Reports

World stock markets daily report (March 12, 2010)

Contributed by Paddy Power Trader

By Paddy Power Trader

It would be stretching things to say that there has been a clear theme in markets overnight. Indeed, for the most part markets are trading broadly where they were this time yesterday. One exception is the bond market, with UK yields under particular upward pressure as investors await the pre-election Budget on 24 March (and the reaction of credit rating agencies to whatever fiscal consolidation is planned).

There was little reaction to the US dataflow yesterday. A small decline in initial jobless claims was welcomed but at 462k the level is still a good way north of where we would like it to be in order to be confident that significant sustained growth in non-farm payrolls lied immediately ahead (beyond the clear positive influences that a rebound from February’s poor weather and census-related hiring will have). However, there are some signs that the stock of jobless claims is stabilizing . Meanwhile, the January trade balance reported a narrower than expected deficit, with a small fall in exports trumped by a slightly larger fall in imports. Whilst this was the first decline in exports since April last year, this largely reflected a little payback amongst erratics after a 3.4% mom increase in December.

US retail sales unexpectedly increased 0.3% mom in February, despite the bad weather and despite the poor auto sales. All measures excluding the more volatile components did surprisingly well. Sales ex autos were up 0.8%, ex autos and gas up 0.9% and the so called core measure that also exclude building materials was up 0.9%mom. Indeed, the level of the core retail sales series has managed to surpass the pre-recession levels for the first time in this cycle (see second chart), a truly remarkable feat. The numbers for the previous two months were revised down (although not massively for the core index), but this doesn?t undermine the strength of today’s number. Ten of the thirteen major categories of sales rose, with electronics sales up 3.7%mom (a trip to the mall to get a Nintendo to play while you were snowed out at home?), food and beverages up 1.3% and sporting goods up 1.2%.

The US consumer appears to be coming back, and seems undeterred by the weather or unemployment. Like the inscription on the NYC General Post Office, “neither snow nor rain nor heat nor gloom of night” seem to prevent them from “the swift completion of their appointed rounds”. And yet, with threats to personal spending aplenty, I find difficult to visualize how the consumer carries on this strength in to later innings of the game..

This put the early bid into US equities but the edge was somewhat taken off the feel good factor by the US Univ Michigan Confidence index which came in shy of expectations 72.5 versus expectations for a 74.0 print

Today’s Market Moving Stories

- Markets remain quiet. The US S&P index popped its head above the 1,150 level last night but a 1,150.24 close hardly decides the battle. The euro is on a bit of a charge this morning as the ‘risk on’ trade undermines the US dollar and market interest rates are generally moving higher. There is talk of a Chinese rate hike happening soon (raising the 1-year deposit rate from 2.25% to 2.52%) and talk of easier policy in Japan at next week’s BoJ meeting. The main economic indicator to be released today will be US February retail sales, though it will be very hard to interpret the data. The employment report tells us that 1 million people missed work during the month as a result of the bad weather. Did they sit at home buying things from Amazon, struggle to the local mall or go tobogganing with the children? The risk is that we see retail sales fall but the market risk is that we are priced for soft data and any reason to see signs of underlying strength will elicit a reaction. In the UK, the John Lewis sales data were released, booming as ever (click here), the latest polls show the Conservative lead at just 3% in the Sun, but at 13% in an Angus Reid poll for ‘Political betting’ (click here). The pound has benefited form the Angus Reid poll, if only because we are now priced for a hung parliament.

- Against this we have the usual Friday Telegraph dose of doom & gloom from APE (Ambrose Pritchard Evans) Europe’s banks brace for UK debt crisis which has led to some GBP softness this morning.

- The US flow of funds data for the fourth quarter were released last night. They make dry reading but for those who want to, click here. There are a couple of interesting points: the first is that despite a sixth consecutive quarterly decline in household debt and a third decline in corporate debt levels, overall US non-financial debt levels are still going up – thanks to very strong borrowing by the public sector. Overall, non-financial debt has reached an eye-popping $34.7 trillion. Public sector debt has reached $10.2 trillion. The other interesting fact (to me, anyway) is that corporate profits have gone back above their peak levels. You might have thought that the worst recession in a lifetime would have given corporate profits a really big squeeze but that isn’t what has happened. The share of profits in GDP is going up again. Low labour costs, massive labour force reduction, a cut in investment spending and low rates are all working their magic. I’m not sure this would get much approval from social economists who probably conclude the free market is failing, but it does encourage me in a view that a weak recovery combined with super-easy money can be very good for asset markets in general including equities.

- Overnight the Nikkei newspaper reported that the BoJ’s discussion on additional monetary easing at the next week’s meeting will likely focus on a proposal to double the scale of a lending facility introduced in December to ?20trn. JPY: Prime Minister Hatoyama said “I think we need to take firm steps against the yen strength”. BoJ governor Shirakawa said “BoJ’s commitment to very easy policy affecting FX moves”.

- Euro-zone: German Finance Minister Wolfgang Sch?uble writes in the FT, “The fallout from the crisis is becoming ever more visible, labour markets in some countries are languishing and government debt almost everywhere is far in excess of permissible deficit limits … there is only one course of action: all Euro-zone members must return to adherence to the stability and growth pact as rapidly as possible … co-ordination between EUR members must be more far-reaching; they must take an active part in each other’s policymaking.” He adds “The prospect of emergency aid connected with hard corrective fiscal action would boost the confidence of financial markets, thus preventing a deepening of the crisis and obviating the Euro-zone members’ need to call upon the IMF in future.”

- China: PBOC Vice Governor Su Ning, responding to a question about President Barack Obama’s call for China to move to a “more market-oriented exchange rate”, said: “We always refuse to politicise the CNY exchange rate issue, and we never think that one country should ask another country for help in solving its own problems”. Separately, Su, commenting on yesterday’s data, said: “We had expected that February’s CPI would be higher than January”. He said: “According to our estimates … inflation will be stronger in the first half than the second half”. Guo Qingping, a PBOC assistant governor, tells the Financial News that the “situation of monetary and credit growth must certainly turn around”, but notes that policy-makers face “complex balances and challenges”. He adds that “A few agreements [for projects] may be cancelled”.

- The euro area industrial output data today showed an increase of 1.7%mom in seasonally adjusted terms in January, substantially more than expected and the largest monthly gain since August 1989. Moreover, the December was also substantially revised up, from a -1.7%mom drop to a +0.6%mom increase. This leaves the level of the series 1.4% higher than a year earlier, the first positive reading since April 2008. The increase was driven was healthy improvements in the major countries (+1.6%mom in Germany, +1.5%mom in France, +2.6%mom in Italy) and the odd 15.3%mom increase in Ireland, with only Spain (-1.1%mom), Portugal (-2.2%mom) and Finland (-2.2%mom) in negative territory. Do not get overly carried away by these positive numbers, as they just mean the Euro area industry is merely starting to catch up on the ground lost during the Great Recession. As you can see in the second of the enclosed charts, although IP on a seasonally adjusted basis is now 5.5% above the cyclical trough of May 2009, it is 16.4% below the previous peak (April 2008) and more than 20% below the pre-crisis trend. That is certainly very encouraging, but my previous comments on the long term trend help to put it some perspective. And, we do need more than good industrial performance. Unless the improvement spills over to other sectors (and, in particular, news from personal spending continue to lean on the weak side) the recovery will remain lacklustre. And a certain slowdown in global demand might take its toll on European exporters sometime down the road.

Equity / Company News

- US rating agency S&P yesterday affirmed CRH’s BBB+ rating but revised the outlook from negative to stable reflecting better than expected credit metrics at the 2009 year end, particular driven by cash flow which was aided by working capital inflows and curtailed capex spend. The favourable revision to the outlook comes despite the 17% fall in sales and a 240bps decline in the reported EBITDA margin. Interestingly, S&P is factoring in mid single digit sales declines for 2010 but with an improvement in operating margins, whilst they also appear relatively sanguine on CRH’s acquisition ambitions (recall management have earmarked EUR1.5bn for acquisition purposes over the next 18 months), stating that “we [S&P] feel that if this spending is spread over the next 18 months, which we consider likely, the group should be able to maintain credit metrics in line with levels commensurate with the ‘BBB+’ rating.

- Reports this morning indicate that AIB may decide within two or three months to sell its Polish unit, Bank Zachodni. Parkiet reports that among potential buyers are Societe Generale, BNP Paribas and Rabobank. This does not come as a major surprise given the pressure on the capital front at the bank. However, investors will ask about the strategic value of the Polish franchise compared to its inherent capital value.

- Stocks on the move today include Lloyds which climbed 3.6% on news the bank is close to agreeing a joint venture with Coller Capital to sell a number of assets assembled by HBOS, Sky News reported on its Web site, without saying where it obtained the information.

- RBS gained 4.7%% as a measure of U.S. banking stocks yesterday closed at the highest since November 2008, led by Citigroup as Chief Executive Officer Vikram Pandit said the bailed-out bank should be consistently profitable. BSkyB rose 2.8% heading for the biggest gain since Dec. 10. News Corp., which already owns 39 percent of the pay-TV company, may be planning to pay 735 pence a share for the stake it doesn’t already own, the Financial Times reported, citing speculation from traders. Climate Exchange Plc added 5.4% after the owner of emissions markets in London and Chicago said it returned to profit last year as carbon-trading volumes surged.

BSkyB Shares Popping On Murdoch Takeover Rumor

And from the WSJ: Examiner: Lehman Torpedoed Lehman and How Lehman Allegedly Manipulated Its Balance Sheet