- Observers are wondering whether the financials-driven rally has hit a wall
this morning as equity markets sink despite Bank of America's impressive Q1
earnings performance. Various commentators have offered cautious comments this
morning, with Fed Chairman Bernanke noting that the global economy is still
facing usual turbulence and the Obama Administration's Larry Summers saying
that "substantial risks" remain in the economic recovery process. In
a sign of extreme skittishness, dodgy dealer chatter circulating before the
bell saying that an unknown blog had obtained published results of the stress
tests actually prompted a rebuttal from the Treasury. A Treasury spokesperson
said the results of the testing aren't in yet, even though the integrity of
this blog source was severely doubtful. Concern over the global outlook weighed
on NYMEX crude, with the front-month contract down nearly $4/barrel, around
- Treasury prices are rallying on risk aversion bids pushing the 10-year yield
back below 2.85%. GILT prices surged following the BOE's latest reverse auction
results which showed a paltry bid-to-cover ratio of 1.83 times. Two-year swap
spreads in the US moved out to their widest level in a month while EuroDollar
futures were also under some pressure early as concerns swirled ahead of the
stress test details scheduled for release on Friday.
- Bank of America
improved on the performances from competitors JP Morgan, Goldman Sachs and Citi
last week, reporting Q1 earnings that were an order of magnitude better than
expected and blowing out revenue targets by nearly $9B. But analysts are
focusing on other aspects of the bank's performance, such as its hefty $13.4B
provision for credit losses, rising net charge offs and a big gain in
non-performing assets. And on the conference call CEO Lewis was hardly
positive, noting that credit is bad and credit conditions are expected to get
worse. Lewis warned the bank's reserves will keep building over next few
quarters, an expensive choice in the short term that will pay long term
results. Note that overnight Citi confirmed it is closing bidding for its Nikko
Cordial unit today, with bids in from Mitsubishi, Mizuhi and SMFG. Teh sale of
Nikko Cordial includes part of Nikko Citigroup, but Nikko Asset Management is
not part of the transaction. Overnight the WSJ reported that lending from top US
banks has continued to decline, with February loan and refinancing activity
from the largest TARP recipients down around 23% from October levels. Shares of
Citi and BoA are down 14% in early trading.
It's been a big morning for M&A, with a couple of headline deals moving
markets. Oracle surprised observers (and likely blindsided IBM) by offering
$9.50/shr in cash for Sun Microsystems in a deal valued at $7.4B. Oracle
expects the acquisition to be accretive in the first full year after closing;
both boards have unanimously approved the transaction and the deal is
anticipated to close this summer. The pharma tie-up dance continued, with
GlaxoSmithKline buying the privately-held Stiefel Labs for $3.6B in cash, debt
and other payouts. Siefel, which is partially owned by the Blackstone Group,
had been reportedly pursued by several other major drug companies such as Johnson
& Johnson and Novartis. The biggest deal
of the day is a family affair, with PepsiCo offering to buy up its bottling
partners Pepsi Bottling Group and PepsiAmericas, for $29.50/shr and $23.27/shr,
respectively. The two deals, which would give PepsiCo control of 80% of its
North American distribution volume, are worth a total of around $9B. Also note
that Chesapeake Utilities signed an all-stock deal to pick up Florida Public
Utilities for $12.20/shr.
- In other earnings news, PepsiCo beat Q1 earnings estimates and reaffirmed its
full-year forecast. The company noted that carbonated drink sales improved on a
sequential basis and expects operating profits to improve in the second half of
2009. Oil services major Halliburton offer solid Q1 performance, a bit ahead on
the bottom line and a bit behind the Street on revenue. Executives warned it
remains unclear when the continuing decline in industry activity will bottom
out. Toymaker Hasbro was also in line with EPS estimates and a bit behind on revenue,
but noted that it is on track to grow both in the rest of the year.
- In currency trading, risk aversion came on strong in the New
York session as the USD and JPY firmed against their
respective majors, with the EUR/USD finally breaking through the 1.2950 support
level seen earlier today to test below 1.29. The EUR/JPY cross was off over two
big figures at 127.00, while GBP/JPY was off 400 pips at 142.80 by the mid-New
York morning. The risk aversion theme was set in
motion by a interview with IMF Director Strauss-Kahn published in German
newspaper Handelsblatt. Strauss-Kahn said the global growth forecast due from
the IMF later this week would be worse than the 0.5% contraction seen in the
prior report. The dealer chatter regarding the spurious bank stress test blog
posting didn't help either. USD/CAD was around 1.2360 as a result of lower
energy prices. AUD/USD is hovering above the 0.70 area. Note that GBP continued
to be hampered by its upcoming budget release on Wednesday; GBP/USD is around 1.45.
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Tue 17 July 2018 AA 08:30 GB- Employment A 13:15 US- Industrial Production AA 14:00 US-Powell Testimony Wed 18 July 2018 AA 08:30 GB- CPI A 12:30 US- Housing Starts/Permits AA 14:00 US-Powell Testimony Thu 19 July 2018 AA 1:30 AU- Employment AA 08:30 GB- Retail Sales A 14:30 US- EIA Crude A 12:30 US- Weekly Jobless Fri 20 Jun 2018 A 12:30 CA- CPI/Retail Sales
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