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Markets News Thursday: Shares rise in Europe and fall in Asia; UK retail sales rise; UK Chancellor promises “lower and simpler corporate tax rates”
By Finfacts Team
May 20, 2010 - 11:29:02 AM
Chancellor Angela Merkel speaks in the German Bundestag on the support measures for struggling Eurozone countries, Wednesday, May 19, 2010.
Bloomberg reports that Europe’s debt crisis will depress the euro still further after it declined to the lowest level since 2006, according to UBS AG and BNP Paribas SA. for years to come.
For the Eurozone, a drop over three to four years would benefit European exporters in countries such as Germany, where foreign sales help offset reductions in government spending and restraint by consumers concerned about inflation. US exports, which President Barack Obama says he hopes to see double within five years, may become less competitive. However, in the view of Finfacts, currency forecasts generally make forecasts on national economies look scientific and beyond a few months have little value.
UK: The seasonally adjusted value of retail sales in April 2010 rose by 4.8% compared with April 2009; the seasonally adjusted volume of retail sales in April 2010 rose by 1.8% compared with April 2009.
The Office for National Statistics said sales volumes, including fuel, rose 0.3% in the month of April, compared with a consensus forecast of a 0.2% rise, after an upward revision to 0.5% in March.
The ONS said monthly sales volumes: i) for predominantly food stores was 1.7% lower than a year ago; ii) for predominantly non-food stores was 5.9% higher than a year ago - - within predominantly non-food stores, the largest rise was in textile, clothing and footwear stores which rose by 9.5%. Non-specialised stores increased by 9.4%. Other stores rose by 4.2% and household goods stores increased by 0.9% over the period; iii) for the non-store retailing sector was 10.0% higher than a year ago; iv) for predominantly automotive fuel was 10.9% lower than a year ago.
Economic View: After the bailout, Germany announces the catch; Goodbody chief economist, Dermot O’Leary, comments - -"It is often said that one should not waste a crisis. Germany is trying to do exactly that. Its moves yesterday to ban short-selling on certain stocks, bonds and CDS, while receiving criticism, is designed as a pre-emptive move to push for stronger regulation of financial markets at a European level. The second part of its reform agenda is a total overhaul of the EU rules governing the fiscal policy of euro-area member states.
In a speech to the lower house of parliament yesterday, one of the possibilities flouted was the introduction of procedures for an “orderly insolvency” of euro-member states. A nine-point plan that will be discussed at tomorrow’s meeting of EU finance officials also includes suggestions of penalties for those countries that don’t play by the rules of the game. These include suspension of EU voting rights and no access to EU development aid. There are also calls for closer scrutiny of national budgets, which looks like a given at this stage. Germany is undoubtedly going to use its substantial clout in negotiations around the future of the euro over the coming weeks and months.
Given that it is on the hook for the most amount of money, this is understandable. While the euro has strengthened overnight somewhat it is still close to four year lows relative to the euro, so some work is still required to convince markets that the situation is under control. One wonders whether the plans for an “orderly insolvency” is contingency planning for a future default by Greece. That remains to be seen, but instead of leading to a euro break-up, the current crisis may in fact lead to an even closer union."
Right now “the Franco-German engine is stuttering,” BNP Paribas' Hans Redeker said. “And for the past 50 or 60 years, this engine had been largely fueled by gasoline made of Deutsche Marks”:
Fed and Bank of England to keep loose policy in place: Davy chief economist, Rossa White, comments -- "Base interest rates are highly unlikely to rise in the US, UK, euro area or Japan this year. The events of the last couple of months will make the key central banks tread even more carefully than before. Minutes released yesterday of the last meetings of the Bank of England (BoE) and Federal Reserve show no appetite for change. Meanwhile, Japanese growth disappointed slightly in Q1 (deflation is a persistent problem) and the ECB would only move to prop up the euro in drastic circumstances if it fell a lot further from here.
The last BoE decision was clear-cut: a unanimous 9-0 vote to keep the repo rate at 0.5%. We reckon that there is an understanding between the (independent) BoE and the new administration. The bank may well keep policy loose for longer, as long as the new government tackles the deficit in meaningful fashion. That strategy will be driven by the bank itself rather than as a result of political interference.
The reality for investors is that the Fed remains very much on their side. 'Nearly all members' are happy to keep the funds rate between 0-0.25% for a long time. Moreover, the current plan for asset sales will help to keep credit and mortgage spreads contained. The majority of members do not want to commence asset sales until after the first rate hike. We can infer that the rate hike and, hence, asset sales are not imminent: 'most participants favoured deferring asset sales for some time'. It surprises us somewhat that the asset sale process could take between three and five years. The recent rally in the dollar (driven primarily by the increased relative focus on the euro area and the UK's fiscal fault lines) and consequent tightening of US financial conditions will guarantee the Fed's soft touch."
Kevin Gardiner, head of investment strategy for Europe at Barclays Wealth, who coined the term 'Celtic Tiger' for Ireland's economy in 1994, tells CNCB's Oriel Morrison that Germany's ban on naked short-selling was "excessive." He explains that this move withdrew liquidity from the markets in an announced fashion which then backfired:
UK: Chancellor of the Exchequer George Osborne on Wednesday night, spoke at the annual dinner of the business group, the CBI, where promised to spur growth and exports by simplifying Britain’s company tax system and delivering “the most competitive corporate tax regime” of any major economy.
Osborne said he will use his June 22nd emergency budget to strip away rules governing exemptions and tax breaks, while tackling avoidance so that he can lower the tax rate on profits.
“We need wholesale reform,”Osborne told the business executives. The new coalition government formed this month is committed to delivering “lower and simpler corporate tax rates.”
Osborne said : "There is a prize that is there for the taking. Every day around the world, in places like China, India, Brazil, Indonesia and Vietnam, people leave the grinding poverty that has trapped their families for centuries and become connected to today’s global economy.
They go to work for low wages in factories - - and I know the massive challenge that presents to our businesses here. But from Asia to America, from Eastern Europe to Southern Africa – nations of manufacturers are taking their first step in their journey to prosperity.
And as they become richer, they will become nations of consumers, just as we did after our Industrial Revolution.
According to the World Bank, the middle class in emerging and developing countries is expected to treble by 2030. That’s 1,200 million people who will want to buy the things that we can sell them.
Modern medicines and branded goods; aircraft engines, high-tech machinery, green vehicles and renewable energy; computer software, television programmes, oil and gas expertise; pensions, insurance, advertising, accountancy and legal services.
British goods and services, made in Britain, exported around the world.
The whole world must be our marketplace.
Our whole future depends on it."
Separately, the new UK government will introduce a banking levy and set up an independent commission to investigate separating retail and investment banking, the Conservative and Liberal Democrat parties said in a longer version of their coalition agreement today.
US Treasury Secretary Timothy Geithner says he will tell Chinese leaders at next week's Strategic and Economic Dialogue that letting the renminbi rise is in the best interest of the global economy. He tells CNBC's Erin Burnett that he's confident that Beijing will make that move, eventually:
US
On Wednesday, the Dow fell 65 points or 0.63% to 10,444.
The S&P 500 declined 0.51% and the Nasdaq dropped 0.82%.
Asia
The MSCI Asia Pacific lost 1.8% Thursday.
The Nikkei dipped 1.54%; the Shanghai Composite dropped 1.23%; Australia's S&P/ASX 200 Index slid 1.61% and India's Sensex Index rose 0.57%.
Japan's government reported Thursday that real (adjusted for prices) GDP (gross domestic product), grew at an annualised 4.9% rate during the first quarter, rising from the 4.2% pace in the final quarter of 2009. The first quarter performance compares with a 3.2% growth rate for the US, and an 0.8% rate for the Eurozone. Unadjusted for price changes, so-called nominal GDP rose 1.2% on a quarterly basis, the most in a decade but below consensus forecasts. Today's figures are subject to revision.
In Europe, the Dow Jones Stoxx 600 has gained 0.45% Thursday.
The ISEQ has climbed 0.81% in Dublin.
Market cap leader CRH is up 1.53%; Elan has added 1.06%; AIB has declined 1.31% and BoI is off 5.62% after the approval of capital raising plans on Wednesday.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009. The index averaged 59% lower in 2009 than a year earlier.
The BDI has risen 30% to 3,929, in the three weeks to My 14, 2010, which is also a six-month high for the global index.
On Monday, the BDI dipped 7 points or 0.18% to 3,922; the index fell 40 points or 1.02% on Tuesday to 3,882; the index dipped 50 points or 1.29% to 3,832 on Wednesday.
Gold is trading at $1191.30 down 10 cents from Wednesday's spot price close in New York.
The FT's Lex commented last week that when financier George Soros called gold “the ultimate bubble” earlier this year, many observers falsely interpreted it as a cue that the great speculator was eschewing the barbarous relic. Instead, he bought exposure and has made a tidy profit so far. Lex said the difference between Soros and the decidedly less-smart money that has helped push gold to a record high is that he has the proper historical perspective. Gold has only enriched those who have known when to sell it to a greater fool.
Another report said India's Hindus have bought gold during the Akshaya Tritiya festival in India for generations, believing that it brings good fortune. However, because of rising prices, Prithviraj Kothari, director at the Bombay Bullion Association, said that he expected gold sales during Akshaya Tritiya to be 50% lower this year than in 2009.
Bank of Ireland (Buy, Closing Price €1.40): All change today - moving to TERP (theoretical ex-rights price); Goodbody's Eamonn Hughes - -"BOI yesterday hosted its EGC passing its proposals to proceed with its rights issue. Then last night the institutional and NPRFC (national pension fund) placings closed (at 9pm) and, this morning, dealings in the nil paids rights and the fully paid rights commence. Last night’s share price close was €1.40 per share, so we estimate that the TERP price at the open this morning should be €0.89 (3 at €0.55 for 2 at €1.40). With a rights price of €0.55, this implies the nil paids should open at €0.34 (€0.89 less €0.55).
We estimate that BOI is now trading on 0.76x P/TNAV (end 2010f) and 5.0x its 2014f EPS (we regard 2014 as the first year the company will reach our normalised ROE of 13.5%). There is likely to be heavy volatility in the stock in the coming weeks through the rights issue period. In addition, the wider market concerns around sovereign risk in Europe is hardly a helpful backdrop over the next few weeks as well. However, we have mentioned on numerous occasions our view that the Irish banks can trade up to 1x TNAV, which would imply that BOI can trade up in due course from its (adjusted new) price of €0.89 closer to €1.17. Having said that, in the short term, the relatives in the past two weeks have become a little tougher given the UK peers have drifted back from 1.15x TNAV to 1x at Lloyds and 0.93x for RBS. They will need to be the far side of 1x before the Irish banks can make it to TNAV, bearing in mind margins in the UK banks troughed at least 18 months ahead of the Irish banks, they are substantially better capitalised (even post the Irish capital raises) and credit charges have already started to turn down.
For the record, the latest time for acceptances by shareholders for the rights is 11am on June 8 and the results of the rights issue will be announced at 7am June 9, with announcement of the take-up of the debt for equity offers later that day (10am)."
