Asian stocks hits 12-week high as Euro Climbs - US Dollar Slides

Market Update
Wednesday, 28, 2010

Asian stocks are hitting a 12-week high on Wednesday and the euro inched ahead as investors took comfort from solid U.S. and European company earnings, while the Australian dollar eased after a sharp slowdown in inflation.

Major European stocks (^FTEU3 - News) rose 0.4 percent in early trade, after shares hit a five-week closing high a day earlier as several European firms beat earnings forecasts.

Germany's economy minister said on Wednesday that his country now has a sustainable recovery, further boosting market sentiment.

The MSCI index of Asia Pacific ex-Japan stocks (^MIAPJ0000PUS - News) gained 0.4 percent to its highest since May 5, largely shrugging off a fall in U.S. consumer confidence to its lowest since February.

Japanese stocks (Osaka:^N225 - News) jumped 2.7 percent, helped by stronger earnings and a weaker yen.


US Markets closed flat

Tuesday, July 27, US markets had to digest a lowered consumer confidence report, but showed mild gains. The S&P snapped a three-day winning streak after mixed earnings reports and as a fall in consumer confidence showed worries over the U.S. job market persisted.

In recent weeks, largely positive earnings reports had eased concerns that the global economy may stall in the second half as fiscal stimulus runs out and austerity programs hit consumer spending.


CDS Indexes Give Up Early Gains On Low Consumer Confidence

Closely watched credit derivatives indexes started giving up their early gains as midday EDT approached Tuesday, after U.S. economic data was marginally weaker than expected.

The Conference Board, a private research company, said the Consumer Confidence Index fell to 50.4 this month, lower than the 50.8 expected and 54.3 in June. James Knightley, economist at ING Bank NV said the data support his view that U.S. GDP growth will be significantly lower in the second half of 2010 from the first half.

At the time of the close of European equity markets, the Dow Jones Industrials Average was flat at 10,526.87.

While the weakening was only modest, it sent spreads wider on five of the key credit default swap indexes. The Markit CDX North American Investment Grade Index lost 4 basis points from its opening level to trade at 102.96 basis points as of 11.30 a.m. EDT.

In the United States, 78 percent of the 175 companies in the benchmark S&P 500 index (^SPX - News) have reported earnings above analysts' expectations, according to Thomson Reuters data.

While strong earnings have buoyed markets in recent weeks, the reporting season is nearing an end. Investors may then turn their focus back to the slowing U.S. economy.

Yale University economist Robert Shiller, a well-known prognosticator in real estate markets, told Reuters Insider on Tuesday that the U.S. economy could enter into a double-dip recession as growth stalls.

"For me, a double-dip is another recession before we've healed from this recession ... the probability of that kind of double-dip is more than 50 percent," Shiller said.


Nymex Crude Falls Back From $80/Bbl Barrier

Crude futures retreated from early gains Tuesday that had traders again failing to reach $80 a barrel, leaving oil to fall into the red on weakening economic data and indecisive equities markets.

Light, sweet crude for September delivery settled down $1.48, or 1.9%, lower at $77.50 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded $1.31 lower at $76.19 a barrel.


Gold Declines

Gold futures dove to three-month lows, as relative calm across financial markets focused attention on recent outflows from the yellow metal.

"It seems asset markets are stabilizing," said Michael Gross, broker and analyst with OptionSellers.com in Tampa, Fla. "That money that moved to gold for shelter" is flowing back into markets perceived as riskier.

Gold futures for August delivery settled down $25.10, or 2.1%, at $1,158 on the Comex division of the New York Mercantile Exchange, the lowest settlement price since April 26, 2010

September silver fell 57.4 cents, or 3.2%, to settle at $17.626 an ounce. Nymex October platinum fell $19.10, or 1.2%, to $1,536.70 an ounce. Palladium for September delivery fell $8.45, or 1.8%, to $466.55 an ounce.


IMF Visit Greece Amid Protest

A delegation of European and International Monetary Fund officials began a two-week visit to Greece to determine whether it was eligible for the next installment of the bailout package as a truckers' protest shut down traffic.


EURO-ZONE LOAN GROWTH PICKS UP

Monetary trends in the euro area brightened, as the pace of credit growth to the private sector edged up to its highest rate in nearly a year.

U.K. BACKS TURKEY EU MEMBERSHIP

U.K. Prime Minister Cameron said that he would push strongly for Turkey to become a member of the EU, saying the country is crucial for the region's trade and security.


French Jobless -0.3% In June, First Drop Since March

The number of jobless people looking for work and unable to find it in France eased in June for the first time since March, as the longtime trend in rising unemployment continued to fluctuate.

Joblessness edged 0.3% lower in June to 2,691,000 million people from May's 2,699,600, the government's Pole Emploi division and DARES employment statistics agency said Tuesday.

June's figure was still up 6.9% on the year, though, reflecting the fact that unemployment remains stubbornly high.

European stocks closed higher Tuesday led by a surge in the banks sector after investors breathed a sigh of relief that future bank regulations won't be quite as tough as anticipated.

Strong bank earnings from UBS and Deutsche Bank also boosted sentiment among financials. But it was the latest update of the so-called "Basel III" rules that drove bank stocks. The revised banking rule proposals, while tougher than current requirements, aren't nearly as draconian as the initial proposals announced in December.

French banks in particular benefited from the changed. Credit Agricole soared 10% to EUR10.63, Societe Generale surged 11% to EUR44.23 and BNP Paribas jumped 5.5% at EUR53.80. The Stoxx 600 Europe banks index closed up 4.7% at 225.40.

Regionally, the pan-European Stoxx 600 index rose 0.4% to 258.11. The U.K.'s FTSE 100 added 0.3% to 5365.67 and Germany's DAX gained 0.2% to 6207.31. France's CAC-40 finished 0.8% higher at 3666.40.


Rebuilding Confidence In Europe

Europe's governments appear to have regained the confidence of investors. Can they now get consumers to follow suit, and offset some of the effects of upcoming austerity?

Recent data are encouraging. Tuesday brought a rosy picture from Germany, where economic expectations surged to the highest level since October 2007 according to the GfK consumer survey. While U.S. consumer confidence data again disappointed, last week's euro-area flash consumer confidence number for July showed a near-record monthly gain, J.P. Morgan points out, and at -14.1 is at its highest level since the recovery started.

ECB To Drain EUR60.5 Bln At Weekly Deposit Tender Tuesday

The European Central Bank said Monday it intends to drain EUR60.5 billion from the money market at its weekly auction of one-week deposits Tuesday. As has been the case since May, the ECB is withdrawing through this operation the money it injects into the market with its purchases of euro-area sovereign bonds through its Securities Markets Program.

The ECB said it settled the purchase of EUR176 million in bonds last week under the program, down from EUR300 million the previous week.

The volume of bonds bought has been gently declining since the mid-May, when fears about the short-term refinancing needs of euro-area sovereigns receded as the EU and ECB put in place measures to ensure that no member state would default.

The program is a contentious issue within the ECB's top management, with Deutsche Bundesbank President Axel Weber, in particular, having distanced himself, citing its "substantial risks to stability." Website: http://www.ecb.int

Germany is in a unique position to benefit from the crisis because of its stable financial position and export strength. It is also not tightening fiscal policy this year and unemployment is falling relatively quickly. Other euro-zone countries may need consumers to take more of a leap of faith.

In Spain, where unemployment is already close to 20% and efforts to reduce the deficit sharply will weigh further on consumers. Spanish consumer confidence plummeted in May but advanced slightly in June. Further improvement in sentiment could start to reduce the household savings rate, which has rocketed to 18.5%. A reduction of 2.5 percentage points in the savings rate, leaving it still far above pre-crisis levels of around 11%, could give a 1.5-percentage-point boost to GDP, something the Spanish government is banking on in its assumptions, says one official.

With Spain the biggest beneficiary of the European bank stress tests and with fears over its sovereign funding receding quickly, the picture could improve. Encouragingly, in Ireland, where austerity is also biting hard, consumer sentiment has improved steadily.

Of course, there are big headwinds. In some countries, such as Greece, additional tax hikes take effect in the second half and will be a further burden. Consumers, although reassured that a government debt crisis has been averted, may yet grow weary of budget cuts and fear tax rises. But European Central Bank President Jean-Claude Trichet looks right in pushing for a degree of austerity. If handled right it could become the source of vital confidence.


Latin America Could Fill India's Commodity Needs

India's rapidly growing economy and shortage of natural resources relative to other large countries makes it a prime trade partner for Latin America, the Inter-American Development Bank said Tuesday in a new study.

"With 1.1 billion people and a scarcity of natural resources...India has the potential to be a large buyer of agricultural and mineral goods, Latin America's main exports," the bank said. Weakening monsoons and limited land has made crop production and development of other raw materials a challenge for India in recent years.

The building of mining plants in the subcontinent's mineral-rich eastern states has also been difficult amid protests that claim such projects will destroy the country's last surviving forests and the livelihoods of tribal populations.

In a bid to help Indian companies secure more resources abroad, government officials are even considering the creation of a sovereign wealth fund.

Latin America has the potential to fill this void but countries in the region, as well as India, must lower tariffs and trade barriers, the IDB said.


South America - Regional tensions rise

Hugo Chávez oil threats: Why Chávez won't cut off oil to the US Venezuelan President Hugo Chávez threatened to cut off oil to the US on Sunday. The latest Chávez oil threat comes amid a rising diplomatic spat with neighboring Colombia, a staunch US ally in the region.

Venezuelan President Hugo Chávez addresses a meeting of United Socialist Party (PSUV) in Caracas July 25. Chávez threatened on Sunday to cut oil supplies to the United States in case of a military attack from Colombia as a dispute escalated over charges his country harbors Colombian rebels.

“This has been said so many times, it has lost its weight,” says Elsa Cardozo, an international relations expert at the Universidad Metropolitana in Venezuela's capital, Caracas. “The US is so important to Venezuela for energy exports, the idea would be suicidal.”


Ecuador's 1Q Fiscal Surplus $902M Vs $596M Deficit Year Before

Ecuador's central government posted a fiscal surplus of $902 million during the first quarter of 2010, compared with a deficit of $596 million in the same period of 2009, the Central Bank said Tuesday.

The January-March surplus is equal to about 2% of Ecuador's $54 billion estimated gross domestic product for 2010. The report said revenue totaled $3.6 billion while total expenditures were $2.7 billion. This compares with $2.1 billion in revenue and $2.7 billion in spending a year earlier. According to the central bank report, higher oil prices increased revenue.


Brazil Finance Minister Sees $45B-$48B Current Account Deficit

Brazil faces a sharp rise in its current account deficit in 2010, but the increase doesn't spell a threat to Brazil's overseas accounts or its booming economy, Finance Minister Guido Mantega said Tuesday.

Mantega predicted a current account deficit in 2010 that will be between $45 billion and $48 billion. The current account deficit in 2009 was $24.3 billion. Mantega made the comments to reporters and was quoted by the local Estado news agency.

"The deficit does not represent any kind of threat," said Mantega. "It does not threaten economic growth. On the contrary, it is the result of economic growth." Mantega said growth in the deficit was coming mainly from an increase in imports due to Brazil's booming economy.