Davy economist Rossa White comments: Bond market may ultimately determine scale of economic rebound - - "Longer-dated government bonds in the US (and to a lesser extent in Europe) have dropped significantly in price since mid-March. This has coincided with the pick-up in risk appetite but also reflects fears about potential supply. Now that it looks likely that the US will pull out of recession in the next three to four months and that global output is recovering (note strong Japanese readings overnight), the question is what happens after the bottom in the economy. Much higher real long-term interest rates would be a worry.
It is interesting that stocks have flatlined over the last month. The initial surge in equities priced in the rising probability of an end to recession in 2009 – enough to stem the collapse in earnings. But investors are now unsure (and rightly so) about what may happen after the economy reaches a floor. In other words, will the economy enjoy a decent rebound or are we set for an extended period of anaemic growth and even the possibility of a double-dip US recession?
We still think the risks are tilted towards the more disappointing outcome. Those risks rise with every day that longer-term bond yields increase. The Fed's goal, through its purchases of financial assets, has been to keep market interest rates down to spur consumer and business borrowing. Business investment depends more heavily on longer-term interest rates: meaningful economic recovery cannot be sparked without it. We hope that government bond markets deal with the surge in supply without a disorderly adjustment in yields at some point. The probability investors place on that bet is probably the key variable for the risk market outlook later this year."
The MSCI Asia Pacific index of regional shares rose 0.9% and is up 14.8% in May.
Asia’s third-largest economy India, grew 5.8% in the three months to March 31st, matching the revised gain of the previous quarter, the statistics office said in New Delhi today.
India’s key Sensitive stock index has risen 18% since the re-election of Prime Minister Manmohan Singh's government two weeks ago.
Japan’s industrial output surged the most in 56 years in April as a recovery in exports renewed hopes that the worst of recession is over.
In April, production rose 5.2% from March, the second monthly gain, the Trade Ministry said today in Tokyo.
May Japan PMI data pointed to another month in which the Japanese manufacturing sector contracted. However, the seasonally adjusted headline Purchasing Managers’ Index (PMI) rose sharply to 46.6, from 41.4 in the previous month, pointing to the slowest deterioration in operating conditions for nine months.
The Nikkei 225 rose 0.75%; China's CSI 300 gained 2.47% and India's sensitive index is up 2.58%.
Asia-Pacific benchmarks
UK house prices unexpectedly jumped by 1.2% in May in a sign the property market slump is easing, Nationwide Building Society said today.
Meanwhile, Racheal Joy, in the Consumer Confidence team at GfK NOP, commented on today's consumer data: ""After rising steadily since February, the GfK NOP Consumer Confidence index has held steady at -27 this month. This is still very low historically, but is at least standing firm in the face of continuing depressed markets and May’s warnings of a possible pandemic. Worries about job losses and harder times are still very much alive – recent GfK NOP research shows that a quarter of the UK are concerned they may lose their job, and nearly half said they have concerns about maintaining their lifestyle – but the UK appears to be stoical about the continuing economic situation.”
German retail sales rose by an unexpected 0.5% in April from March, signalling a recovery in consumer spending.
The German statistics office Destatis, said retail turnover in April 2009 in Germany decreased 0.9% in nominal terms and 0.8% in real terms compared with the corresponding month in the previous year.
In Europe Friday, the Dow Jones Stoxx 600 is up just over 1% as is the FTSE 100 and Germany's DAX.
The ISEQ is up 1.25% in Dublin.
Elan has risen 3%.
Currencies
The euro is trading at $1.3990 and at £0.8727.
For live currency updates, check the right-hand column of the Finfacts home page.
The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.
Commodities
Crude oil for July delivery is currently trading on the New York Mercantile Exchange (Nymex) at $65.42 per barrel up 34 cents from Thursday's close. In London, Brent for July delivery is trading on the International Commodities Exchange at $64.67cup 28cents.
Gold is trading at $966.40 up $7.40 from Thursday's spot price close in New York.
Davy analyst Emer Lang comments on UK FSA banks' stress scenario - - "The FSA has issued a statement to clarify how stress tests have been used within the UK and to detail the macro economic assumptions currently being used. According to the FSA, over the last eight months since the intensification of the financial crisis, it has 'greatly increased the use of stress tests as an integral element of its ongoing supervisory approach'. It stresses that the tests used are not forecasts of what is likely to happen but are deliberately designed to be 'severe'. They are used to identify if at any time in the next five years there is a danger that under the stress scenario the level of capital will fall below the prescribed 4% Core Tier 1 minimum.
The stress tests analyse all the relevant variables which may affect a bank's capital adequacy, including its revenue generation potential given scenarios for GDP growth and interest rates, the probability of default leading to loan losses and possible declines in the market value of assets held in the trading books as well as any known firm-specific events.
Its current stress scenario models a recession that is more severe than any other since World War II. It assumes a peak-to-trough fall in GDP of over 6%, with growth not resuming until 2011 and only returning to trend growth in 2012. It models the impact of unemployment rising to just over 12% and the effect of a 50% peak-to-trough fall in house prices and a 60% peak-to-trough decline in commercial property prices. A report in the Financial Times suggests that investors had expected 'more stringent tests than this'.
Putting this in some context, Bank of Ireland (BKIR) recently revealed the assumptions underlying its 'base case' loss scenario, which envisages loan losses of €6bn over the three-year period to March 2011. It assumes a severe contraction in Irish GDP (BKIR uses consensus forecasts, Davy forecast is -14.2%), average unemployment rising to 14% in 2010 and peak-to-trough house price declines of 45%. Its key UK assumptions are average unemployment rising to 10% in 2010 and house price falls of 35%.
Elsewhere, Anglo Irish Bank is expected to reveal a substantial interim loss later today. Media reports suggest loan losses for the six months to March may exceed €4bn 'even worse than previously feared', driven by loan concentration. This would largely erode Anglo's €4.9bn core equity base. A key focus will be how this fits with the NAMA process – i.e. whether losses recognised at this stage on its property development book of over €18bn will limit the 'haircut' on transfer to NAMA – and the resultant capital requirement."
