Having spent the better part of two months humbled by resistance near 950, the S&P finally took the bull by the horns and went on a tear. The pressure had been building and the excuse was that 48 out of 59 major US companies reported earnings before the close ahead of expectations with Ford (F) and 3M (MMM) the star turns. But if you scratch below the surface things are not so rosy. Top-line revenues are not nearly as strong, earnings are still down nearly 25% on a year ago and Microsoft (MSFT) provided a soggy start to after-hours trading. Nonetheless, the top of the old range has finally been breached. Note the Nasdaq 12 day winning streak is its best run since 1992.
With US futures pointing downwards, there may be some impetus for investors to take some chips off the table being a Friday after such a stellar run up. Also, concerns that China may hike reserve requirements more quickly than expected, could see the market worry that this period of strong global liquidity is almost over. Note UPS (who for me are a key bellwether of the overall health of the REAL US economy) CFO Kuehn said yesterday “our trends so far in July show no material uptick in growth, we don’t have any confidence that either demand or activity is going to pick up substantially”.
Today’s Market Moving Stories
- The relentless surge in Asian shares has taken the benchmark MSCI index of Asia-Pacific shares outside Japan up 73% from its March lows, stoking some worries among analysts that an asset bubble may be forming as investors rush to take part. A sudden rebound in property markets in China, Hong Kong and other parts of Asia has already stirred concerns about inflationary pressures. The MSCI benchmark for Asia was up 0.4% yesterday and 4.5% on the week, tracking the weekly gain in the MSCI index of world stocks.
- The Shanghai Securities News has cited an unpublished report by the Chinese Ministry of Housing and Urban-Rural Development as saying that speculative demand for real estate started to emerge in May and June. The month-on-month change in nationwide Chinese property prices turned positive in March. Then in June, prices rose from year-earlier levels for the first time in seven months. The property sector is one of the major drivers of the Chinese economy, especially now that exports are falling. To pull the market out of a downturn, Beijing has reduced the equity requirement for new projects, allowing developers to increase their leverage. The government has also cut mortgage rates, taxes and minimum down payments for first-time buyers.
- In Japan a white paper on the economy, the Cabinet Office comments that the worst of the recession is over due to a pick-up in overseas demand. The paper called for the need to pay attention to three major risks: deteriorating employment conditions, falling consumer prices and the possibility of further economic declines in overseas economies.
- US existing home sales look to have bottomed, beating forecasts yesterday, just as foreclosed sales as a proportion of total sales, and overall inventory have peaked.
- The Irish Times reports this morning that NAMA is arranging that foreign banks not covered by the Government’s guarantee could participate in NAMA. ACC, which is owned by Rabobank, has made attempts to appoint receivers against a number of developers in recent weeks, which has raised concerns that it could make the creation and workings of NAMA more complicated. At the end of December, ACC had a €5.6bn loan book, of which €3.3bn was commercial lending. The UK-owned banks operating here are participating in the UK Asset Protection Scheme and there is believed to have been some liaison between these banks, the Irish Government and representatives of the UK Government, so it is likely that some progress has been made on the interaction of both schemes to deal with impaired assets where there is exposure across developers. Danske indicated in its Q109 conference call that it “would have to think a lot” before it would consider whether it should be included.
- More on the high velocity (picking the small guy's pocket) controversy – traders profit with computers set at high speed.
- So your bank turns you down for that loan, well why not keep the teller busy. Roger Griffiths today made a stand against Westpac (WBK) by withdrawing his $190,000 savings in $20 notes.
- If you’re a taxpayer, view it and weep – the US debt clock.
Much Ado About Nothing
There were two sets of data: housing starts from the Commerce Department and existing home sales from the National Association of Realtors. The headline numbers were that starts rose 3.6% between May and June and that existing home sales also rose 3.6% to an annual rate of 4.9 million. And yes, there is a startling coincidence between the numbers. In June the foundations were poured on 470,000 new homes across the US. According to the realtors, 465,000 existing homes were sold. In other words, in a country where there is an overhang of 3,823,000 homes for sale, or 9.4 months supply, they are building the same number of new homes each month as there are sales. Is this good? Well, I guess it’s good for home builders and real estate agents, and therefore no disaster for the economy.
The median price is up 4% month on month according to the realtors’ association, although perhaps that has something to do with the fact that January housing starts were only 488,000 which are the houses that would have come onto the market in June. But US housing starts are down 46% year on year, monthly sales of existing homes are down 25% from 2006 and the average house price is down 20 or 30%, depending whether you believe the real estate agents or the Case-Shiller Index. In any case, while the global financial crisis had its beginnings in the US housing crash, it has now moved to an employment crash.
Last night’s other news on the US economy, which was overshadowed by the euphoria around home sales, was the weekly unemployment insurance report from the Labour Department: the number of unemployment claims was 554,000, up 30,000 in a week. The disastrous labour market may weigh on potential homebuyers in the coming months, especially with the unemployment rate expected to continue to rise through year-end.
- European shares look soggy this morning with banks (BNP (OTCQX:BNPQY)) and miners (Rio Tinto (RTP), Vedanta) opening on the weak side but the big mover is drug maker Merck (MRK) which is off 13% after reporting Q2 net income down 48%.
- On the upside this morning is Vodafone (VOD) after coming in with a 9.3% rise in revenues boosted by M&A activity and favourable exchange rate movements. They also reaffirmed their full year guidance.
- Ericsson (ERIC) missed analysts' consensus because of losses at its mobile-phone and semiconductor joint venture with net income plunging 56%.
- But we’re still eating yogurt and buying branded baby food as Danone (OTC:GDNNY) posted profits which were up 3% today.
- Overnight Samsung (OTCPK:SSNLF), the world’s top maker of memory chips and LCD screens, posted its best quarterly profit in 2-½ years thanks to a turnaround in its memory chip business but maintained caution for the rest of the year. Samsung looks poised to make the most of a nascent recovery in the global memory chip sector following a 2-year-old industry slump, as it enjoys a technological edge over rivals such as Elpida (OTC:ELPDF). Separately Panasonic (PC) jumped nearly 7% after JPMorgan raised its rating on the stock.
- Microsoft, Amazon.com (AMZN) and American Express (AXP) posted disappointing quarterly results after the bell, sending their stocks lower and adding a fresh note of caution in Asia.
- Basket case bank CIT, which is looking at selling off some assets, is most likely to sell its aviation-finance and rail-finance operations, the Wall Street Journal said, citing sources familiar with the matter. The people, who said evaluations were still in the early stages, told the paper that CIT was approached by Warren Buffett’s Berkshire Hathaway (BRK.A) and Leucadia National (LUK) to buy parts of the company, but spurned the offers because of low bids. CIT, which is a lender to nearly a million small- and mid-sized businesses, averted a crisis and bought some time this week with a $3 billion emergency financing from large bondholders to restructure its debt and avoid bankruptcy.
- Bloxhams Stockbrokers have a sharply upped their loss estimates for Aer Lingus from a €130mln to €152mln (some 37% worse than the current Bloomberg consensus forecast amongst those analysts who follow the stock).
- RBS and Lloyds (LYG) have relented to pressure from the EU and submitted restructuring proposals that may see the banks forced to sell assets in return for state aid. Under EU rules, organisations that receive state aid for longer than six months are required to restructure their operations to offset any competition distortions which may have occurred as a result of the aid. The commission has indicated that Lloyds will have to make “a viable carve out” as a result but it is not set to lead to job cuts. The plans could see Lloyds being forced to sell off its Halifax or Bank of Scotland network, while RBS could see its hand forced on its Asian division. The submitted plans however are still believed to be just outlines at present with further more detailed submissions being required in the coming weeks.
- Marketwatch reports China State Construction Engineering priced its Shanghai initial public offering at 61 US cents a share, the top of its indicative range, raising $7.3 billion. The IPO, reportedly more than 35 times oversubscribed, was the world’s largest so far this year. The state-owned construction contractor, known for building the Water Cube indoor-swimming centre for last year’s Beijing Olympics, made the offering through both retail and institutional tranches. The company has said it plans to use the IPO proceeds for housing and infrastructure projects and for working capital. Mmmmmmmmm smells like the Nasdaq in 1999 to me.
Data Ahead Today
At 15:00 (all times UK) we get the final US Michigan consumer sentiment for July. Lower petrol prices and higher stock prices should see a slight upward revision in sentiment to 65½.
And Finally… While I Leave Tweeting To The Birds, There Are Those Who Take It A Lot More Seriously
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