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Chancellor Angela Merkel took the oath of office in the German Bundestag in Berlin on Wednesday, Oct 28, 2009. She was reelected Chancellor in the first round of voting. Of 612 valid votes, 323 were for and 285 against with four abstentions.
German unemployment
German unemployment unexpectedly dropped in October, in a signal of the recovering economy as Chancellor Angela Merkel begins her second term in office.
The number of people out of work fell a seasonally adjusted 26,000 to 3.43 million, the Nuremberg-based federal employment agency said today.
Frank-Juergen Weise, the agency’s head, said government measures including short-time work with incentives to hold on to staff are helping to keep unemployment down.
The jobless rate fell to 8.1% from 8.2% the previous month, today’s report showed.
Irish Financials: Falling back to earth
Goodbody's Eamonn Hughes comments today: "The Irish banks collapsed again yesterday, with AIB down 11% and BOI down 25%, on a day when European banks were off by 3%, bringing the week-to-date tally to 26% and 35% respectively. It’s hard to dis-aggregate the many likely factors, but here goes!
Firstly, in recent months, the stock market has continued to ignore the mounting newsflow of tougher regulation in the banking sector and higher capital requirements. However, the ING breakup and rights issue on Monday finally led investors reappraise the risk profile for banks (a 'game-changer'?). In particular, banks relying on state aid have been most in the firing line, so specifically banks in the Benelux, UK and Ireland have been hardest hit. State aid in an Irish context relates mainly to the NAMA process (but there’s also the preference shares, Anglo Irish etc) and the valuation on the loans being transferred to the asset management agency. However, we would be of the view that the Irish government has been working with the main European authorities in framing its NAMA package.
Secondly, investors may also be taking little comfort from the Minister for Finance saying late yesterday that the NAMA asset transfer could 'slip into January' compared with earlier expectations of the top 10-15 developer loans sometime in December. This just highlights that the process is likely to be more cumbersome (mainly legal title on loans related) than the market was previously willing to acknowledge.
Thirdly, the Irish banks bounced the most from the lows in recent months, so with the wider sell off in European banks, they have given up more of their gains, with shareholder bases that would now be less diversified than peers adding to the volatility. So the 2.7x two year beta of the Irish banks to the E300 Index has put them at the forefront of the selling pressure. AIB is now down 45% from its recent peak and BOI is down 52% (vs European banks just off 8%). Having been marketing extensively recently, its clear to us that investors have minimal, if any, visibility on normalised earnings in the Irish banks (we think 2014), so they have traded as beta plays on the wider macro environment.
Fourthly, with the banks in the ascendant until recently, rising share prices meant greater appetite and less dilution on equity issuances. We believe 4% at the bottom for core equity ratios (to RWAs) and 8% over the cycle are the appropriate ratios. A week ago, this implied AIB needed to raise 140% of its market cap to get to 8% and BOI circa 90%. At yesterday’s close, that’s now jumped to 205% and 145%, so the market may be concerned about the negative circularity of the equity issuances and it raises the spectre of the State being possibly on call here again.
With the stocks almost halving in four weeks, the current share prices are now starting to pique our interest given our reservations at the immediate post-NAMA euphoria in September. However, with so much uncertainty again building up around the level of normalized earnings and capital and difficulties now in raising the substantial level of equity needed to fix balance sheets relative to current market cap levels, the equity risk premium for the banks must have increased substantially in recent days. This limits upside. We wonder whether investors may now need to see the BOI results next week, the passing of the NAMA legislation, the Irish Budget on December 9 and the final ruling from the EU on NAMA in order to rebuild confidence levels back to the pre-ING levels. It’s back to one step at a time."
EU Commission President Jose Manuel Barroso told CNBC Wednesday that after ING and Northern Rock, other European banks that received state aid will have to play according to the rules:
Goodbody's Anna Lalor comments: Lending Survey shows credit standards stabilising but demand falling - - "The Irish Central Bank yesterday released the bank lending survey for Q4. It shows that credit standards continued to tighten in the three months to October, although at a lower pace than in Q2. Demand for lending continued to fall and came in lower than expectations. Tightening of credit standards continued to be driven by the banks' access to market financing, funding costs and other balance sheet constraints, but at a lesser pace than in Q2. Banks perception of risk of those they were lending to also contributed to their decision to tighten. Demand was impacted by lower investment financing and M&A borrowing requirements from firms, while mortgage demand was affected by non-housing related consumption expenditure, consumer confidence levels and housing market prospects. It appears that weaker lending numbers are being driven now by lower demand rather than continued tightening of access to finance.
The banks' access to wholesale funding through usual channels continues to be impacted by the situation in financial markets, but Government intervention has helped the banks access funding markets and is expected to continue to do so. Credit standards on lending to businesses tightened further in Q3 (except for SMEs), but at a lesser pace than in Q2. Credit standards for business loans are forecast to remain unchanged in Q4 (for the first time since Q207). Demand for lending by businesses decreased by more than expected in Q3 and is expected to continue to fall in Q4. Mortgage lending credit standards tightened further in Q3 and at a greater extent than that expected at the beginning of the quarter. However, lending criteria for mortgages appear to have remained unchanged in Q3 on Q2. Credit standards on mortgages are expected to remain unchanged in Q4. Demand for mortgages in Q2 decreased significantly more than expected at the beginning of the quarter, but demand is expected to remain unchanged in Q3."
Kentz
Irish-Malaysian oil services company, which is listed on London's small company AIN market, reported today that it has been awarded a multi-million dollar contract for the engineering, procurement and construction (EPC) of the Receiving and Loading Facility Project for Laffan Refinery Co. in Ras Laffan Industrial City (RLIC), Qatar in the Arabian Gulf.
Dr. Hugh O’Donnell, chief executive of Kentz, said: “The award of this EPC package reflects the confidence that this major client has in Kentz’s ability to deliver critical and complex projects. We have mobilised our project team and look forward to carrying out another successful project for Qatar Petroleum and their partners in Qatar.”
Plenty of mixed signals on whether or not the housing sector is recovering, with Robert Shiller, Yale economics professor:
US
The Wall Street Journal reports that the US economy is about to post growth numbers reminiscent of the good old days, otherwise known as the "old normal." But a "new normal" of slower growth might be inevitable.
The Bureau of Economic Analysis is set to release Thursday its first read on third-quarter gross domestic product. Economists estimate GDP grew at a 3.2% annualized rate, after shrinking 0.7% in the second quarter. A handful of economists expect growth of 4% or higher.
Among the reasons for growth: Companies dumped inventory in the third quarter, though less aggressively than during the previous three months. By the math of GDP accounting, merely slowing down inventory liquidation will boost GDP's growth rate by at least one percentage point, according to many estimates.
US markets
Stocks fell Wednesday after US new home sales were reported to have fallen in November.
The Dow Jones Industrial Average dropped 119.48 points, or 1.2%, to 9762.69.
The Standard & Poor's 500 fell 2% and the Nasdaq dipped 1.7%.
Asia
Japanese games company Nintendo's first-half profit plunged by 52% as sales of its hit Wii home console stalled, forcing the maker of Super Mario and Pokemon games to cut its forecast for the full year.
Nintendo said it sold 5.75 million Wii machines around the world during the period, compared with the more than 10 million sold for the six months last year, despite slashing the price of its flagship console.
The MSCI Asia Pacific Index dipped 1.4% Thursday, extending a two-day, 2.9% decline.
The measure has risen 62% from a more than five-year low on March 9th.
The MSCI World Index lost 0.3% after slumping 2% Wednesday.
Japan’s Nikkei 225 Stock Average slipped 1.8%; China’s Shanghai Composite Index and Hong Kong’s Hang Seng Index both slid 2.3%. Australia’s S&P/ASX 200 Index declined 2.4%.
In Europe, the Dow Jones Stoxx 600 is up 0.4% Thursday.
Volkswagen AG, Europe’s biggest carmaker, today reported an 86% dive in quarterly profit on falling European deliveries by its Audi brand. The carmaker forecast new models will help increase market share.
Third-quarter net income fell to €172 million or 43 cents a share, from €1.21 billion, or €3.02 a year earlier. Sales dropped 10% to €26 billion.
Deutsche Bank AG, Germany’s biggest bank, said today that improved capital markets and investors’ increasing appetite for risk should bolster securities firms in the fourth quarter.
Deutsche Bank’s investment bank posted pretax profit of €988 million in the third quarter, exceeding analysts’ estimates, on equity and debt sales and trading. Net income more than tripled to €1.38 billion, or €2.10 per share, from €435 million, or 83 cents, a year earlier, the Frankfurt-based bank said in a statement today
The ISEQ has risen 1.9% in Dublin.
Allied Irish Banks (AIB) is up 4% and BoI is up 7.6%.
Shares in AIB tumbled 11.9% on Wednesday to €1.85, while Bank of Ireland slid 25% to €1.65, making it the worst hit financial stock in western Europe.
AIB had shed a quarter of its value since Dutch financial group ING was forced by the European Commission on Monday to sell off its insurance unit in return for €10bn of state aid. Bank of Ireland's value has fallen by over a third since then.
Gold is trading at $1,033.70 up $6.00 from Wednesday's spot price close in New York.
The price of gold could be in the middle of a major turnaround and could be head lower toward $1,015 per troy ounce and possibly $980, Chris Zwermann from Zwermann Financial told CNBC Thursday:
Davy chief economist Rossa White says reducing the price of Irish public services not the volume is what matters - -"Ireland faces an important Budget in December. It has committed to the European Commission to cut the deficit by €4bn or about 2.5% of GDP. The government has stressed that target over and over again in recent times. But recent suggestions by unions of a 'slash-and-burn' policy with regard to public services are nonsense. The plan is to cut the price (or cost) of public services, not the volume. It is the unions themselves that may decide to cut the amount of public services provided by their members.
The shape of the €4bn consolidation looks like being as follows: €2.5bn in current spending cuts, tax hikes of €750m (mainly from a carbon tax) and capital spending reductions of €750m. That mix is much better than what has been seen so far, where much of the consolidation has come through tax hikes. Income tax hikes hurt competitiveness: workers demand higher wages to compensate. It is all about getting the cost of public services down, mainly by cutting the €20bn pay bill. Public sector wages are too high compared with the private sector (and other countries), having been inflated by years of windfall tax revenue from property that has now disappeared. Wages can be reduced easily without affecting the volume of activity.
The deflationary argument does not hold much water. It is worth pointing out that the fall in consumer prices seen already (caused in part by a strong exchange rate) means that cuts in nominal wages are compensated for by increased purchasing power. More importantly, one factor causing the savings ratio to spike from 2% to 12% is that households feared that the public finance situation was spiralling out-of-control, resulting in a potential repeat of 1982-1987 when taxes looked like rising indefinitely and public services, rather than their cost, ultimately had to take a hit. The Budget will cement the progress made already in the fiscal consolidation effort if it reduces our inflated cost base. Households may react by easing precautionary saving (fiscal consolidations can at some point become expansionary, e.g. late-1980s Ireland). Remember that the goal of doing it right is to make Ireland an even more attractive platform for export operations in order to generate jobs."
Goodbody chief economist Dermot O’Leary comments: Economic View; Some respite on currencies at last - -"After moving sharply higher against both sterling and the dollar since August, the euro has reversed some of this performance in the past few days (sterling now at £0.898 and the dollar stands at $1.470). We have discussed at length the fact that Ireland would have to engineer a real devaluation to improve the country’s competitive position and thus take advantage of a recovery in global demand. With the euro moving in the wrong direction over the past few months, despite improvements in its relative price position, Ireland was effectively running fast just to stand still. It is clear that the quantitative easing strategies of the US and the UK have had a depressing effect on their respective currencies over recent months, but this will have to end at some stage.
In the case of the UK, there has been a threat of further quantitative easing since August, when Governor King expressed his wish to do so. The Bank agreed to review its policy in preparation for the November Inflation report, so we will get more information as to their findings next Thursday when their policy announcement is made. More forthright rhetoric from the ECB also suggests that the rise in the euro was becoming problematic in its view. In relation to the dollar, the recent increase in risk aversion has reversed the downward trend. In summary, there is finally some respite on the currency front for Ireland and the euro-area. Our currency forecasts imply that the euro continues to weaken relative to sterling and the US dollar into 2010. For 2010 as a whole, we have assumed an average exchange rate of 85p and $1.40, for sterling and the dollar, respectively."
Davy analyst Emer Lang comments on the travails of Irish banks: Under the cosh - - "Irish banks lost further ground on October 28th in the aftermath of ING's break-up/fundraising announcement and the acknowledgement by finance minister, Brian Lenihan, during the committee stage debate on NAMA legislation that the timeframe for transferring developer loans to NAMA could slip into 2010. NAMA's business plan, published on October13th, envisaged that the ten largest exposures, accounting for €16bn of the total loans of €77bn, would transfer in December.
The negative read-across from the ING break-up appears to centre on the power of the European Commission to dictate the terms of the break-up, particularly its demands for balance sheet reduction, to ensure it approves ING's restructuring plan. In an Irish context, the EC has already indicated its broad approval of the NAMA process though it has cautioned against overpaying for loans. However, the fact that 5% of the €54bn price is in the form of subordinated debt, payment of which ultimately hinges on the performance of NAMA, and that the government has agreed to legislate for a separate levy to deal with any possible residual loss, would appear to us to tick the necessary boxes in the EC guidelines for state aid. The ING situation has also raised the prospect of the EC insisting on asset disposals within a certain timeframe as part of banks' plans, but it is by no means clear to us that this should be viewed as a negative; it is very likely to be a positive.
European banks have been scrambling to announce equity issuance, raising the bar for core equity levels and weighing on the Irish banks. ING's planned €7.5bn rights issue and news that Lloyds is to be given the go-ahead to test market with an ambitious £25bn refinancing (including a rights issue of £11-15bn) are the latest in a queue of planned bank issuance and investors fear that the Irish may have missed the boat. Recent performance (ALBK - 25% since October 23rd; BKIR -35%) is clearly a significant setback, but ALBK's announcement on September 16th that it plans to raise €2bn capital over a 12-18 month timeframe suggests that it is biding its time.
Where does the recent setback leave valuations? Our current base case is that the banks will need to hit a trough core equity level of 5%+ (end-2010 for ALBK; March 2011 for BKIR). Even if we assume substantial dilutive fundraisings at a discount to current depressed levels to get there, both banks are on undemanding ratings. Our model suggests that ALBK is trading at 0.9x trough TNAV (end-2010) and on a 2011 P/E of 4.5x, while BKIR is trading at 1.1x trough TNAV (March 2011) and on a March 2012 P/E of 6.1x. Our P/Es are not based on any heroic assumptions for net interest margins/cost take-out, both key drivers of operating profit. In this respect, results from BKIR on November 4th will provide a timely update on operating profit and impairment trends."
