Preview from Europe: Stocks Suffer as Financials Take the Strain

by: The Mole

On the day, the S&P lost 1.27% and now sits 4.6% below its recent high of 956.
The rot set in with disappointing results from electronics retailer Best Buy (NYSE:BBY) but it was financials that bore the brunt of the selling pressure. All this on news that the Obama administration plans to create a quango called the Consumer Financial Protection Agency. This will in theory help protect consumers’ credit, savings and other banking transactions.

Transports fell 1% and financials fell 2%. Both indices failed to break their 200 day moving averages and Dow Theorists are now keenly focused on the transports' inability to confirm the recent high from the Industrials. The market doesn’t go down in a straight line, but this can be viewed as a shot across the bow. The attempt at an end of day rally was also stopped cold in its tracks - something that we haven’t seen in nearly a month.
In other news the PPI data confirmed that the inflation that the bond sellers and stock buyers were calling for is practically non-existent and in the near-term is far overblown.
Sometimes You Need One Of These Around The Office

Today’s Market Moving Stories

  • Media reports indicate that the US Federal Reserve is weighing using next week’s FOMC statement to damp rate hike speculation. Following the Bank of Canada’s approach of voicing its intention not to hike before 2010 would be one option, Bloomberg reports referring to a “person familiar with the matter”.
  • The US ABC consumer comfort index deteriorated 2 points to -49 in the week through June 14th, putting it back to its worst since the middle of April. That was driven by a drop in the buying climate index to -50 from -46 and by the personal finances index to -14 from -10. The national
    economy index held steady at -84.
  • Almost two thirds of Germany’s top managers believe the country will not return to the high export levels that prevailed before the crisis, but to much lower long-term growth rates. This is according to a very interesting poll by Capital Magazine in Germany, as reported by FT Deutschland. The poll flatly contradicts the consensus among Germany’s economically illiterate political classes who believe that Germany’s only suffered so much this year because of its strong exports, while Germany will be among the first countries to bounce back due to its high competitiveness. The article quotes Bart van Ark (I kid you not), one of Europe’s leading experts on productivity, who said that Germany’s success pre-crisis depended largely on cost-cutting, rather than innovation.

UK: Keeping Things in Context
The market currently expects the Bank of England’s MPC to begin hiking in the next 6 months. The MPC minutes are likely to acknowledge recent green shoots, and the Agents’ report will probably reflect improving economic conditions. However, given the other recent influences on the BoE inflation projection, we believe the market has got ahead of itself in pricing in interest rate hikes so soon. In particular, the recent appreciation in the GBP exchange rate implies a drag on the inflation projection – outweighing the likely upward revision to the bank’s growth projection.

US: Plunging Output Belies the Surveys

Industrial production has fallen 14.7% since its past peak making this the worst recession in manufacturing in the post WW II era. The huge drop in production caused utilization rates to fall to their lowest levels. Production in the auto industry has fallen 60.5% from its peak. The present suspension in auto production by the companies in bankruptcy perhaps explain the divergence between ISM surveys and actual output. Some regional purchasing managers surveys have started to regress after months of improvement. Assuming that the ISM index declines slightly in June and July it should cool some of the present optimism over economic recovery.

Will Mervyn Entertain at the Mansion House?
This evening sees the UK’s Mansion House dinner, which includes key note speeches from both the governor of the Bank of England, Mervyn King, and the Chancellor of the Exchequer, Alistair Darling. The Treasury has already provided a signal on what the Chancellor will say, and it is likely to be received with stony silence from the Bank. Darling is expected to indicate there will not be any change to the UK’s tripartite regulatory regime. He will say that shifting the power between the Treasury, BoE and FSA will not prevent future crises. The BoE will disagree. It criticised the system in the wake of Northern Rock’s demise and has since suggested that a method of macro-prudential policy, which will allow it an element of supply side control as well as demand side on interest rates, would be beneficial.

Positive Outlook Ahead Says Merrill Lynch Survey

The latest Merrill Lynch global equity fund manager survey (conducted 5th – 11th June) reveals optimism over the global growth outlook which continues to build at a respectable pace. Optimism over the global growth outlook continues to build at a respectable pace, and asset allocations are shifting in a pro-risk direction. The survey suggests investors are back to overweight equity/underweight bond positions. Alongside historically significant overweight Emerging Markets equity positions and a stretched Emerging Markets foreign exchange position (i.e. overbought), this suggests that pressure on the USD related to a positioning adjustment to an early cycle environment has probably come to an end. The main risk to this view is that the overweight US equity/underweight Eurozone equity position is unwound as and when any global economic upswing is perceived to be broadening.

UK Retailers Deliver
Sainsbury (OTCQX:JSAIY) has followed Tesco (OTCPK:TSCDY) with reasonably solid Q1 results. Like for like sales grew 7.8% excluding fuel. Easter and clothing may have boosted these numbers. The company highlights value and quality as two key drivers in their revenue momentum. Like Tesco, Sainsbury continues to grow its store network as the larger players leverage the recession to grow market share. However the shares are off sharply on plans to raise £445m to buy property stepping up their plans to add convenience store space during a recession.

AIB Indulges In A Little Bond Play

AIB announced yesterday that the replacement bond in hybrid exchange program will have a coupon of 12.5%. This bond will be used as an exchange for six bonds which AIB announced it was repurchasing last week, providing a significant boost to core Tier 1 Capital at the bank. The bank also outlined the range of prices it was willing to pay for the instrument, moving from 50c to 67c. The weighed average price of the buy back works out at 55.4c, but the final blended average price will depend on the take up in each class of issuance. Bank of Ireland recently saw a take-up of 55% for its cash repurchase program. On a similar take up the capital benefit to AIB is c€688 million moving to €813 million at a 65% take up. The deadline for exchange is Friday.

Mining Digs Deeper
There is notable weakness in mining / commodity stocks this morning with all the big names (BHP Billiton, Anglo American, Xstrata & Rio Tinto) suffering again while steelmakers are also under selling pressure (note Sweden’s SSB is down 8% + after warning on “severe weakness” in demand) as the European retracement enters its 4th day.

Markets Can Be Ironic
For the longest time, equities were on the cusp of an upside break, now we are staring in the face of a breach of the S&P 200-day moving average to the downside. How ironic that fears of a slow retreat from Quantitative Easing are more inclined to hurt equities than hurt bonds. Not that the Fed story is that simple. The market expects less unconventional stimulus, but equally has been shaving back expectations for early 2010 rate hikes, a view we have backed vigorously since the market got ahead of itself after the last NFP numbers. Another source of irony is how equity volatility looks to be on the rise, while bond volatility has tapered off slightly, a reversal of recent events. Plainly there is a directional component here, with respective bond and equity “fear” rising the most on higher bond yields and lower equity prices, respectively.

Now not even Michael O’ Leary thought of this one.
BA Employees Are Crying Wolf

Be very afraid, Jim Cramer says that US housing has bottomed out, AGAIN!
Note the best part of Cramer’s bottom call is that he credits yesterday's increase in housing starts as evidence. Yes Jim, an increase in supply is exactly what we need in the middle of a supply glut.

Data Ahead today

  • UK average earnings and unemployment, Apr (09:30 all times UK): Another large rise in unemployment alongside sluggish earnings growth is expected.
  • Unemployment should rise from 7.1 to 7.3% and average earnings growth should remain very low at -0.2% (market: +0.2%), with ex-bonuses growth drifting down to 2.7% from 3.0%.
  • BoE MPC minutes (09:30): The minutes will be watched for how the debate on additional Quantitative Easing is progressing, although Tuesday’s sticky inflation data complicate the outlook.
  • US CPI, May (13:30): The CPI should rise by 0.3% on higher energy prices. The core CPI should be up 0.2% owing to gains in shelter and education.
  • US current account balance, Q1 (13:30): The deficit should shrink to USD85b, which would be the smallest shortfall since 2003

And Finally…..

Thinking about home loans…think bank shows you how it can be a pain…

Disclosures: None

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