Stronger Banks, Weaker USD, Oil, Treasuries

By Rudi Filapek | More Articles by Rudi Filapek

The Dow closed up half a percent (53.51) at 10,680.77, the S&P500 gained 9.47 pts (0.83%) to 1145.69 and the Nasdaq bounced 1.12% (25.59 pts) to 2307.90.

The Australian SPI 200 Mar 10 futures contract is up 13 points or 0.3% to 4865.

US bank stocks enjoyed a positive day on Wednesday (US time) following sell-offs earlier in the week as plans about an extra tax for the sector by the Obama administration had been leaked to the press.

Bloomberg managed to convince an anonymous source in the administration to spill some more juice on the topic, allowing the news service to report that President Barack Obama will tomorrow announce his intention to impose a fee on more than 20 of the largest banks and financial institutions to help recoup rescue funds and trim the federal budget deficit.

More ominously, perhaps, is the fact that these fees may be collected for as long as ten years.

The news didn’t deter investors to start buying financial stocks again. As reported in Tuesday’s Overnight Report, US banks are expected to grow their profits at the fastest rate of all sectors over the next year(s) and one might assume that an extra tax will only temper the strong growth outlook, not destroy it. Such a logic inevitably means there’s value up for grabs, hence why investors resumed buying financial stocks last night.

The renewed interest in US financials ignored weakness in European banks and financials earlier in the day, as Societe Generale, France’s second-biggest bank, announced 1.4bn euros in writedowns and provisions on risky assets. European equities rose for the first time in three days as gains by technology shares overshadowed the overall retreat in banks stocks. The DJ Euro Stoxx 50 rose 0.1% to 2978, the German DAX gained 0.3% to 5963, but the FTSE was 0.5% lower at 5473.

Telecom stocks and the energy sector remained largely out of favour, while technology stocks were boosted by positive research reports in Europe. Analysts at Goldman Sachs added German chip manufacturer Infineon Technologies (once upon a time a division of Siemens AG) to its Conviction Buy List, while Dutch chip equipment manufacturer ASM Lithography received an upgrade to Buy.

The news about the double upgrade was sufficient to lift technology stocks in Europe, and the positive sentiment flowed on into the US session. Research firm Forrester Research provided extra support by predicting that after a dismal 2009, global spending on technology products and services this year will grow 8.1% to more than $1.6 trillion, with US spending alone expected to rise 6.6% to $568 billion.

Steel makers also gained in Europe after analysts at Bank of America Merrill Lynch elevated ThyssenKrupp, Germany’s largest steel maker, and ArcelorMittal, the world’s largest, as their "top picks" for the year ahead. Meanwhile, financial television channels continue rolling out every man in the universe with an opinion to give their five cents worth on whether Google should shut up shop in China or not, and what the possible consequences of either move might be.

For those who missed yesterday’s news: Google suspects the Chinese government has instigated some highly sophisticated hacker-attacks to get hold of the email addresses of human rights activists. This, of course, raises questions not just about on-line security, but also about trust and integrity. To make the matter more complicated: Google is not the number one search engine in China (Baidu is), but the Chinese market is widely considered a key growth zone for the company.

Last night also saw the release of the Fed Beige Book, a state-by-state anecdotal update on economic conditions. As one would have anticipated, the Fed survey contained a rather mixed message with both lending demand and credit quality continuing to weaken.

"While economic activity remains at a low level, conditions have improved modestly further", according to the Beige Book. The market took it as a positive and started pushing up share prices. The Philadelphia and Richmond Fed districts (two out of twelve) were the only ones reporting ongoing "mixed conditions".

The Beige Book also revealed that most district banks reported holiday-season consumer spending was "slightly greater" in 2009 than the year before, but it remained "far below" levels of 2007. Manufacturing improved or held steady in most districts, while the labour market "remained soft" in most districts, the report said.

The fact that "conditions have improved modestly further" in 10 out of 12 Fed districts decreased the safe-haven appeal of US Treasuries and the result was higher US bond yields for the first time this week. The 2-year yield rose 5bps to 0.952%, whilst the 10-year yield gained 7bps to 3.785%.

Lending further support to US stocks last night was the fact that Bank of America-Merrill Lynch earlier this week decided to increase its allocation of equities to 65% of total assets from 60% and reduce its bond allocation to 30% from 35%. In addition, the head of the Oldstein All Cap Value Fund went public by stating that S&P 500 earnings estimates are "severely understated because of all the disasters in the financials", implying there’s more value at hand than seems apparent at face value.

The USD index retreated some more. Yesterday, I reported the US dollar bounced back, but this was largely against the world’s commodity currencies, such as the Australian dollar. As far as the USD index goes (large weighting for the euro) Tuesday saw another small retreat, and yesterday was no different.

The British Pound made an unexpected come-back as investors contemplated sooner rather than later rate hikes in the UK (call me a sceptic on this one) and the Aussie dollar had a good night too. This morning, AUD/USD opens stronger around 0.9230 with AUD/EUR having traded h

Rudi Filapek

About Rudi Filapek

Rudi Filapek-Vandyck is approaching three decades as an active journalist. During the nineties, Rudi successfully built a financial news wire in Europe. After arriving in Australia in 2000, he worked on several projects before founding FNArena.

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