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Tuesday, January 11, 2011

World stock markets daily report January 11, 2011

World stock markets daily report January 11, 2011 : U.S. stocks declined for a third day Monday as a daylong advance that reversed most of a 100-point loss in the Dow fell short of erasing all the losses spurred by concern Europe’s credit crisis may worsen. DuPont Co. and Duke Energy both fell at least 1.1% after announcing takeovers valued at more than $20 billion. Strayer Education found the naughty step and led losses in for-profit education stocks, tumbling 23% after forecasting less profit than analysts estimated because enrolment had plunged. But Apple rallied 1.9% after analysts said Verizon Wireless’s introduction of the iPhone will boost sales.

Kicking off the US earnings season Alcoa swung to a fourth-quarter profit as the economic recovery boosted aluminium prices, and the aluminium maker said it expected demand would stay strong. The bottom line topped analysts’ expectations, although sales growth wasn’t as strong as Wall Street had expected. After closing up 0.43% shares slid 1.6% to $16.22 in after-hours trading.

Today’s Market Moving Stories
FX implications of Japanese White Knights
Japanese Finance Minister Noda says Japan will buy EFSF bonds. The EUR/USD jumped 70pips on the headline, before settling back down. FX implications:

This is a major vote of confidence in the Eurozone’s main rescue vehicle (which has a max theoretical size of €440bn). The EFSF exists, but still has to come to market, and no-one can be absolutely sure how it will be received. The maiden bond issue is planned for end-Jan and will be worth €3-8bn. Noda said Japan will take at least 20% of this. The vote of confidence alone is euro-positive.

Japan is broke, so clearly no JPY impact here (they will not be paying from tax receipts or the proceeds of JGB issuance). Instead Noda says purchases will be funded by FX reserves (which are likely to be very overweight USD). Will there be some switching from USD into EUR which would be EURUSD positive? No, at least not yet. Existing euros in the FX reserves will be used to pay for the new EFSF bonds. So not only will there be no JPY flow accruing from this, there will be no EUR flow either (essentially Japan will rotate out of one euro asset and into another).

Having said that, the EFSF is at the beginning of what will likely be a very long life. There will be lots more bonds issued, especially if the crisis forces Portugal and Spain etc. into a bailout. So Japan will likely buy a lot more than this initial stake. Japan’s FX reserves are worth $1.1trn. If we assume 20% already in euro, then Japan clearly has the firepower to keep buying EFSF bonds without impacting FX spot market too much.

But this raises another question. Presumably Japan holds some euro cash, and the rest in bills and bonds. The more Japan buys EFSF bonds, the more it will be forced to sell other European bonds to raise the euro cash to buy from the EFSF. Some of the bonds sold will come from Europe’s periphery, which gives credence to fears that EFSF issuance will crowd out issuance from vulnerable sovereigns. So we could see some further (euro-negative) spread widening in Europe courtesy of EFSF issuance over the coming months.

Japan will be paying with their existing Euros this time. But if their EFSF holdings grow, they may need to sell some US Treasuries to fund the purchases. That would mean actual spot FX flow. This is not hugely likely in my view as the mere existence of EFSF bonds is not a good reason for Japan to adjust its currency allocations. More broadly given the recent supportive statements by China, is there a whiff of a coordinated global attempt to bailout the Eurozone from its follies?

ECB limiting euro downside, for now
They’re not actually buying the Euro – just the sovereign bonds from the periphery and doing so more aggressively in the last two days & with some impact. But given the strong correlation between the two, the result is the same.

The fingerprints of the ECB were all over yesterday’s and this morning’s price action in sovereign bond markets. This action saw yields for Portugal, Ireland, Greece all falling, spreads tightening (ECB buying these) while yields of Spain, Belgium and Italy continue to rise (the ECB has never bought these). Clearly behaviour of Spain, Belgium and Italy give a truer picture of what is actually going on here – crisis is escalating with each passing day.

But for now the plaster is sticking & the ECB caught the market short. Traditionally dealers would sell / go short the bonds of a country having a bond auction (due tomorrow in Portugal & Thurs in Spain)& then cover the short (take profit) in the auction buy placing an order & buying back the bonds. It’s been a no brainer tactic for the last 18 months.

Deja-vu in Portugal
Portugal has been looking like a re-enactment of the Irish bailout:

(1) Steadily rising yields, taking us into unsustainable territory

(2) Reports of external pressure to accept bailout

(3) Denials of said reports (both by France and Germany, and the vulnerable country in question)

(4) Now, as happened in Ireland, a local central banker speaks publicly in favour of a bailout – not the governor of the Portugal’s central bank (Carlos Costa), but still a member of the policy board (Teodora Cardaso). She said:”It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt, but if we do it alone, for the markets to believe in it, it has to be brutal,”

ECB’s Costa on Portugal

Central bank governor of Portugal worried aloud that fiscal consolidation would not be enough without a growth strategy. Our European economists have been warning about this for ages – it’s not at all clear how Portugal will grow out of its difficulties (at least Ireland has a fighting chance on the growth side given a vibrant export sector). Costa was not ready to throw in the towel just yet though – asked about possibility of a bailout he said: “The Portuguese have the capacity to resolve their problems themselves.”

For how long can Portugal hold out? Well, the next bond matures in on April 15 (€4.532 bn principal and a €0.145 bn coupon due the same day). Expect Portugal to resist for as long as it can, but pressure clearly mounting. And will have to allow for some lead time, for example Ireland has yet to receive any EU/IMF monies, despite formally requesting help in Nov.

But some good news this morning from Portugal
Portugal’s budget outcome surpassed expectations in 2010 according to provisional data, showing a smaller deficit than the 7.3% of GDP target after a 9.3% shortfall in 2009. Revenues were reported to have risen by 5.3% (4.5% target). There were no numbers for expenditure. Diario Economico reported that the deficit was between 6.9% and 7.1% of GDP. ECB Governing Council member and Portuguese central bank governor Costa noted on Monday that Portugal’s public debt path is unsustainable. He called for strategies to boost economic growth and additional budget consolidation measures. Prime Minister Socrates faces increased political pressure with opposition party Social Democrats (PSD) calling for Socrates resignation if the leader accepts EU/IMF support. Portugal is scheduled to issue up to €1.25bn in government bonds on Wednesday. PM Socrates repeated that Portugal is “doing its work” and “will not ask for a bailout”.

Chinese FX Reserves
China’s foreign-exchange reserves climbed 18.7% to a world-record $2.85 trillion at the end of 2010 from a year earlier and domestic lending exceeded the government’s full-year target. The currency holdings, reported by the central bank on its website today, were bigger than the $2.76 trillion median estimate in a Bloomberg News survey of nine economists. Full- year yuan-denominated lending of 7.95 trillion yuan ($1.2 trillion) compared with a government target of 7.5 trillion yuan.

Company / Equity News

- HSBC: is up 2.7% after Citigroup upgraded the bank to “buy” from “hold,” saying it may increase dividends from 34 cents in 2010 to 65 cents in 2013.

- Barclays has jumped 5.1% after BofA Merrill Lynch Global Research raised its price estimate for the British bank by 35% to 500 pence and reiterated its “buy” recommendation.

- Societe Generale: have upgraded Europe’s banking industry to “overweight,” citing “attractive” valuations and an improved economy.

- BHP Billiton: led a rebound in mining companies, climbing 2% after JPMorgan upgraded the world’s largest mining company to “neutral” and copper advanced on the London Metal Exchange as investors bought the metal after the longest slump since June. Nickel and zinc also rose

- Google: may lose business as Verizon Wireless starts selling Apple Inc.’s iPhone, giving the carrier’s customers a new alternative to smartphones running the Android operating system. Verizon is set to announce plans in New York today to bring the iPhone to its network, according to a person familiar with the matter. A Verizon iPhone may cannibalize about 2 million Android phone shipments a year, said Dan Hays, partner at management consultant firm PRTM. Gartner Inc. says 20.5 million Android devices were sold in the third quarter.

- Wolseley: the world’s largest supplier of heating and plumbing products, rose the most in more than three months in London trading after analysts increased share-price predictions for the company. Analysts at Deutsche Bank forecast that the U.K. company’s shares may rise more than 16% in the next 12 months to 2,425 pence as the U.S. economy improves. And Citigroup said Wolseley shares are underperforming compared with U.S. and Canadian peers and may be worth 4,500 pence in as little as three years. Competitor Cie. de Saint-Gobain also rose as much as 2.8% today in Paris and CRH was u 1.6% in Dublin.

- Bank Of Ireland: As I previously noted back in early December a Debt-for-Equity swap for Irish Banks (Tier 1 and possibly Upper Tier 2 Debt) seems to be gaining some momentum with a Bloomberg article yesterday commenting that Bank of Ireland is considering such a move according to unnamed sources. Bank of Ireland 7.40% Perp Tier 1 bonds rallied by as much as 4 points on the news to close 38.00/43.00. In December, Bank of Ireland raised €700m of its €2.2bn capital target via a LT2 Debt Exchange. An addittional €200-300m raise via a Debt for Equity swap (which has been suggested) would leave still leave a shortfall of €1.2bn (to be raised before end Feb 2011). We also note speculation that Bank of Ireland has been in discussion with Middle Eastern investors with respect to anew equity investment
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