Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times

Big inflows into money market funds
By David Oakley in London
Copyright The Financial Times Limited 2010
Published: July 9 2010 19:58 | Last updated: July 9 2010 20:40
http://www.ft.com/cms/s/0/b0877070-8b84-11df-ab4d-00144feab49a.html


Investors have poured tens of billions of dollars this week into money market funds – considered to be among the safest assets – amid fears that a double-dip recession in the developed world could send financial markets tumbling.

The global funds, which are seen as a proxy for cash, enjoyed their biggest weekly inflows in 18 months, absorbing $33.5bn, research group EPFR Global said on Friday.

Some of the world’s biggest fund managers are now holding up to 40 per cent of cash in their portfolios. Before the financial crisis, they held as little as 5 per cent.

In spite of this week’s powerful rally in equities, driven by hopes the eurozone debt crisis may be past its worst, the large volumes heading into money market funds suggest investors are worried about the risk of another slide in share prices.

The fear of a debt default by one of the weaker eurozone countries, slowing growth in China and doubts over the strength of the US recovery have emerged as the main threats to the global economy.

Chris Tuffey, co-head of capital markets for Europe, the Middle East and Africa at Credit Suisse, said: “This is about capital preservation.”

Inflows into money market funds in the week to Wednesday were the highest since January 2009 when $37.7bn was put into the funds. The funds tracked by EPFR include US and some non-US funds. Of the $3,000bn tracked, about two-thirds are US funds.

Investors have also been investing money in gold as a hedge against the growing volatility in financial markets. The lure of gold and precious metals has helped commodities funds top a list of sectoral funds tracked by the group.

They committed $419m to these funds, taking year-to-date inflows to more than $11bn.

The world’s big fund managers are facing difficult investment decisions as they need to put money into assets that beat the benchmark indices against which their performance is measured.

Recent market volatility – the S&P 500 gained 4.8 per cent this week having tumbled 15 per cent from its 2010 high in April – has sharpened that dilemma.

Money market funds offer yields of about 0.5 per cent, lower than those on government bonds and corporate bonds.




Hedge funds look for a golden edge
By Sam Jones and Jack Farchy
Copyright The Financial Times Limited 2010
Published: July 9 2010 19:10 | Last updated: July 9 2010 19:10
http://www.ft.com/cms/s/0/f1b2691e-8b80-11df-ab4d-00144feab49a.html


Not so long ago, hedge funds would send their most junior analysts to the seminars that bullion bankers hosted.

Gold, for much of the past two decades, was the ultimate dreary asset – of interest only to central bankers and miners.

Now those same bankers are struggling to find time in their diaries to fit in many of the hedge fund industry’s biggest players.

In mid-town New York, funds that employ barely 100 staff are finding themselves with gold holdings larger than those of some developed nations.

Paulson & Co, one of the world’s most successful hedge fund managers, denominates a third of its $33bn of assets under management in a share class bolstered by huge positions in the gold market.

In fact, gold is the firm’s largest single position. The $3.4bn stake in the SPDR Gold Trust, a listed US instrument backed by physical gold, equates to a greater tonnage of the metal than Australia holds.

The reason for this is simple. Amid fears that the global economy could be heading for a double-dip recession – and as financial markets continue to gyrate – some hedge managers are becoming increasingly bullish about the precious metal. They are drawn to gold’s traditional status as a store of value in crises.

Paulson & Co is the largest hedge fund to back gold, but others including Soros Fund Management, Tudor Investment Corp, Greenlight Capital and Third Point, are now converts.

“I have never been a gold bug,” Paul Tudor Jones, founder and chairman of Tudor Investment, wrote last year. “It is just an asset that, like everything else in life, has its time and place. And now is that time.”

The consensus view among the funds is that the price of gold – trading at around $1,200 an ounce – will rise to well above $1,500 before it suffers any sizeable correction.

This expectation of further prices rises (gold has increased four-fold since 2002) is based in part on the view that bullion provides a hedge against a rise in inflation.

Some fund managers believe a sharp jump in inflation is unavoidable as a result of central banks’ monetary easing policies, which have, in effect pumped more money into the economy.

Historically, they say, the correlation between gold and inflation is hard to ignore.

Over the past half century, the gold price has tracked the amount of money in the world – measured broadly in terms of “M2” monetary supply – fairly accurately, peaking at times of inflation, such as the mid-1970s and early 1980s.

The hedge funds argue that the recent swelling of the monetary base will translate into a spike in monetary supply. When it does, gold prices will follow.

“The number of funds who are exposed to gold has increased massively in the last three or four years,” says Philip Klapwijk, executive chairman of GFMS, a precious metals consultancy.

In common with other investors, hedge funds are also keen to hold their gold in physical form – either as bars in a vault or as an investment in an exchange-traded fund backed by physical assets.

Marcus Grubb, head of investment research at the World Gold Council, an industry-backed body, says the funds are looking to reduce counterparty risk in the event of another crisis: “In the past they might have been happy to just use futures strategy, now they are looking to have physical investment.” Many analysts agree that gold is likely to set fresh nominal all-time highs in the coming months. But they also see the weight of investment in the metal as a warning signal.

Mr Klapwijk says the rush to invest in the metal is not irrational. The motivation is fear about the debasement of paper currencies and of a panic in markets fuelled by any worsening in the eurozone debt crisis. But he also says that gold currently has “elements of a bubble”.

Jeffrey Currie, head of commodities research at Goldman Sachs, points to a strong historical inverse relationship between gold prices and real interest rates. The time to sell, he says, will be when the economy returns to normal.

“It’s pretty simple. Just stay long until real rates rise, likely driven by central banks taking liquidity out of the system.”

“Gold’s appeal is clear in this zero cost of carry environment,” says Mr Klapwijk. “But what if real interest rates were at 3 per cent? In my view, investor interest would be a good deal lower.”

At that point, other supply and demand factors may come into play.

As the price of gold has risen, jewellery buying in India, typically the backbone of gold consumption, has fallen sharply. So, if investors bought gold at a slower rate or became net sellers, the price would probably fall until other sources of demand picked up the slack.

“Don’t forget, gold is also a commodity with supply and demand fundamentals that can come into play,” says Mr Klapwijk.

Some managers are all to aware of the distinction, and view with derision the bets of their colleagues in a market they know little about.

“The problem is that people see it [gold] as both a commodity and a refuge,” said the manager of one London-based macro hedge fund. “It is not really a liquid instrument and there’s a danger that the market is being cornered.”

Paulson & Co remains optimistic that the trade is not crowded. In a presentation to potential investors, salesmen from the firm point out that gold ETF holdings amount to $78.3bn,a fraction of the $2,849bn held by US money market funds. The implication is that, with massive unconventional monetary easing under way, gold will become the ultimate store of value.

Not all hedge funds are convinced, however. While a third of Paulson & Co’s assets under management are denominated in gold, most of the holdings are those of its employees, including Mr Paulson.

In spite of having one of the best names in the business, Mr Paulson’s dedicated gold fund, which has a capacity of up to $5bn, has raised just $500m.


China shrugs off global fears with export strength
© Reuters Limited
July 10, 2010
http://www.ft.com/cms/s/0/7a802320-8c09-11df-9087-00144feab49a.html


BEIJING, July 10 - China’s trade surplus in June topped expectations on surprising strength in exports that suggests the global economy maintained momentum despite worries about a fresh slowdown.

Chinese exports in June rose 43.9 per cent from a year earlier, beating forecasts of a 38 per cent rise. Imports rose 34.1 per cent year on year, in line with projections.

That left China with a trade surplus of $20bn, its largest in nine months. The market had expected a surplus of $13.8bn.

“Exports were better than expected because the negative impact from the European debt crisis was not as serious as the market had feared,” said Liu Nenghua, an economist with Bank of Communications in Shanghai.

“Growth in China’s exports will slow down in coming months, that’s for sure,” Mr Liu added. “But there will be no sharp drop.”

The strong trade numbers could help ease fears -- for a time, at least -- about the potential for a skid in the Chinese economy after the government’s campaign to clamp down on the red-hot property market.

It could also lead to fresh calls for Beijing to let the renmimbi rise more quickly. China de-pegged its currency from the US dollar on June 19, after keeping it locked in place for 23 months to help exporters ride out the global economic turmoil.

The renmimbi has gained just 0.78 per cent against the dollar since then, and pressure is again building on US President Barack Obama to take a stronger line against Beijing. Critics say a persistently undervalued exchange rate gives China an unfair trade advantage, robbing other countries of jobs and growth.

In that respect, the wider Chinese trade surplus is not entirely welcome news for the global economy.

Over the past year, with the US and European economies struggling to regain their footing, global firms and investors looked to China to make up for the shortfall in their demand.

China’s slowdown in import growth, from a year-on-year pace of 48.3 per cent in June, was in large part caused by a higher base of comparison, but it also pointed to a slackening in domestic demand as investment flags.

Imports grew 0.9 per cent from May after calendar adjustments, the customs authority said.

And if a sustained rebound in China’s exports adds fuel to trade disputes with Europe and the United States, that would be an additional source of uncertainty for markets at a time of great concern about the fragility of the global recovery.

But analysts said that China’s export strength might be transitory. Shipments could slow in coming months as US fiscal stimulus fades and European governments cut back on spending.

Though sales to emerging markets surged in June, they cannot compensate for a downturn in demand from major economies, Tom Orlik, an economist with Stone & McCarthy Research Associates in Beijing, said.

“A resurgent trade surplus will clearly strengthen the argument for rapid appreciation of the renmimbi,” he said. “But with the global recovery on slippery sands, the outlook for China’s exports is not as stable as the last two months of data suggest.”



ECB set for rethink on bond purchases
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: July 9 2010 18:30 | Last updated: July 9 2010 18:30
http://www.ft.com/cms/s/0/9def9844-8b7e-11df-ab4d-00144feab49a.html


The European Central Bank has given the clearest hint yet that its controversial government bond purchases could end as financial market tensions ease and economic prospects improve.

Government bond buying by the ECB started at the height of the eurozone debt crisis in early May, when liquidity conditions deteriorated sharply for several countries’ bonds and almost dried up for Greece.

Jürgen Stark, an executive board member, said on Friday the declining scale of the ECB’s purchases since then showed how the market environment was better. “If the situation improves further, then there is no need to continue,” Mr Stark said.

His comments put the ECB on a collision course with International Monetary Fund, which this week urged it to continue to support bond markets, which it said were “not yet convinced of the central bank’s commitment to scaling up purchases if necessary to prevent a further deterioration in market functioning”.

The ECB has argued its programme is different from US or UK “quantitative easing”, which is aimed at pumping liquidity into the economy. The ECB has “sterilised” the inflationary effects of its purchases by reabsorbing an equivalent amount from the financial system.

Ending the programme would be a relief to some ECB policymakers. Axel Weber, the Bundesbank president and ECB governing council member, had warned of risks to inflation. Mr Stark, a former Bundesbank vice-president, has previously said he shared such concerns.

In mid May the ECB bought bonds worth €16.5bn ($21bn, £13.7bn) but that had fallen to €4bn by last week. This week’s purchases, to be revealed on Monday, could be substantially lower.

No details have been given but the ECB is thought to have focused on Greek, Portuguese and Irish government bonds.

Tensions remain in European financial markets but at the same conference in Frankfurt where Mr Stark spoke, Jean-Claude Trichet, ECB president, hinted the programme’s aim had been simply to avert a disaster. Asked how the ECB would rate its success, Mr Trichet asked his audience “to reflect on . . . what would have happened to the [monetary policy] transmission mechanism if we had not decided what we decided”.

Mr Stark added that the strength of the eurozone’s recovery had not yet been fully appreciated. “The IMF has not caught up with the reality in Europe,” he said. Earlier this week the fund revised down its forecasts for 2011 eurozone growth to 1.3 per cent as a result of “turbulence” in the region.

Eurozone governments had recognised the seriousness of the debt crisis and responded with economic reforms, Mr Stark said. In a clear reference to the US, he warned that other “leading economies” still favoured expansive fiscal policies that would “turn out not to be sustainable”.

The ECB’s optimism followed data this week that showed German exports had soared 9.2 per cent and industrial production 2.6 per cent in May compared with the previous month.