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Markets News Monday: Shares rise in Europe - - fall in Asia; AIB up in Dublin after Green Party support for Irish "bad bank" NAMA
By Finfacts Team
Oct 12, 2009 - 11:05:04 AM
Green Party leader John Gormley wins approval for Ireland's State-owned "bad bank" NAMA, on Saturday Oct 10, 2009
US dollar
Bloomberg reports that central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.
Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.
World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.
China
The Wall Street Journal reports that Chinese leaders are concerned that their nation's enormous economic expansion is becoming an excuse for foreign suppliers to inflate commodity costs. So, they hope to use their three futures exchanges to fight back.
Government officials say the country is positioning its futures markets to be major players in setting world prices for metal, energy and farm commodities. By letting the world know how much its companies and investors think goods are worth, China hopes to be less at the mercy of markets elsewhere.
The Irish Green Party voted in favour of “bad bank” legislation. According to Rossa White from Davy Stockbrokers, “the alternative wouldn’t have been worth contemplating, so it’s good news that the Green Party did vote for NAMA (National Asset Management Agency).” He said the legislation will likely be finished by the end of October:
Asia
The city state of Singapore, today raised its 2009 economic forecast after GDP (gross domestic product) rose a second consecutive quarter.
The economy will contract 2 to 2.5% this year, less than an earlier forecast of a contraction of 4 to 6%, the trade ministry said. GDP rose an annualised 14.9% last quarter from the previous three months, the second consecutive expansion.
The MSCI Asia Pacific excluding Japan Index fell 0.5% Monday.
The Shanghai Composite fell 0.6% while India's BSE Sensex 30 rose 2.25%.
In Europe, the Dow Jones Stoxx 600 is up over 1% Monday.
Dutch electronics giant Philips today reported net earnings of €176m in the third quarter of this year, three times the level achieved in the same period in 2008.
Sales revenues were €5.6 billion in the third quarter, down 11% from €6.3 billion in the same period last year, but compared with a 19% fall in the second quarter.
Philips had announced global job cuts of 6,000 last January.
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.
“The (economic) situation has certainly stabilized, and the panic that we saw around about the time of the Lehman Brothers collapse has sort of flowed out of the system,”Benjamin Pedley from LGT Investment Management told CNBC Monday. A lack of US bank lending and government stimulus packages remain a concern, he added:
Gold is trading at $1,051.20 up $2.30 from Friday's spot price close in New York.
Davy chief economist, Rossa White, comments: Revised 'Programme for Government' does not significantly alter likely shape of Budget 2010 - -"The Green Party (Ireland's junior coalition partner) passed a revised 'Programme for Government' at its convention on October 10th. The changes to previous policy are relatively small and will not significantly alter the likely shape of Budget 2010. The priority will remain to cut public spending and avoid further income tax hikes.
Among the commitments are a carbon tax (which was flagged already); abolition of the employee PRSI limit (an effective tax hike of over €200m, or 0.2%, of disposable income); and the reversal of some education cuts. Note that the carbon tax was one of the two main proposals from the Commission on Taxation; a property tax was the other (the Greens are committed to a version of this where land would be taxed, albeit it won't be introduced until 2011). The Minister for Finance recently suggested that there would be no tax hikes in Budget 2010, bar a carbon tax and the closing of some tax reliefs/loopholes. The weekend news does not change that except for the removal of the PRSI limit.
We still expect the fiscal consolidation for 2010 to total €4bn. The government has made this commitment to the European Commission (and to the bond market by extension). But the shape of that plan is likely to change. The current spending/tax/ capital spending split of €1.5bn/€1.75bn/€0.75bn will be revised. We anticipate that current spending cuts will make up around €2.5bn of the plan (from €1.5bn), reducing tax hikes to €750m. The government certainly has a menu to choose from: Colm McCarthy's spending review group outlined more than €5bn in potential cuts without having public pay within their terms of reference."
Goodbody chief economist Dermot O’Leary comments: Economic View; The show goes on - - "After agreement was reached between the two main Government parties on Friday night, the Green Party, the minority partner, endorsed the new Programme for Government by a comfortable majority at its special convention at the weekend. The second motion to oppose the setting up of the National Asset Management Agency (NAMA) was easily defeated. With that, another potential stumbling block for the Government has been removed, with focus now moving on to the formal passing of the NAMA legislation and, of course, Budget 2010 in December.
With the Greens holding the balance of power, the party was always going to use this influence in the negotiations around a new Programme that will take the Government up to 2012. It was made clear in the document released on Saturday morning that the last Programme was on the basis of continued economic growth of 4.5%. Importantly though, the new Programme takes account of the new fiscal realities, and at the heart of it, contains a commitment to restore the public finances to stability, encompassing previously agreed targets on reducing the budget deficit to 3% of GDP by 2013 (including the €4bn in savings in Budget 2010).
Concessions were given to the Green Party in the areas such as education, political reform, and fur-farming (yes, fur-farming!), and the document also sets out its commitment to the “Smart Economy” approach for growth over the medium-term. It also gives some hints about what is coming down the tracks in December, with commitments on a carbon tax, the abolition of the PRSI ceiling and the introduction of a standard rate of pension relief. Nevertheless, the new Programme for Government does not change the near-term priorities of NAMA and the Budget. With Lisbon and the Green Party vote now out of the way, it’s two down and two to go."
Goodbody's Eamonn Hughes comments: AIB Group; Losses may mount in Latvia - - "Last week, the Latvian government indicated it is planning new proposals that will limit mortgage collections to the value of the home rather than the original loan value, in an attempt to bail out property owners after the collapse in the economy. GDP is anticipated to fall 18% this year. It’s still a proposal, but was enough to unnerve the Scandinavian banks, given that Latvia accounts for c.5% of lending of those banks. The Scandinavian banks say the proposals would contravene European law and Swedbank has indicated it will reduce its presence in the country. In 2008 AIB took a stake in Amcredit, which provides mortgages in Latvia, Lithuania and Estonia. AIB took a provision to the goodwill of this acquisition in its last set of results, though it now appears there could be further writedowns on the loan book itself. However, the loanbook is miniscule in a group context and Latvia only represents a portion of the book."
Davy's Scott Rankin comments: Greens pass programme for government and NAMA - -"A major hurdle for bank stocks was passed over the weekend with the Green Party giving an overwhelming show of support for a new Programme for Government and NAMA. A massive 84% voted in favour of the new plan, while there was just 32% support for the motion to oppose NAMA.
The result should mean that NAMA is virtually certain to be passed in Parliament later this month as the government has the requisite support it needs, failing a mutiny in its ranks. Our understanding is that the second stage of debate will start this week with the third, or committee stage, due to kick off on Tuesday 20th. It is still envisaged that NAMA will become law by the end of the month.
In other news, the weekend press reported that Allied Irish Banks Chairman Dan O'Connor met government officials last week and pressed the case to have Colm Doherty appointed as CEO. However, the government is not keen on having an insider appointed, and hence a stand-off seems to have emerged.
Finally, one proposal contained in the new Programme for Government is a single rate of tax relief on pensions of 30%. That would increase the relief slightly for lower-paid workers but reduce the limit for middle to upper earners (those most likely to have private plans) from the current 41%. Curtailing pensions tax relief in such a way would be a slight negative to the life assurance industry and the likes of Irish Life & Permanent, but proposals along this line have been well flagged."
