Yes vote prevented market slump, say brokers

A DRAMATIC fall on the Dublin stock market was avoided yesterday due to the resounding Yes vote in the Lisbon Treaty referendum, according to stockbrokers. Traders had feared that a No vote would send the Iseq tumbling by as much as 20 per cent yesterday, but instead the index of Irish shares held its value.

However, Irish bond spreads continued to widen yesterday in comparison with German debt.

The initial market reaction on the bond market was favourable, with the spread between 10-year Irish securities and the German bund, a measure of the market’s assessment of the quality of Irish debt, tightening in early morning trade.

At one point the spread dropped to about 159 basis points, but closed at just over 167 basis points.

According to Simon Barry, chief economist at Ulster Bank Capital Markets, the initial tightening was due to a reduction in “residual uncertainty” over the Lisbon Treaty, even though a Yes vote was expected.

However, the announcement by the National Treasury Management Agency (NTMA) yesterday that it is to issue new 15-year bonds – primarily to finance Ireland’s 2010 budget deficit – pushed out the spread again.

“This move in relative bond spreads is not what we were expecting,” commented Ciaran O’Hagan, fixed-income strategist at Societe Generale. A “Lisbon bonus” had been anticipated in the event of a Yes vote.

“From a bond market viewpoint, Irelands firm commitment to the EU, second time around, will be welcomed as precursor to a continued strong relationship, at a time when the Irish economy is at its weakest,” Bloxham stockbrokers predicted yesterday.

International ratings agency Moody’s described the Lisbon result as “rating supportive”. The agency currently rates Ireland’s long-term Government bonds as “Aa1”.

“With the decisive Yes vote, the Irish electorate removed a lingering uncertainty that had clouded Irish creditworthiness,” Moody’s senior analyst Dietmar Hornung said in a note yesterday.

However, he warned that the outlook on the State’s debt remains negative, reflecting the risk of a further deterioration in Ireland’s debt affordability, which is the share of Government spending absorbed by interest payments.

He also stressed that Ireland has benefited “massively” from its membership of the European Monetary Union (EMU).

The euro strengthened 0.5 percent to $1.46 against the dollar yesterday, supported by the news that Europe’s manufacturing and services industries grew more than had been initially estimated, adding to signs the economy is gaining momentum. The Iseq closed more or less flat on the day at 3,233.

Although the market did not get a bounce from the Lisbon result, “it hasnt been negative”, a broker said.

The Yes vote had been largely priced into the market.

However brokers noted that the profit-taking expected did not materialise, which was interpreted as a positive reaction.

(Additional reporting: Bloomberg and Reuters)