Preview from Europe: Stocks Get the China Syndrome

by: The Mole

U.S. stocks ended the summer with a whimper as the Dow Jones limped lethargically over the finish line down 36 points in low volume despite a good showing from tech names after Intel (NASDAQ:INTC) revised their outlook higher. In a typical example of a distorted late summer market, Bank of America (NYSE:BAC), Citigroup (NYSE:C), Fannie Mae (FNM) and Freddie Mac (FRE) accounted for more than 40% of all trading on the New York Stock Exchange last week. Scary. Even more alarming is the fact that these companies now have a combined market capitalisation of more than $200bn. Why?

Note that this is the final “morning” edition of Market Watch. I’ll be switching to a European afternoon slot from tomorrow September 1st circa 16:00.

Today’s Market Moving Stories

  • Note Chinese stocks have gone cliff diving again this morning, off nearly 7%. The concerns of weak bank lending as well as further capital-raising issues are not new, but markets are showing that tightening itself can be a credible trigger for weakness. With a number of technical indicators still suggesting that markets are toppy, I’m sticking with a bearish short-term view.
  • The Dow futures currently point to a soggy opening stateside, off 63 points. With London on holiday trading volumes are liable to be fairly anaemic until the U.S. comes in.
  • We learnt overnight that Japan’s industrial production continued to recover, rising 1.9%. This is the fifth increase in a row after massive falls in late 2008/early 2009. And the Nomura/JMMA PMI for August rose to a fresh high of 53.6. This compares with a January low of 29.6 and is the highest level since late 2006.
  • Almost one third of German companies are facing credit problems, a DIHK survey reveals. In turn, Merkel will be pushing for new government loan guarantees in coming days, according to media reports.
  • House prices in England and Wales fell at their slowest annual rate in almost a year in August as prices rose for the first time in more than two years on the month, Hometrack announced. The website added however that prices were buoyed by a lack of supply and did not reflect a broader improvement. UK Hometrack house prices rose 0.1% in August (-6.7% yoy), the first gain in two years.
  • Concerns over NAMA seem to be reaching boiling point with acres of newsprint dedicated to the much misunderstood and poorly explained plan. Indeed the inability of the current Irish government to explain somewhat complex ideas (Lisbon Treaty and now NAMA) in plain simple English to the Irish public (leaving room for scare mongering) has been a hallmark of this administration. A rejection of the legislation, according to Garrett Fitzgerald, former leader Fine Gael, could put the country “into the hands of the IMF”. Other media reports suggest that the Government is prepared to take majority stakes on the two main listed banks as part of the solution to the banking crisis, following on from comments from Minister Brian Lenihan last week. Meanwhile the Government is to reduce the upfront payments to the Irish banks for purchase of assets for NAMA. Proposing an 80/20 split, the final payment would be held back until the assets purchased has realised the forecast value by NAMA.
  • Celtic owner and billionaire investor Dermott Desmond has sold his holdings in AIB and Bank of Ireland over the past month on concerns over NAMA. His investment vehicle IIU sold the shares on the belief that NAMA legislation could fail to get passed, pulling support for the Irish banks shares.
  • Large corporations are tightening the screws on their smaller counterparts as the credit crunch intensifies companies’ efforts to hold on to their cash. In an example of corporate Darwinism at work, the recent round of quarterly earnings results showed companies with annual revenue of more than $5 billion sped up their collection of cash from customers while slowing their own payments to suppliers.
  • A novel approach to stock market forecasting. Believe it or not, but the Demi-Ashton ration is a reliable indicator of the five-to-ten-year trend in the US stock market.

Economic Recovery

All Change In Japan
In Japan’s lower house election, the DPJ (Democratic Party of Japan) won a clear-cut victory, taking power in the Diet for the first time since 1993. Importantly, the DPJ-coalition won more than two-thirds of the seats, enabling it to fulfill its manifesto with less conflict with the LDP. Before yesterday’s election, the parliament was known as the “Twisted Diet”, with the DPJ holding the majority in the upper house and the LDP possessing an overwhelming majority in the lower house.

The election should see the DPJ accomplish more in the Diet, with the focus now on the feasibility of its manifesto, which concentrates on consumer spending by supporting child-rearing and elimination of highway toll fees, etc. Household consumption was shored up in Q2 by a cash hand-out from the Government, tax reductions on eco-friendly cars, and the initiation of an eco-point system to help consumers buy home appliances. Another round of measures to supply funds to households will become effective soon once it is implemented. The Nikkei initially rallied on the election result but is now off nearly 2%. As I noted last week, selling the news seems to be globally in vogue just now.

Political Risk In The Fatherland?
German politics got a lot more exciting over the weekend with results in three state elections showing a decisive shift to the left. In all three state elections, the Left Party gained over 20%, and in two states, it stands a good chance to participate in a coalition with the SPD and the Greens, and dislodge sitting CDU state premier in those states. There are, of course, special factors in each of those state elections. Oskar Lafontaine, now head of the Left Party, was a former Saarland premier himself, and remains popular in his home region. So one should not jump at premature conclusions for the federal elections next month, but it does not look good for the CDU.

For German speakers Frankfurter Allgemeine has a good article this morning about the shell-shocked reactions at CDU headquarters in Berlin. But, as Der Speigel noted in a commentary, the elections tell us that we should not take a CDU/CSU/FDP victory at the September general election for granted. Merkel will most likely remain chancellor, but one should not readily dismiss alternative constellations, including another Grand Coalition, or even an SPD-led coalition with the Greens and the FDP. The article said the SPD can now lead a much more aggressive campaign, targeted not against Merkel but against Westerwelle, the head of the FDP, who would be a foreign minister in a centre-right coalition, but lacks foreign policy experience.

Data Ahead Today
At 10:00 (all times UK), Euro area CPI for August should show that HICP inflation rose to an above-consensus -0.2% (market: -0.3%), reinforcing the view that inflation troughed in July. Inflation should turn positive by October/November as the strong base effects related to the sharp decline in commodity prices in the second half of 2008 unwind.

At 15:00 we get the US Chicago PMI for August. Following the noticeable improvement in the Philadelphia and NY gauges, the Chicago index should increase to 48.0.

See all the week’s releases in the Weekly Calendar.

Disclosures: None