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German chancellor Angela Merkel with Nigeria's president Goodluck Jonathan, Abuja, July 14, 2011.
above the $1,600 an ounce price benchmark in early trading Monday on the London
Bullion Market, triggered by US default fears related to the ongoing political
struggle in Washington DC to agree a rise in the federal debt ceiling of
$14.3trn and the Eurozone sovereign debt crisis.
Last week, on the London Bullion Market, gold
rose to $1587 an ounce from $1541.50 the previous week.
US data raise concerns that Q2 slowdown may be persistent: Conall Mac
Coille, chief economist at Davy, comments - - "Data published on Friday
July 15th have raised concerns that the slowdown in the US economy in Q2 may
prove to be more persistent. Industrial production was always expected to slow
in the second quarter following the supply chain disruption around the time of
the earthquake in Japan. However, Friday's US industrial production releases
indicated that output growth was close to zero in the second quarter, weaker
than previously expected following revisions to the April and May data.
The US Michigan measure of consumer confidence, which had been expected to
rise, fell to 63.8 in July, the lowest level since March 2009, and the Empire
State manufacturing survey failed to bounce back in July as the market had
expected. Friday's data also follow the very disappointing payrolls numbers for
June, indicating a sharp fall-off in employment growth. So the outlook for
activity in the US economy in Q3 has weakened following Friday's data.
Of course, the softening in the macroeconomic data has been overshadowed
by negotiations to raise the US Treasury's debt ceiling. The most likely outcome
still seems an agreement ahead of the August 2nd deadline. However, should the
US put in place a more stringent deficit reduction plan, this should put further
pressure on aggregate spending in the US economy –reinforcing views that
softening of economic activity in Q2 may evolve into a more persistent
PCAR ensures Irish banks pass EBA stress test with capital ratio of 9.8%;
Stephen Lyons, an analyst at Davy, comments -- "On July 15th, the
European Banking Authority (EBA) published the latest round of European bank
stress testing results. Only eight of the 90 European banks tested failed the
required hurdle rate of 5%, with a combined capital shortfall of €2.5bn. A
further 16 banks nearly failed and will come under pressure, as will banks with
significant exposures to stressed peripherals.
The stress-testing exercise may be cynically viewed as a retro-fitting
process engineered to result in a tolerable number of failures and crucially
fails to adequately test for the impact of a sovereign default. However, the
tests provide transparency and result in a strengthening of banks' capital –
banks raised €50bn in advance of the tests and further raisings are now
The high core tier 1 ratio of 9.8% for the Irish banks is testament to the
conservative nature of the March 2011 Prudential Capital Assessment Review (PCAR).
The PCAR test tested for three years of adverse losses (versus two under EBA)
and demanded a higher hurdle rate of 6% and further contingency capital. The
banks were also required to raise capital to facilitate deleveraging.
The fact that recapitalisation/restructuring measures are not complete
does not detract from the capital scores. Liability management exercises are
mostly completed, and the bulk of the capital raising is expected by end-July.
Indeed, the cash balances are already on deposit with the banks.
The results from the EBA exercise are a positive for Irish banks and the
sovereign as they validate the restructuring measures undertaken. However, for
the outlook to improve, a successful resolution to the euro area's problems is
Economic View: Greater sense of urgency for
Thursday’s summit; Dermot O’Leary, chief
economist at Goodbody, comments -- "It seems like I haven’t been away,
what with yet another euro-area summit to be held this Thursday. The 'financial
stability of the euro-area as a whole and the future financing of the Greek
program' are the only items on the agenda. Will it finally come up with a
credible solution? Based on previous attempts, one would not hold out much hope.
However, rising yields in Spain and Italy in recent weeks has triggered a
greater sense of urgency to the situation, while avoiding an event of default is
not now seen as a necessary condition of any plan any longer.
This is the most positive development that we
can take from the events over the last few weeks as it finally recognises that
if a solvency problem is to be resolved it must by definition ease the debt
burden for the Greek sovereign. One way this can be done is by allowing a
buyback of Greek sovereign debt by way of the EFSF. This is an idea which is
gaining some traction and may indeed form part of the decisions that will be
made later in the week.
For Ireland and Greece, the events of recent weeks have in some ways been a
positive as it has hammered home the view that a European solution is needed for
a European problem. Even the IMF had this view in their press conference
following the conclusion of the second mission to Ireland on Friday. All eyes
this morning will be on the market’s reaction to the bank stress tests in Europe
on Friday. However, the main focus for the week will be Thursday’s crisis
Bad News For US If Debt Talks Stall: Robert Parker, Senior Advisor at Credit Suisse says if the U.S. debt extension is not passed, we can expect to see pressure on the USD and a shock to the country's equity market:
Irish Financials: Irish banks pass EBA stress
tests; Eamonn Hughes, head of research at Goodbody, comments - -"The
European Banking Authority (EBA) released its European bank stress tests on
Friday evening. The tests analysed 90 banks in 21 countries to an adverse test
scenario over 2011 and 2012 with a target core tier 1 ratio benchmark of 5%. The
tests were based off end-2010 balance sheets, but incorporated capital raising
exercises between January and April and resulted in just 8 banks failing to make
the 5% target ratio. Among the eight failed banks, 5 were Spanish, there were 2
Greek banks and one Austrian. The EBA recommends that national regulators take
specific steps to address the capital shortfall of just $2.5bn at these banks. A
further 16 banks (including seven in Spain) were identified in a 5-6% range and
the inference would be that regulators should look at these banks as well. All
three Irish banks, AIB, BOI and IL&P passed the tests.
The EBA tests employed slightly different methodologies than the PCAR tests
performed on the Irish banks back in March. The EBA period looked at losses over
a two year period versus three in the PCAR, the benchmark 5% figure was a higher
6% in the PCAR and there were a few differences around funding mix and cost, the
impact of deleveraging and balance sheet growth and buffers. However, the market
is likely to just focus on the headline passing benchmark (5% and 6%) and the
general consensus will be one of no surprise the Irish banks have passed.
According to the Central Bank release, BOI was 7.1% under the EBA stress test,
AIB was 10% and IL&P 20%, though bear in mind the EBA will not have had the same
level of deleveraging losses built in as the PLAR test (the liquidity test).
The market had been braced for up to 15 banks failing the EBA stress test with a
€29bn capital hole, so we wonder whether the tests create the same indifference
as generated with the same tests in 2010. Also, the tests specifically excluded
a Greek default. They did include a 25% markdown on Greek debt, but with the
price of Greek debt (10% year) just 52c in the euro and CDS spreads indicating
an 87% chance of default, the market has moved beyond the implications of the
tests. Also, Portuguese debt is trading at 54c in the euro, but the tests were
for a 22% haircut. There is extensive sovereign disclosures for all banks, which
will allow market participants to do their own homework, so more transparency is
always better than less, but it feels like events in the market have already
bypassed the results of the tests.:
The MSCI Asia Pacific Index ex-Japan
fell 0.5% Monday.
Japan's markets were closed;
China's Shanghai Composite index slid 0.12%; Australia's S&P/ASX 200 declined
0.03% and the Bombay Stock Exchange's Sensex index slipped 0.04% in Mumbai.
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.
On Thursday, July 15,
2010, the index fell for the 35th straight session, by 9 points, or 0.537%,
to 1,700 points,
July16th, the BDI rose 20 points or 1.12% to 1,700 to break the 35-session
On Friday last week,
the BDI fell 14 points or 1.02% to 1,353.
Financial Times reported in January, that Australia’s flooding and fears of
ship oversupply has pushed down a gauge of the cost of hiring ships to carry
coal, iron ore and other dry bulk by nearly half since October to the lowest
level since the aftermath of the financial crisis. The Baltic Dry index, the
widely watched measure of dry bulk charter rates, fell to 1,453, nearly half
the 2,784 peak reached on October 27, 2010.
The margin between the US
benchmark WTI (West Texas Intermediate) used on the New York Mercantile
Exchange and Brent is over $19.
The US Energy department
recently said that growing volumes of Canadian crude oil imported into the
United States contributed to record-high
storage levels at Cushing, Oklahoma of over 41m barrels at the end of
March 2011 (86% of working capacity at Cushing), and a price discount for
WTI compared with similar-quality world crudes such as Brent. A discount for
WTI is expected to persist until transportation bottlenecks impacting the
movement of mid-continent crude oil to the Gulf coast are relieved.
Consequently, the projected US refiner average acquisition cost of crude
oil, which was about $2.70 per barrel below WTI in 2010, is $1.60 per barrel
above WTI in 2011 and $1.10 per barrel above WTI in 2012.