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Good morning,
Markets are called to open flat this morning. This is what's happening today:
Europe
The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area. The Frankfurt-based ECB said yesterday it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. Once the recapitalization process is finalized, and it is expected this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations. The move comes after Draghi acknowledged for the first time that Greece could leave the monetary union. While the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet.” Greece faces a fresh election on June 17 that may boost parties opposed to the conditions of its international bailouts, raising the possibility of its exit. The formal announcement of the election date, probably June 17, will be made after the new parliament is sworn in today and then dissolved.
Spain will try to show investors it can keep funding itself today as yields approach levels that pushed other nations into bailouts and foreign investors shun the country’s bonds. Spain will seek to sell E1.5b to E2.5b of bonds maturing in 2015 and 2016, about half the level it aimed for a year ago. Spanish 10-year bond yields rose as high as 6.5% yesterday, approaching the 7% mark that pushed Greece, Ireland and Portugal toward European rescue packages. Prime Minister Mariano Rajoy said yesterday that Spain faces the “serious risk” of losing access to debt markets and called on European institutions for support. The Treasury is trying to sell bonds after foreign investors’ share of the nation’s debt fell to the lowest since 2003. Spanish banks picked up the slack with the help of emergency funding from the European Central Bank. Spain, which has already sold 53% of its planned medium and long-term issuance for this year, will auction debt maturing in January and July 2015 and April 2016. The last sale on May 14 came in just below the maximum target of E3b. The Treasury paid an average rate of 2.985% to sell 12-month bills, up from 2.623% a month earlier. France’s borrowing costs fell at an auction yesterday.
US
The Federal Reserve signaled further monetary easing remains an option to protect the U.S. economy from the danger that lawmakers will fail to reach agreement on the budget or Europe’s debt woes worsen. Several members of the Federal Open Market Committee said new actions could be necessary if the economy loses momentum or “downside risks to the forecast became great enough,” according to minutes of the Federal Open Market Committee’s April meeting released yesterday in Washington. U.S. stocks declined yesterday as reports the European Central Bank will stop lending to some Greek banks overshadowed stronger-than-forecast data on U.S. housing and manufacturing.
Minutes from the last Federal Reserve meeting showed some policy makers said further easing may be needed should the U.S. economy slow. Industrial output in the U.S. rose last month at the fastest pace since December 2010.
Japan
Japan’s economy expanded faster than estimated in the first quarter, boosted by reconstruction spending that’s poised to fade just as a worsening in Europe’s crisis threatens to curtail export demand. Gross domestic product rose an annualized 4.1% from the final three months of 2011.
Stock to watch: General Motors (Price $21.91, Price Target $37)
We believe that GM's configuration represents a dramatic departure from "The Old GM". Costs are competitive and its products are gaining increased traction. Moreover, GM is now solidly profitable and cash flow generative at the bottom of the demand cycle in its core North American market. We believe this alone dramatically alters the risk/reward profile for investors. GM has the potential to benefit greatly from a cyclical recovery in NA, with operating leverage possibly greater than any other global automaker. GM should also benefit from a future restructuring of its European operations as well as its favorable BRIC exposure. Free cash flow is already quite strong despite a relatively low US SAAR and despite heavy European losses. Buy.
For further information on General Motor or other stocks we follow, contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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