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Markets News Wednesday: UK jobless benefit claims fell in December the most since early 2007; IMF's Strauss-Khan says China's yuan is overvalued; IBM raises 2010 earnings forecast
By Finfacts Team
Jan 20, 2010 - 11:21:55 AM
UK unemployment fell at the fastest pace since April 2007 in December as the economy showed signs of exiting from recession.
Claims for jobless benefits fell 15,200 to 1.61 million, the Office for National Statistics said in London today. The number of people seeking work in the three months through November fell for the first time since March-May 2008.
In the 3 months to November, the employment rate was 72.4% and there were 28.92 million employed people. The unemployment rate was 7.8% and there were 2.46 million unemployed people.
Total pay (including bonuses) rose by 0.7% on a year earlier; regular pay (excluding bonuses) rose by 1.1% on a year earlier.
The number of people in employment at 28.92 million in the three months to November 2009, was down 14,000 from the three months to August 2009 and down 451,000 on a year earlier. The number of people in full-time employment was 21.21 million in the three months to November 2009, down 113,000 from the three months to August 2009. Of this total, 13.52 million were men and 7.69 million were women. The number of people in part-time employment was 7.71 million in the three months to November 2009, up 99,000 from the three months to August 2009. Of this total, 1.88 million were men and 5.83 million were women.
IBM
IBM on Tuesday raised its earnings target for 2010 and reported a stronger than expected 9% rise in profits for the fourth quarter of 2009.
It said cost cuts and a shift to more profitable IT services and software contracts helped it weather a slump in business spending.
IBM expects a profit of at least $11 a share in 2010 compared with its previous target of $10 to $11 per share.
The company said its fourth-quarter profit rose 9% to $4.8 billion, or $3.59 a share, from $4.4 billion, or $3.27 a share, a year earlier.
Quarterly revenue rose 1% from a year earlier to $27.2 billion, just above forecasts.
"We concluded a strong year with a solid performance in the fourth quarter in which we again delivered growth in margins, profit and earnings," said Samuel J. Palmisano, IBM chairman, president and chief executive officer. "IBM continued to benefit from our strategic transformation, offerings that our clients value in this economy, and our commitment to developing countries around the world.
"In 2009, we invested in opportunities such as Smarter Planet solutions, cloud computing and advanced analytics. These new capabilities position IBM to grow as the economy recovers. The increased operational leverage we have established by creating a globally integrated enterprise will enable us to drive greater profits as revenue growth returns. We are confident about 2010 and our ability to achieve the high end of our long-term roadmap."
International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn said today that China’s yuan is undervalued and should trade freely if it’s to be regarded as an international currency, according to Bloomberg.
The yuan will play a bigger role as China’s importance to the global economy grows, Strauss-Kahn told reporters in Hong Kong today. Earlier in a speech, he said letting currencies appreciate can help to quell capital inflows from abroad.
Major obstacles stand in the way of widespread international use of the Chinese yuan/renminbi, according to a report recently published by Standard & Poor's Ratings Services, titled Why China's Currency Won't Replace The Dollar Anytime Soon.
"An increased awareness of foreign exchange risks among China's policymakers is contributing to Beijing's push to internationalize the renminbi. However, the currency is still conspicuously absent in international trade or financial transactions, and is rarely used beyond China's borders," said Standard & Poor's credit analyst Kim Eng Tan.
S&P cites the non-convertibility of the renminbi and strict capital controls as key obstacles. It also notes that China's developing financial markets are largely inaccessible to non-residents.
"The Chinese market will always be the largest and most liquid market for renminbi funds. If non-residents cannot easily buy and sell the currency and if non-resident financial flows are strictly regulated, the costs and liquidity risks of holding the renminbi would likely deter widespread international use," said Tan.
S&P also discusses the government's efforts to date to promote the renminbi as a leading currency and the benefits to the Chinese economy of greater usage of the renminbi in international trade--such as reducing foreign exchange exposure. The report draws comparisons with the experiences of the euro and yen.
China remains an export-led economy that relies on a competitive currency, says Stephen Roach, chairman of Asian division at Morgan Stanley, speaking to CNBC's Martin Soong and Amanda Drury:
Headache for Bank of England as UK inflation spikes
Davy chief economist, Rossa White, comments: "The UK bond market was taken by surprise as the CPI leaped in December. Annual inflation jumped by one percentage point from 1.9% to 2.9%, and it cannot be blamed on energy or seasonal factors. This creates a headache for the Bank of England. Long-term interest rates are already rising thanks to worries about the UK's public finance problem and jitters about the upcoming general election. It will want to keep long-term rates anchored to help sustain the recovery. But the inflation data suggest that spare capacity may not be as abundant as the Bank had thought.
It is not often that inflation forecasts miss by quite as much (it is somewhat easier to estimate than other data). The market expected a monthly rise of 0.3%; yet prices increased by 0.6%. No matter what components, alone or in combination, are stripped out (e.g. energy, seasonal food, alcohol or tobacco), the month-on-month rise was similar at 0.5-0.6%.
The labour market has begun to tighten up: the unemployment rate seems to have peaked below 8%. The unemployment rate that threatens to lead to inflation (NAIRU) may be somewhat higher than the mark of around 5% of the last decade, given that some capacity may now be redundant thanks to a different credit regime. Unemployment is probably the best real-time measure of spare capacity as manufacturing plant utilisation is less relevant in an economy where the sector accounts for not much more than one-tenth of output. Inflation concerns, whether genuine or not, give the Bank's Monetary Policy Committee plenty to think about in the months ahead."
Government stimulus measures were meant to bolster banks' balance sheets and not pay large employee bonuses, Lothar Mentel from Octopus Investments told CNBC Tuesday. Mentel considers the outlook for sector:
US markets
On Tuesday, the Dow rose 116 points or 1.09% to 10,725.
The Nasdaq gained 1.42% and the S&P 500 added 1.25%.
Asia
Chinese stocks fell Wednesdayd, dragging the region’s benchmark to its third straight decline, after regulators told some of the nation’s banks to limit lending.
The Morgan Stanley Asia Pacific Index fell 0.7%.
The Nikkei 225 dipped 0.25% and China's Shanghai Composite fell 2.93%.
In Europe, the Dow Jones Stoxx 600 is down 0.17% Wednesday.
In Dublin, the ISEQ is down 0.42%.
Goodbody analyst Marina Houghton comments: "Aer Lingus is up 2.74%; DCC is down 2.74% and Elan is up 1.96%.Aer Lingus announced last night that Niall Walsh, Deputy Chief Executive and Chief Operating Officer, has resigned and is leaving the company with immediate effect. Christoph Mueller is to take on the COO role for the time being until an external candidate is found and has drafted in Fergus Wilson, Chief Engineer, to assist him. Meanwhile the role of Deputy Chief Executive has been scrapped. This is the second resignation in recent months from senior management, following the resignation of the CFO, Sean Coyle, in December and comes at a time of major restructuring at the airline.
Meanwhile we note the industrial action by Irish Air Traffic Controllers (ATC) is to go ahead for four hours this afternoon at Dublin, Cork and Shannon airports. The IAA indicates that “significant numbers of flights will be disrupted and cancelled today”, with some 150 flights expected to be cancelled, disrupting over 20,000 passengers. As a result of the strike action, Aer Lingus has reportedly cancelled 64 flights today, with Ryanair cancelling 48. In a dig to the ATC union IMPACT, Ryanair posted the news of the cancellations on its website, urging its 6,000 affected passengers to contact the union’s General Secretary to seek compensation.
Elsewhere, we note news on the wires that Air France could be among three bidders interested in buying a controlling stake in Poland’s national airline LOT, whilst Australian press has focused on Air France potentially charging obese passengers up to 75% of the cost of a second seat from February 1."
Greek Finance Minister Georgios Papaconstantinou getting commiserations from colleagues at the Eurogroup meeting of finance ministers in Brussels, Jan 18, 2010
The euro has been very good for Greece and the possibility of the country exiting the Eurozone, as some analysts speculated recently, is "absurd," Greek Finance Minister George Papaconstantinou told CNBC Wednesday:
Goodbody chief economist, Dermot O’Leary, comments: Economic View; What is the real housing oversupply in Ireland? - -"The major contributory factor in the severity of the recession in Ireland is the construction sector in general and specifically the residential sector. Final data yesterday confirmed the extent of the collapse in housing output in Ireland in 2009. There were 26,820 house completions in Ireland, representing a decline of 48% yoy. At the peak in 2006, almost 90,000 units were completed. Over the past three years, we estimate housing alone has knocked 8% off the level of GDP (9% of GNP).
However, there are legacy issues that Ireland will have to continue to deal with from the oversupply in the housing market over the 2003-2007 period. Due to the lack of data on this very important topic, we have previously attempted to estimate the extent of oversupply in the Irish market. A new estimate by an Irish university, cited in the Irish media this morning, puts the number of vacant homes in the country at 300,000 units. The details are quite sketchy, but let’s try to work with our own estimates to see how the researchers may have got to this number. The starting point is the 2006 Census, where it was estimated that there were 216,000 vacant homes, excluding holiday homes in the country.
Since then though, there have been 222,000 further housing units completed. There are no data yet available on mortgages for new homes in H2 2009, but from Q2 2006 to Q2 2009, there were 118,000 mortgages issued for the purpose of purchasing a new home. Although the researchers used a slightly different methodology, this way, one can indeed get close to the estimate of 300,000 units.
We think a few adjustments should be made to this figure though: (1) the estimate of holiday homes may be too low; we use a separate survey, which decreases the number of “vacant” homes by 23,000; (2) there will always be a certain amount of homes that are vacant in any market, with the EU average standing at 7.3%; (3) public sector housing output since the Census should be excluded from the calculation and; (4) a certain number of homes purchased since the Census would have been purchased without the use of a mortgage, although the extent of this is unknown.
Taking all of these into account, and using a estimate of mortgages paid out in H2 2009, we calculate that the vacant stock in the country amounts to between 103,000 and 144,000 units, depending on ones assumptions on the number of homes purchased without the use of a mortgage since 2006. The conclusion for the Irish property market is that there is still c.3 years of supply in the system, but, importantly, these units may not be in the right place, with bigger oversupply issues in parts of the country. Ireland is still dealing with the legacy of the housing boom, but a two-speed market will emerge in the coming years with urban areas having less oversupply, like Dublin in particular, recovering first."
Goodbody analyst, Eamonn Hughes comments: Bank of Ireland; Discretionary coupon payments deferred - - "BOI yesterday announced that in line with the EU Commission assessment of the bank’s restructuring plan, that it is not to make coupon payments on its Tier 1 (T1) and Upper Tier 2 (UT2) instruments falling due on February 1 and 4. Non-payment on these instruments triggers a dividend stopper on a range of dividends on its junior share capital and any parity security. The issue of non-payment of coupons while under EU assessment is common across Europe and this is why these instruments are trading at discounts to par. This was flagged in an Irish context back on December 1 when AIB indicated something similar with a coupon due in mid-December.
The complicating factor in an Irish context is that the dividend stopper applies to the State’s €3.5bn of preference shares. Conditions on these prefs indicate that failure to make the cash payment could result in a payment in value by shares to the value of the coupon payment, which at €250m, would equate to c.15% of the current market capitalisation, bringing up dilution fears. However, BOI has indicated - as did AIB late last year - that it is in ongoing negotiations with the Department of Finance and the EU on this matter. We note after the AIB release in December, that the Department indicated its desire was not to take payment in equity. In fact, the EC responded soon after the AIB announcement that it would support efforts by the company “to raise private capital, including measures aimed at providing adequate remuneration to the Government’s preference shares without necessarily diluting existing shareholders”. As such, the share price reaction yesterday for BOI was correctly relatively muted.
Interestingly, BOI yesterday indicated that non-payment of coupons for a longer period would be unfavourable for holders of the range of impacted securities from this announcement. As such, BOI said it “is examining the merits of further liability management” which may see an additional hybrid buyback in some shape or form. Last summer, both large Irish banks netted about €1bn of capital gains apiece through buying back/exchanging chunks of their hybrid debt instruments."
