Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Trading cautious ahead of US jobs and earnings reports
Copyright The Financial Times Limited 2010
Published: October 4 2010 05:58 | Last updated: October 7 2010 16:40
http://www.ft.com/cms/s/0/cf577414-cf63-11df-9be2-00144feab49a.html


Thursday 16:35 BST. The dollar’s bounce from early losses has delivered a mini sell-off in the metals complex, but traders are otherwise reluctant to challenge the recently bullish equities trend ahead of the US earnings season and the always eagerly anticipated US payrolls data, due on Friday.

Barometers of economic and financial system wariness remain near record levels, however. Gold earlier breached $1,360 an ounce while two-year Treasuries yield below 0.37 per cent as the perceived promise of further quantitative easing by major central banks continues to distort markets.

The dollar is hovering above fresh 8-month lows as the war of words over currency manipulation rattles across continents.

The FTSE All-World equity index is up 0.1 per cent at a fresh five-month high and the Reuters-Jefferies CRB basket of raw materials is at its best level in nearly 9 months after being powered over the past few days by Japan’s moves to stimulate its economy and hopes that the US Federal Reserve will follow suit.

Indeed, further largesse from the Fed remains a central tenet of many traders’ strategy, even after data released on Thursday pointed to a slight improvement in the economic environment. US same-store retail sales for September rose 2.8 per cent compared with expectations for growth of 2.1 per cent, while weekly initial jobless claims, though still worryingly high, have fallen to a near 3-month low.

Wall Street opened on the front foot and hit a new five-month high, and after some choppy trade the S&P 500 is down just 0.1 per cent.

The Market Eye

As the Aussie dollar approaches parity with the buck, no prizes for spotting one of the financial market’s tightest correlations. The resource-rich nation is considered a highly-geared play on global growth, so it is little wonder that the dollar from down-under likes to hold hands with commodity benchmarks such as the CRB index.
Austratian dollar and commodities

Magnifying glass

Factors to Watch. Aluminium producer Alcoa will kick off the US third-quarter earnings season after the closing bell.

Europe

Europe. Bourses rallied after opening softer, but are having difficulty making significant headway, with the FTSE Eurofirst 300 down 0.1 per cent. London’s FTSE 100 closed down 0.3 per cent as banks came under pressure following weak UK house price data.

Forex

Forex. Traders are wary of possible intervention to weaken the yen as the Japanese currency hit new 15-year highs relative to the dollar. This morning, the yen touched Y82.12 and is now up 0.7 per cent to Y82.29. Against the euro, the yen is up 0.7 per cent to Y114.64.

The US dollar index, which tracks the buck against a basket of its peers, slid to a new 8-month low just prior to the US open of 76.91. However, a fall-back in the euro helped the DXY pare its losses and it is currently off 0.1 per cent at 77.34.

The euro is flat at $1.3930, having at one point breached $1.40 after the ECB left monetary policy unchanged.

The Aussie dollar has hit a 27-year high and is challenging parity relative to its US namesake following stronger than expected jobs data. It is currently up 0.5 per cent to $0.9821.

The renminbi is unmoved versus the greenback at Rmb6.6895 as China resists more pressure to let its currency appreciate faster.

Sterling was initially under pressure after the Halifax house price index fell a record 3.6 per cent in September, raising the chances, in investors’ minds, of more QE from the Bank of England. However, the pound rallied and is now up 0.2 per cent versus the euro at 87.47p after August’s industrial output beat forecasts and the Bank of England offered no evidence of any imminent shift in policy.

Commodities. Another day, another nominal record for gold, whose chart looked earlier to be entering the foothills of the parabola. The precious metal has hit a fresh peak of $1,364.6 as ratcheting up of the forex spat rhetoric adds to the worry about the debasement of currencies. However, as soon as the dollar showed signs of paring early losses, the bullion followed other metals lower.

It is currently down 0.8 per cent to $1,335 an ounce. Silver touched a new 30-year high of $23.51 an ounce and is now $22.75.

Copper is down 1.5 per cent at $8,120 a tonne and tin is about a thousand bucks shy of its record high, down 2.1 per cent at $25,650 a tonne. Oil is down 0.7 per cent at $82.66 a barrel.

Higher prices for most agricultural produce means the Reuters-Jefferies CRB index, which tracks 19 commodities, is holding at its best level since mid January.

Rates

Rates. Longer-term US Treasuries are seeing a bit of profit taking after Wednesday’s run to record and mullti-month low yields along the curve, with the 10-year yield up 1 basis point to 2.40 per cent The two-year note is seeing more demand, however, down another 2 basis points to 0.367 per cent, having hit a record low of 0.359 per cent.

Japan’s bonds are also seeing some selling. The 10-year JGB yield is up 4 basis points to 0.88 per cent, after dipping to a 7-year low below 84 per cent in the previous session.

Eurozone peripheral sovereign spreads with Bunds are slightly tighter. Gilts are underperforming Treasuries by a couple of basis points after the UK production data.

Asia Pacific

Asia-Pacific. Shares were generally firm, with commodity stocks a bright spot, as investors waited for US non-farm payrolls data on Friday and kept a wary eye on currency markets as the Japanese yen continued to power higher.

In Tokyo, the yen’s strength was weighing on exporter stocks and traders were on watch for another possible intervention to weaken the currency by the Japanese authorities. However, today’s sharp move higher in the yen came after Tokyo closed, so the Nikkei 225 managed to lose just 0.1 per cent, supported by property stocks on hopes the Bank of Japan may step in to buy real estate investment trusts as part of its monetary easing measures.

The FTSE Asia-Pacific Index climbed 0.5 per cent, on track for its highest close since August 2008, before the collapse of Lehman Brothers. Shanghai remains closed for a holiday and will open again on Friday, and Hong Kong was sufficiently uninspired to finish flat.

Australia’s S&P/ASX 200 rose 0.1 per cent following the jobs report, but South Korea’s Kospi lost 0.2 per cent on mild profit-taking after the benchmark index breached the 1,900 level for the first time in two years.

Follow the market comments of Jamie Chisholm in London and Telis Demos in New York on Twitter: @JamieAChisholm and @telisdemos







US new jobless claims drop to lowest since July
By Telis Demos in New York
Copyright The Financial Times Limited 2010
Published: October 7 2010 15:07 | Last updated: October 7 2010 15:10
http://www.ft.com/cms/s/0/93777d30-d20c-11df-965c-00144feabdc0.html


The number of Americans claiming new jobless benefits fell by 11,000 last week to its lowest level since July, giving some hope that hiring may be steadying, though at a still-depressed level.

The US department of labour reported that 445,000 US workers requested benefits from the government last month, extending the streak of declines in claims to four weeks.

The less-volatile four-week moving average of claims fell to 455,750, also its lowest since July. However, it remains above historical norms, and below the threshold economists say is necessary for the US to sustainably create new jobs.

The improvement was sunnier than the slight uptick in claims that surveyed economists had been expecting. The previous week’s claims were also revised upward, from 453,000 to 456,000, making the improvement more dramatic.

Meanwhile, the number of people still receiving jobless benefits decreased by 48,000 to 4.462m after an upward revision of last week’s figures. It was still higher than economists expected, suggesting that people are not finding jobs as quickly as they would normally be expected to.

“It’s pretty clear the US labour market is still basically frozen,” said Zach Pandl, desk economist at Nomura in New York. “There’s some hiring going on, some quitting, but the gross labour market turnover the US is famous for has not been operating as it used to.”

Mr Pandl noted that the bulk of Americans receiving unemployment insurance are now in emergency programmes not reflected in the labour department’s data.

There are 5.1m people receiving emergency benefits, a figure which rose 256,500 from the second to third week of September, the most recent data available.

The claims data also continue to show a rising trend in regional divergence, in which employment in the older, “rust belt” states was steady, while previously faster-growing “sun belt” states were seeing job losses as fast as at any point in the recession.

The biggest increases in claims were in California and Florida, while New York and Illinois saw the biggest drops in claims.

The improvement in the new claims data also contrasts with a decline in private employment as measured by the ADP survey on Wednesday. That showed a cut of 39,000 jobs by companies in the private sector.

The most complete tally of employment will be reported on Friday, when the US releases its non-farm payroll report.

The median forecast became more pessimistic on Thursday, following the fresh ADP and claims reports. Previously economists had called for a flat report, but they are now expecting a loss of 5,000 jobs for September.

Economists still foresee a gain of 75,000 private-sector jobs, offset by a decline in government hiring from the census programme. The economy had lost 54,000 jobs in June and July.








Yen at fresh high amid intervention talk
By Mure Dickie in Tokyo
Copyright The Financial Times Limited 2010
Published: October 7 2010 12:33 | Last updated: October 7 2010 12:40
http://www.ft.com/cms/s/0/9d298a74-d1f5-11df-965c-00144feabdc0.html


The Japanese yen hit a fresh 15-year high against the US dollar on Thursday despite veiled warnings from Naoto Kan, Japan's prime minister, of possible currency market intervention.

The dollar's fall to Y82.25 during Tokyo trading will place more pressure on Mr Kan’s government to shore up the greenback, just three weeks after Japan's dramatic sale of an estimated Y2,100bn ($25.5bn).

But any further round of intervention by the world's third largest economy could fuel fears of international competitive devaluations or even a currency war that could threaten global growth.

"We will continue to watch closely currency movements and will take decisive action if necessary," Mr Kan told the Japanese parliament.

"Decisive action" is the government's standard phrase for moves including intervention. But the renewed warning was not enough to prevent the yen from rising past the level at which it intervened last month.

The yen's climb underscored the limited effect on the currency of the Bank of Japan's announcement this week of a package of monetary measures including the possible purchase of up to Y5,000bn in assets.

While such expansion of the central bank's balance sheet might be expected to weaken the yen, markets are speculating that the US will soon adopt such "quantitative easing" on a much more aggressive scale.

Mr Kan has sought to head off criticism of further intervention. In a recent interview with the FT, Mr Kan insisted that there was international agreement that overly rapid currency movements were undesirable – and that further drastic yen rises could make intervention "unavoidable".

Fumihiko Igarashi, Japanese vice-finance minister, echoed that message on Thursday, telling Bloomberg that Tokyo had would not "engage in a currency-devaluation race for the sake of the national interest”, but would rather focus on "smoothing operations".

However, Mr Kan is being pushed to halt a yen climb that threatens to undermine exports, the engine of Japan's fragile recovery from its sharpest post-war recession.

Pressure on the prime minister is sure to mount. As the yen climbed toward its new 15-year-high, the head of the Keidanren, Japan's most influential business lobby, warned in a speech that the recent “sharp rise” in the value of the yen had "hit business hard".

"If the yen remains at this level, it could seriously undermine the competitiveness of Japanese industry, stifle investment and result in a loss of job opportunities," said Hiromasa Yonekura, Keidanren chairman.

Some analysts say international fears of competitive devaluation could inhibit Japan from further direct action on the currency.

Any attempt to hold the yen to a particular level could make Tokyo diplomatically vulnerable, particularly since the currency is not particularly strong on a trade-weighted basis when the effect of chronic Japanese deflation is taken into account.

Dominique Strauss-Kahn, director of the International Monetary Fund, has said moves such as Japan's intervention only make sense as a one-shot effort to restore calm.

However, monetary authorities in Japan's main trading partners have avoided any public criticism of last month's intervention.

Timothy Geithner, US Treasury secretary, on Wednesday dismissed suggestions that Japan had inflamed tendencies toward competitive devaluation. He said the main problem was that "a set of emerging economies" were "leaning heavily against pressures for appreciation" of their undervalued currencies.

"That’s not a viable, sustainable strategy for them," Mr Geithner said. "It’s not a sustainable strategy for their trading partners … and it’s not good for the system as a whole."






EU set to clamp down on bankers’ pay
By Brooke Masters, Patrick Jenkins and Megan Murphy
Copyright The Financial Times Limited 2010
Published: October 7 2010 13:08 | Last updated: October 7 2010 13:08
http://www.ft.com/cms/s/0/0adec5ca-d205-11df-965c-00144feabdc0.html


European regulators are poised to impose much tougher restrictions on bankers’ pay than expected, in spite of concerns raised by French, UK and Spanish officials that the rules could make the European Union uncompetitive, people familiar with the talks said.

The Committee of European Banking Supervisors, made up of representatives of all 27 EU countries, has been meeting in London on Wednesday and Thursday to draft regulations to implement the tough pay rules agreed by the EU over the summer.

While the discussions are still fluid, the group is leaning towards requiring banks to adhere to a strict ratio that would cap bonuses at a multiple of annual salary. The size of the cap would depend on the national regulator’s view on whether the bank is effectively linking pay to performance and risk.

The group is also inclined towards the strictest possible interpretation of the planned cap on upfront cash. The EU directive already calls for up to 60 per cent of bonuses to be deferred for three years, and now the draft of the regulations specifies that any immediate cash payment must be capped at 20 per cent of the total bonus.

The UK Financial Services Authority had proposed that the cash portion simply be limited to 50 per cent of the total bonus in its draft remuneration policy. Regulators at the CEBS meeting have not announced a final decision on the issue.

In a blow to banks with global operations, the rules will apply to the worldwide operations of all EU-based banks and the European subsidiaries of any non-EU banks. Industry groups have warned this would make EU banks uncompetitive in Asia and the US.

Although the EU directive simply states that the pay rules apply to senior management and “risk takers”, the regulators are also considering requiring each country to set a numerical floor where the pay restrictions would kick in. The FSA code currently applies to people making more than £500,000.

Some of the proposals, particularly the cap on bonuses as a multiple of salary, would require radical restructuring of many banks’ pay practices and would almost certainly increase fixed costs because they would be likely to inflate salaries.

The current draft contains good news for asset managers because it allows national regulators to adapt the rules to be “proportional” for non-banks.

The regulators are expected to conclude their meeting late on Thursday and publish a draft within days. The document would then be the basis of a consultation with the industry over the coming weeks.





Vatican bank goes to court over frozen funds
By Guy Dinmore in Rome
Copyright The Financial Times Limited 2010
Published: October 7 2010 14:55 | Last updated: October 7 2010 14:55
http://www.ft.com/cms/s/0/3cbdb4fc-d20f-11df-965c-00144feabdc0.html


The Vatican has taken what is believed to be the unprecedented step of resorting to an Italian court in an effort to free €23m ($32m) belonging to its bank that was frozen by the Italian authorities during an investigation into a suspected breach of anti-money laundering regulations.

Vincenzo Scordamaglia, a lawyer representing the Institute of Religious Works (IOR), as the Vatican bank is formally known, said he had filed a case with a Rome tribunal on Thursday to challenge the seizure of the bank’s funds. A first hearing is scheduled for Friday.

In the first case of its kind, the Italian judiciary last month froze €23m held by the Vatican bank in an account in Credito Artigiano, an Italian bank. The Vatican bank’s two top officials – Ettore Gotti Tedeschi and Paolo Cipriani – were placed under investigation for suspected breach of anti-money laundering norms.

Veteran Vatican observers said they could not recall a previous case of the Vatican, a sovereign state, seeking redress through the Italian judicial system. A Vatican spokesman declined to comment.

The observers said the move reflected the extreme sensitivity of the Holy See over the issue as it starts the process of seeking inclusion on lists of jurisdictions compliant with international norms on tax co-operation and money laundering administered by the Organisation for Economic Co-operation and Development, and the Financial Action Task Force.

The Vatican bank says the dispute was the result of a “misunderstanding” with Credito Artigiano when the Vatican tried to make two transfers to accounts it held at two other banks, in Germany and Italy. The Bank of Italy initially blocked the transfers because the Vatican bank had failed to identify the intended beneficiaries and the reason for the transfer as required by Italian law.

Mr Gotti Tedeschi – a veteran banker and lecturer in ethics in finance – was appointed by Pope Benedict XVI a year ago to bring more transparency to the Vatican bank following its entanglement in the fraudulent collapse of the partly Vatican-owned Banco Ambrosiano in the 1980s and the Enimont corruption trials involving Italian government officials a decade later.

Mr Scordamaglia told the Financial Times he had received the go-ahead to seek redress through Rome’s Tribunal of Freedom by Cardinal Tarcisio Bertone, the Vatican’s secretary of state, in order to “clear the bank’s name” and demonstrate the Vatican’s commitment to international regulations on combating terrorism and money-laundering.

Magistrates in Rome led by Nello Rossi questioned Mr Gotti Tedeschi and Mr Cipriani, for two hours each last week.





Schwarzenegger raps ‘black oil hearts’
By Sheila McNulty in Houston
Copyright The Financial Times Limited 2010
Published: October 7 2010 17:29 | Last updated: October 7 2010 17:29
http://www.ft.com/cms/s/0/6ccb6236-d22b-11df-8fbe-00144feabdc0.html


As energy companies try to roll back California’s carbon legislation, Arnold Schwarzenegger, the governor, accuses them of greed in their “black oil hearts”.

The governor spearheaded legislation four years ago that established California as a global clean energy leader, requiring it to cut greenhouse gas emissions 30 per cent by 2020. The economy was strong at the time and the US appeared poised to pass similar regulation nationally. But the economic downturn has undermined national efforts to pass energy legislation and is leading to questions over whether California can afford to begin those set to go on its books in January.

“This is not the time to layer on this expensive global warming legislation,’’ said Anita Mangels, spokeswoman for Proposition 23. The measure, to be voted on by Californians in the November 2 election, would delay implementation of carbon regulations until the state’s unemployment rate falls to 5.5 per cent and stays that way for a year. It is 12.4 per cent.

The lead backers are Valero Energy and Tesoro, which own four California refineries and say the regulations would cost the state more than 1.1m jobs, raise electricity rates up to 60 per cent and result in $3.7bn more in higher gasoline and diesel prices. “California’s economy is in deep trouble,’’ said Bill Klesse and Greg Goff, the respective chief executives of Valero and Tesoro, in a joint letter to California newspapers. “Let the voters weigh the cost of climate change rules and decide if they want to bear that cost right now.’’

Mr Schwarzenegger is lobbying against efforts to pass Proposition 23 in an effort to protect his legislative legacy as his term as governor nears an end. “Does anyone really believe that these companies, out of the goodness of their black oil hearts, are spending millions and millions of dollars to protect jobs?’’ he said last week.

Many in the industry warn that a lack of legislative certainty nationally endangers the renewables boom. “The attack from the Texas oil companies has had a chilling effect on sentiment around clean energy,’’ said Dan Adler, president of CalCEF, a non-profit venture capital fund formed to accelerate development of clean energy technologies.

Tom Arnold, vice-president of Energy Efficiency and Carbon Solutions at EnerNOC, an energy management firm, said investors needed long-term policy certainty. “It would be very frustrating to have a policy that ebbs and flows with the unemployment rate.’’

Royal Dutch Shell said the regulatory uncertainty introduced by Proposition 23 would make it difficult for businesses to plan.

The end result would be lost jobs, including those in SPG Solar, said Tom Rooney, chief executive of the company that designs and installs solar photovoltaic systems.

“It’s certainly a threat,’’ said Tim Raphael, regional representative for the American Wind Energy Association.

Ken Medlock, energy expert at the James A Baker III Institute for Public Policy, said the battle over Proposition 23 was indicative of a looming national controversy over whether cleaning up the environment was bad for the economy. “It’s going to be difficult for people to swallow a pill that we are going to try to become cleaner at the expense of economic gains.’’

While the Obama administration is supporting renewables, with new solar panelling on the White House and plans to build the first solar plants on federal lands in California, Congress has proved resistant to new measures.

“Almost every US renewable company is really, really hurting right now,’’ said Kevin Shaw, energy lawyer at Mayer Brown. He added that most projects “don’t make short-term economic sense and can only be justified from a long-term policy standpoint”.





Fear undermines America’s recovery
By Alan Greenspan
Copyright The Financial Times Limited 2010
Published: October 6 2010 20:08 | Last updated: October 6 2010 20:08
http://www.ft.com/cms/s/0/4524339a-d17a-11df-96d1-00144feabdc0.html



Although rising moderately this year, US fixed capital investment has fallen far short of the level that history suggests should have occurred given the recent dramatic surge in corporate profitability. Combined with a collapse of long-term illiquid investments by households, they have frustrated economic recovery. These shortfalls, the result of widespread private-sector anxiety over America’s future, have defused much, if not most, of the impact of the administration’s fiscal stimulus. Moreover, the activism embodied in such programmes has itself stoked the degree of anxiety.

The instinctive reaction of businessmen and householders to uncertainty is to disengage from those activities that require confident predictions of how the future will unfold. For non-financial corporations (half of gross domestic product), the disengagement is best measured by the share of liquid cash flow allocated to illiquid long-term fixed asset investment. In the first half of 2010, that share fell to 79 per cent, its lowest reading in the 58 years for which data are available.

The corresponding surge in the proportion of liquid assets following the Lehman bankruptcy was the most rapid in postwar history, amounting to a rise of nearly $400bn. By mid-2010 total liquid assets had risen to $1,800bn, the highest share of total assets in nearly a half century. Without this unprecedented cash flow diversion, the rate of increase in capital expenditures of non-financial corporations would have been double the modest increase that emerged during the first half of this year.

In such an environment, the equity premium (the excess return that equity produces over the risk-free rate) has become exceptionally elevated. As estimated by JPMorgan, it is currently “at a 50-year high”.

American households have shifted their cash flows from illiquid real estate and consumer durables to paying down mortgages and consumer debt. Commercial banks are exhibiting a similar reduced tolerance towards risk on partially illiquid lending. A trillion dollars of excess reserves remains parked, largely immobile, at Federal Reserve banks yielding only 25 basis points with little evidence of banks seeking higher returns through increased lending.

It is this rapid rise in aversion to illiquid risk that explains a large part of the anaemic recovery in the US. Construction outlays, almost all long-term, are down 43 per cent in real terms since their peak in 2006 and reflect the heaviest price discounting of any major fixed asset class.

The pronounced lack of tolerance for illiquid investment risk is quite at variance with current relatively narrow corporate bond spreads. Since a portfolio of liquid privately issued 10-year bonds can be sold virtually at will, the portfolio is the equivalent of a very short-term asset that happens to exhibit high price and interest rate volatility. The difference between liquid and illiquid assets is the reason non-financial corporations, whose assets are largely illiquid, maintained net worth amounting to 45 per cent of assets at the end of 2006 (just prior to the onset of the crisis) compared with 10 per cent for commercial banks.

In these extraordinarily turbulent times, it is not surprising that important disagreements have emerged among policymakers and economists. Almost all agree activist government was necessary in the immediate aftermath of the Lehman bankruptcy. The US Treasury’s support of banks through the troubled asset relief programme (Tarp), and the Federal Reserve’s support of the commercial paper market and money market mutual funds, were critical in stemming the freefall.

But the value of fiscal stimulus has been the subject of wide debate. Fiscal stimulus – the amount of tax cutting and federal spending increases – from the programme’s inception in early 2009 was approximately $480bn. During the same period, the cumulative shortfall in private fixed capital investment measured against the long-term average shares of cash flow appears to have been about $325bn.

Most in the business community attribute the massive rise in their uncertainty to the collapse of economic activity, but its continuance since the recovery took hold is attributed to the widespread major restructuring of our financial system and the burgeoning federal deficit, which creates critical future tax uncertainty.

Only the deficit lends itself to being quantified. Fixed capital investment as a share of cash flow over the past four decades has been significantly (negatively) correlated with the ratio of the federal deficit to GDP, with the deficit ratio leading the fixed investment share by nine months.* This would imply that the federal deficit as a percentage of GDP since September 2008 (cyclically adjusted to remove the effect of a weaker economy), accounted for as much as a third of the $325bn shortfall in business capital investment since early 2009.

But an indeterminate amount of the remaining shortfall reflects both a direct and indirect hobbling of vital financial intermediation. It is going to take years to address the unprecedented complexity of final rulemaking required in the massive Dodd-Frank bill. The inevitable uncertainty engendered will inhibit financial innovation and intermediation, and render the rules that will govern a future financial marketplace disturbingly conjectural. This is bound to have a significant impact on economic growth. Business planners must now confront a much wider set of scenarios that could affect the profitability of contemplated long-term commitments. This wider set, of necessity, increases risk premiums on illiquid assets.

The critical question, of course, is how much of a contraction in deficits and a decrease in the frenetic pace of new regulations can assuage the sense of a frightening future, allowing the natural forces of economic recovery to take hold. That process, which I outlined in earlier Financial Times articles on March 23 and June 25 2009, would accelerate if fear-determined equity premiums were reduced and stock prices accordingly rose. That would spur capital investment (they are highly correlated) and wealth-driven consumer expenditures. Economic growth would finally bring an important fall in unemployment.

* Based on National Income Account definitions

The writer is former chairman of the US Federal Reserve