Home > Blog > Trader talk > Trader Talk: An Analysis of the Markets this Morning

Good morning,

Markets are called to open higher this morning. This is what's happening today:

  • Obama defeated Republican Mitt Romney. Obama is the US President for the next four years. He will need to address a so-called fiscal cliff of more than $600 billion in tax increases and spending cuts that take effect in 2013 unless Congress can reach a budget compromise;
  • Futures on the S&P 500 pared a loss of as much as 1 percent as Obama closed in on victory;
  • BNP Paribas SA, France’s largest bank, said third-quarter profit more than doubled after it posted higher revenue at the investment-banking unit;
  • The Greek parliament votes later today on austerity measures needed to keep the nation’s bailout on track;
  • China’s Communist Party will start a meeting in Beijing tomorrow that will formally pick the next generation of the nation’s leadership, with Xi Jinping expected to be chosen as general secretary;
  • 10-year Italian debt is yielding 4.887%, 10-year Spain is yielding 5.640% and 10-year Portuguese debt is yielding 8.407%;
  • Brent is trading at $110.74;
  • Apple closed the session at $582.85

What does an Obama Victory mean for the markets?

Futures on the S&P 500 pared a loss of as much as 1% as Obama closed in on victory. Obama has been president during the weakest post-recession economic recovery since World War II as unemployment averaged 9.1% and the housing market stagnated until this year. Economists forecast US GDP will expand 2% in 2013, a slowdown from this year’s 2.1% projection. Treasury yields were already at record lows when Obama took office and have fallen as Europe’s debt crisis boosted demand for dollar-denominated assets. The S&P 500, up 111% since March 2009 amid 10 straight quarters of earnings growth, would reach the average length of bull markets since World War II in April.

However, stock and bond investors enjoying the biggest advance in more than a decade under Barack Obama may see the momentum fade as the rallies age and the president confronts Congress over spending cuts and taxes. Obama will preserve interest-rate policy at the Federal Reserve, however, his re-election endangers tax breaks enacted a decade ago on dividends and capital gains.

The rate on dividends for high-income taxpayers will rise to 43.4% from 15% and the top rate on capital gains to 23.8% from 15%. For an individual with $10,000 invested in the S&P 500, payouts would fall to $120 a year from $180.20 should the old rate be reinstated. An investor who sells the stock at a $5,000 profit would face capital gains obligations of about $1,190 compared with $750 now. Utilities and phone companies, the industries with the highest dividend yields in the S&P 500, had the worst performances in the index yesterday.

Shares of alternative energy suppliers, discount retailers, hospitals, specialty pharmaceutical companies and communications infrastructure providers are among the industries that will benefit from an Obama win.

Now that the election has been decided, investors will turn their focus to the $607 billion of tax increases and federal spending cuts set to kick in automatically in January, the so- called fiscal cliff. The Congressional Budget Office has said the U.S. economy would slow by as much as 0.5% next year if Congress fails to keep the increases from taking effect.

BNP reported good results for Q312. Here are the main points from the results:

  • BNP Paribas 3Q net income more than doubled to EU1.32b, est. EU1.06b (prior EU541m)
  • 3Q rev from equity, advisory ops up 51% to EU444m
  • 3Q fixed income sales more than double to EU1.13b
  • 3Q CIB pretax profit EU732m vs est. EU686m
  • Reached EU45b of CIB risk-weighted asset cuts
  • BNP says made 90% of planned job cuts in CIB3Q retail banking net rises 8.8% to EU1.71b
  • 3Q French branch earnings EU525m vs EU487m
  • 3Q Belgian retail banking pretax profit up 8.5% to EU192m3Q Italian retail banking pretax profit down 6.6% to EU141m, est. EU109m
  • Core tier 1 ratio reached 9.5% end Sept
  • BNP up ~29% YTD vs 19% advance in Stoxx 600 banks; 23 buys, 10 holds, 2 sells

Stock to watch: BNP (Price E39.12, Price Target E46)

Deutsche Bank comments – We find BNP Paribas well positioned in the current challenging environment. First of all, BNP Paribas is little impacted by Basel 3 and we even calculate a comfortable capital surplus under Basel 3 for the company, which is a luxury among European banks in our view. We also think that BNPP is particularly well positioned to gain some market shares in investment banking, especially in FICC, where the bank should benefit from the trends towards more disintermediation. We also like BNPP's strong asset quality which we find is a key advantage in a recessionary environment. Given the substantial upside to our target price and the good positioning of BNPP in these challenging times we rate the stock Buy.

For further information on BNP or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli