Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Risky assets rally as test results digested
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: July 23 2010 09:12 | Last updated: July 23 2010 22:03
http://www.ft.com/cms/s/0/f4ac5dae-962b-11df-96a2-00144feab49a.html


Friday 21:45 BST Risky assets are gaining following the initial results of the European bank stress tests, in which all but seven banks passed, but traders are waiting until Monday to take a stronger view of the eurozone and the global economy’s future.

Though the headline result was fewer failures than expected, early reaction to the details of the tests was disappointment. The CEBS says the total capital shortfall for the seven failed banks was just €3.5bn. A handful of banks that were earlier seen as in danger of failing, such as Italy’s Banca Monte dei Paschi di Siena and Germany’s Deutsche Postbank, narrowly passed.

Following the results, US traders pushed the biggest-volume New York-listed shares of European banks lower. Deutsche Bank and Banco Santander were each down 1.2 per cent at one point, though they have since rallied to gains.

“It won't be until Monday that the cynical camp will digest the full details and decide if it was an obviously non-credible test,” said Eric Fine, portfolio manager at Van Eck Global. “But €3.5bn sounds low to me.”

However, broader market action was rather muted. The S&P 500 index is 0.8 per cent higher, but traders are crediting General Electric, which said it was raising its dividend, and Sanofi-Aventis, which was reported to be exploring a megadeal for drug-making rival Genzyme. US Treasury yields and the euro have moved higher, alongside shares, but were mostly unchanged immediately after the test release.

The FTSE All-World index is up by 0.8 per cent. Although European banking shares spent much of the session lower, Europe was ultimately well supported by a rising economic tide, including surprising jumps in UK GDP growth and German business confidence. Crude oil remains softer despite support from the risk of storms interrupting supply.

In general, traders have not been eager to take substantial positions in any market before the tests are fully understood. Thursday’s sharp rally was the real reaction to the early leaks of the stress test results; now begins the wait for serious analysis. While the results may not have impressed, the sheer volume of information released by the CEBS is said to give analysts and investors plenty to work with over the weekend.

“The information set is so rich, it should be feasible for people to make up their minds about each bank. Once that fear of not knowing is gone, you’ll see it’s a generally a positive for risk,” said Sebastien Galy, strategist at BNP Paribas in New York.

Indeed, that reaction has already begun to some degree. Credit markets actually cheered the results, according to Markit figures, with credit default swap spreads on European banks nearly universally narrowing. The biggest gainers were Greek banks EFG Eurobank, narrowing 109 basis points, and National Bank of Greece, narrowing 92bp.

The Market Eye

How to judge the stress test results? Well, here is what was expected: The most oft-cited benchmark was a report by Goldman Sachs analysts predicting 10 banks to fail, three too many. Particular banks anticipated to flunk, such as Germany’s troubled Hypo Real Estate, did. Both of Ireland’s banks in the test were said to have passed, and they did.

The El País newspaper in Spain reported on Friday that “several” of the Spanish caja savings banks had failed the test, which proved accurate. Also on the mark was a report on Thursday in the Wall Street Journal saying that five of six Greek banks had passed. But Spain’s market rallied, while Greece tumbled. Such is the emerging conventional wisdom on the stress test for the most troubled banks: Failure means it was a good, tough test; success means it was too lenient.

● Europe European equity markets were slightly lower for most of the day. The tone was set after Ericsson, the mobile phone maker, missed its earnings targets, saying global network sales were slower. Shares were down 5.7 per cent, leading telecoms sector lower across Europe.

The banking sector was 0.1 per cent higher, rising a bit towards the close after spending much of the session lower. UK banks were softer, leading the FTSE 100 index down slightly lower.

Spain’s Ibex index was up 0.8 per cent, with BBVA up 1 per cent and Banco Santander up 1.3 per cent. Spain’s smaller caja savings banks, not its large commercial banks, are in the spotlight. The Athens index, however, was down 1.4 per cent as fears for its largest commercial banks took hold, which were somewhat realised by the failure of Atebank.

● Asia Markets took their overnight cue from Wall Street. They were boosted further by a group of after-the-bell positive earnings reports, including American Express and Microsoft.

The Nikkei 225 index was up 2.3 per cent, with the Hang Seng rising 1.1 per cent. The Asia-Pacific index overall added 1.6 per cent. The Shanghai Composite index was a laggard, however, rising just 0.4 per cent, damping hopes that the depressed market had finally turned a corner.

Bombay’s Sensex was also behind, adding 0.1 per cent. India’s central bankers are sounding aggressive about monetary tightening, in spite of a report from a government minister of softer-than-expected price growth.

● Forex The pound is up 1.2 per cent, to $1.5426, thanks to the UK’s GDP surprise. The euro has rallied to 0.1 per cent higher against the dollar, at $1.2914. As a result, the dollar is down on a trade weighted basis. But it is 0.4 per cent higher against the yen, at Y87.43, a sure sign of investors embracing risk.

Moody’s said that it was putting Hungary, whose austerity programme is seen as insufficient by the International Monetary Fund, on watch for a potential downgrade. The forint is 1.4 per cent lower against the euro.

● Debt US Treasury yields have finally broken their tether to session lows, breaking out a bit toward the end of the session. Two-year bond yields are up 2 basis points from their record-low yield at 0.58 per cent. Ten-year yields are up 6 basis points, at 2.99 per cent, their highest mark in over a week.

Core bonds reflected shaky confidence during the European session. German 10-year Bunds, whose yields were higher most of the day, ended flat, at 2.7 per cent.

UK Gilts, however, were up 8 basis points to 3.43 per cent following second-quarter GDP growth coming in at nearly double the forecast.

Peripheral debt in Portugal and Spain was in demand, while Greek two-year notes were higher by 10 basis points, to yield 10.28 per cent.

● Commodities Benchmark crude oil is down 0.3 per cent, to $78.97, as traders book some of their profits from earlier, when crude nearly hit $80. But it has traded choppily as they weigh an uncertain growth outlook (Europe’s up, but is the US down?) against the support of an approaching storm off the US Gulf coast.

The base metals complex is higher across the board, with copper adding 1.1 per cent, to $7,010 a tonne in LME trading, a fresh two-month high. Gold fell 0.4 per cent to $1,190 a troy ounce, as the inflation outlook remains uncertain.




Seven banks fail EU stress tests
ByPatrick Jenkins, Banking Editor
Copyright The Financial Times Limited 2010
Published: July 23 2010 17:46 | Last updated: July 23 2010 19:16
http://www.ft.com/cms/s/0/c14b9464-9678-11df-9caa-00144feab49a.html


Europe took a further step towards restoring confidence in its banking system on Friday as it published the results of stress tests into the region’s leading financial institutions, showing that only seven of 91 banks failed to meet its capital requirements.

However, investors signalled their distrust of the assumptions underlying the tests and the surprisingly small number of banks to fail the tests.

Five of the seven were cajas, Spanish savings banks, sparking nervousness that the pan-European exercise that Madrid had championed might backfire.

The Bank of Spain on Friday indicated that it had sufficient contingent liquidity measures in place to reassure caja customers and counter any threat of a run on these banks.

The Committee of European Banking Supervisors, which oversaw the tests, identified a capital shortfall of €3.5bn at the seven banks that failed to reach the pass mark of a 6 per cent tier one capital ratio.

The test involved modelling macroeconomic and sovereign debt stresses over 2010 and 2011, applied to end-2009 capital levels.

Germany’s Hypo Real Estate and Greece’s ATEbank were the only non-Spanish institutions to fail.

Among the near-fails, which analysts say could come under pressure to raise capital soon, were Italy’s Monte dei Paschi, on 6.2 per cent, Allied Irish Banks, on 6.5 per cent, and Germany’s Postbank, on 6.6 per cent.

A handful of some of Europe’s most-stretched banks announced a combined €1.3bn of capital raisings on Friday, just hours before regulators divulged the results of the test, although two of them – National Bank of Greece and Slovenia’s NLB – both passed.

The third, Cívica, a caja based in northern Spain that failed the test, secured €450m of convertible bond finance from JC Flowers, the US buy-out firm that has a record of investing in troubled banks.

That marked the first time a caja had sought outside capital, following a liberalisation of the law governing the public sector institutions.

Among the top-rated banks in the tests was Barclays, the UK bank whose baseline tier one ratio of 13 per cent at the end of last year, rises under the stress scenario to 13.7 per cent by end-2011.

The two-month long test exercise has been closely scrutinised by investors, with growing scepticism in the markets that the parameters of the stress scenarios were insufficiently tough.

Germany also upset the pan-European exercise at the last minute by saying its banks would be disclosing the full details of sovereign debt holdings – an adjunct to the stress tests that all banks had been expected to comply with – only on a voluntary basis.

At least six German banks – including Deutsche Bank, Postbank, HRE and DZ Bank – did not publish sovereign holdings on Friday night.

“Arguably the failure here is not the banks concerned but the test itself,” said Richard Cranfield, chairman of the global corporate group at Allen & Overy, the law firm.

“There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making this a wasted opportunity.

“One assumes those banks that have failed will be rescued or recapitalised. However, the banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on,” he said.

But European regulators hailed the results of the tests – which they said were three times as tough as last year’s US ones – as proof of the strength of the industry.

“The US did its tests before all its banks had recapitalised,” said Christian Noyer, governor of the Banque de France.

“European banks have now been through recapitalisations, restructurings, cleaning out of their portfolios. We’re arriving after the battle. A few years ago it would have been different,” he said.

Additional reporting by James Wilson and Mark Mulligan




Moody’s to review Hungary’s credit rating
By Chris Bryant in Budapest
Copyright The Financial Times Limited 2010
Published: July 23 2010 12:23 | Last updated: July 23 2010 12:23
http://www.ft.com/cms/s/0/977adb6e-9636-11df-96a2-00144feab49a.html


Hungary’s credit rating is set to be reviewed for possible downgrade after Moody’s Investors Service on Friday responded to the increased fiscal risks following the suspension of budgetary talks with the International Monetary Fund.

Moody’s will review Hungary’s Baa1 rating after the IMF and EU walked away from the talks having criticised Budapest’s ‘short-termist, distortive’ economic policies.

Viktor Orban, prime minister, has since sharpened his rhetoric against the IMF and sown confusion about how fast Hungary will cut its deficit and under whose supervision.

Although analysts have some sympathy with Hungary’s desire for more flexibility in next year’s budget deficit target, there is increasing consternation among investors about the government’s defiant public posturing

The forint declined by 0.8 per cent against the euro on Friday, snapping a three-day winning streak. If Hungary were to be downgraded, its borrowing costs would probably rise, increasing the pressure on government finances. The cost of insuring Hungary’s debt against default jumped by 10 basis points.

“Moody’s decision to initiate this review was prompted by the increased uncertainty regarding Hungary’s fiscal outlook and economic prospects,” the agency said.

“This uncertainty is the result of the recent breakdown of Hungary’s talks with the IMF and EU (after a disagreement over the country’s 2010-11 fiscal deficit targets), which in turn led to a suspension in the next disbursement from the IMF/EU €20bn loan programme for Hungary.”

The announcement came only hours after Hungary’s parliament passed a Ft200bn financial sector tax on Thursday evening, which the government has itself described as “brutal”. The levy is expected to cause several banks to report losses this year, and could restrict lending and set back the economic recovery, the IMF has warned.




Ford profits hit six-year high
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2010
Published: July 23 2010 13:31 | Last updated: July 23 2010 13:31
http://www.ft.com/cms/s/0/1ee78aa0-9652-11df-96a2-00144feab49a.html


Ford Motor, the US’s second-largest carmaker, on Friday said it expected to hold a net cash position by the end of next year as its operating performance continues to improve.

The group, which on Friday reported its highest quarterly profit in six years – its fifth consecutive quarterly profit – said net debt shrank to $5.4bn from $9bn in the second quarter.

“By the end of 2011, Ford expects to move from a net debt position to a net cash position,” the group said.

Ford shares jumped 3.4 per cent to $12.50 on Friday morning, reinforcing their recovery since the bottom of the recession in late 2008 when they sank close to $1.

“We are ahead of where we thought we would be despite the still challenging business conditions,” Alan Mulally, chief executive, said, adding that “we expect even better financial results in 2011”.

Ford, the only one of the three Detroit carmakers not to accept a government bail-out, has benefited from a steadily improving share of its core North American market and rising transaction prices for its models.

The carmaker said its priorities included expansion in China, India and other fast-growing markets; further lowering costs; and strengthening the balance sheet with a view to regaining its investment grade credit rating.

Ford on Friday said second-quarter net profit rose to $2.6bn from $2.3bn a year earlier while operating cash flow was $2.6bn. Both far exceeded analyst estimates.

Ford’s gross debt, which fell to $27.3bn from $34.3bn, is far higher than General Motors or Chrysler. Ford’s cash reserves stood at $21.9bn at the end of June.

Ford’s profits rise was driven mainly by a sharp turnround in North America, where pre-tax operating profit surged to $1.9bn, compared with an $899m loss a year earlier and first-quarter earnings of $1.2bn.

A combination of new models, an improved brand image and higher trade-in values have enabled Ford to boost transaction prices. Lewis Booth, chief financial officer, told the Financial Times that customers were also buying more high-margin accessories.

Edmunds.com, an online car-buying service, estimates that the average price of an F-Series pick-up, Ford’s top-selling vehicle, rose to $32,759 in the second quarter from $30,602 a year earlier.

Ford Europe’s operating profit rose to $322m from $57m a year ago and $107m in the first quarter.

The carmaker expects its market share in Europe to be lower this year than in 2009. “We’ve made a conscious decision that we’re going to run the European business for profit rather than for market share,” Mr Booth told the FT.




GE raises dividend in show of strength
By Jeremy Lemer in New York
Copyright The Financial Times Limited 2010
Published: July 23 2010 21:15 | Last updated: July 23 2010 22:19
http://www.ft.com/cms/s/0/06f9d44c-9694-11df-9caa-00144feab49a.html


General Electric on Friday unexpectedly increased its quarterly dividend by 20 per cent in an effort to show that the diversified industrial conglomerate is over the worst of the financial crisis and confident about the future.

GE said it would resume buying back stock this quarter for the first time since September 2008 and had authorisation to make $11.6bn of purchases through 2013. It also raised the possibility of making future acquisitions.

“We are able to restore the GE dividend ... and to extend our share buy-back programme because of continued strong cash generation, recovery at GE Capital and solid underlying performance in our industrial businesses through the first half of 2010,” said Jeff Immelt, GE’s chief executive.

The quarterly dividend will rise by 2 cents to 12 cents a share, costing GE an extra $800m over a full year. That is still well below 31 cents a share per quarter – its level at the start of 2009, before the credit crisis forced the company to slash its pay-out for the first time since 1938.

The past two years have been among the most difficult in GE’s history as the company’s big financial services arm left it dangerously exposed when credit markets seized up. In March 2009 the shares hit a low of $6.66, down from about $40 a year earlier.

Since then, the light-bulbs-to-loans conglomerate has trimmed GE Capital and pledged to return to its industrial roots. But its slimmed-down financial services business has recovered quicker than its other units.

GE has about 10.7bn shares outstanding and is one of the most widely held stocks. The shares closed up 3.3 per cent to $15.71 on the news.






US cuts budget deficit forecast by $84bn
By James Politi in Washington
Copyright The Financial Times Limited 2010
Published: July 23 2010 20:05 | Last updated: July 23 2010 20:05
http://www.ft.com/cms/s/0/5f709872-968a-11df-9caa-00144feab49a.html


The US on Friday trimmed its forecast for this year’s budget deficit by $84bn on the back of faster repayments of financial bail-out money, but the government warned that the US remains on an “unsustainable fiscal course”.

Even with the reduction in size compared to its earlier estimate in February, this year’s fiscal gap is on track to be the largest on record, at $1,471bn (€1,140bn, £955bn), or 10 per cent of gross domestic product. This compares with a budget deficit of $1,410bn in 2009.

The new estimate on the budget was delivered as the administration of Barack Obama offered new projections for the US economy, with GDP growth rising by 3.1 per cent this year and 4 per cent in 2011, roughly in line with expectations of moderate growth among officials at the Federal Reserve.

But the White House is predicting that unemployment will remain high for the foreseeable future, averaging 9.7 per cent in 2010, declining to 8 per cent by 2012 and not falling below 6 per cent until 2015.

In its mid-session review of the budget, the administration said there were some “hopeful signs” in the US economy. But it added: “Too many Americans are still out of work; and the nation’s long-term fiscal trajectory is unsustainable, threatening future prosperity.”

Although the estimate for the budget deficit for the current fiscal year that ends in September was lowered, the administration raised the estimate for budget deficits in 2011 and 2012 by a combined $233bn. Still, the White House says the US is in a position to meet its goal of reducing the deficit by half, or to 4.2 per cent of GDP, by 2013, at the end of Mr Obama’s first term as president.

The US’s soaring budget deficit has emerged as a critical issue heading into the November congressional elections, where Republicans, who have been sharply critical of US fiscal policy under Mr Obama, are expected to make significant gains.

Earlier this year, Mr Obama established a bipartisan fiscal commission to come up with solutions to improve the budgetary outlook, led by Democrat Erskine Bowles and Republican Alan Simpson. T

The commission is expcted to release its findings in December, after the mid term elections, and could suggest a series of tough measures to increase government revenues and reduce spending. The commission’s report will set the stage for a broader revamp of US tax policy that could occur next year.




Bankers overpaid by $1.6bn during crisis
By Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: July 23 2010 19:47 | Last updated: July 23 2010 19:47
http://www.ft.com/cms/s/0/3bdce8ba-9686-11df-9caa-00144feab49a.html


Citigroup, Bank of America and 15 other bailed-out financial services companies overpaid their top executives by $1.6bn during the height of the financial crisis, according to a review by the White House’s special master on Wall Street compensation.

Kenneth Feinberg, who was appointed last year by Barack Obama, president, to oversee the pay policies at the companies that received the greatest government support, began in March his latest inquiry into top executives’ compensation from late 2008 to early 2009.

While the payments were legal at the time, Mr Feinberg said on Friday, they would have fallen foul of restrictions the government set for participants in its troubled asset relief programme (Tarp).

Citi topped the list on excessive pay, thanks in large part to the compensation of several star employees at the bank’s Phibro commodities trading unit, people familiar with the matter said. Citi sold the business to Occidental Petroleum last year.

“Getting our compensation structure right is a priority for us,” a Citi spokeswoman said. “Since the crisis, we have done a lot of work to make sure it is performance-based and we look forward to reviewing the special master’s recommendations.”

The other companies cited by the special master were: American Express, American International Group, Boston Private Financial Holdings, Capital One Financial, CIT Group, JPMorgan Chase. M&T Bank, Morgan Stanley, Regions Financial, SunTrust Banks, Bank of New York Mellon, Goldman Sachs, PNC Financial Services Group, US Bancorp and Wells Fargo.

While Mr Feinberg no longer had the authority to police compensation at those that had paid back the government’s investment, he used a “look back” provision in the statute to ask for more information about their pay during a window between the start of the Tarp and when new restrictions on executive pay took effect.

Mr Feinberg reviewed what the 419 companies that received government assistance before February 2009 had paid their top 25 executives. The institutions were required to submit details on employees who earned more than $500,000.

Eleven of the 17 companies cited by the special master have repaid the government for its assistance during the crisis. And, while Mr Feinberg conceded that none of the retention awards, bonuses, golden parachutes and other payments that appear excessive today was “contrary to the public interest”, he proposed the companies adopt a new policy that would supersede pay guarantees granted to executives.

Mr Feinberg implored companies to give their boards’ compensation committees the right to restructure, reduce or cancel payments to executives during times of crisis.

In October, he had moved to slash the 2009 cash compensation of the top executives at the seven companies within his jurisdiction by an average of 90 per cent from a year earlier.

In December, Mr Feinberg took aim at a second tier of managers, setting a $500,000 salary limit for hundreds of employees at the companies that were still under his thumb. The White House last month appointed Mr Feinberg as administrator of BP’s fund to pay claims from the oil company’s devastating spill. He will leave his current post as “pay tsar” in August.