FRIDAY 7/11/14; Portugal Contagion Worries Subside; WFC Kicks Off Q2 Bank Earnings

The Portugal banking contagion risks are subsiding. Banco Espiritio Santo remains suspended from trading. The complex ownership structure of the troubled bank and associated banks is leaving analyst’s heads spinning. Interestingly, the world markets in general are a sea of derivatives on top of derivatives. Credit Agricole trades negative on news it owns 15% of the troubled bank but Credit Ag says the exposure is not a concern and recovers +1% higher. The Portugal PM says there is no need to worry and all financial systems are stable. Portugal has the funds to absorb the bad bank.

The Portugal PSI 20 stock index recovers one-half of yesterday’s losses up +2.1%. The Portugal 10-year yield recedes to 3.88% stepping away from the 4% teased yesterday indicating slight calm returning. The European choir is all singing from the same hymn book telling global markets not to worry about Portugal. European leaders say there is no contagion and the crisis will not spread into other European nations. Traders embrace the happy talk believing that the central bankers will always paper over any problems and stocks will continue higher.

Asia trades mixed which is a common theme in recent days. The NIKK drops -0.3% and KOSPI loses -0.7%. The stronger yen (lower dollar/yen 101.31) creates the Japan stock market weakness. Korea drifts lower on a -2% loss for Samsung. Allegations surface that a Chinese supplier to Samsung is using underage workers. The SPASX200 and SSEC are both up +0.4%. Australian banks trade higher. ROC Oil remains a takeover target jumping nearly +4%. China is boosted by the auto sector.

European markets trade higher. The euro remains sticky at the 1.36 level unable to move lower since everybody and his brother is short the euro. Italy’s MIB is up +1.2%. ECB’s Nowotny does not rule out using the QE money bazooka in Europe. This boosts European stocks. The central bankers continually provide lip service and cheer leading, promising easy money forever, to boost global stock markets. The Portugal banking crisis, however, creates a shaky uneasiness across Europe since the banking system is obviously not as healthy as many have come to believe over the last year. Banks in Spain, Italy, and Brazil in South America, all remain on shaky ground.

The Israel-Gaza crisis continues. Lebanon is now firing rockets into Israel. It appears that Hamas wants to create a larger conflict since the turmoil can be deescalated quickly if Hamas simply stops the rocket fire at Israel. Airlines flying into Tel Aviv are on high alert since Hamas is targeting airplanes. An Israeli ground invasion remains on the table. Some say Israel PM Netanyahu is bluffing but others say the risk is real. Tensions remain high but global traders continue to ignore the geopolitical events unless they directly affect the banking system.

At 6 AM, US futures are positive. S&P +5. Dow +40. Nasdaq +11. The 10-year yield is 2.52% remaining subdued under the important 20 and 50-day MA’s and also under the strong 2.65% resistance. Traders are focused on the imminent WFC earnings which kick off the bank sector earnings for Q2. Tobacco companies are strong today on continuing M&A chatter. GPS is down -1.3% on the lower June comp news from last evening.

At 8 AM, WFC earnings match on EPS at $1.01 and beat on the top line revenue at $21.07 billion versus the $20.84 billion expectation. The stock bounces on the news but leaks negatively minutes later. CVX drops -0.5% pre-market despite stating that Q2 earnings will be better than Q1 earnings. Activist investor Carl Icahn says “it is time to be cautious” on the stock market. Icahn says he remains very selective in what he buys this year.

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Star basketball player Lebron “King” James returns to his home town Cleveland and the Cavaliers after receiving two championships with the Miami Heat over the last four years. Cleveland is also hosting the republican convention so the city will receive a much needed economic shot in the arm. TWTR explodes in activity proving how folks have come to rely on this hip news service with tweets spiking each time a geopolitical, celebrity, sports or other current event occurs.

The Israel-Hamas continues. Israeli ships are firing on Hamas targets in Gaza. Hamas has launched over 1000 strikes at Israel in four days. Two Israeli’s are injured but none have died while 100 Palestinians are dead 13 killed today. The conflict should last at least for several more days if not weeks.

A rocket attack in Ukraine kills 19 troops and wounds 93 with President Poroshenko vowing vengeance. Obviously the pro-Russian separatists in East Ukraine are being provided weapons by the Russians. The Ukraine civil war continues despite the focus on Israel lately instead. Traders continue ignoring geopolitical events since the Fed and other central bankers keep providing easy money eliminating any worry concerning a market selloff. The central banker policies have destroyed price discovery across all asset classes and created new asset bubbles in areas such as dividend stocks and high yield instruments.