Report From Europe: Stocks Sag After U.S. Jobs and Inflation Data

by: The Mole

Stocks advanced on hump day yesterday, a day after the biggest rally since November for the S&P 500 Index, as better-than-estimated earnings, industrial production and housing data bolstered confidence in the economic recovery. Deere (NYSE:DE), the largest maker of farm equipment, advanced 5% after profit was boosted by lower raw-material costs. Whole Foods Market (WFMI), the biggest US natural-foods grocer, jumped 13% after raising its earnings forecast. Equities maintained gains as minutes from the Federal Reserve’s meeting last month showed policy makers debated how and when to shrink the central bank’s $2.26 trillion balance sheet. Earlier stocks in Europe climbed after results from BNP (OTCQX:BNPQY) and Deutsche Boerse (OTCPK:DBOEF) beat analysts’ estimates. Housing starts in the US topped the median economist estimate of 580,000, a sign that government support is helping to stabilise the real estate market. Industrial production rose 0.9% in January, more than the median forecast of 0.7%.

A lack of bad news seems to be enough to raise the risk appetite with the known consequences across board in form of rising equity prices and the appreciation of high-beta currencies. But looking at the mountain of unsolved issues and the still persisting high risk that it might get out of hand at a certain point it looks as if financial markets remain in a stage of total denial. That said, the question is when are we receiving a wake up call which is loud enough not to be ignored any longer? Well, it is difficult to say what the catalyst is going to be, but from a pure charting perspective it could be a failure of the S&P 500 to surpass key-resistance at 1105 or at 1125 followed by a break below key-Fibonacci-support at 1043.

The most remarkable thing about today is probably the absence of any Euro negative public finance stories. Greek bond yields did come under modest pressure, but having fretted about Italy yesterday the FX market seems a little fatigued by the microscopic focus on the fiscal situation in the peripherals. Bond supply is likely to be the next focus for the euro fiscal circus – Spain got its new benchmark 15-year bond away reasonably well yesterday, despite the background noise, and thoughts will now turn to whether Greece will choose to opportunistically raise funds in the next few weeks, to avoid a refinancing logjam in April. One final interesting snippet on the euro is that hedge funds are claimed to be switching from bearish CDS trades to bearish EUR FX trades as a precaution against any regulatory clampdown by European politicians on sovereign CDS trading.

Stocks wise, Daimler (DAI) is off 7% today after reporting a huge €2.6 billion loss and saying they won’t be paying a dividend. The results were accompanied by some very downbeat commentary and outlook while in contrast engineering group ABB (NYSE:ABB) reported a doubling of profits and are upping their divie payout. BAE Systems (OTCPK:BAESY) is ahead by 3% after announcing a £500m share buyback but BT (NYSE:BT) has shed 4.5% after rating agency S&P cut their long term credit rating on concerns about their under funded pension liabilities. But the biggest loser thus far today is paints and coating giant Akzo Nobel (OTCQX:AKZOY) (down 8%) after surprising the markets with a Q4 loss of €60m when analysts had been looking for a profit of €97m. Stateside Wal-Mart (NYSE:WMT) reported a stronger than forecast quarterly profit but disappointed with their guidance. Dell (NASDAQ:DELL) is due to report after the bell tonight. Economic figures from the US today were a major disappointment with a big jump in weekly jobless claims to 473k (versus a 438k which analysts had expected) and a rise in continuing claims. The wholesales PPI inflation numbers were also worse than the street was anticipating.

Today’s Market Moving Stories

  • UK public sector finance numbers this morning were worse than projected in January – a borrowing requirement of £4.3bn vs a forecasted surplus of £2.6bn. Mortgage applications were very weak (49K in Jan from 60K in Dec) but the presumption is that these figures were adversely affected by bad weather. CBI industrial trends survey showed a further modest improvement in conditions.
  • In Japan overnight the Bank of Japan left its call rate unchanged at 0.10%, following a unanimous decision. The BoJ said the Japanese economy was picking up, but domestic demand lacked momentum. The pace of recovery is likely to remain moderate until at least the middle of this year into 2011. As a result the BoJ pledged to maintain very easy monetary conditions. It said it is important to pull Japan out of deflation.
  • Staying with Central bankers, Bank of England MPC member Barker sounded cautious and even dovish in comments to the Belfast Newsletter. She said credit is unlikely to flow from the banking system out to the wider economy in the near term, and as a result the economic outlook remains hesitant. In fact she said it’s possible the UK could drop back to a quarter of negative growth.
  • The IMF is to sell 191.3 tonnes of gold as part of its previously scheduled program to raise new funds for loan and assistance programs. Last year the IMF reported it would sell a total 403.3 tonnes of gold (1/8th of its stock). Up to now the IMF has made its sales on a placement basis, with India, Mauritius and Sri Lanka taking about half of the IMF’s sales. This time round the IMF said it would offer gold through the open market.
  • Rollin Stone magazine has an interesting read called “Wall Street’s Bailout Hustle”. How Goldman Sachs (NYSE:GS) and other big banks aren’t just pocketing the trillions we gave them to rescue the economy – they’re re-creating the conditions for another crash.
  • The 100 least powerful people under 100. Chairman of Compensation Committee at AIG (NYSE:AIG) and Chief of the Iraqi Tourism Board are the top two.

The Heat Is On Goldman Sachs
Angela Merkel has sharply criticised the banks for helping Greece circumvent EU budget rules. She is quoted as saying that “it would be a disgrace if it turned out to be true that banks that already pushed us to the edge of the abyss were also party to falsifying Greek statistics.” Jean Quatremer, in his blog, reveals the identities of the large investment bank and the hedge funds, which have launched a concerted attack on the euro, and on southern European bond markets. The investment bank, he says, is Goldman Sachs, and the hedge funds are two vehicles run by John Paulson. Quatremer makes the point that the role of Goldman Sachs is particularly shocking given its involvement in the currency swap, and in trying to help secure a purchaser for Greek bonds.

Simon Johnson, a former chief economist with the IMF, takes a look at the role Mario Draghi, the governor of the Bank of Italy, who between 2002 and 2005 was vice chairman of Goldman Sachs International, and head of the committee, dealing with government affairs. We are quoting Johnson: “Presumably this means that Mr. Draghi will have to answer a series of embarrassing questions, should he wish to continue pursuing the presidency of the ECB, along the following lines.

  1. Was he aware of the Goldman-Greece deal(s)? (Given that he was involved in management for Goldman – and that these deals reportedly made $300m for the firm – he surely knew what was going on.)
  2. Did he attempt to stop it or prevent further such deals? If not, why not?
  3. Does he approve of such deals today? It not, why did he approve earlier in the decade?
  4. Did he or his associates engage in any such transactions for Italy when he was at the Ministry of Finance?
  5. Are there are other Greece-type deals, involving other EU countries (or anyone else), that he would care to discuss in detail?

He also said the European Commission should launch a full-scale enquiry into the role of Goldman Sachs.

Reading The Fed Tea Leaves
The US Federal Reserve has gradually changed its communications policy this year. Chairman Bernanke kicked it off on the first weekend of the year with uncharacteristically hawkish remarks on the need to unwind policy in a timely manner as the US economy revived. Over the last few weeks that’s been tweaked with the Fed now making it clear that asset sales are looming (interesting really because the Fed hasn’t actually finished its purchase program yet). This is important because halting purchases is one thing (and could be considered a de facto tightening) but actual sales are an unwind of policy and hence an actual tightening. The minutes to the FOMC’s January meeting showed a number of members believing that a program of asset sales should begin "in the near future." Members agreed there is a need to eventually return the balance sheet to a more normal composition and that it should hold only Treasuries. The Fed noted that draining reserves could be seen as a prelude to tightening and hence should only be used when the Fed is actually ready to raise rates. There was a good discussion on the extent of slack in the economy – that’s important because it’s the factor that most central banks are pinning their inflation outlooks on.

The Fed has altered its economic forecasts, in general improving its outlook. It said it now expected 2010 GDP in the range 2.8-3.5% from 2.5-3.5% previously. 2011’s GDP range was left unchanged in the range 3.4-4.5%. It tightened its 2010 unemployment forecast to 9.5-9.7% from 9.3-9.7%, but cut the 2011 view to 8.2-8.5% from 8.2-8.6%. The inflation view was nudged a bit higher. In 2010 PCE inflation is seen at 1.4-1.7% from 1.3-1.6% and in 2011 at 1.1-2.0% from 1.0-1.9%.

Fed member Plosser’s comments were consistent with the message contained within the FOMC’s January minutes – asset sales are likely before too long. He said the Fed will sell agency MBS as the economy recovers and also said that the Fed’s emergency lending authority should be severely curtailed. Plosser said there are signs the labour market is slowly improving and that a modest economic recovery is now underway. He said the policy exit will be hard to achieve and will need decisions to be made about the likely landscape in the next three years. Plosser also had a small rant, warning the Fed’s independence is under threat and must be protected.

Company News

  • Kingfisher (OTCQX:KGFHY) has reported a 1.6% decline in sales for the 13 week period to January 30, 2010 to £2,308m, and a 3% drop on a constant currency LFL basis, with the fall attributed to January’s extreme weather. The company described the underlying trend as “relatively resilient” and expects “adjusted full year pre-tax profit to be up strongly on the prior year and slightly ahead of current analyst consensus estimates” of £540m.
  • Pernod-Ricard (OTCPK:PDRDF) has reported an 11% drop in H1 EBIT to €1062m, versus €1128m consensus, although this was largely due to foreign exchange rate effects. The company has reduced net debt by €565m during the 6 month period to €10,323m as a result of strong cash flow and the Tia Maria disposal. The company sees more favorable market conditions in the second half of the year and has affirmed its target of growth in organic profit from recurring operations of between +1% and +3% in the year to June 2010.
  • French banking giant SocGen (OTCPK:SCGLY) made a Q4 profit of €221m, slightly above market consensus of €127m. However, it reported an operating loss of €759m in the fourth quarter due to high credit costs primarily for SME customers in France and emerging countries. Overall, a weak set of results, flattered by one-offs, despite being above consensus.
  • Insurer AXA (AXA-OLD) said net profit almost quadrupled in 2009 as it shook off the worst effects of the financial crisis and cleaned up its US activities that hurt it at the end of last year. Net profit for 2009 increased to €3.61 billion from €923 million a year earlier. Revenue slid 1.2% to €90.12 billion. “AXA should benefit from favorable trends in the insurance and asset management markets, its leading brand, innovative products and improving quality of service,” AXA’s chairman of the board Henri de Castries said. “Our 2010 priorities will focus on optimizing margins in all business lines, through improvement of business mix in life, combined ratio in property and casualty, and net inflows in asset management.”
  • Hewlett-Packard’s (NYSE:HPQ) fiscal first-quarter profit climbed 25% amid higher worldwide sales and profit growth in the company’s core personal computer business, where shipments also jumped. The company also raised its full-year outlook. Shares rose 1.1% to $50.65 in after-hours trading. Chief Executive Mark Hurd, on a conference call, characterized overall spending on information technology as a mixed picture. “We want to see whole of the quarter close before we make a call on true IT growth for year.”
  • Dow Jones reports that computer makers are developing strategies and devices to challenge Apple’s (NASDAQ:AAPL) iPad, hoping to capitalize on new interest in a category of gadgets that was moribund until recently. In the next few weeks, executives from Hewlett-Packard will meet in the US and Taiwan to tweak prices and features on an upcoming keyboardless computer dubbed the Slate. Executives at Dell, Acer and Sony (NYSE:SNE) say they are all watching Apple as they refine their own products. And Microsoft (NASDAQ:MSFT) has a secretive team working on a two-screen tablet device.
  • Applied Materials (NASDAQ:AMAT), the world’s largest producer of chipmaking equipment, forecast sales and profit that topped analysts’ estimates, indicating that semiconductor companies are beginning to increase orders. Profit in the current period will be 17 cents to 22 cents a share, excluding certain items. The company said sales will rise as much as 25% from the first quarter.
  • Blockbuster (BBI) is down 5.50% pre-market after Standard & Poor’s Ratings Services lowered the video-rental chain’s corporate credit rating to CCC from B-, indicating that the video rental chain is “vulnerable to default.” The outlook is negative.
  • Better news from Heinz (HNZ) which raised its earnings outlook for 2010 to a range of $2.82 to $2.85 a share, thanks to “dynamic growth in emerging markets.” For the third quarter, the foods producer expects to report a profit of 82 cents a share.

And Finally… How To Abolish The Federal Reserve

Disclosures: None

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