Financial News Courtesy of the Financial Times

Financial News Courtesy of the Financial Times


US consumer confidence plunges in June
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: June 29 2010 14:31 | Last updated: June 29 2010 15:39
http://www.ft.com/cms/s/0/24f68242-837a-11df-8451-00144feabdc0.html


Consumer confidence in the US plunged in June, as fears about sluggish job creation made Americans feel gloomier.

The Conference Board’s confidence index tumbled by nearly 10 points, dropping from a revised 62.7 in May to 52.9 in June. The decline was far steeper than Wall Street analysts had projected and broke a three month stretch of rising optimism.

“Increasing uncertainty and apprehension about the future state of the economy and labour market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence,” said Lynn Franco, director of the Conference Board’s research centre. “Until the pace of job growth picks up, consumer confidence is not likely to pick up.”

Consumers expressed growing pessimism about business conditions and job prospects. On Friday, the labour department’s non-farm payrolls report is expected to show that 111,000 jobs were created in June, with the unemployment rate ticking up to 9.8 per cent.

“Consumer confidence gets crushed,” said Steven Ricchiuto, chief economist at Mizuho Securities, noting that the figures fit into a “double dip” scenario for the economy.

Analysts keep a close watch on consumer confidence as an indicator of consumer spending, but such surveys can be volatile. Tuesday’s confidence figures clash with a separate survey released last Friday by Thomson Reuters/University of Michigan, which showed sentiment rising in June to the highest level since January 2008.

Meanwhile, US home prices recorded a modest rise in April, as a rush of buyers taking advantage of an expiring government tax credit gave the market a lift, figures showed on Tuesday.

House prices in the 20 biggest US cities rose by 0.8 per cent from March to April, according to the closely watched S&P/Case-Shiller index. That beat economists’ forecasts of a monthly dip and prices are up by 3.8 per cent compared with a year ago.

Although the rise was welcome, S&P noted that the increase was heavily induced, with 18 of 20 cities experiencing monthly price increases in April compared with just 6 in March. The first-time homebuyer tax credit expired at the end of April, and home prices, purchases and construction have been under pressure since then.

“Other housing data confirm the large impact, and likely near-future pull-back, of the federal programme,” said David Blitzer, chairman of the S&P index committee. “Consistent and sustained boosts to economic growth from housing may have to wait to next year.”

In April, Washington, San Francisco, and Dallas recorded the strongest monthly increases, while house prices declined in Miami and in New York, which fell to a new low for the cycle. Much of the improvement in the past year has been concentrated in California, which was among the states hardest hit by the housing market downturn.

Since peaking in June 2006, home prices remain off by 30 per cent, leaving them at their 2003 levels.

Analysts have expressed concern that the US housing market could be facing a double dip as the withdrawal of government support has revealed how reliant the market was on stimulus. Although housing remains highly affordable, headwinds such as high rates of foreclosure and persistent unemployment continue to strain the market.

“Housing transactions volumes have plunged since the credit expired and this drop will in due course be reflected in the home price numbers,” said Ian Shepherdson, chief US economist at High Frequency Economics. “The decline could be quite sharp though we are hopeful it will not last too long.”





Fed official warns of asset risk
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: June 29 2010 01:08 | Last updated: June 29 2010 01:08
http://www.ft.com/cms/s/0/6b6b6318-830d-11df-8b15-00144feabdc0.html


The Federal Reserve would risk its credibility if it bought more assets to stimulate the economy, board member Kevin Warsh said in a speech on Monday.

Buying more assets – to add to the $1,600bn of Treasury and mortgage-backed bonds it has bought since 2008 – is one measure the Fed could take if it thought the economic recovery had stalled. Mr Warsh’s comments suggest he would oppose such a move.

“I would want to be convinced that the incremental macroeconomic benefits [of buying more assets] outweighed any costs owing to erosion of market functioning, perceptions of monetising indebtedness, crowding-out of private buyers or loss of central bank credibility,” said Mr Warsh.

Until recently the Fed’s focus was on how and when to sell its bond portfolio, but Europe’s fiscal crisis, soft data on the housing and labour markets, and political opposition to further fiscal stimulus have prompted questions about what it could do if the economic situation declined.

In a statement last week, the federal open market committee said “financial conditions have become less supportive of economic growth on balance” and that “underlying inflation has trended lower”.

By in effect creating money to buy bonds, the Fed can flood banks with cash and try to push down long-term interest rates. But some economists doubt that buying more bonds would make much difference. They also fear that long-term rates could actually rise if the Fed lost its credibility as an inflation fighter.

Mr Warsh said asset sales by the Fed “will not take place in the near term”. But he said the Fed should consider gradual asset sales and that they could be kept separate from any decision to raise the Fed funds rate from its current range of 0-0.25 per cent.

That puts Mr Warsh at odds with the Fed’s chairman, Ben Bernanke, and the majority of the FOMC who think that asset sales should only begin after the Fed has raised interest rates for the first time.

Opponents of early asset sales worry about how the markets would react if the Fed started to sell its mortgage-backed bonds. They fear that markets might see it as a signal that higher interest rates are on the way or that it could prompt a premature jump in mortgage rates.

Mr Warsh said that “any sale of assets need not signal that policy rates are soon moving higher”. He said that in recent months the Fed had been able to close many of the special lending facilities it had created during the financial crisis even as rates had been kept low.




Fresh fears over European bank sector
By David Oakley, Capital Markets Correspondent
Copyright The Financial Times Limited 2010.
Published: June 29 2010 13:34 | Last updated: June 29 2010 13:34
http://www.ft.com/cms/s/0/1a3a7758-8368-11df-8451-00144feabdc0.html


Fears rose over the health of the European banking system on Tuesday as interbank rates jumped to nine-month highs amid worries that the European Central Bank may be reducing emergency financial support to financial institutions too soon.

Key three-month euribor rates, which measure the cost at which banks are prepared to lend to each other, jumped to the highest level since September and the biggest one-day rise since April 28. Euribor rates rose to 0.761 per cent from 0.754 per cent.

Bankers warn that the ECB’s decision to offer banks loans for only three months instead of a year is raising concerns that many institutions will come under further pressure in the strained interbank markets.

Don Smith, economist at Icap, said: “There are major worries over the systemic risks for banks, with many struggling to access the private markets. The ECB is in effect weaning the banks off the artificial support system – and this is a concern.”

The ECB will on Wednesday offer unlimited loans to European banks for three months as it seeks to smooth funding for those banks that have to return one-year loans to the central bank on Thursday.

However, in spite of the vast amount of support the ECB is offering to the market, with more than €800bn in outstanding loans to eurozone banks, analysts say the fact the ECB is no longer offering loans for a year has worried some investors.

This is because the shorter-term loans create more dangers of so-called rollover risk. In other words, weaker banks relying on the ECB for lending as they struggle to access the private markets have less certainty over their financing than if they had the loans for a year.




Google faces loss of China licence
By Kathrin Hille in Beijing
Copyright The Financial Times Limited 2010
Published: June 29 2010 09:23 | Last updated: June 29 2010 14:34
http://www.ft.com/cms/s/2/3ea0fa9c-8352-11df-8451-00144feabdc0.html


Google said on Tuesday that it had started a final attempt to rescue its presence in China after the Chinese government threatened to close its Chinese website down at the end of this month.

In a blog post published late Tuesday, David Drummond, the company’s chief legal officer, said the Chinese government had rejected Google’s practice of automatically redirecting users in mainland China to its Hong Kong site.

“It’s clear from conversations we have had with Chinese government officials that they find the redirect unacceptable – and that if we continue redirecting users our Internet Content Provider license will not be renewed (it’s up for renewal on June 30),” he said. “Without an ICP licence, we can’t operate a commercial website like Google.cn – so Google would effectively go dark in China.”

If Beijing does block Google, the internet company faces the threat of losing the Chinese market, one of the world’s fastest-growing internet market which has the world’s largest internet population at more than 400m.

In March, Google started automatically redirecting visitors of its mainland Chinese site, google.cn, to its Hong Kong site, in an attempt at preserving a bridgehead in China while ending controversial censorship of search results.

Since then, access to Google.com.hk has been patchy, with Chinese-language searches containing certain characters triggering browser errors which experts believe are caused by Beijing’s filtering of foreign websites.

But overall, the impact on the US company’s presence in China had been smaller than feared, as its share of Chinese online search revenues dropped just five percentage points to about 30 per cent in the first quarter, according to Analysys, a Beijing-based research house.

Google’s latest announcement, however, indicates that the March solution was not based on a compromise negotiated with Beijing but rather a one-sided attempt at finding a loophole in China’s internet censorship regime.

The company has launched a last attempt at compromise. Instead of automatically redirecting users in China to its Hong Kong site, it has now created a “landing page” on Google.cn which offers visitors an optional link to the Hong Kong site.

“This approach ensures we stay true to out commitment not to censor our results on Google.cn and gives users access to all of our services from one page,” Mr Drummond said.

He added that Google had resubmitted its ICP license renewal application based on this approach.

Google said it was “hopeful” that its licence would be renewed on this basis, but it is understood that the latest attempt at creating a solution has not been discussed with the Chinese government.

If Beijing refuses this latest proposal as well, it could close Google.cn down, effectively cutting the bulk of Chinese users off from the US search engine. Many Chinese internet users are not familiar with Google’s sites outside the mainland and could quickly switch to familiar alternatives such as Baidu, the country’s home-grown market leader.

The Chinese government could even block foreign Google sites.

Spokesmen at the Ministry of Industry and Information Technology, in charge of the ICP license renewal, were not available for comment.

Qin Gang, foreign ministry spokesman, repeated Beijing’s earlier stance and said: “The Chinese government encourages foreign enterprises to operate in China according to the law and we also administer the internet according to the law.”