Two Day Market Slide, But No Ground Lost

After indices yesterday finished in the red, we’re encountering a rare two day slump. The bulls won’t be running for the gates just yet though as that slide has cost the Dow Jones only 46 points out of its 2,700 point rally. Yesterday’s drop was led by sinking energy stocks and the Nasdaq (^IXIC), which tumbled twice as far as the broader markets. NYSE trader Doreen Mogavero nicely summed up the action by saying “even if they are bullish on the market, people are thinking it’s probably prudent to start taking money off the table. That’s what we’ve been seeing the last couple of days.”

Today’s Market Moving Stories

• European stocks opened lower today with cyclical plays like metals and chemicals producers leading the downturn. The FTSE 100 (^FTSE) opened off 0.6% at 4,664 and the German DAX dropped 0.6% to 5,337.
• The Bank of England surprised markets by pumping an extra £50bn into the economy. That’s an expansion of their quantitative easing by 40%. According to the central bank, the recession is “deeper than previously thought.” Sterling tanked in response with GBP/USD falling 1.25%, back under $1.68 after starting the day at $1.70.
• Obama was on the defensive last night saying that his administration’s economic policies helped stop the economic freefall. Putting a positive spin on things, he also said the country is seeing the “very beginnings” of the end of the economic recession and that the financial system was no longer on the verge of collapse.
• US retail continues to be extremely weak with an 11th straight month of declining same-store sales. Macy’s (M), Costco (COST) and Target (TGT) were the worst of a bad bunch this month, all reporting worse-than-expected sales declines.
• The US “cash for clunkers” programme, which pushed July car sales higher after a record-breaking slump, tripled in size on Thursday as the Senate, voting 60-37, extended it by $2bn.
• Official figures show that Germany’s trade surplus soared in June to €12.2bn, up more than 28% compared with May, as exports soared by 7% in the month.
• Morgan Stanley (MS) said it inked a deal with the government to repurchase its TARP warrants for $950mln. The bank said the deal provides taxpayers with a 20% annualised return. I wonder if any of the Irish or UK banks will be providing us with such a return.
• Royal Bank of Scotland slumped 8% at the open as the taxpayers’ bank said first-half impairments surged to £7.5bn from £1.5bn and said impairments will remain at elevated levels. Overall they posted a £1bn loss after the market had forecast a £1.2bn profit for them. Not good, not good at all, especially as other UK high street banks had posted relatively decent numbers earlier in the week.
• Fannie Mae (FNM) needs yet more money, planning to tap another $11bn in government aid after posting another massive quarterly loss as the housing market bust keeps growing. Although AIG (AIG) seem to have wrapped up the biggest Black Hole award, Fannie Mae could push them close if they keep going like this. No relief for the taxpayer as Freddie Mac (FRE) are expected to report its results today.

More Trouble Ahead For US Housing
According to one of the world’s biggest banks Deutsche Bank, 48% of US mortgages will be underwater by 2011. They claim that the number of US mortgages worth more than the actual value of homes is going to double in the next couple of years with the bank especially worried for prime and jumbo borrowers. 41% of prime borrowers will be underwater by 2011, up from 16% at the start of this year. Jumbos will be even worse, with a 46% underwater rate. “The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding”. Deutsche Bank is expecting home prices to fall another 14% by 2011, for a total crash of 41%.

Data Today
Starting today off, we have UK PPI (Producer Inflation) at 09:30. The market expects a fall of about -1.7%.

At 11:00, German Industrial Production is released. While the year-on-year (YoY) fall is going to be about 17.7%, production in June is expected to have risen 0.5% from May, which itself rose 3.7% from April, so an encouraging couple of months.

There’s a chunk of Irish data also released at around 11:00, including CPI, Total Persons on Live Register and the Unemployment Rate. This data won’t move the market and is likely to be quite depressing, so you may want to give it a miss.

Later at 13.30 is the biggie - US NonFarm Payrolls. It is considered by most economists to be about the most important economic indicator, and certainly, its immediate aftermath creates a high level of volatility. Expect more volatility today as there is a wide range in estimates. The official consensus is for a -325K drop, but Goldman Sachs is forecasting a mere -250K fall. They upgraded their expectation yesterday evening from a previous guess of -300K after watching US Initial Jobless Claims fall by 38K to 550K last week. Economists had been predicting claims would rise by 1K. So watch out for a better-than-expected NonFarms surprise.

The latest US Unemployment rate will be announced at the same time as the NonFarm Payrolls and the market thinks that it will tick up to 9.6% from 9.5%.

We’ve earnings today from three bailed out financial institutions - Royal Bank of Scotland from the UK, Hypo Real Estate in Germany and AIG from the US. Other than those basket cases, there are earnings from Allianz, Puma, Kazakhmys and LogicaCMG.

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