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Deutsche Bank Early Morning Reid – July 25

Another day another slew of record levels for markets with the highlight probably being the first ever 10 year US treasury close below 1.4% and the Italian stock market trading through the 2009 lows and closed at its lowest level since Bloomberg’s time series starts in 1997. Spain’s IBEX (-3.58%) fell for its third consecutive day to close below the 6000 mark for the first time since 2003. Spain’s 10yr bond yields rose higher for the 9th consecutive day to hit another euro-era wides, closing near the day’s highs at 7.621% (+12bp on the day).

A weak day for markets (Stoxx600 -0.47%, DAX -0.45%, CAC -0.87%) was rescued just before the close by the influential WSJ journalist Jon Hilsenrath overnight suggesting that Fed officials are getting impatient and are moving closer to taking action if growth fails to pick up soon. The article noted that Fed officials could take new steps at their two day meeting next week (31 July/ 1Aug) though they might wait until their September meeting to accumulate more data before deciding whether to act. Although as our economics colleagues pointed out, Hilsenrath’s conclusion was largely based around recent public commentaries from Fed officials rather than any new insights from the Fed. That probably helps explain the lack of positive follow through in markets overnight, although Apple’s rare earnings miss after the bell has overshadowed the article to some degree.

Nevertheless it seems likely that markets will start to price in some probability of both the Fed and the ECB acting next week but we still think that the Fed may wait until September and that the ECB may wait for Governments to make more progress before they step in. However current stresses make this a close call. If nothing does come out of next week’s meetings the market could be in for a
pretty bad August.

Despite the late respite in US equities (close -0.90% from -1.58% intra-day lows) Apple’s notable earnings miss after the bell is weighing on the trading tone in Asia overnight. The Nikkei and KOSPI are down -0.9% and -0.7% respectively with regional tech stocks negatively affected by Apple. Overnight also saw Moody’s revise its outlook on EFSF’s Aaa rating to Negative following its outlook change on various Aaa core sovereigns yesterday. The UST 10yr yield is unchanged at 1.387% and S&P 500 Futures are (-0.13%) slightly lower.

Back to Europe, yesterday’s session was also weighed down by Greece and it looks like the market is increasingly worried about further debt restructuring. Three EU officials were quoted by Reuters yesterday as having said that the Troika review would likely conclude that a further Greek restructuring is necessary and this time the official sector (ie ECB and eurozone governments) would likely have
to take a hit on the estimated EU200 billion Greek government debt they own for the country’s finances to be placed back on a sustainable footing. One official told Reuters that “Greece is hugely off track” and “The debt-sustainability analysis will be pretty terrible.”

A quick recap of yesterday’s data highlights now. The manufacturing sector in core Europe remains weak according to the latest flash PMI readings. Notably German manufacturing PMI came below market consensus (43.3 v 45.1) to hit its lowest print since June 2009. French manufacturing also disappointed (43.6 v 45.5) to the lowest since May 2009. In aggregate the eurozone manufacturing PMI fell to 44.1 from 45.1, also below the 45.2 expected. Services sector PMIs were mixed with the reading in France recovering above 50 for the first time in four months but with a disappointing reading in Germany (49.7 v 50.0). In the US the Markit PMI preliminary index was a touch softer than expected (51.8 v 52.0) and the Richmond Fed manufacturing survey (-1 v -17) disappointed sharply.

Taking a brief look at the latest beat:miss stats overnight, about two thirds of the S&P 500 companies that reported overnight came ahead of market’s EPS consensus but only a third of them topped sales estimates. So the trend continues and adds further weight that cost discipline might have been the driver for earnings rather than strong top line performance. Whirlpool, Apple and United Parcel Service were also the latest to indicate a slowing demand from Europe over the Apr-Jun quarter.

Looking at the day ahead, the focus will be on results of the ECB third bank lending survey of the year. Any tightening of lending standards may start to give the market hope that the ECB can find justification to roll out another LTRO (or the like). Further headlines out from Athens from the troika mission in Athens will also be closely followed given increasing chatter of another Greek debt restructuring. In terms of key data points today we have the advanced UK Q2 GDP print which is due at 9:30am London time with the recession expected to continue. We also have Germany’s IFO surveys today which may tell us more about momentum in core Europe. In the US, new home sales will be the main release.

Oh and for those wanting to escape before the Olympics overload of the next two weeks or so, I’m afraid you’ve left it too late as today sees the first action of the games two days before the opening ceremony as GB’s ladies take on New Zealand. I cycled to a meeting in
the West End yesterday and central London was gridlocked. The best piece of advice I can give in today’s EMR is if you’re in London for the next two and a half weeks don’t take a taxi. Tube, walk or cycle! More travel news tomorrow. Maybe I should make this even more like a breakfast show and include the weather! The good news is that London is experiencing a sudden and spectacular heatwave!!!.

Jim Reid
Strategist

Colin Tan, CFA
Research Analyst

Deutsche Bank