Reports

World stock markets daily report (March 19, 2010)

Contributed by Paddy Power Trader

By Paddy Power Trader

The S&P 500 closed a smidgen lower Thursday on speculation the Federal Reserve will  increase its discount rate which tempered the potential for gains spurred by further evidence that the economy is strengthening without stoking inflation. Bank of America and Schlumberger paced declines that sent financial and energy companies lower. In contrast Boeing, DuPont and 3M led gains that drove the Dow to an almost 18-month high after reports showed growth in Philadelphia manufacturing, a drop in jobless claims and no change in consumer prices. FedEx surged as its profit more than doubled and Nike rallied on higher-than-estimated earnings

So G5 near-zero rates continue to propel equity markets higher and help growth in the developing economies dramatically outstrip the G7. Meanwhile inflation is non-existent or at least very well behaved, so there is no pressure to tighten at the major central banks. With the unemployment rate at 9.7% my conviction is that the first Fed hike comes later rather than sooner.

The Fed may not change the Funds rate for a long time but rumours have re-surfaced about another increase in the discount rate in the next few weeks. The Fed increased the discount rate to 0.75% a month ago as they seek to normalise the structure of rates. The discount rate is supposed to be an emergency short-term borrowing rate and the spread between discount rate and Fed Funds rate was cut to an artificially low level during the credit crisis. So, normalisation makes sense and has no significance for market rates. However, if they do it again, the Fed will be signalling that the return to normality continues. That contrasts sharply with events in Europe where things are definitely not back to normal as the game of chicken between Greece and the EU over financial support continues. You can always rely on the Telegraph to jump on these stories and this morning’s column, ‘Markets spooked as Greek rescue plan crumbles’, is no exception. EUR/USD sinking (and for now, GBP/USD also) continues to be a core theme for me.

Note its quadruple witching options expiry today which usually makes for some jerky and often counter intuitive price action – watch out the the spike in the VIX.

Today’s Market Moving Stories

- China announced that it is to send Vice Commerce Minister Zhong Shan to the US March 24-26th in an attempt to ease trade frictions. He Ning, head of the commerce ministry’s North American division said that “channels of communication between our two sides are open. All issues of concern to either side can be discussed through these channels”. However, he noted that continued demands for a CNY revaluation “will make the whole situation more complex, imposing an external disturbance on our normal channels of communication. That’s a trend that we do not want to see”.

- Yu Yongding, former PBOC adviser, stated that the US government should take steps to allay China’s concerns over the safety of its foreign-exchange reserves, of which US Treasury bonds compose a large part.

- UK Chancellor Alistair Darling ‘plans to use a revenue windfall to trim projected borrowing by ?5bn to ?10bn in next week’s Budget, making debt reduction a priority as he tries to put the public finances on a sounder footing’. Public spending is on course to end the year close to target, meaning that the government will be in the red by about ?170bn, compared with a pre-Budget report forecast of ?177.6bn.

- MPC member Andrew Sentence has told CNBC that “there is some risk of a double-dip recession, but it’s not the central forecast”.

- Angela Merkel tells the German parliament that ‘speculators are not to blame’ for the decline in the value of the EUR. Meanwhile, the Telegraph reports that her Finance Minister Wolfgang Sch?uble has told the Bundestag that to protect the EUR, the government might tell its intelligence agencies “to set up surveillance of financial speculators who target currency bets”. Total madness and a sign of a deeply paranoid mind.

- Japanese banking minister Shizuka Kamei has called once again for fresh fiscal stimulus to boost the economy. He said that “what we need is not just piecemeal policies. We need a policy that will galvanise the whole economy. Otherwise land prices will keep falling”. Separately, a Reuters Poll today showed that 44% of Japanese investors say the political situation in Japan is worse since Hatoyama government took over.

- Separately, today’s Nikkei morning edition reported that Prime Minister Hatoyama considered a redenomination of the yen when he took office in September. Hatoyama asked former Finance Minister Fujii to handle the change, but it did not realise because Fujii stepped down in January. The discussion over the redenomination sometimes comes up as a tool to stimulate economy; redenomination of a currency will sharply boost demand for printing, machine, and computer software. Some people say it may have inflationary impact because corporate and shops raise the price slightly when they adjust the price according to the redenominated currency. In addition, there is an incentive to cut “two zeros” to make Japanese currency unit in line with USD, EUR and other major currencies. However, I do not see any imminent possibility of Japanese government really going forward with the discussion over redenomination.

A Closed Mouth Gathers No Feet

So, now we know. No bail out of Greece, no bailout of anybody. Angela Merkel decided that the bailout rule needs to be applied strictly, and that Greece should go the IMF if it needed help. The decision provoked strong reactions and unsettled markets. The political roller coaster is likely to continue at least until next week’s summit meeting. The eurogroup is deeply split over the issue. While an IMF solution would find support with the Netherlands, Finland and Italy, the majority behind France is still against it. Central Bank President Jean-Claude Trichet said it would show the EU can’t solve its own crises.

Markets reacted with caution. The euro dropped as much as 1.1% to $1.3587,  and the extra yield that investors demand to hold Greek 10 year bond rose 18 basis points, CDS rose to 295bp. PM George Papandreou said that Greece can’t afford to hold out much longer at current market rates. His government still needs to raise another ?20bn to repay bonds maturing on April 20 and May 19.

Papandreou meanwhile appealed to European politicians saying that the Greeks, who are ready to make sacrifices, deserve better treatment. He reiterated his threat that Greece may turn to the IMF unless EU leaders agree to set up a lending facility at a March 25-26 summit. The FT calculated that given the current rate for IMF loans of 1.26%, Greece would be better off than the current market rate even if there were a surcharge. FT Deutschland said that so far Greece is not an official item on the EU summit’s agenda.

But the strain is certainly starting to show and the Greeks are being unrealistic. I am astounded by the rhetoric from Greece’s PM. PM Papandreou’s (a man who clearly doesn’t value silence highly enough) key ideas seem to be: – “speculators” are “profiting” from the “stringency efforts” of Greek citizens – we want lower borrowing costs, at the same level as other EU governments – we want a “loaded gun” to achieve that – it is sink or swim for all the EU. If we don’t get the support, expect trouble.

I think the Greek authorities’ rhetoric is from another world. PM Papandreou was previously a researcher of sociology, so we shouldn’t expect a mastery of Economics 101, or Credit 101. But we might perhaps have expected that of his speechwriters. If he is serious about reducing borrowing costs, he needs to recognize there are no shortcuts—and no alternative to the tough reforms. Bottom line: the only way that Greece can exit its current problems comfortably is via evidence of responsible policy (and speech) making. Implement austerity and Greek government bond over German bond yields spreads will narrow – a lot. It is that simple, Mr Papandreou.

Company News

- Lehman Brothers Holdings, the investment bank liquidating in bankruptcy, said it was seeking a total of $11 billion from Barclays, including a $5 billion “windfall” allegedly gained by the UK bank when it bought Lehman’s North American brokerage. In a lawsuit filed in November, Lehman said Barclays received a “secret” discount of $5 billion on securities it acquired as part of the purchase, and a $3 billion gain on other assets taken on.

- Palm after the bell last night reported a narrower quarterly loss but warned of significantly lower revenue in the current quarter amid disappointing sales of its latest smart phones. Its flagship Pre and Pixi smart phones, which were launched last year, aren’t selling as well as it hoped. The struggling handset maker has been beset by competition from deep-pocketed rivals such as Apple and has also been hurt by heavy marketing by carriers for rival devices. Palm shares were down 14% at $4.86 in after-hours trading. The shares have fallen by more than half so far this year.

- Lloyds released a very brief statement this morning ahead of an investor conference next Wednesday updating on 2010 year-to-date performance. Interesting timing, not expected. All positive stuff from the group, saying first 10 weeks of the year have been “strong” and all business areas look to be performing in line with recent guidance. Costs are under control, while impairment provisions continue to trend at lower levels and even expects better performance than recent guidance. This is the most bullish statement of the whole release and provides a positive read through to other UK banks. Lloyds is forecasting, on a combined business basis to be profitable in 2010. The stock is up 10% today.

- DSG has released a statement saying that the Renewal and Transformation plan remains on track. Gross profit uplifts of reformatted stores are running at an average of 20%, with early indications that second year trading in reformatted stores remains “strong”.