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| DAVOS-KLOSTERS/SWITZERLAND, 29 JAN 09 - The audience listens to the debate during the session 'The Values behind Market Capitalism' at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 29, 2009. Copyright by World Economic Forum swiss-image.ch/Photo by Remy Steinegger |
Bloomberg reports that Federal Reserve officials warned of a prolonged global economic slowdown that may push the U.S. to the brink of deflation.
For the first time during the credit crisis, the Federal Open Market Committee’s statement yesterday indicated concern about the worldwide economy weakening “significantly,” with “some risk” that inflation would remain below ideal rates. The Fed signaled it’s moving closer to buying long-term Treasuries and expanding its $600 billion program to buy home-finance debt.
Chairman Ben S. Bernanke and his colleagues are focused on reducing a range of long-term borrowing costs to stem the longest recession since 1982. Policy makers, concluding a two-day meeting yesterday, left their target range for the main interest rate unchanged at close to zero and reiterated rates will be “exceptionally low” for “some time.”
FOMC Statement
Rossa White, economist at Irish broker Davy commented: "The US Fed went a little further in outlining its 'nuclear policy' options in yesterday's statement than in its last one on December 16th. Whereas then it was examining the possibility of buying long-term government bonds, now it is prepared to do so. The bond market was perhaps disappointed that it did not say that it would definitely act soon. But it is really the last weapon at its disposal.
Buying long-term treasuries in theory can deliver two results. First, it may bring market rates down by reducing long-term bond yields, off which all other interest rates are priced. Second, at the extreme, it paves the way for unlimited fiscal stimulus. If the US cannot sell its bonds to domestic or overseas investors to finance a spending programme, then the Fed is ultimately the buyer of last resort. It can print an unlimited supply of money to buy those bonds — meaning that there is no real constraint on the amount of bridges, schools and roads to nowhere that can be built.
The Fed will not really want to go that far. But much depends on whether the current fiscal and monetary efforts work. For example, we are still unconvinced by the measures to repair the global banking system. They strike us as partial solutions, as the authorities continually struggle to catch up. Until there is massive public recapitalisation and private debt reduction, it is hard to see the inflection point. That means all options, including the most extreme from the Fed, are still on the table. "
The Wall Street Journal reports that New York Attorney General Andrew Cuomo is expanding the scope of his investigation into bonuses paid by Merrill Lynch, with the inquiry now likely to include whether directors and shareholders were misled about giant losses at the Wall Street firm, a person familiar with the situation said.
Mr. Cuomo plans to press John Thain, the former Merrill chairman and chief executive who was forced to resign last week from Bank of America Corp., on what he told Merrill directors about ballooning losses in mid-December, this person said.
In addition, Mr. Cuomo wants to know why the Charlotte, N.C., bank didn't publicly disclose that Merrill's condition was deteriorating. BofA Chairman and CEO Kenneth Lewis is likely to face questions from Mr. Cuomo about bonus payouts by Merrill, including what he told directors about them, according to this person.
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| The Values behind Market Capitalism: Tony Blair DAVOS-KLOSTERS/SWITZERLAND, 29JAN09 - Tony Blair, UN Middle East Quartet Representative; Member of the Foundation Board of the World Economic Forum captured during the session 'The Values behind Market Capitalism' at the Annual Meeting 2009 of the World Economic Forum in Davos, Switzerland, January 29, 2009. Copyright by World Economic Forum swiss-image.ch/Photo by Remy Steinegger
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In New York Wednesday, reports that the Obama administration was planning creating a "bad bank" to buy toxic assets and signals from the Federal Reserve that it could take bolder steps to help the economy, triggered rally.
The Dow Jones Industrial Average rose 200.72 points, or 2.5%, to 8375.45 and the Standard & Poor's 500 Index closed up 3.4%, at 874.09. Both indexes are down by more than 40% from their October 2007 record closes.
Citigroup closed up 18.6%; Bank of America gained 13.7% and JP Morgan Chase rose 10.4%.
The Nasdaq Composite Index rose 3.6%, boosted by Yahoo, up 7.9%, and Sun Microsystems, which jumped 21.8%,
In Asia Thursday, the MSCI Asia Pacific Index rose 1.4%.
The Nikkei 225 Stock Average gained 1.8% and in Hong Kong, the Hang Seng Index jumped 5% following a three-day holiday for the Chinese Lunar New Year. China and Taiwan remain shut for the week. All regional markets rose except Thailand and the Philippines.
Asia-Pacific - benchmarks
European stocks have fallen following Wednesday's surge and the Dow Jones Stoxx 600 has fallen 1.32%
The ISEQ has dropped over 4% in Dublin.
AIB Bank has dipped 26% and both BoI and IL&P 18%.
Aer Lingus has dropped 5% and C&C over 4%.
European confidence in the economic outlook fell to the lowest on record in January.
An index of business and consumer sentiment dropped to 68.9 from a revised 70.4 in December, the European Commission in said today. That is the lowest since the index was first published in 1985. Eurozone capacity utilization fell to 75.2% - - the lowest since 1990, in the current quarter.
European Benchmarks
Irish Share Prices
Euribor Rates
AIB Daily Report
Bank of Ireland Daily Report
Goodbody economist Dermot O'Leary says: Some things are just outside our control: "While vital talks on a fiscal consolidation package and recovery plan continue in Ireland, nothing can be done about the continued deterioration in the international economy. Yesterday’s revised forecasts from the International Monetary Fund (IMF) starkly illustrate the scale of the difficulties facing the global economy in the next twelve months. Growth is expected to come to a virtual standstill globally, with the 0.5% increase the worst global performance in the post-war period, according to the IMF. Within that, developed economies are expected to contract by 2% this year. Both forecasts represent downward revisions of close to 2% from the estimates set out last November.
Within the major economies, the US is expected to contract by 1.6%, the euro-area by 2.0% and the UK by 2.8%. Despite downward revisions to Asian growth prospects, one would have to think that there is further downside risks to these, with China, for example, still expected to grow by close to 7% in 2009. Given the latest evidence coming from the region, this looks on the high side. For a small, open economy like Ireland, these headwinds are likely to manifest themselves in exports and inward FDI.
However, evidence of such economic contraction is only going to strengthen the will of policy-makers to come up with solutions to counter the crisis. The Fed reiterated last night that it will leave interest rates close to zero for the foreseeable future and will do whatever is needed to support the financial markets; the US fiscal package, passed last night by the House of Representatives is weaving its way though the houses of power; monetary and fiscal efforts are continuing in Europe too. There is no doubt that the picture is bleak, but when these policy efforts finally begin to bear fruit, those participating in negotiations in Irish Government building must ensure that the Irish economy is competitive enough to ride that international wave of recovery."
Goodbody banking analyst Eamonn Hughes says on Irish Financials; Are you insured? :"President Obama’s plans for the banking sector continue to ignite share prices. Comments from Treasury Secretary Geithner that the Administration was “looking at a range of options” and hopes to lay out a viable plan “relatively soon” lay behind the 13% jump on financial stocks last night in the US. Financials took 19 of the top 20 slots behind the S&P’s 3.4% rise. The bones of the US proposal – as we commented on yesterday – is the creation of a bad bank, which will probably be run by the FDIC.
So banks this side of Europe also had another good day yesterday – including our own banks. We note the speculation in today’s Irish Independent that the heads of the main banks are understood to be keener on the Government pursuing an insurance scheme à la UK (it announced an asset guarantee scheme last week) or ING (it announced a deal with the Dutch government earlier this week on its troublesome Alt-A loan book). The article indicates that the plans to recapitalise the banks (announced on December 22) which were to be completed by end Q1 could now be fast tracked for inclusion in the wider economic package that the Government has deadlined for next Tuesday. In our view it would appear rational that any macro package would also refer to the banking system.
The government still appears intent on progressing with the December 22 plan, which calls for the injection of €2bn apiece of preference capital into each of the two main banks, with a further €1bn optional as well. As we indicated yesterday, we think the injection of €2-3bn on its own will fail to ease the market’s ultimate concern, which is the extent of losses on the loan book. Hence, as we have been indicating for a few days now, it appears that the government may have to tag it with an insurance proposal as well. A bad bank proposal like the US certainly has its merits too, though upfront injections of capital, which would be dilutive (despite helping loan to deposit ratios at the banks) and the question of who administers it, may prove a more complicated structure.
Remember, the FDIC in the US is a long established state agency with extensive knowledge of this topic. The targeted nature of the ING proposal to focus on the most-at-risk part of the loan book (development property in Ireland, in our view) certainly wins the simplicity stakes and probably even looks easier to administer than the UK asset guarantee scheme which appears set to accept a range of collateral from the banks. If the media speculation proves correct, then Tuesday could be a more interesting day than we first envisaged."
Currencies
The euro is trading at $1.3057 and at £0.9244.
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
Crude oil for March delivery is currently trading on the New York Mercantile Exchange (Nymex) at $42.04 per barrel down 12 cents from Wednesday's close. In London, Brent for March delivery is trading on the International Commodities Exchange at $45.34 up 44 cents.
Gold spot price
Gold is trading at $878.20 down $8.2 from Wednesday's spot price close in New York.
