Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Cheer over earnings props up shares
By Telis Demos in New York
Copyright The Financial Times Limited 2010
Published: July 20 2010 08:41 | Last updated: July 20 2010 22:11
http://www.ft.com/cms/s/0/fd829860-93bc-11df-83ad-00144feab49a.html


Tuesday 22:10 BST. Traders hold steady as investors are steeled by mostly positive earnings, though still veered away from taking on substantial risk by the fallout from European fiscal difficulties.

The FTSE All-World equity index reversed its losses and was up 0.5 per cent, but the dollar bounced off near 10-week lows as its haven attraction trumps concerns about the US economy. The euro was also in retreat and US 2-year Treasury yields hit a new low.

Gains appear likely to continue: After the close there was an anticipated agreement by BP to sell $7bn in assets to Apache; that will give backbone to those cheering a potential return of the bid premium to shares. And Apple, which has been going through a rare spell as a laggard, reported stronger-than-expected earnings on the back of brisk sales of iPads and iPhone 4 devices.

But the trigger for the session’s early slide appeared to be news highlighting how the stretched budgets of many European nations, and the austerity drives designed to combat them, will place strains on financial systems and negatively affect the corporate sector.

The UK’s fiscal situation came into focus following a profit warning from UK-listed telecoms group Cable & Wireless Worldwide. That brought home to investors how the slashing of government spending can hurt company earnings. News that the UK government’s borrowing in June was the highest on record for that month only serves to highlight the extent of cuts to come.

In the US, the first substantially negative earnings report, from Goldman Sachs, knocked back sentiment early, as the S&P 500 opened nearly 1.5 per cent lower. However, growing revenues and earnings at IBM and Texas Instruments, plus earnings-forecast beating perormances by PepsiCo and UnitedHealth Group, attracted bargain seekers.

Even Goldman Sachs, still the leading trading franchise on Wall Street, was higher later in the session as bargain hunters swooped in. The S&P 500 index was up 1.1 per cent.

“The company reports we’ve had so far are inconsistent with the double dip concerns that the markets have been pricing in,” said Stuart Schweitzer, global markets strategist at JP Morgan Asset Management.

Yet many of the earnings reports contained notes of caution – notably forecast cuts by Johnson & Johnson and Tupperware, plus below-expectation business sales growth at IBM – that did little to dispel fears that the economy was slowing. Such is the worry about the US and global economy potentially slipping backwards, that some analysts see the Federal Reserve needing to consider further monetary stimuli.

Indeed, Mr Schweitzer cautioned: “The strength of corporate profits is what leads me to expect that business hiring and capital spending will improve in the coming months, but it’s not going to be an overnight recovery. There are just too many negatives out there.”

In addition, a poorly-received auction of three-month bills by Hungary showed investors are getting increasingly nervous about the stand-off between Budapest and the IMF/EU over the extent of the austerity package relating to the receipt of a €20bn loan. That has hurt the region’s banking stocks, which are seen having significant exposures to eastern european debt.

Sales today of debt by Ireland, Spain and Greece have gone fairly well, but then the ECB stands as a backstop for such “peripheral” sovereigns. A six-year UK gilt auction was more of a struggle. US Treasury bonds saw buying in spite of shares rallying after housing starts were said to slow 5 per cent in June (though permits for future potential building did offer some hope).

This only highlights the difficulties investors – and governments – know they face in trying to assess a patchwork global economy and thus the markets’ prospects in the medium term.

Just north of the border, the Canadian central bank raised interest rates for the second time in six weeks – from 0.5 per cent to 0.75 per cent – as it seeks to normalise policy as activity rebounds.

The move shows that areas of strength persist, a point highlighted today by the Asian Development Bank which, while acknowledging that issues such as the sovereign debt crisis had made the environment more uncertain, raised growth forecasts for most economies in the region.

At the same time, Australia and Brazil are struggling over whether to slow their growth or keep their foot on the accelerator. The Australian dollar was higher on speculation of another rate hike, while Brazil’s real was lower (and its stocks higher) after a report showing a more moderate pace of inflation growth led traders to conclude that another rate hike was not necessarily imminent.

New US housing data were also received with confusion. New construction was down 5 per cent June, leading homebuilding shares to initially tumble. But shares later rallied as markets focussed on a sub-data point showing permits for future building to be on the rise.

● Asia. The FTSE Asia-Pacific index added 0.2 per cent, shrugging off worries about US growth and the poorly-received results overnight from IBM and TI. S&P 500 futures had fallen nearly 1 per cent after the bell in New York following those results, but by the time the Asian session drew to a close the contract had pared losses as investors in the region took a more phlegmatic view of corporate prospects.

Shanghai sported its second consecutive good advance, rising 2.2 per cent as traders welcomed signs of currency liberalisation by Beijing. Hong Kong climbed 0.9 per cent, though Tokyo fell 1.2 per cent as Japan played catch-up after being closed for a holiday on Monday.

● Europe. Bourses initially responded to Wall Street’s rebound overnight and saw decent gains from the off. However, the austerity worries took their toll as the session progressed and falls accelerated after the Goldman earnings hit the wires.

The FTSE Eurofirst 300 was only fractionally higher even though miners did well. Banks, which were modestly higher as investors reasoned that the outcome of the eurozone stress tests due on Friday will restore confidence to the sector, faltered later on.

The FTSE 100 in London was down 0.2 per cent, led lower by telecoms.

● Forex. The dollar rebounded as equities slid. The dollar index, which measures the greenback against a basket of its peers, was up 0.3 per cent.

The euro had earlier reclaimed the $1.30 mark, but the renewed fiscal worries, profit taking and haven trades left the single currency down 0.4 per cent at $1.2891.

Notably, the euro seemed to ignore early rumours, based on reports in Spanish media, that all of Spain’s caja savings banks passed the stress tests. That news, if true, could go either way with traders. Either it means that Spain’s troubled lenders are healthier than expected, or that the stress tests were not stressful enough.

● Debt. The market faced a deluge of sales, with Spain, Ireland, Greece and the UK auctioning debt of various duration. Eurozone auctions had been considered pretty successful of late, so any disappointing sale could have hit sentiment.

Spain, for example, sold €4.3bn of 12-month bills and €1.7bn of 18-month bills, and though the bid-to-cover ratios were slightly lower than seen for an auction last month, so were the yields demanded, a sign of easing investor stress. Spanish 10-year benchmark yields are down 7 basis points at 4.33 per cent.

US Treasuries enjoyed demand as traders seek havens. The 10-year yield is down 1 basis point at 2.95 per cent, while the 2-year note earlier hit a new all-time low of 0.5764 per cent. In late trading it had flattened out to 0.5845 per cent.

● Commodities. The complex managed a stoic performance given the bond market’s flight from risk. This may partly be the result of the complex’s correlation to sentiment emerging from China, where stocks had another good day. Copper was up 2.7 per cent at $3.01 a pound in New York trading. Oil reversed an early slide, rising 1.2 per cent to $77.44 a barrel, helping to push the Reuters-Jefferies CRB index up 0.1 per cent.

Gold was up 0.8 per cent at $1,191 an ounce, having hit a fresh two-month intra-day low of $1,175.



FDIC chief warns over capital standards
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010.
Published: July 20 2010 22:09 | Last updated: July 20 2010 22:09
http://www.ft.com/cms/s/0/40271298-9428-11df-a3fe-00144feab49a.html


Sheila Bair, chairman of the Federal Deposit Insurance Corporation, has said some members of the committee setting international capital standards are “succumbing” to “disingenuous” lobbying from large banks.

In an interview with the Financial Times, Ms Bair also said she would not hesitate to use newly acquired powers to break up an institution if it could not provide a credible “living will” describing how it could be wound up in the event of failure.

Ms Bair, who is a leading voice in the US regulatory debate and involved in drafting the new Basel III standards, said she thought most watchdogs deciding new rules at the Bank for International Settlements wanted banks to hold significantly more – and higher quality – capital.

But, in another sign of the rifts that have been an obstacle to a global accord, she said some were being persuaded to adopt a softer stance.

“I think there are a few that are perhaps succumbing somewhat to industry arguments that if we raise capital requirements, we’re going to stifle the recovery and they’re going to cut back on lending,” Ms Bair said.

“I’m very disappointed in many members of the industry because I think they’ve made some really disingenuous arguments about that.”

Wrangling between countries has pitted the US, UK and Switzerland against Germany, France and Japan, with the first group preferring a more conservative assessment of what counts as capital, tough liquidity rules and a new simple leverage ratio.

The Basel committee said it was on track to deliver final proposals by the November meeting of the Group of 20 countries in Seoul.

Its members are working towards a compromise but there are signs that banks are winning the argument over the strictness and timing of the new rules.

Ms Bair said the application of the new standards could be phased in over time but that “five years is probably the maximum”. Some have argued for a longer phase-in period if the trade off is a more rigorous future regime.

The FDIC was set up in the 1930s in response to the Great Depression to insure customers’ bank deposits against the risk of default. It has emerged from the last crisis with new powers, including the ability to wind up a failing systemically important institution.





Goldman Sachs profits plunge 83%
By Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: July 20 2010 14:07 | Last updated: July 20 2010 19:31
http://www.ft.com/cms/s/0/0a5669e0-93fe-11df-83ad-00144feab49a.html


Goldman Sachs reported a steep drop in quarterly profits on Tuesday as the exceptional trading conditions that followed the 2008 financial crisis evaporated, exacting a toll on Wall Street’s most powerful profit engine.

Goldman’s net income after payment of preferred shares plunged 83 per cent in the second quarter, to $453m, or 78 cents a share, missing analysts’ estimates. Revenue from its trading and principal investments – the heart of Goldman’s business – fell nearly 40 per cent. The bank also set aside more than $1bn for the UK bonus tax and penalties it agreed to pay last week to settle with the Securities and Exchange Commission.

Goldman executives gave few signs that a pick-up in trading activity was imminent.

“The market environment became more difficult during the second quarter and, as a result, client activity across our businesses declined,” Lloyd Blankfein, Goldman’s chief executive, said in a statement.

The results came less than a week after Goldman settled SEC charges that the bank had defrauded investors when it sold a structured-debt security as the credit markets hurtled toward crisis. The deal, along with greater clarity on the shape of financial regulatory reform, has removed some of the doubts that had dogged Goldman and its shares for much of this year. The stock climbed 0.7 per cent in midday trading on Tuesday.

Net revenue fell 36 per cent to $8.84bn, led by a sharp decline in equity trading. A spate of clients’ bets on equity volatility indexes at the start of the quarter went against Goldman, which had taken the other side of those trades, said David Viniar, the bank’s finance chief. But no factor loomed larger during the period than the dearth of client activity, he said.

Goldman’s value at risk, a formula used to measure the most losses the bank could lose in a single trading day, slipped to a three-year low during the period, Mr Viniar said.

“There was a fear of will there be future growth or not, on regulatory reform, European sovereigns,” he said. “All kinds of things were weighing on people.”

Mr Viniar told the Financial Times that results from the stress tests on European banks could serve as a catalyst for renewed confidence. But the new month did not change most clients’ cautious stance.

“Suffice it to say, there has not been a big pick-up in activity in the first two weeks of the quarter,” Mr Viniar said.

The bank set aside $3.8bn during the period for employee pay and benefits – roughly 43 per cent of net revenues. This so-called compensation ratio matched what Goldman accrued during the first period, and was below the 49 per cent ratio in the first half of 2009.

Revenue from trading and principal investments dropped 39 per cent in the second quarter to $6.55bn. Equities slipped 62 per cent to $1.2bn, while fixed-income, currencies and commodities trading fell 35 per cent to $4.4bn. Goldman said it recorded a $600m charge for the UK payroll tax and paid $550m to settle SEC complaint.







New devices fuel Apple sales
By Richard Waters in San Francisco
Copyright The Financial Times Limited 2010
Published: July 20 2010 21:58 | Last updated: July 20 2010 21:58
http://www.ft.com/cms/s/2/00265a20-9430-11df-a3fe-00144feab49a.html


Strong demand for Apple’s latest iPhone and its new iPad tablet computer contributed to unexpectedly strong results for the latest quarter, calming fears on Wall Street that a bumpy iPhone transition would dent the numbers.

The US consumer technology company reported revenues of $15.7bn, well ahead of the $14.7bn that most analysts had expected. Earnings of $3.51 a share compared with analyst estimates of $3.10.

Underpinning the latest figures was a smooth transition to the iPhone 4, in spite of the complaints of signal loss when part of the antenna is touched.

Apple said it had sold 8.4m iPhones in the latest quarter, the third of its fiscal year, putting paid to worries that inventory adjustments and supply constraints would hold back sales.

Meanwhile, sales of the iPad appeared to have eaten into the mature iPod business, as some observers had forecast. Apple said it had sold 9.4m iPods, down from 10.2m in the same period the year before and the 9.8m that most analysts had expected.

Apple’s shares edged only 3 per cent higher in after-market trading despite the strong earnings performance, reflecting the fact that unofficial “whisper” estimates on Wall Street had called for results significantly above the official forecasts