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Asia Market Update

GSE bailout fails to inspire confidence as US rally fizzles, Asia remains weak on export concerns

Wed, Nov 12 2008, 09:20 GMT
by Trade The News Staff

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Veteran's Day holiday has hardly discouraged volume or volatility in late US trading session, as investors refocused their attention from third quarter earnings reports to macro themes of housing woes and impending consumer-driven recession. US indices reversed intraday weakness after more news of proposed bailout to homeowners facing foreclosure, but were unable to regain positive territory, ending the session down 2% in the Dow and 2.2% in S&P and Nasdaq.
On behalf of federal authorities and mortgage GSE's Fannie and Freddie, FHFA announced plans to offer troubled borrowers reduced interest rates and longer payment schedules to make their loans more affordable. Although the plan focuses on Fannie/Freddie loans that represent only 20% of delinquencies, FHFA's Lockhart has also asked other private loan servicers to adopt the federal program terms in exchange for $800 payment for each modified loan. However, critics were quick to point out that by adding time or principal to the tail end of the payment schedule, the plan does not address the widespread concern of those whose loans have been well in excess of the market value of deflated properties, encouraging owners to allow foreclosure process to proceed. In the words of FDIC's Sheila Bair, the plan falls short of achieving wide-scale modification of distressed mortgages at a time when government is willing to spend billions to bail out distressed banks. Critics see the consumer as being left holding the bag of the busted housing bubble while the lenders get a pass, something that they claim could only be rectified by revaluing distressed properties and adjusting mortgage loans accordingly. Congressional Democrats like Charles Schumer also foresee the problem of investors blocking loan modification, impacting those whose situation may be exceedingly more dire, thus calling the plan inadequate.

As investors gear up for widely anticipated earnings from Wal-Mart later this week, traditionally retailer/discretionaries-heavy tail end of earnings season has given markets little to cheer afterhours yet again. Health-oriented nutrition retailer NBTY (NTY) came well short of estimates on top and bottom lines, citing lower profit margins, weak sales in Europe, and increased freight costs that compressed its gross margins by 8%, sending shares south by over 16% afterhours. Midcap regional restaurant operator / meat product producer Bob Evans Farms was hurt by both restrained consumer spending and feed/fuel costs, also coming well short of estimates on income reporting Q2 $0.37 vs $0.44 expected. Additionally, BOBE slashed its forecast to FY09 $1.75-1.85 v $1.92e, prompting a massive selloff that sent shares down by 10.5% afterhours. Natural gas giant Atmos (ATO) was the lone bright spot on the earnings calendar, beating -$0.03 estimates with $0.02 result while reaffirming its 2009 EPS guidance at $2.05-$2.15 v $2.08 expected. Pre-open reporting notables on Wednesday include department store giant Macy's (M) and financial service provider Thomson Reuters (TRI) - representatives of two sectors that have been highly susceptible to the economic downturn. Meanwhile, front month S&P contract appears to be resilient in Asian hours, remaining in positive territory above 900 level. Notably, credit conditions barometer TED spread continues to contract further below the 2. 00 mark.

Over in Asia, share prices have also turned to major macro themes. Trading conditions have thus far mirrored prior session's pattern, selling off sharply in opening hours, paring those losses toward unchanged levels before heading moderately lower yet again. Japan saw a glimmer of hope from better than expected consumer confidence in October, however at 29.8, the levels remain sufficiently depressed to warrant further recessionary market sentiment. Pressure on commodity prices evident in front month crude contract establishing residence below $60 are translating into Tokyo notables such as Mitsubishi dropping by over 6%. The largest Nikkei component by volume, the company derives half of its profits from commodities and is thus clearly impacted by their pronounced downturn. Nikkei 225 index was off by 1.5% coming out of the mid-session break.

Elsewhere, pessimistic remarks from Hong Kong Finance secretary, who sees increasing difficulty for the state to meet 4.5% 2008 GDP growth forecast, have extended the losses in Hang Seng index beyond 2.8%. That sentiment was in turn echoed by S Korea's Finance Minister Kang, who sees current turbulence lasting longer than expected and the "fallout from crisis spilling over into real economy." S Korea's unemployment rate for October was reported in line with estimates at 3.1%, however the trend in this major Asian economy's job market is likely to point higher in light of its heavy dependence on the struggling export sector. In mid-session hours, the Kospi was off by 1.6%.

Australia's equity markets that led the initial decline in Asian in the prior session was relatively stronger following better than expected economic data. November consumer sentiment data saw surprisingly strong results, coming in at 4.3% from prior month's -11.0%. Also, Q3 wage cost index was marginally lower, relieving pressure on the central bank to mind spillover wage inflation as it looks to ease overnight borrowing by another forecasted 75bps in December. S&P/ASX was last seen giving up just under 1% in spite of early pressure on commodities that was being most acutely felt by Aussie miners and drillers such as Woodside Petroleum whose shares traded down over 2% on the session.

In currencies, EUR/USD breach of 1.25 was met with strong buying interest, sending the most widely traded pair higher by over a full figure. GBP/USD also reversed its early session losses, bouncing back above 1.54 after initial weakness while remaining contained by US session highs at 1.5470. USD/CHF was largely rangebound between 1.1820-1.19. Yen pairs are also oscillating in narrowed ranges: USD/JPY rebound appears to be contained by 97.90, EUR/JPY session-long resistance is seen just above 123.30, and GBP/JPY has found consistent selling interest around 151.20. Commodity FX is likewise contained technically: AUD/USD has struggled with support turned resistance at 0.6640 while USD/CAD is thus far unable to take out resistance turned support in 1.1970-90 range.

In commodities, crude oil is lower but has returned just above $59/bbl. Earlier in the session, crude traded down to as low as $58.55, but has since bounced higher. Crude oil prices are currently tracking the weakness in Asian equities.
Also, speculation that the IEA may lower its 2009 oil demand forecast has weighed on the commodity as the organization has already lowered its 2008 demand forecast. Later today, US weekly inventories data is expected to show that gasoline supplies rose by 200K barrels during the prior week, while crude stocks are expected to have risen by 750K barrels, according to one survey. In terms of the speculation regarding a potential OPEC output cut in Dec, an unconfirmed report noted that OPEC might lower production by 1M bpd at its December meeting due to lower demand and this would follow Octobers 1. 5M bpd cut. Spot Gold is higher by more than 0.40%, after declining by close to $14 during the US session. Gold is outperforming oil prices on today's session and is tracking the gains in the EUR against the USD.

Published on  Wed, Nov 12 2008, 09:22 GMT

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