Quick Glance into Ryanair

Ryanair, the Dublin-based airliner known for its operation of low-cost passenger airline service, is in the news for signing an order from The Boeing Company worth $15.6 billion. Ryanair is one of the few airliners that orders exclusively from Boeing, and has now expanded its fleet by 30% to over 400 units in order to grow its capacity to over 100 million across Europe by 2018. Boeing (NYSE: BA), which has seen its stock price soar by over 10% in the past month to close at around $85, welcomed the news, as its Commercial Airplanes CEO Ray Conner remarked the Next-Generation 737 "as the most efficient, most reliable large single-aisle airplane flying today," which "has been and will continue to be the cornerstone of the Ryanair fleet."

Ryanair Holdings (NASDAQ: RYAAY), the holding company for Ryanair, has market cap of around $12 billion. Its net profit margin in Q4-2012 fell to 1.87% after posting 12.76% for Q3. A visit to Ryanair's website indeed illustrates the low-cost business that it operates. There's a roundtrip from London to Dublin one month in advance available for only 44 GBP. On flight search websites that offer comparison, it becomes even more evident that the $56 value is significant that of its competitors, including $194 from British Airways. The low fares do come at some costs though; as users go on the website to search for flights, they are prompted to enter a "security code," which is obtained by viewing a short advertisement. Nevertheless, the colossal deal was signed today in New York.

Sources:

• http://www.forbes.com/sites/davidewalt/2013/03/19/boeing-lands-a-15-6-billion-737-order-from-ryanair/
• http://www.nytimes.com/2013/03/20/business/boeing-secures-15-6-billion-order-from-ryanair.html?_r=0
• https://www.google.com/finance?q=NYSE%3ABA&ei=yKFIUfj7HZL-rAGRew
• https://www.google.com/finance?q=NASDAQ%3ARYAAY&ei=vpZIUai9A4eNrAH9rgE
• https://www.bookryanair.com/SkySales/booking.aspx?culture=en-gb&lc=en-gb
• http://www.skyscanner.com/flights/lond/dub/130420/130427/airfares-from-london-to-dublin-in-april-2013.html

Currency Movements and Global Macro Calls

2013 Year Ahead Report published by Bank of America Merrill Lynch Global Research features 10 macro calls on the world economy. One call regarding interest rates and currencies states that "the U.S. dollar and euro could rally on the global recovery and greater fiscal clarity, pushing the yen lower and emerging market currencies higher." Another recall, regarding the crisis in Europe, states that "the big tail risk of a eurozone breakup has likely passed."

With this theme in mind, it was announced on Monday that Japan would further devalue its currency. It has already fallen 14% since October, and this has been helping the country's exports. Prime Minister Abe has "[stepped] up the pressure for the Bank of Japan to ease monetary policy" and increase the inflation target to 2%. The yen currently trades at 88.95 on the US dollar, which is near its 52-week high. While the yen has been pushed lower, the euro has hit an 11-month high against the US dollar, at $1.3382. Yields on Italian and Spanish 10-year bonds have stabilized to 4.19% and 5.03%, respectively. These numbers do go along the macro call from report that "European economy should stabilize as the year progresses."

Sources:

• http://money.cnn.com/2013/01/13/news/economy/japan-yen/index.html?iid=HP_River
• http://www.reuters.com/article/2013/01/14/us-markets-global-idUSBRE88901C20130114
• http://newsroom.bankofamerica.com/press-kit/bofa-merrill-lynch-global-research-2013-year-ahead-report
• http://www.bloomberg.com/quote/USDJPY:CUR
• http://www.bloomberg.com/markets/rates-bonds/

Eurozone Downgrade

On Friday, the financial crisis in Europe took another turn as Standard & Poor, the same rating agency that cut the AAA rating for United States, downgraded the ratings for 9 euro-zone countries, citing that "the policy initiatives taken by European policy makers in recent weeks may be insufficient to fully address ongoing systemic stresses in the euro zone." Among the top-notch ratings downgraded were France and Austria, which like the United States, fell to AA+. Italy saw its rating fall to BBB+, dangerously close to the junk bond level. Other countries seeing their ratings fall were Slovenia, Slovakia, Spain, Malta, Cyprus, and Portugal. However, avoiding the downgrade was Germany, which kept its AAA rating and its role as the stronghold in the euro-zone.

Although the downgrade was predicted, stock markets on both sides of the Atlantic fell Friday. London's FTSE 100 and Germany's DAX were both done about 1.5%, while indexes in United States fell about 0.5%. The downgrades will mean that the cost of borrowing will be higher for these European nations, and the impact will be seen in two days when France sells over 8 billion euros in bills. After the S&P announcement of increased European bonds, investors sought the US treasuries, sending the yield on 10-year note to 1.87%. Similarly, yield on Germany's 10-year also decreased to 1.76% as the country maintained its strong rating. Meanwhile, as the collective risk of the euro-zone governments increased, demand for euro decreased as the euro hits a 16-month low against the dollar, at $1.2665.

Sources:

• http://money.cnn.com/2012/01/13/markets/sandp_europe_downgrade/index.htm?hpt=hp_t3
• http://www.bloomberg.com/news/2012-01-13/france-to-lose-aaa-from-s-p-afp-says-citing-state-official.html
• http://www.nytimes.com/interactive/2012/01/13/business/nine-euro-countries-ratings-are-cut.html?ref=global

December Jobs Report

On Friday, the Labor Department announced that 200,000 jobs were added into the economy in December. Beating analysts' estimates of 150,000 gain, this dropped the unemployment rate to 8.5%, the lowest level since February 2009. Overall for 2011, the economy added 1.6 million jobs, the most in five years. However, the US stock markets didn't respond mildly to these news. Dow and S&P 500 posted marginal losses.

Despite the latest signs that the economy is improving, employment still remains 6.1 million below the levels before the recent recession. Even with December's rate of growth, it will still take over two years to recoup such amounts. Moreover, seasonal variability accounted for much of the growth seen in December. Contribution to the growth were construction jobs, boosted by mild weather. Messenger and retail industries also added significant number of jobs for the holiday shopping season. As colder months arrive and the holiday season wanes, growth in these sector may slow down.

Furthermore, European situations continue to worry investors globally. Unemployment in the 17 nations that use the euro is at 10.3%. Italy's 10-year bond yield climbed to 7.09%, above the 7% threshold that impelled bailouts in Portugal and Ireland. The Spanish levels are dangerously resting at over 5.6%. The euro fell to $1.2696, the lowest since September 2010. The yield in US Treasury 10-year note fell to 1.96%. At first, this may contradict the general rule that as interest rates increase in a country, money and investment will flow into that country and appreciate its currency. However, dollar is appreciating against the euro despite decreasing interest rates in US and increasing rates in Europe. In this scenario, it can be explained that higher yield in Italian bonds are due to greater risk. Investors instead choose to put money in the low-risk US Treasury bonds. As the demand for US Treasury bonds increases, the bond yield falls.

Sources:

• http://www.reuters.com/article/2012/01/06/us-usa-economy-idUSTRE7BM0AB20120106
• http://www.latimes.com/business/la-fi-stocks-20120106,0,1764620.story

Europe at the Brink – A WSJ Documentary

The Wall Street Journal recently published a documentary about the origin of debt crisis in Europe, citing imperfect union as the root cause. After World War II, economic ties were sought to prevent future conflicts. 1957 Treaty of Rome established European Economic Community. In the next decades, the idea of a unifying currency was sought, finally leading to the rise use of euro today. People hoped that this would be the start of a united Europe. However, while there was monetary union, there lacked fiscal union. All countries shared same policies regarding the supply and value of euro, but each country differed in its growth and governmental policies, helping to plants the seeds of current situation. Due to low borrowing costs, counties like Greece took on debt to offset its own weak internal growth.

In October 2009, Greek debt projected to be 3% of its GDP was actually 12%. Foreign investors panicked, and costs of borrowing to Greece increased. Given the abundance of countries and governments in the euro-zone, actions were slow to be implemented. In May 2010, Greece needed a bailout for its debt, but anxiety about Greek fiscal soundness continued. Furthermore, the worry began to spread through the continent. Particularly distressing was Italy, the euro-zone’s third largest economy.

The question looms whether to form a tighter fiscal union or let the countries dissolve further apart. The premise of the euro was for the countries to converge their economies, but such has not been observed. What direction Europe would go also remains a mystery; some even speculate one or more members leaving the zone this year. Disciplined approach to national finance is now crucial. The stake of the entire world economy is contingent on the approaches Europeans take.

Source:

• http://blogs.wsj.com/dealjournalindia/2012/01/04/europe-at-the-brink-%E2%80%93-a-wsj-documentary/

Berlusconi to Resign

On Tuesday, Italian Prime Minister Silvio Berlusconi announced that he will resign after parliament approves economic reforms. The announcement comes after Parliament passed a budget measure with 308 votes, but saw over half of the 630 lawmakers not taking part in the vote, a vivid indication that Berlusconi no longer has the support of a majority in Parliament.

Italy has the third largest economy in the eurozone and eighth largest in the world. Struggling European countries like Greece, Ireland, and Portugal already had to be bailed out. Although currently solvent, Italy poses a tremendous challenge with its 1.9 trillion euro debt, or about 120% of its economic output, that Europe can't afford to bail out. The Italian bond yield reached 6.77% on Tuesday, dangerously approaching the 7% mark that prompted bailouts for Portugal and Ireland.

In the United States, the news of the impending resignation pushed Dow up 101 points to close at 12,170.18. Stock markets in Italy, Germany, and France also rose slightly.

Sources:

• http://finance.yahoo.com/news/Berlusconi-promises-to-resign-apf-3530821317.html?x=0&sec=topStories&pos=2&asset=&ccode=
• http://edition.cnn.com//2011/11/08/world/europe/italy-economy/index.html
• http://finance.yahoo.com/news/Stocks-rise-after-Berlusconi-apf-803223079.html?x=0&sec=topStories&pos=4&asset=&ccode=