A sea of red in global equity markets confirms that the Greek crisis has gone global as worries brought more peripheral panic in the PIIGS. ECB member Axel Weber said there is a threat of “grave contagion effects” from the debt crisis and an unnamed official at the central bank was quoted as saying that there were now current plans for QE. Indeed the wholly dysfunctional state of the European government bond market has spiraled out of control and is now reaching a crescendo that has brought yields to levels that throw the already dire budget arithmetic for those countries out the window and is undermining European equities. We are very much in the eye of a eurozone storm with all eyes now focused firmly on the ECB. The time for soothing talk has passed, we’re way beyond fail safe here; swift decisive action is required and I fear we will be disappointed as at all points the EU and ECB have been behind the curve on this crisis.
Today’s Market Moving Stories
- The Chinese market is down 4% overnight after its latest property market tightening measure, the government has stopped developers from using revenue from a property project’s pre-sales before the development’s completion, the state-run China Securities Journal said. Previously, developers were allowed to use revenue from pre-sales of uncompleted projects to invest in other projects. This is, of course, just the latest move by the government. Most recently it instituted a one apartment for family rule, and of course it’s been steadily upping reserve requirements at banks, in hopes of establishing more prudent lending.
- Greece’s Parliament will debate today the austerity measures demanded as a condition of an internationally led bailout as the nation mourns the three victims of Athens protests against the plan. Prime Minister George Papandreou will tell lawmakers today that the wage and pension cuts are necessary to secure the €110 billion package and avoid default. “No one was happy with the new measures,” Papandreou told parliament yesterday after the killings, which he called a “brutal murder.”
- Confidence in an orderly solution of the debt crisis has been shattered even further which led to another selling wave of the EUR/USD across board where a projected Fibonacci-target at 1,2800 has already been reached. Below the latter there is only monthly trend line support at 1.2691 left to prevent a straight attack on old lows from March 09 and October 08 at 1.2458 and at 1.2329. French house Soc Gen are predicting EUR/USD goes to 1.15 if the ECB engages in full blown QE via secondary market purchases of PIIGS country government bonds.
- Aside from the ongoing concerns over the sovereign debt crisis in the euro area, that most traditional of safe havens, the Swiss Franc, has been the big mover of the day as the SNB (Swiss National Bank) finally pulled away from the bid at 1.4325 in EUR/CHF.
- Elsewhere, European equities have clawed back some of their earlier losses and are now marginally in positive territory. Sentiment has been helped by a successful Spanish auction earlier in the session though the stresses in the bond markets continue with Southern Med bond yields widening further versus German Bunds. Comments from the Greek PM highlight the urgency of the situation as he admitted that the country would not be able to pay €9bn on debt that is due to mature in the coming months with out IMF/EU aid. The focus will now shift to the ECB press conference later this afternoon. What was shaping up to be a relatively routine press conference is now eagerly anticipated in terms of the possible policy responses that could be deployed.
- The April’s UK CIPS/RBS report on services suggests that the recovery in the services sector is finding it harder to maintain momentum than that in the industrial sector. The fall in the headline business activity index from 56.5 to 55.3 was the second monthly drop in a row and left it – January’s weather related dip aside – at the lowest level since last September. It is clearly of some concern that the survey has started to move in the wrong direction. I still doubt that the recovery will gain much more momentum.
- German new orders jumped 5.0% mom in March (Consensus: +1.4%), following stagnation in the previous month. Both, domestic and foreign orders were up very strongly, 5.4% and 4.7% respectively. New orders from the EMU countries even rose 16.2% mom. The latest jump in orders from the EMU neighbor countries, which still account for some 70% of German exports, confirm that, despite the Greek debt crisis and the feared contagion to other member countries, the revival in global industrial activity remains broad based.
- Moody’s placed under review for possible downgrade the senior and junior debt rating of all 10 rated Portuguese banks, triggered by the possible downgrade of the Aa2 ratings of the Portuguese government.
- Super political collage to The Who’s “Won’t Get Fooled Again”.
What To Do With Greece
Three ways to go from here:
- Policy makers cross their collective fingers and hope it goes away. This was more or less the strategy until last weekend and it has clearly failed as the market called the EU’s bluff.
- The ECB buys Greek and possibly other PIIGS country government bonds, i.e. QE.
- Domestic banks / pension funds are coerced into buying their domestic debt.
All three are probable, but focus on potential ECB buying. The US Fed bought $300bn of US government paper during its QE program. If the ECB were to do the same I note mischievously that they could own the entire stock of Greek debt (market capitalization is some €275bn).
With regard to the last option above it’s worth noting comments yesterday from insurance giant Allianz (OTCQX:AZSEY) CFO Paul Achleitner confirming that Allianz will participate in a private-sector initiative aimed at supporting government measures to rescue debt-stricken Greece. “We have a strong interest in functioning bond markets in Europe and a stable euro, therefore we will work on constructive solutions for Greece, as it is in the interest of our stakeholders and of the German economy,” Achleitner told the annual meeting of shareholders.
- Stocks on the move in Europe today include Cairn Energy (OTCPK:CRNCY), which advanced 3.2% after brokerage Exane upgraded the shares to “outperform” from “neutral,” saying the stock “remains undervalued” despite its gains since December. Cairn has soared 27% since December 1.
- Mining stocks were stronger with Xstrata (OTC:XSRAF) climbing 3.5%and BHP Billiton (NYSE:BHP) gaining 1% as copper prices advanced on the London Metal Exchange.
- Morrison Supermarkets (OTCPK:MRWSY) shed 1.5% as sales at stores open at least a year rose 0.8 percent, excluding fuel and value-added tax, in the 13 weeks ended May 2. But that missed the 2% median estimate of analysts.
- Swiss Re is ahead by 5% after the company reported a 22% increase in first-quarter profit to $158 million as higher investment income countered claims from the Chile earthquake and European winter storm Xynthia. Analysts had estimated net income of $139 million.
- Axa (AXA) lost 2.3%, marking a fifth day of declines. Europe’s second-biggest insurer by market value today reported first-quarter revenue of €27.9 billion, compared with analysts’ median estimate of €28.2 billion. Life and savings new business value, a measure of the present value of future profits expected from long-term life or pension policies, rose 35% to €317 million. That missed analysts’ estimate of €336 million.
- Grafton issued a positive trading update in advance of the group’s AGM taking place later today. Following a slow start in January due to the impact of weather the group reports that its UK businesses have returned to like for like growth each month since (February – April) and that the rate of decline in Ireland has reduced. The UK now accounts for over 70% of group turnover (FY 2009: 68%).
- Diageo (NYSE:DEO) reported organic sales growth of 12% in their third quarter, well ahead of the 7.1% expected (and compared to -2% in H1). Pernod (OTCPK:PDRDF) reported 16% growth last week, although expectations for Diageo were lower given their developing markets exposure is less focused upon the fast growing Asian market. Growth was flattered by a combination of weak comps, an earlier Easter this year and sales being brought forward ahead of duty rises in certain markets.
- BNP Paribas (OTCQX:BNPQY) today became the second French bank in two days to comfortably surpass market expectations for first-quarter net profit, reporting a 47% rise propelled by its acquisition of Belgian bank Fortis and waning loan-loss provisions. A day after rival Societe Generale (OTCPK:SCGLY), BNP Paribas displayed its own earnings muscle, posting net profit of €2.28 billion, up from €1.56 billion a year earlier. The figure was well clear of the €1.65 billion forecast from analysts. Like SocGen, BNP Paribas detailed its exposure to the troubled Greek economy – exposure to Greek sovereign debt is around €5 billion, while its exposure to the commercial sector is around €3 billion.
- Germany’s Commerzbank (OTCPK:CRZBY) swung to a €708 million net profit for the first quarter as strong trading profits and fewer bad loans boosted its bottom line. The quarterly result is Commerzbank’s first net profit since closing on its acquisition of Dresdner Bank in early 2009, and underlines management’s progress.
- As oil keeps flowing from an uncapped well alongside the sunken hulk of the Deepwater Horizon, the insurance industry is becoming more concerned about the cost of the disaster. At first, the industry focused on the rig itself. Transocean (NYSE:RIG), its owner, has $560 million of insurance covering total loss and wreck removal. Several insurance industry executives have estimated this could be an $800 million to $900 million event. But a much bigger hit could come from liability claims stemming from the oil spill. That’s especially true if lots of oil pollutes the shorelines of Florida and other states around the Gulf of Mexico.
- Moody’s has also revised to negative its outlook for BP’s (NYSE:BP) credit, to reflect the possible impact of its oil spill in the Gulf of Mexico. The move suggests the ratings agency could change its view of the oil major for the first time in a more than a decade. Moody’s wrote that while BP’s financial position had benefited from strong operating results and cash flow, which would help cushion the cost of the disaster, it was “too early to exclude scenarios leading to downward pressure on [BP’s] Aa1 rating”.