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Markets News Tuesday: Lenihan denies approving AIB executive salaries; Obama presses China on yuan appreciation
By Finfacts Team
Nov 17, 2009 - 11:52:37 AM
Chinese President Hu Jintao shakes hands with visiting US President Barack Obama after meeting the press at the Great Hall of the People in Beijing on Nov. 17, 2009. Photo: Xinhua/Li Xueren
President Barack Obama today called on President Hu Jintao of China to stick to the commitment to allow the yuan to appreciate, to ease trade imbalances that are seen as one of several causes of the global financial crisis.
In pre-crisis years, American consumption rose to a record 72% of GDP (gross domestic product), boosting demand for Chinese goods. China in turn, kept the value of its currency down and built up its reserves to $2.3 trillion while recycling dollars from its exports through purchases of US government securities.
“I was pleased to note the Chinese commitment, made in past statements, to move toward a more market-oriented exchange rate over time,” Obama said during a joint press conference with Hu, in Beijing today. “Doing so based on economic fundamentals would make an essential contribution to the global rebalancing effort.”
China has pegged its currency to the US dollar since mid-2008.
President Hu did not comment on currency issues.
China’s central bank, the People's Bank of China, last week said foreign-exchange policy should take into account global capital flows and changes in major currencies
Finance ministers at the Asia Pacific Economic Cooperation (APEC) forum in Singapore last weekend, called for “market-oriented exchange rates that reflect underlying economic fundamentals.”
However, Hu had a reference to currency scrubbed from the leaders' statement.
The Chinese economy expanded by 8.9% in the third quarter from a year earlier.
President Hu Jintao said that the key to Sino-U.S. relations was to mutually respect and accommodate each other's core interests and major concerns while differences from different national conditions were normal.
"The China-US relations are very important. Maintaining and promoting such ties is a shared responsibility of both sides," Hu told reporters
"China and the United States would work together with all other members to fully carry out the commitments of all G20 summits and continuously strengthen the role of G20 in the management of the global economy, while pushing forward the international financial system reform and increasing the voices of developing countries on the global financial arena by ensuring that they are better represented,"Hu added.
Obama said the two leaders “agreed on maintaining open markets and free flows of commerce.”
Discussing the outcomes of President Obama's trip to China, with CNBC's John Harwood; David Goldman Asteri Capital; Peter Morici, University of Maryland who is a regular Finfacts contributor; Andy Busch, BMO Capital Markets:
The euro weakened against the yen for a fourth day and slipped against the dollar after the International Monetary Fund managing director said the global economic recovery may be sluggish and Asian stocks fell. /P>
The European currency declined against 9 of its 16 most- traded counterparts after Dominique Strauss-Kahn, the IMF managing director, spoke in a media briefing in Beijing.
Strauss-Kahn also said that a stronger yuan would be in the interests of China and the world.
Chinese President Hu Jintao and U.S. President Barack Obama speak at a joint press conference following the summit in China:
AIB
The Minister for Finance Brian Lenihan has responded to an Irish Times report that senior AIB executive Colm Doherty, who will shortly be appointed managing director of the bank, will not be forced to take a salary cut to meet the Government’s cap of €500,000 for top bankers.
Statement from Department of Finance:
"The Minister received a proposal from Allied Irish Bank on certain salary arrangements. The Minister has not approved these arrangements.
Any suggestion that the Minister has is inaccurate.
No further comment at this stage."
US
Davy chief economist Rossa White comments: Bernanke reiterates Fed line from two weeks ago - - "Much of yesterdays' speech by Fed chairman Bernanke to the Economic Club of New York was historic. But looking ahead he made a few points clear. First, the Fed is still worried about the lack of credit flow and particularly about the labour market. Second, related to the financial system, it has a particular concern about commercial property and is committed to its specific programmes to help. Third, he simply reiterated the Fed statement from two weeks ago to keep rates low for an extended period. The US bond market rallied further as a result.
Bernanke perhaps provided a hint about the threshold that the labour market has to cross before the Fed would consider withdrawing stimulus. He noted that 'as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labour force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect'. The Fed would like to see a number of sustained months of job growth before considering lifting its funds rate.
As for the withdrawal of quantitative easing by selling back bonds to the market, there were a couple of lines in the speech not contained in the last statement. He noted that the Fed has 'a wide range of tools' available when the time comes for orderly exit. But he said that time will come only when the 'economic outlook' allows, keeping the labour market again in mind. The sale of any securities back to the market looks unlikely to commence before the end of Q1 2010."
US markets
Retail sales data for October boosted sentiment.
The Dow closed up 136 points or 1.33% to 10,407 on Monday - - a 13-month high.
The Nasdaq rose 1.38% and the S&P 500 gained 1.45%.
Asia
The MSCI Asia Pacific Index of regional shares fell 0.2 Tuesday, after earlier gaining 0.5%.
The Nikkei fell 0.40%; the Shanghai Composite rose 0.24% and Australia's S&P/ASX 200 dipped 0.54%.
Another 20% decline in the UK housing sector is "certainly not beyond the realms of possibility," Andrew Clare from Cass Business School, said Tuesday. Today's UK house price-to-earnings ratio "is still not very far from where it was at the peak before the last crash in the early 90s," he added.
Goodbody analyst Eamonn Hughes comments: Irish Life & Permanent; Q3 IMS highlight is weaker than anticipated - - "IL&P has reported an IMS for Q3 this morning. Overall, it is weaker than anticipated. Margins on the life side are lower than expected, though volumes look in line in the core Life business. On the banking side, the margin guidance is weaker and they have raised their over the cycle credit charge guidance, which the market may not welcome. Overall, the cost performance looks to be good, both on the bank and in the life company. At the interim stage (late August), IL&P guided a H2 outturn similar to the H1 outturn of -€51m at the Operating Profit level. Having said that, upward GDP revisions through H2 saw us pare our Operating Loss estimate back into -€95m on like-for-like basis with IL&P (we have cost of government guarantee below the line, so our published figure is -€65m). There is no formal Operating Loss guidance at the IMS stage, but given the updated commentary today, we will likely be increasing our loss estimates.
On Life & Pensions, IL&P is guiding that new business sales should be down c35% for the full year. This compares to declines of 41% in Q1 and -43% in H1 (so an implied -45% yoy in Q2), so the pace of decline is easing and compares to our full year -36% estimate (which implied -29% in H2). Previously, IPM had guided for a full year decline of c30%. Guidance is for €1.7bn of new business sales at ILIM, after the €600m of inflows in H1 and guidance at the H1 stage was for €1.5bn inflows at the full year, so a bit better here. New business margins are anticipated at 9-10% on the Life side and 6-7% at ILIM, compared to our expectations of 11.0% and 9.5% respectively, so well behind. On persistency, IL&P is guiding around €60-70m negative experience and assumption variances, which compares to the figure of -€40m in our models (-€60m for experience and +€20m for other). Below the operating line, short term investment fluctuations are guided at €105m (-€50m in our models) and economic assumption change variances are guided at €35m (we have -€90m in our models), so combined, in line with expectations. The associate comment is broadly in line with what we have in our models.
On the banking front, IL&P is guiding new lending down 80% for the year in its core business. It was down 81% in H1 (Irish mortgage lending only) and we have -74% pencilled in for the full year, so looks ballpark. “Redemption rates remain exceptionally low” and the loan book is anticipated to “decline modestly”, which compares to our current -3% expectation. On margins, IL&P is shifting its guidance down from 80-90bps for the full year to 80-85bps, whilst we are sitting on 90bps, so we will have to cut that estimate. On funding, deposit growth looks better than anticipated both on retail and corporate, but IL&P comments that this has come “at a higher cost”. ECB funding was €7bn, which compares to €12bn in June and €10.6bn at end August, so moving in the right direction. In relation to credit quality, IL&P is guiding that the rate of growth in arrears in Ireland is slowing and down in the UK - as per previous guidance. However, it is now raising its credit charge guidance up to €800-900m over 2009-11. Previously, it had indicated impairments of 170-180bps in the 3 years to end 2011, which we think was circa €700-750m in a total charge. Our models have €960m over this 3 year period, so they are coming up to meet us. IL&P is guiding a similar H2 impairment provision as H1, which is what we have in our models."
Goodbody economist Deirdre Ryan comments: Economic View; Regional divergence featuring in rental market adjustment - - "The Daft rental index for the third quarter indicates that rental levels continue to adjust downwards, although at a more moderate pace than seen for some time. The latest release shows a 4% qoq drop in rental levels nationwide in Q3, the smallest quarterly decline since Q3 08. On an annual basis rents nationwide were down 18% yoy. Seasonal supply and demand dynamics were very likely a factor in this more moderate rate of quarterly decline in rents, with Q3 traditionally a time of increased demand for rental properties. According to Daft the stock of properties for rent at the end of Q3 was 10% lower than was the case at the end of the second quarter, with c22,000 properties for rent at the end of Q3.
Similar to price developments in the housing market, a continued regional divergence in terms of rental declines is a feature of the rental market according to the latest report. Dublin house prices have seen the most marked adjustment in prices to date and the same is the case in the rental market, with Dublin rents down 25% from the peak (in February 2008). This compares to the average fall across other cities of 18% from the peak. The more moderate pace of decline in rental levels in Q3 has led to a slight increase in the rental yield also, which comes after four consecutive quarters where the yield had been trending downwards.
The national rental yield stood at 3.9% at the end of Q3, up from 3.8% in Q2 but behind the yield of 4.3% seen at the peak. Given that there still remains a significant stock of properties for rent, there is likely some way to go yet in terms of further rental declines, although the more subdued rate of quarterly decline is encouraging. We estimate a peak to trough decline in rents of 30%, which would see the rental yield return to a more normalised level of 4.4%, although given that house prices continue to adjust downwards also this point will not be reached until mid 2011."
