Becalmed US equities closed little changed overnight, with modest gains in financials offset by modest losses in the energy sector. In truth there has been little news for the market to trade off of. On the negative side of the ledger, the Dallas Fed manufacturing index looked more like its New York Fed counterpart than the upbeat Philly Fed survey released last Thursday. Of particular note was the very sharp pullback reported in new orders. By contrast, the Chicago Fed’s National Activity Index rose in January with the three-month average now at its highest level since July 2007. This index is now back at levels that would typically point to an economy growing at a trend-like rate of growth. Of course the economy will need to do much better than that if it is to generate the jobs needed to make a sizable dent in the unemployment rate. Stocks on the move included Exxon Mobil (NYSE:XOM) and Newmont Mining (NYSE:NEM), which declined as natural gas and copper prices fell at least 1.5%. Natural gas dropped below $5 for the first time in more than 10 weeks, as forecasts for milder weather in the Midwest next week signalled reduced demand for the heating fuel. Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) led financial shares higher, while Smith International (SII) and Millipore (MIL) rallied on takeover bids.
The Fedspeak overnight remained mostly sobering, with San Francisco Fed President Janet Yellen giving a typically dovish assessment of the outlook for monetary policy overnight. In particular, she expressed concern about the challenges that lie ahead in the commercial real estate sector (challenges that she expects will lead to the failure of further community banks over the next couple of years). According to Yellen, inflation is a bit below where the Fed would like it to be and, “the economy still needs the support of extraordinarily low rates.” Indeed, Yellen noted that she would vote for negative interest rates if that were possible. And she noted that the Fed would consider restarting its MBS purchase program if there was a serious change in the economic outlook.
Today’s Market Moving Stories
- An opinion piece in the China Information News commends moves by China to cut US Treasury holdings as well as carrying out domestic tightening measures. The article came after data from the US last week showed China’s holdings of US government debt fell to $755.4bn at the end of last year from peak of $801.5bn in May.
- Former Treasury adviser Roger Bootle has warned that a second dip in growth is a real possibility and deflation a live risk. At an event in London yesterday, Bootle forewarned the economy was entering a “very grave stage” and moving into next yr said it was going to be a very dangerous situation. Once a “technically-caused” rise in inflation is over, he expected inflation to fall like a stone and recommended the BOE to expand on its quantitative easing.
- In its monthly report, the Japanese government downgraded its outlook for exports. It reiterated that it will work with the Bank of Japan to overcome deflation and to ensure an economic recovery, even as it maintained its overall view that the economy is picking up.
- The minutes of the BoJ’s January 25-26th policy meeting stated that “some members noted that according to recent surveys consumers’ short-term price expectations had declined. A few attribute this to the possibility that the acceleration in deflation through the summer of 2009 and increased discussion about deflation might have affected consumers’ views on prices”. However, the policy board stuck to the view that deflation would ease gradually in the long run.
- ECB executive board member Lorenzo Bini Smaghi is reported to have said on Monday that the EU may have to help Greece, but any financial aid is likely to be more limited than the €20-25bn plan reported. He also said that the EUR is ‘sound’ and that it is Europe that must help Greece, not the IMF.
- In the UK Bank of England MPC member Miles said keeping the stock of purchases in place was “on balance the right thing to do this month” and also said “if the news is that the economic outlook seems even weaker, inflation pressures lower and that moves down that profile, I think there’s a strong case for expanding the asset purchases.” While BoE Governor King said the UK has a “political consensus” on the need for fiscal consolidation and said he would be “immensely surprised” if the UK’s credit rating changed. He also added that the BoE stands “ready to do whatever seems appropriate” saying monetary policy could be expansionary or contractionary. Data wise January British BBA mortgage lending sharply fell to 35.1K vs. 43.0K expected. This, combined with the dovish comments and the idea of more QE, lead to a round of GBP selling.
- The key German Ifo business climate index released this morning unexpectedly fell from 95.8 to 95.2 (consensus 96.1). However, the weaker overall index reading was driven by a strong drop in the current situation component from 91.2 to 89.8. Expectations continued its upward trend and rose from 100.6 to 100.9.
- The Bank of Spain is expected to further increase the provisions it demands of Spanish lenders to cover real estate held more than a year. The central bank’s move would further dent bank profits already hit by recession, say analysts. In November, the central bank raised its provisioning requirement from 10% of the property’s value to 20% for real estate held more than a year, and is now expected to raise it to 30%, although it has yet to notify lenders formally.
- US commercial property values had their biggest monthly rise on record in December as the number of transactions jumped, according to Moody’s Investors Service. Transaction volume rose more than 75% from the previous month. Values, which fell to a seven-year low in October, are down 29% from a year earlier and are 41% lower than the peak in October 2007. While the period of “large” price declines is over, it is too early to say the market has bottomed, Moody’s said.
The Latest On The Stricken Dubai World
According to US Deputy Treasury Secretary Neal Wolin, it may be several weeks before Dubai’s government unveils details of its plan to restructure debt owed by its corporate flagship Dubai World. He expects the emirate’s government to articulate plans for dealing with Dubai World’s debt in the next two to four weeks. “I encouraged them to do it quickly, to take their medicine sooner rather than later and to do it transparently,” Wolin said. Dubai World, a conglomerate with ports, private equity, real estate and other operations, shocked investors late last year when it asked for a six-month standstill on its debt payments. It has since been negotiating with creditors who have loaned it some $22 billion. Wolin said he doesn’t expect the firm’s debt restructuring to have a major impact on US financial firms.
But the main news overnight is a story in Al-Ittihad newspaper which suggests that Dubai’s Government has allocated $5bn to Dubai World. This has helped Asian equities generally to move higher.
- Irish food group Kerry’s full year (FY) 2009 results show a company controlling and developing its profitability amid a deep recession and highly volatile exchange rates. Its EBIT grew 3.2% last year to €422mln and adjusted eps rose 8.2% (to 166.5c). These advances come from further restructuring initiatives, commodity price movements and evidence that Kerry has gained market share during the downturn as retailers and multinational food and beverage companies alike gravitate towards market leaders.
- Carlsberg (OTC:CGBWF) released a set of decent results this morning, helped by cost savings and synergies from the takeover of Scottish & Newcastle in 2008. Operating profit for the beverage activities rose 28% on revenue which was up 6% pre currency and acquisition impact. Carlsberg benefitted from strong pricing and cost savings, offsetting the impact of a 4% decline in volumes.
- FY results from Heineken (HINKY.PK) came in slightly ahead of expectations, with EBIT rising 14% to €2.1bn on sales down 4.6%. Strong pricing and cost saving offset a 5.4% volume decline due to the weak global economy. Impressively, free operating cashflow (the company’s definition) increased from €550mln to €1,741mln, driven by a combination of higher profits, lower capex and a substantially improved working capital performance.
- According to reports in both Handelsblatt and the FT Deutschland, the proposed sale of Siemens‘ (SI) hearing aid business could be close to collapse. The stumbling block is valuation, with Siemens supposedly seeking more than €2bn for the business, whilst bidders (mostly private equity) are reportedly only willing to offer €1.5-1.6bn. With Siemens under no particular pressure to sell, this suggests that the Group may not be willing to revise its expectations downward and that talks may grind to a halt. Whilst a potential sale would have been a modest benefit to the Group’s balance sheet, we do not believe that a collapse of the sale will be sufficient to meaningfully shake spreads, especially in the context of Siemens‘ overall balance sheet.
- Global sales of mobile handsets increased in the fourth quarter from a year earlier, boosted by growth in both smartphones and low-end devices, research firm Gartner said. Gartner said 340 million handsets were sold in the three months to December 31, up 8.3% from the same period a year earlier. The increase comes after third-quarter handset sales increased only 0.1% from a year earlier, to 309 million units. The market for mobile phones is rebounding from a deep downturn during 2009, when the economic recession hit consumer spending across the globe. Sales of smartphones, such as Apple’s (NASDAQ:AAPL) iPhone and Nokia’s (NYSE:NOK) N97, continued to outgrow the overall market in the fourth quarter, rising 41% to 53.8 million units. In the full year 2009, mobile phone sales fell 0.9% from 2008, to 1.21 billion units.
- Commerzbank (OTCPK:CRZBY), Germany’s second-largest bank, posted a wider-than-estimated fourth-quarter loss after writedowns on investments related to bond insurers and setting aside money for bad loans. The net loss was €1.86bn, wider than the €1.26bn median estimate.
- Pharmaceutical and chemicals company Merck (NYSE:MRK) said it swung to a net profit in the fourth quarter but failed to meet analysts’ expectations, and said it would cut its dividend for the year. The company said it expects revenue growth of between 3% and 7% in 2010, but “it will be crucial whether the economic recovery trend remains stable”.
- News Corp. (NASDAQ:NWS) is close to buying a stake in broadcaster and music group Rotana Media, which is owned by Saudi billionaire investor Prince Alwaleed bin Talal. Under the deal, which could be announced as early as on today, News Corp. would take an initial 10% stake for an undisclosed amount, with an option for about 20% later. It said the deal would also include the prince’s interest in Lebanese broadcaster LBC Sat.
And Finally… US Is A Puppet Of Private Bankers