Fundamentals

Stocks Slip On One-Year Anniversary of 12-Year Low For European Equities

Europe Session Key Developments

•    German Chancellor Merkel Urges Derivatives Regulation
•    Greece Continues Efforts to Cut Deficit, May Have Overstated Tax Revenues
•    Commodity Prices Drop on Greenback Strength, European Currencies Weak

European stocks were generally lower today, the one-year anniversary of the “bottom” for European stocks- March 9, 2009 when equities traded to a 12-year low.  The Dow Jones Stoxx 600, a broad collection of European equities, fell for a second consecutive session to 256.80.  Greece continued to stay in the spotlight, as investors today were concerned that Greek tax increases may not generate as much revenue for the government as initially thought.  This would clearly hinder the efforts of Prime Minister George Papandreou in his efforts to reduce the Greek budget deficit to less than the current 12 percent of GDP.  Investors sold off Greek bonds on the news, driving yields 2 basis points higher on 10-year bonds to 6.24 percent.  As for bailout speculation, it appears that EU leaders will try to avoid any provision of aid to Greece as long as the stability of the euro region does not come into question.  The EU’s Olli Rehn maintained in an interview today that Greece remains on the path to debt below 3 percent of GDP by 2012.  German Chancellor Angela Merkel and Luxembourg Prime Minister Jean-Claude Juncker have redirected their efforts towards the derivatives market, calling for the immediate regulation of the “very speculative elements” of such trades in order to maintain regional stability.

Overall, investor uncertainty remained the leading factor for market moves today and drove investors away from riskier assets.  Crude oil traded down nearly 1 percent to the $81 a barrel level, while gold and silver futures dropped to $1118 and $17.21 respectively.  As for currencies, the U.S. dollar strengthened against its European counterparts, gaining against the euro for the first time since Thursday and pushing cable lower for a second day.

FTSE 100                       5602.30                      -4.42                       -0.08%
British shares fell for the first time since Thursday as financial shares dropped over 0.7 percent on the session.  Ratings-agency Fitch said today that the U.K. government must reduce its budget deficit at a faster rate than currently planned because the nation’s credit profile has deteriorated “pretty sharply.”  Standard Chartered fell 2.8 percent on the credit concerns and Royal Bank of Scotland fell 1.2 percent.  U.K. banks may need to shrink their balance sheets by over 500 billion pounds to meet liquidity and capital requirements, according to an analyst at Credit Suisse.  Furthering index losses today were shares of Liberty International, which fell the most this year after the British mall owner reported net asset values that missed estimates.

CAC 40                            3910.01                     +6.47                      +0.17%
French stocks rallied for the second time in three days, led by strength in utilities and health care shares.  Pernod-Ricard posted the largest gain on the index, adding over 1.5 percent, while GDF Suez also posted a strong gain.  GDF, a natural gas and energy services firm, rose on rumors that U.K. utility International Power would consider a “tie-up” with the French utility.  Pharmaceutical firm Sanofi-Aventis added 0.7 percent after an announcement that the firm would combine its veterinary medine units with those at Merck & Co. to create the world’s largest animal health entity.

DAX                                 5885.89                       +9.98                    +0.17%
Trading in Germany led to the biggest gains among major European indices, as the DAX added nearly a quarter-percent on strength in utilities and basic materials shares.  Basic materials traded higher despite weakness in commodity prices, as shares of Bayer rose over 1 percent.  Furthering gains in the sector were Linde, which added 0.6 percent, as well as Salzgitter and Basf, which were also higher on the day.  Mail carrier Deutsche Post had the biggest gain on the DAX, rallying over 2 percent after the company announced its full-year profits for 2009 as “considerably higher” than in the year prior.

IBEX 35                          11002.80                     -75.50                   -0.68%
Trading in Spain led to the biggest loss among major European indices, as Ebro Puleva plunged nearly 5 percent.  The Spanish food company announced yesterday that it would be selling its dairy business to Lactalis, Europe’s largest dairy group.  Other weak performers were Mapfre, which fell nearly 3 percent after announcing its purchase of a 50 percent stake in the insurance units of Caixa Catalunya.  As for financials, Banco Popular fell for the first time in six sessions, dropping over 1 percent after UBS trimmed its price estimate on the shares.

FTSE MIB                      22355.80                     -42.41                    -0.19%
Italy’s FTSE MIB closed lower for the first time in eight sessions on weakness among financial shares.  In addition to a price revision for Banco Popular, analysts at UBS also revised their price estimates lower for Banca Monte dei Paschi di Siena, Intesa Sanpaolo, UniCredit, and Unione di Banch Italiane.  Further dragging down the Italian index today was cable maker Prysmian, which fell over 1 percent on bearish commentary from UniCredit.

There is a growing divergence in the state of the financial market’s fundamentals and its general level of activity. In the past week, there have been developments that have degraded the fidelity of the Euro Zone, leveraged the threat of a financial crisis in China and added risk to the very assets that are used to establish risk-free returns.