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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Euro and Irish Banks Nationalization, Chinese interest rate hike the Grinch for Equities

Stock-Markets / Financial Markets 2010 Dec 28, 2010 - 02:21 AM GMT

By: Bari_Baig

Stock-Markets Almost half of German companies see breakup of Euro region as a real threat and to make things worst Irish High Court has given the go ahead to the government to acquire Allied Irish bank without the consent of the shareholders! Dublin would now be injecting $4.8 billion into Allied Irish bank to raise its stake to 92% from 19% before. This is not the first bank/lender which Ireland has nationalized, it is the 4th lender now and Ireland’s Ministry of Finance had this to say “Allied Irish was Ireland’s largest company by market value in 2007 [which at its peak valued at 21 billion Euros] however, [now] the bank’s market capitalization is at 347 million Euros only and had the government not invested now then there would have been no Allied Irish bank on Jan 1st”.  The stock would be delisted from the stock exchanges it is listed on and would be moved to the junior Irish bourse. So, in simple words the Allied stake holders are wiped clean out.


Should we side Mr. Lenihan the Finance Minister of Ireland who by nationalizing Allied Irish Bank has increased the total losses to the Irish tax payers?  Or with this [Fourth] nationalization we expect the mess in which Irish lenders are to improve materially for the better? Could this be the end then?

There is one simple answer to all the questions raised above which is a resounding [No]. Nationalized Allied Irish Bank would now need several billions of Euros in order to meet the new capital requirements. This raises yet another concern that these lenders which could only find mercy in form of nationalization to save them from default counters, how would they now invigorate enough interest to meet the higher capital targets and that too in just over 2 months. Is nationalization the key to success?

It might help clean up the mess in the short term which too is very necessary keeping in view the mess that Irish banking system is in but, going forward it opens yet another “Pandora” box which is regarding the price at which the banks/lenders are liquidated because the mode of price discovery is not “Dynamic Market” rather Mr. Lenihan and Co are at the centre stage of that.

Had people not believed in dynamic price discovery there wouldn’t have been equity or any other form of market place in the world regardless of the fact that at times stock markets can show exaggerated prices. We do not challenge market’s price and that’s that but the countless examples that we have in the past of a government functionaries liquidating any assets they were always believed to be liquidated much below the real value so, that is one big thorn in all the nationalized lenders/banks of Ireland which as time passes would start to come up one by one.

When the going gets good such occurrences seldom draw any attention and thus they are quietly brushed below the carpet but keeping in view the state in which Euro Zone is at the moment with no concrete steps towards debt crisis and the next big threat of Portugal followed by Spain for debt salvation things are not looking bright.

This is what is happening on the ground and it all boils out on the single European currency.  The bulls of Euro might have to wait a lot longer. For now they’d have to quench their thirst on the corrective rallies which follow through after sharp declines. As we stated on December 22nd here at www.marketprojection.net that Euro bulls are quick to declare victory as Euro has failed to break the bottom and seems to be forging a bottom between 1.3070 and 1.3200. Good enough, if thin volumes and lack of activity in the market means we are forming a bottom then let the bulls cheer on until trading volumes normalize and only then we’d know how much of the bulls claims hold true. Bear would have been the king of the jungle had it not hibernated. It is cold, and the beast hibernates. We mince our words at that.

Would the Chinese interest rate hike double as Equities Grinch: China after surprising many of the economists last time when it opted not to raise the interest rate hasn’t disappointed the lot this time around. The benchmark rate now stands at 5.81% from 5.56%. Everyone is breathing a sigh of relief because everyone believes “inflation indicators” are running wild in China and what we find even more interesting is the fact that everyone’s eyes are towards China and her tightening of the policy. It is interesting because the U.S is providing further easing and developed nations except for Australia all have bench mark interest rates near bottom and at this point in time their focus to tilt towards tightening seems farfetched.

This would certainly help curb inflation in China but this would also put a bid on Renminbi and serve the greater goal of making Renminbi a freely floating currency. This makes commodities cheaper in terms of Renminbi and puts an offer on them. This makes the equities cheaper and thus shall put an offer on equities too. Perhaps this tightening of the policy would help put a lid on the “bubbl’ish” pace at which equities and commodities have sprung up in last few months without any significant or material correction. People’s bank of China is expected to increase the interest rate to 6.56% by the end of 2011 but most of the hikes are expected to take place in the start of 2011. As the street is of the view that more hike in the bench mark interest rates can be expected therefore there’s a growing consensus that markets might have already priced in the plausible hike and thus there might not be much risk aversion and the steady uptrend of stocks and commodities would continue however, this is where we do not share the view with the street.

Investment is essentially a measure of risk versus reward. The optimism of investors right now seems too high, high enough that everyone believes markets can brush aside any news or factor which might have negative consequences and press on regardless. This is what raises a flag of caution for us. All that glitters is not gold, this we say because China’s explosive growth has indirectly managed to pull the rest of the nations which thus far have lagged far behind the curve stand on mildly sturdy feet. As China slows with increased tightening of the policy it would negatively affect “those” slow nations and the sentiment from “overly bullish” gradually shifts to corrective and then bearish sentiment.

As the New Year starts and trading volumes normalize, we feel risk aversion might become more evident. We advocate bullish spells for they are more fun than bear markets but we advocate market’s health even more and at this point, we find global equities to be fast approaching overbought territory. We on December 9th saw Dow breaking away the previous peak and pressing ahead to 11,700 once Dow cleared the jitter zone which stretched from previous peak to 11,550.

Dow seems to be stuck in the jitter zone. The street’s of the view that markets are moving sideways due to lack of “driving” indicators, as this totally contradicts the “speculative” sentiment of being overly bullish. If all is that great, then you do not need “driving” factors. We do see Dow trading 11,700 but after that we see a good correction and a very quiet phase as well.

By Bari Baig

http://www.marketprojection.net

© 2010 Copyright Bari Baig - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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