Monday, January 30, 2012

MIxed markets as traders watch Europe

After starting the day lower, stocks rallied but Dow was unable to finish in the black.  Dow dropped 6, decliners ahead of advancers 2-1 & NAZ was up 6 (helped by Apple's rise).  Bank stocks were weak all day, taking the Financial Index down 2 to the 188s (still near its interim highs of 191 reached last week). 

MLPs & REITs fell but junk bond funds were mixed.  Risk averse money went into Treasuries, taking the yield on the 10 year Treasury near its record lows of 1¾%.  Oil declined as European leaders sparred with Greece over a 2nd rescue program & US consumer spending stalled.  While bouncing around in the last 2 days, gold ended little changed.

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CLH12.NYMCrude Oil Mar 1298.82 Down 0.74 (0.7%)

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  • Germany's Chancellor Angela Merkel meets with France's President Nicolas Sarkozy and Italy's Prime Minister Mario Monti shortly before an informal meeting of the European Council ahead of the European Union leaders summit in Brussels January 30, 2012.   REUTERS/Bundesregierung/Jesco Denzel/Pool
Photo:    Yahoo

European leaders are struggling to reconcile austerity with growth at a summit that approved a permanent rescue fund for the euro zone & was trying to put finishing touches to a German-driven pact for stricter budget discipline.  But disputes over the limits of austerity, & Greece's unfinished debt restructuring negotiations, hampered efforts to send a more optimistic message that Europe is getting on top of its debt crisis.  Leaders agreed that a €500B euro European Stability Mechanism will enter into force in Jul, a year earlier than planned, to back heavily indebted states.  Europe is already under pressure from the US, China, the IMF & some of its own members to increase the size of the financial firewall.  The risk premium on southern European gov bonds rose while the € fell on concerns about a lack of tangible progress in the Greek debt talks & gloom about Europe's economic outlook.  Highlighting those fears, Spain's economy contracted in Q4 for the first time in 2 years & looks set to slip into a long recession.  France halved its 2012 growth forecast to a mere 0.5%, another potentially ominous sign for President Sarkozy's troubled bid for re-election in May.

  • Nicolas Sarkozy

    Photo:   Bloomberg

    French Prime Minister Fillon said that the country is slashing its forecast for economic growth this year from 1% to 0.5%.  The move enables the gov to "take into account the deteriorating economic environment" before revising the budget with a last-minute package of measures that are to go before the Cabinet next week.  Last week the IMF said it forecasts the French economy to grow only 0.2% this year.  The lower growth figure will have an approximately €5B impact, Fillon said, but he added that this "can be reabsorbed" because of past efforts and a prudent budget.  France is the eurozone's 2nd-largest economy, after Germany, & its lagging finances could weigh on efforts to bail out weaker eurozone countries.  The updated budget is expected to include higher consumption taxes & other measures to cut debts & boost growth.  With presidential elections in Apr & May, the measures must be rushed through a parliament, about to close down ahead of the voting.  One of the measures is to impose a 0.1% tax on financial transactions starting in Aug.  Markets don't like added taxes.

    Sarkozy to Levy Transaction Tax Opposed by Finance Industry, Central Bank

    Morgan Stanley (MS) & Citi (C) are making some of the biggest cuts in compensation for investment bankers, averaging as much as 30%, as they grapple with lower revenue.  MS, owner of the largest brokerage firm, will also cap cash awards & defer more payouts while Credit Suisse (CS) plans to give a portion of senior employees’ bonuses in bonds backed by derivatives.  Citi may cut some bonuses in the securities & banking unit as much as 70 %.  Curbing pay & changing formulas are done to limit expenses, with some giving more stock & less cash.  Revenue shrank last year as mergers & trading slowed.  Bank of America (BAC), a Dow stock, plans compensation cuts averaging 25%, with some cash bonuses capped at $150K & some base salaries frozen.  Goldman Sachs (GS) cut discretionary compensation “significantly more” than the its 26% drop in revenue, CFO David Viniar said on Jan 18.  Times are tough everywhere & these cuts will result in lower taxes paid by the top 1%.

    Morgan Stanley, Citigroup Lead Pay Cuts

    The markets behaved fairly well considering the negative news from Europe & a dismal report on consumer spending.  Negotiations about refinancing the Greek debt are touchy.  A bigger than expected 50% haircut for the bondholders could trigger a default rating by the credit agencies.  This is new to everybody & nobody knows where it will lead.  Unfortunately the bias is strongly on the negative side.  One prominent stock has been immune from the selling of late, Apple (AAPL).  It jumped 5 to 453, yet a another record after reporting a blowout qtr.  Facebook's IPO sounds like it's around the corner, maybe this week.  If so, the market's reception will give a strong indication about its market's appetite for risk.  Treasuries have been surging in the last week, risk averse thoughts are alive & well.

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