Preview from Europe: Is the Stock Market Rally Over?

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Includes: AA, AAUKY, BHP, DAX-OLD, INTC, MT, RBS, RIO, SAY, TWX, USO, XSRAF
by: The Mole

The Dow Jones fell 245 points yesterday in the biggest fall in a month. Stocks had their cage rattled with a quadruple body blow in the form of:

  • A gaggle of ugly earnings warnings (Intel (NASDAQ:INTC), Time Warner (NYSE:TWX), Alcoa (NYSE:AA)). Expect similar very dour outlooks to come.
  • Huge private sector job cuts (that woeful ADP report, the dire Challenger report and the huge drop Monster employment index) which have caused economists to revise downwards their expectations of how bad Friday’s key official Nonfarm Payroll will be.
  • Yet another confidence sapping ethics scandal (Satyam Computer (SAY), the Indian Enron). On top of Madoff this really does shake people’s faith in investing. Seems bean counters PWC were asleep at the wheel in India. Ironically Satyam means “truth” in Sanskrit!
  • The biggest drop in crude prices in seven years which dragged down energy related stocks.

Added to this cocktail was the now monthly warning from banking analyst Meredith Whitney that US banks are going to have to raise a lot more capital in 2009 (which will be easier said than done). All of this has rekindled risk aversion and a bit of a bunker mentality ahead of Friday at 13.30 GMT.

Today’s Market Moving Stories

  • I think that the very downbeat earnings forecast from Intel, one of the stocks considered most representative of the underlying health of corporates, is very significant. This is their second warning on Q4 earnings in jig time and should pressure the tech heavy DAX in particular today. Even Chinese computer makers are feeling the heat.
  • No matter what paper you read today there is nothing but dire economic news; from US commercial real estate to the restaurant business to plummeting German exports.
  • Mineral extractors (read BHP Billiton (NYSE:BHP), Rio Tinto (RTP), Anglo American (AAUK), Xstrata (OTC:XSRAF), ArcelorMittal (NYSE:MT)) are under pressure today on the renewed weakness in commodity prices and general gloomy global outlook. RBS (NYSE:RBS) is managing to buck the trend. Its shares are up on reports that they are considering selling their £2bn stake in Bank of China. The retrenchment and de-leveraging continues apace.
  • On the back of Oppenhemeir’s star analyst Meredith Whitney’s dire warnings, here’s another hard edged and punchy article on banks by Doug McIntyre.
  • The ongoing global scale of the crisis is beginning to get even nastier with a spate of suicides.
  • Everyone wants a piece of the Bailout Nation, even the porn industry. Will the TARP become the TART?

Data Today
The BoE’s MPC meet at high noon (GMT) today and are set to cut rates to their lowest level since the bank was founded in 1694. The median expectation is for a 0.5% reduction to a mere 1.5%. But there are plenty of punters and economists looking for a shock and awe cut of 0.75% to the full monty 1%, particularly as the London Times is reporting that the government is considering printing money.

The bugbear remains the weakness of the currency and the historical fact that sterling has been very prone to speculative attacks and requires huge capital inflows to balance the books. The key question is will the market be “underwhelmed” by a mere 0.5% rate cut? It will be interesting to see if they make any statement on quantitative easing.

Just how uncertain the market is about today’s decision is aptly demonstrated by the London Times Shadow MPC vote which saw three members call for a 100bp cut today, three for 50bp, and three for no change. Despite this disparity of views, there was a shared belief that there is a growing urgency to focus on policies beyond conventional rate cuts to address the ongoing blockages in the transmission mechanism. Some believe that any further rate cuts are academic due to the lack of pass-through, and others think that rates should be cut as low as possible, as fast as possible, before quantitative easing measures are introduced.

And Finally… Watch Out 2009
Stock Market Bears Waiting To Get Stuck Into 2009

Disclosure: None