Equities Rally As Libor DeclinesTo Record Lows

Published May 18th, 2009 - 09:07 GMT

European equities continued to rally today as the London-interbank-offer-rate declined to as low as 79 basis points today, the lowest level on record since as far back as1990. The drop comes as a sign of relief for overly battered financial institutions and signals that central-bank efforts to lower the rate may be paying off.



Europe Session Key Developments

• Libor 3-month At Lowest Rate On Record Since As Far As 1990
• Financials Lead The Rally On The Move But Remain Exposed To Losses
• Market Optimism Will Stay Strong For The Short-term

European equities continued to rally today as the London-interbank-offer-rate declined to as low as 79 basis points today, the lowest level on record since as far back as1990. The drop comes as a sign of relief for overly battered financial institutions and signals that central-bank efforts to lower the rate may be paying off. After months of continual easing and unorthodox efforts by central banks to lower the rate, the rate has showed steady decline in past weeks. This steadiness is important since it may represent a much more stable and long lasting decline; one that would allow the economy to stabilize and companies to shift focus from short-term survival to long-term growth opportunities. With lower financing costs that could result from this, companies will be able to borrow more freely and pursue consolidation in industries where weaker companies may be facing bankruptcies. This is one of the key ingredients for a turnaround for the economy and if established could begin to solidify the bottom that many market participants have been searching for. Nevertheless, though positive, the news does not firmly establish this turnaround. In reality, a number of economic risks threaten to derail this development. Financial Institutions continue to hold substantial exposure to loans that are likely to show further losses in the coming quarter. Beyond that, even with lowered financing costs, the economy will remain weak in the near-term. Many companies and individuals will still have trouble meeting obligations. These conditions could potentially lead to another wave of losses. Losses from these exposures would limit the willingness of banks to lend to each other and could consequently raise the Libor once again. As such, fundamentally speaking equity rallies may be hasty in their movements. On the other hand, in the past months sentiment has driven markets rather than traditional fundamental analysis. In turn, this unexpectedly positive development will likely maintain market optimism for some time. Equities will likely continue to show strength for the short-term.

FTSE 100 4440.71 +92. 60 +2.13 %
UK equities were lead by the Financial and Technology sectors, which rose by 4.77% and 5% respectively. The Financials sector rose as Lloyd’s Banking gained 9.87% following announcement of agreement with UK Treasury to convert preferred shares into common stock. Barclays gained over 6.1% as well after announcing it would pursue sale of its asset management unit, which could amount to about $12 billion when sold.

CAC 40 3238.80 +69.75 +2.20%
Technology and Finance sectors lead rallies with gains of 4.17% and 4.28% respectively. Alcatel-Lucent gained 2.49% after a CFFO release showed Cash flow from operations rose 368% YoY in same period. STM Micro also gained over 9.13% after several analysts including Goldman Sachs raised the company to a buy. Arcelor Mittal showed gains of 4.24% despite posting a $100 million first quarter loss as it announced that it had begun talks with labor unions to reduce costs. The Utilities sector showed some weakness with a decline of 0.6%.

DAX 4841.98 +104.48 +2.21%
Financials and Technology sectors too led the German index, which gained 3.92% and 3.8% respectively. Telecoms were also buoyed by Deutsche-Telekom gaining 1.99%. In the financial sector, Commerzbank gained over 9.07% after announcing its Czech branch doubled its year over year profits of same period. It also announced that its shareholders approved a common stock sale to the government in order to raise capital. Deutsche-Bank AG similarly gained 7.2% after it announced it had won bid to handle the auctioning of Electricite De France SA’s distribution network in Britain.

IBEX 35 9159.30 +180.70 +2.01%
Strength in the Financials and Basic Materials sectors lead rallies, with gains of 3.4% and 3.2% respectively. Telefonica prices rose 1.31% after it announced it would raise its stake in Chinese telecom company, China Netcom group to from 5.24% to 9.19%. Banco Santander also gained 4.26% despite the Bank of Spain announcement that the bad loans ratio rose to 4.2% from 1.17% since last year.

S&P/MIB 19912.00 +364.00 +1.68%
The Technology sector showed impressive gains of 8.92% followed by the Telecom sector, which gained 5.04%. Uncredit Spa rose by as much as 12.85% as some analysts raised target price for the company while others downgraded it to reduce from hold. Telecom Italia SA also gained 5.6% after announcing sale of £760million of bonds due December 2017. Citigroup also upgraded the company to buy.




-Written by Stefan Tifigiu, CFDTrading Research
Please send any comments about this report to Stifigiu@fxcm.com

 

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