The End of Recession End
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The Regular Update from The Mole and paddypowertrader.
The Financial Markets - 27 May 09
An upside surprise in the US consumer confidence number (to it’s best level in 8 months) trumped a record drop in the Case-Shiller home price survey report (down 19.1% in Q1 2009, with nationwide US home prices now back at 2003 levels).
The result was that the latter was a rear view measure while the former is forward looking. That’s all very fine but this new found confidence needs to translate into higher consumer expenditure and less saving.
Today’s Market Moving Stories:
- In other news a Morgan Stanley upgrade of Apple helped propel the Nasdaq to a 3.45% gain. JPM was up over 6%, buoyed by earlier stories that Dodgy accounting rule changes would lead to a massive jump in profitability.
- Crude Oil rose ahead of UST yields, with front Nymex above $62.
- The ECB’s Finnish board member Liikanen made clear that in his view the ECB has not decided that the 1% refinancing rate is necessarily the low. He does not buy into the recovery story yet, suggesting that more evidence is needed to say the economy is turning.
- The BoE’s Besley, in an interview with Bloomberg, highlighted the need to deal with rising public deficits in the UK.
- While over in the US San Francisco Fed researcher Rudebusch said “it’s possible that the fed funds rate may need to remain close to zero for several years
- GM (now know as Government Motors) will become 70% state owned with the government having to inject another US$50bn, CNBC reports.
- The US ABC consumer comfort slipped 2pts to -47, the 2nd consecutive decline. Not to sure how that squares with the VERY surprising upside consumer confidence number we had yesterday?
Stimulus Tsunami in Asia
Stocks are soaring in Hong Kong on better than expected export news and further stimulus. This includes the fact that the Chinese have injected another round of tax cuts and infrasturcture stimulus:
The Hong Kong Special Administrative Region yesterday announced HK$16.8 billion of tax cuts, fee waivers and spending to shield people from a recession that’s likely to be the worst on record.
The government could “do something further” if conditions worsen, its Financial Secretary John Tsang said at a briefing in the city yesterday. Adding fuel to the good news, was a better than expected report on exports. Analysts had been expecting exports to fall 24% year over year, but they came in falling just 18.2%.
Japan’s exports showed modest signs of recovery in April with shipments to China declining at a slower pace than a year earlier, adding to signs that the worst of the global slump in trade may be over. But many analysts remain cautious about the outlook for the world’s No.2 economy. It is still mired in its worst recession since World War Two.
Doctor Doom still scares in the US
Doctor Doom Professor Nouriel Roubini on Wednesday said that the end of the global recession is likely to occur at the end of the year rather than the middle, and that US growth will remain below potential afterwards.
“We are not yet at the bottom of the US and the global recession,” said Roubini. “The contraction is still occurring and the recession is going to be over more toward the end of the year rather than in the middle of the year.”
“There is still too much optimism that a recovery is just around the corner,” said Roubini, a professor at New York University’s Stern School of Business and chairman of RGE Monitor, an independent economic research firm. Roubini, who is widely credited for predicting the current economic turmoil, was speaking at the Seoul Digital Forum.
“A more sober analysis suggests we’re closer to the bottom; there is light at the end of the tunnel, but it’s going to take a while longer, and the recovery is going to be weaker than otherwise expected.”
Once the recession ends however, he thinks things will pick up slowly.”US economic growth is going to be below potential for at least two years,” he said, amid multiple imbalances in the housing sector and the financial system, and the rise of public debt. Roubini said the outlook for Asia was more positive than for Europe, Japan and the United States, thanks to stronger fundamentals. “The latest economic indicators from Korea … suggest there is the beginning of an economic recovery, and growth might be already positive in the second quarter.”
The downside risk, Roubini said, was if advanced countries did not recover fast enough and if China’s rate of growth started to slow again. Roubini predicted China would post a 6 percent growth rate this year, a “hard landing” considering it grew by 10 percent for a decade.
A robust recovery in Korean, China and other countries in the region would depend upon relying less on external demand and export-led growth and relying more on domestic growth, he said.
NAMA News
In Irish news the prospects for BoI appear a good deal clearer after Finance Minister Lenihan’s comments yesterday. Speaking before yesterday’s Oireachtas committee, the Minister for Finance, Brian Lenihan confirmed that there was no “conclusion” on the likelihood of a further capital requirement for AIB but that Bank of Ireland “may” not need new capital when loans are transferred to NAMA.
Reading through this comment, it is clear that AIB is lagging Bank of Ireland in clarity on capital requirements, reflecting the uncertainty attached to the former’s bigger development loan exposure and the question marks over its €1.5 billion fund raising efforts.
From Bank of Ireland’s viewpoint, the news is welcome and reflects the fact NAMA’s impact on its capital base may be more benign that that of its Irish peer. The Minster also highlighted that nationalization of the two main banks would not be in the interests of the state. Mr Lenihan confirmed that the legislation covering NAMA would not contain detail on the levy which the Government can impose on the banks if there is a shortfall in the cost and resale value of the assets acquired by NAMA.
When asked about the IMF estimate that NAMA would cost €24 billion, the Minister suggested that the “first loss” was to borrower equity, often amounting to 35 per cent of loan value. Brendan McDonagh, interim MD of NAMA stated that the outline draft of the legislation for the agency would be ready within two to three weeks with final legislation ready by July.
He outlined that the banks are to receive government bonds as payment for the transferred loan books which could be used as collateral for ECB funding.
It is also expected that any interest payable on the bonds will be offset by inflows from the performing loan book held by NAMA. NAMA is also examining whether it will apply a 10% discount to the price of loans it acquires which could be refunded to banks if they achieve a certain level of performance on the management of the loan repayments. Without such an incentive there is a fear that a “hit and miss” repayment profile could be seen, as has been witnessed in previous bad bank schemes. It is as yet unclear whether this potentially increases the “haircut” which could be applied to the bank’s loan books on transfer to NAMA.
On the valuation metrics set to be used, Mr McDonagh hoped they would be in line with EU guidelines. While the EC has suggested the current market value of the assets “where possible”, the Commission noted there may be no meaningful value in the current climate. In this scenario a “transfer value reflecting the underlying longer-term economic value of the asset” or a mark to model approach would be an acceptable “valuation methodology”.
Equities
- In a tactical shift in pricing strategy it is reported this morning that C&C is to cut the price of a Bulmers pint bottle by 10% in the Irish on-trade market
- According to an article in today’s Irish Independent, Irish Life is close to agreeing a distribution of bancassurance products through Ulster Bank’s 140 retail branches in the Republic of Ireland. Irish Life would be the sole provider of life products. This would further increase Irish Life’s dominance in the life market, which had a 37% share at Q1 2009. In other news Irish Life & Permanent is to be removed from the Dow Jones Stoxx 600 Index but will remain within the DJ Total Market Index.
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"The End of Recession End" last update by The Mole, 27-May-2009
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