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News : International Last Updated: Dec 15, 2009 - 4:37:33 PM


Markets News Tuesday: European banks are increasing holdings of government debt as lending continues to remain tight
By Finfacts Team
Dec 15, 2009 - 9:30:50 AM

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President Barack Obama speaks during a meeting with members of the financial industry to discuss economic recovery, small business lending, improving lending practices for homeowners and the Administration's plans for financial reform, during a meeting in the Roosevelt Room of the White House, Dec. 14, 2009.

European banks are increasing holdings of government debt as lending continues to remain tight.

Bloomberg reports that financial institutions increased their holdings of government debt to €1.51 trillion in October, from 1.19 trillion at the end of 2007, ECB data show. The situation is similar in the US, where bank investment in such securities has risen by 25 percent to $1.39 trillion since 2007, according to the Federal Reserve.

Bipartisan Commission calls on US policy makers to tackle the Federal Debt

The Peterson-Pew Commission on Budget Reform on Monday outlined a plan for Congress and the Administration to begin working now to significantly reduce the national debt, which is currently $7.6 trillion.  Red Ink Rising, the Commission’s first report, calls on policy makers to enact both spending cuts and tax increases to shift our nation’s fiscal course.

The bipartisan group is comprised of former Members of Congress, including co-chairs Bill Frenzel, Tim Penny and Charlie Stenholm, as well as former heads of the Office of Management and Budget, the Congressional Budget Office, the Government Accountability Office, and other fiscal experts. The group recommends that Congress and the White House:

  • Adopt an ambitious, but achievable target that would reduce the public debt to 60 percent of GDP by 2018; 
  • Negotiate a specific package of spending reductions and tax increases that are gradually phased in to protect the recovering economy; and
  • Create an automatic enforcement mechanism to keep revenues and spending on target.

“The public debt is an economic time bomb that must be addressed by Congress and the Administration,” said David M. Walker, president and CEO of the Peter G. Peterson Foundation. “In this year alone, the public debt rose by nearly $2 trillion, and it is headed much higher in coming years. That kind of dramatic growth is not sustainable and threatens the foundations of our economy.”

“We hope this report will be a rallying point for citizens and policy makers to restore the nation’s financial strength,” said Rebecca W. Rimel, president and CEO of The Pew Charitable Trusts. “Putting our financial house in order is a prerequisite to addressing the other challenges that confront us.”

Under reasonable assumptions, the public debt is projected to grow steadily from 53% of GDP in 2009 to 85% in 2018, 100 percent in 2022, and 200% in 2038. The report says such high levels of debt would jeopardize the American standard of living and weaken the economy.  And, as more government resources are used to finance interest payments, less would be available for other priorities, such as tax relief or spending on popular programs.

Rebound in UK commercial property to help offset NAMA haircut concerns

Davy analyst Stephen Lyons comments:"The latest IPD monthly figures show that UK commercial property values rose by the largest monthly figure in 15 years in November, with capital growth up 2.4%. This also marks the fifth consecutive month of yield compression in the sector, with yields ending the month at 7.3%. According to IPD, the recovery in UK commercial property markets over the last four months has gathered enough momentum to make a positive annual return for 2009 achievable.

The recovery in the UK commercial property sector is in contrast to the Irish sector, which has fallen 53% from peak and still faces lingering valuation concerns. These concerns have created uncertainty over NAMA valuations and reflect the abolition of upward-only rent reviews, exceptional flooding and suggestions that valuers are adopting a conservative approach to valuation to safeguard against future legal action. However, the fact that c.€21bn or 27% of NAMA loans are to assets in the UK, including Northern Ireland, suggests that UK haircuts should be lower, favouring those like BKIR with a greater UK bias."

- - See report link in Box below

Tensions between developed and developing nations reached boiling point Monday as talks were suspended at the UN Climate Conference in Copenhagen. CNBC spoke to Jeroen Van De Veer, chairman of ERT’s Energy and Climate Change Working Group and former CEO of Shell:

US

US banks Citigroup and Wells Fargo have agreed with the US Treasury to repay a total of $45 billion in bailout money, over a year after the government saved some of America's biggest finance houses from collapse.

The two  firms were the last big firms to pay back funding provided by the the Troubled Asset Relief Program (TARP) - - which was proposed by the Bush Administration in its final months.

"We are pleased to be able to repay the US government's trust preferred securities and to terminate the loss-sharing agreement," said Citigroup's Indian-born chief executive Vikram Pandit.

"We owe the American taxpayers a debt of gratitude and recognise our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need,"he added.

Wells Fargo CEO John Stumpf said TARP stabilised the US financial system "when confidence in financial markets around the world was being tested unlike any other period in our history."

Both companies said their shareholders would be taking losses in the deals, with Citi saying the repayment would result in a loss of some $8 billion, but would save the firm $1.7 billion a year in interest.

On Monday, during an hour long meeting in the Roosevelt Room of the White House with senior executives of 12 of America's biggest banks, President Obama urged them to stop fighting the regulation legislation intended to deal with the problems that led to the financial crisis, White House officials said.

“I made very clear that I have no intention of letting their lobbyists thwart reforms necessary to protect the American people,” Obama said in remarks after the meeting. “If they wish to fight common sense consumer protections, that’s a fight I’m more than willing to have.”

The Dow Jones closed up 30 points or 0.28% at 10,501, on Monday.

The Nasdaq gained 0.99% and the S&P 500 rose 0.7%.

Dubai's bailout is a harbinger of worse things to come next year, says Enzio von Pfeil, CEO of EconomicClock.com. He explains to CNBC's Sri Jegarajah why he believes this poses an immense systemic risk:

Asia

The MSCI Asia Pacific Index fell 0.6% Tueday.

The Nikkei 225 fell 0.22%; he Shanghai Composite dipped 0.86% and Australia's S&P ASX 200 rose .42%.

Asia benchmarks

Finfacts Reports

Global Economy 2010: Morgan Stanley forecasts advanced economies to grow 2%; Emerging economies 6.5%; BofA Merrill Lynch expects China's GDP to rise 10.1%
New car sales in Europe rose by 26.6% in November 2009 boosted by scrappage schemes - - down 2.8% in 11 months; Sales in Ireland down by 62.3% year to date
V-shaped recovery underway in Emerging East Asia; Asian Development Bank warns of risk from early exit from fiscal and monetary measures
UK commercial property capital growth reaches 15-year high in November
IMF's F&D Magazine looks at world emerging from crisis
Markets News Afternoon: FBD warns on cost of flooding; Citi to repay $20bn bailout support to US government; Eurozone lost 712,000 jobs in Q3 2009
Northern Ireland PMI for November shows ending a period of contraction that had lasted for twenty-three months
Eurozone industrial production fell 0.6% in October

In Europe, the Dow Jones Stoxx 600 has risen 0.16% Tuesday.

The ISEQ is off 0.37% in Dublin.

Elan is down 1.12%; CRH has dipped over 2%; Aer Lingus has risen 1.75%.

Goodbody analyst Ian Hunter commented on Elan: Drug candidate trial clipped on safety concerns -  - "Elan and its partner Transition Therapeutics this morning announced that they have withdrawn patients from two of the three dosing regimes in their Phase II clinical trial of ELND005 for the treatment of Alzheimer's disease. Patients are being removed from the two highest doses (1000mg and 2000mg dosed twice daily) because of safety concerns, given the greater risk of serious adverse events among patients on those doses, which has included nine deaths. The trial is continuing with the lowest dose (250mg twice daily) and placebo. The drug is in an 18 month, 350-patient, Phase II clinical trial.

This is a considerable blow for the progress of the drug, given that two of the three dosing regimes have been withdrawn and the number of deaths associated with the two highest doses. With J&J having picked up the development of its AIP programme, which includes Bapineuzumab and AAB-002, ELND005 is the most advanced product in Elan's remaining pipeline. Given that it is in an 18-month Phase II trial, we had little value attached to the drug candidate and no revenue pencilled in over the next five years. However, this is a set back for Elan in terms of pipeline development and longer term potential and will affect the sentiment on the stock."

European Benchmarks

Irish Share Prices

Euribor Rates

AIB Daily Report

Bank of Ireland Daily Report

UK interdealer broker, Tullet Prebon, has offered to help employees relocated to avoid the UK's new bonus tax. Stephen Hopkins from Eversheds considers whether there will be an exodus from the City of London:

Currencies

The euro is trading at $1.4603 and at £0.8975.

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

The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - -  close to a 1986 low.

The BDI slid 41% in the third quarter and rose 40% in October.

The index fell for a sixth straight day on Monday, dipping 49 points or 1.4% to 3,530.

The Key Indicator of Global Trade  - - Tudor Davies, Motley Fool UK.

Crude oil for January 2010 delivery is currently trading on the New York Mercantile Exchange (Nymex) at $69.55 per barrel up 4 cents from Monday's close. In London, Brent for January delivery is trading on the International Commodities Exchange at $71.75.

Gold spot price

Gold is trading at $1,118.40 down $8 from Monday's spot price close in New York.

Finfacts Gold Page

 

Goodbody chief economist: Dermot O’Leary comments: "The upward momentum in UK house prices continues. The latest survey from the Royal Institute of Chartered Surveyors (RICS) shows its house price index rose for the ninth consecutive month in November, with 35% more survey respondents stating that prices have risen over the past month than fallen. Given the still weak state of conditions in the ground, most have been surprised with the strong rebound in house prices in 2009 – prices are up 8% since the trough. The reason, though, is demand, not supply.

Demand, as measured by the RICS index on average sales per surveyor has risen off the floor, but still remain 30% below the levels reached in 2006. Meanwhile, stock levels remain at very low levels, being over 40% below long-term average stock levels. RICS have made comments this morning that the price momentum is likely to slow in 2010, as new supply comes on the market. For this not to occur, one would want to see a further improvement in mortgage approvals, which seem to have stalled somewhat in recent months after bouncing strongly from the lows. Low stock levels, though, for the time being continue to act as a floor to UK house prices. In turn, rising house prices should act as an incentive to build. Unlike here in Ireland, 2010 should still see a recovery in UK housing output in our view."

Goodbody analyst Gerry Hennigan comments on Dragon Oil - -"Dragon provided an update on field operations this morning, which indicate that while much of the market focus over the past few months has been on M&A, events on the ground continue to progress. LAM B, the second new platform to be commissioned in the field by Dragon, has been installed in the western part of the field, where we would expect decline rates from new wells to be less than on the eastern side of LAM, where most of the activity has historically taken place. Drilling has already commenced on the new platform with results from the B/141 development well due in Q1 2010. The well is being drilled by the Astra rig, which is due to drill two wells during the course of its six month contract. With the Astra now on site, Dragon currently has three rigs in operation.

On the drilling front, results from the latest well (A/139) on the LAM A platform produced a combined flow rate of 2,647 bopd, slightly below the average achieved of 3,333 bopd from the nine wells drilled on LAM A to date. The rig that drilled A/139, the Iran Khazar, has been moved to commence the drilling of well A/142 on the same platform. To date, seven of the planned eight wells due for completion in 2009 are now in production. With regard to contract negotiations on the securing of a fourth rig the statement adds that those negotiations are being finalised towards securing a long-term contract. While the latter is somewhat disappointing given that we would have expected those negotiations to secure a platform rig on a long term contract to have concluded by now, operations elsewhere would appear to be broadly progressing to plan. Our forecasts assume gross production this year of 45.1 kbopd, a target that we upgraded post the IMS IN October as outlined in our report (‘Steady Progress’, October 27th). As indicated below our price target of 495p is based on core NAV (i.e. oil production only).

The official inauguration yesterday by the respective Presidents of the 7,000 km pipeline that will supply gas from eastern Turkmenistan via Uzbekistan, Kazakhstan and into China was symbolic for several reasons. First, it demonstrates that the political will exists, despite somewhat fractious relations between the former soviet block neighbours, when a power house such as China comes calling. Second, it demonstrates a resolve to pursue trade and relationships behind the confines of the former soviet states and in particular Russia. The latter is of particular relevance to Turkmenistan given the ongoing dispute between it and Russia over gas supply north into the Gazprom infrastructure. A pipeline explosion earlier in the year meant that supply ceased with an obvious financial cost to the Turkmens (estimated at $1bn a month). While the pipeline has been fixed, supply has yet to re-commence with the Russians apparently unwilling to acquire gas on the basis of the previously agreed terms. The experience has clearly reinforced the need for diversification to the Turkmens, an opportunity that the Chinese are more than willing to avail of, while the EU and US largely fail to deliver any coherent plan to source gas from Central Asia that will by-pass Russian control.

That said, at a corporate level, greater efforts are being made and we notice that one of the attendees at yesterdays ceremony was the CEO of Eni. Discussions between Eni and the Turkmens are not just confined to the onshore Burun field (south of Dragon’s operation), but extend to tentative plans by Eni to export gas from the region to Italy via Turkey. Given the impasse with the Russians, through which most of the Turkmen gas is currently distributed, the Turkmens are clearly open to alternative routes to market. Conventional wisdom would suggest that once a gas sales agreement is in place for Dragon that the gas would head north into Russia before winding its way down into Europe. While very much at the drawing board stage, a southern corridor financed by Eni, would clearly improve the long term commercial value for Dragon. As stated previously, our price target of 495p reflects our core NAV (i.e. oil production) only. Attributing value to the gas increases our NAV to 597p (Total NAV)."

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