Report From Europe: Anglo Rumors and Weak Irish GDP Worries

Includes: DIA, QQQ, SPY
by: The Mole

U.S. stocks fell Wednesday, dragging the S&P 500 Index to its biggest decline in two weeks, as a weakening earnings outlook for technology and financial companies overshadowed speculation the Federal Reserve is warming up the print presses for QE2.

Adobe Systems (NASDAQ:ADBE) tumbled 19% after estimating sales that missed analysts’ projections and PMC-Sierra (NASDAQ:PMCS) dropped 6% as the chipmaker reduced its third-quarter revenue forecast. Microsoft (NASDAQ:MSFT) shed 2.2% after announcing a dividend increase that was smaller than some analysts expected. Morgan Stanley (NYSE:MS) and Goldman (NYSE:GS) both lost at least 2.2%, pacing a slump in financial shares, as Deutsche Bank cut its earnings estimates for the banks.

Turning to Thursday and it is panning out as yet another bad hair day for Ireland with CDS and bond spreads blowing out to just another high. The bad news today started with a story in the Examiner which picked up on comments by Minister Lenihan yesterday that seemed to imply there is some doubt about whether Anglo Irish’s subordinated bond holders would get paid in full. This has gone viral and the name AIB (AIB) was subbed for Anglo in some reports, causing panic. And to top that we’ve just had some very disappointing GDP numbers from the CSO (at -1.2% QOQ versus consensus +0.4%) with downward back revisions! Not good.

According to this link the Examiner story on Anglo subs was transmuted on internet into AIB subs. Twitter has a lot to answer for.

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Chinese Currency Strength

Dow Jones reports that China’s Premier Wen Jiabao on Wednesday ruled out any large-scale appreciation in the Chinese currency in defiance of mounting pressures from U.S. policymakers. Yet Wen said he is confident that the trade imbalances between the two nations will narrow over time. Wen sees a bright future in the bilateral relationship, saying that the two nations aren’t competitors, but co-operative partners. Speaking in a dinner event on Wednesday night, Wen said conditions aren’t established for a significant move in the Chinese currency, known as the renminbi or the yuan, and any large-scale appreciation may lead to social instability.

“If the renminbi appreciates by 20% to 40% according to the requests of the U.S. government, we do not know how many Chinese companies will go bankrupt and how many Chinese workers will be laid off and how many rural workers will go back to homes and there will be major turbulence in the Chinese society,” said Wen.

Many U.S. lawmakers have said China artificially depresses the yuan’s value to boost exports, which in turn has led to job losses in the U.S. manufacturing sector. President Barack Obama said Monday that the yuan exchange rate is a “real issue” and that the U.S. government has pushed China to let the yuan to rise. Bills have been proposed in the U.S. Congress ahead of the November mid-term elections that would levy tariffs on Chinese imports if China doesn’t allow a large appreciation. Wen is attending the United Nations conventions in New York and is scheduled to meet Obama Thursday.


BoE chief economist Spencer Dale says (in regard to the discussions within the MPC over monetary policy): “There is an absolutely vigorous debate going on. You can have a 9-0 or an 8-1 vote and the people are there until late until the night debating very aggressively what they think is going on.” He adds that most MPC members see both upside and downside risks to inflation.

Job vacancies at London financial services companies fell 8 percent in August as the City went on summer holiday, according to a survey. The number of new job openings in the City, as London’s main financial district is known, and elsewhere in the British capital fell to 5,544 in August from 6,048 a month earlier, recruitment consultant Morgan McKinley said in a statement today. The number of people seeking new jobs rose 6 percent to 10,810, the survey showed.

U.K. BBA reported new mortgage approvals of 31.8k in August, down 22.3% y/y, lower than July’s 34.2k reading (revised from 33.7k) and the smallest new mortgage approvals reading since April 2009.

Eurozone PMIs

Eurozone PMIs dropped more than expected in September. The eurozone manufacturing PMI declined to 53.6 from 55.1 in the previous month. Equally, the services PMI dropped to 53.6 from 55.9, much lower than our forecast and median of 55.4.

The German September manufacturing PMI dropped to 55.3 from 58.2 in August, while the services reading slumped to 54.6 from 57.2.

Company / Equity News

  • Mitchells & Butlers, the UK pub group has released a trading update covering the 9 weeks up to 18th September. Sales trends at Britain’s largest pub group continue to improve. Like for like sales grew 3.6% over the period. This up from 1.6% in the 42 weeks to July. In terms of outlook, the board has said that this performance gives it confidence about the future prospects of the business. While I continue to like C&C over the longer term, I’m concerned that its earnings outlook may disappoint to the downside over the coming months. In both the UK and in Ireland, the company is entering another phase of significant consumer uncertainty that will apply further pressure on the group’s pricing power, margins and profitability.
  • Dell (DELL) expects about 20% sales growth in the current quarter and plans to release a new tablet-style computer, CEO Michael Dell said today. Dell, on stage at a conference sponsored by Oracle Corp. (NYSE:ORCL), touted a tablet computer running the Android operating system backed by Google Inc (NASDAQ:GOOG). The machine also sports a 7-inch screen.
  • Microsoft (MSFT), one of only four non- financial U.S. companies with the top AAA ratings, sold $4.75 billion of bonds, including three- and five-year maturities at the lowest coupons on record. The company’s $1 billion of 0.875 % notes due in 2013 and $1.75 billion of 1.625 percent debt maturing in 2015 have the lowest interest rates of more than 3,500 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt. Oh that Ireland could borrow at such rates!
  • Facebook is working with mobile-handset manufacturer INQ Mobile Ltd. on two smartphones that may be carried by AT&T Inc. (NYSE:T), according to three people familiar with the matter. The devices, which will feature Facebook social-networking services, are due to be introduced in Europe in the first half of 2011 and the U.S. in the second half, said one of the people, who asked not to be identified.
  • The WSJ reports that Potash Corp. of Saskatchewan Inc. (POT) on Wednesday sued in U.S. federal court to block BHP Billiton Ltd.’s (NYSE:BHP) hostile $39 billion takeover bid for the Canadian company. Potash Corp., the world’s largest producer of potash, a key ingredient used in fertilizers, filed its complaint with a U.S. District Court in Chicago, saying the takeover bid is built upon false and misleading statements. The suit is the latest move in a struggle for control of Potash Corp.
  • HSBC’s (HBC) Finance Director Douglas Flint is a likely candidate to replace Stephen Green as the bank’s chairman, the Financial Times reported, citing three unidentified people close to the lender’s board. A “compromise candidate” may be appointed to the post, which would enable Michael Geoghegan to continue as chief executive officer, the newspaper said.
  • German airline Deutsche Lufthansa AG (OTCQX:DLAKY) Wednesday named a new CEO , as expected, and placed orders worth EUR3.5 billion for 48 new aircraft to meet growing demand. Lufthansa ordered 40 planes from Airbus and eight from Brazil’s Empresa Brasileira de Aeronautica, known as Embraer, that will be shared between the flagship carrier and its Germanwings and Swiss subsidiaries.

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