For the most part equities, commodities and debt traded within a narrow range on Friday. Most of the action was in FX-land with the Euro benefiting from confirmation that the EU leaders had reached an accord to provide backstop financing to Greece if needed. According to the EU leaders, “As part of a package involving substantial IMF financing and a majority of European financing, Euro Area Member States are ready to contribute to coordinated bilateral loans… Interest rates will be non-concessional, i.e. not contain any subsidy element.” Beyond that, the details are as sketchy as ever, perhaps because most (including the Greek PM) believe that the package will not require implementation.
Stocks wise Friday RadioShack (NYSE:RSH) jumped 8.5% on a report that the electronics chain is considering a sale of the company. Apple (NASDAQ:AAPL) and Progressive (NYSE:PGR) advanced after analysts either raised price targets on the shares. Benchmark indexes retreated from their highs of the day after an explosion sank a South Korean navy ship near a disputed border with North Korea.
The main point in the final Q4 US GDP report was not the slight downward revision to growth but confirmation that corporate profits were 31% higher than a year earlier. Surging profits normally bode very well for capital expenditure and hiring with about a six month lag, thus we should expect to see some good numbers around the middle of this year.
Today’s Market Moving Stories
- Germany’s Der Spiegel magazine reported at the weekend that the IMF’s contribution to the Greek rescue package will be worth EUR12 bln. Given the assistance total is expected to be EUR25 bln (as Der Spiegel has been reporting for some time now) , that leaves the EMU nations contributing EUR13 bln. Finance ministers had indicated that the IMF’s contribution would be substantial, but had also suggested Europe would take the lead role in financing. From the looks of these figures, it’s actually a pretty even split. This is likely to be helpful to Germany, which will want to see maximum pressure applied by the IMF for Greece to make necessary reforms before handing over its cash. Meanwhile, note that Greece commented at the weekend that it still hasn’t decided whether to issue a new bond this week. That followed an FT report on Friday which cited the head of the PDMA as saying Greece wanted to get a EUR5 bln issue away before the end of the month (ie by Wednesday’s close). Indeed Greece this morning announced a 7 year 5bn bond issue but at a serious give away premium adding to future debt service costs (& taxes).
- ECB member Noyer said the was not concerned by the current position of the euro. He said while the currency was towards the upper limits of the comfort band, it remained inside the range the Eurozone should be able to live with. In fact he noted the euro’s recent retreat against the dollar has been of help to Europe. ECB member Weber told Japan’s Nikkei newspaper interest rates remain appropriate and that the recent unwind of special measures do not represent an overall policy shift. Weber said he expected Germany’s Q1 GDP will be weak, but that the overall recovery trend remains in place. In any case, that should make Q2 and Q3 all the stronger. Weber tried to be upbeat on Greece – it does not have a solvency issue he said, rather just poor financing conditions.
- ECB’s Liikanen started putting his weight behind what’s likely to be a lengthly verbal lead into tighter policy. On the face of it his comments that Eurozone interest rates will need to rise, but that he didn’t know when or by how much, are pretty nothing comments. However, they are releveant in that this is the sort of suggestion that’s going to be heard a lot, as members prepare the public and the markets are an eventual move. In other words, contrast this phrasing to that of a few months ago – there’s no need to alter policy.
- The Fed’s central theme, as communicated by chairman Bernanke, remains lower-for-longer, but it’s starting to look like members are beginning to question the future implications of this policy. Bernanke has consistently claimed that spare capacity will offset any inflationary implications of the Fed’s policy. Last weekend, however, saw Plosser and Warsh warning that the Fed needs to be careful. Plosser said the Fed will need to sell some of its balance sheet assets before it starts raising interest rates. He said as things stand the policy transmission mechanism is not very efficient, distorted by the extend of the Fed’s balance sheet and also by the scale of excess reserves being carried by the banks in their Fed accounts.
- Fed governor Warsh, meanwhile said that the run of low inflation readings should not lull the Fed into a sense of complacency. He said the extent of the simulus provided over the last 15 months or so means the Fed needs to be careful with the inflation outlook. "Inflation expectations will be anchored until they are now," he said. Bernanke does have his supporters, however. Bullard said the housing market isn’t seeing a sharp rebound, but rather merely a stabilisation. A renewed bout of housing market weakness would hence make it difficult for the Fed to start selling MBS. Bullard also warned that financial reform could be "growth retarding," with the proposals being touted at the moment likely to slow the potential growth of the US.
- UK bank lending data remained weak in February, underscoring that demand for mortgages remains weak; PNFC financing also continues to contract. BoE data on bank lending to individuals showed that mortgage approvals fell to 47.1k in February, from 48.1k in January (52k, consensus: 48.4k).
- Germany’s SoFFin financial markets stabilization fund is worried that Commerzbank AG might not be able to pay interest on or pay back the government aid it has received during the financial crisis, weekly magazine WirtschaftsWoche reports ahead of publication Monday. “Commerzbank is our biggest concern behind Hypo Real Estate,” the magazine quotes an unnamed member of the Soffin supervisory committee as saying. “What we’re after is that we will receive the agreed interest at some point.” Another member of the supervisory committee is quoted as saying there is skepticism that Commerzbank will be able to fully pay back the state aid. The German government provided Commerzbank with EUR18.2 billion of aid to survive the financial crisis, and in turn took a 25%-plus-one-share stake in the bank. A spokesman for Commerzbank said Sunday that the bank still plans to begin paying back the government aid from 2012 at the latest.
- European banks may face a €156 bn ($209 billion) shortfall in funds needed to refinance commercial real-estate debt in the next two years, DTZ Holdings Plc estimates. About €480 bn of property loans will mature by the end of 2011, according to research by the London-based broker. Banks won’t be able to refinance all of the debt, particularly when loans exceed the value of the properties backing them. More than half of the shortfall will occur in the U.K. and Spain, DTZ said. European lenders are grappling with the legacy of €1.8 tn of loans given to buyers of stores, offices and warehouses in the five-year real estate boom that ended in mid- 2007. Many were granted near the market’s peak at more than 80%of building values. Prices then sunk by about 26% across continental Europe and 44% in the U.K, leaving many borrowers owing more than the value of the buildings. The shortfall “is the biggest short-term challenge to the European property markets,” Nigel Almond, the study’s co- author, said in the report. “As many loans reach their maturity in the next few years, we expect defaults to become more likely.” Lenders have so far been able to maintain most of their problem loans due to central bank support. That includes asset protection measures that allowed them to extend loans and ignore most defaults or breaches of borrowing terms. That will change because some of those policies are set to be reversed, DTZ said.
NAMA-astrophe Continues in Ireland.
A watershed week for Irish banking which will undoubtedly shape the future of Ireland’s Banking Sector. The timetable of events this week would appear to be a follows: Today (after market close) – NAMA is expected to provide a status update and announce the haircuts on initial loan transfers for Irish Nationwide and EBS. The initial loan transfers relate to the highest risk assets where the haircuts could be as high as 60-70% in some cases. The average haircut upon completion of the loan transfers is now expected to be in the region of 33%-45% depending on the Bank. Initial haircuts on Bank of Ireland (NYSE:IRE), AIB (AIB) and Anglo Irish Bank (OTC:AGIBY) are expected to be released over the course of the week and early next week. At this point – we should have a better understanding of the timetable for loan transfers and the haircut process. Initial haircuts expectations on loan transfers are as follows; EBS €0.8bn at 35%, Irish Nationwide €1bn at up to 60%, Bank of Ireland (BOI) €2bn at 35%, AIB €3bn at 40% and Anglo €10bn at 40%/45%. It also appears that whilst the total amount of loans transferring to NAMA will be close to the €77bn stated in the NAMA business plan from last October, the composition will see more loans transfer from Anglo (€36bn from €28bn), less from BOI (€10bn/12bn from €16bn) and AIB (€23bn from €24bn).
In summary expect final loan transfers to remain between €77bn and €80bn and at an average overall haircut to be closer to 35% (losses €27bn) than the previously anticipated 30%.
Tuesday – The Irish Financial Regulator and the Governor of the Central bank will make statements. The Minister for Finance will deliver a speech on the future of the Banking sector and details of a Bank recapitalisation plan will be revealed .
Wednesday – Bank of Ireland is set to announce 9 month results (to 31st December 2009) and Anglo Irish Bank (Results to be released on Tuesday or Wednesday) will announce 15 month results (with an expected €12-€13bn net loss).
What can we expect? 1) Higher NAMA haircuts are now widely expected although it is important to stress that the initial haircuts announced this week by NAMA will not be reflective of the final average haircut 2) The Irish Regulator is expected to outline the short term capital requirements for the Irish banks which will take account of expected NAMA losses but also protect against continued deterioriation of their remaining loan books. A target 7% Equity Core Tier 1 ratio by year end, the demand for additional reserves to protect against non-NAMA losses and a strict timetable for implementation could result in higher than anticipated capital needs. It would also increase the likelihood of significant government ownership in both Bank of Ireland and AIB who both clearly have a preference for “self help” options over a period of time. Weekend media reports suggest the state will have ownership of between 40% and 50% in BOI and up to 75% in AIB as a consequence. 3) The Minister of Finance will outline details of Bank recapitalisation and the extent of government participation in this plan. The key focus (from a bond market perspective) will be on how much additional capital will be funded via the Exchequer and how much of it will be funded in 2010. Any additional capital for Bank of Ireland or AIB is expected to come from a conversion of government preference shares or an additional investment by the National Pension Reserve Fund (the €7bn investment in Preference shares came from this fund in 2009). The Minister of Finance was quoted at the weekend as saying that there were “financial mechanisms” which would be used to spread the cost to the state over a period of time. For Anglo and Irish Nationwide we therefore could see a staggered approach whereby capital will be provided (via the exchequer) to meet minimum regulatory requirements in 2010 with a facility in place which could be drawn upon over time and upon establishment of Anglo’s “Good Bank – Bad Bank” (subject to EU approval) and the expected “3rd force” concept (in which Irish Nationwide is due to play a part). On this basis – I do not envisage the Bank recapitalisation plan having a fundamental impact on government funding requirements for 2010 . The Government clearly wants to send a message to the market that it is taking a “no nonsense” approach and intends to take immediate / transparent action to regain international confidence in the Irish Banking sector. An interesting week ahead.
- ITV announced on Friday that it had formulated a scheme to reduce its pension deficit by a quarter on a funding basis – there will be no change to the IAS deficit of £436 mn. The overall flexibility of the arrangements is a positive for ITV protecting the Group somewhat in a downside scenario and limiting the cash payments in the short term.
- Verizon Communications Inc. (NYSE:VZ) and Vodafone Group Plc (NASDAQ:VOD) continue to hold informal talks on how to increase returns from their U.S. mobile-phone partnership, two people familiar with the talks said. Options include combining the two phone companies, having one carrier sell its stake in Verizon Wireless to the other, or paying a dividend to investors, according to the people, who declined to be identified because the talks are ongoing. No decisions are imminent, the people said.
- Swedish wireless-telecoms-equipment giant Ericsson AB (NASDAQ:ERIC) on Monday said it has signed second-generation (2G) and 3G frame agreements with Chinese operators China Mobile and China Unicom (NYSE:CHU) worth $1.8 bn in total. Under a $1 bn agreement, Ericsson will in 2010 provide China Mobile with new radio bases and mobile technology to boost the capacity of its network. Under an $800 mn deal signed with China Unicom , the gear maker will build a faster 3G network with HSPA technology to provide a better user experience.
- With commodities prices rallying after London Metal Exchange copper inventories fell for the 18th and nickel rose to its highest level since June 2008 mining stocks are bid with Xstrata (OTC:XSRAF), the world’s fourth-largest copper producer better by 3%, Antofagasta Plc (OTC:ANFGF), owner of copper mines in Chile, up 1.2%, while Kazakhmys Plc increased 1%.
- Other stocks on the move today include Antisoma which plunged 22% after the U.K. company said a late-stage trial of the experimental lung cancer treatment ASA404 will be stopped because the medicine doesn’t work. BofA-Merrill Lynch Global Research downgraded the shares to “underperform” following the announcement.
- Blacks Leisure Group jumped 13% after the U.K. retailer that rejected an indicative takeover bid from Mike Ashley’s Sports Direct International this month, said the company was considering increasing its offer. Sports Direct gained 4%.
- Dana Petroleum (OTC:DNPXF) shed 2.1% on news the Scottish oil and natural-gas explorer reported a drop in annual profit to £22.6 mn pounds from £96.2 mn in 2008. Sales declined 23% to £397 mn because of lower oil and gas prices.
- Desire Petroleum collapse 50% after the explorer said drilling at the Liz prospect near the Falkland Islands found a “poor” quality crude reservoir. Rockhopper Exploration , which has a stake in Liz, tumbled 23%
- Southern Cross Healthcare dropped 25 % after the U.K.’s largest care-home operator said profit may be disappointing this year because of lower-than-expected average occupancy and fee settlements from local governments.
And Finally… Ladu Gaga Gets Arrested