Financial News Courtesy of the Financial Times

Financial News Courtesy of the Financial Times

Markets seek new direction after G20
ByJamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: June 28 2010 07:44 | Last updated: June 28 2010 16:42
http://www.ft.com/cms/s/0/49f5f0ae-8277-11df-85ba-00144feabdc0.html


Monday 16:35 BST. Like an England centre-half pairing, markets appear unsure which direction to take, with investors relieved by a benign G20 meeting but still harbouring lingering concerns about the strength of the US and European economic recoveries.

The FTSE All-World index is up 0.5 per cent, commodities are mixed, and though the dollar is higher, the currency complex is struggling to establish its previously clearly-defined risk-on or risk-off trend.

In addition, the S&P 500 on Wall Street has endured a volatile session and is currently up 0.2 per cent as traders warily eye the falling US 10-year bond yield, whose 14-month low suggests many remain worried about economic prospects.

Still, the relative calm will be welcomed by bullish investors after last week’s pull-back in riskier assets following disappointing economic data – primarily consumer-focused reports from the US – and continuing worries about the debilitating impact of austerity measures designed to tackle Europe's’ fiscal difficulties.

A mooted spat at the G20 meeting between the US and the EU about the timing of such fiscal stricture has been overshadowed by news that the proposed implementation of tough capital rules for banks will be delayed.

Coupled with the finalising of the US financial regulation bill, many analysts believe this should remove a fair degree of uncertainty for the country’s banking sector – a prerequisite to any broader rally for stocks.

In the meantime, trading may be affected over the next few days by manoeuvring ahead of the end of the second quarter. Then, looming large, we have the US labour data due at the end of the week.

“Direction ’til Friday should be dictated by position traders; that is the traditional bulls and bears, looking to add or trim positions ahead of the next quarter,” said Geoff Howie, senior vice-president of global futures at MF Global Singapore, in a note.

“Given the weak mode of May and June, there is more potential for the bulls to make a seasonal move.”

● Europe. A positive start was helped by firmness in resources and insurance stocks. The FTSE Eurofirst 300 is up 1.1 per cent and London’s FTSE 100 rose 0.5 per cent, with the UK benchmark supported by a rare up-day for BP.

● Forex. The dollar is up 0.3 per cent versus the euro at $1.2335 as eurozone fiscal worries fester, but 0.4 per cent lower against sterling at $1.5102 as the UK’s severe Budget is rewarded.

A lack of comment from the G20 about China’s currency policy has left the renminbi barely changed at Rmb6.7960 versus the greenback.

The dollar index, which measures the buck against a basket of its peers, is up 0.1 per cent at 85.41.

● Debt. Investors are making quite a fuss about the US 10-year Treasury’s move towards the 3 per cent mark, with stock traders wary that a breach of that level may signal growing fears about the health of the US economy. The yield on the US 10-year Treasury is currently down 5 basis point at 3.06 per cent, its lowest level since April 2008.

The eurozone “peripheral” sector is under a bit of pressure as traders contemplate the prospects for Greece’s return to the sovereign debt markets. Greek 10-year yields are up 23 basis points to 10.71 per cent, close to the highest level since the ECB unveiled its €750bn support package in May. Spanish 10-year yields are up 8 basis points at 4.57 per cent.

● Commodities. Industrial metals are mixed, with copper down fractionally but others, such as aluminium and nickel higher. Oil is off 0.9 per cent at $78.12 a barrel as some of the premium it attracted at the end of last week on Gulf of Mexico storm fears starts to abate.

Gold had earlier threatened its all time nominal high of $1,265, but has since fallen back and is now down 0.3 per cent at $1,250.

● Asia. The FTSE Asia-Pacific index rose 0.1 per cent in mixed regional trading as investors awaited a fresh catalyst. Hong Kong and Seoul closed up 0.2 per cent and 0.1 per cent respectively.

Tokyo fell 0.5 per cent as chartists cited technical reasons for the Nikkei 225’s drop to a two-week low. Shanghai lost 0.7 per cent as the imminent float of Agricultural Bank of China hovered over the market, while Sydney was off 0.6 per cent on those lingering global growth concerns.

Monday’s Market Menu
What’s affecting risk appetite

Risk on

● G20: nothing untoward

● Euro: appears to have stabilised

Risk off

● Peripherals: spreads again widening

● Treasuries: near 3 per cent yield still suggests uncertainty






Interest rates may need to rise, warns BIS
By Norma Cohen, Economics Correspondent
Copyright The Financial Times Limited 2010
Published: June 28 2010 12:01 | Last updated: June 28 2010 12:01
http://www.ft.com/cms/s/0/cc70b8c2-808b-11df-be5a-00144feabdc0.html


The Bank for International Settlements warned on Monday that central banks might need to raise interest rates even before their respective economies are clearly in recovery.

The so-called “central banks’ central bank” issued the warning because of fears that rates held low for a long time can have dangerous unintended consequences, including distorted investment decisions and market participants taking on bigger risks in their pursuit of higher yields.

The conclusions on monetary policy are contained in the BIS’s annual report that looks closely at what has happened in various countries when interest rates were held low for relatively long periods of time.

While policymakers need to use other tools to address some of the risks, the BIS concludes that “they may still need to tighten monetary policy sooner than consideration of macroeconomic prospects alone might suggest”.

The report also comes down firmly on the side of those who argue that in spite of the evident fragility of economic recovery in many industrial nations, governments need to address burgeoning fiscal deficits.

The issue was a dominant one at the G20 meeting over the weekend, with Europe and the US divided over the balance between austerity and fiscal stimulus measures. The gathering ended with all countries agreeing to halve their deficits by 2013 and stabilise the ratio of debt to gross domestic product by 2016.

“A programme of fiscal consolidation – cutting deficits by several percentage points of GDP over a number of years – would offer significant benefits of low and stable long-term interest rates, a less fragile financial system and, ultimately, better prospects for investment and long-term growth,” the BIS says.

It is understood that much of the report was written before heightened fears about sovereign debt in Europe roiled money markets and caused inter-bank lending to seize up. Nevertheless, the BIS makes clear that its concerns remain about the side-effects of a long-term spell of low rates.

Among the distortions associated with rates held low for a long time are asset price bubbles of the type that manifested themselves in the years before the financial crisis, particularly in housing and real estate in many countries. And because low central bank rates lead to low interest rates at the shortest maturities, banks and investors may be encouraged to engage in duration mismatch – borrowing short and lending long – a tactic that can destabilise the financial system if liquidity suddenly dries up.

Moreover, low interest rates make it easier for banks to engage in “evergreening”, the term the BIS uses to describe the practice of rolling over debt to non-viable businesses that can continue on interest payments at low rates but cannot afford to repay prinicipal.

This delays the necessary restructuring not only of the financial sector but also of other, inefficient industries, the report says.

It also notes that low interest rates may inadvertently contribute to instability in financial institutions, which in spite of massive government interventions, remain fragile “Cutting interest rates to record lows was necessary to prevent the complete collapse of the financial system and the real economy, but keeping them low for too long could also delay the necessary adjustment to a more sustainable economic and financial model.”

The report also looks at fiscal deficits in several countries that appear to be spiralling out of control, and in particular, those associated with age-related spending in economies where demographic shifts are tilted towards older adults. It notes that while extraordinary support measures have been necessary to contain contagion across markets, these cannot remain in place for too long.

“Some measures have delayed the needed adjustments in the real economy and financial sector where the reduction of leverage and balance sheet repair are far from complete,” the BIS report says, adding that the effect of this risks undermining confidence.

If anything, the failure to undo extraordinary measures threatens “to send the patient into relapse and to undermine reform efforts”.







G20 backs drive for crackdown on banks
By Chris Giles and Alan Beattie in Toronto and Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: June 27 2010 23:07 | Last updated: June 28 2010 00:31
http://www.ft.com/cms/s/0/15fdcbd6-821e-11df-938f-00144feabdc0.html


Leaders of the world’s largest economies insisted on Sunday on implementing tough capital rules to force banks to hold sufficient buffers to guard against a future crisis, but they signalled a delay before they take effect.


The G20 also agreed a compromise pledge to halve fiscal deficits by 2013, which papered over cracks between continental European countries such as Germany on the one hand, and the US and some emerging markets on the other.

Barack Obama, US president, denied any rift over deficits, saying that the G20 was in “violent agreement” on the issue, but he warned that other countries must boost domestic demand. “No nation should assume its path to prosperity is paved with exports to America,” he said.

David Cameron, prime minister, said of capital requirements: “While the rules must be tough, on the timing we need to be careful we don’t shrink the monetary base.”

Currently, the ratio of core tier one capital of a bank to its risk-weighted assets is 2 per cent. This is expected to double and could rise further.

Seeking to inject new political momentum into the ongoing technical discussions, the G20 communiqué stated: “The amount of capital will be significantly higher and the quality of capital will be significantly improved when the reforms are fully implemented.”

There are still considerable disagreements over what will count as a capital buffer, but in a bid to resolve differences and aim for tight standards, the G20 has watered down the previous target of achieving the new capital standards by the end of 2012. That date is now downgraded to an “aim”.

But to keep individual countries with weak banks happy, the phase-in of the new global rules “will reflect different starting points and circumstances with initial variance around the new standards narrowing over time as countries converge”, the communiqué added.

Striking a similar tone, US officials signalled that large US banks could face a more draconian overhaul than they anticipate. Neal Wolin, deputy US Treasury secretary, said: “There’s no doubt that the legislation on its way towards enactment in the Congress will require some of these firms in a range of ways to raise more capital, better quality capital.”




US state budget crises threaten social fabric
By Matthew Garrahan in Los Angeles
Copyright The Financial Times Limited 2010
Published: June 27 2010 19:13 | Last updated: June 27 2010 19:13
http://www.ft.com/cms/s/0/403eb4de-8212-11df-938f-00144feabdc0.html


The small southern California city of Maywood has hit on a unique solution to its budget crisis. Crushed by the recession and falling tax revenues, the city is disbanding its police force and firing all public sector employees.

Maywood has opted for an extreme solution, by contracting out all public services, including the most basic, to save cash. But it is not alone.

States around the US are cutting costs wherever possible as they prepare budgets for the fiscal year that starts this week for most of them. Their combined deficit is projected to reach $112bn by June 2011.

Local government activities, such as funding police, school buildings, fire departments, parks and social programmes, are in the line of fire.

“We are where the rubber meets the road,” said Sam Olivito of the California Contract Cities Association, which represents cities that outsource public services. “Local government is the fabric of our nation – it’s what keeps everything working properly.”

The biggest state deficit is in California, which has a $19bn hole in its finances. A series of contentious spending cuts is being debated in the state.

But for Maywood time has run out: the city’s insurance costs spiked because of long-running problems associated with its police department, while revenue from property and sales taxes declined. When city officials failed to respond to conditions imposed by its insurers, coverage was withdrawn.

Despite its problems, Maywood’s experience could be repeated elsewhere. “A lot of cities and municipalities are struggling to make ends meet,” said Mark Baldassare, president of the Public Policy Institute of California. “Local governments are so constrained by their budgets – they can’t raise taxes and they have rising pension obligations.”

While Californian cities and municipalities grapple with a drop in income – sales and property taxes have fallen by as much as 40 per cent, according to Mr Olivito – the state is considering a range of revenue-raising measures to tackle its deficit.

These include the legalisation of marijuana, which will be put to voters in November’s mid-term elections, and the possible introduction of digital car license plates, which will be capable of carrying moving advertisements.

But none of these initiatives will solve the short-term fiscal woes facing cities like Maywood. “There’s a real danger of a social fabric breaking down . . . all cities are trying to deal with the same thing,” said Mr Olivito.

There has been a sharp increase in the number of cities considering contracting out public services, he adds. “We’ve had 10 or 12 cities contact us recently. There have been three of four in Los Angeles County alone.” Outsourcing saves money because cities no longer have to finance the capital costs.

But it can change the dynamic of cities, Mr Baldassare points out, partly because local communities no longer have a direct link with the providers of those services. “Do people want public services that are accountable to them? How do you maintain a local community?”











US savings rate rises to eight-month high
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: June 28 2010 14:22 | Last updated: June 28 2010 15:40
http://www.ft.com/cms/s/0/039c4840-82b0-11df-85ba-00144feabdc0.html


The US savings rate rose to its highest level in eight months in May as consumers hoarded more of their income in the face of persistent joblessness.

Personal consumption expenditure rose by 0.2 per cent last month, commerce department figures showed on Monday. That was a slightly bigger rise than expected and marked a rebound, following flat spending in April.

Spending was outpaced by a 0.4 per cent rise in incomes from April to May. Incomes have climbed for three consecutive months, as businesses have thawed frozen salaries and started to offer pay increases again.

“Incomes were boosted modestly by temporary hiring for the census but the underlying trend is positive nonetheless,” said Ian Shepherdson, chief US economist at High Frequency Economics.

In spite of the increase, consumers are still showing signs of caution. Americans saved 4 per cent of their disposable income, up from 3.8 per cent in April.

“The data has also shown greater propensity for the savings ratio to stabilise, so consumption is primarily being driven by income growth – or the product of employment, income per hour and hours worked,” said Alan Ruskin, strategist at RBS Global Banking & Markets.

Economists take mixed views about the savings rate because consumers need to solidify their balance sheets but consumer spending, which accounts for about 70 per cent of US economic activity, is a crucial engine for growth. The modest spending revival comes after disappointing retail sales figures earlier this month fuelled fears that consumers might be retrenching.

Last Friday, official figures showed that consumer spending grew at a weaker-than-expected annual rate of 3 per cent in the first quarter of this year. The US economy grew by 2.7 per cent during those three months.

Meanwhile, inflation remained subdued in May. The commerce department’s closely watched gauge of prices ticked up by 0.2 per cent in May from the previous month and was up by 1.3 per cent year-on-year.


Byrd’s death threatens Wall St overhaul
By Anna Fifield in Washington
Copyright The Financial Times Limited 2010
Published: June 28 2010 16:07 | Last updated: June 28 2010 16:07
http://www.ft.com/cms/s/0/4c756eb8-82c2-11df-85ba-00144feabdc0.html


The prospects for passing a financial regulatory reform bill through the Senate were thrown into doubt on Monday, following the death of Democrat Robert Byrd and equivocation from Republican Scott Brown.

The loss of just one vote could deny the Obama administration the 60 votes it needs to pass a sweeping overhaul of financial regulation finalised last week, which would impose a $19bn (£12.6bn) levy on Wall Street and force banks such as Goldman Sachs and Morgan Stanley to retreat from lucrative businesses.

The bill is due to come up for a vote in the Senate this week and had been carefully engineered to win the 60 votes required to avoid a Republican filibuster.

Mr Byrd, the US’s longest serving senator, died in a Virginia hospital early Monday morning, at the age of 92. He was first elected to the House in 1952 and moved up to the Senate in 1959.

Mr Byrd had regularly been sick in recent years, but he showed up for several key votes, notably being pushed into the Senate chamber in a wheelchair in the early hours of Christmas morning to vote for the passage of healthcare reform legislation.

Joe Manchin, the Democratic governor of West Virginia, which Mr Byrd represented, will appoint a replacement to serve out the rest of the senator’s term, which lasts until 2013.

But Mr Byrd’s death could affect the passage of the financial reform bill, said Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation.

“It does create a new dynamic,” Ms Bair said on Monday. “It [the majority] was razor thin to begin with, so it does introduce a new unknown into the process.”

Separately, Mr Brown – who won a Senate seat in Massachusetts in January, giving Republicans the 41st vote they needed to block Democratic-led legislation – wavered in his support for the bill at the weekend.

“I was surprised and extremely disappointed to hear that $18bn in new assessments and fees were added in the wee hours of the morning by the conference committee,” Mr Brown said.

Political leaders on Monday paid tribute to Mr Byrd’s long service in Congress.

“Robert Byrd was a member of this nation’s Congress for more than a quarter of the time it has existed, and longer than a quarter of today’s sitting senators and the president of the United States have been alive,” said Harry Reid, the majority leader in the Senate, calling him “the foremost guardian of the Senate’s complex rules”.

Mitch McConnell, the Republican leader in the senate, said Mr Byrd would be remembered “for his fighter’s spirit, his abiding faith, and for the many times he recalled the Senate to its purposes”.







Apple sells 1.7m iPhone 4 units on launch
By Tim Bradshaw, Digital Media Correspondent
Published: June 28 2010 15:06 | Last updated: June 28 2010 15:06
Copyright The Financial Times Limited 2010
http://www.ft.com/cms/s/0/0a5be980-82b8-11df-85ba-00144feabdc0.html


Apple has hailed its new iPhone 4 as its most successful product launch, beating analysts’ expectations by selling 1.7m of the devices in its first weekend.

Analysts at Piper Jaffray had forecast Apple to sell 1m smartphones in the first three days of availability. Last summer, Apple sold 1m of its iPhone 3GS devices over the opening weekend.

Apple admitted before the launch that it was facing supply problems after advance demand crashed its pre-ordering systems.

The iPhone 4 sold out in many stores in spite of a slew of new competitors, including Motorola’s Droid X, running Google’s Android software, and early technical glitches afflicting Apple’s touch-screen device.

The new iPhone has suffered from complaints about mobile reception. In e-mailed responses to early adopters, who have paid upwards of $199 (£179) for the phone, Apple suggested that they should “just avoid holding it in that way”. Apple is imminently expected to release a software update as a more permanent fix to the problem.

Apple’s careful choreography of any new device launch was also disrupted in April when a prototype was found in a bar near the company’s Cupertino headquarters, and sold to a gadget blog.

“This is the most successful product launch in Apple’s history,” said Steve Jobs, Apple’s chief executive. “Even so, we apologise to those customers who were turned away because we did not have enough supply.”

The iPhone 4 was released last Thursday, June 24 in North America, the UK, France Germany and Japan, after receiving hundreds of thousands of pre-orders. It will be released in a further 18 territories next month.

Apple said last week that it had sold 3m of its iPad tablet computers in less than three months.

Shares in Apple, which overtook Microsoft’s market capitalisation a month ago, stood at $266.70 ahead of Nasdaq’s open on Monday.