Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Weak jobs data raise prospects for more QE
Copyright The Financial Times Limited 2010
Published: October 4 2010 05:58 | Last updated: October 8 2010 17:07
http://www.ft.com/cms/s/0/cf577414-cf63-11df-9be2-00144feab49a,s01=1.html


Friday 17:00 BST. The dollar is slumping, short-term Treasury yields are at record lows and US equities are slightly higher after a worse than expected US jobs report raised hopes that the Federal Reserve would step in to support the economy.

The FTSE All-World equity index is up 0.2 per cent, fractionally off its best level since late April, while a key commodities basket is parked at its highest reading in almost two-years. Gold is rallying.

Headline non-farm payrolls fell 95,000 in September, the commerce department said. The crucial private sector net job growth was plus 64,000 against expectations of a 75,000 gain. The unemployment rate held at 9.6 per cent

The report pleased those investors who have been pushing major risk asset gauges higher in the belief that markets have entered an investment “sweet spot”, where economic growth is showing tentative signs of improvement, but not so much to dissuade central banks from delivering more monetary stimuli.

Indeed, the initial reaction to the data suggests that traders remain more concerned about missing out on extra quantitative easing than they are worried about anaemic growth.

Action prior to the jobs release on Friday also suggests this “better news is bad news” reasoning is the most prevalent. US equity futures had dipped, and the dollar perked up with bond yields after St Louis Fed president James Bullard told CNBC that improving economic conditions meant the need for further monetary easing was a “tough call”.

That move has now been reversed, and the S&P 500 index in New York is up 0.5 per cent.

Once traders have digested today’s figures, attention is likely to turn to the third-quarter US earnings season, which began on a positive note late Thursday, after aluminium producer Alcoa topped analysts estimates.

Magnifying glass

Factors to Watch. Traders will be aware that this weekend’s meeting of G7 finance ministers holds a greater than usual chance of delivering a forex catalyst given recent rhetoric about currency wars. It is surely no coincidence that China has on Friday allowed the renminbi to hit its highest level versus the dollar since the revaluation of July 2005, up 0.3 per cent to Rmb6.6704, an unusually large daily move.

It is also worth noting that Japan’s markets will be closed on Monday for the Sports Day vacation, possibly providing some nice thin conditions in which Tokyo may favour a spot of yen-weakening intervention.

Europe

Europe. Bourses are in thrall to the US futures, and are well off earlier lows. The FTSE Eurofirst 300 was flat and London’s FTSE 100 was off 0.1 per cent, with industrial metals groups lending support.

Germany’s Dax is up 0.1 per cent despite a bigger than expected fall in the country’s exports in August as the higher euro took its toll.

Forex

Forex. The dollar reversed early gains following the release of the jobs data as traders factored in a greater likelihood of more quantitative easing from the Fed.

.The US dollar index, which tracks the buck against a basket of its peers, is down 0.1 per cent at 77.30, just off 8-month lows. Against the euro the dollar is down 0.1 per cent $1.3934. The euro fell sharply at one point after Jean-Claude Juncker, the chairman of eurozone finance ministers, said the single currency was too strong at $1.40. But this decline was soon reversed as traders reckoned it made little difference what Mr Juncker thought, and the ECB was unlikely to take action to target a softer euro.

The yen has hit a fresh 15-year high versus the dollar of Y81.86 and is currently down 0.7 per cent to Y81.85. Investors are keeping watch for further intervention by Japanese authorities to weaken the currency, after Yoshihiko Noda, finance minister, said that the government will take necessary steps if the foreign exchange markets move abruptly.

The Australian dollar is trading at $0.9836, up 0.4 per cent on the day, after reaching a record $0.988 on Thursday, its highest level since it was floated on foreign exchange markets in 1983. Some analysts are predicting the currency will reach parity with the US dollar in a matter of weeks.

Rates

Rates. Core bond yields were earlier pushed slightly higher following the Bullard comments, but they moved lower after the payrolls report.

The 5-year US Treasury yields continue to march toward 1 per cent, falling 5 basis points to 1.08 per cent, as bond investors continue to be on QE. The US 10-year yield is down 3 basis points at 2.35 per cent, its lowest since January 2009. The two-year note has hit a new record low just over 0.34 per cent, as it has every day this week.

Japan’s 10-year yields are down 2 basis points to 0.86 per cent after the government approved a Y5,100bn ($62bn) stimulus package to help flagging economic growth.

Peripheral eurozone sovereign spreads are continuing to tighten as worries about the region’s fiscal woes recede. The Greek 10-year yield has dipped below 10 per cent for the first time since June, according to Reuters data, as investors welcome recent supportive comments from China regarding Greek assets.

Commodities. The drop in the dollar is providing a broad boost to the complex. Industrial metals are again challenging multi-month and record highs, with copper up 2.8 per cent to $3.78 a pound in Nymex trading.

Gold is up 1 per cent at $1,346 an ounce, having touched a peak of $1,365 in the previous session. Oil is up 1.3 per cent at $82.69 a barrel.

The Reuters-Jefferies CRB index, a commodities benchmark is up 2.4 per cent. The CRB is at its best levels in nearly two years, having enjoyed a strong advance on the back of improved China manufacturing data and the greenback’s 13 per cent slide since its cyclical high in June. Agricultural products are also providing a lift after a bullish monthly report on supply from the US Department of Agriculture.

Asia Pacific

Asia-Pacific. Shares were lower on Friday morning for the first time in six days, led by metal stocks and exporters, as investors took some profits ahead of the US jobs report.

The FTSE Asia-Pacific index is down 0.7 per cent, with Japan’s Nikkei 225 average off 1 per cent as the strong yen continued to weigh on exporters.

Australia’s S&P/ASX 200 fell 0.2 per cent after raw materials stocks lost ground on lower commodity prices. South Korea’s Kospi Composite is 0.2 per cent lower as tech stocks falter following a disappointing earnings forecast from Samsung Electronics.

The main bright spot is China, where the Shanghai Composite climbed 3.1 per cent as it played catch-up after a four-day holiday, and the Hang Seng index in Hong Kong, which added 0.3 per cent.

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







Investors price in US inflation fears
By Michael Mackenzie in New York
Copyright The Financial Times Limited 2010
Published: October 7 2010 22:00 | Last updated: October 7 2010 22:55
http://www.ft.com/cms/s/0/df1ab5ea-d252-11df-8fbe-00144feabdc0.html


Investors are betting that an aggressive push by the Federal Reserve to revive the US economy could drive up inflation, with Treasury bond markets pricing in the effects of a return to emergency monetary easing next month.

Inflation expectations in the US have jumped sharply this week, with one measure rising to its highest level since late June. So-called breakeven inflation rates, which are the bond market’s expectations of future inflation levels, have leapt on the growing belief that the Fed will initiate a fresh round of quantitative easing – in effect, pumping money into the economy – at the November meeting of its interest rate-setting committee.

Breakeven rates reflect the difference between yields on cash Treasury bonds and those of Treasury inflation-protected securities, or Tips.

The 10-year breakeven rate rose as high as 1.98 per cent on Wednesday, its highest level since June 24. It is up from 1.8 per cent on Monday and well above its low for the year of 1.51 per cent in late August. By the close in New York on Thursday it had slipped back to 1.91 per cent.

The yield on the 30-year bond above that of the 10-year note has also hit a record at 1.31 per cent, up from 1.16 in September.

As stocks tumbled over the summer, many investors feared the US could suffer a prolonged bout of Japanese-style deflation. The Fed’s message that it is determined to avoid this has led to the recalibration of inflation expectations.

“The price action is telling you that QE is coming and that the Fed will deliver it,” said George Goncalves, head of interest rate strategy at Nomura Securities.

However, Richard Fisher, Dallas Fed president, sought to damp expectations, saying on Thursday: “The markets have drawn too quick a conclusion that this [easing] is a likely event,” Reuters reported.

“If the Fed is successful with QE, inflation breakevens should be higher,” he said.

The dollar on Thursday tumbled to a fresh 15-year low against the yen and hit its lowest level in 8 months against sterling. The Australian dollar rose to its highest against the US currency since it was floated in 1983.

While breakeven rates remain well below their highs of earlier this year – the 10-year rose to 2.47 per cent in January – the prospect of renewed QE and the Fed’s desire to push inflation higher poses a significant risk to bond market investors.

Also under pressure is the dollar, which has fallen to successive 15-year lows against the Japanese yen and shed 5 per cent versus the euro since the Fed’s meeting in September.

The yield on 30-year Treasury bonds, which are highly influenced by inflation expectations, has climbed to a record high and is 1.3 percentage points over the 10-year note yield. A rise in inflation would erode real returns on government debt, making Treasuries less attractive to hold. That could lead to a bond sell-off.

“Breakeven inflation rates should rise significantly from their present levels, particularly as Fed officials are talking about allowing inflation to rise above their target level for a period of time,” said Michael Pond, co-head of US rates strategy at Barclays Capital.

This week officials including William Dudley of the New York Fed and Charles Evans of the Chicago Fed have supported tolerating a period of inflation above the central bank’s target so as to offset times when inflation is below target. “Markets are just not priced for that outcome,” said Mr Pond.

That has compelled investors to buy equities, commodities and government bonds, while shunning the dollar. While 10-year breakeven rates rose above 1.90 per cent after the Fed’s September meeting, until this week, inflation expectations had been contained.





US sheds 95,000 jobs in September
By Robin Harding and James Politi in Washington
Copyright The Financial Times Limited 2010
Published: October 8 2010 14:13 | Last updated: October 8 2010 15:56
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The US suffered another month of mediocre job growth in September, adding to the pain of Democrats as they campaign for mid-term elections to Congress and increasing the chances that the Federal Reserve will restart quantitative easing.

The private sector created 64,000 jobs in September, but overall payrolls fell by 95,000 as the government laid off workers. The unemployment rate held steady at 9.6 per cent, the labour department said on Friday.

Some traders welcomed the release as a sign that the Federal Reserve could step in with further quantitative easing, boosting stocks and Treasuries but hitting the dollar. The dollar, which had been rising, fell 0.2 per cent against a basket of currencies and against the yen it briefly fell below 82 for the first time since 1995.

S&P 500 futures, which had been edging lower before the release, erased most of their losses and were down just 0.1 per cent at 1,155.00. The yield on benchmark US 10-year Treasuries, which had been climbing, fell 1 basis point to 2.37 per cent.

The overall job losses were worse than the decline of 5,000 expected in a survey of economists by Bloomberg, reflecting the unexpected loss of 76,000 local government jobs, in addition to 77,000 temporary census workers.

That suggests that state and local governments are starting to cut jobs in response to pressure on their budgets and shows how the fading out of last year’s fiscal stimulus package is starting to hit the economy.

The disappointing figures came as the Treasury department announced a $1.5bn funding package to spur small business lending. The money will be allocated on a state-by-state basis and Treasury predicts it will generate an additional $15bn in additional private lending.

The US needs to create about 200,000 jobs a month in order to keep up with population growth, let alone bring down the unemployment rate, and the weakness of the labour market since the spring has been one of the most troubling signs that the economic recovery has hit a soft patch.

The weakening of the recovery has led the Fed to consider whether it should start expanding its balance sheet again in order to drive down long-term interest rates and stimulate the economy. The Fed next meets at the start of November. Stephen Wood, a senior market strategist at Russell Investments, said that Friday’s jobs data “at a minimum take away the ammunition from the hawks and reinforce the argument of advocates of quantitative easing” on the Federal Open Market Committee.

“The data does not appear to be strong enough to derail the implementation of quantitative easing in November,” said Ward McCarthy, chief financial economist at Jefferies . “However, it does suggest that the FOMC is more likely to follow a more measured approach…as opposed to the ‘shock and awe’ approach,” he said.

With less than a month to go before the congressional elections, political reactions to the data came swiftly.Carolyn Maloney, the New York Democrat who chairs the joint economic committee, noted in an interview with the Financial Times that the private sector had now created jobs for nine consecutive months. “The recovery is continuing. We are in much better shape than we were a year ago. The policies that we put in place are working.”

But Eric Cantor, a Virginia Republican in the House of Representatives, disagreed : “Over the past two years, the policies pursued by the President and Democrat leaders in Congress have created a cloud of uncertainty and fear that has inhibited productivity, innovation and job creation

The details of the data showed some further weakness. The number of people working part-time because they could not find a full-time job rose by 612,000 to 9.5m.

Average hours worked and average hourly earnings – both of which tend to increase before companies start to expand their workforce – were flat compared with the previous month.

Employment in healthcare was up by 24,000, leisure and hospitality jobs rose by 34,000 and professional and business services added 28,000. Manufacturing employment was little changed but construction fell once again, declining by 21,000 from the previous month.

There were slight revisions to estimates for previous months. The estimate of jobs lost in July was increased from 54,000 to 66,000 and the estimate for August was raised from 54,000 to 57,000.






Japan finance chief defends yen intervention
By Michiyo Nakamoto in Tokyo
Copyright The Financial Times Limited 2010
Published: October 8 2010 05:34 | Last updated: October 8 2010 05:34
http://www.ft.com/cms/s/0/6a5d13ca-d292-11df-9e88-00144feabdc0.html


The Japanese finance minister has sought to counter criticism that Japan is engaged in a currency devaluation race, saying the Bank of Japan’s intervention in the foreign exchange market last month was aimed at stabilising the market rather than weakening the yen to gain a competitive advantage.

Japan’s intervention was “aimed at curbing excessive foreign exchange movements, not meant to guide [the yen] to a certain level over the long term,” Yoshihiko Noda said on Friday, before leaving for this weekend’s Group of Seven finance ministers meeting in Washington.

The yen hit a new 15-year high of Y82.25 against the US dollar on Thursday and continued to trade in a tight range on Friday because of speculation that Japan would not be able to intervene ahead of the G7 meeting.

The meeting is expected to be focused on ways to prevent a potential “currency war” as a growing list of countries has intervened to lower their currency levels in order to help their own exports.

However, Mr Noda warned that the Tokyo government was watching the market with great interest and that it would take “decisive action, including intervention, if necessary.”

Japan has attracted criticism for its intervention on September 15, when it spent an estimated Y2,100bn to buy dollars – its first foreign exchange intervention in six years which had the instant effect of weakening the yen by Y3 to around Y85.50.

As the yen resumes its rise in recent weeks, government leaders have repeatedly warned that Japan would be prepared to intervene again.

One theory behind the yen’s strength is that Chinese purchase of Japanese government bonds and other yen assets is contributing to the currency’s sharp appreciation.

However, the finance ministry on Friday revealed that China, which attracted attention for amassing a record amount of Japanese government bonds earlier this year, was a net seller of Y2,020bn in short-term Japanese bills in August.

Despite China’s sell-off, central banks seeking a safe haven would continue to buy yen assets and that remained a factor behind the Japanese currency’s strong rise, according to Tohru Sasaki, chief foreign exchange strategist at JPMorgan.

In the four months from May, net purchases of JGBs through London totalled Y12,700bn, a 70 per cent increase from the same period last year, he said in a note to clients.

In an effort to counter the negative impact of the high yen, the Japanese cabinet on Friday approved a Y5,050bn emergency stimulus package aimed at boosting regional economies and helping small businesses cope with the slowdown.

The impact of the yen’s appreciation showed through in Japan’s current account surplus in August, which fell 5.8 per cent from a year earlier to Y1,114bn.

The trade balance declined 35.2 per cent in August from a year earlier to Y195.9bn, its first drop in more than a year.

Export growth slowed to a 16.5 per cent rise from a year ago, down from July’s 24.7 per cent gain.



Grain prices surge as US slashes forecast
By Javier Blas in London and Gregory Meyer in New York
Copyright The Financial Times Limited 2010
Published: October 8 2010 16:37 | Last updated: October 8 2010 16:37
http://www.ft.com/cms/s/0/c5ceeaac-d2ed-11df-9166-00144feabdc0.html


Agricultural commodities prices exploded higher on Friday, with wheat jumping by 10 per cent, as the US government slashed its forecast for grains production after adverse weather damaged crops worldwide.

The US Department of Agriculture shocked traders by forecasting in a monthly report that the country’s corn farmers will harvest about 12.7bn bushels in the 2010-11 crop year that started in September, down 4 per cent from its previous estimate.

The larger-than-expected drop would slash the country’s stocks to a 14-year low of 900m bushels. The USDA also cut wheat and soya bean production estimates.

“This revision highlights that we are in a very fragile supply and demand situation,” said Abdolreza Abbassian, senior economist at the UN Food and Agriculture Organisation in Rome.

In Chicago, all agricultural commodities surged to daily fluctuation limits imposed by exchange rules as soon as markets re-opened after the USDA forecast. CBOT December corn surged 6 per cent, or 30 cents, to $5.28¼ a bushel. Traders, unable to hedge using futures because of the daily limits, used options instead, with synthetic prices at $5.50-$5.60 a bushel, up 12.5 per cent.

CBOT December wheat jumped 9.1 per cent, or 60 cents, to $7.19¼ a bushel while in Paris, the European benchmark Liffe November milling wheat jumped 10 per cent.

Corn is a key animal feed and its rally of 49 per cent since June 30 threatens to raise meat prices. As livestock farmers often subsitute one feed for another, a rise in corn could also trickle down to the staple grains relied on by the world’s poor. CBOT November rough rice rose 50 cents, the maximum allowed, to $13.295 per 100lb on Friday.

The US is the world’s largest corn grower and its exports make up more than 60 per cent of global trade in the grain. The agricultural department had earlier forecast a record corn crop for this year’s harvest. But a combination of unfavourable heat and heavy rains that leached nutrients from soil forced a re-evaluation of yields once farmers began the harvest.

The USDA now expects the average US corn field to yield 155.8 bushels per acre, 6.7 bushels lower than its September estimate and 8.9 bushels below last year’s record 164.7 bushels.

“You can only characterise it with superlatives, and the superlatives are price-supportive,” Greg Wagner, an independent commodities analyst in Chicago, said of the forecast.

“It completely caught the trade off-guard. This is a left hook – any bears still standing just got put on the mat,” he said.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.
Published: October 8 2010 16:37 | Last updated: October 8 2010 16:37

Agricultural commodities prices exploded higher on Friday, with wheat jumping by 10 per cent, as the US government slashed its forecast for grains production after adverse weather damaged crops worldwide.

The US Department of Agriculture shocked traders by forecasting in a monthly report that the country’s corn farmers will harvest about 12.7bn bushels in the 2010-11 crop year that started in September, down 4 per cent from its previous estimate.

The larger-than-expected drop would slash the country’s stocks to a 14-year low of 900m bushels. The USDA also cut wheat and soya bean production estimates.

“This revision highlights that we are in a very fragile supply and demand situation,” said Abdolreza Abbassian, senior economist at the UN Food and Agriculture Organisation in Rome.

In Chicago, all agricultural commodities surged to daily fluctuation limits imposed by exchange rules as soon as markets re-opened after the USDA forecast. CBOT December corn surged 6 per cent, or 30 cents, to $5.28¼ a bushel. Traders, unable to hedge using futures because of the daily limits, used options instead, with synthetic prices at $5.50-$5.60 a bushel, up 12.5 per cent.

CBOT December wheat jumped 9.1 per cent, or 60 cents, to $7.19¼ a bushel while in Paris, the European benchmark Liffe November milling wheat jumped 10 per cent.

Corn is a key animal feed and its rally of 49 per cent since June 30 threatens to raise meat prices. As livestock farmers often subsitute one feed for another, a rise in corn could also trickle down to the staple grains relied on by the world’s poor. CBOT November rough rice rose 50 cents, the maximum allowed, to $13.295 per 100lb on Friday.

The US is the world’s largest corn grower and its exports make up more than 60 per cent of global trade in the grain. The agricultural department had earlier forecast a record corn crop for this year’s harvest. But a combination of unfavourable heat and heavy rains that leached nutrients from soil forced a re-evaluation of yields once farmers began the harvest.

The USDA now expects the average US corn field to yield 155.8 bushels per acre, 6.7 bushels lower than its September estimate and 8.9 bushels below last year’s record 164.7 bushels.

“You can only characterise it with superlatives, and the superlatives are price-supportive,” Greg Wagner, an independent commodities analyst in Chicago, said of the forecast.

“It completely caught the trade off-guard. This is a left hook – any bears still standing just got put on the mat,” he said.






BofA halts foreclosures across US
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 8 2010 17:20 | Last updated: October 8 2010 17:20
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Bank of America said that it would halt sales of foreclosed homes across the US as it widens its review of its repossession process amid growing controversy over flawed documents.

The US bank, which previously said it was evaluating its foreclosure processes in 23 states said on Friday that it was expanding its review to all 50 states.

“We will stop foreclosure sales until our assessment has been satisfactorily completed,” BofA said in a statement. “Our ongoing assessment shows the basis for foreclosure decisions is accurate.”

Earlier this week, Democratic lawmakers called on federal authorities to investigate thousands of foreclosures after complaints that the banks were misplacing documents and failing to provide information to homeowners trying to avoid foreclosure.

JPMorgan Chase and GMAC said in September that they would suspend evictions and foreclosure sales in several states while they conducted internal reviews.

Banks have been criticised for processing court documents without having them notarised or checking them for accuracy. A JPMorgan employee said in a sworn deposition that she signed thousands of affidavits allowing the bank to foreclose properties without verifying who owned the mortgage and how much was owed on it.

BofA handles the most mortgages of any US bank and is the first to halt foreclosures in all 50 states.




MGM seeks approval for bankruptcy plan
© Reuters Limited
October 8, 2010
http://www.ft.com/cms/s/0/38bf09e2-d28b-11df-9e88-00144feabdc0.html


LOS ANGELES, October 7 – Film studio Metro-Goldwyn-Mayer proposed a pre-packaged bankruptcy plan on Thursday that would wipe out $4bn in debt and put the founders of Spyglass Entertainment at the helm.

MGM, which has been mired in discussions with creditors and investors to try to reduce its debt, said it had begun seeking lenders’ votes for the plan of reorganisation to salvage one of Hollywood’s most legendary studios.

The plan provides for MGM’s secured lenders to exchange more than $4bn in outstanding debt for 95.3 per cent of equity in the company upon its emergence from Chapter 11, the company said.

Any agreed restructuring should clear the way for the making of The Hobbit, a two-part prequel to the blockbuster Lord of the Rings trilogy, which MGM is set to make with Time Warner. The companies have yet to announce the start of production but MGM’s woes had been an obstacle.

The studio, home to the James Bond and Pink Panther franchises, has struggled for years with debt after a $2.85bn 2005 leveraged buy-out by a group that included private equity firms Providence Equity Partners, TPG, Quadrangle Group and DLJ Merchant Banking Partners, and media companies Sony and Comcast.

The deadline for the company’s secured lenders to vote on the plan is October 22 unless extended. More than 50 per cent of MGM’s creditors who own at least two-thirds of its debt must endorse the plan for it to pass.

A majority of the company’s senior secured lenders are led by JPMorgan Chase and Credit Suisse, according to Thomson Reuters data.

Following receipt of the required consent, MGM said it plans to begin the pre-packaged Chapter 11 proceedings.

MGM first began exploring options in November. It put an initial idea of selling itself outright on hold after offers for the studio from such entities as Time Warner – which had bid about $1.5bn – were considered too low.

On Thursday, the studio presented a plan under which production company Spyglass would contribute certain assets in exchange for 0.52 per cent of a reorganised MGM. Two Spyglass affiliates, Cypress Entertainment Group and Garoge, will merge into MGM in exchange for 4.17 per cent of the reorganised company.

Spyglass founders Gary Barber and Roger Birnbaum will serve as co-chairman and chief executive officers of MGM once it emerges from Chapter 11, as had been reported since this summer.

A source familiar with the matter said the pair were planning to ramp up both film and television production once a restructuring was complete.

A spokeswoman declined comment when asked if the studio would entertain any increased bids, but a source familiar with the matter said the auction was now closed.