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Sunrise Market Commentary

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US Equities again lower led by financials, while Asian stocks rise this morning

Wed, Aug 20 2008, 07:12 GMT
by KBC Market Research Desk

KBC Bank

• Chinese stocks gain the most in four months on speculation of a fiscal stimulus package

• Lehman Brothers Holding Inc. falls 13% as it searches buyers for its investment-management department and on speculation that third-quarter write downs will be worse than expected.

• AIG falls after Goldman Sachs said it is increasingly likely the company will have to raise more capital.

• Dollar weakens, as commodities rebound. Gold back above 800 USD/ounce

• Nato warns Russia that it could not draw a new line in Europe preventing Georgia and other countries from joining the western military alliance

• Calendar is thin today with only the BoE Minutes and the CBI industrial trends.

Markets

Yesterday, equities remained under pressure on ongoing concerns about the health of the financial sector and the outlook for the global economy. Lehman Brothers fell 13%, as the investment bank wants to sell its asset management unit amid speculation that its Q3 earnings will be worse than expected. Freddie Mac had to pay a record premium of 113 bps over Treasuries to sell USD 3 B of five-year notes. In Europe, the equity indices lost more than 2% and also in the US equities closed once again lower. The S&P 500 was down 0.93% on the day. This morning, Asia performs rather well on the back of a surge in Chinese equities, which are supported by rumours about a fiscal stimulus package.

Despite the weak performance of the equity markets, bonds couldn’t hold on to their early gains, as fears about inflation resurfaced on the back of the upward surprise in the US PPI data and hawkish comments of Fed’s Fisher and Lacker. Both suggested that the Fed must be prepared to act if the economic slowdown doesn’t moderate the increase in prices. Bonds both in the US and in Europe reversed early gains and closed the day mixed with the curve a tad steeper. In the US, yields were down 3.5 bps at the short end and up 3 bps at the ultra-long 30-year segment compared to 1 bps and 4 bps in Europe. As such, US Treasuries failed to break decisively above the July highs, which would have improved the technical picture.

On the forex market, the dollar touched a six-month high against the euro, but also reversed course later in the day on the persistent financial stress in the US and the rebound in the commodity markets, where oil and particularly gold rebounded strongly. Gold rose about 20 USD/ounce and is back above the 800 USD/ounce.

Today, the calendar is very thin in the US and Europe. In the UK, the Minutes and the CBI industrial trends survey will be published. But following last week’s BoE’s inflation report, the Minutes shouldn’t contain much new information.

US equities (S&P) decline again on persistent concerns about US
financial system, as …

… Lehman Brothers drops 13%.

The weakness in the equity markets (S&P, red line) however fails to
support bonds (US T-Note future, white line), as inflation concerns
resurface.

As a result, the US T-Note future fails to break decisively above
the July highs.

Dollar retreats after setting a new high against the euro, as …

… commodities (gold) rebound.

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Published on  Wed, Aug 20 2008, 12:12 GMT