14.06.12 – On Europe, Japan, telco capex. GS on the markets pricing a new disaster? MS: what Europe really needs. Burger King’s new bacon ice cream.

Bonjour

Europe set for lower start as Moody’s cuts Spain’s Govt bond rating to Baa3 and keeps on review for further downgrade. Moodys also cuts Cyprus’s rating. Asia lower weighed by financials as Greek elections loom and ahead of Italian bond auction today. FT says France pushing EU to adopt financial stability package which may include measures to put ECB in charge of bank supervision + use ESM to recapitalise banks directly. German coalition Gov’t + opposition still unable to agree stimulus measures, although along with EU partners, agree on transaction tax. Macro eyes on US CPI + Weekly jobless claims + Eurozone CPI.

Greek banks to stay under strong pressure as Credit Agricole says it’s making plans to sell Emporiki.

AFTER MARKETS

Moody’s cut the ratings on Spain from A3 to Baa3, ie 3 notches downs and just one above junk.

Stocks struggled in the back half of today’s session and the S&P closed out the day off ~80bp. There really weren’t many incremental trends or themes and a lot of the same trading characteristics remain relevant: stocks are extremely headline sensitive, fastermoney is dominating flow, every S&P tick is being closely scrutinized, and single-stock cash is still very quiet. There were a slew of headlines in the back-half of the session that were cited for the weak close, inc: 1) US official calling the G20 next week a non-event, 2) EU’s Almunia warning of a failed Spanish bank, 3) BHP cutting commodities price outlook 4) Greek deposit outflows accelerating says WSJ, 5) Credit Agricole planning for a Greek exit per WSJ 6) Egan-Jones downgrading Spain

Liquidity and volumes remain very thin and it doesn’t take much to move this tape a few handles in either direction. DXY ended off its worst levels of the session though still ended the session with a loss of ~0.35%

As the SP500 sold off into the afternoon, Materials, Industrials, and Consumer Discretionary all ended up lagging the market while the BKX and some of the historically defensive groups (e.g. Healthcare, Telecom Services) held in a bit better than the broader tape.

CURRENT THEMES

On Europe

We may get a new acronym after all, as apparently, German officials say that Angela Merkel may be adopting a softer tone regarding the creation of a European Redemption Fund (ERF), a “sinking fund that would pay down excess sovereign debt in the Eurozone”. Debt crisis: Germany signals shift on €2.3 trillion redemption fund for Europe – Telegraph http://bit.ly/Lablsl

France seeks Eurozone stability package (see the FT: http://on.ft.com/MCnp0j) ahead of the EU summit on the 28th. Paris would like the ECB to to be in charge of banks supervision and the ability for the ESM to directly recapitalise the banks.

On Japan

While investors get really depressed in Europe and start to really worry aboutht eUS fiscal cliff, things seem to look better in Japan. Core orders beat exppectations in April. The reconstruction demand is holding firm and capex is growing.

On Capex

May be not the right section here, but there is a very interesting report by Nick Delfas (MS) on the need for huge capex investments in the telecoms industry with the rise of smartphones and tablets. He thinks a 20% capex increase could lead to 80% uplift in equity value (of the players who can grab the data flow).

STRATEGY

GS (Wilson) Global Economics Weekly

Are markets priccing a rare disaster?

In this paper, GS writes about low probability events with severe consequences. Apparently, the market was pricing worse “rare events” in 2008 and 2009, but GS thinks the worst thing now is the prolonged stagnation of major economies.

MS (Fels) The Global Macro Analyst

Euro 2012: The Final

What Europe really needs accroding to Fels and Anreopoulos:

– Fiscal Union

– Banking Union

– a lender of last resort.

All the detail sin this 2 pager. As Mr Fels say, these are formidable poitical obstacles but not insurmountable. But things may need to get worse before the political will is really switched on moving things…

OTHER STUFF

Burger King: The new bacon ice cream sundae offered in three month promotion by fast food chain | Mail Online http://bit.ly/KWPANd

Italy Aims To Sell €4.5 Billion As Borrowing Costs Surge – Business Insider http://read.bi/LCVLEn

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