Once again, equity markets seemed to be a side-show to movements in the Currency and Fixed Income markets Wednesday. Treasuries continue to move lower i.e. meaning higher yields & I wonder for how much longer stocks can ignore this increase in borrowing costs (10yr @ 3.51%, 30yr @ 4.6%). US Macro figures were a touch better across the board (CPI 0.1% v 0.2% cons, Empire Manufacturing 10.57 v 5 cons, Industrial Production 0.4% v 0.3% cons) and the markets found a bid in the afternoon and combined with ongoing concerns over the sovereign / banking debt situation in the European PIGS lent a strong bid to the Dollar (the $ index DXY +1%). The GBP was the biggest loser (-1.5%), on a spurious report from Credit Agricole, which spoke about the potential for a post election default in Ireland (given UK's banks massive exposure to Ireland), and contributed to weakness in the EUR.
Stockswise General Electric (GE: 17.77 +0.28 +1.60%), JPMorgan (JPM: 40.0125 -0.1975 -0.49%) and Alcoa (AA: 14.46 +0.50 +3.58%) dropped at least 1.1% for the biggest declines in the Dow while Visa (V: 67.19 -9.75 -12.67%) and MasterCard (MA: 223.49 -25.73 -10.32%) both fell more than 1.9% ahead of a Federal Reserve Board meeting tomorrow that may disclose proposed caps on some transaction fees. And US chipmakers slumped after Gartner Inc. predicted spending on semiconductor equipment will drop next year.
Today's Market Moving Stories
EU Leaders Meet
Today EU leaders gather in a two-day summit in Brussels (17:00CET) to address the situation of the Eurozone countries that are facing financial difficulties. However, early signs that the EU leaders will deliver some relief to the Eurozone are not encouraging. According to EU officials, the governments in the region are close to agreeing a minor change in the Lisbon Treaty that could apply from 2013. The amendment foresees a "mechanism to safeguard the stability of the euro area as a whole", with financial assistance provided to distressed governments "subject to strict conditionality" (Bloomberg). But market participants have been expecting measures that could contain contagion stemming from Greece and Ireland spreading into other countries in the Eurozone. Although the ECB has increased the pace at which it buys bonds under its Securities Market Programme and eased contagion fears, it appears adamant that it will not start QE. Furthermore, the proposal related to increasing the size of the EFSF and making it more flexible by allowing purchases of government bonds of peripheral countries has been ruled out by Germany. Whilst the alternative of using jointly guaranteed European bonds, is also unlikely to succeed at the summit, according to one of its promoter Luxembourg PM Jean-Claude Junker.
Some Surprising Developments in Germany
Merkel has taken Germany to the brink, but it looks that Germany does not like what it sees. After the extraordinary Steinmeier/Steinbrück article in the FT, Germany's opposition yesterday launched an unprecedented political attack on the German chancellor, accusing her of being un-European. Jürgen Trittin, the leader of the Greens, called her a "Teutonic savings-monster". Frank-Walter Steinmeier, the leader of the opposition in the Bundestag, put his fingers on the issue. If Merkel continues to favour crisis-solution via the ECB, then the ECB ends up as a bad bank. The Left Party's spokeswoman said Merkel's position did not reflect the national interest but those of the banks (a position with which we would agree. Merkel is extraordinarily lazy in the definition of what constitutes the national interest.) Quentin Peel of the Financial Times noted: "The one thing that united almost every speaker was a determination to be the most pro-European. No one sought to blame Ms Merkel for not being German enough."
For the opposition to break with the chancellor on a European issue so massively, and so loudly, has potentially important implications for Merkel's negotiating position in the European Council today and tomorrow. It is now clear that Merkel represents the German government, but that broader German opinion is more diverse than it seemed previously.
Spain will push for an extension of the lending ceiling of the EFSF, and for allowing it to buy bonds in the secondary market, thus relieving the ECB. We are now in the perverse position that Germany of all countries is favour a monetisation strategy. (We have to pinch ourselves to check whether this is for real.)
German Unrest
The German media also yesterday seemed to have a day of conversion. In an online editorial Der Spiegel invoked Willy Brandt's famous campaign slogan "to dare more democracy" by calling on the European Council "to dare more Europe". It said the Council has been complacent in its anti-crisis response, and was falling to see the historical significance of the situation. The editorial calls for the coordination of all aspects of economic policy, includes taxes, wages, and pensions. Der Spiegel's online edition starts with the headline "Union of the Unreconciled".
Under a headline "Germany plays politics while Europe drowns", Mohamed El Erian writes in the FT: "The situation this time suggests good economics should play a greater role. Rather than simply doubling up on a faltering liquidity approach, the time has come for Germany to lead a more holistic solution focused on addressing the periphery's debt overhang and competitiveness problems."
Willem Buiter calls for a big bang approach solution, according to FT Alphaville, which describes his prescriptions thus: "1. Get out their 'big bazooka': Expand the EFSF to €1.7trn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium…. 2. Initiate a coordinated process of bank restructuring in the distressed periphery. Buiter reckons that bank recapitalisation still has a way to go, and that Europe needs to stop kidding itself that senior bondholders can go much longer without a 'short back and sides'. But the process of bank restructuring can't continue piecemeal as this will lead to the 'mother of all contagions' as bondholders dodge countries where they think haircuts are imminent."
A few people asked why EUR/USD tumbled earlier in the European session. It was on the back of comments from the Swiss National Bank's DANTHINE: who said that we "will continue to pursue the goal of diversification". The market assumes that mean selling EUR for JPY, GBP and USD. SNB currently has US$ 220 billion in reserves; 1 year ago they stood at US$ 79 billion. May was the big month of accumulation, where they bought EUR 78 billion. Most SNB reserves are based in EUR.
Japanese Pessimism
Overnight we learnt that Japanese companies are so pessimistic that even the biggest cash piles since 2001 and borrowing costs near five-year lows can't spur them to invest. Cash and equivalents at members of the benchmark Nikkei 225 Stock Average climbed 8 percent to 1,309 yen ($15.60)a share this year, the most since Bloomberg began collecting the data. Companies cut bond sales 17 percent to 9.5 trillion yen this year from last year's record 11.4 trillion yen even as the Bank of Japan reduced interest rates to near zero and average corporate yields dropped for a second year, reaching 0.67 percent in October, the least since July 2005, the data show. "We have more cash than we need, but no growth investments," Kazuto Tsubouchi, chief financial officer at NTT DoCoMo Inc., said in an interview last month. Japan's largest mobile-phone operator reported 529.7 billion yen in cash as of Sept. 30. "This is a great time to issue bonds, and we would if we had no money," Tsubouchi said.
Irish Good News Story!
Some half decent economic data from Ireland this morning! Ireland's GDP grew for the second quarter in three in Q3 2010. GDP was 0.5% higher than in Q2 in volume terms, seasonally adjusted. The Q2 change improved from -1.2% to -1%. Following the 2.1% increase in Q1, it means that the economy is now 1.7% bigger in volume than in Q4 2009. That quarter seems to have been the trough of the recession.
Further evidence that the Irish economy is now out of recession was provided by the GNP numbers (GNP strips out the profits of the foreign-owned multinational sector net of Irish residents' income abroad). GNP rose 1.1% in Q3 in volume, after a gain of 0.1% in Q2. This is the first time since Q3-Q4 2007 that GNP has expanded for two straight quarters. It is also the largest quarterly increase in real GNP since Q1 2007. GNP tends to be a solid guide to the domestic economy.
Of course nominal variables matter too, especially in the context of debt sustainability. Here the evidence was encouraging: nominal GDP has now grown for three quarters in a row. That had not occurred since Q1 – Q3 2006. Nominal GNP increased by 1.9% in Q3, the same as in Q2.
Exports are driving the re-emergence of economic growth. Exports increased 3.9% quarter-on-quarter in Q3, following the 2% gain in Q2 and the 6.9% jump in Q1. In volume terms, the cumulative rise in exports since the bottom at the end of 2009 is now 13% (17% in value terms). Exports were up 13.2% in volume year-on-year in Q3 (+15.1% in current prices). That marked the most rapid rate of export growth since Q1 2001. In comparison, euro area-16 exports increased 11.3% in volume in Q3 compared with Q3 2009 (the annual gain was 10.7% for the EU-27 and 12.6% for the US in Q3). Ireland's goods exports increased 12.9% in the last 12 months, while services grew by 13.6%.
Imports are also growing quickly: up 11% year-on-year in Q3 in volume (there is a high-import content in Irish goods exports in particular). But that did not prevent the biggest current account surplus since Q4 2003 at €255m in Q3. Ireland is no longer living beyond its means. Most forecasts predict a current account surplus for the full year 2011.
It is disappointing that consumer spending has not yet bottomed in real terms: spending slipped 0.5% in Q3, following -0.1% in Q2 and -0.3% in Q1. Investment is still weak and choppy. It fell 18% in Q3, following the 11% increase in Q2. But that marked a new low for fixed investment (in structures and machinery and equipment). Investment is now back to 1998 levels, as payback for the bubble period in 2002-2007. Government spending is declining in line with the programme of fiscal austerity.
Looking at the output accounts of the different economic sectors, it is clear that the economy is two-speed. Industry and agriculture are growing rapidly, but private services, public services and construction are shrinking still (although construction now makes up a smaller portion of the economy than the European average).
Company / Equity News
- Stocks on the move today in Europe include Ericsson which has rallied 3.7% as Svenska Handelsbanken raised its recommendation to "accumulate" from "reduce," saying gross margins will be "stronger for longer."
- Travis Perkins owner of the Wickes home improvement-products chain, gained 1.7% as Deutsche Bank AG gave the shares a "buy" rating in new coverage.
- BP (BP: 43.75 -0.11 -0.25%) has lost 1.8%, the biggest drop in a month. The company put profits over safety and is responsible for the Deepwater Horizon drilling rig explosion that set off the largest offshore oil spill in U.S. history, lawyers suing the company said in a new court filing. BP and other companies connected to the well "ignored crucial safety issues, cut corners and violated federal and state law to save time and money in favour of production and profit," lawyers for thousands of businesses and individuals claiming economic losses from the spill said in a master complaint filed in federal court in New Orleans. Transocean Ltd (RIG: 69.31 -2.58 -3.59%) which owned the Deepwater Horizon rig and is also a defendant in the lawsuit, fell 3.8% today.
- BAA has released its latest investor report for the two London airports securitized via BAA Funding Limited, which includes forecasts for 2010 and 2011. They are forecasting 88m passengers for Heathrow and Stansted in 2011, a strong increase of 3.7% over their latest estimate of 84.8m for the full year 2010, although about half of the increase will be the catch up effect from the disruption earlier in 2010. The split will be 6.2% growth for Heathrow, and a 5.1% decline at Stansted. Perhaps more significantly BAA are forecasting a 15.2% increase in 2011 EBITDA to GBP1,120m driven by these higher passenger numbers and the 4.7% RPI plus 7.5% tariff increases at Heathrow from April 2011.
- Carrefour: A report in Les Echos suggests that Carrefour is considering either an IPO or spin off of its property division and considering options for its discount division. Carrefour's freehold property was valued at EUR16.7bn in the most recent accounts, whilst the discount division has been reported as being worth around EUR4bn. These are both longstanding stories, and are likely to be actively considered given the recent weak share price performance as well as the threat to its credit ratings (certainly Moody's). I continue to think that it is within Carrefour's control to avoid a downgrade from Moody's – flexing the share buyback is another alternative – with the odds of a cut being less than 50% in my view.
- Microsoft Corp. (MSFT: 27.9875 +0.1375 +0.49%) updated its Bing search engine today, aiming to build on U.S. market-share gains last month as it chases Google Inc. (GOOG: 591.71 +1.41 +0.24%). Bing, which ranks third in the market, accounted for 11.8 percent of U.S. searches in November, up from 11.5 percent the previous month, Reston, Virginia-based ComScore Inc. said today. While Google remained dominant, its share slipped to 66.2 percent from 66.3 percent. Yahoo! Inc. remained second.
- Facebook is likely to generate 2010 revenue of about $2 billion, a larger sum than projected earlier, according to three people familiar with the matter. Sales will more than double from 2009, said the people, who declined to be identified because the privately held company doesn't disclose revenue. Facebook had $700 million to $800 million in sales last year, and the 2010 figure was previously expected to be closer to $1.5 billion, according to two other people familiar with the matter earlier this year.
- Twitter has said it's valued at $3.7 billion after receiving a $200 million round of funding led by venture capital firm Kleiner Perkins Caufield & Byers. The company also added two directors to its board, Chief Executive Officer Dick Costolo said in a blog post. Twitter spokesman Matt Graves provided the valuation in an e-mailed statement. Twitter, which has more than 175 million users, can use the funds to hire more people for its advertising service, which began earlier this year. The San Francisco-based company started in 2006 and has more than 350 employees, up from 130 a year ago.
