Worries persist about US economy
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: June 25 2010 08:18 | Last updated: June 25 2010 17:01
http://www.ft.com/cms/s/0/a28ea3c0-801d-11df-8b9e-00144feabdc0.html
Friday 17:00 BST. Doubts about the prospects for the US economy are again weighing on investors’ appetite for risk, although a slew of encouraging developments in the banking sector and elsewhere may be alleviating the pressure.
Treasury yields remain close to 12-month lows, oil and copper are falling and the FTSE All-World equity index is down 0.5 per cent, pulled lower by Asian markets’ reaction to Wall Street’s 1.7 per cent stumble on Thursday.
Traders continue to fret about the health of the US household sector after some badly received earnings reports and forecasts from a number of consumer-facing companies.
Adding to these concerns was Friday’s final reading of US first-quarter gross domestic product, which showed growth in the world’s biggest economy had been revised down from 3 per cent to 2.7 per cent.
The S&P 500 index in New York is down 0.2 per cent and European bourses extended losses at their close on Friday as investors continue to fret about a global “double dip”.
While some of the risk surrounding US banking shares may now be dispelled after lawmakers in Washington finalised the sweeping financial regulation bill, the finish line still a bit down the road.
“It’s an unambiguous positive that there’s going to be some clarity on regulation,” said Doug Cliggott, equity strategist at Credit Suisse. “But I think there’s unfortunately quite a few i’s to dot and t’s to cross once the bill is signed before we have real certainty on things like capital requirements.”
Meanwhile, banks appear to have convinced regulators to ease the Basel III conditions, while Thursday’s sale by Citigroup of a $3.2bn loan portfolio may be taken as a welcome sign that the market for banking assets is functioning pretty well. The FTSE Global Banks index is up 0.6 per cent, led by a 1.4 per cent increase in S&P 500 bank shares.
In addition, bulls have received support from the forecast-busting after-hours earnings report from Oracle, the world’s third-largest software company. This has reminded investors ahead of next month’s second-quarter earnings season that corporate earnings are providing a sturdy foundation for market valuations.
☼ Factors to Watch. Traders will also be keeping an eye on any developments emerging from the G20 meeting in Toronto. ☼
● Asia. The region has borne the brunt of Wall Street’s overnight slide, with exporters particularly concerned about the US economy. The FTSE Asia-Pacific index is down 1.5 per cent, badly hurt by a 1.9 per cent slide by Tokyo’s Nikkei 225.
Similar demand worries have hurt commodities and thus the resource-rich Sydney exchange, with a more sober reaction to the prospects for the mining super tax also impacting sentiment. The S&P/ASX 200 in Sydney fell 1.5 per cent.
Hong Kong fell 0.2 per cent and Shanghai lost 0.5 per cent.
● Europe. Banks provided a reasonably perky start to trading, but softness in the resources sector counteracted those gains. The FTSE 100 in London was down 0.8 per cent, yet again held back by a heavy fall in BP shares. The FTSE Eurofirst 300 was lower by 0.5 per cent.
● Forex. The recent dislocation between risk appetite and the currency market continued, in early action, to confound those more used to clearly defined lines of correlation. However, as the European session progressed, the dollar’s propensity to strengthen when the mood is wary returned to colour trading.
At the present , though, the dollar is flat on a trade-weighted basis at 85.75.
The euro is down 0.2 per cent versus the dollar at $1.2287, while sterling has retreated from the $1.50 level but is still up 0.1 per cent at $1.4955.
The yen is on track to close higher than any point since early March. It has gained every day except one in the past two weeks. On Friday it is up 0.3 per cent to Y89.34 against the US dollar.
● Debt. US 10-year notes have seen demand fade as Wall Street equity futures improve and could not sustain the bounce seen immediately after the release of the US GDP data. However, yields remain close to the 3 per cent level that could spark more talk of “double dip” recession and cause a further flight into so-called “core” sovereign bonds, were it to be breached. Auctions of US debt this week have gone well, lending further support to the complex. Yields are down 4 basis point at 3.09 per cent.
Confirmation that deflation continues to stalk Japan has held Tokyo’s 10-year JGB yield at close to a 7 year low of 1.15 per cent.
Eurozone “peripheral” debt markets are seeing little movement but yields remain at recent highs. Greek 10-year notes are sporting a yield of 10.5 per cent, for example, while credit default swaps are being quoted at 970 basis points, still close to a record.
● Commodities. Metals are seeing selling as demand fears linger, with copper down 0.4 per cent at $6,665 a tonne. Oil is bucking the trend and is up 1 per cent at $77.24 a barrel on worries that a hurricane is forming in the Atlantic.
Gold is threatening Monday’s intraday nominal high of $1,265 an ounce and is presently up 0.8 per cent at $1,254 an ounce.
Friday’s Market Menu
What’s affecting risk appetite
Risk on
● US FinReg: completion should remove uncertainty
● Basel III: welcome news for banks
● Oracle: reminder that earnings have been good
Risk off
● G20: always a chance for something silly
● Treasuries: 3 per cent yield eyed suspiciously
Additional reporting by Telis Demos in New York
Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm
US growth figures revised lower
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: June 25 2010 14:12 | Last updated: June 25 2010 15:32
http://www.ft.com/cms/s/0/03e465ce-8055-11df-8b9e-00144feabdc0.html
The US economy grew at a slower pace in the first quarter than previously thought because of weaker consumer spending, adding to fears that the recovery is losing momentum.
Gross domestic product rose at an annualised rate of 2.7 per cent in the first three months of the year, the commerce department said. That was slower than the 3 per cent growth rate estimated last month and 3.2 per cent estimated in April.
Economists had anticipated stronger output after the economy grew at a rate of 5.6 per cent during last year’s fourth quarter, although a raft of disappointing data in recent weeks provoked some analysts to downgrade their forecasts.
“With the banking and consumer sector still struggling with weak balance sheets, exogenous events like the European sovereign debt crisis are more likely to have lasting negative effects on the recovery,” said Steven Ricchiuto, chief economist at Mizuho Securities.
Friday’s revision was largely because of a downgrade in consumer spending, which accounts for about 70 per cent of overall output. Consumption grew by 3 per cent in the first quarter, less than the previous reading of 3.5 per cent.
This week the Federal Reserve issued a cautious statement saying that the economic recovery was “proceeding”. That was less enthusiastic than its prior statement indicating a “strengthening” recovery.
The economy continues to face headwinds, particularly a stubbornly high unemployment rate and a residential real estate market that has shown signs of entering a “double dip”. Earlier this month, US retail sales recorded a surprise drop as customers delayed buying building materials and summer clothes.
The weaker first-quarter output was also the result of more imports, although upward revisions to exports and private inventory investment provided a lift.
Analysts were especially disappointed with signs that shifting inventories had a greater impact on growth, leaving real final sales - the clearest indicator of demand in the economy - about half as strong as previously estimated.
David Rosenberg, chief economist at Gluskin Sheff, notes that real final sales have grown at an average annual rate of 1.2 per cent in the last four quarters. That is less than a third of the rebound in demand experienced during the recovery after the second World War.
“Once you strip out the huge contribution from inventories, you can see what is really happening in the economy and it is far from encouraging,” Mr Rosenberg said.
There was a glimmer of hope on Friday from the Thomson Reuters/University of Michigan survey of consumer sentiment, which showed confidence rising in June to its highest level since January 2008. The increase was the result of greater optimism about the labour market, although consumers said they expect growth to slow this year.
“Overall, confidence is strong enough to sup-port the continued growth in consumption, although the pace of growth will slow into the start of 2011,” said Richard Curtin, senior economist of the consumer survey.
BP’s shares hit 14-year low
ByCarola Hoyos and Anousha Sakoui
Copyright The Financial Times Limited 2010
Published: June 25 2010 14:13 | Last updated: June 25 2010 14:13
http://www.ft.com/cms/s/0/5990378a-8052-11df-8b9e-00144feabdc0.html
BP’s shares fell to a 14-year low on Friday as concerns grew that the company would have to raise larger-than-expected cash funds to pay the costs associated with its oil spill in the Gulf of Mexico.
BP’s share price at one point fell to below 300p, as traders also cited worries about a tropical storm that could further delay BP’s attempts to kill the leaking well and push more oil to Gulf’s shores.
Credit markets were also increasingly concerned amid talk that the company may need to bolster its liquidity, according to analysts at data provider Markit.
The cost of protecting against the default of BP on its bonds rose by $44,000 per annum to $580,000 (or 580 basis points, up 44 bps on the day) to protect $10m of bonds from default for five years.
The price of credit default swaps for BP rose amid a worsening credit market generally, tracking weaker stock markets.
BP said on Friday that it had spent $2.35bn on the clean-up so far, compared with $2bn announced at the start of this week.
However, the market is more concerned about the costs BP could incur because of its broader liabilities towards those affected by the spill.
BP last week set up a $20bn escrow account in an agreement with the White House.
At the time, it said the company had $5bn in cash and $10bn in committed banking facilities. Those amounts are now believed to be considerably higher.
BP has cancelled its dividend for three quarters and pledged to raise at least $10bn by selling assets, with further funds coming from reduction in capital expenditure, much of which analysts believe will be connected to the sold assets.
BP has not yet decided which assets it will sell, but said it would reach the $10bn by the end of the year, suggesting it will have to do more next year.
Alastair Syme and his team of equity analysts at Nomura wrote in a note on Friday: “A heavy inversion of both credit yield and equity volatility suggests the market is concerned about a near-term credit event around BP. Creating a scenario that puts near-term liquidity [of US$11bn-plus] at risk looks remote; however, we recognise that with an uncapped well, hurricane season and continued media focus the market will struggle to get much comfort.”
He added: “We think this perception of near-term credit risk is highly damaging for BP, likely leading to constraints around counterparty trading, the attractive roll of drawn commercial paper and the ability to dispose of assets at attractive prices.”
Tony Hayward, BP’s chief executive, in his speech to employees on Thursday spent some time explaining that BP needed to show a strong cash position to persuade the market the company could meet the costs and liabilities of the spill.
He said: “You will see in a month from now that our operating results are very strong.” He was referring to BP’s second-quarter earnings announcement at the end of July.
Additional reporting by Jamie Chisholm
France unveils €3.5bn in fresh tax rises
By Ben Hall in Paris
Copyright The Financial Times Limited 2010
Published: June 25 2010 14:26 | Last updated: June 25 2010 14:26
http://www.ft.com/cms/s/0/ee456358-804a-11df-8b9e-00144feabdc0.html
The French government on Friday announced a further €3.5bn of tax rises for 2011 as it sought to bolster confidence in its commitment to reduce its budget deficit.
The latest drip-drip announcement – intended to reassure the markets while not scaring the French public about impending austerity –- brings to €13.2bn the amount France aims to raise from tax increases next year.
The plans are considerably more ambitious than Germany’s austerity programme, which envisages only €11bn of tax rises and spending cuts in 2011.
France’s planned tax increases will bring in only slightly less than the UK’s planned 2.5 percentage point increase in value added tax in 2011-12.
François Fillon, prime minister, said personal and corporate tax breaks would be reduced by €8.5bn rather than by a planned €5bn next year. It is the latest in a series of measures to cut France’s public deficit by €40bn, or from 8 per cent of gross domestic product in 2010 to 6 per cent in 2011.
This month the French government announced €3.7bn of tax rises on business and the wealthy in 2011 to help plug a hole in France’s pension system. Paris also hopes to raise €1bn next year in a new levy on its banks.
President Nicolas Sarkozy has repeatedly said the government would not raise taxes, but the plans show the extent to which France is relying on tax increases as its main discretionary measure to reduce the deficit.
Mr Fillon denied that France was now conducting its own austerity drive. Austerity meant public sector wage cuts and redundancies, drastic spending reductions and VAT rises, as in Britain.
“For the moment, what we are trying to do is avoid that kind of policy,” he said.
Speaking a day after France’s trade unions organised the biggest strikes and demonstrations to hit the country in more than a year in protest at pension reforms, Mr Fillon refused to retreat on plans to raise the retirement age from 60 to 62.
Mr Fillon said withdrawal of economic stimulus measures would account for €15bn of the planned €40bn deficit reduction next year.
The government is counting on the return of robust GDP growth – it is forecasting 2.5 per cent in 2011 – to bring in an extra €10bn in revenues. However, the European Commission and the International Monetary Fund have said that the forecast is too optimistic and that additional savings measures will have to be found.
The government also intends to impose a cash freeze on central government spending excluding interests payments and pensions. It is expected to give further detail next week on how it will achieve such a spending squeeze.
One option is to freeze public sector pay. Mr Fillon said the government was prepared to honour a commitment to raise public sector salaries by 0.5 per cent in July. But he said he wanted to open discussions with the unions on the subject, suggesting he could be looking to phase in the increase.
The government will also try to trim spending programmes by as much as €6bn a year by 2013.
China’s currency plans remain unclear
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: June 25 2010 11:09 | Last updated: June 25 2010 11:09
http://www.ft.com/cms/s/0/2c460aca-8039-11df-8b9e-00144feabdc0.html
China announced a significant revision to its exchange rate policy last weekend but the modest appreciation in the level of the currency during the first week of trading under the new regime has raised questions about B.eijing’s real intentions.
The Chinese central bank announced it would abandon its two-year peg to the US dollar a week ahead of Saturday’s G20 summit in Canada where the value of the renminbi had threatened to become one of the major issues.
Since then, the Chinese currency has risen by 0.5 per cent against the US dollar, a large movement in the context of the usually tightly controlled currency regime, but still only equivalent to the daily 0.5 per cent trading limit that has been in place for five years.
As a result, the Chinese delegation could yet come under pressure at the G20 summit to be more specific about what will change with the new currency policy.
“The rest of the [G20] were not born yesterday, and there may be some suspicion that the move over the last week was just window-dressing to take the exchange rate issue off the top of the agenda,” said Brian Jackson, a strategist at Royal Bank of Canada in Hong Kong. “To reduce the risk of trade tensions, we will need to see further renminbi gains in the days and weeks ahead.”
Washington has so far given a cautious welcome to the policy shift. Barack Obama, the US president, said on Thursday that initial signs were positive and that it was unrealistic to expect swift increases in the value of the Chinese currency.
“We did not expect a complete 20 per cent appreciation overnight, for example, simply because that would be extremely disruptive to world currency markets and to the Chinese economy,” he said.
However, Mr Obama added that it was “too early to tell whether the appreciation ... is sufficient to allow for the rebalancing that we think is appropriate”.
Sander Levin, chairman of the US House of Representatives ways and means committee, said that legislation designed to press China into more rapid appreciation would be kept “on the burner”.
“We’ll see if China’s action in this immediate period really reflects a very significant change in policy,” said Mr Levin.
Jiang Yaoping, a Chinese deputy minister of commerce, whose department fiercely opposed any shift in currency policy, said that any changes in the exchange rate would be “gradual”.
“Accusations that China is manipulating its currency are groundless. The facts have proved that it’s not true,” he said.
Mark Matthews at Macquarie Securities in Hong Kong said investors were wrong to dismiss this week’s modest market movements as “just a continuation of the same cat-and-mouse game [China has] been playing with the US since 2008”.
A more dramatic shift would have been criticised in China as capitulation to the US Congress and would have attracted a huge volume of speculative capital.
“The important thing with currencies is not the absolute level but the trend,” said Mr Matthews. “Longer-term, this move shows that China has decided it will let its currency appreciate.”
Scene set for G20 battle over fiscal strategy
By Alan Beattie in Washington and Quentin Peel in Berlin
Copyright The Financial Times Limited 2010
Published: June 24 2010 19:26 | Last updated: June 24 2010 19:26
http://www.ft.com/cms/s/0/8fbd9542-7fb6-11df-91b4-00144feabdc0.html
So, is there to be a fight over fiscal frugality in Toronto or not? That appears to depend not just on whom you ask, but on which day you ask them.
Heading in to this weekend’s meeting of the G20 heads of government in Canada, the scene appeared set for a battle over fiscal strategy between the US and most of the rest of the G20.
The US has appeared to place much more weight on the need to keep demand going in the short run, with most of the rest of the G20 – certainly the Europeans and the Canadians – preferring to emphasise rapid deficit reduction.
A letter by President Barack Obama released last Friday was widely read in Europe as thinly veiled criticism of Germany’s plans to cut spending and raise taxes. But the US then struck a more emollient tone. Angela Merkel, Germany’s chancellor, reported that Mr Obama had not criticised German policy during a phone call on Monday.
Meanwhile, a senior administration official in Washington said the US was content with the current fiscal stance across other G20 countries, and enjoined observers to watch what governments were actually doing rather than what they were saying.
Nonetheless, Wolfgang Schäuble, Germany’s finance minister, felt the need to hit back in a column in Thursday’s FT.
Americans, Mr Schäuble said, might not understand the historical revulsion against deficits and inflation in Germany. He contrasted the automatic fiscal stabilisers in the German economy with the situation in those countries criticising Germany.
Behind this, officials say, lies some frustration among other G20 members, particularly Germany, about mixed signals. They say they have received forthright criticism in private from US officials such as Tim Geithner, Treasury secretary, which contrasts with more emollient statements made in public.
The US denies any inconsistency. A senior administration official said: “There is no disagreement around the importance of fiscal consolidation ... The US isn’t asking for any particular country-specific action. We are focused on ensuring there is durable global growth and job creation and have made it clear that the US cannot be the consumer of last resort.”
G20 observers say that the US and other countries are treading fine lines between what they really think and what image it is safe to portray in public.
In the US, the administration is under attack from Republicans and some centrist Democrats for spending too much. Polls have shown rising public concern about deficits.
Similarly, Germany’s fiscal plan is actually less draconian and more backloaded than it appears, but German official rhetoric is being modulated to reflect public opinion in favour of rapid deficit reduction.
Indeed, a US official notes that the US is forecast to have the sharpest reduction in its deficit over the next few years in the G20, thanks to the expiry of stimulus spending and other measures.
Much public and official opinion has shifted towards erring on the side of prioritising deficit reduction over short-term boosts to demand.
This week the UK, frequently a US ally in economic matters, unveiled a budget raising value-added tax and promising to slash spending. Stephen Harper, the Canadian prime minister, released a letter last week calling for faster deficit reduction.
Eswar Prasad, a former senior International Monetary Fund official now at Cornell University, says that with some emerging market countries such as India also becoming more concerned about deficits, the US itself is worried it will become the target rather than the source of pressure in the G20.
“The situation has definitely shifted,” Prof Prasad says. “The question now has come whether the rest of the G20 will be pushing the Americans to fall into line.”
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