Stocks Piggy Back Rally on the Fed FOMC Statement
Stock-Markets / Financial Markets 2009 Apr 30, 2009 - 02:57 AM GMTBy: PaddyPowerTrader
Despite a horrific headline GDP number yesterday, the market was encouraged by the entrails, which showed consumer expenditure up by more than expected and a massive drop in inventories (which of course is required to find a new equilibrium between supply and reduced demand). The Fed also chimed in with some cheer with a more upbeat tone in their FOMC statement, while Starbucks beat street estimates. I assume the mood for the day was that the Armageddon story is off.
Today’s Market Moving Stories
- No surprise as the Bank of Japan (BoJ) left their rates at 0.1% this morning. In Japanese releases today, industrial production beat expectations with a 1.6% rise following a horrific collapse over recent months. Japanese PMI, improved to 41.4, pointing to activity contracting at a less dramatic pace. So, tentative signs that the worst part of the deepest postwar recession the country has experienced may be behind it. Asian markets were up strongly overnight with the Nikkei playing catch up from their holiday jumping 4%.
- The WSJ reports that “talks between the Treasury Department and lenders aimed at keeping Chrysler out of bankruptcy broke down late Wednesday, making it all but certain that the car maker will file for Chapter 11 protection. Administration officials, who have been braced for a Chrysler bankruptcy filing for weeks, say all the pieces are in place to get the country’s third-largest employer through the court quickly, perhaps in a matter of weeks”.
- The UK GFK consumer confidence index rose three points to -27 for April, its highest level since April 2008 and its third consecutive monthly rise. The sub-index measuring the economic outlook jumped 16 points to -15, its highest level since August 2007.
- Nationwide said the average UK house prices fell 0.4% mom in April following a surprise 0.9% rise in March. Prices fell 15% yoy following a 15.7% decrease in March.
- With no increase in Quantitative Easing from the Fed or rhetoric to the effect in the FOMC statement the bond market sold off with yields reaching the top of their recent range above 3%. The Fed appears to be playing a dangerous game of chicken here as if they are wrong about the green shoots and yields continue higher this will choke off refinancing and push up mortgage rates.
- Bloomberg “Anthony Bolton, president of investments at Fidelity International, said a bull market in equities has already begun and financial shares are poised to drive recent gains higher. Low valuations indicate advances that began in March are the start of a bull market, Bolton said. He favours financials, consumer cyclical, technology, and “value stocks,” such as retailers, automakers and construction-related shares”.
- Shame that the Irish Finance Minister doesn’t know the difference between solvency and liquidity.
Does Deflation Beckons For Europe?
The Commission survey of 12-month ahead price expectations (i.e. what people think inflation will be in the future) has turned negative for the first time in the history of the survey that stretches back to 1985. That’s interesting on a number of levels.
The German survey was last negative in the 1980s and the following year the GDP, deflator was negative. The survey is strongly correlated to core CPI and short-end interest rates. When Japan moved into a liquidity trap, the academic world reckoned that if the Bank of Japan could maintain positive inflation expectations, then the liquidity trap would not be binding, and monetary policy is then not impotent. The ECB is aware of this (Council member Bini Smaghi speech Tuesday referred to it directly) but probably does not feel anywhere near the risk that inflation expectations turn lower. Still, this could be one of the fist sign-posts of warning for the ECB, with others being soft wages and core CPI itself. Note JC Trichet has consistently dismissed the prospect of any lasting deflationary shock in the Eurozone. But if he is wrong, it wouldn’t be the first time!
Well, it means we must take more seriously the ideas that:
- ECB unconventional measures are appropriate and will be enacted at some stage if this data continues,
- The Eurozone rates could go sub 1%, which is currently seen as the floor,
- The ECB risks falling into a low inflation trap if it does not act in a timely and aggressive enough measure.
However, being an old hand, Trichet will more likely choose to focus on the slight thaw hinted at in yesterdays ECB Bank Lending Survey. Although the responses to the survey still point to pronounced further net tightening of lending standards, this is significantly down on the previous peak and will be taken as evidence that the credit crunch is lifting to some extent. The ECB will no doubt feel at least partially vindicated by the improvement in financial conditions which on balance suggests that the ECB’s strategy of providing banks with unlimited liquidity through its money market operations is working. This report prepares the ground for the ECB to be able to argue that further more proactive quantitative easing is not necessary in the Eurozone at the moment and as a result, the ECB will be sticking to its strategy of offering full allotment fixed interest tenders. However, if there is some sort of prolonged period of deflation in the Eurozone, this will prove to be yet another costly policy error by the ECB.
Equities
- European equities are looking perky this morning, with German chemical giant BASF up nearly 6% (who beat analysts’ estimates after proactively closing factories to counter a slump in demand) and fellow DAX component Infineon up 3% after narrowing their Q2 loss and forecasting Q3 sales being up 10%. To the downside, we have Ericsson’s, who have just reported a 35% drop in Q1 profits.
- The pressure on Irish food companies was exposed in trade data yesterday which indicates a 9% fall in food exports to the UK during February. What’s to be done? Well, they can cut costs or increase prices in Sterling. But however you slice it, the sector faces a tough year.
- Independent News and Media (INM) reported its 2008 results this morning and delivered a 2% decline in group revenue to €1,476.6m. The group delivered an operating profit of €290.3m, ahead of the guidance given on January 26th. But the key focus is now of course on the much-publicised refinancing of its €200 million bond, with the INM indicating there is a strong likelihood of a breach of the financial covenants, if an amendment or waiver is not granted by the lenders in advance. The group is seeking a standstill in obligations beyond the 18th of May. INM has begun constructive discussions with an ad-hoc committee of bondholders, its banks and two major shareholders in relation to its refinancing requirements.
- Petroceltic, with a portfolio of assets in Algeria and Italy, has raised $40m by way of new equity at a price of 7p. The proceeds will be used to underpin its Algerian drilling programme (due to commence in the middle of May) and allow the group to advance and put in place a drilling programme in Italy.
- Trinity Biotech delivered a sharp uplift in year-on-year profitability, driven primarily by cost savings. They also commented that their R&D initiatives remain firmly on track.
Data Today
At 09:00, unemployment figures for Germany are going to be released. Later at 10:00, Eurozone’s April unemployment percentage is out with the consensus forecast being 8.7%. Eurozone HICP is out at the same time, expected to be 0.6% yoy.
Amongst others today we get numbers from ExxonMobil (expected EPS $0.94), Proctor and Gamble ($0.81), Comcast ($0.23), Colgate ($0.96), Dow Chemical ($-0.21), Kodak ($-0.33), Kellogs ($0.79), Metlife ($0.34), Motorola ($-0.11) and Hartford ($-1.16).
And Finally… Autoworkers Compete to Keep Jobs
Disclosures = None
By The Mole
PaddyPowerTrader.com
The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.
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