Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times

Risky assets rally as banking fears ease
By Telis Demos in New York
Copyright The Financial Times Limited 2010
Published: July 7 2010 08:45 | Last updated: July 7 2010 21:48
http://www.ft.com/cms/s/0/e6bd5a74-8986-11df-9ea6-00144feab49a.html


Wednesday 21:25 BST. Banks and earnings season rode to the rescue of a frightened market as traders turned optimistic about the eurozone financial sector stress tests and after the world’s second biggest custody bank said earnings would beat expectations.

Earlier, risky assets dipped following Tuesday’s disappointing US service sector figures, and then news that German manufacturing orders unexpectedly fell in May, the first decline this year.

But European banking stocks began to rally in the middle of the session as investors’ hopes grew that the publication of the stress tests of eurozone banks, due later this month, will reduce uncertainty surrounding the sector. US stocks had their best day since May, and rallied for the second day in a row.

Further impetus was provided to the bounce after State Street said in pre-market trading that its profits would come in much higher than analysts had forecast – leading some investors to raise broader expectations for the up-coming earnings season.

Unsurprisingly, that is leading US stocks to rally – considering that at Tuesday’s close the S&P 500 was valuing shares at only 12.3 times expected earnings for 2010. That is lower than the historical average of closer to 15 times, according to David Bianco, head of US equity strategist at Bank of America Merrill Lynch.

“Even during the deflationary US depression and the Japan deflation, the price-to-earnings ratio remained in the mid-teens,” Mr Bianco said.

Since many earnings estimates were already projecting less-than-robust growth in consumer spending, an expected bounce in Thursday’s retail sales report – which early indicators, such as Redbook reporting a 3 per cent jump in chain-store sales in June, suggest may be strong – is adding fuel to the fire.

The FTSE-All World was up 1.5 per cent, the S&P 500 in New York was higher by 3.1 per cent to 1,060 and the FTSE Global Banks index – which had at one stage recorded a loss of 1.4 per cent – was up 3 per cent.

On a further potentially positive note, some analysts are pointing to Agricultural Bank of China’s ability to price its shares at the top of its IPO range, raising $22bn in the process, as a sign of investors’ faith in the Chinese economy. Sceptics, however, will note the peculiarities of the Chinese capital markets.

Sceptics will also note that earnings multiples are based on a view of their future growth. While the US economy may not ‘double dip’ in 2010, if the possibility grows that it dips again in 2011, shares’ multiples could easily stay depressed.

“The equity market is pretty reliant on having a favourable reaction to earnings,” said Barry Knapp, US portfolio strategist at Deutsche Bank.

“Even if this quarter will be good, it’s only a matter of time before 2011 expectations are marked down. If business confidence is impacted by the combination of problems in Europe, the dollar’s strength and maybe even some regulatory changes, it’s certainly possible companies could be cautious and start taking down guidance sooner than expected.”

● Europe. Bourses dropped sharply at the open, tracking Wall Street’s late slide from its highs on Tuesday. However, the turnaround in the banking sector drove exchanges into positive territory later in the session. The FTSE Eurofirst 300 was up 1.5 per cent, though the FTSE 100 in London under-performed with a gain of 1 per cent as miners proved to be a drag.

● Forex. The dollar’s early haven flows have receded and the buck is down 0.2 per cent on a trade-weighted basis, and off by 0.1 per cent versus the euro at $1.2643.

In part, the euro’s weakness may be due to some of the details that have come out about the European bank stress tests. The Committee for European Bank Supervisors said 91 banks will be tested, with a 3 percentage point deviation in European GDP growth.

It did not contradict the anticipated assumption of a 17 per cent haircut on Greek bonds, which analysts have pointed out is not very stressful at all. The credit default swap market is already pricing in a 60 per cent loss, according to Reuters.

“These kind of numbers do not seem particularly robust,” and not enough “that would ease market anxiety. If more people conclude this, the euro may come off,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Meanwhile, it’s not surprising to see bank shares rallying – passing the stress tests can only be good for the banks themselves, at least in the near term. At least it was in the US, when the stress tests prompted a huge rally in shares.

“Growth” currencies were originally under pressure, but they too are rallying, leaving the Aussie dollar up 1.6 per cent at $0.8662.

● Debt. US Treasuries on Tuesday had delivered their verdict on the US data, dipping back towards multi-month lows even as their stock-trading brethren partied in the next room. However, Wall Street’s bounce on Wednesday is delivering some selling to the complex and the yield on the 10-year note is currently up 6 basis points at 2.98 per cent, despite news that China was not considering selling its vast holding of US debt.

Spanish and Portuguese benchmark yields are several basis points higher, despite the latter completing a well-received €762m auction of six-month bills.

● Commodities. The sector rallied as risk aversion eased. The Reuters-Jefferies CRB index is up 1.6 per cent as metals find their footing. After a volatile session, oil is now up 3.5 per cent at $74.49 a barrel.

Gold is up 0.8 per cent at $1,202 an ounce, having bounced off a six-week low of $1,185. The precious metal remains under pressure, however, after China’s State Administration of Foreign Exchange said it did not see the need to make the precious metal a significant part of its asset portfolio.

● Asia. Softer growth prospects in the US and Europe hit Australian commodity-related stocks, leaving Sydney nursing a loss of 0.5 per cent. Hong Kong lost 1.1 per cent but Shanghai bucked the trend with a 0.5 per cent gain, possibly on relief over the AgBank IPO.












China rules out ‘nuclear option’ on T-bills
By Geoff Dyer in Beijing and Peter Garnham in London
Copyright The Financial Times Limited 2010.
Published: July 7 2010 10:44 | Last updated: July 7 2010 17:55
http://www.ft.com/cms/s/0/5f038fc8-89a3-11df-9ea6-00144feab49a.html


China has delivered a qualified vote of confidence in the dollar and US financial markets, ruling out the “nuclear option” of dumping its huge holdings of US government debt accumulated over the last decade.

But the State Administration of Foreign Exchange, which administers China’s $2450bn in reserves, the largest in the world, also called on Washington and other governments to pursue “responsible” economic policies.

The statement on Wednesday, one of a series that Safe has issued in recent days in an apparent effort to address criticism about its lack of transparency, also played down the chances of China making major further investments in gold.

Safe’s comments coincided with the news that China had made record purchases of Japanese government bonds in the first four months of the year, helping push the yen to an eight-month high against the dollar.

Analysts said it was too early to tell whether China’s move into JGBs was the start of a trend, but Greg Gibbs, FX strategist at RBS, said unlike in the US, Tokyo would not welcome foreign central banks routinely accumulating yen assets.

With such inflows not required to help stabilise its currency given the country’s current account surplus, yen appreciation could hurt the country’s exporters.

“If this persists it may generate tensions between Japan and China. It would seem a little ridiculous for Japan to allow the yen to be pressed upwards by inflows from China, when Japan is not able to counter with renminbi asset purchases,” said Mr Gibbs.

About two-thirds of Safe’s funds are believed to be in dollar assets, giving China a huge exposure to the US economy but also raising fears that the holdings could be used to pressure Washington.

Given the US government’s huge funding needs, some analysts worry that China’s stated objective of diversifying its reserves could also lead to higher US interest rates if it buys fewer Treasuries.

However, Safe said that the “nuclear” option of selling huge volumes of US assets was “completely unnecessary”. Given its security, liquidity and low transaction costs, the US Treasury market was “a very important market for China”. It added: “Any increase or decrease in our holdings of US Treasuries is a normal investment operation.”

The statement said that while Safe had worried that the dollar could drop sharply because of heavy US borrowing, the problems in other countries – notably in the euro area – had made this a less pressing problem.

However, it added: “China has been calling for the US to genuinely take measures to protect investors’ interests and confidence as a responsible large nation.”

Since the start of the financial crisis, Chinese leaders have publicly expressed concerns about the weakening dollar and rising US debt levels, calling on the US to pursue sound fiscal and monetary policies.

Although US officials say that in recent months China has not been privately critical of its economic policies, scepticism about the dollar remains widespread in China.

“Even with the situation in Europe, the bigger problem is still the US and its long-term debt position,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences, in a recent interview.

Safe said the gold market was too thin and volatile and even a big purchase would not help to diversify its holdings a great deal. “There are some limits to investing in gold and it cannot become a main channel for investing our foreign exchange reserves,” it said.

Safe has been criticised at home for some of its investments, including the large reported stakes it has taken in US equities before the financial crisis. The body said: “Safe will never be a speculator. It mainly seeks to protect the safety of China’s foreign exchange reserves and to ensure a stable investment return.”



EU parliament backs tough bonus rules
By Nikki Tait in Brussels and Brooke Masters in London
Copyright The Financial Times Limited 2010
Published: July 7 2010 12:19 | Last updated: July 7 2010 20:17
http://www.ft.com/cms/s/0/6f7788da-89aa-11df-9ea6-00144feab49a.html


Tough new rules restricting bankers’ bonuses were approved by European Union lawmakers on Wednesday and could take effect in much of the 27-country bloc in time for this winter’s pay season.

Banks will be required to defer 40 to 60 per cent of bonuses for three to five years, and half of any immediate bonus must be paid in shares or in other securities linked to the bank’s performance. As a result, bankers will only be able to receive between 20 and 30 per cent of any bonus in upfront cash – the toughest restriction worldwide of this kind.

While the new bonus rules are broadly in line with global recommendations endorsed by the Group of 20 leading nations, bankers say the EU may have put itself at a competitive disadvantage by staking out such a firm position.

The US has opted for guidelines rather than legislation and banks there are hopeful they will be able to exploit the difference when competitive recruiting pressures return.

“We will be competing on a global basis for talent and we have to know what the rules are elsewhere,” said Stuart Fraser, policy chairman of the City of London.

The EU measures, part of a broader set of amendments to bank capital rules, were agreed between member states and EU parliamentarians last week. The legislation approved on Wednesday calls for national regulators to implement the bonus portion by January 2011.

City professionals said the practical impact would depend on how quickly and strictly national regulators applied the legislation and whether they exercised powers to fine banks that flouted the bonus rules.

Most banks have already changed their pay structures. A survey of 39 financial firms by consulting firm Mercer found that 94 per cent have cut use of cash bonuses and over 65 per cent have a mandatory deferral programme.

Supporters say the rules are designed to prevent backsliding.

Arlene McCarthy, the British MEP who steered the new rules through the parliament, told fellow lawmakers this week that the regime should help address “fundamental flaws in the banking system” and discourage excessive risk-taking.

“Since 2008, banks have failed to reform their structures – we are now doing the job for them,” she said.

Michel Barnier, the EU’s internal market commissioner, also said he believed the new regime would “restrict remuneration policies which have only encouraged excessive risk-taking”.

He said that Brussels was now considering rules for other parts of the financial services industry “but taking into account the specific nature of those sectors”.