Market Rallies As US Returns To Growth

European equity markets traded lower this morning adding to yesterday’s declines and following their lead from the US and Asia overnight. Both the S&P and the Nasdaq fell for the fourth straight day amid weaker than anticipated new home sales of -3.6%. The Dow Jones US home construction index fell 5.5%, its worst one day performance since May.

This afternoon, things have gotten a lot better for the indices bulls. US gross domestic product (GDP) rose in the third quarter by 3.5%, better than the expected 3.3%. This was the first time in a year that economic activity expanded nationwide and was the best showing in two years. It’s a clear signal that the economy has entered a new, though fragile, phase of recovery. Buoyed by this, indices are now posting strong gains. The S&P 500 is on track to end its four-day slump. The tech-heavy Nasdaq is up almost twice as much as the broader markets.

Looking at the Dow Jones components, Alcoa (AA), American Express (AXP) and Procter & Gamble (PG), which issued an upbeat earnings report, are leading the gainers this afternoon. On the downside, the index’s biggest percentage losers are drug maker Merck and ExxonMobil, which reported weaker-than-expected results.

Today’s Market Moving Stories

• We know that the worst of the UK housing market downturn was in the final quarter of 2008. As has been clear in the UK mortgage approval and housing transaction figures, activity levels have improved significantly. Official housing start figures released today provide yet more confirmation of this. English housing starts recovered from just 16,210 in Q4 2008 to 21,580 in Q2 2009. of this year. Still a long way to go though before they return to historic averages of 35,000-45,000 per quarter.
• In his prepared testimony to the House Financial Services Committee, US Treasury Secretary Geithner has thrown his support behind the bill to combat systemic risk, which he says “represents a comprehensive, coordinated answer to the moral hazard problem posed by our largest, most interconnected financial institutions. It produces strong, accountable supervision of all our major financial firms and imposes costs not on the taxpayer but with the risk-takers, where they belong.”
• It’s PIMCO’s Bill Gross’s turn to give his thoughts about the US dollar. He says that “the Chinese, the Asians, have owned too many dollars for too long. The dollar becomes more and more owned and less and less desirable, so ultimately the direction is down. I don’t sense stability in the dollar.”
• The people at the Royal Bank of Scotland (RBS) sent out a note to clients saying that “the euro remains in an uptrend, and investors should buy the currency when it weakens. It has dropped back to the middle of its last consolidation zone in late September and early August. In a bigger correction scenario it may make it down to 1.45-ish, but it is no longer a compelling sell, and medium term considerations favour buying dips.” Seems the euro is still the Big Dog so.
• The Reserve Bank of New Zealand met last night, and while they officially removed their easing bias from their monetary statement, they did not come out and outright mention rate hikes. In fact, they said that there was “no urgency to begin withdrawing monetary policy stimulus.” So we could see a weakening Kiwi dollar in coming weeks as their neghbours in Australia do raise rates. Checking out the straggly chart I made below, it does looks like AUD/NZD has broken out of it downward channel. Maybe AUD/NZD is set for a rally?
• US Natural Gas in storage rose by 25bn cubic feet last week, lower than the forecast of 30bn cubic feet. The Natural Gas contract for December is fluttering about, not making much of this latest news with the actual so close to the consensus.
• Airline stocks are generally up today after the International Air Transport Association said international passenger traffic rose 0.3% in September, the first time in a year that traffic has grown.

What’s Going On With The Irish Banks?
The two big Irish banks, AIB and Bank of Ireland, are off about 50% since the euphoria of the NAMA legislation on the 17th of September. Also the two bank’s share prices are hugely underperforming against the rest of their banking industry Why? Well Irish Finance Minister Brian Lenihan is pleading his case first, denying that it’s anything to do with his recent comments about a possible delay in passing the NAMA legislation. He’s probably correct - it’s probably got little to do with that. Then what’s the problem? Ok here are three likely factors:

1. The ING break-up debacle. It seems that the European Commission gets to dictate the terms of the ING break-up, including demands for balance sheet reduction and asset disposals. Many European banks are preparing for this and have scrambled to announce rights issues. However Irish banks seem to have missed the boat. With the number of equity raises by financial firms likely to increase, the ability of the Irish banks to raise capital in private markets has been put into question. If they can’t raise the money, the Irish banks may have nasty terms imposed on them.
2. The Irish banks rally. Let’s not forget that the Irish banks bounced the most from the lows in recent months. For example, Bank of Ireland is still a whopping 1200% off its lows! With the wider sell off in banks, its only fair that the Irish banks give up more of their gains. They are a high beta and high risk trade. When the banking industry goes up, they go up more and when the industry falls, they fall more.
3. The stock market rally may be ending. In recent months, with the raring bull market, traders have simply ignored the mounting newsflow of tougher regulation in the banking sector and higher capital requirements. It’s very difficult to stand in opposition to a steaming bull! But with the sharp fall off in indices this week, traders who have wanted to sell in the past while are now able to take their opportunity with more confidence.

Company News

• Dutch insurer Aegon became the latest European firm to detail plans to reimburse bailout funds, saying it will repay one third of the €3bn it received by November 30. The Dutch central bank has approved the payback, which will come from €1bn raised in a share issue in August. Aegon says it intends to pay the full amount “at the earliest opportunity.” Shares are up a tasty 8.8%.
• Feeling the impact of lower crude oil prices, ExxonMobil’s net income plunged 68% to $4.73bn during the third quarter, missing expectations for the third consecutive quarter.
• But consumer products conglomerate Procter & Gamble (P&G) reported earnings that exceeded analysts’ forecasts, as higher margins and a slight improvement in sales helped boost the company’s results. The giant said it earned $3.3 billion with revenue at $19.81 billion. Shares of P&G are up 4.5% in early trading.
• In its results statement this morning, Lufthansa has announced operating profit of €226m for the first nine months of 2009, way ahead of the consensus of €79m. They have a positive outlook for the year but that remains subject to very considerable risks.
• Independent News & Media released an trading update this morning. Total revenues are 14% behind last year. Circulation is down 2% with advertising revenues down 19%. Operating profit is down 37% yoy. But there has also been a 9% reduction in operating cost. Their restructuring together with previously announced disposals is estimated to reduce debt by up to €350m which will leave the group in a much better position to take advantage of any cyclical recovery.
• Ryanair’s CEO Michael O’Leary has indicated that talks with Boeing are progressing “slowly” and reiterated the carrier’s intention to shelve the 200 additional aircraft requirement as well as cancelling or deferring existing commitments should a deal with the aircraft manufacturer not materialise this year.
• Diageo CEO Paul Walsh has said that the company may boost its dividend if target acquisitions do not come up at the right price. He stated that the Group would be interested in acquiring Moet Hennessy which it already owns a 34% stake and Curevo along with Shui Jing Fangs which Diageo bought a minority share in 2007.
• There are reports that the Irish government is now planning a merger between only EBS and Irish Nationwide, contrary to earlier suggestions of a 5-way merger of Irelands smaller lenders. Irish Nationwide in particular is in need of a merger as its writedowns are estimated to be at least 35% on the loans transferring to NAMA, requiring a capital injection of at least €1bn.

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