JPMorgan Disappoints; Banks Lead Stocks Lower (16Jan)

Banks lead stock market lower as JPMorgan surprises Wall Street with disappointing earnings

- STI: +1.75% to 2791.5

- MSCI Asia-Pac ex-Japan: +0.58%

- Euro Stoxx 50: -0.33%

- S&P500: -0.5% to 1289

 

S&P downgraded European sovereign debt ratings, with France and Austria losing their AAA down a notch to AA+ on negative watch. Needless to say Spain and Italy were downgraded, and while Finland, the Netherlands and Luxembourg kept their AAA, they were put on negative watch. Germany remained unscathed. While this was done after European markets closed, we expect ex-German yields to rise cum Monday, as US markets saw a flight to treasuries.

 

The even bigger news is that Greek haircut talks broke down. Sure, we'll swap old debt for new at 50% par, the private sector says, but at what yield and maturity? Expect this issue to come down to the wire. Will bond holders cave? Who knows... A default leading to leaving the Euro would be disastrous due to contagion.

 

US data saw exports decline 0.9% on weak European demand. Recent retail sales data was weak as well, as well as the unexpected spike in unemployment claims.

 

We are now less positive over the short term for global equities on EZ sovereign downgrades impacting deficits, possible Greek default, US data below market expectations, and the prospect of China loosening is postponed. On the other hand, market supportive reasons like the rate of mfg contractions in Europe and Asia having eased somewhat, and unlimited liquidity by the ECB resulting in backdoor QE are still there. Electronics sector in Singapore could also be bottoming out if global sentiment improves, but headwinds are significant (see next para). We don't have a strong conviction over the short term at the moment.

 

Over the larger trend for the STI and S&P500, we are still bearish: (a) we expect US growth to surprise on the downside due to incomes not rising fast enough to offset a fiscally tighter 2012, (b) EZ fiscal and debt-GDP targets will be missed, refinancing will be tough, exacerbated by on-going recession, (c) China will avoid hard landing but its slowdown will be a drag on Asian exports. Positive challenges to our view would be (1) the Eurozone process for fiscal integration actually addresses its suboptimal growth path, and (2) lead econ indicators globally corroborate resilience. We have some improvement in the latter already.

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