Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times

US consumer confidence plunges in July
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: July 16 2010 14:38 | Last updated: July 16 2010 17:24
http://www.ft.com/cms/s/0/6a768626-90d3-11df-85a7-00144feab49a.html


Consumer confidence fell to its lowest level in nearly a year in July on growing fears of a stalling recovery, in spite of declining energy prices lowering the cost of living in the US last month, figures showed on Friday.

The Reuters/University of Michigan survey of consumer sentiment fell from 76 last month to 66.5 in July. The drop was much bigger than expected and erased most of the gains in sentiment made during the last year.

With unemployment stubbornly high, consumers are feeling worse about the current state of the economy and are less optimistic about the next six months. Economists keep a close watch on consumer confidence as a gauge of future consumer spending, which accounts for 70 per cent of economic activity in the US.

”American consumers are troubled by reduced values of residential properties, tight credit, high debt burdens, and high levels of unemployment,” said Chris Christopher, an economist at IHS Global Insight.

The grim data sent stock markets tumbling, with the S&P 500 down 0.7 per cent to 1,077.93, and the Dow Jones Industrial Average 0.6 per cent lower at 10,197.72 at midday

Meanwhile, labour department figures showed that the consumer price index declined for the third consecutive month in June, declining by 0.1 per cent, and raising the fears of deflation. The dip was in line with economists expectations and left prices 1.1 per cent higher than June 2009.

Leading prices lower was a 2.9 per cent drop in the cost of energy, while food prices remained flat for the second consecutive month.

Core prices, which exclude volatile swings in food and energy, were up by 0.2 per cent last month. That was the biggest monthly increase since last October.

In spite of the monthly fall, there were upticks in prices for clothing, used cars, tobacco and housing. The closely watched “owners’ equivalent rent” measure rose last month for the first time since August 2009, offering a glimmer of hope for the US housing market.

“Over the past several months, it has become increasingly clear that the key shelter category, which accounts for more than 40 per cent of the core, reached a bottom in the spring and has started to gradually turn higher,” said Ted Weisman, an economist at Morgan Stanley.

The CPI figures follow a report on Thursday showing that wholesale prices fell in June, supporting the argument that inflation is not a near-term threat.

The Federal Reserve has said that inflation is likely to remain subdued for the next couple of years, making it unlikely that changes to its near-zero interest rate policy are imminent. In its latest meeting minutes, some Federal Reserve members expressed concern about deflation.

“The inflation data will raise more questions at the Fed about too-rapid a disinflation, or deflation, risk,” said John Ryding and Conrad DeQuadros, economists at RDQ Economics.

Messrs Ryding and DeQuadros noted that the fall in energy prices should give a lift to consumers, supporting their spending on other goods and services, however this has failed to boost consumer confidence.





Relief fails to lift bank stocks
By Francesco Guerrera and Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: July 16 2010 22:04 | Last updated: July 17 2010 00:48
http://www.ft.com/cms/s/0/27788192-911b-11df-b297-00144feab49a.html


The lifting of two of the biggest clouds hanging over the financial sector – uncertainty over Washington’s new rules for Wall Street and a high-profile regulatory action against Goldman Sachs – did little to help US banking stocks on Friday.

Relief at the passage of legislation and the $550m settlement between the Securities and Exchange Commission and Goldman proved temporary, as fears about banks’ profit growth in an uncertain global economy returned to the front of investors’ minds.

Goldman was the only big bank to record a rise on Friday as investors welcomed news that it was no longer in the SEC’s sights. The stock rose even though analysts predicted that the settlement could reduce second-quarter earnings per share by about 40 per cent

The mood towards the rest of the sector was darkened by poorly received results from Bank of Americaand Citigroup. Both BofA and Citi beat analysts’ expectations but their numbers were flattered by one-off items and big reductions in reserves. The results mirrored those of JPMorgan Chase, which reported earnings Thursday.

The disappointing results from two of the largest US banks – along with a weak July consumer confidence survey and a lower-than-expected revenue result from General Electric – sent markets tumbling.

The S&P 500 had its worst day this month, tumbling 2.9 per cent to 1,064.88.

Benchmark 10-year Treasury yields fell 7 basis points to 2.92 per cent, their lowest end-of-day yield since March 2009.

BofA led financials down, falling more than 9 per cent, as it compounded worries by revealing that the new rules could cost over $2bn from next year.

In the weeks since the outlines of the legislation have been clear, investors have shown a mixture of relief and resignation. But BofA is one of the first lenders to forecast the bill’s impact on the bottom line.

“For bank stocks, it was a combination of weak loan growth, and more broadly the regulatory uncertainty,” said Charles Noski, BofA’s chief financial officer. “We are in the business of loaning money to people, but people have to want to take out loans.”

John Gerspach, Citi’s finance chief, said that uncertainty over the recovery and regulation would keep a lid on loan demand. “I don’t see a great deal of demand in the near term, at least until this uncertainty is removed,” he said.

Shares in Citi, in which the US government has an 18 per cent stake, fell more than 5 per cent even though it reported a profit for the second quarter.

Investors are focused on the lack of revenue and loan growth at the banks, along with sluggish performance in their investment banking units – all signs that the sector is still to regain its footing after the recent turmoil.




Why US savers remain the ‘silent majority’
By Spencer Jakab
Copyright The Financial Times Limited 2010
Published: July 16 2010 17:17 | Last updated: July 16 2010 17:17
http://www.ft.com/cms/s/0/84cecbc0-90ef-11df-85a7-00144feab49a.html


Don’t believe the hype about America’s new culture of thrift – the economic playing field has rarely been tilted so sharply against savers and in favour of spenders. Minuscule short-term yields and rising taxes on passive income are the unpleasant flipside of stimulus.

The fact that a government living in fear of a deflationary recession is happily propping up grasshoppers at the expense of ants should come as little surprise. But only a study of demographics makes it clear why the majority of Americans prefers the status quo.

Economist Irwin Kellner recently evoked Richard Nixon in dubbing savers the “silent majority”. While this is technically true – nearly everyone saves something – only a small subset of Americans are savers in the sense that they prioritise growing their nest eggs or maximising investment income. The rest are understandably far more concerned with goodies such as cheap mortgages, cash for clunkers or extended unemployment benefits than Treasury yields.

In a Federal Reserve survey carried out just before the market crash, less than half of American families had any sort of formal retirement savings and, for those who did, the median value of those savings was just $45,000. Interest and dividends made up less than 1 per cent of a median family’s income, so low yields are little concern. And the threat that fiscal strains will lead to higher taxes are also an abstract threat to more than half of Americans who do not pay income taxes, while recent talk in Washington of consumption taxes has been quashed.

Nearly $8,000bn in savings is held in short-term interest-bearing instruments. Yet an investor buying two-year Treasury notes now receives 0.6 per cent interest, less than a fifth of what he got as recently as 2007, and the return on shorter maturities is virtually zero. Aside from the ruinous solution of spending principal more quickly, savers can only boost returns by purchasing longer-dated securities that are both more volatile and prone to inflation risk or those that have flimsier guarantees such as dividend-paying stocks or corporate bonds. Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo, wrote recently that the income squeeze could well be the genesis of the next investment bubble as this money shifts.

The picture is no brighter for those whose wealth is in bricks and mortar. Americans who own all or most of the equity in their homes have seen it decline by more than a fifth. They should, in theory, be better off than those with big mortgages whose equity has shrunk far faster or vanished entirely, but American borrowers have a unique reset button. Hundreds of thousands of borrowers are strategically defaulting – walking away from their mortgages even when they have the ability to pay, taking advantage of these loans’ non-recourse nature. A recent study by CoreLogic showed that those with mortgages greater than $1m were most likely to default. Real estate tracker Zillow estimates nearly a quarter of US mortgages have negative equity, with a third of recent home sales below their previous purchase price. With nearly all mortgage loans repackaged into federally guaranteed bonds issued by bailed-out government sponsored enterprises Fannie Mae and Freddie Mac, the losses are ultimately borne by taxpayers. Notwithstanding the drubbing this has given their balance sheets, the GSEs have kept the spigots open in what is perhaps the most important but unheralded plank of government stimulus efforts. The Congressional Budget Office calculates that, had all direct and indirect subsidies to these lenders been included in the 2009 federal budget, it would have added $291bn to outlays – more than the combined bail-outs of US banks, carmakers and AIG combined. Add to that annual cost the $103bn subsidy borrowers received last year by being able to deduct mortgage interest and those that own their homes free and clear – once objects of envy in America – look increasingly like patsies.

America’s frugal can be justifiably bitter about years of putting off instant gratification, but life is not fair. Their country needs its spenders to spend, consequences be damned.

jakab.spencer@ft.com







China offers vote of confidence in euro
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: July 16 2010 13:38 | Last updated: July 16 2010 13:38
http://www.ft.com/cms/s/0/879055fc-90d3-11df-85a7-00144feab49a.html


China delivered a strong vote of confidence in the euro on Friday when Premier Wen Jiabao said that Europe would always be one of the main investment markets for China’s foreign exchange reserves.

Speaking alongside German Chancellor Angela Merkel, who is on a state visit to China, Mr Wen said “Europe will certainly overcome its difficulties”.

The comments come a week after China bought several hundred million dollars worth of Spanish bonds, signalling a return by Asian investors to the eurozone’s peripheral markets after an absence of two months.

Mr Wen’s remarks are the strongest sign yet that Chinese confidence in the European economy and in the euro – which breached $1.30 for the first time in two months on Friday – has been restored since the launch of the massive rescue package by European leaders in mid-May.

“The European market has been in the past, is now and will be in the future one of the main investment markets for China’s foreign exchange reserves,” Mr Wen said. China’s stockpile of foreign exchange reserves worth $2,450bn is the largest in the world.

“I want to say that at this time, when some European countries are suffering sovereign debt crises, China has always held out a helping hand,” he added. “We believe that with the joint hard work of the international community, Europe will certainly overcome its difficulties,” he said.

Ms Merkel welcomed the public show of support from the Chinese government. “It’s an important signal that China, too, has made it clear that it has confidence in the euro,” she said.

Euro in crisis

FT In depth: The EU and IMF seek to prevent contagion from the Greek sovereign debt crisis

While there was a high level of concern in Beijing about the European economy when the euro first started to fall sharply in value, there have been signs in recent weeks that opinion was shifting. Even before Mr Wen’s comments yesterday, several policymakers had made more upbeat statements about Europe, while influential economists have made the case for China providing some support for euro assets.

“There is no need for China to panic, the economic fundamentals in Europe are not that bad,” said Yu Yongding, an economist at the Chinese Academy of Social Sciences and former adviser to the central bank, in a recent interview. “To support the euro and euro assets is in the interests of China.”

Some government advisers have also suggested that strong public support for the euro would be a smart political move at a time when China’s exchange rate policy is still vulnerable to international criticism for being undervalued.

According to people familiar with Spain’s recent bond issue, China’s State Administration of Foreign Exchange, or Safe, which manages the foreign exchange reserves, was allocated up to €400m ($505m) of Spanish 10-year bonds in a debt deal last Tuesday.

Ms Merkel urged China to do more to open up its economy to foreign companies. “Chinese companies, like those of many other countries, enjoy very good access to the German market. We hope that German enterprises can enjoy the same access to the Chinese market,” she told reporters.






Cameron to fight BP’s corner in US
By George Parker and Ed Crooks in London
Copyright The Financial Times Limited 2010
Published: July 16 2010 22:51 | Last updated: July 16 2010 22:51
http://www.ft.com/cms/s/0/bf42828a-911f-11df-b297-00144feab49a.html


After three months of attacks against it provoked by the spill in the Gulf of Mexico, BP hopes it is regaining the initiative.

The group continued to stop any oil leaking from its Macondo well on Friday, using a cap installed this week, and is close to having a system in place to collect all the oil that has been escaping.

Its shares have recovered in the past two weeks as hopes rise that it can prevent the costs of the spill spiralling out of control.

The political attacks on BP in the US Congress have continued this week, with allegations over the company’s role in the release of Abdel Basset al-Megrahi, the convicted Lockerbie bomber, and a threat to stop it securing any more offshore exploration leases.

BP is concerned that the pressure from US politicians could cripple the company, leaving it vulnerable to a bid from ExxonMobil, the largest US oil group.

Carl-Henric Svanberg, BP’s chairman, met Mr Cameron on Friday to urge him to help counter the attacks being directed against BP from Capitol Hill.

Mr Cameron told Mr Svanberg that he did not want to inflame the row but that he would deliver a firm reminder to Barack Obama, US president, and congressional leaders of the importance of BP to the UK economy.

“The prime minister will be keen to make clear how important the company is as a UK employer and how important it is for pension funds,” one official said, speaking after the 45-minute meeting with Mr Svanberg.

In another move to support BP, Sir Nigel Sheinwald, UK ambassador to Washington, rejected the accusation by some US senators that the group had lobbied the UK government to release Mr al-Megrahi from jail in an attempt to win new contracts in Libya.

In a letter to John Kerry, chairman of the Senate foreign relations committee, Sir Nigel said inaccuracies were “harmful to the UK”.

BP has acknowledged it did lobby the UK government to speed up a prisoner transfer agreement with Libya.

Mr Cameron and Mr Svanberg agreed that the prime minister should not stoke the row, nor exaggerate the threat to BP posed by some senators, but that he would stress the UK national interest.

One aide to Mr Cameron said: “At the moment, we’re not overly worried. These are just a few senators talking at the moment. We don’t think the US administration is taking it too seriously either.”

Mr Cameron is not expected directly to lobby any of the senators who have been most critical of BP, including Chuck Schumer from New York, who accused BP of making a “wink-and-nod request” for Mr al-Megrahi to be freed.

The prime minister is also expected to discuss financial issues on his visit.

Downing Street declined to comment on suggestions that he would meet Jamie Dimon, chief executive of JPMorgan Chase, and Lloyd Blankfein of Goldman Sachs.


AIG to pay $725m to settle lawsuit
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2010
Published: July 17 2010 00:03 | Last updated: July 17 2010 00:03
http://www.ft.com/cms/s/0/6985eafe-912d-11df-b297-00144feab49a.html


AIG is to pay $725m to a group of Ohio pension funds to settle a six-year-old class action lawsuit over allegations of securities fraud – a decision that could force the bailed-out insurer to raise more than $500m in new equity.

The settlement brings to a close a turbulent period in AIG’s history spurred by an aggressive probe by Eliot Spitzer, then New York’s attorney-general, that led to the departure of Hank Greenberg, the company’s long-standing chief executive.

In the lawsuit, the three pension funds alleged they had lost money after AIG had inflated its earnings through accounting changes that led to a large restatement in May 2005.

Under the deal announced on Friday, AIG will pay $175m to a group of former investors led by the Ohio pension funds within 10 days of the court’s preliminary approval of the settlement.

AIG has until the court gives the settlement final approval to pay the remainder and said it might raise the required $550m through share offerings.

Any share sale would have to be approved by the US government, which owns an 80 per cent stake in the insurer after rescuing it during the crisis. Unless the government buys any new shares, it would see its holding diluted by a capital raising.

AIG shares, which plummeted in the aftermath of the government rescue in 2008, have risen nearly 19 per cent this year and closed at $35.64 on Friday.

The insurer did not admit or deny wrongdoing, as is customary in these cases.

“We are pleased to have resolved this matter,” it said on Friday.

“This settlement ends a long-standing lawsuit, allowing AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders.”

AIG has been selling assets to repay billions of dollars in taxpayers’ funds.

Richard Cordray, Ohio’s attorney-general, said the settlement was an “excellent result for all [AIG] shareholders”.

“Ohio is determined to send a strong message to the marketplace that companies who don’t play by the rules will pay a steep price,” he said.

Mr Greenberg and other defendants had settled their parts of the lawsuits last year.


Thousands arrested in Asia gambling crackdown
By Tim Johnston in Bangkok and James Boxell in London
Copyright The Financial Times Limited 2010
Published: July 16 2010 17:01 | Last updated: July 16 2010 19:32
http://www.ft.com/cms/s/0/b43bbaa2-90d7-11df-85a7-00144feab49a.html


Thousands of Asian gamblers who are alleged to have placed illegal bets on the football World Cup have been arrested in a regional crackdown on organised crime gangs in China, Malaysia, Singapore and Thailand.

In a large-scale operation co-ordinated by Interpol over the month of the tournament, local police in the countries raided more than 800 gambling dens suspected of taking illegal bets worth $155m, arrested more than 5,000 people and seized $10m in cash.

Betting on football is banned in all four countries because of its close ties to the criminal underworld. Jean-Michel Louboutin, Interpol’s executive director of police services, said on Friday: “As well as having clear connections to organised crime gangs, illegal soccer gambling is linked with corruption, money laundering and prostitution, and our operation will have a significant long-term impact on these serious offences as well.”

Illegal betting syndicates in the Far East are regularly accused of trying to rig match results across the world – even at prestigious tournaments such as the World Cup. Interpol insisted its operation was focused on illegal gambling but said it would look at the intelligence gathered from the arrests to see if there was any evidence of match-fixing. “If there are any indications then that would be investigated,” it said.

Before the World Cup Interpol teamed up with Fifa, football’s ruling governing body, to create an international taskforce aimed at tackling illegal football betting. Ronald Noble, the head of Interpol, said at the time that “we know illegal sports betting is frequently controlled by organised crime groups willing to corrupt players and officials”.

The World Cup operation is the third of its kind led by Interpol in the past three years. In 2008, the organisation worked with law enforcers across Asia to raid illegal betting dens during the European football championship. In total, the three operations have resulted in nearly 7,000 arrests, the seizure of about $26m in cash and the closure of illegal gambling dens which handled more than $2bn of bets.

In the Thai capital Bangkok alone, more than 1,700 gamblers and 28 bookmakers were taken into custody during the South African tournament – double the haul of the 2006 World Cup – according to Police Colonel Thirapong Wongsamarn, along with betting slips worth $100,000.

Last week police in Hong Kong said they had arrested 93 people both there and on the mainland and seized betting slips with a face value of $1.1bn.

But in spite of the police successes, it is likely to be the tip of the iceberg.

China’s Centre for Lottery Studies estimates that Chinese gamblers punt more than $87bn a year through offshore betting networks. The Malaysian illegal sports gambling industry is believed to be worth $6bn a year, and a study in Thailand in 2003 estimated that between Bt500bn and Bt800bn a year – between 10 and 15 per cent of gross domestic product – was running through the illegal gaming industry.