MarketView for September 13

 

 

Summary  

 

It appears that Wall Street decided to make a bet on Tuesday that European leaders would take action soon to ease the Greek debt crisis. Now it appears that the Street is looking to a  supposed conference call that is planned between French President Nicolas Sarkozy, German Chancellor Angela Merkel and Greek Prime Minister George Papandreou on Wednesday.

 

The result was that the afternoon’s volatility gave way to some nice gains by the major equity indexes by the closing bell. Worries that the euro zone crisis could send the global economy into another recession have placed considerable pressure on the markets, although the point has been reached that you could argue a Greek default is priced in to the market. Approximately 7.8 billion shares changed hands on the major equity exchanges, a number that was slightly above last year's average of 7.6 billion shares.

 

In favor on Tuesday were the large-cap tech shares, which are currently being viewed as less risky and an area likely to benefit in an improving economic climate. Nonetheless, it is important to keep in mind that Reuters calculations based on Markit credit default swap prices put the probability of a Greek default at 90 percent. Greek two-year bond yields hit a record near 94 percent.

 

Oracle, Intel and Apple were the major issues that added to positive close for the Nasdaq index. Oracle ended the day up 3.6 percent to close at at $27.72.

 

Among declining stocks, Best Buy said quarterly sales were flat, missing estimates on weak demand for televisions, but the big consumer electronics chain stood by its fiscal-year revenue outlook. Its shares slid 6.5 percent to $23.35.

 

CBO Cuts Economic Outlook

 

The Congressional Budget Office (CBO) -- the non-partisan budget and economic analyst for Congress – reported that the nation’s economic growth would slow from previous estimates and a nagging, 9.1 percent jobless rate would basically remain stuck there through next year's presidential and congressional elections.

 

"The economic outlook remains highly uncertain," CBO Director Douglas Elmendorf told an inaugural hearing of the congressional panel charged with finding at least $1.2 trillion in new government savings over the next decade.

 

Elmendorf said his agency now sees economic growth of around 1.5 percent this year and 2.5 percent in 2012. That's down from CBO's August estimate of 2.3 percent and 2.7 percent, respectively. New data since CBO pieced together its August outlook contributed to the downward estimates, Elmendorf said.

 

The U.S. unemployment rate, now at 9.1 percent, will remain "close to 9 percent through the end of 2012," Elmendorf said. Last month, CBO estimated joblessness at 8.9 percent this year, falling to 8.5 percent in 2012.

 

"Particularly important, given the current state of the economy, immediate spending cuts or tax increases would represent an added drag on the weak economic expansion," Elmendorf told the panel. Republicans take note!

 

Record 46 Million Poor People in 2010

 

The number of Americans living below the poverty line rose to a record 46 million last year, the government said on Tuesday. The Census Bureau's annual report on income, poverty and health insurance coverage said the national poverty rate climbed for a third consecutive year to 15.1 percent in 2010 as the economy struggled to recover from the recession that began in December 2007 and ended in June 2009. That marked a 0.8 percent increase from 2009, when there were 43.6 million Americans living in poverty.

 

The number of poor Americans in 2010 was the largest in the 52 years that the Census Bureau has been publishing poverty estimates, the report said, while the poverty rate was the highest since 1993. The specter of economic deterioration also afflicted working Americans who saw their median income decline 2.3 percent to an annual $49,445.

 

About 1.5 million fewer Americans were covered by employer-sponsored health insurance plans, while the number of people covered by government health insurance increased by nearly 2 million. All told, the number of Americans with no health insurance hovered at 49.9 million, up slightly from 49 million in 2010.

 

The economic deterioration depicted by the figures is likely to have continued into 2011 as economic growth diminished, unemployment remained stuck above 9 percent and fears grew of a possible double-dip recession.

 

The report of rising poverty coincides with Obama's push for a $450 billion job creation package, and deliberations by a congressional "super committee" tasked with cutting at least $1.2 trillion from the budget deficit over 10 years.

 

Analysts said poverty-related issues have relatively little hold on politicians in Washington but hoped the new figures would encourage the bipartisan super committee to avoid deficit cuts that would hurt the poor.

 

The United States has long had one of the highest poverty rates in the developed world. Among 34 countries tracked by the Paris-based Organization for Economic Cooperation and Development, only Chile, Israel and Mexico have higher rates of poverty.

 

Diabetes Cases Hit 366 Million

 

The number of people living with diabetes has soared to 366 million, and the disease kills one person every seven seconds, posing a "massive challenge" to healthcare systems worldwide. The vast majority of those with the disease have Type 2 -- the kind linked to poor diet, obesity and lack of exercise -- and the problem is spreading as people in the developing world adopt more Western lifestyles.

 

Diabetics have inadequate blood sugar control, which can lead to serious complications like heart disease and stroke, damage to the kidneys or nerves, and to blindness. Worldwide deaths from the disease are now running at 4.6 million a year.

 

The latest figures, unveiled at the European Association for the Study of Diabetes (EASD) congress in Lisbon, underline the need for urgent action by governments at a U.N. meeting next week, according to top doctors in the field.

 

The high-level United Nations meeting in New York on September 19-20 -- only the second to focus on disease after one on AIDS in 2001 -- will consider what should be done to counter the growing problem of non-communicable diseases (NCDs), including diabetes.

 

Food, drinks and tobacco companies are in the firing line for selling products linked to cancer, heart disease and diabetes, but there is unlikely to be sufficient funds for a decent fight. The NCD Alliance, which groups 2,000 health organizations from around the world, argues that spending $9 billion a year on tobacco control, food advice and basic treatments would avert tens of millions of untimely deaths this decade.

 

Cash-strapped governments, however, have baulked at finding new money, though the cost of inaction may be even greater, with annual healthcare spending on diabetes alone now put at $465 billion.

 

The new figures on the prevalence and cost of diabetes are to be published in the fifth edition of the Diabetes Atlas, the authoritative guide to the disease issued by the International Diabetes Federation (IDF).

 

The previous edition in October 2009 had estimated the number of diabetics at 285 million for 2010, although a separate study published in the Lancet medical journal in June this year had already put the figure at a much higher 347 million.

 

"The IDF's latest Atlas data are proof indeed that diabetes is a massive challenge the world can no longer afford to ignore. In 2011 one person is dying from diabetes every seven seconds," said IDF President Jean Claude Mbanya.

 

Mbanya and EASD Vice-President Andrew Boulton said more research was needed into strengthening health systems around the world to deal with diabetes.

 

Many older classes of diabetes drugs are now available as cheap generics, but global drugmakers -- including Sanofi, Eli Lilly and Novo Nordisk -- aim to introduce new classes of drugs that could further extend treatment options.

 

For a write-up on Novo Nordisk, please see Streetwise for Sunday, September 4. (Click here)

 

Global sales of diabetes medicines totaled $35 billion last year and could rise to as much as $48 billion by 2015, according to research firm IMS Health, driven by increased prevalence and treatment, especially in countries such as China, India, Mexico and Brazil.

 

Anxiety over European Debt up a Notch

 

International alarm over Europe's debt crisis reached new heights on Tuesday, with U.S. President Barack Obama pressing the bloc's big countries to show leadership as talk of a Greek default escalated and markets heaped pressure on Italy.

 

German Chancellor Angela Merkel sought to quash talk of an imminent Greek default or exit from the euro zone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy resulted in additional market volatility.

 

Confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds.

 

Merkel said in a radio interview that Europe was doing everything in its power to avoid a Greek default and urged politicians in her own coalition to weigh their words carefully to avoid creating turmoil on financial markets.

 

Her economy minister said earlier this week that there should be no taboos in stabilizing the euro, including an orderly bankruptcy of Greece. And lawmakers from her coalition have said in recent days that Greece may have to leave the euro zone -- a move Citigroup's chief economist warned would lead to "financial and economic disaster."

 

Merkel, in an interview with RBB inforadio, said Europe would use all the tools at its disposal to prevent a Greek default and warned that an exit from the bloc would immediately lead to "domino effects."

 

"We face a completely new challenge, one that has no historic precedent," she said. "We want our currency to succeed. Germany is absolutely committed to this currency."

 

Merkel and French President Nicolas Sarkozy are expected to issue a joint statement on Greece, which, in turn, sent the euro and Greek bank stocks higher. A short time later a spokesman for Sarkozy changed course and denied a statement was planned, sending markets into reverse. German officials told Reuters the government in Berlin had seen no need for a statement, as Merkel and Sarkozy are due to hold a call with Greek Prime Minister George Papandreou on Wednesday.

 

The mixed signals reinforced the sense in the markets that European countries are unable to unite behind a common approach to the crisis. Merkel faces intense pressure at home to resist new steps to shore up weak euro zone countries after agreeing to bailouts of Greece, Ireland and Portugal over the past 15 months. However, concern is growing abroad that Europe's piecemeal approach could backfire, with grave consequences for the global economy.

 

President Barack Obama told Spanish journalists in a group interview published on Tuesday that euro zone leaders needed to show markets they were taking responsibility for the debt crisis. Weakness in the global economy would persist so long as it is not resolved, he said.

 

In a measure of the alarm in Washington, Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend.

 

Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy.

 

"In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy," the news agency EFE quoted him as saying.

 

Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund and consider boosting its size, an EU source said.

 

Markets have already priced in the near certainty of a Greek debt default. Credit default swap prices suggest a 90 percent probability of default in the next five years, according to CDS pricing data provider Markit. Meanwhile, international inspectors are due to return to Athens on Monday to review deficit-cutting steps before deciding on the next tranche of aid. Greece has said it only has a few weeks' cash and needs the 8 billion euro tranche in October to pay salaries and pensions.

 

Pressure on Italy mounted on Tuesday at a bond auction that showed the limits of European Central Bank efforts to hold down Rome's borrowing costs by buying government bonds in return for austerity measures to cut its budget deficit. Italy’s five-year bond yield hit a euro lifetime high of 5.60 percent despite ECB purchases in the secondary market that led to the resignation of the central bank's German chief economist, Juergen Stark.

 

A Financial Times report that Rome had asked China to buy "significant" quantities of its bonds in recent talks provided little support. According to one report, Italian Economy Minister Giulio Tremonti met Chinese officials last week including the head of its sovereign wealth fund. However, Italy says the talks centered on possible Chinese investments in Italy's industrial sector, not its bonds. Nonetheless, Chinese leaders have repeatedly offered verbal support to Greece, Portugal and Spain but encouraging words have not so far been matched by any sort of tangible action.

 

Obama's comments suggested that Washington is trying to nudge European governments toward closer fiscal union or a bigger bailout fund to recapitalize teetering banks but European politics, especially in Germany, make that difficult.

 

The German Constitutional Court last week appeared to rule out issuing common euro zone bonds unless Berlin amended its Basic Law and the EU adopted a new treaty. Partially as a result, Merkel suggested the way forward should involve sharper punishment for states that violate the bloc's budget discipline rules, which have been repeatedly breached in the last decade, including by central euro zone powers Germany and France.

 

"Until now, for example, if countries violate the Stability and Growth Pact they cannot be taken before the European Court of Justice," she said.