Stocks Rally is "Excessive", Financial System "Very Damaged" Says Roubini (Euro Open)

The rally in stocks has been “excessive” and the financial system is still “very damaged” according to comments from Nouriel Roubini, the infamous New York University professor that has earned the nickname “Dr. Doom” for predicting the 2008 credit crisis and recession.

Key Overnight Developments

• Australian Manufacturing Sector Shrinks at Slowest Pace in 10 Months
• Japanese Workers’ Earnings Fell The Most in Over 18 Years
• New Zealand Economy Will Shrink in Third Quarter, Says Treasury
• Roubini Says Financial System “Very Damaged”, Stocks Rally “Excessive”

Critical Levels



The Euro tested above 1.43 in overnight trading but failed to break through once again, ticking in a 60-pip band above 1.4240. The British Pound oscillated in a narrowing range around 1.6740.

Asia Session Highlights



Australia’s AiG Performance of Manufacturing Index rose to 44.5 in July, showing the sector was contracting at the slowest pace since September 2008. The rebound likely owes to generous fiscal aid package: Prime Minister Kevin Rudd and company have distributed over A$12 billion in cash handouts this year and set aside A$22 billion for infrastructure projects. AiG chief executive Heather Ridout said that while the result was “encouraging”, the big question going forward “whether these improvements will be sustained once [fiscal] stimulatory forces have abated.”

Japan’s Labor Cash Earnings fell at an annual pace of -7.1% in June, the largest decline since records began in January 1991. Last week, the jobless rate rose to the highest in 6 years as companies cut production capacity amid the downturn in global demand. Earnings are likely to remain stagnant with unemployment to approach 6% by the second half of 2010 according to a survey of economists conducted by Bloomberg, trimming consumer spending and holding back the world’s second-largest economy from staging a meaningful rebound from the worst recession since World War II.

New Zealand’s Treasury Department said the economy will contract for the sixth consecutive time in the third quarter, shedding 0.2%, with positive growth likely to return in the final three months of 2009. GDP is expected to shrink 0.4% in the three months through June. The Treasury added that consumer spending is likely to “remain soft” as unemployment continues to rise. Indeed, economists forecast the jobless rate will hit 6% this year and average a whopping 7.45% in 2010.

Infamous New York University professor Nouriel Roubini that has earned the nickname “Dr. Doom” for predicting the 2008 credit crisis and recession said the US financial system is still “very damaged” and predicted that the economy will grow at a rate of just 1% for the “next couple of years” as weak credit growth restricts economic recovery. Still, Roubini noted the European Union and Japan are experiencing a “more dynamic” slowdown that that seen in the States and said that US interest rates may rise next year. Turning to the global economy, Roubini said lower spending will hold back growth and cautioned that deflation, not inflation, is the biggest threat to a sustained rebound. On the financial markets, Roubini said recent stock gains are “excessive” while current oil prices are “not justified” and driven primarily by “speculation”. On the US Dollar, Roubini said the greenback may fall against Asian currencies.

Euro Session: What to Expect



German Retail Sales are set to grow 0.9% in the year to June, the first time annualized growth turns positive in five months. The improvement likely owes to the government’s 85 billion euro stimulus plan, which includes spending, tax breaks, and a 2500 euro payment to consumers who trade in their old car and buy a new one. Seasonal forces are also likely to have helped the metric higher, with many German stores running discounting campaigns during the summer. Markit, leading provider of financial information services, said last week that the recent rebound in retail activity was “generally attributed [to] promotional activity.” Looking ahead, weakness in the labor market is likely to keep underlying consumer demand lackluster as the effects of fiscal policy fade and stores run out of room to mark down prices as profit margins narrow. The jobless rate held at a 19-month high of 8.3% in July and the OECD has forecast it will top 11% next year, weighing on disposable incomes and discouraging spending.

Switzerland’s SVME-Purchasing Managers Index is expected to tick higher to 43.6 in July from 41.8 in the previous month, showing that manufacturing is contracting at the slowest pace since October 2008. Most of the sector’s output is exported for sale in the European Union, where ample government spending plans and efforts to top up depleted inventories have slowed the drop in demand brought on by the global economic crisis. Things do not look particularly rosy in the months to come, however, with most industrial countries struggling to find catalysts for continued growth after the flow of stimulus cash dries up.

The UK Manufacturing Purchasing Manager Index is set to follow the same trajectory as its Swiss counterpart: the metric is set to rise for the fifth consecutive month to register at 47.8 in July, driven by stimulus-fueled demand and restocking.