Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times

Investors take stock as growth doubts linger
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: July 5 2010 07:45 | Last updated: July 5 2010 12:19
http://www.ft.com/cms/s/0/52d6ab00-87f4-11df-a4e7-00144feabdc0.html


Monday 12:00 BST. Traders are making tentative additions to some riskier bets as they reason that recent evidence suggesting global economic growth is slowing may be priced into the market.

The FTSE All-World index is flat and industrial commodities are seeing some tentative buying following sharp falls of late. The dollar is slightly firmer.

However, trading is cautious and likely to be thinner than normal because Wall Street is closed for a public holiday and fresh data are at a premium.

Investors may welcome the chance for reflection given the severely negative tone over the past few weeks.

Poor US household-focused surveys over the past month have been adding to concerns that the world’s biggest economy is struggling to maintain its recovery. Coupled with nagging worries about the impact of the eurozone fiscal position on the region’s financial system and growth prospects, these fears have knocked investors’ risk appetite and delivered a miserable May and June for stocks and commodities.

But there is no reason to panic, argue the bulls: Asia, and in particular China, remains the engine for global growth, while manufacturing activity across most economies is performing fairly robustly. Recent comments from German industry have been positive.

Unfortunately for the optimists, last week’s purchasing managers surveys suggest the pace of industrial expansion, from China to the US, is faltering. Today’s reports of slowing Chinese and stalled European service sector growth add to those fears.

In addition, the latest US payrolls data point to a labour market that is stuttering and not providing the sort of improvement necessary to support the levels of consumption considered a prerequisite for sustainable economic growth.

This has left the S&P 500 at its worst level since the start of October and down 16 per cent since April’s cyclical peak. It has pushed investors into bond “havens”, forcing US Treasury yields to 13-month lows.

US sovereign debt markets are also shut today, but electronically traded US equity futures encapsulate the broader market’s reticence and were the S&P 500 to open it would start 3 points lower.

☼ Factors to Watch. Investors will be preparing strategies to tackle a busy week for monetary policy, when comments on how central banks see the economic slowdown will be keenly parsed. The European Central Bank and the Banks of England, Australia and South Korea will make their decisions. ☼

● Asia. A mixed, guarded session has left the FTSE Asia-Pacific index up 0.2 per cent. Tokyo’s Nikkei 225 provided the most lift, rising 0.7 per cent with traders citing short covering in heavily battered exporters as an important driver.

Worries about a global slowdown crimping demand for resources trumped the positive pop from bid action in Sydney, and the S&P/ASX 200 lost 0.4 per cent.

Chinese-facing stocks continue to struggle, with Shanghai off 0.8 per cent as fresh supply to the market – primarily in the form of Agricultural Bank’s imminent IPO – weigh on sentiment. Hong Kong lost 0.3 per cent.

● Europe. An early minor bounce soon faded as miners and banks gave up initial gains, the latter on nagging concerns regarding the stress test results due later this month. The FTSE Eurofirst 300 is up 0.1 per cent and the FTSE 100 in London is down 0.1 per cent in fairly diminished volume.

● Forex. Trading is quiet though the theme of dollar strength at a time of worry appears to be making a return. The dollar index, which measures the buck against a basket of its peers, is up 0.3 per cent.

The euro is down 0.3 per cent to $1.2521 following its 1.5 per cent advance last week. Sterling is softer after a measure of UK service sector activity hit a 10-month low.

● Debt. With US Treasuries not trading, the benchmark focus turns to the German Bund. The 10-year is seeing some buying and the yield is 3 basis points lower at 2.56 per cent.

Yields on eurozone “peripheral” debt are slightly lower, while the cost of insuring corporate and sovereign debt is falling back a bit.

● Commodities. Mild buying can be seen in metals following last week’s chunky selling, with copper up 0.4 per cent to $6,475 a tonne. Oil is higher by 0.2 per cent at $72.29.

Gold is down 0.3 per cent at $1,208 an ounce after dipping below $1,200 on Thursday.

Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm

Monday’s Market Menu
What’s affecting risk appetite

Risk on

● Oversold? Recent falls may reflect slower growth fears

● Eurozone: euro holding above $1.25 as calmer mood prevails

Risk off

● Services: sector PMI confirm growth is stalled or slowing

● Vix: fear gauge remains above apparently significant 30 level







The long and the short of fiscal policy
By Clive Crook
Copyright The Financial Times Limited 2010
Published: July 4 2010 20:34 | Last updated: July 4 2010 20:34
http://www.ft.com/cms/s/0/5993f40c-879a-11df-9f37-00144feabdc0.html


The US recovery is faltering. Last Friday’s jobs report, though not discomfiting the markets, contained more bad news than good, and followed a slew of other disappointing indicators. What Congress can do in current circumstances is limited, but Washington’s politicians are making sure to avoid doing even that. A limping recovery and a squabbling, impotent government are no formula for restoring confidence.

Non-farm payroll employment fell by 125,000 in June. This was roughly as expected, since the government was shedding temporary census workers. The headline unemployment rate fell from 9.7 per cent to 9.5 per cent – good news, on the face of it, except that it happened for the wrong reason. The number of people searching for work fell: if you are out of work but no longer looking, you are not “unemployed”.

Private-sector hiring, a key number, came in at 83,000, less than expected, following an even worse number for May. Average hours worked and hourly earnings both fell, albeit modestly – leading indicators of continued weakness in the jobs market. Seasonally adjusted, the median duration of unemployment rose to 25 weeks, adding to fears that European sclerosis might infect the US.

These gloomy figures did not appear in isolation. The Institute for Supply Management’s manufacturing index came in lower than expected. The outlook for hiring and orders worsened. The housing market wobbled again, as tax credits expired. Pending home sales fell by 30 per cent in May, against an expected decline of 12.5 per cent. That was bad news for house prices, still barely off their 2009 lows. More analysts are starting to fear a double dip in housing.

As I noted in a previous column, interaction between the housing and labour markets is a particular concern. Negative equity ties homeowners down, impeding the mobility that boosted jobs growth in previous US recoveries. Shattered net worth, the ongoing threat of foreclosure, and the stuttering jobs market all weigh with unusual force on consumer confidence – which dropped sharply in June, by the way, according to the Conference Board.

With the recovery stalling, how should policy respond? Simple: keep monetary policy loose, and provide fiscal stimulus if conditions permit. But do they permit? With elections on the way, the quarrel in Washington over this question is increasingly bitter. The result is a degree of paralysis unusual even by this town’s remarkable standards.

Conditions not only permit but demand that fiscal stimulus should be extended. Long-term interest rates are very low. The US has the luxury denied to other countries of being able to print the world’s reserve currency. One day, inflation will again be a problem; today, it is the least of the country’s worries. There are no signs of stress in the market for US government debt.

Now, this will not last. There will come a time when the country’s fiscal course has to change. The Congressional Budget Office’s latest projections underline the point. On business-as-usual assumptions (different from the “current law” baseline, but more realistic), US public debt is on course to exceed 100 per cent of gross domestic product in 2025 and to reach 185 per cent of GDP in 2035. Strong measures – spending cuts and tax increases – will be needed to stabilise the ratio at a safe level, by which I mean a level that will permit strong fiscal action in the next economic crisis.

To ignore this, as advocates of continued stimulus tend to, is a grave mistake in both political and economic terms. For the sake of maintaining fiscal policy as an anti-recession tool, a commitment to fiscal control is needed right now. With alarm over the outlook for debt so widespread, this might be the best single thing Congress could do to restore confidence. A long-term fiscal-consolidation strategy would provide additional stimulus in its own right – more, perhaps, than an extra $100bn-$200bn added to the short-term deficit.

Granting all this, short-term restraint is both unnecessary and dangerous. A second downturn, if it is allowed to happen, will overwhelm the effect on the debt of any short-term tightening. The balance of risks points to keeping fiscal policy loose this year and next. The most recent data only strengthen the case.

This laughably simple prescription – maintain or add to stimulus for the time being, plan to reduce the debt once the economy strengthens – is evidently beyond both branches of government. In Congress, Republicans sense triumph in November. A failing recovery is their friend, so long as they can blame the administration’s supposed fiscal irresponsibility. The strategy is working. It even has the party voting to block extensions to unemployment benefits, which under the circumstances is not just bad economics but an affront to ordinary decency.

But where is Barack Obama’s leadership when you need it? The White House is letting Republicans win the argument by refusing to address the long-term issue. The president set up a fiscal commission to make recommendations – a classic stalling device. He and his party, if they believe in anything, believe in bigger government. Yet he has tied his own hands on revenues by promising no tax increases for most Americans. He has pushed through an unpopular healthcare reform that only he and his most besotted allies believe will cut costs.

Is it surprising that the country thinks fiscal policy is out of control, even to the point of looking warily at extended jobless benefits? To get its way on short-term stimulus, the White House needs to talk seriously about long-term budget policy. The silence is deafening.

clive.crook@gmail.com










US claims of higher drug costs under fire
By Andrew Jack in London
Copyright The Financial Times Limited 2010
Published: July 4 2010 19:28 | Last updated: July 4 2010 20:24
http://www.ft.com/cms/s/0/4ae8b8a4-8798-11df-9f37-00144feabdc0.html


Claims by the US drugs industry that the US disproportionately funds research and development of new drugs by paying higher prices than Europe for its medicines have been undermined by a new study to be published soon.

Panos Kanavos and Sotiri Vandoros at the London School of Economics argue in their report that a rigorous like-for-like comparison shows that transatlantic differences in patented medicine prices are modest and declining over time.

In a forthcoming article in Health Economics, Policy and Law, the co-authors conclude that “public prices for branded prescription medicines in the US are comparable to those in key European and other OECD countries”.

Their findings are an embarrassment for the industry, and notably PhRMA, its powerful Washington, DC-based trade body. In the past PhRMA has argued that Europe’s ill-conceived public policies, including price controls and sluggish regulatory decision-making, have chilled innovation and raised doubts among private investors who help to underwrite research.

But the study confirms data released recently by several pharmaceutical groups, including AstraZeneca and GlaxoSmithKline. This data – confirmed informally by senior industry executives – suggests profits in the US are only marginally greater than in Europe.

Past studies of drug price differences – including by the US General Accounting Office and by congressional officials – have suggested that US prices are at least one and a half times those of European prices.

Mr Kanavos says such comparisons are flawed, often comparing European list prices with US factory gate ones, which do not take into account the discounts negotiated between manufacturers and health insurers in the US. He says some previous studies have also taken unrepresentative samples.

By taking a basket of 68 of the leading branded prescription medicines, Mr Kanavos and his co-author conclude the US prices are a maximum of 25 per cent higher than European ones, and below Mexican levels.

Based on a comparison of prices between 2004 and 2007, he also concludes that there is convergence over time, with innovative medicines becoming more expensive across the US, Europe and other countries.

His study concludes that Europe remains a relatively attractive market by volume and price, even though budget deficits have forced through aggressive price cuts in several EU states in recent weeks.

But Mr Kanavos demonstrates that manufacturers of branded drugs do not significantly cut prices to compete with lower cost generic rivals once patents expire. Governments typically have to ensure that prescribers switch to generic alternatives to save money.