There was an inauspicious start to Q4 as U.S. stocks fell again Monday, condemning the Dow to its biggest drop in almost a month, as broker downgrades cuts of companies including Microsoft (MSFT) and Macy’s (M) triggered risk aversion before the start of the earnings season. Microsoft slumped 1.9 percent after Goldman Sachs Group removed its “buy” rating on the shares, citing the company’s struggle to gain market share in mobile devices, while Macy’s fell 1.7 percent after Goldman lowered the department- store chain to “neutral” and Alcoa (AA), the aluminum company that will unofficially kick off the earnings season on Oct. 7, lost 2.5 percent as Deutsche Bank advised selling the shares. It worth recalling our course that historically the month of October has been a nasty month for equities.
That said, overnight Asian stocks rose after Japan cut its benchmark interest rate and Australia unexpectedly kept its rate unchanged for the fifth straight month leaving European markets to open up in the black, Tuesday.
Today’s Market Moving Stories
- So hot on the heels of currency intervention in Japan, a Bank of Japan (BoJ) reduction in the uncollateralised overnight rate from 0.1 percent to a zero-0.1 percent range was coupled with plans to introduce an asset purchase vehicle alongside (and separate from) its Rinban operations. Here are some details. They cut the policy rate. It used to be 0.1 percent. Now it’s a range between 0-0.1 percent. This is very significant in my view (even though reserves earn 0.1 percent interest). It allows BoJ to pump in unlimited liquidity if they like and not worry about compromising their policy target. (The Fed also adopted this approach – that’s why Fed now targeting a range too…). Also means they can do as much unsterilized intervention as they like without worrying about the implications for they policy target. This gives them maximum flexibility. It also allows JGB (Japanese government bonds) yields to fall further.
- Monthly JGB purchases unchanged at Y1.8 trn but… they have created a new facility to buy up to Y3.5 trn in assets (JGBs, T-bills, corporate bonds etc) over the next year. Very significantly, the cap on JGB stocks that the BoJ imposes on itself will not apply *to this facility*. The cap will continue to apply to their traditional bond holdings held in the normal way. But it is highly significant that they are willing to compromise this rule at all – it demonstrates that the wider future of the self-imposed rule on their wider JGB holding could soon be up for debate – not today of course, but the decision opens the door to this in future.
- The Federal Reserve Chairman Ben Bernanke Monday issued a stern new warning about the huge U.S. budget deficit, saying failure to tackle the problem could have dire economic consequences. U.S. public finances are on an “unsustainable path” in the long run largely due to an aging population and continuing rise in health-care costs, the Fed chief said. In remarks prepared for delivery to a meeting of the Rhode Island Public Expenditure Council, he said the nation would face “serious economic costs and risks” if it failed to address the situation. In the short run, “concerns and uncertainty about exploding future deficits could make households, businesses and investors more cautious about spending, capital investment and hiring,” he said. “In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity and economic growth.” Bernanke pointed to congressional projections that the ratio of federal spending for health-care programs–mainly Medicare and Medicaid–to national income will double over the next 25 years. Meantime, the aging of the U.S. population will also strain Social Security, as the number of workers paying taxes into the system rises more slowly than the number of people receiving benefits. In his speech Monday, Bernanke said the weak economy provided little scope for reducing deficits significantly further over the next couple of years- “indeed, premature fiscal tightening could put the recovery at risk,” he cautioned. However, the former Princeton professor said steps could already be taken today to improve the country’s longer-term fiscal position, and that could even help improve the near-term economic outlook. The sooner a plan is established, the longer those hit will have to prepare for the necessary changes, he said. Bernanke said setting a fiscal rule could help. He pointed to Switzerland, Sweden, Finland and the Netherlands, which all realized improvements in their fiscal situations after adopting rules that limit spending.
- Bernanke also said the central bank’s first round of large-scale asset purchases improved the economy and that further buying is likely to help more. “I do think that the additional purchases — although we don’t have precise numbers for how big the effects are — I do think they have the ability to ease financial conditions,” Bernanke said in response to questions in Providence, Rhode Island, at a forum with college students. He said the first wave that ended in March was an “effective program.” Bernanke and other Fed officials have signalled during the past two weeks that the central bank may announce the purchase of more Treasuries as soon as their next policy meeting Nov. 2-3 in an effort to boost economic growth and reduce an unemployment rate persisting at 9.5 percent or higher for the past year.
- U.K. banks would have rejected 3.8 million home-loan applications in the past five years had the Financial Services Authority’s plans to tighten lending been in force, the Council of Mortgage Lenders said. About 51 percent of customers applying for mortgages from 2005 to 2009 would have failed the FSA’s tests on whether they could afford the loans, the lobby group said in a statement today. The figures contradict the FSA’s own study, which found 17 percent of borrowers would have been rejected, the CML said. Britain’s financial watchdog published a report in July proposing stricter tests for borrowers to ensure they have sufficient money to repay the loans if interest rates rise and house prices decline. The regulator’s plans would restrict interest-only mortgages and ban self-certification mortgages, according to lenders. “The current proposals sacrifice far too many borrowers,”
the London-based CML said in the statement. “Our concern is to make sure that the rules which are finally implemented are clear in their intended impact, practical in their implementation, and fair in their overall effect.”
- September’s UK CIPS/Markit report on services should, temporarily at least, ease fears about the risk of a double-dip in the economy. The rise in the main business activity index from 51.3 to 52.8 (consensus 51.0) is the first increase in four months and means that the index is at least consistent once again with positive growth in the biggest part of the economy. Admittedly, this hardly suggests that the economy’s out of the woods. For a start, the new business balance edged down again, suggesting that the improvement in the headline index might only be temporary. And with the manufacturing PMI falling again in September, a weighted average of the CIPS surveys still suggests that quarterly GDP growth will slow sharply, to just 0.1 percent or 0.2 percent before the end of the year. Nonetheless, today’s survey at least provides some reassurance that the economy is not plunging head-first into a renewed contraction.
- Moody’s has put the rating of Ireland on review for downgrade. It is currently rated Aa2 (AA equivalent) which is one notch higher than both S&P and Fitch which have the rating on AA- S&P also with a negative outlook. As such I don’t envisage there will be much additional significant move in bank spreads as a result, but the headline is nevertheless the last thing Ireland want to see. The rationale remains no surprise- the additional bank recap costs are the main driver, as well increased uncertainty in the economic outlook and an increase in the sovereign’s funding costs, which, if sustained, will evidently have a big impact. The fiscal consolidation plan remains a key aspect of the conclusion of the review. If it cuts it will likely be one notch which would bring it in line with S&P and Fitch. The reaction bond spreads wise was very muted.
- The Washington-based Institute for International Finance has warned of a crash in the dollar as a result of the Federal Reserve’s expected policy of further monetary stimulus, according to Frankfurter Allgemeine. In a report, the IIF calls on the Fed to pursue a monetary policy that supports foreign demand for US goods. Otherwise there is a threat of a significant spike in capital flows to emerging markets, which would rekindle global imbalances and financial instability. The managing director of the IIF is quoted as saying that market participants have to be persuade that the large economies comprehend their collective responsibility to achieve balanced and sustainable growth. The IIF also published its forecast for net capital flows into emerging markets, raising its previous 2010 estimate of $709 billion to $825 billion. To avert the danger, the IIF has called on the world’s leading nationals to agree a currency pact, or face the risk of protectionism. This follows last week’s warning by Brazil’s finance minister Guido Mantego of a currency war. The IIF is specific about the pact, according to the FT. It should be an updated, and more far-reaching agreement than the 1985 Plaza accord, aimed at weakening the dollar at the time, and should include stronger commitments to medium-term fiscal stringency in the US, and for structural reforms in Europe. An exchange-rate deal alone would be insufficient, according to the IIF.
- European governments will be allowed to provide soft loans and other concessionary support to their banking and industrial sectors for one more year because of the lingering effects of financial crisis, according Europe’s top competition regulator. But in an interview with the FT, Joaquín Almunia, the EU Competition Commissioner, said he would reinstate the much tougher “normal” state aid regime from the beginning of 2012.
- Greece unveiled an ambitious draft budget aiming to slash its budget deficit to 7.0 percent of GDP next year, deeper than the 7.6 percent goal agreed with the EC, the ECB and the IMF and aimed at securing a return to the bond market at some point next year. The 2011 draft budget sees the general government budget deficit drop to €16.28 billion in 2011 from a forecast €18.5 billion this year on higher tax revenues and spending cuts with real GDP projected to contract by 2.6 percent. PM George Papandreou told cabinet members: “Our aim is none other than to get out of the tunnel as soon as possible. Our path remains difficult but after many years of derailment, we are returning to fiscal health. Moody’s seems impressed and has intimated they are considering upgrading their sovereign credit rating.
- Eurozone August retail sales unexpectedly fell 0.4 percent (median +0.2 percent m/m ), after a rise of 0.1 percent m/m in July. On the year, sales were up just 0.6 percent y/y, after 1.1 percent y/y in July.
The EMU September services PMI was revised up to 54.1 (median 53.6) from 53.6 reported initially but still down from 55.9 in the previous month.
There are further indications of loose monetary policy. The RBA surprised markets and has not hiked rates from 4.5 percent the BOJ has eased again and even the ECB bought €1.384 billion of Irish and Portuguese bonds in a move that can be described as credit easing. Everything equal, equity markets should jump for joy, but as is so often, everything else is not equal. The latest PMI releases have provided a strong warning signal suggesting that the global manufacturing sector has started to weaken. These signals have been most emphasised in the US where the ratio between new orders and inventories has eased to a level widely associated with a recession. Rising inventories and falling new orders suggest upcoming PMI releases will come in weak, which can easily lead to a situation where the market assumes the Fed might be pushing the string. Adding to economic uncertainties is that US law makers have not voted on the Bush tax cut. The Obama administration wants to scarp the Bush tax cut for high income levels above $250k, which would save the government $700 billion over 10-years. However, the Republicans oppose this move with the consequence that the vote on the prolongation of the Bush tax cut has not taken place. Provided that law makers fail to vote on this issue the US will face a significant tax hike in January taking $3 trillion out of the US economy over the next 10-years. Tax uncertainties have been a major factor holding back US corporate investment plans. Note, New-Zealand, which is heavily linked to the US economy via funding and trade has seen its Q3 NZIER business confidence falling to 6 percent from 18 percent, turning its own activity forecasts negative. Add to this the decline of the HSBC service sector PMI in China and soft capital market regulations imposed by Brazil and Korea (Brazil’s FinMin Guido Mantega announced that Brazil will raise the taxes on foreign investments in fixed income securities to 4 percent, up from a previous 2 percent, South Korea plans to check FX derivative positions at banks) and equity markets have a good reason not to respond to the monetary stimulus.
Company / Equity News
- Renewed bid talk surrounding Rentokil resurfaced in the equity round up sections of yesterday’s Evening Standard and today’s FT. The FT mentioned speculation that the private German cleaning group CWS-Boco would lead a break up bid. We have been here before without any real interest manifesting and do not see why things should be different this time. Rentokil remains too broadly based to be an attractive target in my view.
BHP’s Billiton’s (BHP) $39 billion hostile approach for Potash Corp. (POT) continues to progress in the favor of the Australian based miner. A new report commissioned by the province of Saskatchewan and released yesterday warned against the threat of a takeover by a state owned enterprise. The report also stated that “we found few negative takeover effects “ resulting from a BHP Billiton acquisition. This report is another blow to a Sinochem bid and means that BHP Billiton may be able to raise its bid without any competition. If this situation were to precipitate it would be a significant positive for BHP Billiton.
Elpida (OTC:ELPDF), the world’s third-largest maker of computer-memory chips, will probably miss previous earnings projections as slowing personal-computer demand drives down chip prices, President Yukio Sakamoto said. Operating income may be between 100 billion yen ($1.2 billion)and 120 billion yen in the 12 months through March, and sales may range from 600 billion yen to 650 billion yen, Sakamoto said in an interview yesterday. Sakamoto, 63, said he previously expected profit of 160 billion yen on sales of about 700 billion yen this fiscal year. With demand growing more slowly than expected, Elpida is delaying plans to boost production capacity at its Taiwanese unit, Sakamoto said. Analysts have reduced earnings estimates at chipmakers including Elpida and Samsung Electronics Co. in the past month on mounting concern a slump in computer-memory chip demand will deepen price declines.
- The components in the latest version of Apple’s (AAPL) Apple TV device, selling for $99, may cost less than $64, according to market research firm iSuppli Corp. The most expensive part at $16.55 is the A4 processor, designed by Apple and manufactured by Samsung Electronics Co., Bloomberg Businessweek.com reported today, citing iSuppli. The same chip is used in the iPad and iPhone 4.
- And Google’s (GOOG) TV service, debuting this month on Sony Corp. (SNE) and Logitech International (LOGI) devices, will include content from Time Warner Inc.’s (TWX) HBO, General Electric Co.’s (GE) NBC, Netflix Inc. (NFLX) and Twitter Inc. Google, which first announced the service in May, also will feature TBS, TNT, CNN and the Cartoon Network channels, and an application from the National Basketball Association, according to a blog posting today. In addition to Sony and Logitech, Dish Network Corp. (DISH) has said it plans to deliver the service.
- Chevron (CVX), the second-largest U.S. oil company, said it will start buying back its stock at a rate of $500 million to $1 billion a quarter as it continues investing in petroleum projects. The repurchases will begin in the current quarter under a plan approved by the board of directors and disclosed previously, San Ramon, California-based Chevron said today in a statement. In July, Chevron said it had ended a three-year, $15 billion repurchase program started in September 2007. A new plan without monetary limits or a set term was put in its place, the company said. Chevron said today that it wants to sustain and boost its dividend as it funds developments, keeps a strong balance sheet and buys back shares.
- Last night the US Justice Dept sued American Express (AXP), Mastercard (MA) and Visa (V) in a civil suit to eliminate rules restricting price competition. The complaint suggests that the companies maintain rules that prohibit consumers from using lower cost payment methods when making purchases. Amex has chosen to fight the suit, while Visa and Mastercard have settled. Our US analyst Ian Jaffe believes the suit has no credence and that there will be no settlement. However, legal uncertainty may be enough to warrant negative rating action by the agencies.
- Steelmaker ArcelorMittal (MT) and Posco (PKX) are leading $80 billion in planned spending in India that would vault the country ahead of Japan as the second-biggest steelmaker. Standing in the way are farmers and their water supply. The farmers refuse to move from irrigated land in three states that hold more than half of India’s reserves of iron ore, a key material to make steel. That’s stymied Prime Minister Manmohan Singh’s ambitions to more than triple India’s steel capacity to 232 million metric tons. The farmers’ concern about water for crops has delayed plans by ArcelorMittal, Posco and at least five rivals to benefit from a steel market that has expanded more than 55 percent since 2005 as Indian imports of the metal tripled in the same period. Posco’s proposal to build a $12 billion steel plant in Orissa has stalled for five years as the South Korean company failed to persuade farmers to move.
- Gerrmany needs a further 3,500 kilometers of high-voltage power lines, a study by the Deutsche Energie Agentur GmbH energy agency will show, Handelsblatt said, citing data from the document. It will cost about €6 billion to extend the power grid by 2020, the German newspaper said in an e-mailed summary of an article to be published in tomorrow’s edition. The energy agency known as Dena will make the findings of its grid study public in November, Handelsblatt said.
- Novartis AG (NVS) Tuesday said the Swiss pharma giant’s third quarter results will be hurt by charges of about $590 million linked to the discontinuation of the development of two experimental drugs, but said its focus on the development of differentiated products and agents remains intact. The company said it will stop further development of chronic hepatitis C compound albinterferon alfa-2b and also discontinue research of Mycograb, an antifungal agent. The resulting impairment charges will be booked in the third quarter. However, the effect of this charge will be mitigated in the full year due to the $400 million sale of Novartis’s U.S. rights of Enablex, an adult incontinence medicine, to Warner Chilcott. Novartis said it is set to benefit from a gain of about $390 million from this sale, which will be booked in the fourth quarter of 2010.
- Tesco (TESO) Tuesday reported a forecast-beating rise in first-half profit as sales growth from its overseas operations, including Asia, offset a sluggish U.K. home market. “The global economic headwinds of the last two years are being replaced by the tailwinds of recovery in most of our markets and this is helping our international businesses to resume strong sales and profit momentum. Our important Asian markets in particular are emerging strongly from recession,” Chief Executive Terry Leahy said, presiding over his last set of earnings after 14 years at the helm. Philip Clarke, head of the group’s international operations, will succeed Leahy in March next year. Tesco, the world’s largest retailer by sales after U.S.-based Wal-Mart Stores Inc. and France’s Carrefour SA, and the U.K. market leader, posted a 14.1 percent rise in profit before tax and exceptional items–the key figure tracked by U.K. analysts and investors–to £1.79 billion for the six months ended Aug. 28 from £1.57 billion a year earlier, beating analysts’ expectations of £1.7 billion. Group revenue excluding value-added tax rose 7.1 percent to £29.8 billion from £27.8 billion last year. Total sales rose 8.3 percent to £32.9 billion from £30.4 billion.
- TUI Travel said in a statement today that booking for winter 2010/2011 has “further strengthened,” and that full-year results will be “in line with previous guidance.” Net debt is expected to be lower than guidance, the company said. The stock is better by 5 percent today.
- KPMG intends to hire 8,000 people over the next three years in Europe, including 3,000 in Britain, the Financial Times reported, citing John Griffith-Jones, joint partner of KPMG Europe. Griffith-Jones said the firm sees “lots of opportunities opening up again,” the newspaper said. Excluding Italy and France, the company’s workforce across Europe will increase to 38,000 from 30,000, the newspaper said.
No more “Moss Keane on the rampage.” A sorry day for Irish Rugby. The gentle giant is dead.