Overview: A classic EU sovereign debt/banking crisis fear inspired risk aversion day, slamming risk assets, especially the EUR. Sparked by a WSJ report that July bank stress tests understated PIIGS bond exposure. This is old new, but comes at a sensitive time as PIIGS seek to sell $80 bln in bonds and their bond and CDS rates are already at/near May crisis levels. Bond markets were already nervous, and now may make new bond sales more expensive yet.
As we’ve long argued the EU crisis is still THE threat to markets and THE wildcard that is most likely to spark the next market crash and a double dip for the US and the rest of the developed world – possibly China too given its real estate bubble and growing risk of associated loan trouble that comes with these bubbles, as seen in the West.
NB: Both BoJ passed on yesterday’s low liquidity chance to sell Yen with minimal investment. Clear signal for no likely intervention until USDJPY gets to around 80, as we argued earlier in our special report on the Yen last week.
STOCKS: US: Up – [NB: FROM FRIDAY,
MARKETS CLOSED MONDAY]Stocks overcame early week losses and surged after overseas markets rose and better-than-expected economic data. The week ended on a positive note following a better-than-expected U.S. employment report.
The S&P 500 rallied 5.3% as all ten sectors posted a gain. Financials (5.7%), consumer discretionary (5.0%) and materials (4.2%) led the way. Defensive sectors underperformed on a relative basis, with utilities gaining 1.6%.
Overseas strength and better-than-expected economic data acted as the main drivers behind the buying interest.
The much anticipated August jobs report provided a needed upside surprise following news that August nonfarm payrolls fell 54,000, much better than the forecasted 101k-120k. Adding to the surprise, the September reading was revised down to a loss of ‘only’ 54,000, vs. the original decline of 131,000.
Private nonfarm payrolls rose 67,000, which was better than the 44,000 consensus. Private payrolls have increased each month since January. The unemployment rate rose to 9.6% from 9.5%, as expected.
However as noted by Gluskin Sheff’s David Rosenberg here, the underlying details were far less rosy. We quote:
- Aggregate hours worked were flat.
- All the employment gains were part-time — full-time employment, as per the Household Survey, plunged 254,000.
- Those working part-time for “economic reasons” surged 331,000 — the biggest increase in six months.
- While private payrolls were better than expected, 10,000 of that +67,000 tally reflected returning construction workers who had been on strike.
- Manufacturing employment was down 27,000 and total goods producing jobs were flat — hardly signs of a robust economic backdrop.
- The diffusion index for private payrolls actually fell to 53.0 from 56.7 in July — a seven-month low. It was 68.0 at the April high, which is consistent with an economy slowing down to stall-speed.
- The labor market gap widened with the all-inclusive U6 unemployment rate rising to a four-month high of 16.7% from 16.5% in July. This is why the odds are stacked against a sustained acceleration in wages.
Clearly the labor market is continuing to struggle, though recent employment reports suggest there is a very low probability of a double-dip recession.
In other economic data, the August Consumer Confidence reading encouraged some buying interest in stocks after confidence climbed to 53.5 from 51.0 (Briefing.com consensus 51.0).
The market reacted positively to news that the August ISM Index rose to 56.3 from 55.5, well ahead of the Briefing.com consensus that called for a decline to 52.9. Later in the week the ISM Services report came in below estimates, but the market managed to shrug off the negative news.
The housing market got a glimmer of positive news after the July pending home sales index increased 5.2% m/m, which was well above the Briefing.com consensus that called for an unchanged reading.
Although we are in the slow period for earnings reports, there was plenty of corporate action on the M&A front. As noted by briefing.com:
Intel (INTC) announced plans to acquire the wireless unit of Infineon Technologies for $1.4 bln in cash.
Sanofi-Aventis (SNY) offered $18.5 bln in cash to acquire Genzyme (GENZ). Genzyme rejected the offer.
3M (MMM) is acquiring Cogent (COGT) for $430 mln, or $10.50 for per share. Separately, 3M is going to pay $230 million to acquire Israel-based Attenti Holdings.
In other corporate news, Monsanto (MON) came under pressure after the company issued a downside FY2010 EPS forecast of between $2.40 and $2.45 compared to the $2.49 consensus. Shares of Monsanto fell 1.4% for the week.
Meanwhile, retailers benefited from better-than-expected August same store reports from the likes of Abercrombie (ANF), Costco (COST) and Macy’s (M), among others.
US Bonds: Up- (as of Friday) Benchmark 10 Year Note down with rising stocks, with yield up from 2.5820% Thursday to 2.7060%. Thus far today bonds heading higher as Asian stocks close lower and European stocks are down.
Asia Stock Outlook: Mixed/Down- Most major Asian markets finish lower or with slight gains after hitting near term resistance and lacking enough positive news to move higher. Some blamed uncertainty ahead of US market response to President Obama’s new economic initiatives, including a %50 bln investment in infrastructure and new business tax cuts.
European Stock Outlook: Down – Almost all European bourses opened and remained lower as of midday GMT due to a combination of a weak Asian close, profit taking at near term resistance levels, and renewed nervousness about the European banking sector after a Wall Street Journal report that Europe’s recent bank stress tests understated some lenders’ exposure to riskier sovereign debt.
If in fact this WSJ article is a reason for banking stock weakness, we find it very odd, given that this is old news and the tests were long ago viewed as so lenient as to provoke suspicions about just how weak the banks must truly be if such low standards were needed to produce a high pass rate. Note that less than a month ago Ireland announced new bailouts for 3 banks that HAD PASSED the stress tests, even though no new stresses had appeared.
Commodities Outlook Monday-Midday Tuesday GMT: Oil slightly down, softs flat/lower, gold steady
Crude Oil Daily Outlook: Down- Futures lower from $74 at yesterday’s close to around $73.40 following stocks lower and weighed down by oversupply concerns, which prevented crude from following stocks higher in recent days – a rare 3 day divergence- bearish for stocks, as commodities tend to reverse trend before stocks.
Gold Daily Outlook: Slightly Lower: Little changed yesterday, futures down from $1250 to $1246, still only about 1% off its highs, may need some anxiety over the EUR or USD to get much higher. If yesterday’s WSJ article about lame EU bank stress tests seriously understating bank risk sparks new concern for EU banks, that could help, so could continued USD weakness.
Softs: Mostly flat or slightly lower.
FOREX Daily Outlook Monday-Midday Tuesday GMT: Clear bias to safe havens. Given that this is a classic risk aversion via the EU debt/banking crisis kind of day, EUR is weakest, JPY strongest
NB: Both BoJ passed on yesterday’s low liquidity chance to sell Yen with minimal investment. Clear signal for no likely intervention until USDJPY gets to around 80, as we argued earlier in our special report on the Yen last week.
US Dollar Daily Outlook: Up vs. the EUR, GBP, commodity dollars, down vs. the CHF, JPY. Boosted by risk aversion widely attributed to yesterday’s WSJ report that the EU bank stress tests understated bank exposure to PIIGS debt. Again this is odd because it’s old news, as is the suspiciously lax standards of the tests, which raised more suspicions than they eased.
Euro Daily Outlook: Down vs. all on a classic risk aversion day generated by yet another in an ongoing series of new bouts of EU sovereign debt/banking crisis fears.
The euro plunged more than 150 points in overnight trade risk aversion widely attributed to yesterday’s WSJ report that the EU bank stress tests understated bank exposure to PIIGS debt. Again this is odd because it’s old news, as is the suspiciously lax standards of the tests, which raised more suspicions than they eased.
Apparently the WSJ article served as a sobering reminder regarding the quality of sovereign debt in the region and corresponding potential instability of the big banks holding that debt. The WSJ article claimed that the tests published in July understated the banks holdings of potentially risk sovereign debt. The Journal noted that, “Some banks excluded certain bonds, and many reduced the sums to account for ‘short’ positions they held-facts that neither regulators nor most banks disclosed when the test results were published in late July.”
Wasn’t this all well known already? Yes, it was.
Perhaps the difference is that it’s a sensitive time for the EZ as peripheral economies in the region prepare for a fresh round of financing this month estimated at 80 Billion euros. If bond markets become more nervous (PIIGS bond and CDS rates are already at/near May crisis levels) we could see a further widening out of spreads between German bunds and bonds of peripheral economies. That would further pressure on the Euro in the days ahead.
As we’ve noted repeatedly, while over the past several months the core economies of Europe such as Germany and France have seen improved economic activity, the recovery has missed the rest of the monetary union, with Greece still contracting under the burden of austerity cuts and Spain mired in a structural recession caused by rigid labor laws and the after effects of the blow up of a massive housing bubble. Regional Spanish banks are dependent on the EU for funding and regional government debt is more serious than that of the national government.
The euro, which has rallied recently vs. the USD based on better data, starts this week down as problems in the periphery economies once again return to haunt it, as they will continue to do until their fundamental problems are addressed with more than bailouts. Additionally, Friday’s better than expected NFPs have moderately eased the worries of a double dip recession in the US, giving the USD a relative lift vs. the EUR.
Remember, for the past years, given the fundamental weaknesses of both the US and EU, the USD and EUR move relative to each other based mostly on which economy is looking worse.
Yen Daily Outlook: Up vs. all after being Down vs. most fx yesterday. Nothing like another bout of EU debt crisis (get used to it) to buck up the JPY and other safe havens.
British Pound Daily Outlook: Down vs. all except the EUR, AUD. No specific news, just continued weakness as fading inflation and employment dim rate hike expectations, such as they were. Austerity will weigh on growth going forward.
Australian Dollar Daily Outlook: Up vs. the EUR, down vs. all others as it suffers from EU induced risk aversion day that punishes only the EUR worse than the AUD.
New Zealand Dollar Daily Outlook: Up vs. the EUR, GBP, AUD, CAD flat vs. the USD, down vs. the CHF
Canadian Dollar Daily Outlook: Down vs. the USD, JPY, AUD, CHF, up vs. EUR, GBP. No related news, though falling oil a likely cause of the relative weakness to the other commodity dollars on a risk aversion day that should favor it over these.
Swiss Franc Daily Outlook: Up vs. all except for the JPY as it continues to perform as the #2 safety fx on this EU inspired risk aversion day. Note the CHF’s ties to the EU are a negative relative to the JPY despite the CHF’s better fundamentals making it arguably more deserving of the #1 safe haven status.
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