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Financial Market Fears Overwhelm Facebook IPO Optimism

Financial Market Fears Overwhelm Facebook IPO Optimism

2012-05-18 22:55:00
John Kicklighter, Chief Strategist
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The volatility surrounding initial public offerings (IPO) is notorious; but when large companies come into the market, there is often a draw of fresh capital to get a piece of the action. Attracting new investors into the market is an especially appealing consideration now. Since the 2008 financial crisis, there has been evidence that suggests that retail level investors have not contributed significantly to strong recovery in US equities. The chart below tallies domestic net capital flow in to / out of equity mutual funds measured by Investment Company Institute (ICI).

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_5.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: Investment Company Institute

Given the sell off so far this month, Facebook’s IPO presents a bright light for lost traders to find their way back – assuming they want to be drawn back in. With a listing price of $38/share, the company opened high and subsequently slid. As shares were worked in after the 11:00 AM EST initial trade, the stock showed the expected, exaggerated swings and even encouraged a boost in volatility for fell tech firm Apple. However, as we can see in the chart below, the highly publicized event couldn’t shake loose of the malaise of the broader market.

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_6.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: FXCM Marketscope and Bloomberg

Instead of the Facebook IPO tipping the balance back into the battered bulls’ favor by catalyzing a reversal from an ‘over-extended’ position and drawing new capital into the market, the pessimism of the broader market pulled the stock into its own wake. Through Friday’s close, the S&P 500 is down six consecutive days (the longest bear run since November 25) and has fallen 10 of the past 13 trading days. This is turning into a serious reversal without the ‘flash’ momentum that can quickly snuff a move out.

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_7.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: FXCM Marketscope

If a headline event like the United States’ third largest IPO can’t rouse enough interest for at least a stall, there is clearly something more fundamentally pressing for the markets to concern themselves with. What could that be?

As stated above, the market recovery since the first half of 2009 has developed through dubious support. With a concerning lack of retail market participation (the bulk of speculative interest under normal conditions), brokers, institutions, hedge funds and governments / central banks (via stimulus) have to do the heavy lifting. Yet, this cumulative interest only stretches so far. Without greater interest from the broader investing community, the climb peters out as the backdrop starts to cloud. Among the concerns that are growing in prominence are the downturn in growth forecasts, expectations of a reduced stimulus safety net, rising correlations across various asset classes (making it difficult to diversify away risk) and a radiating financial crisis in the Eurozone.

In the chart below, we can see the progress in the deteriorating financial conditions for the region just through this month alone. At this pace, the situation is clearly deteriorating more rapidly. As we have seen with the spread of the US-born, sub-prime troubles back in 2008; the transmission of fear and financial retrenchment can have crippling consequences.

Date

Event

Key points

6-May

French Presidential

Socialist François Hollande elected;

Election - 2nd Round

reiterates vow to renegotiate EU fiscal pact

Greek Parliamentary

Fails to yield workable coalition;

Election

anti-bailout parties stronger

El Mundo newspaperreports

Reports Spain planning 30 billion Euro issue in June

Spain to issue hispanobonos

Hispanobonos conceptually similar to Euro-bonds

Bonds backed by Spain, proceeds flow to regional gov'ts

Gov't neither confirms nor denies report

9-May

Spain nationalizes Bankia

Gov't converts preferred shares into

(4th largest Spanish bank)

common voting shares, increases stake to 45 pct

11-May

Spanish gov't announces

Measures include:

new banking sector

30 billion Euros additional loan-loss provisions

measures

Transfer of repossessed property to special entities

FROB loans with 10-pct interest rate

Audits and valuation of bank loan portfolios

14-May

Moody's downgrades

Banks downgraded include UniCredit, Intesa Sanpaolo

26 Italian banks

Moody's cites Italian recession, tight funding markets

15-May

Greek President Papoulias

Papoulias: depositors withdrew 700 million Euros on May 14

speaks of deposit withdrawals

Cites conversation with head of central bank

16-May

El Mundo newspaper

Citing Bankia Chairman, El Mundo reports more than

reports run on Bankia

1 billion Euros of deposit withdrawals since May 9

nationalization

Spanish Economy Ministry denies report

ECB suspends loans to some

ECB cites undercapitalization, negative equity

Greek banks

Affected institutions to rely on Greek central bank

Access to standard refi ops to resume after recapitalization

17-May

Fitch downgrades Greece

Greece cut from B- to CCC

Cites inconclusive election, "material" risk of Euro exit

Fitch imposes country ceiling (effective rating cap) of B-

Moody's downgrades

Banks downgraded include Santander, BBVA

16 Spanish banks

Moody's cites weak Spanish economy, non-perf assets

Spanish regional gov'ts commit

Spanish gov't approves fiscal adjustments of regional gov'ts

to budget cuts

totalling 18.3 billion Euros

In tracking the intensity and breadth of selling pressure, a good read can be found through tracking the relative performance between the S&P 500 and EURUSD. The benchmark equity index is a reflection of the investing interests of a heavily-biased, long-only crowd. Given the heights the stock benchmarks have in particular scaled (with help from stimulus), a reversal can prove lasting.

For contrast, EURUSD follows the primary catalyst for this particular global correction. The European sovereign and banking-level crisis is clearly reflected in the world’s second most liquid currency – especially when paired against the top reserve and safe haven currency, the US dollar. With the bounce from EURUSD and follow through decline for the S&P 500 through Friday’s close, we could see a fundamental pressure relief for Monday or evidence that selling pressure is now self-generating for the capital markets.

Financial_Market_Fears_Overwhelm_Facebook_IPO_Optimism_body_Picture_8.png, Financial Market Fears Overwhelm Facebook IPO Optimism

Source: FXCM Marketscope

--- Written by: John Kicklighter, Senior Currency Strategist and Lujia Lin for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

To be added to John’s email distribution list, send an email with the subject line “Distribution List” to jkicklighter@dailyfx.com.

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