MarketView for March 1

 

 

 

Summary 

 

Share prices were higher on Monday, sending the major equity indexes into positive territory for the second consecutive trading day. Key among the factors adding to the day’s momentum was an announced agreement by AIG to sell a major Asian unit, combined with an announcement by SanDisk that it had raised its revenue forecast. Hopes for an agreement to resolve the uncertainty regarding Greece’s financial difficulties also encouraged those looking to put money in equities. It was reported that Athens might be nearing a deal with European Union governments for some form of emergency aid. U.S.-listed shares of National Bank of Greece rose 2.3 percent to $3.95.

 

AIG saw its share price increase 4.4 percent to $25.85 after Britain's Prudential Plc agreed to buy its AIA Group insurance arm for $35.5 billion. That and other merger and acquisition news lifted sentiment because it suggests corporate managers see purchases of other companies as a way to drive growth.

 

SanDisk saw its share price close up 11.9 percent to $32.63 after the flash memory maker raised its revenue forecast for the first quarter late Friday and said the outlook for the industry in the coming years is strong.

 

There were also some positive signs with regard to economic data as consumer spending was up slightly in January and there was some positive growth within the manufacturing sector. Data from the Institute for Supply Management indicated that the manufacturing sector grew in February. In addition, the Commerce Department reported that consumer spending increased slightly faster than expected in January as consumers both their savings accounts, in addition to seeing their  while incomes rose slightly.

 

Fed Chairman Ben Bernanke announced on Monday that Fed Vice Chairman Donald Kohn, a 40-year veteran of the central bank, is stepping down in late June.

 

Encouraging Economic News

 

According to a report released by the Commerce Department on Monday consumer spending increased by 0.5 percent, after an upwardly revised 0.3 percent in December. Consumer spending in December was previously reported to have increased 0.2 percent. It was the fourth consecutive month of increases for that indicator. Held back by stubbornly high unemployment, consumer spending rose at a modest 1.7 percent annual rate in the fourth quarter, as compared to 2.8 percent in the prior period.

 

Meanwhile, an industry report indicated that the manufacturing sector gained strength in February but at a slower rate than was expected. According to the Institute for Supply Management (ISM) its index of national factory activity declined to 56.5 in February from 58.4 in January. A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion.

 

If you adjust for inflation, consumer spending rose 0.3 percent in January, picking up from a 0.1 percent gain the prior month. Personal income edged up 0.1 percent, a month after increasing 0.3 percent in December, the Commerce Department said. Real disposable income fell 0.6 percent in January, the largest decline in seven months, after increasing 0.2 percent the prior month. The drop in income pulled the savings rate down to an annual rate of $367.2 billion, the lowest level since February 2009.

 

Construction spending was also down, falling for the third straight month to its lowest level since June 2003 in January. The savings rate fell to 3.3 percent, the lowest since October 2008, from 4.2 percent in December.

 

Greece Must Undertake More Extreme Austerity Programs

 

The European Union told Greece on Monday it needed to undertake greater austerity measures within days to tackle its debt crisis, while at the same time indicating that the EU would help Greece overcome its fiscal difficulties. EU Economic and Monetary Affairs Commissioner Olli Rehn made the call after talks with Greek officials amid growing market expectations of a trade-off between new deficit-cutting steps and practical EU support for Greek borrowing.

 

Prime Minister George Papandreou appeared to be preparing the nation for such a plan of action in broadcast remarks to the cabinet dramatizing the crisis and appealing for public support. His labor minister proposed a freeze on pensions this year as one measure to contain spending. He has a potentially crucial meeting in Berlin on Friday with Chancellor Angela Merkel of Germany, which is Europe's largest economy and holds the key to any financial support.

 

A German government spokeswoman maintained it was up to Greece to pursue budget consolidation to win the confidence of markets and said that Berlin had nothing new to report on the issue of possible steps to support Greek debt.

 

Greece's borrowing costs fell to their lowest level since mid-February on expectations the government will agree soon on new tax rises and spending cuts to plug a budget gap which EU experts say has grown due to a lingering recession.

 

That in turn may trigger tangible EU support for Greece's effort to borrow or refinance about 25 billion euros ($33.97 billion) by late May, possibly through public guarantees of banks' purchases of Greek sovereign bonds, EU officials and German lawmakers said.

 

Even with Monday's slight easing, Greece will have to pay more than 3 percentage points on top of German bond yields to borrow on capital markets. At the same time, European officials and regulators stepped up moves to deter speculation against Greek debt.

 

Greek bank shares rose by 4 percent on hopes of a deal. Fellow euro zone southern rim countries Portugal, Spain and Italy also saw their debt spreads over benchmark German bonds narrow.

 

Rehn, a stickler for fiscal discipline, held talks with Greek leaders on additional steps to slash Greece's deficit by 4 percent of gross domestic product this year to 8.7 percent. The Socialist government has already announced two waves of deficit-cutting measures, including a pay freeze and cuts in income supplements in the public sector, tax rises, a crackdown on tax evasion, higher fuel duty and public spending cuts.

 

But Papandreou, whose approval ratings remain high despite a 24-hour general strike against his austerity plan last week, has promised extra measures if needed to achieve the deficit target. Among the measures under consideration are an increase in the Value Added Tax, a luxury goods tax, a further fuel duty hike, a freeze in public sector pensions and possible further cuts in state spending, Greek officials said.

 

The executive European Commission is due to give an interim report on implementation of the Greek fiscal consolidation plan to EU finance ministers on March 16. In parallel, discreet talks are going on among euro zone governments on possible mechanisms to support Greece if necessary on the international bond markets.

 

Merkel, who faces strong opposition at home to any aid for Greece, stressed in a TV interview on Sunday that no decision had been taken and that Greece must put its own house in order. Saying the euro was in the most difficult phase since its creation, she noted the "no bailout" clause in the EU treaty but did not explicitly rule out the possibility of guaranteeing Greek debt through state-owned institutions.

 

Greek bonds have been under attack since the new government revealed in October that the 2009 budget deficit would hit 12.7 percent of GDP, more than twice its predecessor's forecast and four times the EU ceiling.

 

Some of those attacks have involved hedge funds and investment banks using the volatile and unregulated credit default swaps (CDS) market to buy insurance against the risk of a default or debt restructuring, traders say.

 

"If the Greeks hold on to the strict parameters and the markets continue to speculate against Greece, we will not let them just march through," the head of the Eurogroup of finance ministers said in an interview published on Monday.

 

Luxembourg Prime Minister Jean-Claude Juncker would not say exactly how the EU might combat speculators but told the German business daily Handelsblatt: "We have the torture equipment in the cellar, and we will show them if needed."

 

French Economy Minister Christine Lagarde said on Sunday that derivatives on sovereign debt such as CDS should be tightly regulated, limited or banned.

 

Greece Trying to Prevent Speculation in its Financial Instruments

 

Germany is trying to prevent speculation in Greek debt and thereby prevent profiteering from any bailout by the euro zone counties of its ailing economy. The initiative by the country's financial watchdog BaFin is part of delicate deliberations in Germany as to whether it should help bail out Greece, which is grappling with mounting debts.

 

The investigation by BaFin comes against a backdrop of worries over Greece's future. It sends a warning to those trading insurance for Greek debt which, while legal, has been blamed for fuelling volatility - though it has so far failed to identify to what extent speculators are behind Greek debt price swings. News of the German probe added to market uncertainty over Greece. Having started the day around $1.36, the euro slipped to $1.3483 by 1549 GMT.

 

The German investigation involved contact with the New York-based Depository Trust and Clearing Corporation, which records transactions such as the buying and selling of Credit Default Swaps. Political pressure is growing to ban hedge funds and others from investing in derivatives of a government's debt, which policymakers fear ultimately makes it more expensive for that country to borrow.

 

Germany is weighing carefully whether it should help rescue Greece, a move that would be unpopular at home but could be necessary to avert a crisis in the euro zone. Its backing is crucial because, as the largest economy in Europe, it would be first in line to provide funding for any rescue.

 

While publicly Chancellor Angela Merkel has insisted that Athens solve its own problems and there has been anger over Greek comments about war claims dating back to the Nazi occupation, privately German officials say they have an emergency plan.

 

Britain’s Pru To Buy AIG Division

 

Britain's Prudential (no relation to the U.S. firm of the same name) will buy AIG's Asian arm for $35.5 billion, making it the insurance sector's largest acquisition ever, while helping to bail-out AIG and the U.S. taxpayer. Britain's No. 1 insurer said it would finance the buy through a rights issue of $21 billion including costs and fees, a record for an acquisition-related cash call, and by raising $5 billion of debt.

 

The acquisition increases Prudential's already strong exposure to soaring demand for personal financial services in Southeast Asia as rapid economic growth there lifts consumer spending power, compensating for at-best sluggish growth in Britain.

 

By acquiring AIG’s Asian arm, the proportion of Prudential's new business profit generated in Asia will increase to 60 percent from 44 percent, with its Asian customer base increasing to 30 million, the company said.

 

AIG, which received a $182.3 billion taxpayer-funded rescue two years ago, will use $16 billion of the cash portion of the sale proceeds to pay the Federal Reserve Bank of New York for its stake in a special purpose vehicle that holds the division being sold. The remaining $9 billion of proceeds will be used to pay down the Fed's credit facility, which has an outstanding balance of about $25 billion.

 

Under the deal, AIG will also receive $10.5 billion worth of stock in Prudential, giving it a stake of about 11 percent, which it plans to sell to further reduce its borrowings.