Global Markets React To Detroit, Tech Stumble

With little going on today besides the just reported GE earnings, which beat consensus EPS expectations of $0.35 by the smallest possible increment but, as expected, missed consensus revenue of $35.56 printing at $35.12, and both the Japanese (which experienced a 500 point drop in minutes overnight) and Chinese (which closed below 2000 again) markets sliding, it is perhaps better to summarize the day that just was: Detroit City files for bankruptcy (send in Detroika!), Moody's take the US off negative outlook, Google and Microsoft miss on earnings and the S&P 500 hits a new record high. As DB says, the above certainly made for an eventful close to the US session after what was a fairly dull second day of testimony and Q&A for Bernanke. He has said all that can be said for now and we're left waiting for the data. And the earnings data so far has been abysmal if mostly on the top line, with corporate revenues now assured to double dip and decline for the second quarter in a row. And if the tech bellwethers all of which have been major disappointments to date and have guided down, are an indication of what is coming, Q3 may and will be even worse.


A quick market recap courtesy of RanSquawk for those who slept through yesterday's event-filled day:



  • Detroit has become the largest city in US history to file for bankruptcy.

  • Technology sector underperformed in Europe after Google and Microsoft failed to meet analyst expectations.

  • Moody's affirmed US sovereign rating at 'Aaa'; outlook changed to stable from negative.


Market Re-Cap


Stocks traded lower in Europe, with technology sector underperforming after Google and Microsoft failed to meet analyst expectations, which in turn saw the likes of SAP, ARM Holdings and Infineon trade down by around 2%. On the other hand, telecommunications sector outperformed, supported by Vodafone, which was also one of the best performing stocks in the FTSE-100 index after the company reported better than expected Q1 organic sales.


Moody's affirmation the US’s sovereign rating at 'Aaa', as well as the change in the outlook to stable from negative was somewhat offset by Detroit filing for bankruptcy after it accumulated approximately USD 18.5bln in debt. There was little in terms of EU related commentary, which in turn meant that the price action across various assets classes remained subdued throughout the session so far.


Asian Headlines


China faces more complex external environment in H2, according to vice finance minister Zhu Guangyao. Zhu said that China should watch the ultra-easy monetary policy in US, the EU debt crisis and problems in emerging countries. Zhu further commented that China should manage economic growth, employment and structural adjustments with emphasis on jobs.


EU & UK Headlines


German chancellor Merkel says election will be very close and wants coalition rerun.


ECB says banks to repay EUR 2.182bln in 1st LTRO and EUR 200mln from 2nd LTRO.


UK Public Finances (PSNCR) (Jun) M/M 3.1B (Prev. 3.1B, Rev. 3.0B)


- UK PSNB ex Interventions (Jun) M/M 8.5B vs. Exp. 8.0B (Prev. 8.8B, Rev. 11.0B)


- UK Public Sector Net Borrowing (Jun) M/M 10.25B vs. Exp. 9.4B (Prev. 10.5B, Rev. 12.8B)


ONS said that there is a significant doubt on revenue from Swiss tax agreement and that Bank of England APF fund transfer lowers PSNB by GBP 3.9bln in June.


US Headlines


Detroit has become the largest city in US history to file for

bankruptcy. In a letter with the filing Rick Snyder, the Republican

Governor of the state of Michigan, said he had approved a request from

Detroit’s state-appointed Emergency Manager Kevyn Orr to file for

Chapter 9 bankruptcy protection.


Moody's affirmed US sovereign rating at 'Aaa'; outlook changed to stable from negative. Said US rating may be pressured if deficit is un-addressed.


Equities


Stocks traded lower in Europe, with technology sector underperforming after Google and Microsoft failed to meet analyst expectations, which in turn saw the likes of SAP, ARM Holdings and Infineon trade down by around 2%.


Goldman's Advanced GLI now locates the global cycle again in the ‘Slowdown’ phase - characterised by positive but falling Momentum.


Microsoft shares traded sharply lower in after-market hours yesterday after reporting Q4 EPS Ex-Writedown USD 0.66 (EPS USD 0.59) vs. Exp. USD 0.75. Similarly, Google shares fell after the company posted Q2 Non GAAP EPS USD 9.56 vs. Exp. USD 10.80.


Earlier this morning, General Electric reported Q2 Adj. EPS USD 0.36 vs. Exp. USD 0.35. Revenues missed.


FX


Price action was range bound across the board this morning, though going forward, market participants will likely focus on the looming upper house elections in Japan where the ruling LDP party is expected to win by a majority. In turn, this is expected to facilitate further JPY weakness and provide exporters with much needed FX adjustment relief.


Commodities


China is to raise gasoline prices by CNY 325/tonne and diesel prices by CNY 310/tonne.


A Nigerian parliamentary commission says that an oil license ( Prospecting License 245) bought by Shell and Eni for USD 1.1bln should be revoked, as the country's national interest was "ceded away" when the license was granted in 2011.


South Sudan will reduce its oil output further, to 100,000 bpd over the weekend, according to the foreign ministry.


India PM Singh said India is committed to bring current account deficit under control and that India needs to reduce demand for gold.


China's NDRC is probing price manipulation by some gold Co.s and shops in Shanghai after some gold Co's admitted to the government that they collude on prices and hurt consumers' interests.


* * *


DB's Jim Reid summarizes the remainder of what happened overnight


On a more macro level Moody’s decision to change the outlook on the US Aaa sovereign rating to “stable” from “negative” came after the US markets had shut, but there was little market reaction to the announcement if stock futures are any guide. The change in outlook comes almost exactly two years to the day that Moody’s first placed the rating on “watch for possible downgrade” (later changed to “negative” outlook). The rating agency said that the USbudget deficit has been declining while growth is currently progressing at a faster rate compared with several Aaa peers and has demonstrated a degree of resilience to major reductions in the growth of government spending. It is a little ironic that the Moody’s announcement hit the newswires just five minutes after it was announced that “Motor City” would be filing for Chapter 9 bankruptcy protection. Detroit City’s filing has been described as the largest ever municipal bankruptcy in US history with debt estimated at around $18.5bn.


Bernanke’s testimony before the Senate Banking Committee contained little new information. Some interesting comments were made on rising bond yields which he described as partly reflecting an unwind of leveraged and “excessively risky” investments. But on a more dovish note he called the tighter financial conditions an “unwelcome” development. Bernanke also said it is “way too early to make any judgment” as to whether FOMC will start tapering purchases in Sept. The reaction in the UST market was rather muted.


Indeed, USTs seemed to react more acutely to the dataflow which included a fairly strong Philly Fed reading (19.8 vs 8.0 expected) and jobless claims (334k vs 345k) which printed at an 11-week low. Interestingly, yesterday’s U.S. 10-year TIPS auction saw a positive yield for the first time since November 2011 with some reading this as a sign that investors are pricing in less of a threat from rising inflation. (Bloomberg).


In Europe, the spotlight returns to Italian politics today with a no-confidence motion against Interior Minister Angelino Alfano, and PM Letta’s coalition partner. This is scheduled in the Senate for the early afternoon. The motion was brought by opposition parties who demanded that Alfano resign over the rushed deportation of the family of a dissident Kazakh oligarch in May. The latest on this is that the center-left Democratic Party has agreed to back its center-right coalition partner in today’s vote. In addition, Letta is expected to speak in defence of Alfano when the senate debates today. The decision has eased fears of a split in the PD after a group of center-left senators pushed for the party to join the opposition in voting against Alfano. Meanwhile, it’s been reported that the Italian government will organise a roadshow soon to outline plans to sell public assets and “strategy to attack debt”.


In Asia, it’s been a fairly up-and-down session this morning with markets initially trading lower as the Nikkei (-1.5%) dipped to early low of -2.7%. Japanese tech stocks are weighing heavily on the index following Google and Microsoft’s disappointing after-market earnings announcements yesterday. Japanese utility Tokyo Electric Power’s stocks were down 10% at one stage this morning after domestic media reported that its Kashiwazaki-Kariwa
nuclear plant may take more than a year to restart. There were also unconfirmed reports of steam coming from the company’s Fukushima reactor.


Chinese equities are outperforming (Hang Seng +0.15%, Shanghai Comp +0.2%) helped by comments from Premier Li Keqiang that the government can achieve its major economic developments goals this year. Asian/Australian credit markets are flat this morning after opening 3-4bp tighter, as a number  of players fade the recent move tighter while others reset short positions.


Turning to the day ahead, there’s very little on the data calendar outside of the Spanish trade numbers and Italian industrial orders. General Electric  reports earnings today before the market open. Something to look out for over the weekend is the July 21st deadline that Portuguese major political parties face to agree on a “national pact” to allow the government’s austerity programme to continue to mid-2014. Peripheral politics is certainly on the  fragile side at the moment.

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