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Last Updated:
Jun 30, 2009 - 9:59:19 AM |
Markets News Monday: European business and consumer confidence improved in June for the third month in a row from low levels
By Finfacts Team
Jun 29, 2009 - 11:04:40 AM
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The Wall Street Journal reports today that government's plan to enable banks to dump troubled assets is facing troubles of its own.
Markets initially rallied when Treasury Secretary Timothy Geithner announced in March a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks.
But that initiative -- called the Public-Private Investment Program, or PPIP -- has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.
The program's problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets. That in turn could hinder efforts to revive the nation's economy.
Prof. Peter Morici of the University of Maryland, commented on some recent news: "The electronic mass media has created two interconnected phenomenon that give us personalities like Michael Jackson.
First, stars can make money in amounts that 1930s and 1940s entertainers could never have imagined. They not only live richly but can become wildly rich and leave estates akin to those of great financiers. With digital recording their intellectual property will support generations of heirs.
Also, the public sees so much of stars they can't hold broad public attention long without becoming odd, unusual or controversial. The Michael Jackson that we knew these last 20 years was a very different from the Michael in the Jackson Five. He manufactured an artificial personality—almost an avatar. Sadly, in many ways, that destroyed his life.
The economics of the media and the saturation of celebrity images require personalities like Michael Jacksons to emerge if they are to enjoy enduring success.
What made us uneasy about him—his wealth and peculiar life—is what the market requires for entertainers to be successful."
Japan today reported a rise in industrial production by 5.9% in May - - matching a gain in April that was the biggest jump since March 1953, when production rose 7.9%. Meanwhile, car production fell for the eighth straight month in May, tumbling 41.4% from a year earlier and the government reported that retail sales fell for a ninth straight month.
The MSCI Asia Pacific Index fell 1% Monday.
The Nikkei 225 dipped 0.95%.
Asia-Pacific benchmarks
European business and consumer confidence improved in June for the third month in a row from low levels, according to the latest EU survey.
The European Commission's economic sentiment indicator (ESI) for the Eurozone rose to 73.3 points in June from 70.2 points, climbing further away from a record low 64.6 points reached in March.
However, in both areas, the level is still below the lows reached in the previous trough at the end of 1992. The ESI increased by 3.2 points in the EU and by 3.1 points in the Eurozone, to 71.1 and 73.3 respectively.
The increase in the ESI resulted from an improvement in sentiment in services and among consumers, which rose in both regions by 3 points, and industry, which rose by somewhat less (1 point in both the EU and Eurozone). Sentiment in construction remained broadly unchanged in both areas, and retail trade also remained stable in the EU, though it declined in the Eurozone by 2 points.
The majority of Member States registered an improvement. Among the largest Member States, France and Germany (+3.2 points), and the UK (+2.7) recorded significant increases in sentiment, while the rise was less marked in Poland (+2.0), Spain, the Netherlands (+1.5) and Italy (+1.1).
The increase observed at sector and country level is mainly driven by improving expectations, as the main economic actors seem to be gaining confidence that the crisis is easing. In a consistent development, employment expectations picked up in industry and services and consumers’ unemployment expectations decreased.
The financial services confidence indicator – not included in the ESI – moved up by 4 points in both the EU and the Eurozone. Managers' improved assessment of the business situation over the past three months contributed most to this positive development in both regions, while past and expected demand for their services contributed less.
Business Climate Indicator improves, but orders continue to deteriorate
The Business Climate Indicator (BCI) for the Eurozone increased slightly in June. However, the level is still far below the previous historical lows of 1993. This suggests that year-on-year industrial production growth will still have been negative in May and will remain subdued in June.
The rise in the BCI reflects an overall easing, except for conditions related to order books. Managers' production expectations continued to improve in June, and their perception of the production trend observed in recent months increased significantly. Managers' opinion of stocks of finished goods also continued to improve. In contrast, both order books and export order books continued to worsen, reaching new record lows.
In Europe Monday, the Dow Jones Stoxx has risen 0.62% Monday.
In Dublin, the ISEQ is up 1.36%.
CRH is up 1.3%; C&C 4% and Elan has risen 6%.
European Benchmarks
Irish Share Prices
Euribor Rates
AIB Daily Report
Bank of Ireland Daily Report
Currencies
The euro is trading at $1.3999 and at £0.8495.
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 August delivery is currently trading on the New York Mercantile Exchange (Nymex) at $69.19 per barrel up 3 cents from Friday's close. In London, Brent for August delivery is trading on the International Commodities Exchange at $68.93 up 1 cent.
Bloomberg reports the International Energy Agency, an adviser to oil-consuming nations, cut five-year forecasts for global crude demand because of the economic slump, predicting consumption won’t regain last year’s levels until 2012.
The IEA cut its oil demand estimates for every year through 2013 by about 3 million barrels a day, it said in its Medium- Term Oil Market Report today. Consumption will average 86.76 million barrels a day in 2012, the first year it will rise above 2008’s level of 85.76 million barrels a day, according to the Paris-based agency.
Gold spot price
Gold is trading at $938.90 down 10 cents from Friday's spot price close in New York.
Davy chief economist Rossa White comments: Fascinating week that should reveal plenty about state of Irish economy - - "This is the most important week of Irish economic data in 2009 so far. Ever since we issued our note last month judging that the pace of decline has slowed, we have been assessing the evidence to see if that trend has continued. This week, we finally get some numbers showing the full impact of April's punitive Budget on economic behaviour. One question is crucial: to what extent did consumers absorb the tax hikes by reducing saving rather than spending?
The calendar kicks off today with June consumer confidence. That index actually bottomed at a remarkably low level last July, but is now marginally higher having moved generally sideways since. Tomorrow sees Q1 GNP numbers, which are the most out-of-date indicator this week. Credit numbers for May are also due. Wednesday and Thursday are salient for numbers. On Wednesday, we have the PMI manufacturing and Live Register. Both have definitely improved recently, signalling a slower pace of decline in output and smaller increases in claimants respectively. Most importantly, Thursday's tax revenue for June will incorporate the Budget tax changes.
Two reports are worth concentrating on. The tax figures for June on Thursday are bang up-to-date: we will be watching to see how well spending-related taxes, such as excise and VAT, held up. Likewise, new car sales for June — probably due on Wednesday — will illuminate that debate too. Our guess is that consumers absorbed some of the savage tax hikes in April through lower saving rather than slashing spending one-for-one. That outcome is plausible because the savings ratio had already shot up over the previous 18 months. The reaction of households to income changes and political developments will define the path for the economy in H2."
Goodbody economist Deirdre Ryan comments: Government spending cuts – what’s in store? - -"Given the scale of the fiscal problems facing the Irish Government, the need for spending cuts to be identified is the most pressing near term issue. With fiscal consolidations that have a larger emphasis on spending adjustments rather than taxation increases tending to be more successful, and given that much of the increase in taxation has already been implemented, the more difficult part of the consolidation programme is in store. In this regard, we have commented on the importance of the impending report from the body examining all aspects of government spending –' An Bord Snip'. Press reports over the weekend indicate that a total of €5bn worth of savings have been identified by the Board, including reductions in spending in the potentially contentious area of social welfare. Nevertheless, given that this area accounts for approximately a third of current spending, it was always going to be difficult to leave untouched.
According to the press reports, reductions in the social welfare budget, as recommended by the board will total €1.5bn, or 7% of total social welfare spending. A reduction in the number of public sector employees of c.10% (or 30,000) will also form part of the recommendations according to the press reports, with this leading to further savings of €1.5bn annually. A restructuring of a number of Government Department’s is also highlighted. Given that the Government has targeted savings of €4bn for 2010, (out of a total planned consolidation of €16bn) and the Board’s total recommendations amount to €5bn according to the press reports, there may be slight room for manoeuvre in some areas. Nevertheless, a number of the report’s proposals are still likely to feature in the all important Budget in December."
Goodbody analyst Eamonn Hughes comments: Irish Financials; More discussions on capital for European banks - - "Mario Draghi, an ECB member, the Italian Central Bank Governor and Chairman of the Financial Stability Board (so obviously very busy!) was making some comments on financial markets over the weekend. However, his comments included a remark that the Basel Committee on Banking Supervision plans to make proposals to strengthen banks’ balance sheets by the end of the year.
Discussions around future capital levels in the banking system have been ongoing for a while and the discussion as to what are the appropriate levels and incorporating what instruments is still a much heated topic. In its Financial Stability Report last week, the Bank of England supported the merits of common equity in the capital structure, broadly echoing comments from the ECB in its FSR a few weeks earlier. Remember, both the UK and US stress tests looked at capital ratios with 4% core equity ratios. However, as the banking system moves to higher capital ratios, there is one interesting comment from the CEO of the British Bankers Association that regulators should wait 10 years before requiring banks to have increased levels of capital, noting that the priority should be to get the banks to emerge from recession first, before implementing new measures. We are not so sure 10 years is going to cut the mustard, but at least her comments open the debate and highlight that it will take time for banks to heal themselves.
Our own view, for what it is worth, is that likely higher capital ratios will be graduated in, but need to be in place within 3-5 years of the commencement of economic growth in the eurozone. So we are looking like H210 plus 3 to 5 years. This will give banks in Europe time to deal with the credit cycle and then raise capital to the appropriate levels. Ireland will come out of its downturn later than Europe, so should have a little less time to address these new levels, but also from a lower starting position as well. So either way, it’s looking like a bonanza for investment bankers operating in the banking sector for the next few years.
We think banks will end up back where we started many years ago, with circa 10% Tier 1 ratios and the bulk of it 7-8% in common equity. The Irish banks will be quite some way from this target after the credit cycle. Actually, while on the topic of capital, we note that the European Commission has approved the recapitalisation of Anglo Irish."
