Trade War

08 Aug 2019

Irish Economy: NTMA cancels another €500m of legacy debt

Ireland’s NTMA yesterday announced the cancellation of €500m of the Irish 2051 Floating Rate Treasury Bond that had been outstanding.

These bonds are linked to the landmark IBRC transaction in 2013, which was a major milestone on Ireland’s journey back to creditworthiness. To date the NTMA has repurchased €15.5bn (nominal) of the €25bn of bonds issued as part of the ‘Prom Note’ deal, with €2.0bn of these repurchases taking place in the year to date. All of the bonds were held by the Central Bank of Ireland, whose holdings have previously attracted adverse comments from the ECB relating to monetary financing concerns, although Frankfurt has since acknowledged the progress made in reducing the stock of IBRC-related assets. While the effective servicing cost of the IBRC-related bonds is immaterial (as the Central Bank repatriates most of its profits to the Exchequer), the repurchases serve to improve the optics of Ireland’s headline debt metrics.

The continued tidying up of legacy matters is another reminder of the progress the State has made in recent years. We expect that all of the two remaining IBRC-related bonds will be repurchased over the medium term, several decades ahead of their scheduled maturity dates (which are June 2051 and June 2053 respectively).

Kerry Group: Solid H119, guidance tightened

Kerry this morning issued a solid set of H119A numbers, reporting a 13.9% increase in adj. EPS to 164.1c from a 12.6% increase in trading profit to €382.9m and 10.7% increase in Group revenue to €3.57bn. At a Group level LFL revenue growth of 3.3% comprised volume growth of 3.3% and flat pricing. The outperformance versus our forecasts was in contribution from acquisitions (4.7%) and FX tailwinds (2.7%). On a constant currency basis, management has marginally tightened adj. EPS guidance to the 7% to 9% range from 6% to 10%. 

At a divisional level, Taste & Nutrition (89.0% of H119A trading profit) reported a 14.1% increase in trading profit to €388.1m, from a 13.0% increase in revenue to €2.91bn. LFL revenue growth of 3.8% was driven by a solid 3.8% increase in volumes while pricing was flat. At the reported line, revenue grew 13.0% as a 5.9% contribution from acquisitions was added to by a 3.3% FX tailwind. Growth was particularly strong in developing markets with APMEA volumes up 9.6%, while the Americas and Europe showed solid progress growing volumes by 2.7% and 2.2%, respectively. 

The Consumer Foods division (11.0% of H119A trading profit) reported a 0.4% increase in trading profit to €48.0m from a 0.6% increase in revenue to €689.4m. LFL revenue growth of 0.3% (0.6% volume; -0.3% pricing). Reported revenue incorporated a 0.3% FX tailwind. This is a solid outturn in a market that management describes as “challenged” given lower consumer confidence. 

H119A results are largely in line with market expectations but guidance has been marginally tightened downwards.

Brexit round-up

The pound remains vulnerable as no-deal planning, and remainer plotting continue to generate headlines. The Sun is reporting that Boris Johnson could seek an election immediately after 31 October, after having delivered Brexit as promised. Meanwhile, the Telegraph writes about remainer plans to force parliament to sit through the autumn recess to give them more time to block a potential no-deal Brexit. 

The 3-week break, which runs from late-September to mid-October, is timed to coincide with the annual party conferences, but remainers will try to use this time to attempt to take control of Parliamentary business, and force government to agree a deal or request an extension. A previous plan to oust Boris with a vote of no confidence and form a national unity government seems likely to struggle with a lack of Labour support. 

EUR/GBP traded close to 0.9250 yesterday, its highest level in almost 2 years. This is the 3rd highest level in EUR/GBP since the Brexit vote, having previously topped out at 0.9306 and 0.9415. Perhaps more significant than how high EUR/GBP goes, is how long the period of weakness might be sustained. The longest previous run of consecutive closes above 0.92p was in August 2017, when EUR/GBP traded above that level for 5 consecutive days. We are already on day 4 so far, of what may prove to be a much longer run of GBP weakness.


Market jitters continue

The mood remains a mixed again this morning, as investors continue to weigh up the latest developments in the US-China dispute and what this means for the global economic backdrop. 

Better than expected China export data has helped to support the mood this morning. Yesterday, the S&P500 moved from a position where it was down nearly 2% in the early session to close 0.1% higher, with comments from the Chicago Fed’s Charles Evans hinting he would be willing to consider more easing. Meanwhile in Asia, the Shanghai Composite is up 0.9% and the Topix is flat. US stock futures point to a rise of around 0.5%. 

In bond markets, the major moves yesterday outlined the nervousness over the global economic outlook as bond yields fell sharply across geographies and maturities. The 10-year US Treasury yields is currently at 1.71%, whilst 10-year German bund yields moved below -60bp yesterday, currently -59bp. The spread between 3-month T-bills and 10-year US Treasury bills has been a key focus with the yield on 3-month paper more than 41bp above the 10-year at one point yesterday, sending an ominous warning over the outlook, with a negative spread almost always preceding  a recession ahead, over the past 50-years. 

Note that the yuan remains a focus again this morning, currently at 7.0452 after a fixing above 7 (i.e. weaker rmb) for the first time since 2008; the yuan is currently trading at rmb7.0039.


UK housing market slows after June bounce 

The RICS house price balance softened in July, with their headline indicator falling to -9% where consensus was for just -1%. It has been thought that the UK housing market was stabilising with the June result coming in at -1%, but recent developments have led to further caution from households amidst greater political and Brexit uncertainty. 

However, we note that this does not look to have dampened demand noticeably, with the new enquiries balance remaining relatively stable at 8%. The RICS release comes a day after the Halifax house price index, which also surprised to the downside at -0.2% (m/m), which was the second consecutive negative monthly print.

Economic Releases

09.00 EZ ECB Economic Bulletin

13.30 US Jobless Claims