International
Markets News Friday: IMF cuts interest rate on €22.5bn bailout loan for Ireland; US jobs report to show monthly jump in payrolls
By Finfacts Team
Mar 4, 2011 - 8:58 AM

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IMF/Ireland: The interest rate on the portion of the EU-IMF bailout for Ireland provided by the International Monetary Fund, has been cut following a change in member country quotas which took effect on Thursday.

A package of measures, agreed in 2008 to strengthen the representation of dynamic economies in the IMF, has entered into force. The reform provides for quota increases for 54 countries, with the largest gains going mainly to dynamic emerging market countries, ranging from Korea, China and Turkey, to Brazil and Mexico. The reform will also enhance the influence of low-income countries in the IMF’s decision-making, including in its 24-member executive board.

Following calls by IMF managing director Dominique Strauss-Kahn for member countries to formally ratify the agreement, which was backed by the IMF’s governors in April 2008, the package has now been signed into law in 117 member countries, representing 85.04% of total voting power in the IMF. This pushes the package above the required 85% majority of voting power and approval by at least 113 member countries, which are needed for approval of these types of reforms.

“I commend our members for taking the required action to ratify this package of reforms adopted in 2008,” said IMF managing director Dominique Strauss-Kahn. “The implementation of this reform reflects the membership’s commitment to strengthening the IMF’s effectiveness, credibility, and legitimacy.”

The 2008 reforms were followed by another governance reform package agreed by the IMF’s membership in December 2010 that, once effective, will lead to a combined shift of about 9% of quota shares to dynamic emerging market and developing countries. It will also protect the quota shares and voting power of the IMF’s poorest member countries.

Once both packages are implemented, IMF representation will better reflect the world economy as it looks today.

“It means we will have the top 10 shareholders that really represent the top 10 countries in the world, namely the United States, Japan, the four main European countries, and the four BRICs,” Strauss-Kahn said.

The term “BRICS” collectively refer to Brazil, Russia, India, and China.

The IMF contributed €22.5bn to the total €85bn joint IMF/EU program for Ireland on November 28, 2010.

The IMF said in a statement that Ireland's quota at the IMF will increase from SDR (IMF's internal currency: Special Drawing Rights) 838.4m to SDR 1,257.6m once the payment for the quota increase is made. With the new higher quota, Ireland's access to Fund resources under the Extended Fund Facility arrangement is reduced to 1,548% of quota, compared with 2,322% originally.

This reduces the share of Ireland's credit that is subject to surcharges, which are due on amounts in excess of 300% of quota. Based on the current SDR interest rate of 0.43%, the average lending interest rate at the peak level of access under the arrangement will be 3.04% on credit outstanding less than three years (down from 3.17%), and 3.85% on credit outstanding longer than three years (down from 4.04%).

A second round of quota increases, approved last year, will further reduce the average lending rate once countries' governments have approved those changes.

Daniel Hui, FX strategist at HSBC, says the euro is valued fairly based on current rate hike expectations by the ECB:

US payrolls to rebound sharply in February: Davy economist, Conall Mac Coille, comments  - - "Stock prices rose sharply yesterday following positive news on the US economy. The Dow Jones industrial Average increased by 1.6% on the day and the S&P 500 by 1.7%. The non-manufacturing ISM survey for the services sector rose to 59.7 in February from 59.3 in January, indicating that the pace of expansion in the services sector continues to outperform expectations. The services PMIs for European countries, also released yesterday, were slightly weaker than expected but still indicate a strong pace of expansion in that sector.

The market was also encouraged by a sharp fall in the level of initial jobless claims to 368,000 for the week ending February 26th, well below the expectation for 395,000 and the lowest level for initial claims since May 2008. Prior to the recession, jobless claims tended to average just over 300,000 so yesterday's data indicate that inflows into unemployment are returning to more normal levels as the US labour market stabilises.

And the initial jobless claims data followed positive signals for the US labour market earlier this week from both the Federal Reserve's Beige Book and the ADP employment report. The ADP report indicated growth of employment of 217,000 in February, up from 187,000 in January and well ahead of the market's expectation for 180,000. And within yesterday's non-manufacturing ISM survey, the employment index had risen to a four-and-a-half year high.

So the labour market data released this week bodes well for today's non-farm payrolls report which will be the market's main focus with few significant macroeconomic data releases scheduled for today. Non-farm payrolls are expected to rise by 200,000 on the month in February, up sharply from an increase of just 36,000 in January. The low January number most likely reflected bad weather conditions and is likely to be temporary. And given the recent positive data on the US labour market, today's non-farm payrolls report may well exceed expectations."

Sharing his concerns over what will happen to bond yields and stock prices, with William Gross, Pimco co-CIO/founder:

Economic View: Expected ECB rate hike an unwelcome reality for Ireland; Goodbody's chief economist, Dermot O’Leary, comments  -- “Strong vigilance” is back at the ECB. In line with its obsession with inflation, the ECB hinted very strongly yesterday that it will increase interest rates in early April.

After stating that inflation risks could move to the upside at its January meeting, the Governing Council judged yesterday that that has, in fact, occurred. Since the beginning of the year, economic data, especially for the core euro-zone has been strong. Along with this improving momentum, inflation has been influenced by the spike in energy prices. These trends are reflected in the updated ECB staff projections, which inflation expected to average 2.3% (mid-point estimates) in 2011, up from its previous forecast of 1.8%. Economic growth of 1.7% is anticipated in 2011 and 1.8% in 2012 (up from 1.4% and 1.7%, respectively).

Its inflation projection for 2012 was increased to 1.7% (from 1.5%). Given that this is still below the 2% target, one might ask what the hurry is, especially when core inflation is only at 1.1%. However, it is clear that the ECB is no longer comfortable having rates at the emergency setting of 1%. We don’t imagine rate hikes to be rapid from here but it is clear that the up-cycle will begin earlier than we would have expected. We are still of the view that two 0.25% rate hikes to 1.5% will occur this year, but the risks to this forecast are now tilted to the upside.

The ECB did have some good news for Ireland, in that it will continue to provide liquidity to the banking system, at least until the middle of July. It clearly expects the size of the Irish banking system to be significantly smaller and thus funding requirements lower by that time. On that front, continuation of its liquidity is not a major surprise.

The earlier than expected rate hikes will hurt an economy that is already hurting. In terms of its impact on consumer spending, we estimate that every 1% increase in interest rates hits disposable incomes by slightly more than 1%, if maintained for a full-year. Giving that disposable incomes will fall on the back of higher taxes, lower employment and falling earnings, this firms the view that consumer spending will fall this year. The rise in rates will also likely drive up mortgage rates aswell, something to bear in mind with the results of the PCAR exercise in the banks imminent. We have said before that we think a return to stability in the banking system is more important than the effects of interest rate increases (i.e. supply of credit is more important that the cost of supply). We are still of this view but the pressure is now firmly on with a rate hike on the way next month."

Irish Financials: Firesale auction to gauge investor interest; Goodbody's Eamonn Hughes comments  -- "Official house price statistics in Ireland show prices down 38% from the peak. Our own view is 50%, but even that figure has been wavering in recent months, with a likely further downward bias. The complete lack of activity in the market has been a problem (for instance, the ptsb/esri index went quarterly from monthly a long time ago given the dearth of property sales).

As such, finding the floor is still an ongoing quest for property buyers and sellers across the country. Well, that comes ahead of an auction by Allsops (which specialises in selling properties held by banks and receivers) and a Dublin agent. A number of properties have a maximum reserve price substantially below nearby properties which are also for sale on various estate agent websites.

Of course, it’s hard to gauge the condition, aspect and specific location of each individual property in the sale, but it’s certainly going to be interesting to watch results in the April 15th auction as a gauge of investor appetite. More than 80 properties in Dublin, Cork, Limerick and Galway will be offered in the sale."

US Markets

The Dow rose 191 points or 1.59% in New York Thursday to 12,258.

The S&P 500 gained 1.72% and the Nasdaq rose 1.84%.

Asia Markets

The MSCI Asia Pacific Index of shares rose 1.1% Friday.

Japan's Nikkei 225 climbed 1.02%; the China's Shanghai Composite added 1.35%; Australia's S&P/ASX 200 Index gained 1.20% and the Bombay Stock Exchange's Sensex index  climbed 0.37% .

Asia benchmarks

Finfacts Reports

Global food prices rose for eighth straight month in February; Real food cost at lowest since Great Depression
Irish managed pension funds made average return of 1.5% in February
Global service sector expansion at near five-year high in February; Cost pressures highest since September 2008
Companies reconsidering how to identify their most valuable customers according to new report
Markets News Afternoon: Euro rises in response to Trichet's inflation warning; Eircom workers/ shareholders to face 10% pay cut
US services activity grew in February for the 15th straight month; Weekly jobless claims fell
Eurozone retail sales volume rose 0.4% in month of January; German sales rose 1.4%
Trichet says on Ireland's EU-IMF program 'the plan is the plan'; Warns interest rates may be hiked in April
European Central Bank keeps benchmark rate on hold at 1.0%; Trichet expected to escalate inflation warnings at press conference

In Europe, the Dow Jones Stoxx 600 is up 0.10% in early trading Friday.

The ISEQ has risen 0.29% in Dublin.

CRH is up 0.40% and Elan has climbed 2.07%.

  Grafton has dipped 3.04%.

European Benchmarks

Irish Share Prices

Irish Stock Market Capitalisation by Company

Key Index Performance Statistics

Euribor Rates

AIB Daily Report

Bank of Ireland Daily Report

Currencies 

The euro is trading at $1.3956 and at £0.8578.

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

The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - - close to a 1986 low.

The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.

On Thursday, July 15, 2010, the index  fell for the 35th straight session, by 9 points, or 0.537%, to 1,700 points, Bloomberg report.

On Friday July16th, the BDI rose 20 points or 1.12% to 1,700 to break the 35-session losing streak.

On Thursday this week, the BDI rose 36 points or 2.81% to 1,317.

The Financial Times reported earlier in January, that Australia’s flooding and fears of ship oversupply has pushed down a gauge of the cost of hiring ships to carry coal, iron ore and other dry bulk by nearly half since October to the lowest level since the aftermath of the financial crisis. The Baltic Dry index, the widely watched measure of dry bulk charter rates, fell to 1,453, nearly half the 2,784 peak reached on October 27, 2010.

Crude oil for April 2011 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $102.74 per barrel, up 83 cents from Thursday's close. In London, Brent for April delivery is trading on the International Commodities Exchange at $115.95. The North Sea benchmark accounts for two-thirds of the global market.

The margin between the US benchmark WTI (West Texas Intermediate) used on the New York Mercantile Exchange and Brent is at $13.

The FT said in early February that a surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed the value of the benchmark against other yardsticks. The International Energy Agency said on Thursday that with “few relief valves” to cut the stock overhang in Cushing, the price dislocation “may persist for months [or years] to come”.

Gold spot price

The spot price of an oz of gold is trading in New York at $1,415.40, up 10 cents from Thursday's close.


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