Irelands Bonds In More Trouble, Stocks Slide

By: PaddyPowerTrader

Despite a pickup in M&A activity US Stocks posted modest losses Monday with financials leading the slide into the close. The sector shed 1.2 percent, which makes for the worst loss of any major sector. Regional banks were under some of the most pressure; they dropped 2.2 percent. Note of Irish interest MT&T slid 7 percent. The general mood wasn’t helped by chat of layoffs and bonus cuts at Morgan Stanley http://www.cnbc.com/id/39386390 and there was another flash crash Monday. Progress Energy fell from over $40 to around $4 in a few minutes (before recovering). It’s just one stock, but it confirmed that the post May 6 circuit breakers don’t work as advertised — another blow to confidence in the financial markets.

Today in Europe stocks on the move include Michelin plunged 8.3 percent Wednesday after the Paris-listed tyre maker will offer the new shares at €45 apiece, the company said in a statement.Shareholders will be able to buy 2 new shares for every 11 held, it said.

Today’s Market Moving Stories

•The talks with Santander on the acquisition of AIB’s M&T stake (current market value of the 22.4 percent stake is $2.2 billion) stalled again as the old argument of who would have control of the combined entity re-emerged. According to Irish Times, if AIB cannot reach an agreement with Banco Santader, it will proceed with a back-up plan which is to sell the stake to institutional investors in a placement at a discount to the market value ($2.2bn). If all goes to plan and it can get a gain of approx €1.1-1.2 billion on M&T, it will be left with €3.8 billion to raise through further asset sales, a rights issue, the government preference conversion etc to get to €7.4 billion target by end of year. Note MT&T shares price was down 7 percent Tuesday.
•Nothing on the wires, but the USD is stronger across the board today after a WSJ article from a reliable Fed correspondent (Hilsenrath) said the Fed hasn’t yet decided to do more QE but, if it does, it will be of the “softly softly” variety and not another “shock and awe” (first time around, in March 2009, the Fed said upfront they would buy 300 billion of USTs over several months). The article says that QE2, if she sails at all, will involve “new tactics” and will be “a more open-ended, smaller-scale program that they could adjust as the recovery unfolds”. This is in tune with recent public comments by Fed’s Bullard – article says in the heat of the crisis it made sense to jar frozen markets back to life with a big attention-grabbing program. Announcing another big program with a finite end-date now would lock the Fed into a policy that might not be appropriate several months from now, and “a large commitment could destabilize markets by unhinging the dollar or creating fears of a big inflation uptick” Article pretty non-committal though – says Fed hasn’t yet decided to step up its bond purchases, let alone agree on an approach. US Equities didn’t like it (down -0.57 percent), but the dollar did.
•The Nikkei newspaper says the BoJ considering more easing in October. Says could come at their next policy decision on Tues Oct 5 next week. Or they may wait until Oct 28, which would take them closer to the Fed’s decision on Nov 3. Article appeared to take markets a little by surprise this morning. Japanese Govt Bonds (JGBs) found a bid, and USDJPY eventually climbed 10 pips higher. Shouldn’t have been much of a surprise though, given comments by BoJ’s Shirakawa over the past two days indicating he’s slightly more amenable to more easing than he used to be. And of course BoJ’s Miyao last week, even vaguely hinting that full-blown QE might be an option (Japanese full-blown QE involves abandoning the policy rate altogether and just pumping up the cash levels in banks’ current accounts held at the BoJ). Full-blown QE is likely to be a bridge too far for now though, and they’ll probably limit themselves to increasing their JGB purchases each month instead. There’s even a very slim chance the policy rate could be adjusted downwards slightly. Apparently unsterilized intervention is already putting downward pressure on that front – the overnight call rate is now 0.088 percent, well below the BoJ’s 0.1 percent target (see MUTKCALM )
More easing should weaken the yen because: (1) monetary easing almost always hurts the currency in question and (2) in Japan’s particular case, fears that the BoJ could be lured into creating money to fund the govt’s debt is especially real. This is because of a little known clause in BoJ Law, which you won’t read about in the newspapers. Ordinarily, the BoJ is forbidden from buying debt directly from the govt (like the BoE, the BoJ normally only buys govt debt in the secondary market). However, BoJ Law allows the BoJ to roll maturing JGBs they already hold by buying bonds *directly* from the govt. It appears they can do this indefinitely. In other words, the BoJ can buy govt debt directly and the govt *never* needs to pay the BoJ back. Clearly the more JGBs the BoJ holds to begin with, the greater the scope for this clause to be abused. The mere existence of this clause should be a concern to yen bulls everywhere. This is another reason why I don’t think BoJ Law will be changed any time soon – within the existing framework, there is already plenty scope for weakening the yen by convincing investors you are being monetarily and fiscally reckless.
The ECB’s Stark said that a number of non-standard measures will mature in Q4 and will not be renewed. ECB’s Stark says latest M3 data are a “positive sign”. The executive board member said latest money and credit data are “good news” and suggest a turning point has been reached.•In the UK a third estimate of Q2 GDP was unrevised at 1.2 percent q/q, no surprises. What was striking from the breakdown was the confirmation that the strength during Q2 was underpinned by temporary factors. Construction output was revised up yet again – from 8.5 percent q/q previously to 9.5 percent q/q! It is going to be very hard for anything close to that pace to be maintained in Q3. Similarly, government consumption was revised up to 1.0 percent q/q from 0.3 percent q/q previously.
•French housing starts suffered a severe correction in August (-27.8 percent m/m) after an unexpected large jump in July (+35.6 percent m/m). The two figures must be considered together; one month does not make a trend, especially for new homes construction. A similar pattern is also visible for building permits. While starts are still down 7.2 percent when the last three months are compared with the same period of last year, building permits are sharply up, +27.8 percent on the basis of comparison.
•Today President Medvedev signed degree on dismissal of city of Moscow mayor Yury Luzhkov ( in status of governor of the region) with wording “lost president’s confidence”. This is the biggest political change in the country since 2008, which completes removal of Yeltsin’s elite from the key political positions. The event was expected – consequently the main part of negative impact on financial markets has been already priced in.
•French retail sales. Retail sales of manufactured goods in France soared 2.7 percent m/m in July (consensus +0.6 percent) and corrected 1.6 percent in August (consensus +0.2 percent); the data for the two summer months are released together. The bottom line is that consumption has been solid during the summer; the August y/y growth is 1.2 percent, above the 0.9 percent consensus. This shows Q3 GDP growth will be supported by solid final demand; assuming unchanged sales in September, Q3 would be up 0.8 percent q/q.
•Germany’s GfK consumer sentiment survey came in much stronger than expected, well above our forecast which was for a positive surprise. The rise in October (the headline index is always released a month ahead), from 4.3 to 4.9, pushed sentiment up to pre-crisis levels; the current level is the highest since mid-2008. The market consensus expectation was for an unchanged reading of 4.1; September’s figure was revised upwards.

Ireland In More Trouble?
More peripheral panic today with Ireland’s CDS out to a record 519bp and climbing and the bond spreads relative to Germany at fresh highs

So what’s happening ? Well things kicked off Standard & Poor’s credit analyst and chairman of Ireland’s fan club (not) Trevor Cullinan who said the total cost of bailing out Anglo Irish Bank Corp. could exceed the agency’s previous €35 billion forecast under the government’s new plan to split the lender. “Estimates which were previously strongly against our 35 billion now seem to be coming in line with that recapitalization cost,” he said in an interview broadcast by Dublin’s RTE Radio today. “So the government’s kind of Plan B with Anglo means this €35 billion could be exceeded.” That could lead to further “downward rating actions” from S&P, he said.

And if that wasn’t enough pressure fellow rating agency Fitch were also on the wires opining that Ireland could face a credit downgrade unless it convinces markets it has a grip on the final cost of dealing with nationalised Anglo Irish Bank.
“I cannot pretend that the current rating is totally secure but that does not mean that negative action is imminent or inevitable,” Fitch senior analyst Chris Pryce told Reuters in a telephone interview. “I think that Ireland has an opportunity to consolidate its position and further downgrades may be avoided,” Pryce said. “But it clearly is going to be a close run thing.” That contrasts with comments from Fitch just a month ago when it said Ireland’s ‘AA-’ rating was “robust enough” to cope with Ireland’s problems, including Anglo Irish. Pryce cited December’s budget for 2011 and the government’s decreasing majority in the Dail as further risk factors. “There are increasing risks but the Irish government may respond in a way which increases confidence,” he said. “The Irish government has at least one more shot in its bow.”
Overnight Irish press reports (Irish Independent) have said that Thursday evening is when the Central Bank and the Financial Regulator in Ireland provide the estimate of the bailout cost to Anglo. The Irish Independent is saying a number of things in its report this morning-

1) Senior bondholders will not take a hit (either through a direct haircut or restructuring/debt for equity swap) as decided last night in government. Good for 2011 and 2012 senior outstanding bonds.

2) “An offer to buy back €2.4 billion of junior debt for around €500 million is likely to be made when the debt comes out of guarantee tomorrow.” The €2.4 billion is broken down as €1.7 billion LT2 with the remainder in perps including a small number of UT2). €500 million cash tender offer equates to an average of 20-21c across the bonds, but I would suspect there will be some differentiation between the Tier 1 and the LT2 offer, but even then it is not looking generous.

3) The expectation is that the government will outline 2 numbers relating to the bailout cost of Anglo- one lower number looking at expected total losses if they base the total on the losses taken on previous NAMA transfers. The other number will be a worst case scenario reflecting higher losses. There has been a €7 billion figure cited in recent reports as the worst case number.

Company / Equity News

•Akzo Nobel, the world’s biggest coatings maker, declined 3.4 percent as it said it is aiming for sales to grow to €20 billion in the “mid-term.” Akzo Nobel wants to increase earnings before interest, taxes, depreciation and amortization each year, while maintaining a 13 to 15 percent margin, the Amsterdam-based company said today.
•Elsewhere JJB Sports shed 6.8 percent after the U.K. sports retailer said it incurred a first-half operating loss of £24.6 million ($38.9 million).“Since the half-year end, sales have been more volatile,” Chief Executive Officer Keith Jones said in today’s statement. “We have consequently taken further steps to drive autumn and peak season sales through increased promotional activity.”
•Basic resources and mining stocks are seeing some selling pressure Tues. Vedanta, which was today downgraded to “hold” from “buy” at Deutsche Bank, has slid 1 percent while Lonmin Plc has retreated 1.3 percent and Antofagasta, owner of copper mines in Chile, has lost 1 percent as Copper fell for a second day in London as the dollar strengthened against the euro on mounting concern that Europe’s debt crisis is escalating. Zinc, lead and aluminum all dropped.
•Man Group slipped 2.6 percent today after the hedge fund manager that’s buying GLG Partners , said it expects first- half profit to drop by more than 55 percent as income from management and performance fees declines.
•Thomas Cook has an IMS out this morning, allowing a gauge on the health of the leisure sector. It indicates that UK bookings and prices have been relatively stable as they approach the end of the summer season, which was softer than anticipated, as highlighted on the August 11 IMS. Whilst still early in the winter season, they say it has got off to “an encouraging start”. In current trading, summer 10 pricing trends are similar to those revealed in the August IMS. On winter 11, cumulative bookings are tracking ahead of planned capacity increases in all markets, except Central Europe, making an encouraging start to the period. Pricing trends, bookings and booked load factors in most of their major markets are currently ahead of last year. In the UK, bookings are 4 percent ahead of last year and the programme at 34 percent booked is 1 percent ahead of last year, with selling prices also 1 percent ahead. Whilst bookings got off to a strong start in Germany, the aviation tax is impacting of late, though prices are ahead yoy. Summer 11 bookings are only available in the UK and “early bookings are good”, up 9 percent with average selling prices 4 percent ahead. The statement indicates a leisure industry still in reasonable health. We may get latest trends from Ryanair at its Investor Day tomorrow, at Stansted Airport.

•DCC has this morning announced the appointment of a new non executive director to the board. Mr Van de Walle is a former CEO of Rexam and previously held a number of senior executive roles in Royal Dutch Shell. Following his appointment the DCC board will extend from 10 to 11 directors. The appointment of Mr Van de Walle is in line with DCC’s comments at the time of its AGM that it would seek to bring further international expertise to the board reflecting its growing profile beyond Ireland and the UK
•Daily Mail has issued a trading statement this morning ahead of its year end on October 3rd. Underlying revenue increased by 2 percent last year. The group has pointed out that trading remains robust with underlying profit growth expected with improvements in margin, driven by the positive revenue trends and effective cost control. Daily Mail also notes a continued reduction in net debt and that it is on track towards its target of 2.5x net debt : EBITDA by its financial year end. The company expects full year EPS to be ‘at least’ in line with expectations. The read through geographically for Independent News & Media is limited. However, the group is pointing out a broad recovery in advertising with business to business and consumer media showing signs of growth.
•Norkom has announced that it has signed a partnership agreement with MasterCard that will enhance MasterCard’s Expert Monitoring Solutions (EMS) fraud management service. This announcement is the second of its type since the group’s profit warning on August 13th and marks a new and creative way for Norkom to deploy and increase the reach of its product base. We will be looking for further announcements on similar deals, along with new client wins in particular, over the coming months.

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By The Mole
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