05 Nov 2018

Market focus switches to the US midterm elections

This week’s key market focus will be the US midterm elections which are being held on Tuesday. Indications point to the Republicans losing their majority in the House of Representatives but retain the Senate. If the Democrats do gain control of the House, then it may hamper the administration’s plans to push ‘tax reform 2.0’ through Congress.

Also note that there is an FOMC decision due on Thursday at 7:00pm. While we do not expect the Fed to announce any changes to its key policy rates, it may offer some insight into how recent market volatility may (or may not) affect policy tightening going forward. US data will return to usual publication times as their clocks went back Stateside over the weekend. The main release is set to be Monday’s ISM non-manufacturing index, particularly after it played a key role in October’s selloff when it reached an all-time high. Later in the week we are set to get the preliminary estimate of consumer sentiment from the University of Michigan (Friday).

 

UK this week

Stripping out all things Brexit related, the key data release will be the first estimate of GDP for Q3 on Friday, which we expect to have shown growth of 0.6% across the quarter. Prior to that, we will get some indication of how growth is shaping up at the beginning of Q4 from the October services PMI on Monday. Figures on the housing market will then come from both RICS and Halifax, while the SMMT car registration figures may be more closely watched than usual given that new emissions tests look to be weighing on growth more generally in the UK (and the Eurozone). Indeed, the key focus in continental markets next week will be manufacturing figures for various EU19 countries for signs of whether car production is beginning to normalise.

 

Europe & ROTW this week

First up we get the EZ November Sentix investor confidence print for October with EC chief negotiator, Michel Barnier, due to give a speech later in the afternoon. On Tuesday we have some ECB heavy-hitters speaking along with EZ PPI data, German factory orders and final EZ PMI’s. Come Wednesday, we’ll get EZ retail sales and German industrial production. In China we get trade figures on Thursday and CPI inflation on Friday. In Japan, investors are set to face the preliminary leading index and core machinery orders on Wednesday, in addition to trade figures.

 

Irish Banks: AIBG and BIRG both perform well in EBA stress tests

Friday evening’s release of the EBA/ECB/ESRB EU-wide banking stress tests delivered a solid outcome from AIB Group and Bank of Ireland Group in both the baseline and stress scenarios covering the 2018-2020 period. In line with the vast majority of the other EU banks undertaking the stress tests, we see no capital or dividend impact occurring as a result of the stress tests. AIBG, which was one of the poorer performers in the 2016 round of stress tests (4.3% FLCET1 under stress scenario), delivered a 18.7% FLCET1 (21.1% transitional/regulatory) in 2020 under the baseline scenario, and 11.8% FLCET1 (14.8% transitional/regulatory) in 2020 under the adverse scenario. This compares against an actual FLCET1 of 17.9% (21.6% transitional/regulatory) at end September 2018. We see this as a strong result for AIBG given the still sizeable level of NPEs which remain on balance sheet, with the group retaining a significant buffer to the regulatory SREP level (9.725%) in even the adverse stress scenario, and a c.600bps drawdown on FLCET1 in 2020 in this scenario (vs current levels) also perhaps lower than the market may have expected given the large stack of NPEs. BIRG delivered a 15.1% FLCET1 (16.2% transitional/regulatory) in 2020 under the baseline scenario, and an 8.9% FLCET1 (11.2% transitional/regulatory) in 2020 under the adverse scenario.

 

This compares against an actual FLCET1 of 13.5% (15.1% transitional/regulatory) at end September 2018. We would see this c.450bps drawdown on FLCET1 in 2020 in the adverse stress scenario (vs current levels) as a positive outcome given the remaining stack of NPEs which the bank continues to work through, and note that the group would retain a FLCET1 in excess of the SREP level of 8.625% in even this scenario.

 

Irish Economy: Services PMI moderates in October

The latest IHS Markit Services PMI report, released this morning, shows a moderation in the rate of growth in activity. The headline PMI was 57.2 in October, down from September’s 58.7 outturn and signifying the slowest pace of growth in seven months (although 57.2 is still consistent with a sharp pace of expansion). The report shows that while New Business continues to grow at a healthy clip, the rate at which it is doing so has (like the headline PMI) cooled to a seven month low. In terms of overseas demand, we note that panellists cited the UK as a source of strength.

 

Companies continued to add to headcounts at a strong rate (October’s pace of expansion was the strongest in 10 months), which contributed to Backlogs of Work posting their slowest increase since September 2016. This follows last week’s Manufacturing PMI release, which showed a contraction in Backlogs of Work in that sector. Input Costs continue to grow sharply, although firms are having success in passing these through to end-customers (charge inflation was the joint-highest in the past seven months). The forward-looking Confidence index was little changed from September’s strong reading. As a result of today’s release the Composite PMI has slowed to a seven month low of 56.1, although this is still consistent with a sharp rate of growth. Recent softness in Backlogs of Work for both Manufacturing and Services firms here is a bit of a concern given the more uncertain international backdrop, although we are reassured by the apparent ease with which Irish businesses are still able to push through cost recovery price hikes.

 

Dalata: Report that debt refinancing has been agreed

Dalata has agreed a €700m debt refinancing according to a report in this morning’s Irish Times. At the time of its interim results in September Dalata noted that it was “currently reviewing its refinancing options and strategies with banking partners” and expected to have a new facility in place within the next six months, i.e. by Q1 2019. This morning’s report notes that the new debt package will be comprised of a €200m term loan, a €325m revolving credit facility and pre-approval for a €175m top-up if required. Two new banks, HSBC and Banco de Sabadell, will join the group’s existing lenders (Bank of Ireland, AIB, Barclays and Ulster Bank) in the consortium. Dalata will also implement a corporate restructuring in order to provide security for the revised debt facilities, according to the report. DHG Glover, a new entity, will hold most of the group’s assets and properties and provide the collateral to lenders.

 

Irish Economy: October Returns a mixed bag

Exchequer Returns released on Friday eveningby the Department of Finance (DoF) were a bit of a mixed bag, with a large (but not unexpected) beat in the month of October accounted for by corporation taxes, while the other headings were broadly in-line. October's tax receipts, at €4.6bn, were €721m or 18.4% ahead of profile (guidance), helping the year to date revenue to come in at €42.2bn, +6.8% y/y and 1.4% ahead of profile. The October beat was down to corporation taxes, which were €773m or 96% higher than profile. This positive "surprise" relative to guidance provided last year was flagged in last month's Budget and is down to IFRS15 implementation. FY18 tax receipts are guided to grow by 8.6% y/y, 180bps ahead of the growth rate in the first 10 months of the year, although further IFRS15 related inflows should close that gap. Undershoots in both net voted (discretionary) spending and national debt servicing costs, respectively €168m and €219m lower than expected, are contributing to a €1.4bn better than expected general government balance of -€4.7bn in the year to date.

 

Yew Grove: Share premium move paves the way for maiden dividend payment

On Friday Yew Grove announced that the reduction in its share premium account, facilitated by Court approval and the registration of that Court order with the Registrar of Companies, has now become effective. This move paves the way for the REIT to pay its maiden dividend in early 2019. In the admission document released at the time of its IPO in June, YEW signalled its intention to seek Court approval to reduce its share premium account, creating a special distributable reserve in the process out of which dividends can be paid. Some €70.25m previously held in the share premium account has been cancelled and will be transferred to the distributable reserve, leaving a balance of €4.0m in the share premium account. This move has no impact on YEW’s underlying net assets.

 

UK manufacturing PMI

September’s manufacturing PMI posted a rise to 53.8, from a revised 53.0 in August. In short, we are not confident that this trend will be extended in October. The month has witnessed a disappointing amount of progress in Brexit discussions, with increased focus on the possibility of ‘no deal’. Indeed the recent CBI quarterly Industrial Trends Survey showed a sudden decline in business optimism, together with a marked deterioration in the monthly responses on expected output and order books. In addition, the ‘flash’ Eurozone manufacturing PMI fell back again in October. This index now stands at 52.1 from its recent peak of 55.1 in July. Global trade tensions appear to be a major factor here and the UK (of course) will not be immune from these events.

 

Economic Releases

09.30 UK Manufacturing PMI
12.00 UK BoE Interest Rate Decision
12.30 UK BoE Gov Carney Speaks
12.30 US Jobless Claims
13.45 US Manufacturing PMI