Stress-Testing - 27th April

Stress-testing, but not the financials…
The weekend started with talk focused on the US financial industry’s stress-test results. At the time that seemed like the single largest problem the world faced, and it was certainly serious enough to dominate the thoughts of every market investor. If someone had told you that by Sunday evening we’d be talking about pig-flu and a possible global catastrophe, well I’m sure many would have simply sneezed at such a suggestion. Truth is, global markets have for once seized upon a reason other than the near total collapse of the financial industry and are now focusing on what might make them money if indeed an end-of-the-world scenario were to occur – not the most heart-warming reaction by the investor base to such a global concern now is it? Some will never learn.

Flying Pigs…
Filthy Swines! – it’s all over the global news networks – whilst a terrible potential epidemic, it makes for a nice change to NOT have the investment banking community mentioned in the same sentence as the often-derided livestock responsible for the latest outbreak of pandemic panic. For the first time in almost 18mths, the world’s woes are not being directly attributed to the fanciful machinations of an all too greedy and immoral financial community. Many will be relieved to have the spotlight shining in a different direction for (hopefully) even a short while.
Then again, one cannot help but smile when realising just how close we have come to witnessing one of life’s greatest myths that has so many times provided a swift exit clause for those avoiding the undertaking of some responsibility – declaring they might acquiesce ‘when pigs fly”. Well, get ready for a lot of promises to finally be acted upon. With the airborne nature of the “swine flu” spreading from pig to human (how I wonder?) and now human-to-human as it is hurtled through the air in coughs and sneezes - this is as close as you’ll ever get to seeing that pig fly.

Markets all around the world are taking their chance to react for the first time since the news (and flu) began to spread – and reacting extremely negatively they are. Not even news that Japan has sharply revised down its GDP forecast (from 0 to -3%) has occupied investors’ concerns – Tokyo’s markets managed to end-the-day in +ve territory though, after rumours spread of certain bank mergers at the lunch-break. Japan’s pharma-leader, Chugai, also advanced strongly being one of the largest suppliers of Tamiflu’s major component – the Roche branded antiviral treatment.

Run-away planes…
Transport and leisure stocks have been absolutely destroyed in the first few hours of trading, with only some recovery coming through in Europe. There was no respite for Asia though. In a less-than-welcome revisit of the fear that swept through the region back in 2003 with SARS, investors have sent all the major indices down sharply – exacerbated by profit-taking following last week’s strong markets. Trades in Australia and New Zealand in particular were the first to be unwound and certain currency trades that had pointed to a brief return of risk-appetite suddenly disappeared – look at the re-gained strength of the Yen, trading at $/Yen 96.5 now. The US$ is gaining against other global currencies though as its safe-haven status takes on a new meaning in the face of a virus far more potent than human greed and materialism.

Hong Kong, Taiwan, Korea, Indonesia and Singapore are all down heavily – they were the first markets open to react with the selling-off of airlines and other leisure + tourist related companies. Those markets able to follow a bit of a recovery in Europe when it became clear that some of the airline stocks in particular (Air China -13%, Cathay -8%) had maybe been over-sold only had a short-time of trading left. As a result, the losses seen in the first few minutes of trade were never recovered. China saw the CSI fall -2.2% with pressure on the heavily-weighted airline firms as well as one of the world’s largest banks by market-cap, ICBC (-5.2%), as news spread that both Allianz and American Express may sell part of their large stakes in the lender after a lock-up expires. A number of China’s recently IPO-ed financial giants are facing large-stake divestments as western investors seek to realise some very large percentage gains to help pay their way out of other less successful investments and free-up some needed capital. The Chinese authorities have been encouraging ongoing negotiations with a number of the larger foreign-holders of stock, and how the first divestments are carried-out will be the creation of an essential precedent for those looking to take-profit as well. It will also be a reflection of how China is intending to deal with future foreign investors. They may well not be happy with the lack of dedicated foreign long-term holders.

Europe has followed-suit at the open, which is a real-shame considering the thoughtful appreciation that had been painfully achieved across the majors over the last couple of weeks. Anyone watching must be wondering whether there could have been a worse-time for such a global flu-scare. Just when it appeared authorities had successfully rid the markets of fear and panic (look at how the VIX index has recovered from 56 in mid-Jan to below 37 today) the bears out there are provided with the perfect excuse to send stocks tumbling once again. The allure of profit-taking was always going to be a problem in a bear-market rally (take what you can while you can) but those pig surely made it a no-brainer to come out of winning-trades this morning.
Europe’s majors opened negative and are struggling to recover as we near the lunch-break – FTSE -0.6%, CAC -1.1%, DAX -1%.

Not even news that the Qatari’s may step-into the Shakespearean family-feud evolving between Porsche and VW was enough to elicit delight that another chapter in this long-running saga may yet be written. Gulf states enjoying taking stakes in car companies is not a new fad (Kuwait’s purchase of Aston Martin, Abu Dhabi’s investment of $2.7bn in Daimler last month),and the existence of one-upmanship between the GCC’s investment entities is always a play for international investment bankers looking for the next white-knight. Let’s hope the Qatari’s love of cars doesn’t end-up in the compound like all those super-cars when the Emir decided to punish his subjects for the flaunting of their wealth last summer!

US futures naturally trading lower right now, sharply lower – DJIA-139pts, S&P -16.9pts. As more developments become clear in the spread (or not) of swine-flu, investors will either become more calm, or dangerously have another excuse to sell the markets. As aforementioned, US$ is gaining in the currency markets. As with any time of uncertainty, Gold is trading up +0.23% but Oil has slipped back below $50/brl (-4.7%) on aviation concern (less flights, less aviation fuel). The BDIY is sadly down 1.3% since Friday.