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Markets News Tuesday: Bernanke says “extraordinarily urgent” US and Asia agree on trade imbalances; EUR/USD rate heading for $1.50; Oil price in New York close to $80
By Finfacts Team
Oct 20, 2009 - 8:58:55 AM
US Fed chairman Ben Bernanke said on Monday that Asian countries were leading the economic recovery but warned that both Asia and the United States needed to do more to reduce global trade imbalances. He said it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.
At a conference on Asia hosted by the Federal Reserve Bank of San Francisco, Bernanke said Asian countries had bounced back from the global recession faster than the rest of the world and had reported “impressive” growth.
“Asia appears to be leading the global economic recovery,”the Fed chairman said, noting that the region as a whole expanded at an annual rate of 9% during the second quarter and that some countries, including China, grew at rates of more than 10%.
Bernanke said that huge trade imbalances between the United States and the rest of the world had played a central role in the global economic crisis and that they could do so again.
“We were smug,”Bernanke said of the United States in a question-and-answer session, referring to the attitude of American policy makers toward the large inflows of cheap money from countries like China that were running huge trade surpluses. The flood of foreign money may not have been a major problem in itself, he said, but the American financial regulatory system was “inadequate” in preventing a surge of reckless lending that aggravated the bubble in housing prices.
Bernanke as a member of the Fed under Alan Greenspan had become noted for his analysis of what he termed a “global savings glut” in the rest of the world, which was pushing down US long term interest rates and at the time was sanguine about the US role in creating the imbalances via the recycling of reserves from Asia.
Bernanke said the US must establish“a sustainable fiscal trajectory anchored by a clear commitment to substantially reduce federal deficits over time.”
He said the US faced a “difficult fiscal situation” but insisted that US policymakers “recognise that we need to develop a fiscal exit strategy” that would put the US on a sustainable long-term fiscal path.
“The United States must increase its national saving rate,” he said.“The most effective way to accomplish this goal is by establishing a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.”
The US federal deficit for the 2009 fiscal year, which ended on Sept 30th, rose to $1.4 trillion, almost triple the deficit in 2008, and it's expected that budget deficits will average almost $1 trillion a year over the next decade.
Whether Fed chief Ben Bernanke will save the dollar, with David Malpass, Encima Global; Donald Luskin, Trend Macro; Andrew Barry, Barron's and CNBC's Steve Liesman:
A private Irish "bad bank"
The former Bank of Scotland (Ireland) head Mark Duffy and and property fund manager Kevin Warren plan to buy toxic property loans from the Irish subsidiaries of foreign banks through a new fund management company named Asset Resolution Corporation (ARC).
Duffy and Warren have been seeking investment from UK institutional investors such as pension and fund management companies to provide substantial equity to fund the venture.
The company would in effect create competition for assets with the State-owned "bad bank" NAMA.
Duffy and Warren are reported to have made presentations to the foreign-owned banks about buying some of their loans for property in Ireland, the UK and USA. ARC will buy these loans at a discount to NAMA, with the banks providing part of the financing for the deals.
Duffy headed Bank of Scotland (Ireland) for 16 years and his vehicle may potentially make a killing from bad loans he had sanctioned during the boom.
German Producer Prices
The German statistics office Destatis, reported today that the index of producer prices for industrial products (domestic sales) for Germany fell by 7.6% in September 2009 from the corresponding month of the preceding year. In August 2009, the annual rate of change was – 6.9%.
Compared with the preceding month, the index fell by 0.5% in September 2009 (+ 0.5% in August 2009).
Insight on whether the new mob mentality towards insider trading will spell bad news for hedge funds, with Thomas Ajamie, securities law attorney Ajamie LLP and Tom Curran Ganfer & Shore attorney:
US markets
In New York Monday, the Dow Jones Industrial Average closed up 96.28 points, or 1%, to 10092.19, its highest close since Oct. 3, 2008. It was boosted by a 6.1% jump in heavy equipment maker Caterpillar, which is due to report today.
Both the Nasdaq and S&P 500 added 0.9%.
Confidence among US home builders fell in October, mainly because of the upcoming expiration of an $8,000 tax credit for first-time home buyer .
The National Association of Home Builders' index of confidence in new-home sales fell for the first time in four months, dipping to 18 from 19 in September.
Latest US data shows home sales were up 30% through August since hitting a floor in January.
Asian stocks deserve to trade at a premium as the region is the only growth story in town, says Andrew Economos, head of Asia equity solutions at JPMorgan Private Bank. CNBC's Lisa Oake & Sri Jegarajah find out more:
Asia
Australia’s central bank said at its rate hike meeting earlier this month, that it may be “imprudent” to keep interest rates near a historic low.
A “very expansionary setting of policy was no longer necessary, and possibly imprudent,” officials said in minutes of their Oct. 6th meeting, issued today in Sydney. The bank said gains in the Aussie dollar “may help contain inflation.”
At the meeting, the benchmark rate was raised by a quarter point to 3.25%.
Asian stocks rose, and the MSCI Asia Pacific Index climbed to a 13-month high,
The regional index added 1.1%; the Nikkei 225 rose 1%; the Shanghai Composite climbed 1.52%; Australia's S&P/ASX 200 added 1.1% and India's BSE Sensex 30 managed a gain of 0.32%.
In Europe, the Dow Jones Stoxx 600 is up 0.11% Tuesday.
Swedbank AB, the largest Swedish bank operating in the Baltic countries, today reported its third consecutive quarterly loss after bad loans in Estonia, Latvia and Lithuania rose more than eightfold.
The third-quarter net loss was SEK 3.34 billion kronor ($483 million), compared with profit of SEK 2.47 billion kronor in the year-earlier period the bank said.
Loan losses at Swedbank and rival SEB AB, the second-largest lender in the Baltics, have jumped as the Baltic republics, which recently boomed after joining the EU in 2004, have been severely hit by the recession.
The ISEQ has risen 0.04% in Dublin.
Petroceltic is up almost 18%.
Davy analyst Job Langbroek comments on Petroceltic - - run of success continues in Algeria: "Well AT-1, the first well on the large Ain Tsila structure in the 75%-held Isarene permit in the Illizi Basin in southern Algeria, recorded a substantially higher flow rate after the reservoir section was fractured. At the maximum possible choke setting possible with the equipment at hand, the well flowed at a rate of nearly 34m cubic feet per day (MCFD). This compares to 11.4 MCFD using a 2 inch choke before fracture stimulation. The large increase partly reflects the fact that the reservoir in the immediate vicinity of the well had been infiltrated by materials used in the drilling process. This is a very material flow rate which will help towards the commercialisation of the Ain Tsila reservoir specifically and the licence in general.
The second well on the ridge (AT-2) has also hit a 100 metre column of gas. Very importantly, the pressure profile in the well shows it to be in communication with the AT-1 well located some 11 km to the north. This is important because it begins to open up the likelihood that the ridge reservoir will live up to best expectations in terms of scale. At the moment, the mean estimate of gas resources is just over 2.5 TCF of gas. However, the flow rate in AT-1 combined with the pressure readings in AT-2 suggests to us that there is upside to the gas resource volumes assumed for the ridge target. By way of reference, pre-drill P10 estimates had been set at 6.3 TCF of gas. Our risked valuation of the group uses a 2 TCF of gas estimate for the Ain Tsila ridge – with every 1 TCF of extra gas adding 3p to our risked group valuation.
Petroceltic will now test the INE-2 well drilled earlier this year. Following this, the AT-2 will be tested. The separate drilling unit is moving to commence the drilling of the AT-3 well some 9km to the south.
Our price target for the group is 27p per share, which looks increasingly comfortable following results so far. We will review this following the testing of the INE-1 and AT-2 wells."
Gold is trading at $1,066.40 up $2.90 from Monday's spot price close in New York.
Goodbody chief conomist: Dermot O’Leary: Economic View; Overhauling the financial system - - "Among the many challenges facing Ireland Inc. at the current time is a complete overhaul of the financial system. It has been widely noted recently, that separation of the roles of the Central Bank and the Financial Regulator in 2003, played a significant role in the problems which have occurred in Irish banking over the recent past. Specifically, as we know too well at this stage, large concentrated exposures of property-related loans were allowed to be built up unchecked, which contributed to turning a collapse in the housing market into a wider banking system crisis.
After announcing that the regulatory and wider central bank functions will be re-merged, further progress was made in the overhaul of the system yesterday with the appointment of a new head of financial supervision, Matthew Elderfield. He will work under the newly appointed Central Bank Governor Patrick Honohan. Both of these appointments seem to tick many boxes. Honohan has extensive experience in analysing financial crises around the world, which will be invaluable as the process of transferring the most toxic parts of the banks’ loan books to the new bad bank will begin in earnest in the coming weeks. The new head of financial supervision is currently head of financial regulation in Bermuda. In this regard, the appointment recognises the importance of the International Financial Services Centre (IFSC), as well as the overhaul of the domestic regulatory structure. The people have been put in place and now the hard work begins."
Davy chief economist Rossa White comments: Many categories of discretionary Irish retail sales yet to bottom - - "Irish retail sales volume reached an overall floor earlier this year, albeit that "core" sales (ex-garages) were barely higher in August than at the April low. But it is not a uniform picture across all retail categories, and it will not be fair to say that spending has truly troughed until discretionary sales are no longer falling. Analysis of the data shows that sales of many non-essential items have yet to bottom.
Four categories of seasonally adjusted retail sales – electrical goods, convenience stores, bars and petrol stations – are still shrinking in volume. It is easy enough to explain the pattern. Spending on durable goods tends to be discretionary, hence the struggling sales of electrical goods. The same applies to bars: the price gap between on and off sales is compelling enough for people to drink at home instead. Convenience stores in Ireland enjoyed rapid growth in the investment bubble of 2002-2007; now they are suffering due to the construction bust and heavy discounting by retail multiples. Fuel consumption is a barometer for general economic activity, but the recession has three to four months to run.
It is important to look at the value of sales too as they provide extra insight. Two other categories have not bottomed in cash terms even through they have bottomed in volume, reflecting ongoing price discounting. Supermarkets are one of those areas, where the impact of the euro's strength against sterling is feeding through most obviously (we reckon margins were pretty wide for the multiples before the recession). Other retail sales (a catch-all category for a number of not- easily-labelled items) are yet to return to growth in value terms. The end of price discounting, when it comes, will be a strong signal that the consumer recession is over."
