Obama urges G20 to boost demand
By Alan Beattie in Washington
Copyright The Financial Times Limited 2010
Published: June 18 2010 13:05 | Last updated: June 18 2010 13:05
http://www.ft.com/cms/s/0/10f0ebec-7aca-11df-8549-00144feabdc0.html
President Barack Obama on Friday urged other G20 countries to boost domestic demand and increase exchange rate flexibility to encourage global growth and rebalance the world economy.
In what appeared to be a warning aimed at China ahead of next weekend’s meeting of G20 heads of government in Toronto, the White House released a presidential letter saying: “I also want to underscore that market-determined exchange rates are essential to global economic vitality.”
The war of words between Washington and Beijing over China’s fixed exchange rate has escalated over the past two weeks ahead of the G20 meeting, with senior figures from Mr Obama’s administration and from Congress suggesting that patience with China was running out.
Many investors had thought that China was likely to allow its renminbi to resume appreciating before next weekend’s G20 meeting. But with the euro sliding against the dollar, Beijing has appeared reluctant to countenance its currency appreciating against two of its major trading partners.
Meanwhile, Chinese officials have hit back at the US, saying the exchange rate is not a major cause of global economic imbalances and accusing Washington of trying to shift the blame.
The economic recovery has not changed the underlying pattern of the global economy from the imbalanced growth seen during the financial crisis, with consumption driven by the US and countries like China and Germany reliant on exports. Mr Obama added: “I am concerned by weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses.”
Germany has embarked on a programme of fiscal retrenchment despite no apparent signs of the financial markets questioning its solvency.
Markets cheer news of European stress tests
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: June 18 2010 07:34 | Last updated: June 18 2010 16:23
http://www.ft.com/cms/s/0/6bb1a352-7a96-11df-8549-00144feabdc0.html
Friday 16:05 BST. Global stocks are higher, recording their ninth day in a row of gains, as investors calculate that the publication of eurozone bank “stress tests” will remove some of the anxiety regarding the bloc’s financial system.
The FTSE All-World equity index is up 0.5 per cent, commodities are stronger but currencies quiet. However, gold has hit a new nominal high of $1,260 an ounce as some traders remain unimpressed by alternative assets.
European Union leaders’ promise to reveal details of the tests by the end of July and the relative success of recent eurozone bond auctions has helped push the embattled euro to a three-week high versus the US dollar.
With the euro acting of late as a proxy for global risk appetite – based on the belief that its moves represent the prospects for the region and thus its potential impact on the world economy – this has helped encourage buying of stocks on growth hopes.
However, investors are wary that much of the consumer-focused data out of the US in recent weeks – such as jobless claims, retail and housing sales – have been disappointing, raising fears of a “double-dip” recession as some government stimuli are pared back.
This is causing a reticence among traders to significantly ramp up their exposure to risk.
Hence, Wall Street’s late move off its lows on Thursday was considered by some analysts to represent nothing more than short covering in a very thin market ahead of the “quadruple witching” expiry of options and futures contracts today.
New York’s benchmark, the S&P 500, is currently up just 0.3 per cent.
● Asia. The FTSE Asia-Pacific index rose 0.4 per cent though trading is cautious as investors weigh the improvement in the euro with the worries about a struggling US household sector.
The Nikkei 225 in Tokyo closed down just 0.04 per cent, while Hong Kong climbed 0.7 per cent. Miners helped Sydney gain 0.5 per cent.
Shanghai fell 1.8 per cent, however, as mainland investors remain concerned about global growth prospects and the impact on liquidity of the $23bn dollar IPO of Agricultural Bank of China.
● Europe. The FTSE 100 in London is up by 0.3 per cent and the FTSE Eurofirst is higher by 0.5 per cent, with banks firmer on hopes “stress test” clarity will reduce the fear discount.
● Forex. The complex appears lethargic in thin end of week and World-Cup-watching trading. The euro is trying to steady at three-week highs, and after breaching $1.24 overnight is now down just 0.1 per cent at $1.2368.
The dollar is up 0.1 per cent on a trade-weighted basis, while sterling is down 0.2 versus the greenback at $1.4783 despite slightly better than forecast public borrowing numbers.
● Debt. The firmer tone to stocks is leading to a move out of haven plays. US 10-year Treasuries are softer, pushing their yield up 4 basis points to 3.23 per cent.
Spanish 10-year notes, which appear to have taken over from Greek peers as the most-watched gauge of eurozone fiscal prospects, are seeing their yields fall 19bp to 4.65 per cent as traders continue to reward a well-received auction on Thursday.
UK gilts traders are less enamoured of the government budget data than their currency cousins, and the yield on 10-year benchmarks are underperforming the wider market to rise 9bp to 3.56 per cent.
Demand for industrial raw materials has improved as the day wears on, pushing the Reuters-Jefferies CRB index, a commodity basket, up 0.3 per cent.
Oil has reversed an initial decline and is now up 0.7 per cent at $77.31 a barrel.
Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm
The Market Eye
Investors seem so obsessed by the eurozone’s travails that they are failing to take full account of the worrying trend developing in the US. True, if fears about stress within the eurozone’s financial system are proven to be overdone, then this may reduce the chances of the bloc hobbling the global economic recovery. But we have possibly several weeks before we see the details of the banks’ “stress tests”, and besides, will the market consider the criteria sufficiently robust to dispel lingering angst.
Meanwhile, over the pond, the consumer-facing parts of the world’s biggest economy are showing signs of weakness. The odd flash of positive industrial data is generally being outnumbered by poor housing, jobs or retail numbers. Falling inflation is also a worry under such circumstances – though optimists will always argue this means the Federal Reserve can keep rates low for longer; good for those wanting to punt with cheap money, but obviously not a sign of broader commercial health.
For now, though, the market seems happier succumbing to the “euro-as-proxy-for-risk” trade. But it is noticeable that while stocks have enjoyed a good run over the past several days, the action in other asset classes points to a tear in their previously tight correlation to the euro’s moves. Industrial commodities are struggling to match the improved mood seen in the equities universe, while core bond yields remain close to 12-month lows.
Given the choice between taking advice from the stock market or the bond market, I’d chose the latter.
Friday’s Market Menu
What’s affecting risk appetite
Risk on
● Euro: holds on to gains as “stress tests” calm some.
Risk off
● Witching: quadruple expiry session can see volatility.
● China: Shanghai stocks hang precariously above 13-month low.
● Commodities. Gold breached its previous all-time nominal high of $1,152 an ounce, hitting $1,260, and is now trading up 1 per cent at $1,256.
US companies tap cash piles for share buy-backs
By Telis Demos in New York
Copyright The Financial Times Limited 2010
Published: June 17 2010 21:02 | Last updated: June 17 2010 21:02
http://www.ft.com/cms/s/0/69e7033e-7a44-11df-aa69-00144feabdc0.html
US companies are signalling a desire to buy back their own shares at the highest rate in months as record levels of cash pile up on balance sheets.
Companies announced 27 new buy-back programmes last week totalling $18.5bn (€14.9bn), the most since February, according to data from TrimTabs. Walmart alone announced a $15bn plan, which included $4.7bn from a previous programme.
“We’ve seen a pretty big decline in share price, so companies are trying to prop them up, and these announcements are one way they can do that,” said David Santschi, an analyst at TrimTabs. “The spike is highly unusual for June, which is not an earnings announcement month. That’s a bullish sign.”
So far in 2010 there have been 343 new authorisations for $178bn in buy-backs, according to Bank of America Merrill Lynch. If carried out, and projected over a full year, it would be the highest volume since 2007, or $898bn. Last year, there were only $128bn-worth of buy-backs. Other US companies announcing $1bn-plus buy-backs in June were CVS Caremark, Viacom and Monsanto.
Companies so far in 2010 have been cautiously exercising their right to buy shares. They are keen to maintain a large cushion, as rating agencies are closely watching cash balances as credit markets tighten.
Jonathan Golub, an equity strategist at UBS, said that while the “absolute level of buy-backs will grow, relative to cash generation, the growth will be disappointing”.
Share purchases per day are estimated to still be well below 2007’s peak of $3.2bn. Buy-backs represented only 34 per cent of company cash in the first quarter of 2010, the lowest level in a decade, according to UBS.
“If the pressure from shareholders and analysts wasn’t there, companies would continue to squirrel away cash until there’s a clearer picture,” said Michael Thompson, managing director at S&P Valuation and Risk Strategies.
Cash available for buy-backs is at all-time highs as companies have cut costs and allowed inventories to shrink. The Federal Reserve last week reported that US companies, excluding financials, hold $1,840bn in cash, the highest level as a percentage of assets since the 1960s.
Share buybacks remain the preferred way to return that cash to shareholders, because they are more flexible than dividends, which must be paid regularly, and are typically better received by investors than acqusitions.
“Buybacks are a signal that management is being cautious with its capital, not squandering it on empire building,” said Brad Thompson, fund manager at Frost Investment Advisors.
Share buybacks also help to boost earnings per share, which are a key determinant of executive pay, by reducing shares outstanding.
Companies are not at the point of borrowing to finance share repurchases, as was common in 2007. In that year, payouts represented more than 100 per cent of balance sheet cash, according to UBS.
“Companies are not bearish, but not dramatically bullish like they were at the market peak,” said Chip Gibbs, managing director in equity capital markets at Bank of America Merrill Lynch.
Issuance of new shares has meanwhile remained depressed, which in theory makes share buybacks more effective at increasing demand for shares, and thus price. While buybacks were peaking last week, there was only one IPO from May 19 to June 10.
1,215 charged in US mortgage fraud crackdown
By Suzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: June 18 2010 00:57 | Last updated: June 18 2010 00:57
http://www.ft.com/cms/s/0/a86739c2-7a66-11df-9cd7-00144feabdc0.html
US authorities said on Thursday that they have charged 1,215 people with mortgage fraud in cases involving an estimated $2.3bn in losses.
The sweep, which involved multiple agencies and was co-ordinated by President Barack Obama’s Financial Fraud Enforcement Task Force, has resulted in 485 arrests and the recovery of $147m since March 1.
Authorities have been under pressure to crack down on mortgage fraud, including schemes that falsely reported borrower income on mortgage applications and inflated home appraisals to make it easier for borrowers to qualify for loans they could not afford. Such practices helped bring about the collapse of the housing market and set off the global financial crisis.
“We will not rest until anyone preying on vulnerable American homeowners is brought to justice,” said Eric Holder, attorney-general.
More than 10 agencies participated in the clampdown, including the US Attorneys Office, the Federal Bureau of Investigation, the Treasury Department, the Federal Trade Commission and the Secret Service.
The Financial Times reported last week that the agencies were preparing to arrest hundreds of people for mortgage fraud. Unlike previous crackdowns, the operation focused on civil as well as criminal cases, allowing for monetary recovery for some victims.
Although the broader economy has shown signs of a rebound, the US housing market remains fragile. The FBI reported on Thursday that mortgage fraud continues to rise, particularly loan modification or foreclosure scams.
A large number of the suspicious activities reported involved purported specialists who promised to arrange a loan modification or more favourable terms in exchange for an upfront fee. Once the fee was paid, the scammers failed to provide any service, according to the report.
Miami, Los Angeles and New York had the highest number of mortgage fraud cases in the six months that ended June 10, the report said.
In one case, a mortgage broker in Duluth, Minnesota, was sentenced to more than 22 years in federal prison for stealing $400,000 from homeowners. They had believed they were refinancing loans when the broker was selling their homes without their knowledge.
In a settlement announced last week, two of Countrywide’s mortgage servicing divisions agreed to pay $108m to settle charges that they inflated fees charged to cash-strapped homeowners.
Homeowners were not the only victims. In June, seven people were charged in Detroit for trying to defraud financial institutions by using false information to write multiple “ghost loans” on the same property.
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