Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times

Solid start to US earnings season trumps China worries
Copyright The Financial Times Limited 2010
Published: July 13 2010 08:26 | Last updated: July 13 2010 16:40
http://www.ft.com/cms/s/0/f3223738-8e3d-11df-964e-00144feab49a.html


Tuesday 16:35 BST. A positive start to the US second-quarter earnings season has overpowered worries about China’s property market and evidence of waning investor confidence in the German economy.

The FTSE All-Word equity index is up 1.4 per cent, commodities have reversed early losses and the dollar has shed initial gains as traders embrace elements of risk. However, Treasury yields are only reluctantly ticking higher as investors in the complex appear to remain cautious.

Wall Street’s S&P 500 is up 1.4 per cent, with optimism on earnings trumping a downbeat NFIB small business survey and a fall in weekly chain store sales.

The S&P 500 futures contract had overnight seen an initial 0.5 per cent advance, delivered in the wake of Monday’s well-received profits report from Alcoa.

The aluminium giant – the traditional curtain-raiser to several weeks of reporting – increased its demand forecasts for the metal and highlighted the appetite for its product in quickly growing economies such as China.

This helped calm fears among traders that activity was slowing in developing nations, as the fallout from several months of market turmoil – particularly with regard to the eurozone’s fiscal woes – takes its toll.

However, US equity futures then fell back to register a small decline following news that, contrary to some reports, Beijing is continuing to insist that tough measures to control property speculation remain in place.

Although analysts disagree whether the Chinese real estate market can be described as a bubble, many fear that too draconian a clampdown could cause a sharp retrenchment that may hit broader demand and leave some of the nation’s banks vulnerable to bad loans.

Asian markets turned tail on the development and confidence in Europe took a further knock after the ZEW reading of German investor sentiment fell in July by much more than expected, hitting a 15-month low.

In addition, news that Infosys, the Indian software services group, had missed profit forecasts after disappointing sales in Europe, increased concerns that the region’s woes will trim the earnings of those groups with exposure to the bloc.

But in a see-saw session, animal spirits have been reinvigorated, after BMW had raised its 2010 outlook – reminding traders of how earnings may deliver delight – and investors decide to take a less jaundiced view of any Chinese property sector slowdown. A relatively successful, if expensive, auction of Greek six-month bills has also calmed nerves – though given the ECB remains as an implicit backstop to the eurozone sovereign debt markets, the outcome was hardly surprising.

☼ Factors to Watch. Results from Intel, the chipmaker, after the Wall Street close will be the main earnings focus. ☼

● Asia. The FTSE Asia-Pacific index lost 0.3 per cent, with Chinese stocks doing much of the damage. Shanghai’s property sector fell 3.2 per cent, leading the Composite Index to a 1.6 per cent decline. Hong Kong fell 0.2 per cent.

Sydney closed down 0.7 per cent as miners succumbed to global growth worries. The Nikkei 225 in Tokyo gave up early gains to finish down 0.1 per cent.

● Europe. Bourses opened higher, reflecting Wall Street’s rally off lows, following Europe’s close on Monday. London’s FTSE 100 rose 2 per cent, boosted by miners reversing early losses and again helped by an advance for BP.

The FTSE Eurofirst 300 is up 1.7 per cent, as the BMW comments boost autos and with all sub-sectors sporting gains. Athens climbed 2.6 per cent, with the nation’s beleaguered banks up between 4 and 10 per cent on relief following the debt auction.

● Forex. Sterling is rallying 1 per cent versus the dollar to $1.5178 following news that UK core inflation moved higher in June.

The dollar was the main beneficiary of Asia’s wobble, but it has relinquished its gains as Europe takes a more risk-aggressive stance. The buck is now down 0.9 per cent on a trade-weighted basis and is down 1 per cent versus the euro to $1.2716

The single currency came under further pressure after Moody’s, the rating agency, downgraded Portugal’s debt, though the wobble was brief and news of the successful Greek auction later provided support.

● Debt. The Moody’s action weighed on Lisbon’s bonds, however, pushing the 10-year yield up 9 basis points to 5.51 per cent. The spread between Portuguese and German benchmarks rose above 290 basis points at one stage as investors demanded a greater risk premium for the former.

However, the spread is now 287 basis points as Bunds falter in the face of improving risk appetite after Greece managed to sell €1.63bn of bills.

US 10-year Treasury yields are still flirting with 3 per cent as some bond investors appear reluctant to swallow the recent risk rally. The benchmark is currently trading up 2 basis points at 3.08 per cent – though off earlier highs – as the market waits for the $21bn auction of new 10-year notes.

● Commodities. Any China growth concerns are guaranteed to hurt metals, and sure enough, copper led the complex lower in early European trading. However, the improvement in broader risk appetite encouraged buying, and the red metal has moved into positive territory, helping the Reuters-Jefferies CRB index to rise 1.2 per cent.

Oil has also turned round an initial decline and tracked equities’ move higher. The US crude contract is now up 2.7 per cent at $76.97 a barrel.

Gold is up 1.7 per cent at $1,215 an ounce. Some analysts were suggesting the bullion had spiked because the Portugal downgrade had raised eurozone concerns. But if that was the case, then gold was the only asset –other than Portuguese debt – that seemed remotely bothered by Moody’s move. A weaker dollar may be a better explanation, but again, gold has recently lacked any consistency in its negative correlation to the buck.

Tuesday’s Market Menu
What’s affecting risk appetite

Risk off

● Portugal: Moody’s downgrade is just a little reminder that all is not well.

● Thin volumes: recent rally has come on back of pitiful trading. London yesterday moved higher on half daily average.

● China: property clampdown can still rattle investors.

● Sentiment: ZEW shows impact of recent turmoil, could effect real economy in third quarter.

Risk on

● Alcoa: decent start to season. But it is forecasts – not the all-but-guaranteed bottom-line expectation beats – that are the crucial factor.

● GulfMex: hopes spill is at an end.

● Sold: Greece T-bill auction shows still buyers – at a price.


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




China exports expand US trade gap
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010.
Published: July 13 2010 14:48 | Last updated: July 13 2010 16:11
http://www.ft.com/cms/s/0/b95841a6-8e78-11df-964e-00144feab49a.html


The US trade gap widened unexpectedly in May as a jump in imports from China pushed the deficit to its highest point since November 2008.

The trade deficit grew by 4.8 per cent to $42.3bn, commerce department figures revealed on Tuesday. That diverged from economists’ forecasts that the gap would shrink in May.

Imports from China, which is the country’s biggest and most politically sensitive trade partner, rose by nearly 12 per cent. That inflated the US trade gap with China by more than 15 per cent to $22.3bn, pushing it to the highest level since last October.

Last week official Chinese figures showed that exports from China had surged 44 per cent year-on-year in June, lifting its trade surplus to $20bn. Such imbalances have raised anxiety in the US, although US policymakers were appeased last month when the Chinese central bank abandoned its near-two-year peg to the dollar.

Michael Feroli, an economist at JPMorgan Chase, said that the surge in imports of Chinese goods experienced in May could be temporary, as Chinese exporters rushed shipments ahead of a reduction in export tax rebates that takes effect on July 15.

Meanwhile, US shortfalls with the European Union and Mexico also increased in May, while deficits with Japan and Germany eased.

During the past year, the US trade shortfall with the rest of the world has soared by 70 per cent as global demand recovered after a severe collapse. The narrowing gap was one of the only bright spots during the recession, blunting the fall-off in output, but analysts said on Tuesday that the swelling shortfall could knock a percentage point from gross domestic product in the second quarter.

“Less domestic production, because of increased imports and less demand for higher-priced US exports, means less job creation in the manufacturing sector, a higher unemployment rate, and less income growth domestically,” said Stuart Hoffman, chief economist at PNC.

In May, US imports continued to outpace exports, rising by almost 3 per cent to $194.5bn. US exports climbed by 2.4 per cent to $152.3bn as global appetite for capital goods, industrial supplies and consumer items picked up.

“Both imports and exports have been on strong growth tracks, powered by inventory cycles here and abroad,” said Joshua Shapiro, chief US economist at MFR.

Growing demand for capital and consumer goods in the US fuelled the May rise in imports. The US imported more sporting goods, clothing, toys, televisions and household furniture.

Economists at Morgan Stanley said that the increase in US demand for capital goods such as computers, machinery and equipment could offset some of the drag on economic growth posed by the expanding deficit. However, they still reduced their estimate for second quarter output, dropping it from a rate of 4 per cent to 3.6 per cent.





Wall St reform proposal wins key support
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: July 12 2010 20:26 | Last updated: July 13 2010 01:00
http://www.ft.com/cms/s/0/a6f8daf0-8ddf-11df-9153-00144feab49a.html


US financial reform has enough votes to pass the Senate after three Republicans said they had decided to back the legislation.

The Obama administration and senior Democrats in Congress need 60 votes to be sure of passing the bill in a much-delayed vote that could take place this week.

Scott Brown, a Republican from Massachusetts, said the legislation “isn’t perfect” but welcomed “safeguards to help prevent another financial meltdown” and said he expected to vote in favour. Susan Collins and Olympia Snowe, two Maine Republicans, said they had also decided to back the bill.

With the support of Maria Cantwell, a Washington Democrat, the Dodd-Frank reform bill has attracted late endorsements from senators who had criticised it as too meek, as well as from Mr Brown, who had said it was too burdensome on financial groups.

In spite of his newcomer status in the Senate, Mr Brown has had a marked influence on the legislation as Chris Dodd, the banking committee chairman, agreed to make changes in an effort to secure his vote.

His demands for banks to be allowed to invest a greater proportion of their capital in hedge funds and for a mooted $19bn bank tax to be scrapped were accepted by Democrats as they made compromises to get the legislation through Congress.

“I appreciate the efforts to improve the bill, especially the removal of the $19bn bank tax,” Mr Brown said in a statement on Monday. “As a result, it is a better bill than it was when this whole process started. While it isn’t perfect, I expect to support the bill when it comes up for a vote.”

The House of Representatives approved the legislation earlier this month and the final Senate votes are the last barrier to Mr Obama signing into law his second big legislative project after healthcare reform.

Mr Brown added: “It includes safeguards to help prevent another financial meltdown, ensures that consumers are protected, and it is paid for without new taxes. That doesn’t mean our work is done. Further reforms are still needed to address the government’s role in the financial crisis, including significant changes to the way Fannie Mae and Freddie Mac [the government-owned mortgage guarantors] operate.”



Obama taps Lew for budget office
By Anna Fifield in Washington
Copyright The Financial Times Limited 2010
Published: July 13 2010 17:22 | Last updated: July 13 2010 17:22
http://www.ft.com/cms/s/0/f64445b0-8e96-11df-8a67-00144feab49a.html


President Barack Obama on Tuesday nominated Jack Lew as the new director of the White House Office of Management and Budget, putting someone who helped President Bill Clinton to balance the books in charge of the government finances.

Mr Lew will take over from Peter Orszag, who is leaving after 18 months, partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, the FT reported earlier this month.

Currently deputy secretary of state for management and resources, Mr Lew served as budget director from 1998 to 2001 for Mr Clinton, the last president to run a surplus.

“As the budget director who left the next administration a $237bn surplus when he worked for President Clinton, I have no doubt that Jack has proven himself equal to this extraordinary task,” Mr Obama said.

Mr Lew, 54, worked as a Democratic aide in the House of Representatives before joining the Clinton White House, where he helped to broker deals with Republicans to balance the budget.

But he will find the government coffers in a markedly different state than during his last tenure at OMB.

The government has already recorded a budget deficit of more than $1,000bn this fiscal year, according to the bipartisan Congressional Budget Office, which warned that the US needs to find a way to increase revenues and reduce spending as quickly as possible as the federal debt was on a path towards “unsustainable levels”.

The size of the deficit has become one of the thorniest political issues facing the White House.

Mr Obama on Tuesday voiced confidence that Mr Lew would be able to help alleviate the budget crisis.

“The experience and good judgment Jack has acquired throughout his impressive career in the public and private sector will be an extraordinary asset to this administration’s efforts to cut down the deficit and put our nation back on a fiscally responsible path,” the president said.

Mr Orszag was seen as the guardian of fiscal conservatism within the White House.

Other members of Mr Obama’s economic team, notably Lawrence Summers, the head of the National Economic Council, have placed more emphasis on the need for continued short-term spending increases to counteract what increasingly looks like an anaemic economic recovery in the US.

Although Mr Orszag agreed with the need to push short-term spending, particularly in the Senate, which again this week failed to pass a measure extending insurance to the unemployed, the budget director became increasingly frustrated with the administration’s caution on longer-term fiscal restraint.