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As London swelters in the summer heat, the FTSE looks to have taken an early holiday this week on a tight ranging, low volume trading day. Most major indices are mixed to negative after a light weekend news flow. In the US two more banks were taken over by the FDIC, First National Bank of Nevada and First Heritage Bank, N.A., but this caused few ripples of excitement across global markets. It is a busy economic calendar this week, but much of the action happens in the latter half of the week with earnings from RBS and Barclays and US payroll figures on Friday. A modest rebound in commodities led by oil has put miners and energy stocks at the forefront, but momentum and volume is relatively weak across the board in either direction.
Stocks are soaring as oil falls further towards $120 on speculation that a slowing global economy will check demand. It will be further bad news for hedge funds who recently endured their worse month for many years as the leveraged oil trades unwound with falling prices. Stalling oil prices are also not helping BP as it pulls back further from the days opening highs. The previous results were impressive, but a significant proportion of those profits come from their Russian joint venture which looks like it will be torn apart over the coming months.
Financials are a mixed bag today with Barclays and RBS falling heavily at the open and struggling to catch up. The US financial sector as whole isn’t having too bad a day despite Merrill Lynch’s write down and plans to raise capital. Merrill is being punished for releasing their announcement less than a fortnight after their earnings figures. Elsewhere the US house price collapse continues to accelerate. The S&P/Case-Schiller Index shows annual declines in prices of existing single family homes of 15.8%. With UK politicians discussing plans to help out mortgage lenders, they would be well served to use the US housing market as an advanced proxy of what could happen in the UK.
The large earnings miss from Lloyds TSB is getting most of the headlines today, but for all the “this is another Northern Rock!” warnings, Lloyds share price is still above the £2.70 low registered earlier in the month. RBS and Barclays are actually enjoying gains of around 4% today as investors cycle back into financials. There has been a lot of uncertainty over bank’s earnings from the likes of Merrill Lynch in the US to Lloyds TSB in the UK. Traders tend to hate uncertainty more than they hate bad news, and although the news from Merrill or Lloyds has been dire, at least market participants can now price in the bad news and start to be able to compute downside risk. This is much more preferable than the unknown and stocks often rise as a consequence.
The release of the news helps to foster the belief that the worst of the credit crunch is behind us, at least from the point of view of being able to estimate future earnings more accurately. The logic behind this can of course be questioned, but it is evident that investors are getting more confident in their bullish positions.
The better than expected US ADP employment report helped boost US markets earlier today as has the continued weakening the price of oil. It is debateable whether we have bottomed or not, but for now the bulls seem in control …… At least until the next big news item.
Traders are buoyant today as one storm (tropical) looks as though it
will miss vital US oil rigs and another storm (economic) might just pass
without reaping total destruction on the global financial system.
European markets led the way today and there has been some welcome
follow on buying from US indices. Banks are amongst the top performers
today with RBS, Barclays and HSBC pushing to their highest levels since
June. Better than expected numbers from scandal hit Societe Generale and
a Government cash injection for Northern Rock have helped push the
sector higher.
Elsewhere, the US service industries index contracted less than expected
and ISM non manufacturing prices retreated to 80.8 from 84.5. This
coupled with oil slipping below $120 has cheered markets as they signal
that inflation may be abating.
Later this evening we have the all important FOMC interest rate
decision. Futures markets are currently pricing in a 93% chance of a no
change verdict and a 7% chance of quarter point rise. For September's
meeting, the futures markets are pricing in a 66% chance of no change
and 32% chance of a raise, while October's futures markets are implying
a 41% chance of a quarter point hike. So while today's meeting is almost
a forgone conclusion, the outcomes of the next couple of meetings are
not so clear cut. Markets are forward looking animals so the excitement
today will come with traders focusing on the possible outcomes for the
September and October meetings. Although a quarter point rate hike in
the next three months seems likely, any sign of this being less likely
than previously expected, or at least a delay in rate hikes and markets
could push even higher into the close. With oil and commodity prices
receding, this may not be out of the question.
US equities have followed the Dollar in making a punchy start to the
final trading day of the week. European equities are well off the pace
on worries about the UK housing market and concerns over growth in the
Eurozone, While American stock markets are doing well today, it is the
currency markets that are stealing most of the limelight. The EUR/ USD
pair finally broke below the 1.53/ 1.60 range that it has been trading
within since the Euro's run up in February. The Euro slumped the most in
more than four years against the Dollar, falling to nearly 1.50 for the
first time since February. The GBP/ USD also broke below the 1.93
support level significantly for the first time in 2008 as more bad news
about the UK economy hit the newswires. While a weak Euro has
contributed to the dramatic drop today, the real driver with both these
break outs has been the resurgent Dollar. After being punished for most
of the year, the Dollar index is now heading back up to the levels first
not seen for 7 months. It is unlikely that today's movements this will
dramatically alter the bleak outlook for the global economy, but there
has been a shift in sentiment that says this isn't just an American
problem, the UK and Eurozone are both waste deep with the tide rising.
The FTSE has managed to hold on to most of the morning's gains, which
were largely a factor of the strong close in New York on Friday. A
relatively quiet economic calendar and low summer volume have muted
activity after last week's impressive action. Banking stocks are
performing well in the UK, with Barclays, RBS and Lloyds all putting
further distance between themselves and the July lows. Investors are
impressed that the banking sector has still been able to maintain strong
earnings in the retail sector, despite the ongoing credit problems many
are facing. In the US retail stocks are performing well with online
giant Amazon leading the way.
While the developing conflict is Georgia is grabbing the headlines, so
far both equity and foreign exchange markets remain largely unaffected.
After an early pull back, the Dollar is back to the unchanged mark
against the Euro and Pound while commodities such as oil have barely
moved since the conflict began. While pipelines have been developed
across the Georgia to help connect the energy wealth to the West, they
still only account for around 1% of the global market.
With the conflict in Georgia seemingly reaching an impasse, financial markets have reacted with the same general disinterest they showed at the start of the conflict. Although the pipeline that crosses Georgia only accounts for around 1% global energy flow, the lack of buying interest in oil is telling. Gold too, is normally seen as a safe haven in times of conflict, but the precious metal is now just $20 or so from being in official bear market territory. The lack of interest in the former 'evil twins of inflation' speaks volumes about the shift in sentiment and attention since financial markets bottomed and oil peaked in July. Before this point, oil was rallying on rumours of supply
shortages or conflicts, but mainly pushing higher on pure momentum alone. This momentum has obviously stalled and buyers, hedge funds especially no longer see the commodity as a one way bet. Still, as it ticks closer down to $100 a barrel, it would be surprising if there was
not a rally of sorts from these levels. There is growing chatter that oil will see a bounce sooner rather than later, especially if it dips to the psychologically important $100 a barrel level.
Financial stocks are mixed in the UK, but energy stocks are pushing higher even without the support of rallying crude prices. The Pound is staking a battering from the Dollar as the US trade deficit unexpectedly shrinks. Although the US housing crisis is showing little sign of abating, the UK housing market continues to lurch from bad headline to dire warning. Sterling is being punished today as a result amid speculation that the Bank of England may not be able to hold its inflation fighting line for as long as it wants.
The FTSE is down around 1%, but the real loser today is UK PLC. The pound is crashing as various factors come to a head. Up until July, the US Dollar was the currency the world loved to hate, now it’s sterling’s turn to be punished. Today’s Bank Of England inflation report was more dovish than expected, opening the doors to possible interest rate cuts before the year is out. This coupled with a housing market that has fallen through the roof has pushed Sterling down 1.11% against the Euro, 1.3% against the Dollar and 1.84% against the Yen today alone.
Stocks are not immune from the general stampede out UK securities. The financial sector is once again under pressure and without the FTSE’s other major sector firing on all cylinders (oil), the index is showing weakness where it counts. It has recently been reported that global bank’s losses & writedowns from the credit crunch have exceeded the $500bn marker. To add to the gloom, New York University economist Nouriel Roubini has recently estimated that this figure could double before the crisis is over.
Markets are on edge with both bulls and bears frustrated and unwilling to take on big positions. There are two big unknowns, the first is the continuing political crisis between Russia and NATO countries. The focus has now shifted from Georgia to the proposed missile defence battery to be located in Poland. The longer this goes on without constructive dialogue from either party, the more nervous investors become. As testament to investors growing unease, oil prices have finally started to move higher, a significant development considering the recent ambivalence seen in crude prices. Russia is vying with Saudia Arabia to become the worlds top oil producer.
Secondly, the specifics of the expected US government bailout of the GSEs Fannie Mae and Freddie Mac are still unknown. With billions, potentially trillions at stake for the US government and US tax payers, equity and bond traders alike are wary of taking on large positions. Financials are therefore underperforming again today, while gold and oil bounce back from their recent dips.
European markets opened on the back foot, this morning due to the sustained sell off on Wall Street last night. The FTSE has struggled to catch up after the Bank Holiday day off and judging by the volume of today’s trading activity, many traders may have taken the chance for an extended holiday.
US markets are mildly positive after better than expected new home sales data. The S&P Case-Schiller house price index fell less than expected for the second quarter, but indicates that US house prices are still down 15.9% year on year. On a more positive note, housing futures based on the Case-Schiller index bottomed at the end of June and have been rising since. Expectations are for lower levels still, but the these levels are now thought to be better than those predicted a few months ago. However, it is too early to say for sure that this heralds the start of the start of the much vaunted turnaround in US house prices. Interest-rate futures are currently implying that banks are again becoming hesitant to lend to each other on fears that credit losses will increase as the feared global recession kicks in. Increased lending rates will hardly be manna from heaven for home owners on either side of the Atlantic.
BetOnMarkets Afternoon Update -
07-28-2008, 03:43 PM
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