The US FED tried to get risk markets going with their QE Light Tuesday – but it had the opposite effect Wednesday – as Treasury bond yields are lower but stock market is down 3% and risk aversion clearly higher in thin summer market conditions. US Stocks dropped the most in three weeks as equities retreated amid investor fears that the Federal Reserve’s stimulus plan indicates the anemic economic recovery is in serious jeopardy. Alcoa (AA), Boeing (BA) and Caterpillar (CAT) each shed more than 3.7% to lead losses in the Dow. Amazon.com. broke a nine-day winning streak after Alibaba.com, the Chinese e-commerce operator, said it wants to expand in the US and tech bellwether Cisco Systems (CSCO) lost 2.4% even before reporting lower-than-estimated sales and warning paraphrasing Ben Bernanke of unusual uncertainty in the economy following the close of US exchanges. Bottom line is that with central banks from the Fed to the BoE sounding more dovish than a flock of pigeons in a crumbs factory, the markets are spooked.
Despite a slew of earnings yesterday morning, which were disappointing on the whole, the day was dominated by macro. Europe came in to news that the Fed is to buy enough Treasuries (concentrated on 2yr to 10yr ) to keep the size of its balance sheet (and thus excess reserves in the banking system) steady. The move by the Fed was not viewed as a positive for risk assets, the fact the FOMC felt the need to take a ’symbolic’ step implies that they are concerned with the strength of the recovery. Asian macro was also weighing on markets, particularly Japanese Machine Orders which came in at +1.6% v +5.4% cons. The Chinese July data dump also provided some ammunition for the bears as the FAI and loan data came in light (24.9% v 25.3% cons and 532.8bn v 600bn cons respectively. The Bank of England did little to raise spirits by cutting their growth outlook (may peak at +3% v +3.6% previously forecast) and predicting inflation will be below the 2% target in 2012, at about 1.5%. Spain also faces growth concerns; Bloomberg reported that PM Zapatero appeared to announce a surprise U-turn in austerity plans yesterday on fears cuts have been too severe so far and may be effecting the livelihood of Spanish companies.
Today’s Markey Moving Stories
- That was quite an FOMC. Following the Committee’s effective downgrade of the US economy on Tuesday, the major US stock indices have lost an average 2.5% apiece, FTSE has lost 2.7% (in a broad reflection of the performance of eurozone bourses generally) and in Asia today, markets have performed much as they did yesterday (the Kospi has a total lost 4%, the Straits Times 3.2% and so on). In keeping with this abrupt collapse in risk appetite, the JPY crosses have also dropped sharply – leading to the familiar questions about tolerance and intervention aimed at the Japanese finance minister; and the USD has also risen sharply across the board – most notably recouping three big figures against the euro.
- The Bank of Japan checked dollar-yen exchange rates earlier today with banks in the foreign exchange market, Reuters reported, citing unidentified people. The checks went beyond the usual contact, the report said as the yen is trading at a 15 year high versus the Greenback. This checking of rates is a clear shot across the bows as of course the BoJ knows full well where the exchange rate is trading at any minute. That said as I’ve reiterated many times, unilateral intervention rarely works.
- As it did with Ireland’s “investments” in Anglo Irish & INBS the EU has ordered Germany to count holdings of bad banks (in West LB & Hypo Real Estate) as government debt, which could raise Germany’s debt/GDP ratio to 90%, Die Zeit reports.
- A swelling trade gap, less stockpiling and weaker construction indicate the U.S. economy slowed even more in the second quarter than the government estimated last month, economists said. Revisions due later this month may shave last quarter’s 2.4 percent annual growth rate by 1 percentage point or more, according to Morgan Stanley’s David Greenlaw and Nomura Securities International Inc.’s David Resler. The trade deficit in the U.S. unexpectedly widened by $7.9 billion to $49.9 billion in June, Commerce Department figures showed yesterday. A surge in imports means American companies contributed less to the rise in gross domestic product, the value of all goods and services produced in the U.S., than previously estimated. Earlier reports showing smaller gains in inventories and less of a rebound in commercial construction than the government projected will
also reduce the pace of expansion.
More Woe For Irish Government Bond Spreads
The Irish bond market came under increased pressure yesterday with spreads 20-30bps wider across the curve at one point. Irish 10yr was 312bps over Germany before lunch before closing the day 303bps over. What is causing the recent sell off ? In reality there is no headline associated with the sudden change of sentiment. Exchequer returns released last week were broadly in line with forecast albeit with a less preferable sum of the parts (lower tax receipts offset by lower capital expenditure) – arguably bond neutral. Unemployment data (13.7% v 13.4%) was a surprise to the negative but received a rather tame response from the market at the time.
The EU’s approval of an additional capital injection into Anglo on Tuesday exceeded the total recapitalisation projected by the Government in March (€22bn) but was in line with recent market consensus (€24-25bn). While €24-25bn is a big number – the market has been aware of this contingent liability for some time. More relevant is the suggestion that the figure could be higher than this – something which will not be clear until NAMA implementation is fully complete. To quantify the risk here; every 10% higher haircut on NAMA loans for Anglo results in a €3.5bn additional capital requirement. The initial projection of a 50% haircut now appears to be approaching 60% with a risk that it could be higher. One should look at NAMA as a see-saw effect in terms of the future impact on the Government deficit. The higher the haircut – the more capital the government needs to inject now – but as a consequence, the likelihood of NAMA being loss making in the future is reduced. Increasingly the market is focussing on the impact of Bank recapitalisation on the 2010 deficit figure. As I previously pointed out, the liklihood is that >€20bn could be added to the 2010 deficit number as a one off accounting adjustment- due to the Bank Promissory Notes being treated as capital transfers (not investments). While the market is aware of this contingent liability, a deficit in the 20-25% range for 2010 would clearly cause a reaction. Whether it is factored in now or spread over 10yrs is merely a Eurostat accounting decision, but arguably it makes sense to “clear the decks” upfront and focus on reaching the stability pact target in subsequent years.
Once again the “imminent syndicated deal” rumor showed its face yesterday. The suggestion being that the government needs to do a syndicated deal in September in order to “fund the banks”. A few points to note here. 1) The Government guarantee (ELG) is available to the banks until December 2010 – it is there for a reason (it may well be extended beyond this date), 2) as I previously pointed out the refinancing risk faced by the banks in September can be managed in an orderly fashion without there being a need to resort to “forced issuance”. €20bn funding year to date , lower balance sheets post NAMA transfers, increased balance sheet liquidity (via NAMA bonds which can be pledged at the ECB) all act as mitigating factors. In addition, one has to assume that €25bn of maturities in September will free up investor appetite for further issuance between now and year end. It is also worth pointing out that the NTMA raised its cash balances to €22bn in September 2008 (and has maintained them at around this level ever since) – in order to provide a contingency plan for Bank funding if ever required. A syndicated deal between now and year end should be seen as a ‘luxury’ rather than a necessity in our view. After next weeks Auction, less than 90% of the official NTMA funding target (€20bn) will be complete. As previously stated, I believe the NTMA will attempt to pre-fund (as per 2009) with total funding reaching €25bn if conditions allow.
This week’s aggressive sell-off was largely driven by the imminent auction supply in our view (notwithstanding some of the concerns raised above). The €800m-€1.2bn T-Bill auction this morning combined with next week’s €1.5bn dual bond auction (total supply €2.7bn) is arguably too much to digest at this juncture. Also not helping today is the usual bit of Paddy bashing from A.E.P in the Telegraph
Company / Equity News
- AIB (AIB) is likely to postpone the deadline for bids for Bank Zachodni beyond August 20th to give it more time to strike a deal with Santander (STD). The report, carried in the Polish press and reported across several other news agencies, suggests that negotiations for the Polish, US and UK assets with Santander are complicated by the regulatory approvals required in each jurisdiction. PKO and BNP have previously been highlighted as likely bidders for the Polish assets.
And Bank of Ireland’s (IRE) target to move fully from State support, takes a central theme in the Irish local press this morning. Yesterday, the management of the bank highlighted plans to move the bank off the State Guarantee as “quickly” and “prudently” as possible. The bank is targeting to pay back the Government preference shares of Euro 1.8 billion by 2013, of which a 10.25% coupon is attached.
Yesterday, the bank confirmed that €4.6 billion of term funding was completed in H1 2010, with €9.5 billion outstanding for the remainder of 2010. Of this, €7.5 billion is due for September. Bank of Ireland has plans for covered and uncovered, as well as secured and unsecured issuance. Management reiterated that it would work out of the Government Guarantee schemes when it is able and appropriate. Capital ratios came in stronger than expected at 8.3% for the Core Equity Tier 1 and the strength (relative) of the European stress test underpins the progress since the capital raising of €2.9 billion. This should benefit the bank when it moves to fund in the wholesale market which would provide a significant signpost for the investment story.
- Prudential Plc (PUK) today reported first-half IFRS operating profit of £968 million, compared with analysts’ estimates of £746 million.
- Credit Suisse (CS), Switzerland’s second-biggest bank, and Barclays (BCS) began cutting jobs after reporting a slide in revenue this year. Credit Suisse, based in Zurich, said in an e-mailed statement yesterday that the 75 reductions in its U.K. investment-banking unit will affect bankers and “certain support functions.” Barclays Capital, the investment-banking unit of Barclays, is eliminating about 300 administrative and support jobs, a person briefed on the matter said. The moves may signal a reversal of recent hiring by investment banks after lackluster markets damped second-quarter revenue at firms from Goldman Sachs Group Inc. (GS) to JPMorgan (JPM). Credit Suisse’s investment bank last month posted a 21 percent decline in revenue from the first quarter, and Chief Executive Officer Brady Dougan described the economy and markets as “uncertain and challenging.”
- Sales of mobile phones continued growing in the second quarter but tough competition pressured selling prices, research firm Gartner Incsaid Thursday. Global handset shipments increased 13.8% in the quarter from a year earlier to 325.6 million units, driven by strong sales of smartphones, it said. Handset vendors’ margins and average selling prices were hit by intense competition, a stronger US dollar compared with the euro, and by attempts by some vendors to win shares in the low-margin market, Gartner said. Sales of smartphones, such as Apple Inc’s (AAPL) iPhone and Research in Motion (RIMM) Ltd’s Blackberry, continued to outgrow the wider handset market, increasing 51% to 61.6 million units.
- Google (GOOG) is seeking to diversify beyond Internet advertising, will sell some television spots for cable networks carried by DirecTV (DTV), the largest U.S. satellite-TV provider. Google will sell ads for networks including Fox Business, Sleuth, TV Guide and Bloomberg TV, the companies said today in a statement. Financial terms of the deal weren’t disclosed. In related news Google’s CEO Eric Schmidt has doubled the anticipated pace of acquisitions this year and expects to maintain that rate after some internal projects have failed to spur growth. “The opportunities are there,” Schmidt said in an interview from the company’s Mountain View, California, headquarters this week. “We can afford it. We’re in a mode of investment for the long term.” Google, the search engine with almost two-thirds of the U.S. market, is making acquisitions every couple of weeks –more than the once-a-month pace Schmidt projected when it began buying companies again last year after the recession. Its latest deal was last week’s purchase of Slide Inc., which makes games for social networks.
- Vedanta Resources Plc (OTCPK:VDNRF) is in talks to purchase assets or take a multibillion-dollar equity stake in Cairn Energy Plc (OTCPK:CRNCY), a U.K. oil and gas exploration company, according to people with knowledge of the matter. The talks are advanced, and a deal may be announced later this month, said the people, who declined to be identified because the negotiations are private. The companies have discussed a range of options, including an equity stake, asset purchases or a complete takeover of Cairn, one person said. The move would represent a strategic shift by London-based Vedanta, the metals producer controlled by Indian billionaire Anil Agarwal.
- VestasWind Systems A/S (OTCPK:VWDRY), the world’s largest maker of wind turbines,won an order for 140 turbines of its V112-3.0 MW model for a project in Australia, the largest wind power project in the country.
- The WSJ reports that Nestle (OTCPK:NSRGY) has joined a growing list of global food makers warning about higher prices for key commodities like tea and cocoa, which could pinch margins and ripple through the grocery store in the remainder of the year. Higher costs add to the hassles for Nestle and other consumer-goods companies, which are dealing with sluggish demand for premium products in Western Europe and North America. In Europe, consumer confidence is low and unemployment is high. Similarly, in the US, consumers say they are shopping harder for deals, choosing more store-brand products and keeping an eye out for discounts. Costs for powdered milk, cocoa, coffee and wheat have risen at double-digit rates over the past few months, prompting big food companies including Danone (OTC:GDNNY), Unilever (UL) and Kraft Foods (KFT) to turn more cautious about their performance for the next two quarters. Packaged-food producers,which are accustomed to commodity fluctuations, say they are planning accordingly.
- Anheuser-Busch InBev (OTCQB:AHBIF) beat expectations with its second quarter profit Thursday and said it expects this growth to accelerate further in the remainder of the year. The world’s largest brewer said that earnings before interest, taxes, depreciation and amortization rose to $3.35 billion in the second quarter from $3.23 billion in the same period a year earlier–slightly ahead of market expectations. The figures strip out currency movements as well as the effect of a number of disposals made in the last year. Total revenue fell to $9.17 billion from $9.5 billion, while net profit was $1.15 billion, compared with $1.07 billion a year earlier. The brewer of Budweiser and Stella Artois said that its comparable volumes in the second quarter rose 2.1%, beating expectations of a 1.1% rise. The company said both volume and profit had exceeded its own expectations after favorable weather drove volume growth in most regions. It added that it expects profit growth to accelerate in the third and fourth quarters, as volume growth comparisons in the second half ease. Growth in the second half should be much easier to achieve, given that volumes dropped 5% in the second half last year.
- General Motors, the automaker currently 61% owned by the U.S taxpayer, is seeking to raise $12 billion to $16 billion in an initial public offering, said a person familiar with the plan. The more than 500-page document, called an S-1, is expected to be filed tomorrow, though it may not happen until Monday, said the person, who asked not to be named because the discussions are private. The exact value of the offering may not be fully detailed in the registration statement filed with the U.S. Securities and Exchange Commission, said the individual.
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