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The world’s financial markets are on a sweet pot, except the value of US dollar, which has been on the back foot for quite some time now. Though the earnings from the US have, so far, been a mixed bag, for the third quarter; investors have been quite sanguine about the direction of stock markets the world over. As a result, all the major stock indices, including the Dow, FTSE 100, India’s Sensex, DAX, Nikkei 225 and Hang Seng have all been pushing to their one-year high levels. This piece of article analyses the various issues involved here and the outlook for world markets in a brief and lucid manner.
THIRD QUARTER PROFITS ARE A MIXED BAG
(See the PDF form at the URL given above, in bold letters, for the graphics...)
As depicted above, the important first results of American companies are a mixed bag. While Bank of America has made a net loss of USD 2.2 billion for the third quarter of this year, Citigroup made a modest profit of USD 100 million. On the contrary, Goldman Sachs, JP Morgan and Google have surprised the markets with their better-than-expected earnings and net income for the third quarter. Tech kingpins, Intel and IBM have surpassed Wall Street’s estimates. As a result, the Dow has reacted extremely positively to the earnings/net income and the Dow has tested 10,000 and it reached its yearly high of 10,100 on Monday close.
One common thread that runs through these results is this: Banks have shown resurgent profits, not due to any increase in their core businesses, but as a result of strong showing in their investment desks, led by rallies in the commodities and stock prices the world over. Banks that relied more on consumer finance have suffered with severe write offs being effected by them as shown below:
Bank of America:
It reported a loss of USD 2.2 billion for the quarter. The loss is after dividends are paid to preference shareholders. It set aside USD 11.7 billion for credit losses during this quarter and made losses in credit cards, mortgages and insurance biz; while the global markets division, which includes ex-Merrill Lynch business, made good profits.
Citigroup:
It is much more exposed to consumer loans and naturally it could show a profit of only USD 100 million. It has written off USD 8 billion of credit losses in third quarter.
Goldman Sachs: Investment Banking is the biggest contributor to profits.
JP Morgan: Strong performance in investment banking division.
General Electric:
Net profit fell by 44% y-o-y while revenues were down 20%. The conglomerate is seen as a barometer of the US economy and is the only co to have continued in the Dow Jones for more than a century. It's a microcosm of the S&P 500 INDEX.
Google:
Profits are up 27% y-o-y. Google has no competition as of now. The internet ad industry is beginning to show signs of strength and Google is the biggest beneficiary of that.
Intel: Profit is down 5% year on year.
Apple: Latest media reports suggest that Apple has made good profits at USD 1.7 billion, nibbling away at market share of giants, like, Microsoft and Nokia with its Mac computers and smarter iPhones. Moreover, Steve Jobs is back at Apple.
THE DOW BALLOONED ABOVE 10,000
Powered by some good corporate results as shown above, for the first time in a year, the Dow (DJIA 30) has pushed above 10,000 last week and has closed a tad below 10,100 Monday.
The Dow has ballooned above 10,000 last week for the first time in a year and is now quoting around 10,100 on Monday close. It is astounding to note that the Dow has touched 10,000 for the first time in its history more than 10 years back in March 1999-which means the Dow has not shown any progress in the last 10 years, which is quite a revelation to many investors. Its life-time high was around 14,100 achieved on October 9th, 2007. Its lowest this year was around 6,450 on March 9th - which means from its nadir of March 2009, the Dow gained more than 55 per cent.
This week is going to be an important week for the US markets as more than 130 companies, which are part of the broader S&P 500 index, will report results during this week, which include 13 Dow components. The standouts are: American Express, 3M, Microsoft, Merck, Pfizer, Coca-Cola, Yahoo, Wells Fargo, Amazon.com and eBay.
ASIAN & EUROPEAN MARKETS TOO ARE ON A ROLL
Stocks across the globe, right from Australia, Asia Pacific, South Asia to Europe have been on a roll on Monday with optimism abounding about the so-called ‘Road to Recovery’ in world’s financial markets. The Hang Seng is hovering around 22,200; Sensex at more than 17,300 (Mumbai had a trade holiday on Monday); the FTSE 100 at close to 5,300; France’s CAC at 3,900 and Germany’s DAX at around 5,850. The world is awash with liquidity and the stock markets are currently reflecting that optimism. Japan’s Nikkei 225 is also on a roll due to good earnings from exporters, such as, Honda Motors, Mitsubishi UFJ Financials and other banks.
COMMODITIES ARE AT ONE-YEAR HIGHS and
THE US DOLLAR IS ON THE BACK FOOT
Led by the stock market surge in the US and other countries, crude oil has jumped from a level of USD 65 a barrel a few weeks back to nearly USD 80 on Nymex on Monday. The optimism about the prospect of a strong economic recovery across the globe has helped boost sentiments in the oil market. The oil price is also at one-year highs. A weak dollar also has helped the rise in prices of commodities to some extent. Even Gold prices are more than USD 1,050 an ounce.
The US Dollar Index (USDX), which is an average of the value of US dollar against six major currencies, like, Euro, Pound Sterling and Japanese Yen is also weak at around 75.26 with its continuous fall from levels of 80 in June 2009.
Even stock market volatility, represented by CBOE Vix, is also showing signs of some stability with the CBOE Vix at 21.50 (during the height of the global financial crisis, the CBOE Vix touched all-time high of around 80 in November 2008). CBOE Vix is a key measure of the market expectations of near-term volatility conveyed by stock option prices in the S&P 500.
EURO-US DOLLAR ONE YEAR CHART:
GBP-USD ONE YEAR CHART:
COPPER PRICES FROM NOV. 08 TILL OCT.09 (USD per m tonne):
WEST TEXAS INTL. CRUDE OIL PRICES (USD per barrel):
GOLD PRICES ONE-YEAR CHART (USD per ounce)
GOLD
(To view these charts, just click the URL given above in bold letters...)
THE ECONOMIC INDICATORS ARE MIXED
Unemployment rate in the US is nearly at 10 per cent. The unemployment rate in the UK is close to 8 per cent, though it has remained stable at that point since May this year. However, consumer spending in the US is up at this point of time. It is hoped that this trend will continue for some time. With the Christmas Season round the corner, the strong growth in consumer spending may continue till the end of this year. Global trade is severely down in the last two years or so which had a devastating impact on export-oriented countries, like, China, Japan, South Korea and others. The capacity utilization across industries and sectors is said to be quite low at this point of time, which gives an indication that the optimism about a V-shaped recovery needs to be tempered a little bit.
THE RUPEE BREACHED 46, BUT SETTLED ABOVE 46
Indian Rupee has strengthened a lot against the US dollar in the last 10 days with the rupee gaining more than 150 paise from a level of 48 to 46.25. The rupee appreciation is led by strong inflows from Foreign Institutional Investors (FIIs) which have pumped in more than USD 13 billion this year alone in to Indian stock markets with the benchmark-Sensex rising by more than 100 per cent in the last six months to the present level of 17,300. And the fact that India has been showing a GDP growth of six to seven per cent amidst a wall of worries for the developed world, like, the US and other big European countries.
OUTLOOK and SUMMARY
The world markets led by the Dow have been showing tremendous signs of optimism underpinning investors’ exuberance about the economic recovery though there are still some signs of weakness, especially, weak world trade and high unemployment rates in the US, the UK and some European countries. The same ebullience is shown in the commodities prices also. With the oil hovering near USD-80 mark a barrel on the Nymex, the surging commodity prices may have some dampening impact on certain industries, which are heavy users of commodities, like the auto industry and others.
Of course, much depends on the earnings picture of the corporates around the world with more 130 companies in the S&P 500 index dishing out their quarterly results this week. Investors will be reacting wildly to the forthcoming announcements – as we have seen on Friday, when US markets reacted negatively to the high loss of Bank of America at USD 2.2 billion for the September quarter. The same wild reaction may continue to happen this week depending on the progress of the corporate announcements.
Investors are also glued in to the actions of Central Bankers, which may take out their easy money policy (or the so-called quantitative easing), in the next few quarters. Some expect that the Central Bankers will continue with their benign interest policies till late 2010 or early 2011. Of course, much will depend on the GDP growth figures and other leading economic indicators in the world. As of now, everything seems to be sunny and funny! And investors across the globe have been enjoying this sunshine for the past six months. The sunshine will definitely continue for some time till the Dow gains another 10 per cent or so and attains a level of 11,500 or so. We shall revisit all the leading economic indicators if and when the Dow breached that important mark again on the upside. Till then, let us enjoy the shining movement.
What may, however, spook the markets may be some nasty announcement from policy makers about taking out the excess liquidity in the system earlier than anticipated or a resurgence of inflationary pressures led by surging commodity prices. Australia raised its interest rates a week back, becoming the first G-20 country to do so in more than a year. Though the announcement was not wholly unexpected, given the rising inflationary pressures in that country, markets are beasts when it comes to the breaking of the consensus view. Markets usually do not like their consensus view getting ruptured so easily.
With this all-round buoyancy, the swagger is back not only on the Wall Street, but also on Dalal Street of what the author would like to call as Bombay, the happening city. As a pointer to the expected things, JUST CONSIDER THIS!
And now with all-round optimism and surging investment-banking dominated profits, nobody is complaining about huge bonuses being dished out by Goldman Sachs and other banks which want to share their booty with employees who have taken excess risks and made some huge gains for their banks. May be, that’s how the world works! Profits are private and losses are public, as the old adage goes!
Outlook for India:
With the global markets in a sweet spot, the Sensex is in a bullish mood, with the Sensex level of 17,300 on Moorat trading day. There is still an upside for Sensex, which may reach a target of around 19,000 by the end of this calendar year. Of course, we need to watch the stance of RBI Governor toward the monetary policy when he presents a half-year review of the Annual Policy at the end of this month. The consensus view is that RBI may continue with its accommodative policy for some more time till the end of this financial year. Amidst a sea of mediocrity as far as GDP growth is concerned, India has attracted the investors around the world with a robust growth of six to seven per cent this year. The surging rupee may impact different companies differently, depending on their hedges and the net foreign exchange inflow/outflow for each company. While export-oriented companies’ earnings may be impacted adversely; the import-heavy industries, like, oil & capital goods may have some positive impact on their profitability. This is not to suggest that Tier-I Information Technology companies, like, Infosys, TCS and Wipro will be impacted very much by the rupee’s strength. These companies enjoy profit margins of between 30 to 35% and they are with deep pockets and as such they may weather the rising rupee much better than companies with low margins, like, the textiles, gems & jewellery, garments and leathers which suffer from low margins due to heavy competition from other Asian countries, like, Bangladesh, Vietnam, Indonesia, etc.
One big concern for India could be the prospect of rising inflationary pressures and the concomitant surge in interest rates amidst supply of huge paper from the Government Securities market (huge government borrowing, which has already borrowed more than Rs 3 lakh crore from the bond market this financial year alone) and in the form of Qualified Institutional Placement (QIP) by several companies in the secondary capital market. However, one soothing factor for the markets could be less than expected growth (a meager five to six per cent at that) in credit off-take in India, which have given some sort of a boost to bond markets in India in the last three to four weeks.
Chart and data courtesy: Financial news websites, newspapers and Google
FINALLY…
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RAMA KRISHNA VADLAMUDI, MUMBAI vrk_100@yahoo.co.in
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