Market Summary
Bears were in the reign as trading was overshadowed by national events due to uncertain US-Pakistan relations and the increasing severity of the memo scandal. Negative sentiment was evident throughout the week as investors exhibited increasingly cautious behaviour. The index closed at 11,028 falling by 111.38 points. Trading volumes declined by 7.30 million and a total of 317 stocks were traded on Friday.
Yields surged to their highest ever levels since May 1997 to 6.47 percent on the auction of three billion Euros, which was up from 6.29 percent that the sovereign government paid last month. Yields on 5-year bonds were 6.69 percent after the auction. These bonds mature on September 15, 2016 and carry a coupon rate of
4.75 percent. Confidence surrounding the ten year Italian bond yield seemed to plummet as yields were back up again well jumping past the 7 percent anxiety benchmark on Wednesday to pass 7.115 percent.
Bouncing back, the KSE 100 index climbed 0.63% by 72 points to close at 11,465 in the last trading session with 43 million shares traded. The market capitalization increased by Rs 18 billion to Rs 2,982 billion. Out of total 298 shares traded, 102 declined, 101 advanced, while 95 closed unchanged. A flurry of activity was witnessed from Thursday’s trading session onwards with positive expectations between the SECP and KSE collectively agreeing on relaxing the rules for capital gains tax collection. KSE members developed a consensus that tax should be collected under the Presumptive Tax Regime (PTR) instead of on the sale of shares. In addition, an agreement was made on differing capital adequacy requirements for both traders and stock clearing members.
Mixed investor sentiments prevailed throughout the week with the market reflecting pessimism on Friday as the index closed at 11,372 falling by 185 points. Trading volumes declined by 9.70 million on Friday dipping the index by 1.60%.
The KSE 100 share index witnessed an overall bearish trend amid speculation regarding the SBP’s monetary policy to be announced next week. The index lost 81.27 points closing at 11,648.14 on Friday.
Upon the conclusion of the thirteenth euro zone summit, officials released a public document highlighting the key aspects which have been outlined in seven main points:
As the thirteenth EU summit aimed at devising solutions to combat the debt crisis reached halfway, policy makers debated a number of ideas raising hopes across global markets that a resolution would be reached. On Monday, markets across the globe advanced, depicting cautious optimism in investor sentiment. U.S. stock index futures edged higher as futures on the Dow Jones Industrial Average rose 32 points to 11789. The S&P 500 Index futures gained 3 points to 1,238.20, while Nasdaq 100 futures added 9 points to 2,343.25 (Reuters). Futures for the Euro STOXX 50, Germany’s DAX and for France’s CAC were all reported between 0.8 and 1 percent. In addition, analysts predicted Britain’s FTSE 100 to open as much as 1.1 percent higher (Bloomberg). The Euro rose as much as 0.4 percent to $1.3951, trading at $1.3897 at 9:49 a.m. (Bloomberg) in Berlin reflecting optimism as negotiations are underway for a road map for a solution to the crisis.
According to the IMF chief, Christine Lagarde stated that European leaders have made “very good progress” on plans to resolve the crisis. French and German leaders announced that the group had developed a consensus which included a decision on the European Financial Stability Facility (EFSF). Contrary to the French plan of increasing the size of the bailout fund, according to reports, Germany was successful at achieving of its summit aims by proposing the pledging of the EFSF as collateral to guarantee government bond sales. Another option placed on the table includes setting up an EFSF-insured fund which would seek private investment in troubled bonds. A separate statement released indicated the need for ‘adequate’ IMF resources to assist the troubled region in addition to contributions from surplus countries.
Further details are yet to emerge on Wednesday on the decision to increase the EU bailout fund and a 50% write-down of Greek debt repayments. However, the meeting was not without fury as an argument reportedly erupted between the French President, Nicholas Sarkozy and British Prime Minister David Cameron. The French President claimed that he was “sick” of the British Prime Minister giving European lenders advice on how to tackle the crisis and was quoted as saying “We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.”
EU leaders have accepted a framework for a recapitalization plan for European banks which is estimated to be in the €107 billion to €108 billion range. Furthermore, leaders mutually agreed on the reinforcement of economic regulations and governance within the EC. On the other hand, negotiations with banks to take losses on their bond holdings advanced slowly and the final decision is expected upon conclusion of the summit which will take place on Wednesday. The ECB has bought €165 billion worth of bonds in an effort to pacify markets. Global financial markets are on full alert expecting what they call ‘a comprehensive solution to the euro zone problem.’ Thus, Wednesday’s decision will clearly highlight which direction policy makers intend to drive their debt-ridden nations.
In the ongoing battle against the euro zone debt crisis, policy makers have been continually engaging in frequent meetings to formulate solutions in order to desolve the crisis amidst the threat of an imminent Greek default. The European Central Bank President Jean-Claude Trichet issued a warning depicting the gravity of the situation, “the crisis is systemic and must be tackled decisively.” Despite the display of solidarity and an indication of support from the European Central Bank, interbank lending rates within Europe depicted a continuous rise amidst growing concern over European banks’ ability to handle the debt crisis. Three-month Euribor rates, traditionally the main gauge of unsecured interbank euro lending, rose to 1.570 per cent from 1.567 per cent.
Germany and France have promised to propose a comprehensive strategy to fight the debt crisis at an EU summit delayed until October 23. The two nations currently differ and need to resolve differences over how to recapitalise banks; whether to force a Greek debt restructuring or stick to a voluntary deal with private bondholders on how to use the euro zone’s rescue fund. Jose Manuel Barroso, president of the EC, told the European Parliament that the EU needed “compatibility” if the crisis is to be resolved. “How can we speak about co-ordination and integration in a disintegrated manner?” he said on Wednesday. “It is obvious that we need a community approach.”
German banks are bracing for losses as high as sixty percent on their Greek government debt holdings as European officials push for more private-investor involvement in rescue of the debt-stricken country. Greek ten-year government bonds are trading at about fourty percent of face value. Some German lenders have already written down Greek holdings to market levels, while lenders that booked smaller write downs may face further losses.
France is in favour of converting the euro zone’s bailout fund, known as the European Financial Stability Facility (EFSF), into a bank which could then acquire leveraging capacity. If this occurred, it would enable the bank to buy sovereign debt and pledge that as collateral to further borrow funds from the European Central Bank. Several other ideas have been put on the table by French officials including the provision of support of other European and international funds.
The European Banking Agency regulator is currently in the process of examining various financial institutions across the region in an attempt to recapitalise many of the affected institutions. The main purpose of the recapitalisation is to ensure that financial institutions are in a position to withstand losses in the event of a Greek default. According to analysts, Banks may be required to maintain a nine percent capital buffer to absorb sovereign risks, up from the five percent core capital level used in July’s stress tests. Eurozone officials say they will measure whether the banks can retain at least nine percent in high-quality reserves measured against their investments in bonds and other risky assets, even after losses on their holdings of government bonds. The nine percent standard would match that of a new set of rules called Basel III, which countries do not have to implement until 2019. In addition, European finance ministers are in process of devising a timeline for banks to strengthen their balance sheets under the Basel III framework. Germany opposes this as banks fear that the new set of capital requirements will become increasingly stringent and these measures will further jeopardise the stability of their banks.
October 23rd is currently viewed as a deadline for officials to lay out a plan to combat the crisis, which has placed Greece under imminent default, shaken world markets and undermined confidence throughout the globe including the stability of the Euro. To regain immediate assistance, Greece should take into account the possibility of private investor funding from outside the euro zone. Japan has indicated such an interest on the condition that a fundamentally sound plan is drafted and implemented within the region.
The State Bank of Pakistan made a momentous shift in monetary policy by slashing 150 bps to bring policy interest rate to 12%. This was the first monetary policy announcement after the government decided not to abide by the “Alien” IMF programme of USD 11 billion on September 30, 2011
Qatar displayed an indication of trust and support within the faltering Greek economy as Qatar Holdings signed a deal on Saturday to buy a stake in the London-based European Goldfields from the Greek building firm Ellaktor. Qatar Holdings is set to buy a 10 percent stake from the 25 percent stake which Ellaktor currently holds in Goldfields. Furthermore, Qatar Holdings will invest another 600 million dollars in European Goldfields (Reuters).
The CEO of Qatar Holdings, Ahmed al-Sayed told reporters “In total, we will invest in the company about one billion dollars.” Qatar Holdings was formed in 2006 and is an investment house which invests in private and public equity globally. The investment from Qatar is a positive sign for the Greek economy and indicates a display of support and solidarity between the two nations. CEO El-Sayed also said Qatar was “examining different opportunities in the country.”
During July, Greece granted a permit to European Goldfields to initiate mining for gold in the north of the country. This move is expected to turn European Goldfields into the European Union’s largest primary producer of gold. This deal comes a year after Qatar and Greece signed a memorandum of understanding to attract five million dollars of Qatar investment within Greece. “We have built a very strong bond of mutual respect, and we Greeks are especially pleased that this bond leads to investments in our country,” stated Greek Prime Minister George Papandreou after a meeting with Qatar’s Emir Sheikh Hamad bin Khalifa al-Thani.
With expectations for the Greek economy to contract by 5.5% in 2011, Greece is in dire need of foreign investment as the economy has been in a recession for the past three years and is expected to further shrink next year. Greece, which has been trying to implement austerity measures, welcomed this deal as it has reportedly been in talks with Qatari officials to attract foreign investment in order to avoid fears of a default on its debt.
This investment is the second major deal made by Qatar in the past two months. During August, the resource abundant nation provided funding for the merger of two of Greece’s largest banks, Alpha Bank and Eurobank. Paramount, a company controlled by Qatar, will own the stake after taking part in a 1.25 billion euro rights offer and fully taking up a 500 million euro convertible bond issue (Reuters).