector is flagging. Nonetheless, the news on the manufacturing sector clearly remains upbeat.

Ryanair Flying High

Bloxham’s write today that Ryanair’s (NASDAQ:RYAAY) FY results show, as expected, a strong rise in FY10 pre-tax profits to €341m with adjusted net income of €319m (+194%). As importantly, guidance for FY11 contains a number of key pointers including 1) yields to rise 5-10% 2) special dividend of €500m to be paid in October 2010 with another €500m guided for FY 13 if an aircraft order is not secured 3) costs per pax to rise just 4% this year depsite higher hedged fuel costs (-6% stage length adjusted) 4) additional fuel hedges extending to H1 FY12 (Q1 50% at $750 per tonne, Q2 20% at $750) which is a 3% rise in dollar terms for a cost item accouting for over 40% of expenses 5) 34 aircraft deliveries financed at an all-in cost of 4% with associated FX crossed at $1.46 and 6) net profit guidance of €350m to €375m for FY11 relative to consensus of €360m i.e a 10-15% rise in net profit. Normally in June Ryanair is extremely cautious in its outlook statement and this guidance must be judged relative to a Q1 affected by ash (net profit to be slightly lower in Q1) for which a €50m maximum exceptional cost has been flagged. Guidance of a 10-15% rise in net profit together with timed special dividends of €1bn are specifically positive backdrops to the analyst briefing at 8.30am.

Company / Equity News

  • Aussie PM confirms he is committed to the mining tax and negotiations will be protracted. As the war of words intensifies Rio Tinto (RTP) issued a statement saying it currently paid “its fair share” of Australian taxes.
  • The Nikkei newspaper reports BHP (NYSE:BHP) agreed to raise prices of coking coal by 12.5% with Japanese steelmakers for 3-month contracts. Despite this, basic resources stocks, miners & steel makers are all weaker today as copper, nickel, tin & zinc prices all fell on the LME after the relatively disappointing economic news from China. Expect Alcoa (NYSE:AA) , Freeport-McMoRan (NYSE:FCX) etc to show weakness in the NY session.
  • In M&A news Covidien (NYSE:COV) has agreed to buy medical device company Ev3 for $2.6bn.
  • Combined price estimates from more than 2,000 forecasters tracked by Bloomberg show the S&P 500 will rise 25 percent in the next year, the fastest projected rate since February 2009, data compiled by Bloomberg show. The rally above 1,350 will be led by industries most tied to the economy, according to analysts who boosted individual share projections by an average of 0.9 percent in May, the 14th straight monthly increase.

And Finally...

Source: Report From Europe: China, The ECB and the Rumor Mill Hurting Stocks