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Daily Comment
Subscribers receive an email every morning with topical commentary on market newsflow. Daily Update 26 March 2010
From Reuters: Japan's Nikkei average climbed 1.6 percent to its highest close in 18 months on Friday as recent weakness in yen buoyed exporters, and helped by investors looking to secure dividends before the financial year end. Tokyo shares have gotten off to a solid start in the first quarter after lagging overseas indexes last year. Expectations for improvements in corporate earnings and steady buying by overseas investors who were underweight last year have boosted the Nikkei 4.3 percent for the year to date, compared to a 1.9 percent gain in MSCI's index of global equities. Shares in a broad swathe of sectors climbed on Friday, including chip-linked shares such as Advantest and Tokyo Electron, which extended recent gains made on the hopes of strong earnings and improving demand. The dollar's rise against the yen this week gave a boost to exporters, and a dearth of aggressive selling ahead of the financial-year end seems to be lending support to the broader market, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "It's hard to tell what will happen once we are in April, but it seems like there are not many people in the market looking to sell before the end of the fiscal year," Ogawa said. I took a contrarian view on Japan coming into 2010, and so far, so good...I'm speaking at a conference in Tokyo in a few weeks so it will be a useful opportunity to take the pulse of local investors. The currency is key for further equity momentum; rumours abound that Japan's Post Bank has been playing the USD/JPY cross (currently just below 93) under direction from the MOF in a campaign of stealth intervention, and I still expect to see it punch through 100 by year-end. From the WSJ: Democrats dragged themselves over the health-care finish line in part by repeating that voters would like the plan once it passed. Let's see what they think when they learn their insurance costs will jump right away. Even before President Obama signed the bill on Tuesday, Caterpillar said it would cost the company at least $100 million more in the first year alone. Medical device maker Medtronic warned that new taxes on its products could force it to lay off a thousand workers. Now Verizon joins the roll of businesses staring at adverse consequences. In an email titled "President Obama Signs Health Care Legislation" sent to all employees Tuesday night, the telecom giant warned that "we expect that Verizon's costs will increase in the short term." While executive vice president for human resources Marc Reed wrote that "it is difficult at this point to gauge the precise impact of this legislation," and that ObamaCare does reflect some of the company's policy priorities, the message to workers was clear: Expect changes for the worse to your health benefits as the direct result of this bill, and maybe as soon as this year. The numbers flying around on the ultimate costs of the healthcare bill would give anyone a headache (which for an insured American would probably necessitate a CAT scan and exploratory neurosurgery) but while a marginal hit on corporate earnings overall, the impact on small company payroll costs will be a major drag on an employment recovery. Employers take an 8% penalty on total payroll if they do not provide a "qualified insurance plan" and pay at least 72.5% of the cost, and it's a good bet that the healthcare provision 'fine' will be a lot higher in a couple of years. It was a huge mistake to extend coverage before controlling industry costs, and the fact the legislation dropped the public option at the last minute means that the upward spiral in healthcare costs will continue unabated, which may be one reason those Treasury auctions stumbled this week.
From Bloomberg: European leaders put the International Monetary Fund on standby to help aid debt-stricken Greece, shrugging off the European Central Bank’s plea that Europe solve the crisis on its own. Leaders of the 16-nation euro region endorsed a Franco- German proposal for a mix of IMF and bilateral loans at market interest rates, while voicing confidence that Greece won’t need outside help to cut Europe’s biggest budget deficit. “It’s an extremely clear political message,” European Union President Herman Van Rompuy told reporters after the leaders met in Brussels late yesterday. “It’s a mixed mechanism but with Europe playing the dominant role. It will be triggered as a last resort.” European leaders sought to bury concerns that divisions over aiding Greece would escalate the debt crisis and further undermine the euro after it sank to a 10-month low against the dollar. After objecting to a possible IMF intrusion on the $12 trillion euro-region economy, the ECB endorsed the package, with President Jean-Claude Trichet saying that European governments will remain in control of the process. Germany has got its way on any potential bailout (and this deal is only to apply in extremis), which is on strict terms with the IMF deeply involved. Ultimately, Greece remains very likely to go bankrupt over the next few years, simply because he country lacks the political and economic cohesion to take the decade plus of brutal austerity that this plan assumes, and the endless squabbling among its euro zone partners shows there is no real appetite to indulge Greek fecklessness. From the FT: US natural gas prices dropped to a six-month low on Thursday amid concerns about growing supply and weak demand as seasonal temperatures rise. Nymex April Henry Hub fell 13.5 cents, or 3.3 per cent, to 3.970 per million British thermal units after US gas stocks rose for the first time this year with inventories up 11bn cubic feet, slightly above the consensus market forecast. US gas stocks usually do not start to rise until slightly later in the year but mild weather in March has dented demand. Gas prices have dropped 28.8 per cent this year. Low gas prices could encourage some US power generators to switch from using coal, which would provide a boost to gas demand. However, traders remain concerned about possible oversupply as the number of rigs drilling for natural gas reached a 13-month high at 939 last week, according to Baker Hughes, the oil services company. The gas price is a victim of the industry's amazing productivity, which adds new reserves on a monthly basis and the US now has about a century of natural gas at current usage rates. The gas/crude ratio is getting back to extreme levels, and open interest in the oil market is at the highest levels since the bubble burst in mid 2008, with net length (bullish bets) by large speculators in crude and oil products four times higher than the same time a year ago. Sounds like the dollar back in early December... Sean Maher
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