Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


China raises rates to control prices
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: October 19 2010 14:02 | Last updated: October 19 2010 17:51
http://www.ft.com/cms/s/0/58ac2d38-db79-11df-ae99-00144feabdc0.html


China raised interest rates on Tuesday for the first time in nearly three years, in a surprise move that could reflect official concerns about increasing inflationary pressures in the economy.

The decision to lift the benchmark deposit and lending rates by 0.25 per cent is the most decisive step yet to scale back the massive stimulus China injected into its economy during the financial crisis and follows a strong rebound in growth.

The move comes after a series of policy tightening measures in other Asian economies in recent weeks in a bid to contain inflation amid concern that loose US monetary policy is prompting a flood of liquidity into the region.

The People’s Bank of China said the one-year lending rate in renminbi would rise from 5.31 per cent to 5.56 per cent, while the one-year deposit rate would increase to 2.5 per cent from 2.25 per cent.

China cut interest rates several time between September and December of 2008 as the financial crisis began to take hold. This is the first increase since December 2007.

As its economy recovered sharply after the crisis, China initially avoided raising rates, preferring to try and limit new credit issued by banks and introducing measures to discourage speculation in the property sector.

Under pressure to appreciate their currency more quickly, Chinese officials have argued in recent weeks that if the US goes ahead with further quantitative easing to boost its economy, it will lead to a surge of capital inflows into China and other Asian countries.

However, one of the risks of raising rates is that provides even stronger encouragement for inflows of capital into the country especially given the continued expectation that the Chinese currency will appreciate in the coming years.

Another risk is that higher interest costs will put pressure on some of the local government-owned companies which borrowed heavily from Chinese banks during the crisis in order to fund ambitious infrastructure projects.

One explanation for the rate hike is that September inflation figures, which are due to be published later this week, could be higher than expected, while third-quarter growth might also have exceeded forecasts. Inflation reached 3.5 per cent in August, ahead of the government’s target for the year of 3 per cent.

The government could also be concerned that its efforts to dampen the property market, unveiled in April, are beginning to lose their force. Sales in a number of cities have taken off again in recent weeks, while prices started to increase again in September over the previous month.

Jun Ma, an economist at Deutsche Bank in Hong Kong, said the decision was the start of a cycle of rate hikes. It showed that “a policy consensus has been reached to tolerate lower growth” and that the government’s willingness “to use interest rate policy to contain speculative property demand”.

However, Mark Williams at Capital Economics said that the decision was a short-term adjustment by a “government increasingly concerned about the pace of lending growth” in recent weeks and which wanted to send a strong signal to the banks. As a result, it would not lead to significantly lower growth.

Some Chinese officials have argued that as real interest rates on bank deposits are currency-negative, the authorities needed to begin lifting rates in order to try and prevent inflationary expectations from soaring.





Japan downgrades view of economy
By Lindsay Whipp in Tokyo
Copyright The Financial Times Limited 2010
Published: October 19 2010 06:38 | Last updated: October 19 2010 13:36
http://www.ft.com/cms/s/0/e776e76c-db40-11df-ae99-00144feabdc0.html


The Japanese government has downgraded its assessment of economic conditions for the first time in almost two years due to the strong yen and weak exports.

The cabinet office on Tuesday said Japan’s recovery from its worst post-war recession appeared to be “pausing”, and warned that the economy could soon face weaker overseas demand.

“The risks that the economy [could be] depressed by a possible slowdown in overseas economies, and fluctuations in exchange rates and stock prices are increasing,” the report said.

The more pessimistic outlook did not come as a surprise given recent concerns about the threat of the surging yen on Japan’s economic recovery. Worries about the recovery prompted Tokyo to intervene in the currency markets for the first time in more than six years, selling a hefty Y2,125bn of its currency ($26bn) in September.

The government is drawing up another economic stimulus package while the Bank of Japan has recently announced additional easing measures.

The strength of the yen, which has already climbed past last month’s intervention level to trade at Y81.40, is hurting business confidence and raising worries about its potential impact on capital spending and further hollowing out of the country’s manufacturing sector.

Banri Kaieda, minister for economic and fiscal policy, told reporters he was concerned that an elongated period of the yen rates at around Y81 per dollar would pose a downside risk for capital spending, as many companies had made plans with currency assumptions of around Y89 per dollar.

Exports have been the main driver of Japan’s recovery. However, exporters have faced stiff competition in overseas markets from neighbouring South Korean companies, which have benefit from a relatively weaker currency, helped by what traders see as active intervention in the markets by the country’s authorities.

Prime minister, Naoto Kan, last week urged both South Korea and China to “act responsibly within common rules” on exchange rates, in a unusually strong statement, ahead of imminent G20 meetings that Seoul is hosting.

Yoshihiko Noda, finance minister, also suggested that as the host of the G20, South Korea could face increased scrutiny over its exchange rate policy given Seoul’s own intervention.

But Mr Noda on Tuesday drew back from any implied criticism of South Korea, telling reporters that he had not been referring to a particular currency policy, and was merely highlighting South Korea’s “weighty role” as host at a meeting where foreign exchange issues were likely to be the dominant theme.





US housing starts climb in September
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 19 2010 14:56 | Last updated: October 19 2010 16:16
http://www.ft.com/cms/s/0/72b43430-db80-11df-ae99-00144feabdc0.html


The pace of new home construction in the US picked up in September, giving a boost to builders and signalling that the market could be stabilising after a volatile summer.

Housing starts rose by 0.3 per cent to an adjusted annual rate of 610,000, according to the commerce department. That was stronger than economists expected and marked the third month running that starts increased.

Year on year, starts are up by 4.1 per cent.

The monthly rise was concentrated among single-family houses, where construction was up by 4.4 per cent. The more volatile multi-family sector was off by 6.8 per cent.

“It seems fair to say core activity is levelling off after the post-tax credit plunge, but a meaningful recovery is not yet on the horizon,” said Ian Shepherdson, chief US economist at High Frequency Economics.

Economists debate the merits of home construction because the market already suffers from an overhang of supply and more new houses will put pressure on prices. However, demand for new houses is a sign of health for the market and the wider economy.

The housing market is also facing renewed uncertainty due to widespread problems with how banks have processed foreclosures and the subsequent freezes on foreclosures that have been implemented while banks review their work.

William Dudley, president of the Federal Reserve Bank of New York, said on Tuesday that home construction remains “extremely low” compared with average rates during the last 50 years. He estimates that there are 3m vacant homes in the US and that this number will grow as mortgage lenders foreclose on more properties.

The glut of supply also continues to weigh on prices. Analysts at Capital Economics argue that US house prices may not reach their previous peak for 10 years and that the rebound could take longer if the foreclosure freeze lingers.

In September, construction was up in the north-east and south but fell in the west and Midwest.

Meanwhile, building permits, which signal future construction, slipped by 5.6 per cent to 539,000 last month and are down by 10.9 per cent from a year ago.

In spite of that, builders have been feeling more hopeful about the sector recently. On Monday, the National Association of Homebuilders said that optimism was on the rise due to increased buyer traffic.








BofA reports third-quarter loss of $7.3bn
By Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: October 19 2010 13:20 | Last updated: October 19 2010 15:03
http://www.ft.com/cms/s/0/e19b07d4-db76-11df-ae99-00144feabdc0.html


Bank of America recorded a $10.4bn non-cash accounting charge that wiped out the lender’s quarterly earnings and underscored the sweeping effects US financial industry reform legislation will have on banks’ business practices.

The US lender wrote down goodwill to account for the effects on new debit-card fee restrictions at its credit-card division. The quarterly profit would have otherwise exceeded Wall Street’s estimates.

“We are adapting to the regulatory environment, credit quality continues to improve, and we are managing risk and building capital,” Brian Moynihan, BofA’s chief executive, said Tuesday in a statement.

“We are realistic about the near-challenges, and optimistic about the long-term opportunity.”

US banks

FT In depth: The progress of US banks in the wake of the global crisis

The bank’s third-quarter net loss widened to $7.3bn, or 77 cents a share, from $1bn, or 26 cents, in the year-earlier period. Excluding the goodwill charge, BofA would have earned $3.1bn, or 27 cents a share. Analysts had expected 14 cents a share, according to a Bloomberg LP survey.

BofA has earned more than $9bn this year, helping the lender strengthen its balance sheet and fulfill new international capital standards. The bank joined rivals JPMorgan Chase and Citigroup in reporting increases to key capital ratios.

Total revenue rose 2 per cent to $27bn. Net interest income, or profits from loans, climbed 8 per cent to $12.7bn. Fee income totaled $14.3bn, just below the $14.6bn the bank collected a year ago.

BofA released $1.8bn in loan-loss reserves during the period, reflecting a healing credit environment. A year ago, the bank had set aside $2.1bn for defaults.

The results capped a tumultuous week for BofA and other mortgage banks. Lenders such as BofA, GMAC and JPMorgan have drawn scrutiny for their foreclosure practices amid evidence that employees had rubber-stamped thousands of documents without checking their accuracy or having them notarised as required by law.

BofA has maintained that its foreclosure decisions were accurate, but nevertheless halted evictions throughout the US earlier this month to review its paperwork. On Monday, the bank said it would press ahead with foreclosures in 23 states.

“We have to get through this difficult work to help real estate markets heal,” Mr Moynihan said during a conference call with analysts.

Losses at the bank’s home-loan division narrowed to $344m from $1.64bn a year earlier. BofA added $872m in provisions for so-called representations and warranties expenses, where the bank is obligated to buy back loans from investors in mortgage-backed securities.

Those expenses totaled $414m in the third quarter. The bank’s total reps-and-warranties reserve now totals $4.4bn.

The credit-card business lost $9.8bn, reflecting the goodwill writedown. The division’s provision for credit losses totaled $3.1bn during the period, less than half what it recorded in the year-earlier period.

Profit from BofA’s desposit-taking business fell as new regulations sapped revenue.

BofA’s investment-banking and markets arm also reported a lower quarterly profit, as tepid trading activity hurt revenue.

Investment-banking fees increased. The bank’s wealth-management business earned $313m, up 34 per cent from a year ago, on higher asset-management fees.





Goldman Sachs quarterly profits fall 40%
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 19 2010 13:54 | Last updated: October 19 2010 15:22
http://www.ft.com/cms/s/0/c97f465a-db7c-11df-ae99-00144feabdc0.html


Goldman Sachs said its earnings declined by 40 per cent in the third quarter as trading revenues weakened.

Net income at Goldman was $1.9bn, or $2.98 a share, down from $3bn, or $5.74 in the same period a year ago, the bank said on Tuesday. The performance exceeded the expectations of Wall Street analysts, thanks to lower costs, and the bank’s shares rose by 1.2 per cent to $155.57 in early trading.

Lloyd Blankfein, Goldman’s chief executive, said that economic conditions continue to be “challenging” but said he was pleased with the bank’s “solid” performance.

Revenues fell by 28 per cent to $8.9bn due to a drop in its trading and principal investments division. Trading revenues plunged by 36 per cent to $5.6bn as volumes declined.

“This decrease primarily reflected significantly lower net revenues in the client franchise businesses, principally due to lower activity levels compared with the third quarter of 2009,” Goldman said.

Investment banking continued to thrive at Goldman, and revenues in that unit rose by 24 per cent to $1.1bn.

Goldman said that its compensation and benefits expenses were $3.8bn in the third quarter, down 28 per cent from the $5.35bn it paid in the same period last year. The bank’s ratio of compensation and benefits to net revenues was 43 per cent during the first nine months of the year, down from 47 per cent in the first nine months of 2009.

US banks

FT In depth: The progress of US banks in the wake of the global crisis

Earlier this month it said that, like other banks, it was freezing some foreclosures as it reviews its procedures.

The bank is also working to rehabilitate its image three months after settling charges levied by the US Securities and Exchange Commission that it misled investors in a collateralised debt obligation the bank had created. The $550m penalty was the largest ever assessed against a Wall Street bank.

Last week, a report by the SEC’s Office of Inspector General concluded that the lawsuit was fair.




EU agrees tougher rules for hedge funds
By Nikki Tait in Luxembourg
Copyright The Financial Times Limited 2010
Published: October 19 2010 15:38 | Last updated: October 19 2010 17:35
http://www.ft.com/cms/s/0/904405a6-db86-11df-ae99-00144feabdc0.html


Europe is set for a tough new regulatory regime for hedge funds and private equity companies after European Union ministers reached a long-awaited agreement on rules to cover the sector.

The package agreed on Tuesday will for the first time impose capital and disclosure requirements on “alternative” fund managers on a pan-EU basis.

Such fund managers will also have to comply with other detailed rules covering, for example, depositary arrangements and pay. But, after an initial transition period, the new regime will allow fund managers to market their funds across the EU, rather than have to seek approval to enter different countries’ markets individually.

These pan-EU marketing rights – or “passports” will also be available to managers from outside the 27-country bloc, provided they and the countries where they are based meet certain conditions, including compliance with international tax and anti-money laundering agreements and regulatory co-operation.

“We will have European supervision of a lot of new instruments for the first time,” said Didier Reynders, Belgium’s finance minister, who spearheaded the final negotiations.

How to treat non-EU managers had been the largest obstacle to agreeing the new rules, delaying any agreement for months. France was particularly concerned that if such managers had easy access to an EU passport, investor protection could suffer.

By contrast, the UK and the European Commission argued that it would be discriminatory to provide an EU passport to fund managers within the 27-country bloc, but not to those from outside it.

Under Tuesday’s unanimously-agreed compromise, there will be a lengthy transition period; the “third country” passport will become available two years after the rest of the new rules take effect, so probably in 2015.

The current system of individual market applications will then continue in tandem for a further three years – to around 2018 – before ending. A review of the new rules will also take place four years after they come into force.

France had also pushed for tight administration of the new regime by the new European Securities and Markets Authority. But other states, including the UK and Germany, strongly opposed extending ESMA’s role.

On Tuesday, officials said the final pact did recognise ESMA’s ability to intervene in situations where there was a risk to the integrity of financial markets – but British diplomats said that this was only in line with the authority’s existing emergency powers. UK treasury secretary Mark Hoban described the result as “a good outcome”.

Representatives of the hedge fund industry also gave the deal a cautious thumbs-up. The Alternative Investment Management Association said it was “glad” an agreement had been reached and added that while the compliance burden would “heavy”, it would be “far less severe” than under the original proposals, which were unveiled more than 18 months ago.

The new rules still require the backing of the European Parliament, and some MEPs have concerns. But diplomats said talks with parliamentarians, would begin very shortly. If these go well, a final deal could be concluded within weeks or even days.

But officials said they did not foresee big problems and Jean-Paul Gauzes, the MEP who has steered legislation in the European Parliament, was hopeful of a final vote of approval in early November.