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Markets News Wednesday: UK unemployment jumps to highest level for 14 years; Shares rise in Europe and Asia
By Finfacts Team
Sep 16, 2009 - 11:30:36 AM
UK unemployment jumped to its highest level for 14 years in the three months to July, official data showed Wednesday, hitting hopes of a rapid economic recovery.
There are signs that the UK economy is growing again, the governor of the Bank of England, Mervyn King, said on Tuesday.
But he added that the "strength and sustainability" of the recovery are still "highly uncertain", in comments made to the Treasury Select Committee of the House of Commons.
King said the state of the banking system, levels of debt, and the global economy were all drags on growth.
He was speaking after figures showed a key measure of inflation has fallen to its lowest level since February 2005.
The Consumer Prices Index (CPI) dropped to an annual rate of 1.6% in August from 1.8% in July.
But the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, rose, to -1.3% from -1.4%.
King said inflation "is likely to be volatile" over the next year.
"Following a precipitate fall in economic activity at the end of last year and the start of this, there are now signs that growth has resumed in the third quarter,"he said.
The governor said there were three "headwinds" that could make the recovery"somewhat slower and more protracted that we might otherwise have thought".
First, he said banks' willingness to lend was a drag on the UK economy.
"Conditions for big companies to raise finance have improved significantly, but small and medium firms are still finding it difficult," he said.
Second, he argued that companies and individuals are focusing on repaying debt, rather than the spending on products or services which is needed to boost overall economic activity.
Finally, he said the UK relied to some extent on what was happening in the rest of the world.
"We've had more encouraging news on that in the past couple of months, particularly in Asia,"he said.
The Office for National Statistics reported today that, according to the broader International Labor Organisation measure, UK unemployment rose by 210,000 to 2.47 million in the three months to July, its highest level since May 1995. That pushed the unemployment rate to 7.9%, up 0.7 percentage point from the previous three months.
The ONS also reported that the number of people claiming benefits rose by 24,400 in August from July's upwardly revised gain of 25,200, also topping expectations of a 20,450 increase. The corresponding claimant count rate was 5% -- the highest since August 1997. The claimant count for July was originally reported as 24,900.
The global banking scene is stabilizing but the industry's structure is undergoing change and it is unlikely to return to the way it operated prior to Lehman's collapse, says Larry Klane, CEO of Korea Exchange Bank, speaking to CNBC's Martin Soong and Amanda Drur:
Obama poll rating
Bloomberg says President Barack Obama earns high marks for his performance even as Americans express anxiety about his domestic policies. One possible reason: Republicans aren’t offering an alternative.
A Bloomberg News poll gives Obama a job-approval rating of 56 percent and 61 percent say they feel favorably about him. Still, respondents are divided over the president’s handling of health care and the economy, while giving him a negative grade on the growth of the budget deficit.
“Americans are despairing of the federal deficit in the wake of several huge government spending programs,”says J. Ann Selzer, the president of Selzer & Co., a Des Moines, Iowa-based firm that conducted the poll. “Health care is one more big- ticket item and taxpayers appear to believe at some point they, or their children, will hold the bag.”
Republicans aren’t benefiting from the negative sentiment toward the economic policies, the poll shows. The survey finds that by about a 2-to-1 margin, Americans say Obama is doing a better job on the economy than his predecessor, George W. Bush.
US markets
Fed chairman Ben Bernanke said on Tuesday that the recession was "very likely over," as consumers showed some of the first tangible signs of spending again. But he warned that the recovery would likely be so moderate it wouldn't produce many jobs.
Bernanke's comments together with retail sales data, which showed a rise of 2.7% in August boosted by the "cash for clunkers" car sales rebate program, improved sentiment.
Davy chief economist Rossa White comments: US 'core' retail sales jump in August - - "US retail sales jumped in August and it was not only thanks to the 'cash-for-clunkers' scheme which boosted car sales. It suggests that underlying consumer demand is firming, underpinned by low interest rates, quiescent inflation and the gradually improving labour market.
It is important to focus on the underlying trend in sales. 'Core' retail sales (ex-autos) increased 1.1% in value, easily eclipsing the consensus estimate of 0.4%. Stripping out autos and gas, sales rose 0.6% when the market had expected no change. Overall retail sales were inflated by the incentives to buy new cars. Total sales spiked 2.7%, the most since January 2006.
The Fed has committed to low interest rates for as long as it takes to underpin sustainable recovery (Chairman Bernanke's speech made that clear again yesterday). Fortunately, increased global liquidity has not pushed oil prices too high too quickly, therefore not offsetting the benefit from lower interest rates. Because it will take time to erode global spare capacity, oil prices probably will not spike. But it is a crucial variable to watch. If energy costs remain contained, the consumer recovery will gather pace in line with the labour market into 2010."
The Dow Jones Industrial Average gained 56.61 points, or 0.6%, to 9683.41 - - the highest close for the benchmark since Oct. 2, 2008.
The Nasdaq Composite Index rose 0.5% and the S&P 500 added 0.3%.
Warren Buffett tells CNBC that while the economy "hasn't gotten worse" but also hasn't "gotten much better" over the past three months, he doesn't expect a 'double-dip' recession and sees significant improvement in residential real estate:
Asia
The MSCI Asia Pacific Index gained 1.8% Wednesday and the measure is up 67% since a 5-year low on March 9th.
The Nikkei 225 Stock Average rose 0.5% and China’s Shanghai Composite Index lost 1.1% after government data showed investors opened fewer trading accounts.
In Europe, the Dow Jones Stoxx 600 is up over 1% Wednesday.
In Dublin, the ISEQ is up 0.4%.
AIB and BoI are slightly down in advance of today's announcement by the Minister for Finance on the valuation of property loans to be transferred to the State's bad bank NAMA - - see link to story in Box above.
The BDI fell by 0.8% Tuesday to 2,431, bringing the monthly loss 12.5%.
Bloomberg reports the rate for leasing capesize ships, boats three times the size of the Statue of Liberty, will drop about 50% from the current price of $37,865 a day to as low as $18,000 before the end of the year, according to the median in a Bloomberg survey of six analysts and fund managers. Forward freight agreements traded by brokers show the fourth-quarter average price will be 7% lower.
Gold is trading at $1,016.40 up $9.20 from Tuesday's spot price close in New York.
Goodbody's Eamonn Hughes comments: Irish Financials; At last, NAMA day! - - "So the last 12 months of turmoil come down to a late afternoon speech from the Minister for Finance later today. Anyway, the market is looking for clarity on the level of haircuts, capital position and possible state intervention in the capital structure of the Irish banking system when he gets up to speak, though it may be a tough ask that we get clarity on everything that is being sought today.
As we said yesterday, it appears the book value of loans for each institution going into NAMA will probably be released and it looks like we could also be getting a breakdown by land, development and associated loans and regional splits, which should make it a bit easier to work out the haircuts by institution. With the government attempting to sell its story to the waiting public, it appears we’ll get a bit of flavour around some of the core assumptions around LTVs, price declines etc, so this will help underpin the various key haircut figures. It also appears we will be getting a split between the current market value and the projected “long term economic value” which presumably is in deference to the EU which - being crude about it - regards the differential as state aid. It also appears, as speculated, that the Minister will encourage a third banking force of IL&P’s bank, Irish Nationwide and the EBS though there is no agreement on that front. This was mooted by IL&P in its recent interim results.
On these haircuts, its still unclear whether we’ll get specific figures by institutions or ranges (since much still has to be worked through), but we are looking at 20% and 17% haircuts for AIB and BOI respectively pre provisions taken to date and 13% apiece net of provisions. Other figures in the market are in the 23/25% and 18/20% range for AIB and BOI respectively. Obviously higher figures, will mean higher haircuts, but then again, we need the variable of what is the exact level of loans going into the scheme, the proportion of subordinated debt in the total of the payments from NAMA to the banks, what the implications are for figures outside the main two banks and so on. On our existing estimates, ballpark every 5% move in the haircut level would equate to a c€1bn higher capital requirement at AIB and c€800m for BOI and while we are basing our requirements on having 4% core equity at the bottom of the cycle, it remains unclear how the regulatory authorities are looking at this figure."
Commentary in today’s press indicates that the Minister is unlikely to set out capital targets for the institutions, but apparently there will be sufficient information set out to allow us to estimate what that figure might be. So a bit of number crunching required on our part. Based on our existing core assumptions, we are forecasting an end FY11 TNAV of €3.7 for AIB and €1.5 for BOI (though investors will note we have €1.8bn higher credit losses for BOI than company guidance over the 3 years to end FY11), but obviously higher haircuts than we are forecasting would obviously move these figures southwards."
Goodbody economist Deirdre Ryan comments: Economic View; Another successful day out for the NTMA but all eyes now on NAMA - - "Another successful bond issue yesterday by the NTMA means sufficient funds have now been gathered to meet the current year’s funding requirement. Yesterday’s auction raised a total of €1bn in funds, with €0.3bn of this in the form of 5 year funds and the remainder in a longer dated 11 year bond. Demand for the issue was strong with the five year bond four times over subscribed while the 2020 maturity bond was subscribed 2.3 times over the amount in issue. There is clearly continuing strong appetite for shorter dated funds. July and August also saw five year bond issues, with those issuances over subscribed by 3.1 and 3.7 times respectively.
In relation to the pricing we have seen significantly wider spreads on Irish bonds relative to their German counterparts feature for much of the year. However, recent months have brought a steady narrowing of the yield differential and this is reflected in yesterdays issue also. The 11 year bond was priced at a yield of 4.91%, a full percentage point lower than an issue of the same maturity carried out last March. In relation to the five year bond, the yield of 3.31% is slightly below the 3.39% yield on August’s five year issue, while the spread relative to German 5 year bonds remained unchanged at 1.02%. Earlier this year the spread on five year bonds relative to their German equivalents had been close to 180bps, highlighting the significant retreat in concerns around the solvency of Ireland Inc.
With just over €23bn raised through bond auctions in the year so far, the NTMA has sufficient funds gathered to meet this years requirement, and may begin the process of pre funding some of next years funding needs. Absent any pre funding, the government debt to GDP level will likely end the year close to 60% of GDP. Next year, the issuance of NAMA bonds as well as further government debt issuance will see the debt level increase significantly. Today’s announcement of the details surrounding NAMA will be critical in providing an estimate of the bonds to be issued. However, it must be remembered that these will be offset by assets and that they will also be used by the banks as collateral for funding from the ECB."
Davy's Emer Lang comments: D-day arrives - - "As we await details of NAMA later today (September 16th), a report in the Irish Times notes that the Minister for Finance Brian Lenihan summoned bank chiefs to his office yesterday before a final Cabinet decision this morning to decide the price NAMA will pay for banks' property loans. At this stage, it remains unclear precisely how much detail we will get, but the minister is expected to confirm the quantity of bonds that will be issued to fund its purchase of loans. This has been widely speculated at €60bn, a proportion of which will take the form of subordinated bonds to ensure a greater level of risk-sharing by banks.
If this €60bn is broadly accurate, then the 'haircut' depends on the quantum of loans involved; at the lower end of the €80-90bn range, it implies a haircut of 25%, rising to 33% at the upper end. Assuming loans below €5m are excluded (this reduces ALBK's land and development loans by €5bn to €16bn) implies less than €90bn, hence less than 33% (there has been a lot of speculation around a 30% figure).
The Irish Times report cites political and banking sources saying that the process is likely to lead the government into 'a majority shareholding position in AIB' while 'significantly increasing its minority stake in Bank of Ireland.' Our base case, outlined in our recent report ('Approaching D-Day; NAMA update', issued September 11th) sees ALBK being majority-owned, but assumes that the government stake in BKIR is limited to the 25% associated with the warrants. To 'significantly increase' the latter implies a higher haircut (we have modelled for 23% on gross loans, which lower than average due to location, i.e. more UK) and/or that the risk-sharing creates a greater capital hole.
The report suggests that the minister is unlikely to set out the requirements for new capital in each participating institution this afternoon but notes that government sources said 'the requirement would be clear to analysts from the information he provides'. It says he is likely to set out the book value of the loans transferring from each institution and the split between the current market value of the assets and the projected 'long-term' value. He will also apparently set out in broad terms the location of the properties backing the loans and will distinguish between land, development and associated loans.
The report states that smaller lenders, such as Irish Nationwide and EBS, are likely to be encouraged to take part in a new 'third force' bank with part of Irish Life & Permanent (PTSB), but that there is no agreement at this stage."
