DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the lines - Bernhard Eschweiler
(firmenpresse) - DGAP-News: Silvia Quandt&Cie. AG, Merchant&Investment Banking /
Key word(s): Miscellaneous
Silvia Quandt&Cie. AG, Merchant&Investment Banking: In-between the
lines - Bernhard Eschweiler
09.09.2011 / 09:18
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- Risk of market turmoil turning into financial crisis has increased
- Central banks provide first defense - but governments have yet to
follow
- EFSF funding increase more likely than Eurobonds
- Economic outlook divided between better data and weaker sentiment
Equity markets remained volatile over the last two weeks with a bias to
test new lows in Europe. Market concerns are widening from the debt
troubles in the US and Europe and the risk of recession to the fear of a
financial crisis. At the center are Europe's banks. Comments by
policymakers and the disappointing fiscal news from Greece and Italy were
not helpful to say the least. Central banks are the first line of defense
and can be expected to do more to prevent a liquidity crisis. However,
markets will remain nervous about who pays the bill. The debate in Germany
over the ratification of the EU summit decisions is not helping markets
gain confidence. Meanwhile, economic data for the third quarter has so far
held up better than feared.
European financial squeeze
The new element in recent weeks is renewed worries over the European
banking system. A cocktail of write-downs by banks of their sovereign debt
exposures, weaker financial reports, profit warnings, new lawsuits and the
call by IMF President Lagarde to raise bank capitalization brought European
banks back in focus. Bank stocks dropped sharply and CDS spreads surged to
all-time highs. Banks show also less faith in each other. Bank deposits
with the ECB rose to a new high, while banks in the periphery including
Italy rely increasingly on ECB funding. The difference between short- and
longer-dated Euribor-OIS spreads widened to a level similar to that before
the Lehman crisis, which shows that banks are not willing to provide each
other funding beyond a few days or a week. By comparison, similar bank
liquidity and credit spreads in the US are far less elevated.
Stabilizing interbank markets is central bank territory. Not surprisingly,
the ECB announced today additional measures to provide banks with
liquidity. As expected, the ECB left the policy rate unchanged, but the
council's expressed concern over growing economic and financial risks
implies that the next rate move is more likely to be a cut than a hike.
However, central banks will remain under pressure to do more beyond
liquidity and interest rate measures. The first to give in was the Swiss
National Bank, which fixed the minimum CHF/EUR exchange rate at 1.20 this
week.
Next in line is the Fed. Speculation of an imminent move is likely to be
disappointed. More bad economic news or better inflation figures are
probably needed to push the Fed. Also, buying more Treasuries at already
historically low yields may have little impact. Instead, the Fed may
consider extending its QE program to other asset classes, such as equity or
mortgages. For the ECB, the question is whether to continue the
bond-buying operations. Financially, the interventions have been a
success, but not politically, thanksto Italy's back paddling on fiscal
reforms. It is unclear how soon the ECB can pass the buck to the EFSF, if
at all. Thus, the ECB will probably be more cautious going forward and tie
its support more directly to credible reform progress by individual
countries.
Germany unlikely to agree to Eurobonds
Whatever central banks will do, markets will only treat this as pain relief
and not as the final cure. Solutions will have to come from politics and
that is unlikely to happen soon and smoothly. The new jobs initiative by
US President Obama is a small step in the right direction. The measures
are mostly supply side, but the size is tiny (0.2% of GDP) and likely to be
further trimmed by Congress. In Europe, there is growing disagreement
about what to do (see the opposing calls by IMF President Lagarde and ECB
President Trichet for more fiscal stimulus and austerity respectively).
The result is paralysis. The issue is not just how to resolve the debt
crisis, but whether and in what form the Euro survives and who pays the
final bill.
At center stage is Germany. The constitutional court has not ruled against
the first Greek rescue package and the setup of the EFSF, but curtailed the
government's ability to pledge more support without parliamentary approval.
Already, the ruling coalition is struggling to get support among its own
troops to ratify the decisions of the EU summit. Most likely, the vote
will pass, but this will not be the last test. There is bound to be more
fiscal slippage in the periphery. Some of that will be due to the lack of
political will, but much will reflect the impact of weaker-than-expected
growth. Sooner or later, it will become clear that the EFSF is not big
enough to handle these problems. The introduction of Eurobonds will come
back on the agenda, but chances that Germany will agree are slim. First,
Eurobonds would require constitutional changes. Second, there is little
support within the coalition for Eurobonds. Third, even the opposition
parties, who are in favor of Eurobonds, will struggle to
win an election on that platform. More likely is that Germany agrees to an
increase of EFSF funds. And even that will be difficult to get and
probably require peripheral countries agreeing to more binding stability
measures, such as constitutional debt brakes and automatic sanctions for
deficit violations.
Data points to stronger German Q3 growth
Data reports over the last two weeks have been better than feared. Yes,
the weaker US labor market report pushed markets lower last Friday, but
manufacturing and services ISMs as well as consumer spending figures were
better than expected. In Germany, unemployment continued to fall in August
along the 10,000 per month trend. Meanwhile, July manufacturing output
jumped 4.5% and now stands 28% annualized above the second-quarter average.
Special factors helped boost production in July, yet the likely negative
payback in August will probably not erase the entire gain. Manufacturing
orders fell in July, but that follows strong increases in May and June,
which were boosted by lumpy non-car transport good orders (aircraft, ships
and trains). Excluding non-car transport goods, orders in July were 11%
annualized above the second-quarter average. The quarter is not yet
finished, but chances are high that third-quarter GDP will come in stronger
and that the impact of the market turmoil (weaker business and consumer
confidence) will only become visible in softer fourth-quarter GDP growth.
Disclaimer
This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,
and was first published 9 September 2011, Silvia Quandt Research GmbH,
Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German
Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht
(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439
Frankfurt.
Publication according to article 5 (4) no. 3 of the German Regulation
concerning the analysis of financial instruments (Finanzanalyseverordnung):
Number of recommendations Thereof recommendations for issuers to which
from Silvia Quandt Research investment banking services were provided
during
GmbH in 2011 the preceding twelve months
Buys: 100 37
Neutral: 37 1
Avoid: 6 0
Company disclosures
Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz)
in combination with the German regulation concerning the analysis of
financial instruments (Finanzanalyseverordnung) requires an enterprise
preparing a securities analysis to point out possible conflicts of interest
with respect to the company or companies that are the subject of the
analysis. A conflict of interest is presumed to exist, in particular, if an
enterprise preparing a security analysis:
(a) holds more than 5 % of the share capital of the company or companies
analysed;
(b) has lead managed or co-lead managed a public offering of the
securities of the company or companies in the previous 12 months;
(c) has provided investment banking services for the company or companies
analysed during the last 12 months for which a compensation has been or
will be paid;
(d) is serving as a liquidity provider for the company's securities by
issuing buy and sell orders;
(e) is party to an agreement with the company or companies that is the
subject of the analysis relating to the production of the recommendation;
(f) or the analyst covering the issue has other significant financial
interests with respect to the company or companies that are the subject of
this analysis, for example holding a seat on the company's boards.
In this respective analysis the following of the above-mentioned conflicts
of interests exist: none
Silvia Quandt Research GmbH, Silvia Quandt&Cie. AG, and its affiliated
companies regularly hold shares of the analysed company or companies in
their trading portfolios. The views expressed in this analysis reflect the
personal views of the analyst about the subject securities or issuers. No
part of the analyst's compensation was, is or will be directly or
indirectly tied to the specific recommendations or views expressed in this
analysis. It has not been determined in advance whether and at what
intervals this report will be updated.
Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate
the shares of the companies they cover on an absolute basis using a 6 -
12-month target price. 'Buys' assume an upside of more than 10% from the
current price during the following 6 - 12-months. These securities are
expected to out-perform their respective sector indices. Securities with an
expected negative absolute performance of more than 10% and an
under-performance to their respective sector index are rated 'avoids'.
Securities where the current share price is within a 10% range of the
sector performance are rated 'neutral'. Securities prices used in this
report are closing prices of the day before publication unless a different
date is stated. With regard to unlisted securities median market prices are
used based on various important broker sources (OTC-Market).
Disclaimer This publication has been prepared and published by Silvia
Quandt Research GmbH, a subsidiary of Silvia Quandt&Cie. AG. This
publication is intended solely for distribution to professional and
business customers of Silvia Quandt&Cie. AG. It is not intended to be
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are made by Silvia Quandt Research GmbH with regard to the accuracy or
completeness of the data or information contained in this report. The
opinions and estimates contained herein constitute our best judgement at
this date and time, and are subject to change without notice. Prior to this
publication, the analysis has not been communicated to the analysed
companies and changed subsequently. This report is for information purposes
only; it is not intended to be and should not be construed as a
recommendation, offer or solicitation to acquire, or dispose of, any of the
securities mentioned in this report. In compliance with statutory and
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GmbH have set up effective organisational and administrative arrangements
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securities and is therefore not included in this report. Silvia Quandt&Cie. AG and Silvia Quandt Research GmbH, its affiliates and/or clients may
conduct or may have conducted transactions for their own account or for the
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Frankfurt am Main, 09.09.2011
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