Stock Markets Tread Water Amidst Low Volumes

By: PaddyPowerTrader

The market eked out another few hard yards last Friday, ending up 28 points to move back into positive territory for the year to date. An early technical systems hitch had depressed volumes. Bank of America was the big winner after a broker upgraded their price target to $22 and also expected them to fully repay TARP funds by the end of 2010. Tech stocks and commodity-related equities were weaker on a fall in crude prices. Although we’ve seen a couple of decent attempts to break out, we remain deadlocked in the same trading range we’ve been in since the first day of June. Indeed according to Bloomberg, the S&P 500 hasn’t posted a daily rise or fall of 1% or more since June 4.

Today’s Market Moving Stories

• On the ‘green shoots’ issue, note a couple of rather pessimistic comments from the UK’s biggest retailers. First from Tesco, chief executive Sir Terry Leahy said he felt rising unemployment was a critical threat to the retail environment. He said that was now the ‘darkest cloud’ over retailing now. Meanwhile, Terry Duddy, chief executive of Home Retail (owner of a number of big high street brands) said it was important not to be carried away by green shoot discussions. He said his group continued to plan cautiously for the year ahead. Improvements in disposable income as a result of lower interest rates and energy costs could easily be offset by rising unemployment, he said.
• Germany’s DIHK chambers of commerce group has warned that, if anything, the credit situation for the industrial sector is getting worse. “The liquidity crunch is increasingly threatening the survival of companies, as well as finance for new orders.” He said Germany’s scrappage scheme had provided the autos sector with only a short-term artificial boost - hence the upturn there was more like a ‘flash in the pan’. A third of large German companies have said that credit conditions have been tightening further in recent months.
• The ECB’s Orphanides tried to walk a fine line in his comments on Saturday. He noted that the world economy was still weak and faced huge difficulties, but at the same time, authorities raised significant challenges given the extremely accommodative state of monetary policy. No real bias one way or the other on a headline basis, but at least interesting to see he doesn’t talk about exit strategies. That perhaps puts him just on the side of the doves.
• Former Bank of England MPC member Blanchflower (by far and away the most dovish member of the MPC through his term) once again urged current members to leave policy accommodative. He said talk of economic recovery was premature and that the economy remained extremely vulnerable.
• BoE MPC member Dale provided a view on when and what the UK’s monetary exit strategies might look like. First he said that the decision to begin an unwind from super easy policy would be with regard to the two-year CPI target of 2%. In other words, it will be a medium term decision. He then said it was possible there’d be a policy combination - interest rates could rise before all the various additional measures were taken back. This is something that governor King has mentioned several times in the past. Meanwhile, he also added to be debate on macro-prudential policy, suggesting that while targeting should be retained, it should also be enhanced. He said short term interest rates were not well suited to managing asset price bubbles or economic imbalances. This all fits very well with the current debate on the additional regulatory powers (or at least the switch of power from the FSA to the BoE) such that the Bank has better supply side control as well as rates for the demand side.
• The Baltic Dry index(BDI) is on the way back up after a week long slide from recent highs. However, there’s a special situation that needs taking into account (not only with the BDI, but also with all the talk of global economic recovery). China is sucking in such massive amounts of iron-ore that a tenth of the world’s entire iron-ore fleet is now at anchor and waiting to unload to Chinese ports. It is reported that a whopping 84 capesize vessels are currently queued to unload, with average waiting time of 10 days each.
• Lloyds are set to take a £450m in its investment in pub group Admiral Taverns. Lloyds lent more than £850m to Admiral to finance a series of acquisitions to help expand its 2,000 pub footprint. The estate is now estimated to be worth less than £500m and with the bank now said to be sounding out potential buyers of its debt, the large write-off is set to be realised. Last month Lloyds warned that write downs on corporate loans were set to be 50% above last years write off’s, due to the continued impact of the HBOS acquisition, putting the figure around £11bn in writedowns.
• The UK’s largest pub company, Punch Taverns is off 12.5% this morning on news that it plans to raise £350m via a Firm Placing and Open Offer.
• A great image on the largest bankruptcies in history.
• Is inflation the saving grace for the US?
• Proving that there’s nothing new under the sun.

The G8 Jamboree
There was a stark contrast between the outcome of this weekend’s G8 meeting in Lecce, Italy and April’s G20 summit in London. For a start, the tone was far more positive than in London, with Finance Minster’s attending the meeting indicating that economic forecasts may need to be revised upwards rather than the steady stream of downward revisions seen over recent months. Officials even began discussing “exit strategies” in terms of withdrawing massive global monetary and fiscal stimulus, requesting the IMF to look at the issue in more detail. Whilst it is somewhat premature to even discuss exit strategies the comments were clearly aimed at easing bond market concerns about widening fiscal deficits and inflation risks. It is doubtful that the communiqué will be sufficient to ease either concern.

Perhaps the communiqué was more relevant for what was left out. The issue of stress tests on European banks was not mentioned even though it was discussed at the meeting. Reported disagreements with Germany and France over transparency over the publication of stress test results meant that an agreement could not be reached. This is a disappointment. At the least it will make it increasingly likely that in addition to a sharp decline in European growth this year, GDP will also drop in 2010.

Lack Of Confidence In The Dollar
Also missing in the final G8 communiqué was any reference to currencies. Given the slide in the Dollar and recent concerns by foreign official investors raised the prospect that there would be some international backing of the “strong Dollar” policy. In the event there was no such reference, but comments on the sidelines of the meeting will likely help the Dollar this week. One such comment was from Russian Finance Minister Kudrin who stated that he has full confidence in the Dollar with no immediate plans to move to a new reserve currency.

Geopolitical tensions including the protests over the results of Iran’s elections as well as more jawboning from North Korea alongside market positioning will also work in favour of the Dollar this week. The CFTC IMM commitment of traders’ data for last week showed a big jump in net aggregate short Dollar positioning to the biggest net short since July 2008 and in contrast the report showed a jump in Euro long positioning. What this means is that the market is now very short Dollars giving more scope for short covering squeeze in the wake of increased risk aversion, geopolitical risks and positive comments from Russia.

Data Ahead Today
The US New York Fed Empire PMI for June is out at 13:30 and is expected to remain unchanged at -4.6 after rapidly improving from its March low of -38. Later at 18:00, June’s US NAHB survey will be released. The housing market seems to have tentatively stabilised and conditions should tick up to 17, up from January’s low of 8.

Economists Do Make Me Laugh

And Finally… Save Our CEOs

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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