Preview from Europe: What's This Week's Catalyst?

by: The Mole

C’est la Vie! The surge in existing home sales to the highest level since August 2007 and the steady gain in single-family starts show a clear upturn in activity driven partly by a tax credit which matures Nov 30th. Fed Chairman Bernanke also noted that the global economy is beginning to emerge from recession which gave buoyant equity markets a three figure kick Friday in a frenzied 15 minutes of trading, propelling them to a new high for 2009.

Looking ahead to the early part of the week with the earnings season all but done (there’s just Dell on the radar for Thursday), what will the catalyst be this week to move markets? Well, possibly another spike in the price of oil or economic data which is scattered throughout the week with US retail sales (which have be awful of late), the Case Shiller house price report, consumer confidence, durable orders and new homes sales. Check out our Weekly Calendar for more.

Today’s Market Moving News

  • Overnight Asian stocks jumped, lifting world shares to a 10-month high, after upbeat US housing data and optimistic comments from Federal Reserve Chairman Ben Bernanke spurred buying of riskier assets. Solid earnings from Chinese heavyweights such as Sinopec, the world’s second largest refiner, gave a boost to Shanghai, which posted a third straight day of gains and started to stabilise from a slide that had spooked investors around the world. Oil prices climbed back near a 10-month peak and copper futures jumped on hopes the global economic recovery is picking up steam.
  • Dr Doom, aka Prof Nouriel Roubini, one of the few economists who accurately predicted the magnitude of the world’s recent financial troubles, sees a “big risk” of a double-dip recession. Roubini said it appears the global economy will bottom out in the second half of this year, but that US and western European economies will likely see “anaemic” and “below trend” growth for at least a couple of years.
  • US uber bank analyst Meredith Whitney said the number of US bank failures will quadruple as lenders struggle with bad loans. “There will be over 300 bank closures.” Bank analyst Bove also warned that “perhaps another 150 to 200 banks will fail,” on top of 81 so far in 2009, adding stress to the FDIC’s deposit insurance fund.
  • China’s economic growth is likely to stay at 8% next year as property and corporate investment and rising exports take up the slack from waning government investment, central bank adviser Fan Gang said. Fan added that the Chinese economy had established a recovery trend and the pace of the recovery was quite rapid. He also told a conference that the global economy had stabilised, although he predicted it will still experience a period of weakness in the future. China’s latest economic data for July indicated that while growth was moderating after a strong second quarter, the recovery remained on track to achieve the government’s goal of 8% growth for the full year.
  • In the UK the Institute of Chartered Accountants has reported the first positive reading for business confidence for two years. The ICA forecasts GDP in Q3 of +0.5%, on inventory restocking, base effects and the impact of the vast fiscal and monetary stimulus.
  • A glance backwards in the UK. In the coming week we receive the second release of Q2 GDP along with the first breakdown of GDP by expenditure components. While I don’t expect any change to the preliminary estimate of GDP growth (-0.8%QoQ), I will be especially watching the inventories component. If this component was to blame for a significant proportion of the Q2 contraction that would send a positive signal (all else equal) for the outlook in the second half.
  • Despite the recent surprisingly strong data from Europe (GDP & PMI’s), the ECB Council members who spoke over the weekend all sounded very dovish and cautious with ECB President Trichet warned at the Jackson Hole junket about a “very bumpy road ahead”. The ECB has “an enormous amount of work to do” and “should be as active as possible”. Council member Liikanen sees “no reason to reassess” the ECB’s monetary policy stance. Likewise, Nowotny doesn’t “see any need for immediate reaction” to recent data and Weber doubts whether the liquidity policy has “the potential of solving all our problems”.
  • German politicians are considering tax incentives as a follow-up program to the car scrapping scheme, Handelsblatt reports. Should be good news for European auto stocks.
  • Anatole Kaletsky believes that the Eurozone economic recovery will lag well behind that in the US and Britain. Despite the Q2 positive GDP prints from France and Germany there is no massive cause for optimism in the Eurozone just yet. Part of the reason for his bearish view is the strength of the currency with the Euro Trade Weighted Index now less than 4% below its highs from July last year.

Quarterly UK CBI Survey Shows Pick Up
British service sector firms see a pick up in business in the coming months but some expect profits to fall amid continued downward pressure on prices, a Confederation of British Industry (CBI) survey showed. The quarterly CBI survey showed that while business levels in the sector remained below normal, the pace of decline has slowed and the balance of firms expect this improvement to continue over the next three months. “Service sector activity has not been anywhere near as weak as in recent quarters and things are starting to look up,” said Lai Wah Co, head of economic analysis at the CBI. “We are still seeing consumers rein in their spending on services, but no longer at rapid rates.” Business conditions remain difficult for service sector firms, she added, with firms forced to cut the prices in order to compete for business. This has dented profitability over the past three months and the balance of consumer services firms, including hotels, restaurants, travel and leisure, expect profits to fall again in the coming quarter albeit at a slower rate. Companies providing business and professional services, such as accountancy, legal and marketing firms, were faring better, the survey found, with the balance reporting an increase in business for the first time in over a year. “Prospects for business expansion and investment are the least gloomy for some time,” Lai said.

Early Equities News
Kingspan has reported operating profit of €30.3mln for the six months to the end of June, down 66% on the same period last year but ahead of analysts' expectations and the shares are up. They reported better margins and expect the second half to show a more stable performance while there was also a €70mln decline in its debt burden.

Mining stocks (Rio Tinto, Xstrata, BHP Billiton etc) are stronger this morning on a rise in copper prices on the LME while Eramet leapt 6%+ on a Nomura buy rating citing a increase in maganese ore prices which they think the market has ignored. Oil producers such as Repsol and Petrofac are also looking perky while advertising giant WPP is also up on a Deutsche bank buy recommendation.

And Finally… A Trailer For Michael Moore’s ‘Capitalism: A Love Story’

Disclosures = None