Good morning,

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

  • BNP reported a fall in profits which was less than expected for Q212;
  • ECB meeting today. Will Draghi to all it takes to save the Euro?;
  • The Fed concluded a 2 day meeting yesterday. Still no stimulus but on the agenda;
  • Germany retained a stable outlook for its top credit rating at Standard & Poor’s just over a week after Moody’s Investors Service warned that the nation’s Aaa grade was at risk;
  • 10-year Italian debt is trading at 5.931%, 10-year Spain is trading at 6.732% and 10-year Portuguese debt is trading at $11.066%;
  • Brent is trading at $106.04/barrel;
  • Apple closed the session at $606.81 and Priceline closed the session at $642.98

The Fed concluded a two day meeting yesterday. Bernanke yesterday said that the Fed will provide additional accommodation as needed to bolster expansion. The problem is that once again the Fed didn't say when it is going to implement this stimulous. Because the Fed didn't provide any form of stimulus yesterday, the dollar strengthened against a basket of currencies and Tresuries slid as the Fed said growth has slowed without taking action. Infact, the markets in the US closed in negative territory.

Whatever Mario Draghi does today, economists say doing nothing is not an option. Investors are looking for the European Central Bank President to make good on his promise to do whatever is needed to protect the euro, interpreted by most as a signal that the ECB will intervene in bond markets. Should Draghi fail to overcome the objections of Germany’s Bundesbank to such action, the disappointment could spark a selloff. He holds a press conference at 2:30 p.m. in Frankfurt.

With Europe it is more complicated than the US for two main reasons. First the situation in Europe is much worse than that in the US and secondly, the Fed has proved to be much more pro growth than the ECB. Despite the markets rallying since mid last week on expectations that the ECB will do something 'big' today after Draghi was caught saying he will do all it takes to save the Euro, I think the markets are pricing in too much because they are expecting too much. There are alot of reasons why the markets could be disappointed this afternoon, many reasons which I have gone through many times. Though one reason which the market is failing to factor in is that the ECB has limited resources it can use and these resources are even more limited until the ESM is given a license to be able to purchase sovereign bonds in the primary markets.

Economists are saying that a grand solution to the crisis is unlikely to be announced today: giving Europe’s permanent bailout fund, the European Stability Mechanism, a banking license. That would allow the 500 billion-euro ESM to borrow from the ECB, boosting its firepower. So although economists are expecting the ECB to act, they still are not expecting a solution to the European crisis this afternoon and this could lead to a sell of in the markets.

My opinion remains the same despite this positive sentiment in Europe. Keep on holding onto your dollars and US blue ship and remain underweight Europe. It is still to premature to start putting money in European markets at this point in time when you can generate value holding US corporates which although are more expensive than their European peers, give a better forecast for future profits.

Stock to watch: BNP (Price E30.7, DB Price Target E39)

BNP Paribas SA, France’s largest bank, said second-quarter profit fell 13 percent as market swings tied to Europe’s debt crisis curbed trading revenue.

Net income dropped to 1.85 billion euros ($2.26 billion) from 2.13 billion euros a year earlier, the Paris-based company said in a statement today. That beat the 1.65 billion-euro average estimate of seven analysts surveyed by Bloomberg. Chief Executive Officer Jean-Laurent Bonnafe, who took over last year, has embarked on asset cuts to comply with stricter capital rules, mirroring similar moves by other large European banks. The lender, hurt by last year’s liquidity crunch and losses on Greek sovereign debt, joined smaller French rivals Societe Generale SA and Credit Agricole SA in shrinking balance sheets and slashing sovereign debt holdings.

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

Good day and happy trading!

Kristian Camenzuli