Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Stocks shrug off bank stress test results
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: July 26 2010 08:58 | Last updated: July 26 2010 17:31
http://www.ft.com/cms/s/0/bfed1662-987e-11df-a0b7-00144feab49a.html


Monday 17.20 BST. US markets have shrugged off the problem of what to do with the European bank stress test results, and are rallying on the back of up-beat economic and corporate data.

The FTSE All-World index is up 1 per cent and industrial commodities are higher as US markets pick up where Asian traders left off, ignoring a soft European session in between. Wall Street has risen steadily, now up 0.8 per cent.

European markets struggled to decipher the meaning of the stress test results, in which only seven banks out of 91 tested failed, with a capital shortfall of just €3.5bn. The euro has made feints at clearing the $1.30 level, but has thus far failed to do so.

But banks are now outperforming sharply, with the FTSE Global Banks index adding 1.7 per cent. Credit spreads on lenders are also tighter, according to Markit, although trading is thin. The iTraxx Senior Financials index is narrower by 12 basis points.

It would be premature, however, to suggest that investors have turned the corner and are now believers in the stress test, in spite of the still widespread criticism that the conditions were too easy. Simon Samuels, banks analyst at Barclays Capital, said that the tests were focused on the risks to interbank funding markets, not to shareholders, who learned little to change their view of the level of risk in bank shares.

“The US bank sector surged 70 per cent around the time of its stress test but we do not think Europe will follow suit,” he said, adding that credit markets would probably greet the tests with only a “cautious welcome”.

Indeed, on that basis it is thus far a tepid welcome. Spanish and Portuguese bonds were in demand, though investors cooled on Greek bonds. The Euribor 3-month borrowing rate also rose 0.4 basis points, to a fresh one-year high, but it has risen for 40 sessions in a row, and the rise was not unusual.

The Market Eye

Beware the signal-to-noise ratio in interpreting reaction to the stress tests. On Friday highly traded US-listed shares of continental banks, namely Deutsche Bank and Banco Santander, rose after the test’s results. But remember that strong corporate news supported equities and risky assets across the board, and that many European banks are reporting earnings this week, including Deutsche Bank and UBS. Also consider that transparency counts as much as results in many traders’ minds. In spite of Deutsche’s strong performance in the test, coming through with a 10.3 per cent tier-one capital ratio, the fact that the bank did not disclose enough to produce a sovereign debt stress result did not sit well with the market. It was the most heavily sold big continental bank when European markets opened on Monday.

In any case, US traders seem ready to put the whole matter behind them and keep the focus on their economy, creating a rising tide lifting European and Asian boats. Markets are seizing on a surprising jump in US new home sales. Property sales had been tumbling in the US since a tax credit expired earlier this year, so the reversal is being greeted as a significant marker. Business-activity bellwether FedEx also supported risk-taking after it raised its full-year earnings estimate.

☼ Factors to watch. The European interbank stress question will stay in view. Strategists say they will be monitoring banks’ use of European Central Bank lending facilities to see whether private markets bought into policymakers enthusiasm for the test results, or are tightening the screws. ☼

Europe. Shares were weak for much of the day, but rallied into the close following the US market open. The FTSE 100 index added 0.6 per cent, and the broader Eurofirst 300 index was up 0.4 per cent.

In Greece, where of six banks tested only the commercial lender Atebank failed, the Athens market was up 2.2 per cent. In Spain, home to five of the seven European test flunkers, the Ibex 35 index was up 1.1 per cent. Earlier efforts to recapitalise the caja savings banks were seen as largely successful, as none of the newly consolidated entities failed.

Asia. Equities made small gains as investors awaited further news about the stress test results. The Nikkei closed up 0.8 per cent and the Hang Seng composite added 0.1 per cent.

Shanghai markets reversed their weaker course of late, adding 0.7 per cent. Mumbai’s Sensex was again the laggard, losing 0.6 per cent, with bulls believing inflation is under control while the central bank seems poised to tighten policy once again.

Forex. The euro is up 0.7 per cent to $1.2995 against the dollar, struggling through a mid-session lull to rekindle its Friday rally. Sterling has been higher since the beginning of the session, up 0.5 per cent to $1.5494, its highest level since mid-April.

Much credit goes to the European and UK economies for supporting those currencies’ gains in recent weeks. Last week, Germany’s manufacturing activity index topped 62, indicating accelerating expansion, and business confidence showed its biggest monthly leap in decades. Meanwhile, the UK’s second-quarter gross domestic product figures were revised higher, nearly doubling the previously stated rate of growth.

The yen is also higher, adding 0.5 per cent against the dollar, to Y87.10. Some in Japan on Monday expressed concern about the strength of the yen after export growth was reported to have slowed for the fourth straight month. That led to calls for the Bank of Japan to intervene on the currency’s behalf, which would knock the value of competing riskier currencies such as the euro.

Debt. Core bonds have reversed and are being sold, in keeping with rising risk appetite in other markets. The yield on 10-year US Treasury bond is up 2 basis points at 3.02 per cent, its highest in nearly two weeks.

Treasury yields have struggled to move higher even though the risk environment has been supportive of late. Traders are concerned that deflation is still the biggest risk in the US, with Ben Bernanke, US Federal Reserve chairman, telling Congress last week about contingency plans for further tightening.

Supply may be providing some counterweight, as the US Treasury will auction off $104bn worth of notes this week, starting on Tuesday.

German Bunds were flat basis point at 2.74 per cent. But peripheral eurozone debt was in demand. Portuguese bonds are down 22 basis points, and Spanish bonds are down 13 basis points. However, Greek two-year bonds reversed strong gains to end the European day up 3 basis points.

Sovereign markets in Europe are viewed as a key measure of the stress tests’ success. After all, with sovereigns in Europe essentially guaranteeing their banks’ survival, it is truly their creditworthiness that the stress tests are measuring.

Commodities. Oil is volatile around the baseline, having risen slightly during Asian trading but struggling to maintain those gains. It suffered from a technical correction as it neared $80, a level not quite yet supported by global economic growth. Brewing storms in the Gulf of Mexico, however, are being closely watched because they may shut down production. US crude is now up 0.1 per cent, at $79.09 a barrel.

In general, the complex is embracing risk. Nymex copper is up 1.5 per cent, a fresh two-month high, at $3.23 a pound. Gold is down 0.2 per cent, reversing an earlier gain, to $1,186 a troy ounce.




IBM faces EU antitrust investigations
By Nikki Tait in Brussels
Copyright The Financial Times Limited 2010
Published: July 26 2010 14:44 | Last updated: July 26 2010 14:44
http://www.ft.com/cms/s/2/5960b57a-98ba-11df-a0b7-00144feab49a.html


Europe’s top competition watchdog has opened probes into IBM over concerns that the US company may have abused its dominant position in the multibillion-dollar market for mainframe computers.

Antitrust officials at the European Commission said on Monday that they were initiating two formal investigations against the company – one resulting from complaints received over the past 18 months and a second on the Commission’s own initiative.

The first case focuses on allegations that IBM has illegally tied its mainframe hardware to its mainframe operating system. This follows complaints to Brussels from a couple of so-called “emulator” companies which accused the US group of refusing to allow customers to run IBM’s mainframe operating systems on anything other than IBM mainframe hardware.

One of the complainants is a French company called TurboHercules, which submitted its allegations to the Commission in March this year. There was also an earlier complaint from another much smaller one-time rival of IBM’s called T3 Technologies.

The second case being opened by Brussels centres on maintenance services. The Commission said on Monday that it had concerns IBM might have engaged in anticompetitive practices to keep potential competitors out of this market “in particular by restricting or delaying access to spare parts for which IBM is the only source”.

Although the mainframe market has been overshadowed as technology has developed, the Commission said on Monday that “the vast majority of corporate data worldwide” still resided on mainframes. It said that sales of new mainframe hardware in 2009 were worth €8.5bn ($11bn), with €3bn being spent in the European Economic Area.

In a statement, IBM said it intended to co-operate with any inquiries from the EU but denied that there was any merit in the complainants’ claims.

“IBM is fully entitled to enforce its intellectual property rights and protect the investments we have made in our technologies,” it said.

The company added that it had made a “critical decision” to invest in the mainframe business when other companies were abandoning such servers and said that “the mainframe server is a small niche in the overall, highly competitive server landscape”.

Competition officials at the Commission started to look at IBM’s mainframe activities several years ago after objections from small technology company PSI.

Microsoft, one of IBM’s big competitors, made investments in both PSI and T3 at various stages. In IBM’s statement on Monday, it accused its rival of being behind some of the antitrust complaints. “The accusations made against IBM … are being driven by some of IBM’s largest competitors – led by Microsoft,” it alleged.

Microsoft had not returned calls requesting comment on this matter at the time of publication.

IBM’s antitrust problems have not been confined to Europe. In the US, the Department of Justice also started a preliminary investigation into IBM’s dominance of the mainframe computer market last year, sending out requests for information. This appeared to be triggered, at least in part, by a complaint from the Computer and Communications Industry Association, an industry grouping which includes some large players such as Google and Microsoft as well as much smaller companies

The US complaint was said to be somewhat broader than the original complaints in Europe, for example, citing T3’s experiences but also making allegations about IBM’s behaviour towards Hercules, an open-source product designed to enable IBM’s systems to run on Intel and AMD-based servers and personal computers.


FedEx raises earnings outlook
By Jeremy Lemer in New York
Copyright The Financial Times Limited 2010
Published: July 26 2010 15:05 | Last updated: July 26 2010 15:05
http://www.ft.com/cms/s/0/b2cdb680-98ba-11df-a0b7-00144feab49a.html


FedEx, the US logistics group, raised its full-year earnings guidance on Monday just a month after its last update, arguing that its core international express markets were growing faster than expected.

“Our revenue and earnings growth are exceeding original expectations, primarily due to better-than-anticipated growth in FedEx Express and FedEx Ground volumes,” said Alan Graf, FedEx’s executive vice-president and chief financial officer.

FedEx Express, the company's overnight air-based delivery unit, had revenues of $22.3bn in 2009. FedEx Ground, which is focused on less time-sensitive domestic package delivery, had revenues of $7bn.

FedEx shares jumped 4 per cent to $82.34 in early market trading.

In spite of fears of a double-dip recession, a slew of second-quarter results in recent days has suggested that big US industrial groups are picking their way through the uneven global economic recovery, tapping growth in expanding markets and benefiting from tight cost controls elsewhere.

Last week the world’s largest package delivery company, UPS, reported better-than-expected second-quarter results thanks to a sharp increase in international revenues and raised its earnings guidance.

In mid-June, Fred Smith, FedEx’s chief executive, dismissed “an undue sense of pessimism”, pointing to rising demand for high-value goods ordered on the internet by the growing middle classes in Brazil, China and India.

For the first quarter ending August 31, FedEx now expects earnings to be between $1.05 and $1.25 per share, as much as a 116 per cent increase compared with a year ago. In June the company said earnings for the quarter would be between $0.85 and $1.05 per share.

For the full year, FedEx expects earnings per share of between $4.60 and $5.20, up from previous guidance of $4.40 to $5.00 per share. Last year, the company reported earnings of $3.76 per share.

FedEx noted that volumes at the high-margin FedEx International Priority unit were expected to grow more than 20 per cent this quarter and said the full-year forecast “reflects the current market outlook for fuel prices and a continued moderate recovery in the global economy”.