Stock Market Searches for Direction on Rudderless Monday

By: PaddyPowerTrader

A choppy whippy day but US stocks rose Friday, with the Dow Jones erasing a 167-point drop in the final hour of trading, on speculation the European Union may propose a solution for Greece’s budget deficit. Oil, gold and copper rebounded, and the dollar pared its gain. The late day rally has been put down to short covering. 

Overnight most Asian stocks fell, as losses at Panasonic and Casio Computer (both down over 4%) overshadowed gains by commodity companies after oil and metal prices increased. Ten Network Holdings, an Australian broadcaster, jumped 9.9% on speculation the government will cut industry license fees.

Looking ahead to this week, the focus in the US will be on Thursday’s January retail sales report, with the markets looking for a solid gain. The weekly jobless claims, due the same day, and Friday’s University of Michigan consumer sentiment report will shed further light on the household sector. As far as the business sector is concerned, I’ll be interested in Tuesday’s NFIB small business survey and Thursday’s business inventories report. As far as central bank comment is concerned, Fed Chairman Bernanke will testify before House Financial Services Committee on Wednesday (on the unwinding of the Fed’s emergency liquidity facilities). In Euroland the focus will be on the Q4 GDP flash estimated from across the region. 0.3% QoQ growth across the region as a whole is the expected read. French and Italian reports are also due. German’s December report, released on Friday, showed a sharp 2.6% MoM decline in output. In the UK the BoE will release its quarterly Inflation Report and December industrial production report. .

It’s been a very muted lack lustre start Stateside today with little newsflow. CIT Group is up after appointing former Merrill Lynch top dog John Thain as its new CEO, Home Depot is bid after a broker upgrade from Morgan Stanley and Motorola could find support in the back of a Barron’s piece.

Today’s Market Moving Stories

• Attending the Group’s meeting in Iqaluit, ECB President Jean-Claude Trichet said that they “expect and we are confident that the Greek government will take all the decisions that will permit it to reach [its deficit reduction goals]”. French Finance Minister Christine Lagarde also said that Eurozone countries would “make sure” the Greek plan was implemented whilst Eurogroup Chairman, Jean-Claude Juncker dismissed the idea that Greece would need money from the IMF.
• Former IMF Chief Economist Simon Johnson stated that “the G7 countries are completely asleep at the wheel. I looked at the information they put out from their meeting I was absolutely shocked… they seem to show no awareness at all that much of Europe is facing a serious crisis and it’s not limited to Spain, Greece and Portugal, it’s also going to include Ireland. I think Italy is also very much in the line of fire. There’s a very serious crisis inside the Eurozone.”
• PIMCO Global CEO Mohamed El-Erian stated that sovereign risk is the key theme for investors through 2010. He added that the Greek government needs to look to external financing to shore up its balance sheet given that fiscal adjustment alone will not cure Greece’s balance sheet woes. He said that “it will be in the interest of the whole of Europe to sort this out… It will take years to sort out sovereign balance sheet issues, some countries have years, others such as Greece do not.”
• Greek public sector union ADEDY said that it may stage a second 24-hour strike later this month, joining a February 24 walkout called by private sector labour union GSEE in protest at the government’s austerity measures. “We will decide on Thursday,” Ilias Iliopoulos, ADEDY’s general secretary, told a news conference.
• The Telegraph reports that Iranian President Mahmoud Ahmadinejad has ordered scientists to enrich Iran’s stockpiles of uranium to the higher level needed for nuclear power. The paper comments that if the order is carried out, it will scupper what was hoped to be a looming deal to transfer most of Iran’s uranium abroad for further processing.
• The Centre for Forecasting Science at the Chinese Academy of Sciences said growth could hit 11% in Q1, before easing slightly for the rest of the year. Q2 GDP is forecast to rise 10.2%, with growth easing to 9.5% in Q3 and 9.8% in Q4.
• Bank of Japan Deputy Governor Hirohide Yamaguchi told a parliamentary committee that “we expect the recovery to continue. But the economy will be in a severe condition until the summer. Quarter-on-quarter growth won’t be big and we may even hit a soft patch”.
• Asked in an interview on ABC TV whether the US would ever lose its AAA rating, Treasury Secretary Timothy Geithner said “absolutely not… that will never happen to this country”. The general flight to the US Treasury market in uncertain times is, he said “a very, very important sign of basic confidence in our capacity as a country to work together to fix these problems”.
• Futures traders have increased bets to a record level that the euro will decline against the US dollar on concern budget deficits in Greece and other European nations will hamper the region’s economic growth. The price of default protection on government debt for Greece, Portugal and Spain rose to a record on Friday on concern the nations’ efforts to rein in their budget shortfalls will hamper growth and cut tax revenue.
• UK banks and building societies have warned that they will have to slash mortgage lending and raise rates on home loans if the government insists on prompt and full repayment of the £300bn they have received in aid since 2008, the Council of Mortgage Lenders said in a report. The paper sets out the group’s case for continuing government support for the Special Liquidity Scheme and the Credit Guarantee Scheme, which must be fully repaid by the ends of 2012 and 2014 respectively.

The Not So Well Hung Pound
Writing on the WSJ’s blog “The Source” over the weekend, David Cottle argued that there are many key reasons for not viewing the UK in the same light as Greece (a long history of political stability, a diverse economy, its own currency etc). However, he also argued that “if the UK is to keep its historical good name as a borrower, it’s going to need a focused, austerity budget as soon as the vote (for the general election due before June 3rd) is over. A hung parliament would make that harder to achieve.” Tellingly, he then noted that “this was a worry for investors in 2009, too, of course. But Greece’s problems, and the nervous glances cast at Spain and Portugal, have sent sovereign debt right to the top of investors’ fret lists.” Regular readers will not be surprised to hear that I agree wholeheartedly with this analysis.

The ICM survey conducted on behalf of the Sunday Telegraph saw the Conservative party lead narrowing by one point over the past month to 39% , Labour unchanged on 30% and the Liberal Democrats up two on 20% . The paper noted that if this result were repeated at the general election there would be a hung parliament, with the Conservatives around 14 seats short of a majority. Importantly, this was the first ICM poll to put the Tories below 40% since last June.

Such has been the shift in thinking within the Westminster village over the outcome of the election that the Sunday Times reported this weekend that the civil service has quietly begun preparing just such an eventuality. The paper noted that “officials want to ensure there is no risk that uncertainty could lead to a constitutional crisis over the Queen’s powers to accept or refuse a request to dissolve parliament.”

Nick Clegg, leader of the Liberal Democrats (and, effectively, the “king-maker” in a hung parliament), clearly understands the power he now wields. He told the Telegraph that neither Gordon Brown nor David Cameron will get his support without signing up to his “fairness” agenda, which includes raising the entry to income tax to £10,000, extra taxes on the rich, a “pupil premium” to help poorer children, breaking up the banking system and electoral reform.

It certainly looks as if a hung parliament is rapidly becoming a realistic prospect. Moreover, the evidence so far also supports the view that a hung parliament will make it harder to put in place a “focused, austerity budget.” What then does this mean for GBP? The rapidly shifting political landscape in the UK is undermining GBP. Indeed, given how strong EUR/GBP performed last week (at a point when investors were asking some very serious questions about the European currency), it seems I am not alone in losing what little faith I had in the Pound. More bluntly, when looking at EUR/GBP, I am coming to the conclusion that I wouldn’t really want to own either.

Company News

• Figures released by the Association of Real Estate Funds disclose that unlisted pooled property funds in the UK raised a net £2.9bn in the fourth quarter of 2009. This represents a substantial increase on the £400m raised in the third quarter, and is a significant uplift on the previous record quarter of £1.7bn raised in 2006. This is indicative of a substantial influx of funds into UK commercial property which are set to continue to push valuations up and rental yields down. Good news for names like Hammerson and Segro.
• Pearson, owner of the Financial Times, may get as many as 12 bids for its 61% stake in market data service Interactive Data Corporation, the Sunday Telegraph reported. Goldman Sachs may advise on the sale of the stake, which might be valued at as much as $1.6 billion. Potential buyers include Thomson Reuters, McGraw-Hill, Blackstone Group, Bain Capital, KKR & Co., Hellman & Friedman, Texas Pacific and Bloomberg.
• BAE Systems announced that it has reached settlement with both the UK and US authorities over corruption and bribery charges that have dogged the Group since 2004. Under the terms of the settlement, the Group has pleaded guilty to a number of charges resulting in fines of $400m payable to the US Department of Justice, with a £30m penalty payable to the UK. This is a positive result for the Group in three respects: (i) the payments are probably smaller than most had feared given the severity of allegations levelled at the company; (ii) it removes a considerable element of uncertainty that had been hanging over the Group for more than 5 years; and (iii) it allows BAE Systems to continue to bid for lucrative contracts from the US and UK Governments, the Group’s two key customers.
• Xstrata has reported a 16% drop in FY sales to $23.6bn and a 27% drop in FY EBITDA to $7,046m, although this was ahead of the $6,743m consensus. The results were affected by well flagged de-stocking during H1 2009 and significantly lower commodity prices, which had a $2.7bn negative impact at the operating profit level, although $ 501m of cost savings helped soften the blow.
• GDF Suez, the French power giant, is considering a revamped bid for International Power, a £5 billion independent power generator. Talks collapsed last month after GDF offered to transfer assets into International Power in return for a majority stake. But International Power believed that the bid undervalued the British company, which has stakes in more than 45 power stations around the world. A source close to GDF told the Independent that it is thinking of returning with a sweetened offer, likely to include cash for shareholders.
• IBM is introducing new server systems today, aiming to bolster its leading position as software rival Oracle enters the market. The Power7 systems will be tailored for specific projects, such as running electrical grids or financial analytics.
• Motorola may rise as much as 40% during the next year if it spins off its mobile-phone unit and revenue from the radio and data- communications equipment division increases, Barron’s reported.
• There was further speculation that CNOOC, China’s largest offshore oil producer may spend up to $2.5bn on a stake in Tullow Oil’s Ugandan assets. The deal with Tullow Oil, which needs final approval from Ugandan President Yoweri Museveni, may include France’s Total as an equal partner in the fields in the country’s Lake Albert Basin. This deal would be a positive for Tullow as the new partner/s would help with the development costs in Uganda.
• Banco Santander is considering listing its UK business on the London Stock Exchange, an offering that may value the unit at more than £15bn. The offering is one of several options the Spanish bank is looking at in an effort to raise funds to pursue a bid for Royal Bank of Scotland’s network of 300 branches. Santander would sell a 25% stake in the unit, which would be listed on the FTSE 100.

And Finally… The Principles Of Economics, Translated

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”.© 2010 Copyright PaddyPowerTrader - All Rights Reserved

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