Market Musings 15/6/11
Over the past 48 hours the main focus for me has been on peripheral Europe. We’ve seen Irish bond yields rise to a euro-era high, not helped by the decision of LCH.RepoClear to hike margins on our sovereign debt to 75% and further downgrades for Greece. Greece is now the lowest-rated sovereign in the world, having fallen below Ecuador, Jamaica, Pakistan and Grenada. The muddled response of the ECB and European Commission to the peripheral countries’ problems to date shows no sign of abating. Indeed, the next head of the ECB, Mario Draghi, ruled out a medium term facility for Irish banks yesterday, which to me means that our banks will continue to limp on from crisis to crisis, thus providing: (i) Ongoing hits to the already fragile consumer confidence here; (ii) Headlines to frighten away prospective private investors; and (iii) Regular sticks for the market to get beaten with.
As regular readers will know, China is a source of major concern to me, given the risks that are intensifying around what is the main engine for world economic growth at this time, particularly in terms of its construction sector. I note that in its latest effort to contain the froth in this area, the PBOC has raised Chinese banks’ reserve requirement ratio for the 9th time since October. The fact that it has been raising this ratio on a monthly basis for 9 months now makes it clear to me that efforts to deflate the bubble thus far have proved to be too little, too late. And as we’ve seen in Ireland, property bubbles can end very, very badly. So it’s no surprise to see the latest rating moves by S&P on China’s property developers.
Turning to corporate Ireland, signs of boardroom tensions at One51 emerged this week. The timing for me is interesting given that the group is presumably doing better on the valuation front on the back of potential corporate activity involving one of its portfolio shareholdings, IFG, while the NAV will have also benefited from the restoration of significant dividend payouts at one of its core shareholdings, Irish Continental Group. However, with the shares listed on an illiquid grey market it’s difficult to see how investors will get an appropriate lift from positive developments such as those. The board of One51 should move to secure a listing on the Irish Stock Exchange to improve liquidity and transparency.