A session without history yesterday as the US markets were closed followed by carnage today in European peripheral PIIGS bond markets on the back of a myriad of negative news stories.
Take your pick from:
1.The WSJ story on the euro bank stress tests getting a lot of airplay (saying banks understated their full holdings of PIIGS sovereign debt). Barclays and Credit Agricole are said to be the 2 worst culprits.
2.The breakdown of Dutch and Belgium coalitions and the possible break up of the latter.
3.The PIMCO story reported by Bloomberg Monday regarding possibility of a Greek default making the rounds. PIMCO’s wonderfully named Andrew Bosomworth declared that “Greek is insolvent.”
4.The continued seemingly endless rumblings from Ireland on a wind-down of Anglo Irish are not helping give confidence to the market plus it was rumoured that Bank of Ireland were trying to issue paper.
5.Portuguese banks dependence upon the ECB for funding reaches an all time high.
6.A Greek cabinet reshuffle (rearranging the deck chairs on the Titanic).
7.Davy’s stockbrokers cut their recommendations on AIB & BoI to “neutral” from “outperform” on concerns that any change in the Irish State guarantees may result in an outflow of deposits.
8.The confirmation the Labour will remain in power in Australia via a minority government with the support of the Greens and some Independents is pressuring mining stocks as the prospect of the super tax looms large.
9.Much weaker than expected German manufacturing orders (@ -2.2 percent versus the expected +0.5 percent).
10.Estimates that German banks may need to raise €105 billion to be compliant with new Basel 111 requirements. This story is pressuring all European bank stocks today.
11.The spread of Irish government bonds over their German equivalent hit an all time high of 380bp or 3.8 percent this morning.
Today’s Market Moving Stories
- Bloomberg reports that Germany’s 10 biggest lenders, including Deutsche Bank and Commerzbank, may need about €105 billion in fresh capital because of new regulation, the Association of German Banks said. The lenders would need to raise that sum to reach an estimated 10% Tier 1 capital ratio, a key measure of financial strength, according to Dirk Jaeger, who is responsible for regulatory topics at the group. The association said higher capital requirements, set to be proposed tomorrow by the Basel Committee on Banking Supervision, may endanger the economic recovery by limiting the ability to lend. The Basel Committee last month rebuffed complaints from banks that the proposed regulations may damage economic growth, saying the impact would be “modest.” The committee estimated in an Aug. 18 report the new rules would trim 0.38% from gross domestic product in the U.S., the euro area and Japan after 4 1/2 years. That’s below the 3.1% cut foreseen by the Institute of International Finance, an industry lobby group, over five years. “Banks face enormous challenges,” Hans-Joachim Massenberg, the German banking group’s deputy managing director, said in a statement today. “It’s clear that more capital is necessary. But it’s also clear that raising additional capital comes with a burden.” The so-called Basel III reforms will probably cost European banks €149 billion in higher capital requirements, capital deductions and loss of earnings, Credit Suisse analysts, including Daniel Davies in London, wrote in a report published Aug. 31. That’s below the brokerage’s previous forecast of €244 billion.
- This is *not* an immediate requirement. So any reaction to this is waaaaay overdone. German banks are simply saying they might need €110bn in fresh capital if the proposed Basle III rules are implemented. Worth remembering the new rules are to be phased in over many years, with full implementation pushed back until 2018. FT picks up on the Reuters headline and suggests the comments are a last ditch effort by the banks to have the rules watered down before they are finally written in stone (the if-you-force-these-through-then-we’ll-be-ruined argument). Also remember, when these Basle III regulations were released in draft form in July, equities rallied, especially bank shares because the new rules were deemed to be so lenient. So the reaction to this headline is totally unjustified.
- Elsewhere President Obama last night confirmed plans for a six-year program of infrastructure investments in a bid to aid job recovery in the US economy. Under the proposed plan $50bn in funding would be available in the first year (2011). Few other details were provided in last night’s Labor Day speech in terms of the breakdown of funding split between roads, rail and runways. The initial $50bn being proposed is broadly similar to the $49bn which was allocated to transportation under ARRA. In the case of ARRA $27.5bn of the $49bn was earmarked for highway and bridge projects. It would appear far from certain that President Obama will be able to deliver on the plan given expected opposition from both within his own party and opposition as to how the programme will ultimately be funded. Any additional funding into US roads will be positive for CRH given its position as supplier to US road projects, however as with all political announcements the devil will be in the detail. For now it would seem that further progress is improbable in advance of the midterm congressional election on 2 November. Aside from getting details on how much of the initial $50bn will be put in road projects the other most immediate question yet to be answered is how much is to be provided under the programme over the full six year period? The announcement is in addition to the extension of a research tax credit worth $100bn over the next 10-years, and a plan to let companies write off 100 percent of their new investment in plant and equipment this year and next year. Obama is expected to provide more detail about the economy on Wednesday in Cleveland.
- The FT reports that employers expect a “static” rate of recruitment for the remainder of this year, according to new research, underlining concerns about the momentum of economic recovery. – The survey of 2,100 employers by Manpower (MAN), the recruitment company, is likely to intensify debate on whether the private sector can create enough jobs to offset those that will be lost in the public sector over the coming years. For the fourth consecutive quarter, the survey showed a seasonally adjusted net employment outlook of +1%, meaning that the number of employers planning to hire over the next three months only slightly exceeded those intending to reduce their workforce. In the public sector, where hundreds of thousands of jobs are likely to be lost by 2015, the outlook was -2%. The economy created a record number of jobs between April and June as output surged ahead by 1.2%, its fastest for 11 years, but purchasing managers’ indices since then have pointed to a rapid slowdown of growth. Manpower said employers were worried about inconsistent demand for their goods and services and were only mildly optimistic about future hiring prospects. “The gap in hiring intentions between the strongest and weakest industry sectors and regions is widening and, although unsurprising, it is a concern for the UK’s post recession growth strategy,” said Mark Cahill, Manpower UK’s managing director. The brightest outlook was in finance and business services and in utilities, both of which reported favourable hiring intentions of +10 percent. Construction was the weakest at -5%. It has reported negative prospects for nine consecutive quarters, as has the retail, hotels and restaurants sector.
- Retail sales (nsa values) grew by 2.8% yoy in August, according to the British Retail Consortium, slightly stronger than the 2.6% rise seen in July. Food sales were reported to have slowed, but non-food sales accelerated, with clothing and footwear, homewares and non-store sales reported to have been particularly firm. Retailers remain sceptical that consumer demand will hold up during the rest of the year, given concerns about government deficit reduction measures. However, the spending data as yet give no indication that a sharp retrenchment is in train.
The WSJ Calls Out The ECB
Overnight, this WSJ story caused carnage in the PIIGS bond spreads (with the biggest one day move EVER in Irish spreads, out a massive 40bp on th day at one point before rumur ECB intervention). Some Euro weakness is due to Europe’s recent “stress tests” of the strength of major banks which understated some lenders’ holdings of potentially risky government debt, a Wall Street Journal analysis shows. As part of the tests, 91 of Europe’s largest banks were required to reveal how much government debt from European countries they held on their balance sheets. Regulators said the figures showed banks’ total holdings of that debt as of March 31.
At the time, worries about banks’ government-debt holdings were fanning fears about the health of Europe’s banking system as a whole. Release of the bank data was considered the main benefit of the stress tests, which were widely criticized as being lenient overall. An examination of the banks’ disclosures indicates that some banks didn’t provide as comprehensive a picture of their government-debt holdings as regulators claimed. Some banks excluded certain bonds, and many reduced the sums to account for “short” positions they held–facts that neither regulators nor most banks disclosed when the test results were published in late July. Because of the limited nature of most banks’ disclosures, it is impossible to gauge the number of banks that excluded portions of their sovereign portfolios from their disclosures, or the overall effect of that practice. But the exposure to government debt of at least some banks, such as Barclays and Credit Agricole , was reduced by a significant amount, according to industry officials and financial filings made by the banks. Adding to the haziness, the stress tests’ reported sovereign-debt levels differed, sometimes widely, from other international tallies and from some banks’ own financial statements.
Why the big reaction? Haven’t we heard all the arguments before? No, this one is a bit different in several respects:
- Stress test results were out on July 23, launching a week-long newspaper frenzy and a flurry of media scrutiny. But, most previous articles criticised the test results, not the methodology. This one tackles the methodology which gives the article much more credibility, and is a fine piece of investigative journalism.
- Article focuses on the sovereign debt disclosures, and pokes holes. Says some banks understated their full holdings and blames the ‘college’ of regulators, CEBS, for not making this clear.
- These disclosures were really the only valuable part of the stress test exercise, and if they’re not credible it doesn’t look good. Also linking the banking system with the sovereign debt issue made it a potent anti-euro cocktail.
- Article comes at sensitive time, with Irish banking system already drawing unwanted attention to both itself and the European banking system.
- We haven’t had an article on how bad the stress tests were since July. Made it stand out.
For an alternative conspiracy take on this story see this one.
Company / Equity News
- The Irish Times is reporting this morning that the Irish government has asked the EC to allow for an extension of the state guarantee on short-term deposits for Anglo, although suspect this request will have applied to the other Irish Banks as well. We have been saying for some time that it remains important that a guarantee on the short-term debt remains in place beyond end-Sept 2010 in order to retain stabilisation and some confidence in the Irish markets and we believe this will be granted, so we see a more gradual phasing out of the guarantees at an appropriately stable time.
- With respect to Anglo -- if media is to be believed, the 10-15yr wind down of the bank looks the most compelling option now, with the Irish Times stating that the EC will likely issue an early signal to confirm this some time in the near future. This week will continue to be a big one for headlines on Anglo. Brian Cowen, governor, continues to assert the costs are “manageable” for the country.
- The €26bn of term funding due for refinancing at end-Sept I still maintain as manageable and will be met by the Irish Banks, although this will likely be accompanied by a spike in ECB funding. Irish Nationwide has just managed to list €4bn of 6-month notes under the government’s bank guarantee, which it will likely repo with central banks. Clearly a longer term funding strategy is crucial to the future confidence in the Irish Banks, but getting over the September hurdle and making the right decisions in terms of guaranteeing debt and Anglo, buys the banks some time.
- Banks may be required to have a Tier 1 capital ratio of 9 percent under new rules, Die Zeit newspaper reported. The new rules, known as Basel III, may demand a minimum capital ratio of 6% as well as a “conservation buffer” of 3% for bad times, the newspaper said in a report on its website today, citing a proposal from the Basel Committee on Banking Supervision. On top of this, regulators may require an additional “anti-cyclical capital buffer” of 3%, which would lift the ratio to 12% during “boom times,” the newspaper said. The Tier 1 ratio is a measure of financial strength. The rules may also foresee a Tier 2 capital ratio of 4 percent, Die Zeit reported. Not great news for Irish financial stocks.
- Reports in Poland are suggesting that Banco Santander (STD) is the most likely buyer of AIB’s (AIB) stake in Banks Zachodni WBK. AIB are expected to pick the buyer before the end of this week, with BNP Paribas (OTCQX:BNPQY) and PKO Bank Polski the other bidders for the bank.
- In an IMS covering the period since May 1, Smurfitt Kappa (OTCPK:SMFTF) peer DS Smith notes that trading has been encouraging with “good volume growth throughout the Group”. The paper and corrugated business has had a good first quarter with increased volumes in Europe and the UK. Furthermore, the phased recovery of box prices is leading to profits in line with its expectations. Overall, the year is progressing in line with expectations, underpinned by continued demand in the fast moving consumer goods sector and management “look forward to the remainder of the year with confidence”.
- Some musical chairs in British banks today. Barclays (BCS) dropped 3.5% . In London after the British bank said that Robert Diamond, the head of its investment-banking arm, will become its new group chief executive starting early next year. Diamond will succeed John Varley, who’s been at the helm since 2004. Elsewhere in the financial sector, the BBC reported that Stephen Green, chairman of banking giant HSBC (HBC), will step down to become trade minister in the UK’s coalition government.
- Shares of Oracle (ORCL) have gained 3.2% in premarket trading. Oracle announced that Mark Hurd has joined the firm as president and has been named to the board. Hurd is the former scandal-hit chief executive of Hewlett-Packard (HPQ).
- Reports in the equity round up sections of the (London) Evening Standard, the FT and The Times amongst others cited trader talk of a PE approach for Rentokil at 145p a share (shares closed up 2.25p at 102p). If I had a pound for each time this story had been mentioned in the press I would have £63 by now. Rentokil is a disparate collection of five businesses, which is not typically the type of group targeted by modern day PE, so I believe a bid is highly unlikely to materialize.
- Samsung Electronics (GM:SSNLF), the world’s largest television maker, said it may equip its TVs with Google (GOOG) software, and compete with Sony (SNE) in offering sets that surf the Web and double as computers. The company, based in Suwon, South Korea, is also likely to meet to its 2010 sales target for TVs, Yoon Boo Keun, head of Samsung’s TV business, told reporters in Seoul today, without giving further details.
- BHP Billiton (BHP) and Rio Tinto (RTP) shares declined in Sydney after independent lawmaker Tony Windsor said he would support Prime Minister Julia Gillard’s Labour Party allowing them to stay in power.
- British Airways (OTC:BAIRY) CEO Willie Walsh said he would resume merger talks with Qantas Airways if the Australian company was interested, the Australian Financial Review reported. Still, there wasn’t “any evidence” that Qantas Chief Executive Officer Alan Joyce wanted to pursue a deal at this stage, Walsh said in an interview with the newspaper.
- Bloomberg reports that more US stocks are paying dividends that exceed bond yields than any time in at least 15 years as profits rise at the fastest pace in two decades. Kraft Foods Inc. (KFT) and DuPont Co. (DD) are among 68 companies in the Standard & Poor’s 500 Index with payouts that top the 3.78 percent average rate in credit markets, based on data since 1995 compiled by Bloomberg and Bank of America Corp. While Johnson & Johnson (JNJ) sold 10-year debt at a record low interest rate of 2.95% last month, shares of the world’s largest health products maker pay 3.66%. The combination of record-low interest rates, potential profit growth of 36% this year and a slowing economy has forced investors into the relative value reversal. For John Carey of Pioneer Investment Management and Federated Investors’s Linda Duessel, whose firms oversee $566 billion, it means stocks are cheap after companies raised payouts by 6.8% in the second quarter, data compiled by Bloomberg show.
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