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Good morning,
Markets are called lower this morning. This is what's happening today:
The UK
Bank of England Governor Mervyn King may leave the door open to add more stimulus as a flare-up in Europe’s debt crisis and government spending cuts threaten to keep Britain’s recovery at bay, according to economists at Deutsche Bank AG and BNP Paribas SA. King will next week lower U.K. growth forecasts in the central bank’s Inflation Report, they said, leaving policy makers leeway to restart so-called quantitative easing again if needed. Officials halted it yesterday, pushing up the pound and sending bonds lower.
The Monetary Policy Committee held fire on more bond purchases as concern among some officials about inflation mounts. Signalling that QE is off the table on May 16 could further boost the pound, adding to pressure on the U.K. economy, while the Bank of England may also favor keeping the door open as tensions in Europe’s debt crisis increase.
Greece
Greece’s political leaders go into a fifth day of talks today to carve out a government with Evangelos Venizelos, the socialist Pasok leader, set to press counterparts on a proposal for a unity government that would avert a new election.
Venizelos, who received the mandate to form a government yesterday, said there was a first “good omen” since the inconclusive May 6 election, after Democratic Left leader Fotis Kouvelis outlined a proposal designed to keep the country in the euro area.
“Our views are very close,” Venizelos said to reporters in Athens after meeting with Kouvelis. “I will continue the effort, preparing the ground for the phase of negotiation that will be coordinated by the president of the republic.”
Greece’s political impasse has raised the possibility another election will have to be held as early as next month, threatening the implementation of austerity pledges. The standoff has reignited European concerns over Greece’s ability to hold to terms of its two bailouts negotiated since May 2010 and sparked concerns about the country leaving the euro.
Kouvelis, whose party holds 19 seats in the 300-seat parliament, said the unity government would last until 2014 and would have a specific agenda to negotiate a gradual “disengagement” from bailout austerity measures. He called on all parties to support his proposal.
Spain
Spain will take over Bankia by converting its 4.5 billion euros of preferred shares in the group’s parent company into ordinary shares, it said two days ago. Jose Ignacio Goirigolzarri, a former second-in-command at Banco Bilbao Vizcaya Argentaria SA, will replace Chairman Rodrigo Rato.
Banco Santander SA and BBVA, the country’s biggest banks, rallied in Madrid trading after the Bankia takeover announcement, while the gap in yield between Spanish 10-year bonds and German bunds narrowed to 4.45 percentage points after ballooning to the widest since November on May 9.
Opinions remain divided on whether Rajoy’s latest plans will succeed. The nation’s lenders carry 184 billion euros of what the Bank of Spain terms “problematic” assets linked to real estate.
The new property provisions “will help but it’s a drop in the bucket,” said Megan Greene, head of European economics at Roubini Global Economics LLC, in an interview with Bloomberg Television’s Francine Lacqua yesterday. She said Spanish banks may need 100 billion euros to 250 billion euros in capital. “The Spanish government kind of can’t win,” Greene said.
Credit Agricole
Credit Agricole SA, France’s third- largest bank by market value, said first-quarter profit dropped 75 percent, hurt by Greek losses.
Net income fell to 252 million euros ($326 million) from 1 billion euros a year earlier, the bank, based near Paris, said in a statement today. That missed the 482 million-euro average estimate of five analysts surveyed by Bloomberg.
Credit Agricole booked 940 million euros of net losses related to Emporiki Bank of Greece SA, the Athens-based unit it acquired in 2006, and Greek bond writedowns resulting from the nation’s sovereign debt restructuring. The French bank is struggling to staunch losses from Greece after reporting its first annual loss last year. “Credit Agricole keeps suffering because of Greece,”
JP Morgan
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the firm suffered a $2 billion trading loss after an “egregious” failure in a unit managing risks, jeopardizing Wall Street banks’ efforts to loosen a federal ban on bets with their own money.
The firm’s chief investment office, run by Ina Drew, 55, took flawed positions on synthetic credit securities that remain volatile and may cost an additional $1 billion this quarter or next, Dimon told analysts yesterday. Losses mounted as JPMorgan tried to mitigate transactions designed to hedge credit exposure. “There were many errors, sloppiness and bad judgment,” Dimon said as the company’s stock fell in extended trading. “These were grievous mistakes, they were self-inflicted.”
The chief investment office was thrust into the debate over U.S. efforts to ban proprietary trading when Bloomberg News reported last month that the unit had taken bets so big that JPMorgan, the largest and most profitable U.S. bank, probably couldn’t unwind them without losing money or roiling financial markets. Dimon, 56, had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money, five former employees said.
Dimon had defended the unit as a “sophisticated” guardian of the bank’s funds on an April 13 conference call, calling news coverage “a complete tempest in a teapot.” On May 2, he led fellow Wall Street CEOs in a closed-door meeting to lobby the Federal Reserve about softening proposed U.S. reforms that might crimp their profits.
Stock to watch: Cisco ($16.83, Price Target $22)
Cisco remains the dominant player in many parts of the data networking industry. While the uncertain macro merits caution, we note secular market drivers are contributing to an acceleration in demand for networking capacity; drivers such as 10GE switching, virtualization, Clouds, 4G/LTE, video, and Web 2.0. We are constructive on the prospects for mid to high single-digit growth in FY12 (we are modeling 6.3%) based on catalysts such as: 1) the 10GE datacenter switching and Layer 4/7 upgrade cycle, driven by Intel Romley and VMWare VSphere5 upgrades; 2) the LTE packet core and edge/core routing upgrade cycles; and, 3) IP video collaboration. A fundamental improvement in sales execution combined with meaningful revenue growth prospects from the 10GE datacenter, and from the LTE and video infrastructure upgrades, is the basis for our Buy rating. Longer-term, we see meaningful prospects for upside to our estimates and to the consensus view based on a modest recovery in global IT spending, and Cisco's leadership position in major spending themes such as datacenters, video, and the mobile Internet.
For further information on Cisco, please contact our offices on 25688688.
Good day and happy trading!
Kristian Camenzuli
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