Research

Is the End in Sight?

In the midst of the debt crisis unfolding in the EU, Dexia became the first consumer bank lender to succumb to the debt crisis as the eurozone braced to recapitalise its banks.

Belgium agreed to buy the local consumer-lending unit of Dexia, ending a 15-year cross-border experiment with France after the European debt crisis deepened. The Belgium government will pay 4 billion Euros for the division and guarantee 60.5% of a so-called bad bank to be set up for Dexia’s troubled assets, while France will contribute 36.5% and Luxembourg 3%.

Belgium’s Aa1 local- and foreign-currency ratings were placed under review for a downgrade by Moody’s Investors Service because of rising funding risks for euro-area nations with high levels of debt and additional bank support measures that are likely to be needed.

The review will focus on the vulnerabilities of Belgian public debt in the current euro-area sovereign crisis and potential costs and contingent liabilities that the government may incur in supporting Dexia, Moody’s said in a statement on Oct. 7. Moody’s will also assess how the risks for the growth outlook of the economy and the government are fiscal and economic plans may impact the country’s debt trajectory.

For France, the challenge is to rescue a portion of Dexia’s operations without endangering its top credit ratings from Moody’s and S&P. It’s one of six countries in the euro-zone with a AAA rating.

Source: Bloomberg

On a technical basis, market remains weak and looking for cues from the development of the eurozone debt crisis. In addition, key economic data such as initial jobless claims and retail sales will be released in the US this week and likely to affect market sentiment.

a few worthy indicators

The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt. Generally the TED spread is an indicator of perceived credit risk in the general economy. From the graph, the rates are still relatively flat despite all the negative news in the market.

However, using a different measure to assess credit risks tells us a different story.   A quick check with the CDX index on Bloomberg shows that cost of credit default swaps are slowly increasing, which indicates that future credit risk are expected to increase.

Adding on this point, commercial paper issuances have reverse, which might indicate continuing softness in the " current transactions" of many companies.

With many contracdictory signals in the market currently, it would be best for the risk adverse investor to sit out the market volatility.

For the more adventurous investors, equity are looking cheap and since the relative credit risk is still low, it might be the best time to pick up some bluechip stock, when market confidence is still low.

S&P 500 has bottomed.

We see an inverse Head and Shoulders formation on the S&P500 hourly.

Price has bottmed and should continue to make its way up in the coming weeks.

Be prepared for a fake move down (which will be a higher low on the daily charts nonetheless) before a strong leg up.

Market Updates - Week of 25th July 2011

DEBT$ - $tart of a BooM or DooM?

Lingering over concerns on the debt problems from recent weeks, traders and investors focused on the outcome of another possible default by troubled EU countries and a threatened downgrade of US sovereign debt rating by credit rating agencies, Moodys and S&P. This is in view that US will default on its debt if it failed to increase its current US$14.3 trillion debt ceiling before the looming 2^nd August deadline. Gold on the other hand breached the US$1600 mark an ounce early in the week on renewed pessimism on continuing debt worries that is stuck in the Europe and US.

However, markets last week was uplifted mainly by better than expected corporate earnings of major US firms and on high hopes that US will avail a default as US President Barack Obama urges oppositions in the congress to accept a temporary increasing in the nation’s debt ceiling. News of strong support by the EU in unveiling a second bailout package worth US$229 billion for Greece, which includes a plan in getting bondholders to assume part of the cost, drove DOW to end the week higher to recent highs last seen on July 7^th. Similarly, STI recorded a hefty gain of 3.18% for the week, closing at 3182.95. The question on hand is if those gains are sustainable and if the investing community has been overly-optimistic about the debt situation.

Nevertheless, the attention is now back in Washington as “US debt talks teeter on edge of collapse” on Friday as Republican House Speaker John Boehner abruptly quit the negotiations due to unresolved taxation issues with the democrats. Will fears of a mounting or actual US default on its debts send shockwaves to the financial markets? Fundamentally and technically, noone including the opposition republicans wants to see US enter into a dire state. US sovereign debts are rated the highest AAA ratings by credit agencies. As such, any defaults or downgrades will further hit the already stalled US economy growing at an anemic pace of 1 to 2% and worsen the employment situation in the US, with jobless rate standing at 9.2%.

Will US congress finally reached a compromised deal before 2^nd August? We shall wait and see…

Capitaland Poised for a rebound

Capitaland seems poised for a rebound with the STI starting to trend strongly for the whole of the 18th to 22nd of Jul 2011.

A higher low, a hammer with a confirmation and the stochastics crossover seem to indicate bullishness for Capitaland. 

Entry: Market price

Stop: $2.81

Profit target: $3.11, $3.50