Markets News Monday: US data raise concerns that Q2 slowdown may be persistent; Gold price close to $1,600 per oz on US default fears
By Finfacts Team
Jul 18, 2011 - 9:02 AM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

German chancellor Angela Merkel with Nigeria's president Goodluck Jonathan, Abuja, July 14, 2011.

Gold jumped above the $1,600 an ounce price benchmark in early trading Monday on the London Bullion Market, triggered by US default fears related to the ongoing political struggle in Washington DC to agree a rise in the federal debt ceiling of $14.3trn and the Eurozone sovereign debt crisis.

Last week, on the London Bullion Market, gold rose to $1587 an ounce from $1541.50 the previous week.

US data raise concerns that Q2 slowdown may be persistent: Conall Mac Coille, chief economist at Davy, comments  - - "Data published on Friday July 15th have raised concerns that the slowdown in the US economy in Q2 may prove to be more persistent. Industrial production was always expected to slow in the second quarter following the supply chain disruption around the time of the earthquake in Japan. However, Friday's US industrial production releases indicated that output growth was close to zero in the second quarter, weaker than previously expected following revisions to the April and May data.

The US Michigan measure of consumer confidence, which had been expected to rise, fell to 63.8 in July, the lowest level since March 2009, and the Empire State manufacturing survey failed to bounce back in July as the market had expected. Friday's data also follow the very disappointing payrolls numbers for June, indicating a sharp fall-off in employment growth. So the outlook for activity in the US economy in Q3 has weakened following Friday's data.

Of course, the softening in the macroeconomic data has been overshadowed by negotiations to raise the US Treasury's debt ceiling. The most likely outcome still seems an agreement ahead of the August 2nd deadline. However, should the US put in place a more stringent deficit reduction plan, this should put further pressure on aggregate spending in the US economy –reinforcing views that softening of economic activity in Q2 may evolve into a more persistent slowdown."

PCAR ensures Irish banks pass EBA stress test with capital ratio of 9.8%; Stephen Lyons, an analyst at Davy, comments  -- "On July 15th, the European Banking Authority (EBA) published the latest round of European bank stress testing results. Only eight of the 90 European banks tested failed the required hurdle rate of 5%, with a combined capital shortfall of €2.5bn. A further 16 banks nearly failed and will come under pressure, as will banks with significant exposures to stressed peripherals.

The stress-testing exercise may be cynically viewed as a retro-fitting process engineered to result in a tolerable number of failures and crucially fails to adequately test for the impact of a sovereign default. However, the tests provide transparency and result in a strengthening of banks' capital – banks raised €50bn in advance of the tests and further raisings are now expected.

The high core tier 1 ratio of 9.8% for the Irish banks is testament to the conservative nature of the March 2011 Prudential Capital Assessment Review (PCAR). The PCAR test tested for three years of adverse losses (versus two under EBA) and demanded a higher hurdle rate of 6% and further contingency capital. The banks were also required to raise capital to facilitate deleveraging.

The fact that recapitalisation/restructuring measures are not complete does not detract from the capital scores. Liability management exercises are mostly completed, and the bulk of the capital raising is expected by end-July. Indeed, the cash balances are already on deposit with the banks.

The results from the EBA exercise are a positive for Irish banks and the sovereign as they validate the restructuring measures undertaken. However, for the outlook to improve, a successful resolution to the euro area's problems is required."

Economic View: Greater sense of urgency for Thursday’s summit; Dermot O’Leary, chief economist at Goodbody, comments  -- "It seems like I haven’t been away, what with yet another euro-area summit to be held this Thursday. The 'financial stability of the euro-area as a whole and the future financing of the Greek program' are the only items on the agenda. Will it finally come up with a credible solution? Based on previous attempts, one would not hold out much hope. However, rising yields in Spain and Italy in recent weeks has triggered a greater sense of urgency to the situation, while avoiding an event of default is not now seen as a necessary condition of any plan any longer.

This is the most positive development that we can take from the events over the last few weeks as it finally recognises that if a solvency problem is to be resolved it must by definition ease the debt burden for the Greek sovereign. One way this can be done is by allowing a buyback of Greek sovereign debt by way of the EFSF. This is an idea which is gaining some traction and may indeed form part of the decisions that will be made later in the week.

For Ireland and Greece, the events of recent weeks have in some ways been a positive as it has hammered home the view that a European solution is needed for a European problem. Even the IMF had this view in their press conference following the conclusion of the second mission to Ireland on Friday. All eyes this morning will be on the market’s reaction to the bank stress tests in Europe on Friday. However, the main focus for the week will be Thursday’s crisis summit."

Bad News For US If Debt Talks Stall: Robert Parker, Senior Advisor at Credit Suisse says if the U.S. debt extension is not passed, we can expect to see pressure on the USD and a shock to the country's equity market:

Irish Financials: Irish banks pass EBA stress tests; Eamonn Hughes, head of research at Goodbody, comments  - -"The European Banking Authority (EBA) released its European bank stress tests on Friday evening. The tests analysed 90 banks in 21 countries to an adverse test scenario over 2011 and 2012 with a target core tier 1 ratio benchmark of 5%. The tests were based off end-2010 balance sheets, but incorporated capital raising exercises between January and April and resulted in just 8 banks failing to make the 5% target ratio. Among the eight failed banks, 5 were Spanish, there were 2 Greek banks and one Austrian. The EBA recommends that national regulators take specific steps to address the capital shortfall of just $2.5bn at these banks. A further 16 banks (including seven in Spain) were identified in a 5-6% range and the inference would be that regulators should look at these banks as well. All three Irish banks, AIB, BOI and IL&P passed the tests.

The EBA tests employed slightly different methodologies than the PCAR tests performed on the Irish banks back in March. The EBA period looked at losses over a two year period versus three in the PCAR, the benchmark 5% figure was a higher 6% in the PCAR and there were a few differences around funding mix and cost, the impact of deleveraging and balance sheet growth and buffers. However, the market is likely to just focus on the headline passing benchmark (5% and 6%) and the general consensus will be one of no surprise the Irish banks have passed. According to the Central Bank release, BOI was 7.1% under the EBA stress test, AIB was 10% and IL&P 20%, though bear in mind the EBA will not have had the same level of deleveraging losses built in as the PLAR test (the liquidity test).

The market had been braced for up to 15 banks failing the EBA stress test with a €29bn capital hole, so we wonder whether the tests create the same indifference as generated with the same tests in 2010. Also, the tests specifically excluded a Greek default. They did include a 25% markdown on Greek debt, but with the price of Greek debt (10% year) just 52c in the euro and CDS spreads indicating an 87% chance of default, the market has moved beyond the implications of the tests. Also, Portuguese debt is trading at 54c in the euro, but the tests were for a 22% haircut. There is extensive sovereign disclosures for all banks, which will allow market participants to do their own homework, so more transparency is always better than less, but it feels like events in the market have already bypassed the results of the tests.:

Asia Markets

The MSCI Asia Pacific Index ex-Japan fell 0.5% Monday.

Japan's markets were closed; China's Shanghai Composite index slid 0.12%; Australia's S&P/ASX 200 declined 0.03% and the Bombay Stock Exchange's Sensex index slipped 0.04% in Mumbai.

Asia benchmarks

Finfacts Reports

Global online consumer confidence declines to lowest level in six quarters
Dr Peter Morici: The debt ceiling and funding the US government after August 2; Running QE2 in reverse
UK commercial property capital growth in second quarter lowest since Q2 2009; Capital growth up 17.3% in recovery
By the end 2010 all business and most domestic consumers in Ireland were paying below EU average price for electricity and gas
Eight banks failed European stress tests; 3 Irish banks passed

In Europe, the Dow Jones Stoxx 600 has dipped 0.24% in early trading Monday.

The ISEQ is flat in Dublin.

Dragon Oil is up 1.19% and Glanbia is down 0.94%.


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 $1.4034 and at £0.8714.

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 Friday last week, the BDI fell 14 points or 1.02% to 1,353.

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 $96.82 down 42 cents from Friday's close. In London, Brent for August delivery is trading on the International Commodities Exchange at $116.48. 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 over $19.

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 $1,597.60 per oz, up $3.50 from Friday's close in New York.

© Copyright 2011 by