Today's Financial news Courtesy of The Financial Times

Today's Financial news Courtesy of The Financial Times

Soothing words on China spur risk return
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010.
Published: July 6 2010 08:22 | Last updated: July 6 2010 13:06
http://www.ft.com/cms/s/0/fdb96a34-88bd-11df-9a9f-00144feabdc0.html


Tuesday 13:00 BST. Risky assets are in demand as investors are tempted back after recent sharp falls and following soothing comments about the Asian economy by the Australian central bank.

The FTSE All-World equity index is up 1.1 per cent, metals prices are rallying and the dollar is softer as a less fearful mood abounds.

S&P 500 futures and Asian equities retraced an early slide early in the session after the Reserve Bank of Australia told traders what they were desperate to hear: that despite caution in global markets it was confident about growth in China, the region and Australia itself.

The comments hit the bull's-eye for investors, who have become increasingly worried that the global economy will slip into reverse if the slowdown in the US and Europe was joined by a stalling of the Asian growth engine.

Wall Street, which was closed on Monday for a public holiday, is currently expected to open with a gain of about 0.6 per cent.

☼ Factors to Watch. It’s a light day for data catalysts, with the only significant report on the slate being the US non-manufacturing ISM numbers. However, any sign that the sector that represents more than 80 per cent of the US economy is performing worse than expected is likely quickly to dispel the better mood emanating from Asia.

Also, it is likely that as the week progresses, traders’ attention will turn to the start next week of the US second-quarter earnings season. ☼

● Asia. Australian stocks staged a sharp turnround after the RBA left interest rates unchanged at 4.5 per cent but made its upbeat comments on economic prospects. The S&P/ASX 200 in Sydney added 1.3 per cent as bank shares were picked up in a market that had fallen more than 7 per cent in the previous 10 days.

The FTSE Asia-Pacific index climbed 1.4 per cent as the region followed the Aussie lead. The Nikkei 225 rose 0.8 per cent while Shanghai and Hong Kong added 1.9 per cent and 1.2 per cent respectively.

The Market Eye
Desperate and deluded, the market today has the feel of a teenage boy interpreting one glance from the opposite sex as a promise. Comments from the RBA about the relative health of the Asian region has provided lift off to equities and commodities as traders seem eager to shed despondency. Unfortunately, implicit in the rally is the admission that the central bankers know more about the state of the global economy than markets do. Unlikely. The crowd probably would be wise to have more faith in their own recent wisdom.

● Europe. Miners are enjoying a pop on hopes that demand out of China will not contract to the extent recently feared. This is helping to push London’s FTSE 100 up 2.2 per cent, while the FTSE Eurofirst 300 is up 2.4 per cent with all the markets sub-sectors gaining ground. Madrid’s Ibex is up 3.1 per cent as the previously battered banks make hay.

● Forex. The dollar and other perceived currency safe zones such as the yen are suffering as investors become less risk averse. The dollar index, which tracks the buck against a basket of peers, is down 0.2 per cent.

The euro is up 0.3 per cent to $1.2574, while the Aussie dollar is leading the “growth” currencies with a gain of 1.3 per cent against the greenback to $0.8506.

● Debt. “Haven” bonds are under pressure as the broader market’s less risk averse tone takes a toll. The yield on German 10-year Bunds are up 5 basis point at 2.60 per cent. However, the yield on the US benchmark is down 1 basis point to 2.97 per cent as Treasuries play catch after being closed on Monday.

Credit default swap indices tracking the cost of insuring corporate and sovereign debt are slightly tighter, befitting the more confident mood.

● Commodities. The complex is also getting a boost on hopes for Asian demand, with the benchmark copper contract up 1.5 per cent to $6,5705 a tonne. Oil is up 1.1 per cent at $72.91 a barrel, having almost breached $71 in early trade, a four-week low.

Gold is flat at $1,207 an ounce.

Tuesday’s Market Menu
What’s affecting risk appetite

Risk on

● No worries: Oz central bank says Asia is fair dinkum.

● Euro: near 7-week high versus dollar as eurozone banking fears fade.

Risk off

● Data: poor recent macro-economic reports lurk below surface.....

● .....as do rotten technicals for stocks, say chartists.


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





China eyes shake-up of bank holdings
By Henny Sender in Hong Kong
Copyright The Financial Times Limited 2010
Published: July 5 2010 19:37 | Last updated: July 5 2010 19:37
http://www.ft.com/cms/s/0/eab99390-885f-11df-aade-00144feabdc0.html


China is considering stripping its $200bn sovereign wealth fund of the country’s banking stakes, in a move that could free it of some restrictions when it invests in the US.

People familiar with the matter said that, under the proposal, China Investment Corporation would no longer be responsible for holding the state’s majority stakes in the country’s biggest banks, such as Bank of China.

The move would end CIC’s status as a bank holding company in the eyes of the Federal Reserve Bank of New York.

That would liberate CIC of certain restrictions when it makes investments in the US, where it is believed to be targeting equities, bonds and real estate deals.

The bank stakes were valued at about $70bn when CIC was established in 2007, but it is not clear whether the fund will be recompensed for the loss of these holdings.

If CIC does receive payment in return for the shares, the fund will nearly double overnight the amount of liquid cash on hand for investing.

The proposal is being championed by Wang Qishan, the vice-premier in charge of finance, according to bankers.

The reform represents the latest episode in the long-standing bureaucratic tussle between the finance ministry and the People’s Bank of China, as each struggles to oversee the big state banks.

CIC was established to invest a portion of China’s huge foreign exchange reserves abroad in order to gain better returns.

But since taking over Huijin – a holding company housing the state’s shares in the big lenders – it also found itself at the heart of the banking system.

When Huijin was first set up in 2003, it was considered a power grab by the central bank to reduce the finance ministry’s influence over the banks. But when Huijin was transferred to CIC in 2007, it was considered a coup for the ministry.

“CIC’s establishment was always less about [being] a sovereign wealth fund than a bureaucratic turf battle,” say authors Carl Walter and Fraser Howie in a forthcoming book about China’s financial system.

Some senior Beijing policymakers are pushing for Huijin to be spun out of CIC and handed ownership of the government’s stakes in financial groups, including the large state-owned insurance companies.

They also want Huijin to be governed directly by the State Council, China’s cabinet.

Such a change is likely to spark political turf wars over control of the banks’ huge dividend streams.

The dividends the banks pay the government currently go to CIC, swelling its returns and giving it welcome cash flow at a time when most of its investments are too young to have produced significant returns.




Australia holds rates as wage pressure builds
By Elizabeth Fry in Sydney
Copyright The Financial Times Limited 2010
Published: July 6 2010 13:06 | Last updated: July 6 2010 13:06
http://www.ft.com/cms/s/0/d833252a-88db-11df-8925-00144feab49a.html


Australia’s central bank held interest rates steady on Tuesday in spite of strong new trade figures and worries about rising wage pressures.

The country recorded a A$1.65bn trade surplus for May, its third-highest ever, according to data released earlier on Tuesday. Exports rose 6 per cent in value from a year before, helped in part by a rise in iron ore prices since an industry shift away from annual supply contracts.

Reserve Bank of Australia figures show commodities prices rising for the eleventh consecutive month in June, with demand from Asia pushing them 46.5 per cent higher than the low they hit in May 2009. Imports grew 4 per cent.

However, the RBAfears that wages are starting to increase and that underlying inflation could reach the upper end of the bank’s 2-3 per cent target band over the next year. The jobless rate dropped to 5.2 per cent in May. Gross domestic product growth for next year is forecast at 3.5 per cent.

The bank on Tuesday kept rates at 4.5 per cent for a second month in a row. JP Morgan, however, expects the Reserve Bank to lift the cash rate as early as next month and again in the fourth quarter, taking it up to 5 per cent.

The Australian dollar rose on speculation that the country’s central bank would soon lift interest rates. It gained 1 per cent against the US dollar to $0.8480 and was up 1.2 per cent to Y74.55 versus the yen.

Volatile financial markets and problems in European economies have forced the RBA to rethink any tightening of the cash rate in the short term.

While export growth is expected to continue to shield Australia from the headwinds facing many other markets, some are concerned the pace could falter. Ben Jarman, a JP Morgan economist, expects Chinese economic growth to moderate, with a slowing of fixed asset investment and construction to which Australia’s iron ore and coal exports are leveraged.

“The Bank remains caught between the demands of a strongly recovering domestic economy and the threat of a renewed global slowdown in the third quarter,” said Michael Hart at Citigroup.

The decision to leave interest rates unchanged for another month is welcome news for new prime minister Julia Gillard, who is preparing to call a federal election in August.

Australia narrowly avoided recession during the global downturn thanks in part to high Asian demand for resource exports, and has since tightened monetary policy more aggressively than any other industrialised economy, raising rates six times since October.

Additional reporting Neil Dennis in London





Crisis-hit BP rules out issuing new shares
By Ed Crooks in London, Andrew England in Abu Dhabi and Simeon Kerr in Dubai
Copyright The Financial Times Limited 2010
Published: July 5 2010 20:31 | Last updated: July 6 2010 00:42
http://www.ft.com/cms/s/0/35e7f9d2-8866-11df-aade-00144feabdc0.html


BP can meet the costs of its huge oil spill in the Gulf of Mexico without issuing new shares, the company said on Monday, rejecting recent speculation that it was seeking a bail-out from a strategic investor.

The company has launched an appeal for support to Middle Eastern and other international investors, arguing that its shares are good value after their near-50 per cent fall since the Deepwater Horizon disaster on April 20.

However, it had “no plans” to issue new equity to bring in a “cornerstone” shareholder, in the way that Abu Dhabi and Qatar supported Barclays Bank in 2008.

An official from one of the Persian Gulf States told the Financial Times that BP had been reaching out to investment entities in the region, particularly those with which it already had relations.

The message, the official said, was: “Our stock is cheap, why not buy some?”

The Gulf is home to some of the world’s biggest sovereign wealth funds, which have previously stepped in to inject capital into western banks.

BP has a particularly long history with the United Arab Emirates – home to several state-controlled funds – where it has operated since the 1930s and is a partner in gas production and the development of power plants that can capture and store their carbon dioxide emissions. Abu Dhabi, the UAE’s capital, operates one of the world’s largest sovereign wealth funds, the Abu Dhabi Investment Authority, which invested $7.5bn in Citigroup in November 2007.

The Qatar Investment Authority has been one of the more active state investment vehicles in recent months, with a series of high-profile investments in UK property, including the acquisition of Harrods, the London department store.

Libya’s top oil official on Monday said that his country’s sovereign wealth fund should invest in BP to take advantage of the troubled company’s weak share price.

Shokri Ghanem, chairman of Libya’s national oil company, made the comments as BP made contact with Middle Eastern investors.

“BP is interesting now with the price lower by half and I still have trust in BP. I will recommend it to the LIA [the Libyan Investment Authority],” Mr Ghanem told Dow Jones.

BP is also active in Libya, having won a big contract in 2007 to explore for gas and oil there. The LIA is seeking to build up its portfolio.

Shares in BP, which said the cost to date of the spill had risen above $3bn, closed 3.4 per cent higher at 333.3p in London.

Whitehall refused to confirm or deny a report in The Times that officials in the Treasury and Department of Business were discussing contingency plans in the event BP collapsed or was broken up.

“Nobody could expect us to comment on hypothetical contingency plans for any company or whether or not they existed,” the business department said.

The talks were said to focus on BP’s position as a generator of dividends for UK pension funds, as a big employer, as well as its role as an operator of key energy infrastructure, particularly in the North Sea.

BP said that there was no evidence of “any unusual government care”.

Additional reporting by George Parker





Investors fear rising risk of US regional defaults
By Nicole Bullock in New York
Copyright The Financial Times Limited 2010.
Published: July 5 2010 19:30 | Last updated: July 5 2010 20:21
http://www.ft.com/cms/s/0/fb933f08-885b-11df-aade-00144feabdc0.html


Investors are worried that the risk of default for US local governments is growing, amid signs that some regions are facing the same type of difficulty in curbing pension and budget deficits as some eurozone countries.

The yield attached to some forms of infrastructure municipal bonds has risen relative to US Treasury bonds because of fears that cash-strapped local governments will struggle to repay these loans.

Absolute borrowing costs for regional governments remain relatively low in historical terms because of the Federal Reserve’s ultra-loose monetary policy. But any swings in municipal yields will be watched closely by investors, since they suggest that the fiscal anxieties about the eurozone could now infect the US.

“The risk in the second half of the year is that investor attention switches from Europe to the US,” said Robert Parker, senior adviser at Credit Suisse Securities, who singled out parts of California, as well as towns and cities in Illinois, Michigan and New York state as among the most vulnerable.

“You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market.”

If these market swings are sustained, they could push up borrowing costs for local governments, which, in turn, could exacerbate the squeeze on local authority finances and place more stress on the federal budget.

“There is more of a perceived risk to munis now,” said Laura LaRosa, director of fixed-income at Glenmede, a private investment manager.

US states faced budget deficits of $89bn for fiscal 2011, which began for most of them on July 1, according to the National Conference of State Legislatures. That is after shortfalls of more than $300bn since 2008.

Local municipalities can default and, depending on the state, file for bankruptcy. Should a state come to the brink, which is not expected at this time, many believe that it would be likely to receive federal support. The sharpest swings in the muni market have been seen in the $100bn so-called “Build America bonds” – or Babs – a type of US muni debt that has characteristics similar to corporate bonds. This sector has attracted a fresh investor base, which is now demanding greater compensation for risk.

Risk premiums, or spreads on Babs relative to Treasuries, have risen to 228 basis points, according to an index from Barclays Capital. The spreads have climbed from a low of 161bp in early May to their highest level since Barclays started compiling the index last October.

Absolute yields have risen to 6.03 per cent from 5.97 per cent.“The problems in the eurozone have driven up fixed-income yields overseas – on banks, utilities and sovereigns,” said Matt Fabian, a managing director at Municipal Market Advisors. “Babs compete directly against those issuers for buyers.”

The cost of insuring against default for munis also has risen. However, this part of the derivatives market is rather illiquid, and the mainstream part of the muni market has not seen as dramatic a swing as the Babs sector, partly because this is dominated by a traditional base of investors. These include local buyers who receive tax breaks when they buy US muni bonds, and who have historically been relatively loyal.

The muni sector has been known for its relatively few defaults and debt service is high in the pecking order of bills that states must pay. However, the threat of default has come to the fore as some states struggled to balance budgets after years of lower revenue and as federal stimulus is tapering off.




US told to seek foreign partners
By Helen Thomas and Nicole Bullock in New York
Copyright The Financial Times Limited 2010
Published: July 6 2010 02:58 | Last updated: July 6 2010 02:58
http://www.ft.com/cms/s/0/f5d4bc0e-888d-11df-aade-00144feabdc0.html


Out of order: the 2008 privatisation of Chicago’s parking meters encountered operational problems when rate rises left drivers needing bags full of coins and overstuffed meters

US antipathy to foreign investment in its infrastructure threatens to deprive the country of much-needed capital at a time when state and local governments are struggling with rising deficits, Felix Rohatyn, the famed Lazard banker, has warned.

Mr Rohatyn, whose advice helped save New York City from bankruptcy in the 1970s, said US resistance to foreign investment in its infrastructure amounted to a “wall of fear”.

“This dislike for foreign ownership is Kafka-esque; much of our country was built on foreign capital,” said Mr Rohatyn. He recently returned to Lazard, which has a big infrastructure business, as a special adviser to Ken Jacobs, chief executive and chairman.

“We are almost broke wherever you turn,” Mr Rohatyn said. “And yet the instinct to reject foreign capital, no matter where it comes from or what it is going to do, is to reject one of the things we are most in need of in the next 10-20 years.”

Lazard said it had found voters’ unease about foreign investment in US infrastructure had grown. A recent poll of likely voters taken for Lazard found that more than 80 per cent were resistant to the idea of foreign investment, up from 68 per cent two years ago. Those in favour of accepting foreign capital fell from a fifth to just 13 per cent.

Private investment in roads, bridges, parking garages and court houses is less common in the US than elsewhere. This is partly due to political opposition, but also because the $2,800bn (£1,852bn, €2,234bn) municipal bond market has provided a cheap source of funding for state and local governments.

But as funding challenges mount, the US will need significant investment in infrastructure in the coming years. The American Society of Civil Engineers has estimated $2,200bn of investment is needed in the next five years to repair and upgrade infrastructure.

Several US cities are pressing ahead with deals to privatise their parking systems, while in Puerto Rico the government is pursuing public-private partnerships on its roads and San Juan’s airport. There is about $60bn of private equity capital sitting unspent in infrastructure funds worldwide, according to data provider Preqin. There are also 116 funds currently fundraising, seeking a total of $83bn.

Such sums are tantalising for state and local governments forced to slash funds for everything from education to public safety to end several years of big budget deficits. Some, like the city of Harrisburg, the capital of Pennsylvania, are even considering bankruptcy.

“State and local governments are going to be in crisis for a number of years,” said George Bilicic, head of power, energy and infrastructure at Lazard. “One way to ease that crisis will be to sell assets.”

But bringing private investors into public works has been a tough sell in the US. The question for the industry now is whether struggling local finances could be the tipping point for local politicians and citizens to embrace the idea.

“Right now we are seeing the tip of the iceberg of the dire condition of state and local government finances which, up until now, has not engendered a slew of assets sales,” said Dana Levenson, head of infrastructure banking, Americas, at Royal Bank of Scotland. “It depends on how much further the crisis goes.”

Proponents of such deals argue that they do not just provide upfront funds, but also allow municipal governments to concentrate on core services such as police and fire rather than running parking lots or managing buildings. Critics, however, worry about the loss of long-term revenues and the prospect of higher rates for services once a private company is involved.

The history of these deals in the US is also chequered. In 2008 a $12.8bn deal to lease the Pennsylvania Turnpike toll highway system to Spanish company Abertis and Citigroup’s infrastructure investment group was shelved as mounting opposition from workers and politicians threatened to derail it.

A $2.5bn deal for a consortium led by Citigroup to take a 99-year lease and concession on Chicago’s Midway airport fell through in April 2009 after failing to secure funding.

Meanwhile, the 2008 privatisation of Chicago’s parking meters encountered operational problems. Rate rises that were agreed to in the sale, before electronic meters were installed, left drivers needing bags full of quarters and meters overstuffed with coins.

But even some of the biggest opponents are warming to the idea. One shift has been the attitude of some local trade unions towards privatisation deals. The unions favour using private capital to help generate jobs and protect pensions.

The Chicago Federation of Labor has urged the city to press ahead with a deal to privatise Midway airport, and backed a public-private partnership to build an expressway between Illinois and Indiana.

Los Angeles, Indianapolis and Hartford, Connecticut, also have privatisation processes under way. Mr Levenson estimates that there are 30-40 projects being considered in the US. “If even half of them get done, it would show that this market is getting the legs that everyone has been expecting for the last five years,” he said.!