My Diary 501 --- A list of warnings

January 13, 2009 --- A list of warnings

Warnings and Warnings -- Overnight, warnings on the drop in state tax revenue, warnings on bank earnings, warnings on autos, warnings from the IMF, continued Russian natural gas issues, continued doubts about China and its buying of commodities, continued war in Gaza, continued risk aversion moves in FX with EUR/JPY closing below 120 and JPY below 89.50.  If this list isn’t long enough, it is sufficient to put the doubt back into investors as they struggle to balance the notable improvements in some credit spreads against the fear that such improvement less significant. 

Indeed, Libor-OIS spread has dropped to 98bps.The last time the Libor-OIS spread closed below 100bps was 12Sep08, the final working day before Lehman filed for bankruptcy. However, US financials/insurers seem in free-fall again, with Citi -17.0%, BOA -12.0%, JPM -4.1%, GS -7.5%, UBS -3.3%. In details, Citi collapsed on concern that though they may book $10bn by selling control of its Smith Barney to MS, the sale will crimp Citi’s LT earnings prospects. BOA plunged on Citi's expectation that they would post a $3.6bn Q4 loss. Life insurers collapsed with Hartford -19% and Prudential-13% after regulators dismissed an industry plea to speed capital relief. Having said so, I think it is all about earnings as Alcoa kicked off a likely horrid earnings season. Analysts currently expect 4Q08 earnings at -20% yoy, the 6th straight period of declining earnings, the longest stretch on record. Commodities related companies expected to post 65% profit decline and financial firms expected to post 53% profit fall.

In local markets, with S&P broke 875 and ‘HSI broke the closed below its 50DMAV yesterday, we may see further downside in HK to retest or at least close to October low…Stay tight.

Oversea Markets Review

Overnight, global equity declined 1.6%, with -2.4% in US (down 7.0% over 4Ds), -1.7% in EU (down 4.2%), and -1.6% in EM (down 6.2%). Japan was on holiday today but is lower 2.7% over the same 4-day period. Elsewhere, 2yr UST yield ticked down 1bp to 0.74%, and 10yr dipped 9bp to 2.30%. 1MWTI oil slumped $3 to $37.59/bbl—down $11 from its recent peak last Monday and less than $4 above its low in mid Dec08. USD rose nearly 1% against EUR to $1.33. Meanwhile, YEN continued to strengthen vs USD , which fell to 89.2, down 4.5% over the past week.