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Markets News Tuesday: German economic sentiment indicator dips in January; Kraft acquires Cadbury; Shares fall in Europe
By Finfacts Team
Jan 19, 2010 - 11:39:20 AM
The ZEW Indicator of Economic Sentiment for Germany fell by 3.2 points in January 2010. The indicator now stands at 47.2 points after 50.4 points in the previous month. This value is still well above the indicator's historical average of 27.1 points.
The development of the indicator suggests that the surveyed financial market experts expect the German economy to recover only at a slow rate within the next six months. According to the experts, the car and consumption sector is likely to slow in the next half year. Business expectations for the German machinery sector, in contrast, considerably improved this month.
ZEW is the Germany-based Centre for European Economic Research.
"The assessment of the financial market experts suggests that we will see an economic recovery in 2010 at best, but not a clear economic upswing. The way out of the recession is burdensome and long," says ZEW President Prof.Wolfgang Franz.
The assessment of the current economic situation in Germany improved in January. The corresponding indicator rose by 4.0 points to minus 56.6 points.
The economic expectations for the Eurozone decreased in January by 1.6 points compared to the previous month. The respective indicator now stands at 46.4 points. The indicator for the current economic situation in the euro zone improved by 5.1 points and now stands at minus 62.7 points.
Some 295 analysts participated in the January-survey which was conducted during the period 04/01 - 18/01/2010. Analysts were asked about their expectations for the next 6 months. Numbers displayed are percentages (month-over-month percentage point changes in parentheses). Balances refer to the difference between positive and negative assessments.
Kraft acquires Cadbury
UK confectioner Cadbury today agreed to a sweetened takeover deal with US food giant Kraft valued at 840 pence per share or £11.5 billion sterling, the two companies said.
Following months of hostilities, the agreed offer is for 500 pence in cash for each Cadbury share and 0.1874 new Kraft shares for each Cadbury share, an increase from its original offer of 300 pence in cash and 0.2589 new Kraft shares.
Cadbury dates from 1824 and the more diversified Kraft wanted Cadbury's access to fast-growing emerging markets such as India and Brazil.
Cadbury employs over 1,000 people in Ireland, in Coolock in Dublin and Rathmore in Co Kerry.
Cadbury is the world's second biggest confectionery company behind Mars. Its leading brands include Dairy Milk chocolate and Trident chewing gum.
Kraft, is second in global size to Swiss food giant Nestlé and is known for Dairylea cheese, Milka and Toblerone chocolate and Oreo cookies.
Discussing the economic conditions of Greece following its plans to reduce its budget deficit this year with Jörg Krämer, chief economist at Commerzbank, CNBC's Maura Fogarty and Anna Edwards:
Sense of déjà vu about UK fiscal chatter
Davy chief economist, Rossa White, comments:"UK politicians are beginning to face up to the massive hole in the public finances, even though they don't want to. That is because an election is on the way in May. But it is remarkable how the chatter in Britain is eerily similar to the opening salvos fired by Irish politicians in the summer of 2008. Irish politicians didn't realise how big the fiscal problem was back then, and it is doubtful whether UK politicians get it today.
The UK General Government deficit was higher than Ireland's as a percentage of GDP in 2009. It looks like coming in at 12.6%, more than one percentage point higher than the probable final out-turn of 11.4% for Ireland. But the structural problem is key. Based on IMF calculations (in 'The State of Public Finances Cross-Country Fiscal Monitor, November 2009'), the UK's structural primary deficit (i.e. ex-interest payments) will be about 8% of GDP in 2010, virtually identical to Ireland. Thanks to a slightly better starting point, the required fiscal adjustment to stabilise debt to GDP over the next decade was slightly lower in Ireland than the UK (as of November). But both adjustments are massive: 11.8% of GDP in Ireland compared with 12.8% in the UK. Ireland's bigger banking issues relative to GDP and the much smaller size of its economy are the only reasons that UK bond spreads are not trading even closer to Ireland.
Things have changed since November though, at least in Ireland. On December 9th, the government pushed through a package that cut the structural primary deficit by 2% of GDP. That pulls the further adjustment required below 10% of GDP, taking the IMF calculations at face value. But the UK is at least 18 months behind in getting serious about its deficit. Its general election will delay matters by another six months. Most dispassionate observers will hope for a clear-cut result so that the swingeing cuts can begin. In our view, a significant roll-back of the welfare state, pay cuts for public servants and tax hikes will eventually be on the table. Sound familiar?"
US markets
US markets were closed on Monday for the Martin Luther King JR public holiday.
London will not suffer the mass exodus in the financial sector that many analysts expect, Savvas Savouri from Toscafund told CNBC Monday. Nick Carn from Odey Asset Management joined the discussion:
Asia
The MSCI Asia Pacific Index lost 0.4% Tuesday.
Bloomberg says stocks on the MSCI World Index are trading near the highest level versus earnings since 2002.
The Nikkei 225 dipped 0.83% and the Shanghai Composite declined 0.30%.
Japan Airlines Corp will on Wednesday begin a three-year restructuring that will significantly shrink its operations to make it viable after the former flag carrier was forced to file for bankruptcy protection.
Termed a pillar of Japan Inc. it was founded in 1951 and was sunk by debt of $25 billion, a level well above its cash flow.
The Wall Street Journal says the company will be aided by a $10 billion lifeline from the government in the form of capital injections and credit. Bureaucrats also strong-armed Japan's banks into forgiving more than $8 billion in outstanding loans, while retirees and employees accepted more than $11 billion in pension cuts.
Shareholders will be formally wiped out when the stock -- once considered one of Japan's bluest of blue chips -- is delisted from trading on the Tokyo Stock Exchange on Feb. 20th.
China will shift its fiscal policy focus from construction to education and health care, predicts Qu Hongbin, senior economist at HSBC Global Markets. He discusses what's at stake, with CNBC's Amanda Drury, Martin Soong & Sri Jegarajah:
In Europe, the Dow Jones Stoxx 600 is down 0.65% Tuesday.
In Dublin, the ISEQ is down 0.83%.
Aer Lingus is up 2.74%; Tullow is off 0.39% and Bank of Ireland has fallen 4.09% - - see link to related story in Box above.
Goodbody's Gerry Hennigan comments on Tullow Oil's Post pre-emption detail - - "The main points to emerge from the Tullow conference call yesterday, post the announcement that it is to pre-empt the Eni bid for Heritage, revolved around: (i) the anticipated timeline for new partner addition; (ii) an objective to standardise equity across all three licences; (iii) the apparent constraints imposed by pre-emption; and (iv) re-iteration of its intention to farm-out up to 50% of its interests. While stressing that it retained a degree of flexibility, a direct read-through would now suggest that Tullow will hold 50% of each of the three licences (1, 2 & 3A) post ultimate farm-down. In effect, that would result in no adjustment to the current stake held in Blocks 1 and 3A (50%) with near term value derived solely from the sale of a 50% stake in Block 2. Whether the current stance derives from the perception of future value yet to be uncovered, or the apparent constraints of the Eni deal, which gave a commitment not to sell on for a period of two years, was unclear, though Tullow did acknowledge that it was a departure from its previously stated approach.
Assuming no bid increase from Eni, and shareholder approval from Heritage, Tullow expects Government approval of its offer, which matches that of Eni (total consideration of $1.5bn), by the end of the first week of February. On the financing terms with the banks to enable Tullow to exercise its pre-emption rights, limited detail was provided, except that it is tied to the subsequent farm-down of its enlarged interest post pre-emption. In terms of new partners, one or two companies with specific skills in pipeline and refinery development are targeted, with potential new partners apparently both aware and in agreement with the move by Tullow to pre-empt. The timeline for initial production (5,000 bopd - 10,000 bopd) is towards the end of 2011 or early 2012, but somewhat understandably Tullow would not be drawn on a timeframe for full commercial production (we assume 2015). As it stands, we view the deal as a short term positive in that it allows Tullow to control the farm-down process and maximise the value attained in any subsequent divestment. A farm-out of 50% of an enlarged interest, however, would limit the immediate value realised to 50% of Block 2 and would appear to commit Tullow to develop a basin that clearly requires considerable capital (c.$5 bn) to fully achieve commercial production for at least a further two years."
Goodbody chief economist, Dermot O’Leary, comments: Economic View; Deflation in every sector of Irish retail - -"Deflation in the Irish economy has been a theme that we have discussed at length recently (see Engineering a real devaluation, 14th January 2010) and it was very much in evidence in yesterday’s retail sales data. In the three months to November, every category of the retail sales index was exhibiting price deflation on an annual basis. The last sector to experience this trend was the bar trade, but succumbed in the latest month due to the need to stimulate demand. The overall deflator for retail sales fell further to -5.2% in the three months to November.
A year earlier, price inflation was still present. A combination of factors is at play in this trend: (1) the fall in the value of sterling over the past two years allows UK retailers located here to pass on price decreases to Irish consumers; (2) A price war is now in train in the grocery sector in particular, as competition has intensified, and retailers have tried to stem the flow of Irish consumers across the border to Northern Ireland and; (3) the main influence is a bid to trigger consumer demand.
There has been some stabilisaton in spending patterns over the past couple of months relative to the collapse at the beginning of the 2009. Nevertheless, with sales volumes down 8.2% in the three months to November, the margins of the retailers are likely to remain under downward pressure in a deflationary environment for the foreseeable future."
