insto - Australian financial markets

"Never waste a good crisis" is advice usually attributed to Machiavelli, but German Chancellor Angela Merkel and her finance minister Wolfgang Schaeuble appear to have adopted it as a mantra. One would assume the German financial services regulator, Bafin, would have anticipated the likely market reaction to Germany's  ban on naked short-selling of German-listed securities and CDS transactions. Was it moralising desperation as claimed by commentators, or is there another explanation for this precipitate action?

Treasury boss Ken Henry's 1000-page review of Australia's tax system is due to be released ahead of the May 11 Federal Budget, and Treasurer Wayne Swan says some of its recommendations are “unacceptable”. 

The Australian labour market has posted another solid performance, with employment rising by 19,600 net jobs in March and the jobless rate unchanged at 5.3 percent. The trend for part-time workers coming back to full employment seems to be continuing, with full time employment up by 30,100 and part-time down by 10,600. CommSec economist Craig James noted that the results showed a 0.6 percent fall in hours worked, after a 2.2 percent increase in February.

The big economic news for the week was on the jobs front, with the February unemployment rate coming in at a seasonally adjusted 5.3 percent, up 0.1 percent on January.

Highlights from the preliminary Thomson Reuters Capital Markets Review for Q4 09 and the 2009 year in review include the following:

• IB fees at lowest annual activity level since 2004: With an estimated US$67.4bn earned in 2009 global investment banking fees (IB fees) are down 10 per cent when compared to last year. It is also the lowest level of annual activity since 2004 (US$67.2bn). Q4 figures do not fare any better down 7 per cent when compared to last quarter.

Risk aversion took hold of markets once again, as fears over Citigroup’s future, US interest rates and Greece’s sovereign ratings downgrade shook traders, who had been hoping to hold onto profits in the slow slide to year-end.

It was a bad day for US financial stocks, with Citigroup one of the hardest hit after the bank priced its US$17bn stock offering below market expectations, forcing the US Treasury Department to back out of a plan to sell some of its 34 per cent stake.

Treasury Assistant Secretary Herbert Allison said the government will unwind its stake in Citigroup, which it values at roughly US$26.5 billion, in the next six to twelve months. Allison's comments came from prepared testimony for his appearance before a House oversight subcommittee.

Bank of America was also among the losers of the financial sector after the bank picked a successor for outgoing CEO Ken Lewis. Bank of America fell 2.4 per cent after the bank late Wednesday named consumer banking head Brian Moynihan as its next CEO, replacing Ken Lewis, who will retire at the end of the year.
 

US market indices

US equity markets lost around 1.2 per cent in value across the board. The Dow lost 133 10 points to 10,308, the S&P 500 dropped 13pts to1,096 and the Nasdaq shed 27 pts to 2180.
 

US bonds

A view that, with Bernanke at the helm, the fed will keep interest rates low helped propel Treasuries to session highs while yields were on track for their biggest one-day drop in about eight weeks, reported Reuters. US benchmark 10-year Treasury notes last traded up in price, with yield, (inverse to price) at 3.49 percent, down 11 basis points from late Wednesday. 30-year bonds traded up with yields at 4.44 per cent, down 9 basis points on the day, said Reuters. US 2-year yields lost 8 points to 0.79 per cent.
 

Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors, summed up the past week, and looks ahead to the week commencing 14 December, as follows:

The past week has seen worries about high sovereign debt in several countries and softer economic data from Europe and Japan weigh on investment markets. Our assessment is that sovereign debt problems are significant, but they are more likely to be speed bumps that will slow the recovery in key advanced countries rather than stop it. The good news is that Australia and most Asian countries (excepting Japan) don’t have much in the way of public debt.

Sovereign debt concerns continued to weigh on European markets, with Spain the next target in the ratings agencies’ sights. US stocks shrugged off the news, though, with major indices half a percentage point higher at close of trade, led by information technology and financial shares.

The Dow was at 10,335 (+49); Nasdaq on 2,184 (+11) and S&P 500 at 1,096 (+4).

US bonds
US treasuries eased modestly on Wednesday (yields higher) following an unexpectedly weak US$21 billion auction of 10-year notes, but continued risk aversion by investors stabilised prices, CBA reported. US 10yr yields rose by 4pts to 3.42pct with US 2yr yields up 2pts to 0.74pct.

Figures released overnight show the US services sector contracted in November, even as Bank of America, its largest bank by assets, prepares to repay TARP funds. The surprise announcement from BoA that it will repay US$45 billion of government bailout money caused a temporary rally, before the ISM sector index printed at 48.7.

US markets dropped in response. By the close, the Dow was 10,366 (down 87 points); the Nasdaq had fallen 12 pts to 2173 and the S&P was trading at 1100 (down 9 points).

US stocks rose on positive economic news, while a weakening dollar gave commodities a boost. Near the close, the Dow was trading at 10,472 (up 127 pts, or +1.22 per cent); with the Nasdaq up 31 to 2,176 (+1.46) and the S&P 500 up 1.2 per cent.

Hopes rose that the Dubai World crisis will be contained, with news overnight (US time) that the Middle East conglomerate was “in the process of restructuring” US$26bn in debt. Although no details were given, this is much less than the US$59 bn originally mentioned. Part of the rise was on the back of several pieces of good news – US established home sales rose again for the fourth consecutive month; and the US ISM manufacturing index printed at 53.6 per cent (down from 55.7 per cent in October), indicating overall growth among US manufacturing firms.