Stock Preacher

European shares hit a 10-month high last week but fell back on Friday, tracking losses on Wall Street. Talk that LVMH could sell its coveted Moët Hennessy division to long-time suitor Diageo sent the luxury brand group’s shares higher. LVMH has repeatedly denied it is planning to sell, in spite of rumors that Diageo is a willing buyer. It ended the week up 3.2% at €65.62. Nestlé shares fell 4.3% at SFr42.20 after the Swiss food group reported a slide in profits and sales in its interim results. Read more

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While bank stocks have been battered, it is the sector’s bonds and their spreads over government debt, that could provide early clues of an upturn. “The best news is that non-financial high-grade corporate debt has been behaving a lot better, but financial sector debt needs to be better bid,” said John Haynes, strategist at Rensburg Sheppard in London. He said a directional change in the iBoxx financial index, a benchmark for bonds from financial companies, was crucial. European financial bond prices have fallen almost 17% on average this year, the iBoxx financials index shows, suggesting investors are giving the sector a wide berth. Haynes said he was also watching the Platinum-to-Gold ratio. Platinum has a variety of industrial uses, notably in cars, while Gold is boosted by its safe-haven allure. The ratio of the two metals, in effect a ratio of economic growth expectations to investor fear, has moved decisively in the direction of fear. Platinum prices were double the level of gold in February last year, but now the ratio is close to 1 to 1.”You look at everything and try and work as you used to, said Fortis’ Gijsels. “But should have an open mind and understand that market internals have changed.”

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US investors are decamping foreign ventures and bringing their US$s home, entrusting them to the supposed bedrock safety of United States government bonds, and China continues to buy huge quantities of the USA’s debt. These actions are lifting the value of the US$, and providing the Obama administration with a crucial infusion of financing as it directs trillions of US$s toward rescuing banks and stimulating the economy, enabling the government to pay for these efforts without raising interest rates. The movement of this money back to the United States appears to be exacerbating the financial crisis world wide. A US$ invested by foreign central banks and investors in US government bonds is a US$ that is not available to Eastern European countries desperately seeking to refinance debt, also, it is a US$ that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment.

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