Markets News Wednesday: Japanese government downgrades assessment of the economy
By Finfacts Team
Apr 13, 2011 - 8:55 AM

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From the IMF's Fiscal Monitor Report, Apr 12, 2011.

Japan: The Japanese government has downgraded its assessment of the economy for the first time in six months, citing the impact of the March 11th earthquake and tsunami.

The government's latest monthly report was issued after a meeting of ministers on Wednesday.

The report says the downgrade is due to a dip in industrial production caused by supply chain delays and the rotating blackouts implemented by the Tokyo Electric Power Company (TEPC0), the operator of the stricken nuclear plant, following the massive earthquake. The report expressed concern over a resulting decline in exports.

The disaster also had a negative effect on consumer spending. Car and department store sales fell due to product shortages and dampened consumer sentiment.

The report concludes that the economy is showing some signs of weakness. This is a downward revision from the March report which said that although the economy was only "weakly self-sustaining" it was "starting to pick up."

The report says signs of weakness will be seen for a while, but the economy is expected to improve as production recovers. It warns the risk of further deterioration remains as long as threats to power supply continue.

On Tuesday, Japan's nuclear regulator raised the severity of the Fukushima nuclear disaster two notches on the official scale to the top level of 7, equivalent to the 1986 calamity at Chernobyl.

Economic View 1: More fiscal adjustment looming for Ireland; Goodbody economist, Juliet Tennent, comments  - - "According to the IMF’s latest fiscal monitor, published yesterday, Ireland may face a longer fiscal adjustment period than previously expected. The IMF is now forecasting that Ireland’s deficit will be 10.8% in 2011, which is close to our own estimate of 10.4%, and not the current Government forecast of 9.4%.

In addition, the deficit will still be above the 3% target in 2016 and not reached by 2015, as laid out in the Programme for Government. This follows the IMF’s downgrade to Irish GDP growth to 0.5% earlier in the week. The Irish Government figures are currently calculated on the basis of 1.7% growth in 2011, but in the light of the deterioration in the labour market we expect that the Department of Finance will have to lower this and adjust its projections for Ireland’s deficit.

The upshot will likely be more austerity and with consumption already dragging on GDP growth, Government spending will be the more likely target."

Obama's Deficit Plan: "It's a very brave plan I would say... it might not be enough, but it's a step in the right direction," John M. Hydeskov, chief analyst at Danske Markets told CNBC on President Obama's deficit plan:

Economic View 2: Breathing room for the Bank of England; Juliet Tennent added - - "Pressure on the Bank of England eased somewhat yesterday when March CPI came in well below forecast at 4%, down from 4.4% in February. Expectations were for it to remain unchanged.

While this is still double the Bank’s mandated target it represents its first drop in six months. With ongoing austerity likely to acerbate existing weakness in consumer spending and the housing market, the Bank of England has been reluctant to raise rates despite firm inflation. This unexpected drop in inflation may give the doves on Monetary Policy Committee all the reason they need to continue to hold off on interest rate increases.

The market certainly thought so and reacted by paring back interest rate expectations and pushing the first rate rise out to September. The significant move displays the uncertainty surrounding the future direction of interest rates in the UK and it would not be a surprise if hawkish minutes from the most recent MPC meeting (due 20th April) or stronger economic data saw expectations in that regard rise again."

Negative reaction to Alcoa results prompts profit-taking in equity markets: Davy's Flor O'Donoghue comments  - -"Alcoa traditionally kicks off the US earnings season and it did so again for the first quarter of this year. Reaction to its results was negative: revenues were weaker than expected and the stock closed down 6%; it was the worst performer in the S&P 500. The negative reaction to the results, along with worries about the worsening nuclear crisis in Japan, sent equity markets lowers as investors locked in profits.

Reflecting this, European markets had their worst day in a month with the leading benchmarks closing down 1.4-1.7%. Across the Atlantic, the S&P fell 0.8% as it retreated from near-12 month highs. Along with Alcoa and Japan, the sharp retreat in oil prices over the past couple of days hit sentiment and energy and materials stocks fell.

Elsewhere, retail sales data from the British Retail Consortium (BRC) provided more evidence of a deteriorating consumer environment in the UK. This, along with a weaker inflation reading than had been expected (4% annual rate in March from 4.4% in February), has clearly reduced the risk of an imminent interest rate increase by the Monetary Policy Committee."

2010 A Good Year for Bordeaux?: "The vintages are already being compared to 1899-1900 so that gives you a fair idea of how rarely this comes around," Stacey Golding, investment director of Premier Cru Fine Wine Investments told CNBC on 2010's Bordeaux vintage wines:

US Markets

In New York Tuesday, the Dow fell 118 points or 0.95% to 12, 264.

The S&P 500 slid 0.78% and the Nasdaq slipped 0.96%.

Asia Markets

The MSCI Asia Pacific Index rose 0.5% Wednesday.

Japan's Nikkei 225 rose 0.90%; China's Shanghai composite index added 0.96%; Australia's S&P/ASX 200 Index gained 0.25% and the Bombay Stock Exchange's Sensex index dipped 0.97% in Mumbai.

Asia benchmarks

Finfacts Reports

State of the Union: Can the Eurozone survive its debt crisis?
European commercial property transactions hit €26.7bn in first quarter; Value of 2 Irish deals was €124.2m
Investors have regained their appetite for risk despite rising concerns over the world economy
Dr. Peter Morici: Getting serious about reducing US federal deficit; Gas prices, consumers and the economy
Markets News: IMF Fiscal Monitor Report; Irish 2011 budget deficit raised; Debt/GDP ratio will be -4.3% in 2015
International Energy Agency maintains outlook for global oil demand but warns of impact of $100+ oil
No change in new Irish private cars licensed in March
UK inflation rate falls to 4% in March
ZEW Indicator of Economic Sentiment for Germany dropped in April
NAMA exploring ways to provide finance for property transactions; Welcomes Supreme Court decision
US trade deficit fell in February to $45.8bn
Society at a Glance: Mexicans work longest days in OECD countries; Irish among lowest ranks for routine housework

In Europe, the Dow Jones Stoxx 600 is up 0.31% in early trading Wednesday.

The ISEQ has risen 0.16% in Dublin.

CRH is up 0.97%; Elan has dipped 2.16%; AIB has risen 6.82% and BoI has added 2.80%.

Tullow Oil (Add, Closing Price £14.13): Ghana and Uganda update; Goodbody's Gerry Hennigan comments  -- "Tullow provided a drilling update this morning in which it announced results from the Tweneboa-4 appraisal well offshore Ghana, the final well to be drilled in the Tweneboa appraisal campaign.

Located 3.9 kilometres southwest of Tweneboa-2 (encountered 21m of net pay); Tweneboa-4 encountered 18 metres of net gas condensate pay. The rig will now move to perform drill stem tests on the Tweneboa-2 oil and gas condensate accumulations. Tweneboa contributes 84.2p to our total risked NAV of £12.04 on a 70% risked basis.

We see this as a small incremental positive to the share price this morning. Elsewhere in Uganda, following the farm-down to CNOOC and Total, two wells, the Jobi East prospect and the Mpyo appraisal well, are expected to commence drilling in Exploration Area 1 (EA 1) within the next two weeks."

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


The euro is trading at $1.4508 and at £0.8915.

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 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 Tuesday this week, the BDI slipped 17 points or 1.25% at 1,342.

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 $106.76 per barrel, down 51 cents from Tuesday's close. In London, Brent for May delivery is trading on the International Commodities Exchange at $121.84. 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 $15.

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 $1,458.70, up $5.00 from Tuesday's close.

Irish Financials: Taking stock post AIB results, looking to BKIR on Thursday; Goodbody's Eamonn Hughes comments  -  - "AIB’s results yesterday had plenty of stats that made for sobering reading; a net loss of €10.2bn, impairments at 13% of the loan book, criticised loans at 30%, an LDR of 165% (some deposit outflows in Q1, but Anglo deal brings the LDR down c.20 pc), ECB/CB drawings at one-quarter of the balance sheet (Anglo & Poland deals should reduce this), margins still in decline in 2011 and the bank confirmed c.15% redundancies.

Having said all that, the recent PCAR tests pre-empted the results and as we said yesterday in our First Glance, the extent of the required capital raise (€13.3bn, of which €11.9bn is equity) and existing State stake will dampen any private investor interest. Commentary today that the bank is mulling over forms of mortgage debt forgiveness may dominate the headlines, but will only serve to underpin the conservatism applied in the PCAR tests, with higher mortgage loan losses applied by the Central Bank in the tests (4.1% in the base case across the sector) than those guided by the banks (3.3%).

Higher impaired loans, with deposit & margin pressures will likely feature in Thursday’s FY10 results of Bank of Ireland. However, the historical 2010 figures are likely to be a sideshow, with many of the key loan, deposit and capital figures already flagged in the PCAR documents 10 days ago.

The main issue will be the capital raise. Our view would be that the market - both equity and debt - probably needs guidance from BOI on a sustainable P&L and balance sheet ahead of any capital raise given the many uncertain metrics at play over the coming 3 years covered by the PCAR tests - prospective loan losses, pace and costs of de-leveraging, margin trends, economic growth etc. However, we suspect it is unlikely that BKIR will be ready with its plans this Thursday so soon after the stress tests. We’ll see what happens tomorrow, but as we mentioned in our PCAR note on April 1, we are struggling to make the current BKIR valuation work based on our assessment of the future potential NAV and franchise value."

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