Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times

Cautious tone ahead of US earnings
Copyright The Financial Times Limited 2010
Published: July 12 2010 08:43 | Last updated: July 12 2010 16:39
http://www.ft.com/cms/s/0/744ee6a0-8d74-11df-b5e2-00144feab49a.html


Monday 16:35 BST. There is a cautious tone to markets as traders absorb the sharp risk asset rally of recent days and contemplate the prospects for the US second-quarter earnings season.

The FTSE All-Word equity index is down 0.3 per cent, the dollar is higher and industrial commodities softer. Treasury yields are lower and the S&P 500 on Wall Street is down 0.4 per cent, despite being supported by news of a $5bn takeover.

Last week, US and European stocks had their best weekly gains in a year – the S&P 500 rose 5.4 per cent – as investors bet that worries about the chances of a US economic double dip had been overdone and fears about the eurozone financial sector subsided.

On the macroeconomic front, strong trade data out of China over the weekend have calmed nerves further. Meanwhile, the cost of insuring a basket of European bank debt against default – as measured by the Markit iTraxx Financial CDS index – has fallen by a third over the past month and now sits close to an eight-week low, another sign of easing stress.

News that several of Europe's biggest banks are discussing creating a €20bn bail-out fund is also being interpreted by some as a positive sign, in that it shows the sector is more confident about its ability to manage current difficulties.

However, for all the economic data on the slate later this week, it is the US earnings season that is likely to determine market sentiment in the short term. It kicks off after the closing bell on Wall Street tonight with Alcoa, and later in the week we will get the likes of Intel, Google and JPMorgan Chase.

Strategists at Royal Bank of Scotland argue that strong earnings seasons usually provide a positive market reaction.

“Over the past 10 years there have been seven quarterly reporting seasons where more than 70 per cent of S&P500 constituents have beaten consensus forecasts, and in six the market responded favourably, posting an average gain of 6.3 per cent over a three-month period,” they said in a note to clients.

“We believe that with the macro risks already aggressively discounted, we should see markets better reflecting corporate news flow.”

☼ Factors to Watch. A quiet day for macroeconomic data. The final reading of UK first-quarter GDP was unchanged, but revision of earlier data shows the recession was harsher than previously thought. This initially pushed sterling further below the $1.50 level, and caused gilts to lag behind peers as investors worried that slower growth would hamper the government’s ability to cut the budget deficit. However, while government debt continues to make little headway, the pound has pared much of its losses and is now down just 0.2 per cent versus the dollar at $1.5028. ☼

● Europe. Bourses pared gains as Wall Street gave up an initial bounce. The FTSE Eurofirst 300 is up 0.3 per cent – held back by miners seeing selling after last week’s good rally

The FTSE 100 in London closed up 0.7 per cent, helped by a 9 per cent jump in BP shares, partly on bid speculation.

● Forex. Dollar strength remained the main feature despite intermittent signs that risk appetite was improving elsewhere. The greenback is up 0.4 per cent versus the euro at $1.2568 and up 0.4 per cent on a trade-weighted basis.

Commodity-linked currencies, such as the Aussie dollar, are softer.

● Debt. Benchmark US 10-year yields are off lows but still down 4 basis point to 3.02 per cent, having jumped sharply last week during the move back into risk. The US will auction $35bn of new 3-year notes today.

Eurozone “peripheral” yields are generally several basis points lower as sovereign tensions ease.

● Commodities. The stronger dollar and the pullback on Wall Street is hurting the complex. Most metals prices are lower and this is pushing the Reuters-Jefferies CRB index down by 0.9 per cent. Oil is down 1.6 per cent to $74.88 a barrel.

The Baltic Dry Index, which tracks commodity-shipping costs, has fallen 3.3 per cent to 1,840. This is the BDI’s thirty-second consecutive day of declines, its worst run in nearly 9 years. However, many transport analysts believe the trend reflects an increase in the supply of vessels rather than a significant decrease in demand for bulk resources.

Gold is down 1.1 per cent at $1,198 an ounce.

● Asia. Tokyo underperformed the region as the yen reversed early weakness and took the wind out of exporters’ sails. The Nikkei 225 dipped 0.4 per cent, with analysts fairly blasé about the impact on sentiment of the latest political upheaval.

Tokyo’s slide has pushed the FTSE Asia-Pacific index down 0.1 per cent, but generally the mood was more upbeat as traders took in Wall Street’s solid close on Friday. Shanghai added 0.8 per cent and Hong Kong is higher by 0.4 per cent, as banks and property stocks rebound on hopes Beijing will go easy on its monetary tightening.

Monday’s Market Menu
What’s affecting risk appetite

Risk off

● Dollar: move into greenback shows classic strategy still has adherents

● Buyers’ remorse: sharp rally encourages touch of profit taking

Risk on

● Calmer: CDS and interbank stress gauges well off recent highs

● China: export data add to growth hopes






China property price rises ease
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: July 12 2010 13:59 | Last updated: July 12 2010 14:11
http://www.ft.com/cms/s/0/3e56f5d2-8dac-11df-b5e2-00144feab49a.html


Chinese property prices eased lower in June for the first time in nearly 18 months, a sign that the government’s campaign to reduce real estate speculation is beginning to bite.

The average price of houses in 70 main cities fell by 0.1 per cent from May, exactly the sort of moderate cooling in the property market policymakers are hoping to engineer.

Following weekend figures that showed slowing growth of imports and the money supply, the house price numbers are a further indication that the Chinese economy is weakening after a period of rapid expansion fuelled by stimulus.

Facing mounting social tensions over the high prices of flats in many cities, the government unveiled a package of measures in mid-April that made it harder to get mortgages for second homes and increased the supply of land being made available for housing construction.

Given that real estate construction has been one of the economy’s growth engines, the government wants to avoid a sharp drop in house prices as it tries to orchestrate a soft landing in the economy as a whole. The annual rate of price increases fell for the second month, from 12.4 per cent in May to 11.4 per cent in June.

However, some analysts believe big drops in prices are inevitable, given that the market has been brought to a near standstill since the April announcement, with transaction volumes in most cities falling by more than half.

“Property prices are going to drop a lot more from the fourth quarter,” said Weng Feiyu, analyst at Everbright Securities in Shanghai. “This drop in prices last month was not enough, it only means that prices are not going up anymore.”

Standard Chartered estimates that house prices will fall by 10-20 per cent in most cities and by 20-30 per cent in Shanghai, Beijing and Shenzhen, which saw the steepest prices increases last year.

Kenneth Rogoff, the former International Monetary Fund chief economist, told Bloomberg last week that property prices could “collapse”, putting pressure on the banking system.

Although there are other signs of weakening domestic demand, including slowing growth of auto sales and electricity generation, exports continue to rebound in spite of widespread fears about the global economy. In June, Chinese exports expanded 44 per cent year on year, ahead of expectations, including a strong expansion in both the US and Europe.

“China’s recovery remains solid, but has moderated from the fast pace set earlier this year,” said Brian Jackson at RBC Capital Markets.

Most analysts believe that the government will maintain its tough stance on the property market for some months, in order to prevent a new bubble inflating. However, one Chinese newspaper reported on Monday that banks in some major cities had resumed offering mortgages for third homes.



UK recession worse than first thought
By Daniel Pimlott, Economics Reporter
Copyright The Financial Times Limited 2010
Published: July 12 2010 11:29 | Last updated: July 12 2010 11:29
http://www.ft.com/cms/s/0/1d9380ce-8d96-11df-b5e2-00144feab49a.html


The UK economy was more reliant on government spending in the first quarter, and the recession deeper than previously thought, according to official data published on Monday.

The economy declined by 6.4 per cent from the peak in output to the trough, the Office of National Statistics reported on Monday, a sharper drop than the 6.2 per cent decline previously estimated and the worst recession in postwar British history.

The sharp contraction in 2008-9 compares with a decline of 2.5 per cent in the 1990s recession and 6 per cent in the early 1980s recession.

Evidence of a deeper recession came as the ONS revised its estimates for the performance of the economy in the first quarter. It left its earlier estimate for first-quarter growth of 0.3 per cent unchanged.

But it found that general government consumption, which includes departmental spending but not capital spending or benefits spending, had risen by 1.5 per cent rather than the 0.5 per cent initially calculated.

Meanwhile, the household savings ratio fell to 6.9 per cent from 7.2 per cent, but this was not enough to stop household consumption from falling by 0.1 per cent.

The greater reliance of the economy on government spending, and weakness of consumption in spite of falling savings underline the fragility of the recovery as the coalition government sets about cutting the deficit.

“With fiscal austerity being stepped up and consumer spending growth still falling, there is significant reason for concern over the UK’s growth prospects,” said James Knightley, economist at ING.

Exports were also revised down to show a 1.7 per cent drop in the quarter, the worst performance since the first quarter of last year, while imports grew by 1.6 per cent. Hopes for a strong recovery partly rest upon the weak pound making British goods more competitive for domestic purchases and for sales abroad, but in recent quarters a widening trade deficit has been detracting from growth.

“We still doubt that the economy is in a good position to withstand the fiscal squeeze,” said Vicky Redwood of Capital Economics.

The first quarter was hit by unusually cold weather and the rise of VAT back to 17.5 per cent. The second quarter appears to have seen a bounce back from that dip, but there are fears that growth is set to slow down as government stimulus is reduced and the repercussions of European economies weakened by fears of fiscal crisis hit the UK.








US small businesses lose out over loan rate
By Jeremy Lemer in New York and Hal Weitzman in Chicago
Copyright The Financial Times Limited 2010
Published: July 11 2010 21:27 | Last updated: July 11 2010 21:27
http://www.ft.com/cms/s/0/d956ba70-8d22-11df-bad7-00144feab49a.html


US small businesses are having to pay more to borrow relative to the Federal Reserve’s benchmark rate than at any time in at least a quarter of a century, according to official data from the central bank.

The data suggest that small businesses – which form the backbone of the US economy – are not receiving the full benefit from the ultra-low rates that are supporting some larger employers.

Securing capital for small businesses – which account for the bulk of job creation – has been a priority for the Obama administration, which has proposed a $30bn fund to help community and neighbourhood banks increase their lending.

The Fed’s data show that in early May interest rates on small commercial and industrial loans, on average worth about $500,000, were 3½ per cent higher than the federal funds rate, the widest gap since the series began in 1986.

The data are contained in the Fed’s “Terms of Business Lending” survey released at the start of July. It is conducted quarterly and based on a survey of 348 domestically chartered commercial banks and 50 US branches of foreign banks.

With the federal funds rate at record lows, the absolute cost of credit is cheap by historic standards. But the data suggest that banks consider small business a relatively risky bet in an uncertain economy.

Getting credit flowing to small businesses has been difficult for officials to achieve. In April, another Fed survey found that domestic banks were tightening up the terms on commercial loans to smaller companies but other indicators suggest that loan demand has also dropped off.

The Federal Reserve has also identified the issue as a key concern. It slashed interest rates during the downturn, and has kept them low since, in part to encourage banks to pass on low-cost capital to main street companies.

Ken Wuethrich, president of Connext Financial in Indianapolis, which arranges loans of $100,000-$1.5m for manufacturing companies, says those tighter conditions and the withdrawal of some large industrial lenders from the market has forced some towards even more expensive secondary markets.

“The secondary money is at a premium because nobody wants to let loose the cash,” said Mr Wuethrich. “Rates are 6 to 9 per cent right now in the secondary market, compared to 4 to 6 per cent at commercial banks.

“If I am a small business at the moment, I don’t have any customers so don’t want to buy more inventory. I am not expanding my plant, I don’t need to buy a new truck and I don’t need to hire workers, so I am not asking for a loan, ” said William Dunkelberg, chief economist at the National Federation of Independent Business and Chairman of Liberty Bell Bank.

Mr Dunkelberg says his own bank and many others have introduced floors of about 5 per cent for loans. He argues small banks can’t afford to offer money at cheaper levels because they don’t have access to base rates.