Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Traders risk-selective as US fears linger
Copyright The Financial Times Limited 2010
Published: July 19 2010 08:31 | Last updated: July 19 2010 19:19
http://www.ft.com/cms/s/0/824ef284-92f3-11df-96d5-00144feab49a.html


Monday 19:15 BST. Traders are apprehensive and selective in their approach to risk as the revival of European fiscal fears joins worries about the health of the US economy.

The FTSE All-World equity index is down 0.4 per cent and oil and other commodities are slipping. But core bond yields, though still depressed, are slightly higher on the day, and the euro is also a bit stronger.

The S&P 500 in New York is up just 0.1 per cent, held back by news that US homebuilder confidence has hit a 15-month low, in spite of continued support from company earnings. Halliburton, the oil-services giant, said profits were up 83 per cent in the face of disruptions related to the oil leak in the Gulf of Mexico.

Activity in Asian trading was curtailed by Tokyo’s closure for a public holiday, but the main drivers of short-term market sentiment were clear from the outset of the global session.

The tremors from Wall Street’s 3 per cent tumble on Friday continue to reverberate. The slide was caused by signs that the US consumer is feeling increasingly timid and by a batch of US corporate reports that disappointed.

The second-quarter earnings season now moves into its second week, during which 122 S&P 500 companies will report – tech giants IBM and Texas Instruments take the stage today after the closing bell. But already the feeling is growing that the recent deterioration in macroeconomic data means the forecasts from chief executives of current trading carries ever greater heft than the backward-looking top and bottom lines.

And if that hadn’t made investors sufficiently cautious, government budget stress has made an unwelcome return.

Hungary’s failure to agree a fiscal strategy with the International Monetary Fund and European Union has revived worries about eurozone exposure to struggling eastern European states, while a Moody’s downgrade of Ireland also reminded investors of the tough battle still being fought even by those seen as more willing to bite the austerity bullet.

Friday’s coming revelation of the eurozone bank stress test results can only heighten the anxiety.

It should be noted, though, that there are some more wholesome nuggets on which bulls can chew. Philips, the Dutch electronics bellwether, has exceeded earnings expectations and, crucially, raised its margin forecasts.

Meanwhile, the $1.7bn private equity purchase of Healthscope, the Australian hospital chain, is the latest in a line of deals that illustrate the improved health of capital markets and show that value can be discerned by some operators.

The break in risk correlation between asset classes is also un-surprising given the low volume typical of this time of year, and also of the market’s still anxious mood. The Vix index of US market volatility is down slightly, but still elevated at 26. Traders are sticking to their own markets, and making small, mostly technical moves.

● Forex. The euro retreated from its recent highs following the Ireland downgrade and news out of Budapest. The wave of buying pushing up the single currency of late has supported it, though it is now up 0.1 per cent versus the dollar to $1.2947.

That could be interpreted as showing that forex traders are more concerned about the relative economic health of the US against the eurozone – as illustrated by a narrowing of bond yield differentials. However, the safe-haven impulse is prevailing, as the dollar index, measuring the buck against a trade-weighted basket of currencies, is up 0.1 per cent.

But the fact that the euro is also up 0.4 per cent against the yen to Y112.35 – a cross that would be expected in more cautious times to move lower – suggests traders are becoming somewhat inured to tales of eurozone woe. For the time being, at least.

The Hungarian forint is down 3 per cent versus the euro since Friday’s close.

● Debt. Credit traders appear more worried about the eurozone’s fiscal condition than their currency cousins. Spreads for sovereign debt considered more likely to default are widening. Credit default swaps – which track the cost of insuring debt against non-payment – are higher. Moody’s downgrade of Ireland has pushed CDS on Dublin’s debt up 17 basis points to 265 basis points, according to Markit. Hungarian CDS are up 55 basis points at 377 basis points.

The more timid mood is helping keep Treasury yields near recent lows. The 10-year US note, nevertheless, is up 2 basis point at 2.95 per cent, rising slightly throughout the later part of the session.

● Europe. Bourses tracked Wall Street’s extra losses and opened lower. A pick-up in S&P 500 futures, the euro’s stoic display and some bid chatter then saw stocks move into positive territory, before relapsing again. The FTSE Eurofirst 300 is down 0.6 per cent. The FTSE 100 in London fell 0.2 per cent, with BP again proving a drag, but miners reversing the negative sentiment towards the sector seen in Asia.

Dublin fell 1 per cent and Budapest lost 2.9 per cent, on the Moody’s and IMF news respectively.

● Commodities. Oil has reversed as is down 0.1 per cent to $75.91 as traders prepare to switch over to the new September contract.

Metals are mostly higher following heavy falls last week but this is not sufficient to keep the Reuters-Jefferies CRB index in the black. The benchmark is down 0.7 per cent.

Gold is down 1 per cent at $1,181 an ounce, having earlier hit a two-month low of $1,177 with traders citing the removal of risk premium – though that appeared contradictory to the broad trend elsewhere.

● Asia. The FTSE-Asia Pacific index fell 0.9 per cent as the region absorbed the sharp fall in New York at the end of last week and fretted about the impact on exports of a struggling US consumer. Sydney, in particular, suffered from those lower growth fears, with miners in the cross-hairs. The S&P/ASX 200 closed down 1.5 per cent.

However, falls were tempered among later-closing markets after Shanghai put in a strong afternoon performance as soothing comments about policy and economic prospects from premier Wen Jiabao encouraged “bargain” hunting. The CSI was up 2.1 per cent, helping Hong Kong to trim its losses to 0.8 per cent.

Monday’s Market Menu
What’s affecting risk appetite

Risk off

● Macro: US data fallout still contaminating sentiment

● Fiscal woes: Hungary, and Ireland downgrades, are reminders as bank stress test results approach...

Risk on

● ...but continued strength of euro suggest some may be getting inured to austerity and sovereign risk fears

● M&A: $1.7bn Healthscope deal – and possible $4.4bn Tomkins bid – are latest in a lengthening line





China now world’s biggest energy user
By Carola Hoyos in London
Copyright The Financial Times Limited 2010
Published: July 19 2010 17:51 | Last updated: July 19 2010 17:51
http://www.ft.com/cms/s/0/937fdd2c-934b-11df-bb9a-00144feab49a.html


China overtook the US last year to become the world’s biggest energy user, the International Energy Agency revealed on Monday.

Beijing’s new status is expected to make it even more influential in global energy markets, in determining prices and how it is used.

China clinched the top slot more quickly than had been expected because the US has over the past decade far outpaced China in using energy more efficiently. On a per capita basis, the US still uses far more energy than China and remains less efficient than Europe.

Fatih Birol, the IEA’s chief economist, said: “In the 2000, the US consumed twice as much energy as China, now China consumes more than the US.” He noted that the US had improved the efficiency with which it uses energy by 2.5 per cent annually during that time, while China managed only a 1.7 per cent annual improvement.

“On the one hand, the US has come to a certain saturation of energy use, but there have also been lots of efforts, especially since 2005, to use energy more efficiently,” he said.

China last year consumed 2,252m tons of oil equivalent of energy from sources including coal, oil, nuclear power, natural gas and hydropower, about 4 per cent more than the US, the rich countries’ watchdog said.

China’s growth has also not suffered the same setback as that of the US following the global financial crisis.

In 2008 it pushed oil prices to record highs, which helped tip the world into recession. Mr Birol said China’s increased need for imports of coal and gas could eventually have a similar impact.

A second big consequence of China’s growing heft as an energy consumer is that the country will thus increasingly determine how energy is used on a global scale – from the types of cars manufactured to the kinds of power plants built. This means China will also determine energy consumption patterns outside its boarders. “There will be a big multiplier effect,” Mr Birol said.

Though the IEA warned the data on China’s energy demand last year was still preliminary, the country’s ascendancy in energy use has been well established, with western policy makers fretting about issues such as Beijing’s agressiveness in seeking to secure oil from Kazakhstan to Sudan and to China’s growing carbon emissions.

China is already by far the world’s largest user of coal. Despite its own vast resources, its imports of thermal coal are expected to hit 105-115m tonnes this year, pushing it ahead of Japan as the world’s largest coal importer. Only three years ago China was a net coal exporter.

The trend has also been apparent in oil. Saudi Arabia, the world’s most important oil exporter, for the first time last year sold more oil to China than the US, which for decades had been its most important customer.

In March, Nobuo Tanaka, the IEA’s secretary-general, called on China to join the IEA, warning that the organisation, which represents the OECD’s largest energy consuming countries, risked losing its relevance otherwise.


America’s sensible stance on recovery
By Lawrence Summers
Copyright The Financial Times Limited 2010
Published: July 18 2010 19:53 | Last updated: July 18 2010 19:53
http://www.ft.com/cms/s/0/966e25b8-9295-11df-9142-00144feab49a.html


Economic commentators are mired in an unhelpful dialectic between “jobs” and “deficits” that, despite its apparent simplicity, has obscured rather than clarified the policy choices ahead in the US, Europe and elsewhere.

Critics have complained that the continued commitment by the administration of President Barack Obama to support recovery in the short term and also to reduce deficits in the medium and long term constitutes a “mixed message”. In fact, it is the only sensible course in an economy facing the twin challenges of an immediate shortage of demand and a fiscal path in need of correction to become sustainable.

Most economists across a broad spectrum would likely agree to three basic propositions about fiscal policy.

First, in normal times, the scale of government budget deficits affects the composition but not the level of output. Increased deficits under these conditions will raise either public spending or private consumption. But because interest rates adjust upward to balance supply and demand at full employment or at the central bank’s desired level of output, any increases in these sources of demand will be offset by reduced investment and net exports. As a consequence, budget deficits will not stimulate output or employment,

A range of other considerations – including the crowding out of investment; reliance on foreign creditors; misallocation of resources into inefficient public projects; and reduced confidence in long-run profitability of investments – all make a case in normal times for fiscal prudence and reduced budget deficits.

And there are numerous examples, notably the US in the 1990s, where reducing budget deficits contributed to enhanced economic performance.

Second, where an economy’s level of output is constrained by demand and the central bank has at best a limited ability to relax that constraint because it cannot reduce interest rates to below zero, fiscal policy can have a significant impact on output and employment. Through either direct spending or tax cuts that promote private spending, hiring or investment, governments possess a range of tools to raise demand directly. As increased demand boosts incomes, these measures raise output further. The result will be economic growth and reduced joblessness.

To the extent that expansionary fiscal policies affect growth, their impact on future indebtedness is attenuated as tax collections rise, transfer payments fall, and the ability of the economy to support debt increases.

Third, and finally, there is a very strong presumption that there are likely to be beneficial effects from the expectation that budget deficits will be reduced after an economy has recovered and is no longer demand-constrained. Not least of these are increased confidence and reduced capital costs that encourage investment, even before the deficit is reduced. Such impacts are likely to be particularly important when prospective deficits are large and raise substantial questions about sustainability or even creditworthiness.

In most of the industrialised world, given that economies are in or near liquidity trap conditions, it is the last two propositions that should control policy. Together they make a case for fiscal actions that maintain or increase demand in the short run while reassuring markets on sustainability over the medium term.

Mr Obama is building on the Recovery Act – passed early last year and now in its most intense phase of public investment – by fighting to extend unemployment and health benefits to those out of work, and to help struggling state and local governments prevent cutbacks in vital services and avoid job losses for teachers, police officers and firefighters. At the same time, he is pushing for additional measures to help create and protect jobs, and strengthen businesses. He has called on Congress to expand the clean energy manufacturing tax credit, to help small businesses through tax cuts and a lending fund, and to pass his proposal to create jobs while upgrading energy efficiency in homes.

While the first step in any sound fiscal strategy must be to do everything we can to promote recovery, Mr Obama has also made it a priority to take tough steps to bring down the deficit to sustainable levels as recovery is achieved.

Fiscal responsibility is not only about our children and grandchildren. Excessive budget deficits, left unattended, risk weakening our markets and sapping our economic vitality. They raise the question – as when Washington put off hard choices during much of the previous decade – of how long the world’s greatest borrower can remain its greatest power.

During the next five years, the US is expected to experience the fastest deficit reduction since the second world war. Much of that will stem from the return to growth and the phasing out of Recovery Act programmes.

But Mr Obama has made other commitments that further reduce the deficit by more than $1,000bn. They include a three-year freeze on discretionary spending outside national security and allowing the 2001-03 tax cuts to expire for the very richest. He has also put in place a framework that offers the potential to contain health costs, and convened a bipartisan commission that will make recommendations to cover the costs of all federal programmes by 2015 and improve the long-run fiscal outlook.

The combination of measures that prevent sharp declines in demand in the short run, and measures that add to confidence by controlling the factors that drive deficits, offers the best prospect for moving the economy forward in the next few years. Of course, US growth can come only in a global context. That is why Mr Obama welcomed the Group of 20 leading nations’ emphasis last month on the importance of global actions to ensure that sound fiscal policies are in place and also that economic recovery has sufficient momentum.

We will see clearly in the years ahead that pushing growth and reducing deficits are complementary, not competing, objectives. Reducing the spectre of prospective deficits will enhance near-term growth. And ensuring adequate growth in the near term will reduce long-term deficits.

The writer is President Barack Obama’s chief economic adviser and director of the White House National Economic Council





Fed eyes options for looser monetary policy
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: July 19 2010 19:20 | Last updated: July 19 2010 19:20
http://www.ft.com/cms/s/0/77c313a8-935d-11df-bb9a-00144feab49a.html


A slew of weak economic data means that when Federal Reserve chairman Ben Bernanke gives his semi-annual testimony to Congress Wednesday his job will be to reassure.

That reassurance might come in three forms: first, that the Fed thinks the economic recovery is still on track; second, that the central bank is ready to act if the economy does falter; and third, that the Fed is confident it has the tools to avert both inflation and deflation if it needs to.

In spite of slow growth in jobs – private payrolls rose only 33,000 in May and 83,000 in June – the Fed’s basic outlook is still one of steady recovery.

Most members of its rate-setting open market committee forecast growth of 3-3.5 per cent this year and higher next year. They forecast core inflation of 0.8-1 per cent.

“I’m expecting growth to continue,” says Jeffrey Lacker, president of the Richmond Fed, in an interview with the Financial Times.

“It’s important to remember as well that the economy’s still expanding despite the slightly disappointing data we’ve seen in the last few weeks.”

That outlook means the Fed is still a long way from changing its policy – something Mr Bernanke is likely to make clear in his testimony.

What the bad data do prompt is a reversal in the Fed’s internal debate: in spring it was all about when and how to exit from very loose monetary policy, now it is more about what to do if even looser policy were required.

Fed officials have a range of measures to judge if the outlook has deteriorated far enough to merit more easing. Some are focused on inflation expectations, which remain quite strong. As long as consumers, markets and businesses still expect inflation, these officials are fairly confident that it will come to pass.

Others will need evidence that the recovery is no longer on course to bring down unemployment.

If weak job market data continue, for example, they could prompt concern about downward pressure on wages leading to very low inflation.

The Fed identifies a range of options if it does need to act but all of them come with risks, opponents on the Federal Open Market Committee, and uncertainty about their effects. The two simplest measures will be to stop paying interest on bank reserves, encouraging banks to lend the money out instead, or to start reinvesting capital repayments from the Fed’s portfolio of mortgage-backed securities.

Neither is a drastic move but the Fed will expect quite a strong signalling effect from its first change towards looser policy.

Cutting interest on bank reserves has the advantage of being easy to reverse but could lead to serious distortions in the money markets.

Another possibility is a change of communication. One option that the Fed has begun to study is linking its pledge of low rates to an external condition.

At the moment, the Fed says rates are likely to stay “exceptionally low” for an “extended period”. Instead, it could say that they will stay low until a variable, such as the price level, has reached a certain target.

Academic research suggests this could be effective in preventing deflation because it commits the central bank to keeping rates at zero until the goal is reached. It would not distort markets and is more flexible than a crude promise to keep rates at zero for a fixed period.

Markets already expect the Fed to keep rates on hold until well into next year, however, which limits the potential gains. FOMC hawks such as Thomas Hoenig, the Kansas City Fed president, who already oppose the “extended period” language, will be deeply reluctant to tie their own hands in this way.

The second option – to start expanding the Fed’s balance sheet by buying more Treasuries or asset-backed securities – is the most controversial. Most Fed officials think that asset purchases were quite effective when the threat came from financial market turmoil early in 2009. They are less sure of the effects when markets are calm.

Many FOMC members are also seriously concerned about the side-effects of buying more assets.

“I would want to be convinced that the incremental macroeconomic benefits outweighed any costs owing to erosion of market functioning, perceptions of monetising indebtedness, crowding-out of private buyers, or loss of central bank credibility,” Kevin Warsh, a Fed governor, said in a speech.





Moody’s downgrades Ireland rating
By David Oakley in London and Eamon Quinn in Dublin
Copyright The Financial Times Limited 2010
Published: July 19 2010 08:02 | Last updated: July 19 2010 10:55
http://www.ft.com/cms/s/0/838381b0-9302-11df-96d5-00144feab49a.html


Moody’s, the ratings agency, on Monday downgraded Ireland’s government bond ratings because of the country’s deteriorating public finances.

The downgrade of one notch to Aa2 puts Moody’s rating on the same level as Standard & Poor’s, which rates Irish debt at AA, and one notch higher than Fitch, which gives the country’s bonds an AA minus rating.

Irish 10-year bond yields, which have an inverse relationship with prices, rose 8 basis points to 5.51 per cent, the highest level since the end of June. The cost to insure Irish debt against default rose by 10bp to 261. The country’s stock markets fell by about one per cent.

However, the euro and other European bond markets remained stable.

The action comes ahead of the planned auction of Irish government bonds on Tuesday when the country plans to issue €1.5bn ($1.9bn) in six-year and 10-year bonds. Ireland’s sovereign debt-issuing agency on Monday said it did not expect the downgrade to have an impact on the auction.

Analysts said the downgrade was not a surprise, given the country’s weak public finances and financial sector while Ireland’s National Treasury Management Agency said that the decision was “not unexpected”.

“We do welcome the fact that Moody’s has changed the outlook from negative to stable going forward. The rating decision is not based on any new information and we do not therefore expect it to have any impact in terms of our debt programme,” the NTMA said.

Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said there was no doubt that the NTMA would continue with its debt auction programme but that “early indications” were that the debt issuing agency would have to pay more at the auction.

Moody’s said the reason for the downgrade was the government’s gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability.

The ratings agency has also changed the outlook on the ratings of the government of Ireland from negative to stable as Moody’s now views the upside and downside risks as being evenly balanced at the current rating level.

Moody’s has also downgraded from Aa1 with negative outlook to Aa2 with stable outlook the rating of Ireland’s National Asset Management Agency (Nama), whose debt is fully and unconditionally guaranteed by the government of Ireland.

“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,” says Dietmar Hornung, a Moody’s lead analyst for Ireland.

The country has suffered a dramatic contraction in GDP since 2008, causing a sharp decline in tax revenue. The general government debt-to-GDP ratio rose from 25 per cent before the crisis to 64 per cent by the end of 2009, and is continuing to grow.

Moody’s also expects economic growth to be below historical trend over the next three to five years for two reasons.

First, banking and real estate – the engines of Ireland’s growth in the years preceding the crisis – will not contribute meaningfully to overall growth in the coming years. Second, the fall in private sector credit is damping the growth outlook.