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Markets News Monday: Obama to propose major federal budget cuts and tax rises this week; Brent crude oil at $126 a barrel
By Finfacts Team
Apr 11, 2011 - 8:54 AM

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President Barack Obama greets surprised tourists at the Lincoln Memorial in Washington, DC, Saturday, April 9, 2011. The President made an unannounced stop to thank people for visiting the memorial a day after he and Congressional leaders agreed on a bill to keep the government open.

US Budget: President Obama on Wednesday will propose major spending cuts and tax changes to slash the federal deficit. He will target both entitlements such as healthcare programs for the elderly and poor, Medicare and Medicaid, as well as changes in the pensions system, Social Security. There will also be proposals for tax increases on people earning more than $250,000 annually.

"Every corner of the federal government has to be looked at here," David Plouffe, a senior White House adviser, said Sunday during a series of television appearances. "Revenues are going to have to be part of this," he said, referring to tax increases.

Although Obama’s health-care law is projected to limit Medicare spending over time, “we have to do more,” Plouffe said Sunday, marking the first time the administration has made an explicit commitment to changes in entitlement programs for the purpose of deficit reduction.

Contrasting the president’s approach with what Republican leaders have proposed, Plouffe said Obama will use a “scalpel” and not a “machete” as he seeks to preserve funding for education and other areas such as research, that he considers crucial to the country’s long-term economic success.

Last week the Republicans proposed cuts of $6.2trn over 10 years while Obama's 2012 budget to take effect on Oct 1st, provided for $1trn in reductions over the same period.

Last Friday, with just over an hour before the midnight deadline, Republicans and Democrats agreed on $38bn in federal budget cuts to this year's budget to avert a government shutdown.

Congress will soon have to vote to raise the legal limit on the federal debt, now $14.25trn. The government is expected to hit that borrowing ceiling in about five weeks, the Treasury Department has said.

Economic View: Ireland still standing firm on corporation tax issue; Goodbody chief economist, Dermot O’Leary, commented:  -- "Unsurprisingly, Portugal’s request for international aid dominated proceedings at the EU Finance Ministers meeting in Budapest at the end of last week.

From an Irish perspective, its aim to achieve a reduction in the interest rate on its loan package still appears to be an elusive one. Heavy pressure is still being exerted on Ireland to give some concessions in the area of corporation tax in return for a reduced interest rate. German Finance Minister Wolfgang Schauble was clear in his position when he said 'If Ireland on its side doesn’t want to have any changes, then there is no willingness on the side of the governments to make changes.'

The ball is clearly in Ireland’s court on this particular issue. It is clear that any changes to the 12.5% corporation tax rate are off the table from an Irish perspective. Apart from the political damage it would do to the new Government, it would also be the wrong decision from an economic point of view for the country. Knowing that Ireland does hold a difficult negotiating position, it may have to give some concessions by way of agreeing to examine the issue of the corporation tax base. For now though, Ireland is correct to hold its position, as maintaining a key plank of its successful industrial policy is more important than a cut in the interest rate."

"Statistics do not reveal the shock or the aftermath of the earthquake yet," Seijiro Takeshita, director at Mizuho International told CNBC. He added that it was too early to assess the impact of the earthquake on Japan's automobile and electronic sectors:

Rising oil prices fail to dent market optimism — for now: Davy's Barry Dixon comments  -- "Brent crude futures have increased by almost one-third year-to-date, with the price increasing from $95 at the end of December to $126 at the end of last week. Taken together with rising prices in other commodities, the devastating earthquake in Japan, unrest in the Middle East and now rising interest rates in Europe, one would have expected the market to reflect these negative trends.

The reality however is quite different. The S&P index is 6% higher year-to-date, the FTSE-100 is up almost 3% while the E300 Index is up 2.4%. Global equity markets appear to want to advance, regardless of the macroeconomic or geopolitical issues.

This week will see the start of the Q1 earnings season in the US. Poor weather in Q1 2010 is likely to provide a favourable platform for easy comparisons in the quarter just ended. This could continue to drive the market, at least in the short term. However, any sign that rising input costs are having a detrimental impact on margins as companies struggle to push through price increases could raise concerns. The market cannot continue to ignore these trends forever."

"Consensus reports are almost always wrong," Richard Cookson, chief investment officer, Citigroup Private Banking told CNBC.

Asia Markets

The MSCI Asia Pacific Index fell 0.8% Monday. The index was down 1.4% this year to last Friday compared with a gain of 5.6% by the S&P 500.

Japan's Nikkei 225 dipped 0.52%; China's Shanghai composite index added 0.44%; Australia's S&P/ASX 200 Index gained 0.62% and the Bombay Stock Exchange's Sensex index dipped 0.66% in Mumbai.

Asia benchmarks

Finfacts Reports

China reports first quarterly trade deficit in 7 years; Issues report on claimed US human rights abuses
World Development Report 2011: 1.5bn people live in countries affected by cycles of political and criminal violence
Emerging market growth eased slightly in the first quarter of 2011
Ireland: Employment Law; Irish public sector staff accrue holiday leave when out sick while private sector employees don’t
Irish construction activity fell at faster pace as new orders declined further in March
New Ireland launches Capital Secure Bond with 7.5% One year Fixed Return Fund

In Europe, the Dow Jones Stoxx 600 is down 0.18% in early trading Monday.

The ISEQ has dipped 0.37% in Dublin.

CRH is down 1.02%; AIB has climbed 7.14%; FBD has risen 3.33%..

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 $1.4451 and at £0.8838.

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 Friday last week, the BDI slipped 25 points or 1.78% at 1,376.

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 May 2011 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $112.79 per barrel, no change from Friday's close. In London, Brent for May delivery is trading on the International Commodities Exchange at $125.89. 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 almost $11.

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 $1,472.70, down $2.30 from Friday's close.

Irish Financials: UK banking body recommends 10% core tier 1 ratio; Goodbody's Eamonn Hughes comments  - -"The UK’s Independent Commission on Banking has announced today in the UK that it will force lenders to ring-fence their consumer banking units, after stopping short of recommending a full break up.

More importantly for read through with the Irish banks, the ICB also recommended a core tier 1 target level of 10% for the banks. This appears to be an equity baseline figure, which means that it is more stringent than the 10.5% figure set for the Irish banks set in the recent PCAR ((Prudential Capital Assessment Review - - stress tests). Bear in mind the Irish target is not all equity, with BOI for instance having 3.3% points of its core Tier 1 in the shape of the government’s preference shares.

Having said that, the PCAR tests require a regulatory buffer above the 10.5% minimum in the form of equity and contingent debt capital (nearly 1% equity in the case of BOI and a further c.2% of Co-Cos). Also, the balance sheets were further stressed to hold a 6% CT1 figure against the EBA tests for European banks at 5%."

"The consensus almost  always assumes things will work out in the best of all possible worlds  and that's usually the right call, but what we tend to do is highlight  the risks in that view," Danny Gabay, director of Fathom Consulting  told CNBC. He added that their outlook on the world economy cited the  euro area as the top risk to global recovery:


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