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Markets News Tuesday: UK recession eased in Q2 2009; European shares slightly down; Top three markets have dipped; Dublin is up
By Finfacts Team
Sep 29, 2009 - 12:21:13 PM
UK gross domestic product (GDP) in volume terms fell by 0.6% compared with the previous quarter, revised from a fall of 0.7% published last month, according to a report today from the Office for National Statistics.
The level of GDP is now 5.5 per cent lower than the second quarter of 2008.
Between the first and second quarter of 2009:
The total volume of output in the production industries fell by 0.5%, within which manufacturing output fell by 0.1%.
Construction output fell by 0.8% over the quarter; the output of the service industries decreased by 0.6%.
The household saving ratio was 5.6% in the latest quarter compared with 3.9 per cent in the previous quarter.
Real households' disposable income rose by 0.9% in the latest quarter following a 1.0% fall in 2009 quarter one.
Irish economy
The Irish economy is set to return to growth in Q1 2010, according to Davy Stockbrokers and in the full year of 2011, GNP (gross national product) growth of 4% is forecast.
Davy is the first financial firm to issue a forecast following last week's data from the CSO, which showed that the economy as measured by GNP, contracted 0.5% in the second quarter of 2009 - - see link to story in Box below.
Chief economist Rossa White says "major policy uncertainty remains (Lisbon, NAMA and the Budget), so forecasts come with a significant health warning. Nonetheless, we think that consensus remains too bearish on Irish economic prospects for the medium term. The economy retains significant competitive advantages (tax, labour supply, regulation) as it begins the arduous task of reducing its cost base premium over its trading partners. Progress has been made: for example, labour costs probably declined 2% on an hourly basis in the year to Q2 versus 4% growth in the euro area.
Looking ahead, the Irish outlook could be transformed. Already this year's government bond issuance has been completed and a minimum of €2bn (or 10% of next year's requirement) will be sourced before year-end. Spreads over Germany have halved since the peak of the hysteria early in 2009. A yes to Lisbon, the implementation of NAMA and a meaningful reduction in public expenditure in Budget 2010 would provide real momentum to economic revival."
BNP raises equity
Goodbody analyst Eamonn Hughes comments: "While the G-20 outlined that banks need more capital and higher quality capital, it appears that BNP has taken them for their word and announced this morning it is raising €4.3bn. The capital raised is to reimburse €5.1bn of the State’s non-voting shares in October and its Tier 1 ratio will be above 9% post the reimbursement. The bank believes that state intervention has “fully achieved its objectives” and “given the changing environment and the strong performance of BNP Paribas, this support is no longer required”.
We believe that AIB and BOI need to have core equity ratios of 4% at the bottom of cycle and get to 8% further out. The G-20 communiqué may tighten our 5 year window on how long they have to flush up their balance sheets (G-20 calling for implementation of new standards by end 2012), but we think it will be tougher for the banks to raise the level of equity required in one go. We think AIB and BOI need to raise €1.3bn and €0.7bn in the months ahead to ensure core equity ratios don’t fall below 4% at the cycle trough. Organic earnings from 2012-14 (we estimate the banks will lose money in 2009, 2010 & 2011) will ballpark get that up to c6% and further capital raisings of c€2.5bn at AIB and €2bn at BOI would be needed to get it to 8% (if they had the time). Presently, the market cap of each stock is c€3bn.
The capital raising at BNP is equivalent to 7% of it’s market capitalisation, so given its franchise there’s likely to be no indigestion problems. With speculation that Unicredito is thinking something similar and large and small capital raisings are on the cards at Lloyds and RBS respectively, there is going to be many mouths feeding at the trough in the months ahead and the order of magnitude of required equity for the Irish banks will certainly rank among the higher levels across Europe. So with the one year anniversary up for the introduction of the Irish government guarantee up tonight, the system - to paraphrase, Richie Boucher, the BOI CEO - has moved from survival to stabilisation. The next step is normalisation, which will require a lot more equity."
Interview with Edmund Phelps, winner of 2006 Nobel Prize in Economics and Professor at Columbia University Business School on the US jobs market:
US
The Wall Street Journal says today that US consumers are finding more reasons for optimism, but their confidence is coming back slowly. And that could hinder the stock market's rise.
The latest read on the consumer zeitgeist is due Tuesday morning from the Conference Board. Economists think the research firm's consumer-confidence index rose to 57 in September from 54.1 in August.
Though consumer confidence already has doubled from its record low in February, it is just half of its historical average and well below the lowest levels of the 2001 recession -- a measure of just how much damage this recession has done to consumer psyches.
Whether that damage is long-lasting and how much it really matters to the economy and stock market are two thorny questions.
Mark Vitner, of Wells Fargo Securities, and Sarat Sethi, of Douglas C. Lane & Associates, share their market insight on CNBC Tueday:
US markets
The 30-component Dow Jones Industrial Average closed up 124.17 points, at 9,789.36, on Monday, boosted by news of two large mergers. Abbott Laboratories, the drug maker, agreed to acquire a unit of Belgium's Solvay for $6.6 billion, and then Xerox, the photocopier company, announced plans to buy Affiliated Computer Services, a business services outsourcer, for $6.4 billion - - see link to full story in Box below.
The S&P 500 rose 1.8% and the Nasdaq added 1.9%.
Asia
Japan's core consumer prices fell 2.4% in August year-on-year - - the fourth straight month of record falls. Meanwhile, the new Finance Minister Hirohisa Fujii said currency intervention may be an option if exchange rates make irregular moves. His remarks followed a surge in the value of the yen after he hinted he favoured a strong currency - - see link to story in Box below.
The MSCI Asia Pacific Index rose 1.1% Tuesday after dipping 2.4% in the past three days. The index has risen 66% from a five-year low on March 9th.
Japan’s Nikkei 225 Stock Average added 0.9%; Australia’s S&P/ASX 200 Index advanced 1.6%.
The top three markets - - London, Frankfurt and Paris - - are down Tuesday and the Dow Jones Stoxx 600 index is slightly off by 0.02%.
In Dublin, the ISEQ Index is up 0.34%.
Elan has risen 2.4% and INM has dipped 13%.
INM
The board of Independent News & Media (INM) on Monday rejected a restructuring plan proposed by its second-biggest shareholder Denis O’Brien and backed chief executive Gavin O’Reilly's proposed deal with bondholders who are owed €200 million, which has been due for payment since last May - - see link to story in Box above.
Davy's Simon McGrotty commented:"The deal comprises a debt-for-equity swap of €123m, which would give creditors an equity stake of approximately 46% in the group. There will also be a heavily discounted rights issue aimed at raising up to €94m for the remainder of the amount outstanding. This will be at a price of 5c share, which represents an 81% discount to yesterday's close. If all existing shareholders exercised their rights, the bondholders would take control of approximately 46% of the group; however, if shareholders failed to exercise their rights, the creditors would take control of 76% of the group."
Elan
Elan Corporation, plc today announced that it intend to offer, subject to market conditions, US$600 million in aggregate principal amount of senior fixed rate notes due 2016. The New Notes will be offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, and to non-U.S. persons in accordance with Regulation S under the Securities Act. The New Notes will be fully and unconditionally guaranteed by Elan and certain of its subsidiaries. Proceeds from the New Notes will be used for refinancing certain existing debt of Elan and its subsidiaries, to pay fees and expenses related thereto and for general corporate purposes.
The New Notes have not been registered under the Securities Act, or any state securities laws and may not be offered or sold in the United States or to U.S. persons absent registration under, or an applicable exemption from, the registration requirements of the Securities Act and applicable state securities laws.
Goodbody's Ina Hunter commented: "Having raised $855m net from the deal with J&J, should this planned refinancing go through, it would leave Elan financially well placed with c.$550m net in cash (operational cashburn notwithstanding), while reducing the mid-term debt repayments to $300m (2011) and pushing the main debt repayment profile out to 2013 ($615m) and 2016 ($600m). The company would then have greater financial flexibility to continue the development of its own pipeline of drugs as well as look to in-licence or co-develop drug candidates at the early stages of development."
Petroceltic
Exploration company Petroceltic International today reported losses of $2.1m for the six months to the end of June, an increase from the loss figure of $1.9m the same time last year.
Petroceltic operates in Ireland, Algeria, Tunisia and Italy and it said that revenue from the royalty interest in the Kinsale gas fields dropped to
$125,000 mainly due to lower gas prices and decreased gas sales volumes.
The company said that its significantly over-subscribed $41m placing provides flexibility and it said that it has cash of $81m at the end of June.
“I think we're probably headed for another leg down at some stage, the only question is when,” Richard Cookson from HSBC told CNBC when discussing the stock market Monday. He said commodity prices have reached their peak and may signal that the economic cycle is “perhaps running out of steam.”
Gold is trading at $991.70 up $1.20 from Monday's spot price close in New York.
Goodbody economist Dermot O’Leary comments: Update on the house price adjustment - - "Although it is generally accepted that it is lagging developments in the market, the house price index from permanent tsb/ESRI provides a useful snapshot of the evolving dynamics of house prices in Ireland. According to the index, prices fell by 1.5% mom in August, bringing the annual decline to 13%. From the peak, the official index puts the decline at 24%, bringing it back to early 2004 levels. On the ground, there is evidence that prices have fallen by significantly more. It is likely therefore that this particular index will continue to record declines for some time to come, as it continues to reflect the scale of reduction in prices across the market.
One of the most common metrics for the analysis of house prices internationally is the price/income ratio. On this basis, using the current average house price of €235,000, we estimate that the ratio stands at 6.4 presently, which is already below the average since 1996 (when this index commenced). However, if we were to use the estimate that prices have already fallen by 40% (which is our peak-to-trough forecast), bringing prices back to late 2001 levels, the price/income ratio declines to 4.9, its lowest level since 1998. Another one of our preferred metrics is the rental yield, which has only moved up marginally over the past two years despite the fall in house prices because of the corresponding fall in rents; we estimate that it currently stands at c.4%. Along with this factor, downward pressures on incomes and the scale of oversupply in the system will surely maintain downward pressure on house prices for some time. This is in our forecasts, but a key point is the adjustment is well ahead of what is indicated by the official price index."
