Markets News Friday: EU leaders confirm Italy's Mario Draghi as next ECB president
By Finfacts Team
Jun 24, 2011 - 9:06 AM

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Sharon Bowles, chairperson of the European Parliament's Economic and Monetary Affairs committee with Mario Draghi, at a hearing on his nomination to be the next ECB president, Brussels, June 15, 2011.

ECB: European Union leaders meeting in Brussels have agreed the appointment of Italy's Mario Draghi to be the next president of the European Central Bank, according to draft conclusions from the EU summit, which is due to finish today.

Draghi, 63, who is currently the governor of the Bank of Italy will take over from Jean-Claude Trichet for one eight-year term, beginning on 1 November.

"The European Council appointed Mr Mario Draghi president of the European Central Bank from 1 November 2011 to 31 October 2019," a draft of the conclusions obtained by Reuters show.

Irish GDP bounces back in Q1; oil prices fall sharply: Conall Mac Coille, Davy's chief economist, comments  -- "Yesterday's national accounts release indicated that Irish GDP rose sharply in Q1, by 1.3%, following a 1.4% decline in Q4 2010. The erratic pattern of Irish GDP and GNP growth through the last two quarters reflects volatile movements in multinational sector profits. The growth of annual GDP and GNP (smooth over Q4 and Q1) better captures the trajectory of the Irish economy. On the year, GDP growth rose by 0.1% in Q1 and GNP was down by 0.9%. This is not too surprising as GDP captures the strength of the export-focussed multinational sector, whereas GNP has been pushed down by the weakness in domestic demand.

The GDP data released yesterday indicated that the configuration of growth is similar to that in 2011. Exports rose by 3.8% and imports fell by 0.3% so that net trade made a very large 4.0 percentage point contribution to growth on the quarter. In contrast, domestic demand remained weak as consumption and government spending both fell by 1.9% on the quarter. Investment rose slightly by 1.1%.

Yesterday's GDP data are therefore something of a relief. We had expected GDP to bounce back in Q1 because we believed that the decline in Q4 GDP was temporary. Many forecasters may not have done so and may now have to revise up their projections for GDP growth in 2011. The broad picture is that Irish exports continue to perform well but there has yet to be any significant sign of a pick-up in the domestic economy. Looking forward, GDP growth is likely to slow as the Q1 growth rate was flattered by the temporary factors that pushed down on GDP in Q4 unwinding in the first quarter. The planned fiscal consolidation, weak nominal pay growth and consumer spending and fragile confidence suggest that consumer spending will remain weak.

Oil prices fell very sharply yesterday and have declined from a high of $114.40 on Wednesday to $108.27 per barrel. The decision by the International Energy Agency (IEA) to release stocks has taken the market by surprise. The IEA intends to release 60m barrels at a rate of 2m barrels per day to compensate for the fall in Libyan output, which normally averages around 1.5mbd. The IEA's decision has been welcomed as a response to OPEC's decision not to raise its output quotas earlier in the month. Iran and Angola, which already operate at close to full production, blocked moves by Saudi Arabia to raise OPEC production quotas. But Saudi Arabia may still decide to raise its oil production unilaterally."

Eurozone Crisis Still At Peak: Analyst: The crisis within the Eurozone is still at its peak and the short term outlook for equities is negative, Patrick Legland, global head of research at Societe Generale told CNBC Friday. He added that there was a need for a European finance minister to be appointed to address a lack of "real European governance"':

Economic View: Two-speed economy still the theme; Dermot O'Leary, Goodbody's chief economist, comments -- "Q1 GDP/GNP had a little for everyone, with upward revisions, an increase in GDP and a fall in GNP, but what does it tell us about the Irish economy’s prospects? Abstracting from the quarterly volatility (GDP up 1.3% qoq, GNP down 4.3% qoq), it doesn’t tell us much more than we knew already. As a result, we will be leaving our economic forecasts largely unchanged for 2011 and 2012. In 2011, we expect GDP growth of 0.5% (previously 0.4%), while we now expect GNP to contract by 1.0% (previously -0.4%). The latter is a reflection of our view that there will be an increase in net factor income outflows in 2011. We are making no change to our estimates for 2012 (1.5% GDP, 1.1% GNP).

Within these forecasts, a trend that has been in evidence since 2008 is expected to continue. That is, net exports are expected to offset a continued decline in domestic demand (with also a contribution from inventories). A breakdown of the growth dynamics over the past twelve months is illustrative; while GDP was effectively flat an annual basis in Q1, this included a c.4% boost from net exports, with domestic demand subtracting a similar amount from GDP in the quarter. After a 6% decline in 2010, we expect domestic demand to decline by 4% in 2011 and a further 1% in 2012, due to the well-discussed drags of fiscal consolidation and a weak labour market environment. While we are pulling back our forecasts slightly for both exports and imports on the back of slowing forecasts in some of Ireland’s main trading partners, net exports will still be enough to push GDP into growth territory in 2011.

A key complicating factor in Ireland’s battle against its fiscal crisis is the deflation that continues in the system, thus pushing down nominal GDP/GNP, impacting tax revenues and also pushing up the debt/GDP ratio. In the context of the need for a real devaluation in the Irish economy, the trade-off is clearly deterioration in debt dynamics.

It is these debt dynamics that will be the key focus for the foreseeable future, and it will take a significant amount of work on the fiscal policy side, as it appears that growth and inflation will not do the job on its own.

Tanaka Says IEA 'Filling the Gap': "In 2008 it was a very hard landing for the oil price, so we have tried to build some sort of soft landing," Nobuo Tanaka, Executive Director of the IEA told CNBC Friday after the organization agreed to release 60m barrels of emergency oil stockpiles:

Bank of Ireland (Closing Price €0.12): Good progress on liability management; Eamonn Hughes of Goodbody comments - - "Bank of Ireland has indicated the early bird take-up for its liability management exercise (LME) saw 72.4% acceptances, with 95% of these bondholders opting for the equity option, the balance for cash. We had previously anticipated a reasonably high take-up of the equity offering in the LME, but are now nudging up the equity acceptance level in our model to 80-85% (from c.75-80% previously and implying a share count c.30bn). In our view, the capital generated from the LME is likely to be approaching the €2.5bn level. We have done some additional work modelling out our trough NAV estimates (out to FY13) for the bank (using PCAR base case).

Our trough NAV rises to €5bn, which implies our NAV per share moves up to 16.5c from 14c mid-point previously. However, the higher NAV dampens the ROE profile, so we don’t see the achievement of early teens ROEs until 2016. As such, our comfort on valuations is now only at the bottom end of our previous guided range of 0.5-0.6x. The higher NAV in combination with the lower ROE profile means our NAV based fair value for BOI is unchanged from previously, at 8-8.5c per share. on our estimates, we struggle on the BOI investment case.

For investors to be interested, they must accept lower implied compound returns than our target (20% p.a.), expect normalised ROEs quicker than we envisage (2016), or believe the Central Bank PCAR to be overly conservative (BOI believes loan losses will €1.4bn lower than the PCAR), or some combination of all three. As a reference level, our P/NAV multiple of 0.5x compares to Italian, Greek and Portuguese banks on 0.4-0.5x and speculation that the upcoming Bankia IPO in Spain could also be priced at a similarly low level, posing a headwind reference level for BOI’s valuation. Should the wider macro picture in Europe deteriorate further, particularly around Greece and any knock-on consequences for Ireland, then presumably all valuation bets are off."

US Markets

In New York Thursday, the Dow fell 60 points or 0.49% to 12,050.

The S&P500 slid  0.28% and the Nasdaq added 0.66%.

Asia Markets

The MSCI Asia Pacific Index rose 1.1% Friday.

Japan's Nikkei 225 gained 0.85%; China's Shanghai Composite index climbed 2.16%; Australia's S&P/ASX 200 added 0.17% and the Bombay Stock Exchange's Sensex index advanced 1.77% in Mumbai.

Asia benchmarks

Finfacts Reports

EU banks forced to consider losses on bonds in stress tests; BoI cuts State's maximum stake to 69%
Greece has to plug additional €5.5bn 'black hole'
For the fifth consecutive year UK forestry investment returns outperformed commercial property markets
The unforeseen consequences of voluntary debt reprofiling for Ireland
Dr. Peter Morici: The New Imperialism; EU aid package will destroy Greece and enrich Germany
International Energy Agency says it will release 60m barrels of oil from emergency stocks in the next 30 days
Bank of America's credit card firm MBNA fined €750,000 by Irish Central Bank for overcharging customers
Irish structural reform is needed to deliver enduring cost competitiveness - - National Competitiveness Council
Irish Economy 2011: GDP up 1.3% in Q1 on exports boost; GNP down 4.3% in quarter as domestic demand dipped
Eurozone growth in June weakest since October 2009, led by sharp manufacturing slowdown

In Europe, the Dow Jones Stoxx 600 has risen 1.02% in early trading Friday.

The ISEQ is up 1.26% in Dublin.

CRH has climbed 2.78% and Dragon Oil has gained 1.44%.

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 $1.4226 and at £0.8908.

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 Thursday this week, the BDI rose 8 points or 0.57%  to 1,414.

The Financial Times reported 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 August 2011 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $91.70 per barrel, up 68 cents from Thursday's close. In London, Brent for August delivery is trading on the International Commodities Exchange at $107.95. 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 $16.

Oil prices plunged on Thursday after the International Energy Agency announced that the big industrialised countries would release 60m barrels of oil from their emergency stockpiles over a 30-day period - -  see story link in Box above.

The US Energy department recently said that growing volumes of Canadian crude oil imported into the United States contributed to record-high storage levels at Cushing, Oklahoma of over 41m barrels at the end of March 2011 (86% of working capacity at Cushing), and a price discount for WTI compared with similar-quality world crudes such as Brent.  A discount for WTI is expected to persist until transportation bottlenecks impacting the movement of mid-continent crude oil to the Gulf coast are relieved. Consequently, the projected US refiner average acquisition cost of crude oil, which was about $2.70 per barrel below WTI in 2010,  is $1.60 per barrel above WTI in 2011 and $1.10 per barrel above WTI in 2012.

Gold spot price

The spot price of an oz of gold is trading in New York at $1,517.70 per oz, down $3.70 from Thursday's close in New York.

Irish Financials: Further commentary on AIB and IL&P; Goodbody's Eamonn Hughes added: "While BOI was making reasonable progress with its LME yesterday (see above), AIB released its own statement indicating that “while discussions remain ongoing [with the government], it is evident to AIB that any subscription for shares by the State would likely be at a very low price, being a very significant discount relative to the current share price. If this is the case, it is likely that the State's shareholding in AIB would increase substantially beyond its current c. 93% level”.

AIB indicates that it expects discussions with the Government will finalise within the next week, at which point it should be in a position to announce the final terms and structure of any capital raising transaction with the State. It expects to remain as a listed company.

Elsewhere, press reports this morning carry coverage of a speech by the Minister for Finance at the Financial Services Ireland annual lunch in which he appears to prefer a trade sale of IL&P’s life company. Reports over the last few weeks appeared to indicate that the timelines on IL&P’s capital raise were tight enough, so that the IPO route was probably the quickest option. However, the latest commentary appears to be going down the disposal route “in the first instance”. A memorandum of understanding is anticipated to be sent to parties who have expressed an interest in “the next couple of weeks”, which presumably kick starts the process.

Either way, disposal or IPO, the extent of the recap required to be raised by IL&P, as we have been saying for some time, implies de-minimis value in the current shares given the extent of dilution."

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