Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Risky assets struggle to extend rise
ByTelis Demos in London
Copyright The Financial Times Limited 2010
Published: July 28 2010 08:35 | Last updated: July 28 2010 14:49
http://www.ft.com/cms/s/0/0dc5fa3e-9a0f-11df-8346-00144feab49a.html


Wednesday 1.45 BST: A recovery in risky assets is running out of steam, as optimism about stronger company earnings weighs against fears that growth may ease later in the year.

The FTSE All-World stock index is up 0.2 per cent, adding to a 10-week high. But markets appear to be peaking at this level, with Wall Street opening slightly lower and European shares stalling after reaching five-week highs.

The currency market is also avoiding risk, following reports that inflation would moderate in previously fast-growing economies Australia and South Africa. The safe-haven yen is higher, and the euro again is struggling to move beyond $1.30.

“Risk appetite has already improved a lot from the worst part of the cycle. After that, it will be much more of a sideways move for some time,” said John Higgins, senior market economist at Capital Economics.

Catalyst-hungry bulls, seeking to extend the risk rally, found a solid peg in China. Zhang Tao, one of China’s top central bank economists, pledged to keep monetary policy stable for the foreseeable future. That followed Tuesday’s central bank outlook for the rest of the year, which said growth would slow but not double dip. Copper, a key indicator of industrial demand, was higher and Japanese safe-haven bonds were sold off.

But industrial companies offered traders reason to holster that optimism. ArcelorMittal, the world’s largest steel maker, said that it had reversed its losses in the second quarter, but warned that weaker Chinese demand for materials could knock its earnings later this year. US steel-makers US Steel and AK Steel late on Tuesday also reduced their forecasts for the year when they reported earnings.

The Market Eye

Mr Market must be listening to Talking Heads, because he has stopped making sense.

The S&P 500 index is down by 0.1 per cent, with sentiment softening after it was reported taht sales of durable goods, excluding transportation, fell 0.6 per cent in June, versus a gain in May. That is the largest drop since August.

Forecast-beating corporate earnings have also lost their lustre, as investors focus more on sales forecasts than last quarter’s profits. A surprisingly large drop in consumer confidence on Tuesday added to fears that final sales growth may slowing. Economists at Credit Suisse said that with deflationary expectations rising, US consumer spending could slow to just 1.2 per cent annual growth.

☼ Factors to watch. The Fed’s Beige Book of anecdotal observations about the economy. “Unusual uncertainty”, that now notorious coinage by Ben Bernanke, US Federal Reserve chairman, is still the watchword. The Beige Book will be scrutinised for its views on the labour market, the severely lagging variable in the US economy. The US Treasury will also auction 5-year bonds. Tuesday's auction of 2-year bonds saw strong demand. ☼

• Europe. European shares are stalling, after opening higher, as they try to extend five-week highs reached on Tuesday. The Eurofirst 300 index is down by 0.1 per cent.

Banks are competing with industrial producers for shares’ direction. European financials are up about 0.7 per cent, while chemical- and steel-makers are down 1.2 per cent, following ArcelorMittal’s warnings about the third quarter. The UK’s FTSE 100 index is down 0.6 per cent, and Germany’s Dax is down 0.6 per cent.

Spain’s Ibex 35 index is up 0.1 per cent, in spite of the country’s second-biggest bank, BBVA, reporting that its second quarter profits fell 17 per cent.

• Asia. The FTSE Asia-Pacific index was up 1 per cent, led by the 2.7 per cent gain for the Nikkei 225 after the yen eased off near-2010 highs earlier on Tuesday and Canon said second-quarter profits quadrupled.

Chinese stocks neared a two-month high. Shanghai’s composite index jumped 2.3 per cent, shrugging off worries about its banking system, in which almost one-fifth of loans to local governments are said to have gone bad, and focusing on growth hopes.

Hong Kong’s Hang Seng index was up by 0.6 per cent and Australia’s S&P/ASX 200 was higher by 0.7 per cent. Mumbai’s Sensex lagged again, down by 0.7 per cent.

• Forex. Risk appetite is declining after economies reported moderating growth. The euro is flat against the dollar at $1.3003. The yen was higher, reversing an earlier dip to gain 0.4 per cent against the greenback, to Y87.60.

Australia’s price growth was reported to have slowed to a three-year low, which sent the Aussie tumbling 0.9 per cent against the US dollar to $0.8931, easing off 10-week highs. The South African rand, following a similar report that local inflation was slowing, is lower by 0.5 per cent to 7.36 to the US dollar.

A dovish outlook by Mervyn King, governor of the Bank of England, weighed on the pound. Mr King predicted that inflation would fall back in line, and did not require a policy adjustment. Sterling pared its gains against the US dollar, and is up 0.2 per cent to $1.5623.

• Debt. Ten-year US Treasury bonds are flat, yielding 3.02 per cent. Japanese core bonds yields were higher by 4 basis points, off their post-crisis lows reached on Tuesday at 1.06 per cent. Ten-year German euro Bond yields were down 3 basis points to 2.75 per cent.

Treasury yields were higher on Tuesday, but an auction of two-year notes was strongly bid, suggesting that while trading was soft, risk appetite is struggling to push yields much further.

Spanish sovereign debt yields are lower. Yields are down more than 20 basis points, to 4.12 per cent, since stress tests that said the country’s banks needed less than €1.5bn of fresh capital to retain sufficient tier one ratios in the event of a crisis, well within its government’s reach to provide. Its credit-default swap spreads rose, however, suggesting peaking expectations.

• Commodities. Crude broke its tight range on Tuesday, falling more than 1 per cent, and it is struggling today in spite of the equity gains. US crude is down 0.6 per cent at $77.03. The American Petroleum Institute reported that US crude inventories unexpectedly rose last week, adding further doubt to the US economic recovery.

Copper was up 1.4 per cent near $3.25 a pound in electronic Nymex trading following China’s pledge of monetary stability. Gold fell by 0.1 per cent, to $1,158 an ounce, after the market was sharply sold off just before the US open.




Tighter terms fail to crimp credit demand
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: July 28 2010 13:10 | Last updated: July 28 2010 13:10
http://www.ft.com/cms/s/0/033e452e-9a34-11df-8346-00144feab49a.html


The eurozone financial crisis led to the region’s banks imposing significantly tougher conditions on loans – but failed to prevent a pick-up in demand for credit, especially for house purchases.

The latest European Central Bank’s bank lending survey, published on Wednesday, showed an unexpectedly harsh tightening of loan standards in the second quarter, with eurozone banks citing constraints they faced in accessing financial markets.

The three months to June covered a period when financial market turmoil over public finances in the ‘peripheral’ European countries was at its most intense.

However, demand for loans improved noticeably during the same period. Eurozone households’ appetite for mortgages was the strongest since early 2006. Demand for loans by businesses remained negative, but less so than in the previous survey.

The results suggest the eurozone crisis may have hampered temporarily the economic recovery in the region, but not disastrously.

Banks had a “kind of knee jerk reaction to what was happening in the markets in June”, said Gilles Moec, European economist at Deutsche Bank. “I think things will continue to normalise in the second half of the year – not spectacularly, because the situation is still stressed, but the tightening was overstated.”

The ECB, the eurozone’s monetary guardian, has argued throughout the crisis that the region was not facing a “credit crunch” – a view that will not be changed by the latest data.

A separate survey by Germany’s Ifo economic institute showed the percentage of companies complaining about restrictive bank credit conditions falling further, from 34 per cent in June to 31.6 per cent in July. “The economic recovery in Germany is scarcely being braked by banks’ credit policies,” Ifo reported.

The ECB hopes the stabilisation of financial markets and the publication of “stress test” results for European banks will boost banks’ willingness to provide the credit needed to oil the wheels of the economic recovery.

It argues that it is normal in an economic recovery for a pick-up in lending to households to precede a revival in lending to business.

ECB figures earlier this week on actual lending by banks showed mortgage lending rose in June at the fastest annual rate for almost two years. However, its latest quarterly bank lending survey, based on responses by 120 banks, showed that the trend of a slowdown in the tightening of credit standards – which emerged last year – was thrown into reverse in the three months to June. The net balance of banks reporting a tightening of standards for companies rose to 11 per cent from 3 per cent in the first quarter of the year.

Asked about demand for credit from companies, the net percentage of banks reporting an increase rose to minus 2 per cent, from minus 13 per cent in the first quarter. The rise in demand for mortgages was far more striking, with the net percentage of banks reporting an increase rising to 24 per cent, from minus 2 per cent. The main reason cited was an improvement in housing market prospects.

Regarding access to wholesale funding, eurozone banks reported a significant deterioration in the second quarter – almost certainly reflecting heightened financial market nervousness. The ECB said the deterioration had been particularly intense for access to short-term money markets and the market for debt securities issuance.




Soros set to buy stake in Bombay exchange
By James Lamont and James Fontanella-Khan in Mumbai
Copyright The Financial Times Limited 2010
Published: July 27 2010 22:31 | Last updated: July 27 2010 22:31
http://www.ft.com/cms/s/0/ff294da0-99b4-11df-a852-00144feab49a.html


George Soros, the billionaire investor, is in final talks to buy Dubai Holding’s 4 per cent stake in the Bombay Stock Exchange, as foreign investor interest in India’s fast-growing financial markets rises, people close to the matter said.

Soros Fund Management is planning to pay about $40m for its stake, valuing Asia’s oldest bourse at about $1bn, said a person involved in the negotiations.

The deal is the latest in a series of strategic investments in India’s stock and derivatives exchanges, which are diversifying into new asset classes and embracing new technologies to attract so-called “high-frequency” traders.

Individual foreign entities are allowed to own up to 5 per cent in a local bourse, according to domestic rules.

Last month, Temasek, Singapore’s sovereign wealth fund, took a 5 per cent stake in the rival National Stock Exchange of India for more than Rs6.75bn ($145m).

Earlier this year, Tom Caldwell, the Toronto financier, and Argonaut, a private equity group, acquired minority stakes in the BSE. Deutsche Börse has had a stake in the BSE since 2007.

Investors have been encouraged by the overhaul of the BSE by chief executive Madhu Kannan, who earlier worked closely with John Thain, former chief executive of the New York Stock Exchange.

Mr Soros’s entry into the BSE comes amid signs of a rift between the exchange and one of its other shareholders, the Singapore Stock Exchange, which has recently given up its board seat, people close to the situation told the FT.

The SGX is looking to move closer to the BSE’s rival, the NSE, which is bigger and more aggressive. It is unlikely the Singaporean exchange will be able to terminate its partnership with the BSE, as its 4 per cent stake is locked in for at least another four years.

Dubai Holding, the group owned by the emirate’s ruler Sheikh Mohammed bin Rashid al-Maktoum, had been looking to exit the BSE for sometime.

Mr Kannan, who has been in the job for a year, said he could not comment on matters related to the shareholdings.

Mr Kannan has focused on building the exchange’s strong brand – the Sensex is India’s benchmark index – and boosting technological development, which has seriously lagged behind its main competitor.

Mr Kannan has also focused on improving transparency by changing most of the senior management, recruiting executives with international experience, and appointing Subramaniam Ramadorai, former head of India’s biggest IT company Tata Consultancy Services, as chairman of the exchange.




Boeing held back by aircraft seat problems
ByHal Weitzman in Chicago
Copyright The Financial Times Limited 2010
Published: July 28 2010 14:02 | Last updated: July 28 2010 14:02
http://www.ft.com/cms/s/0/d0976322-9a41-11df-8346-00144feab49a.html


Boeing, the world’s second-biggest aircraft maker, earned profits in the second quarter well ahead of analysts’ average expectations but the company said on Wednesday it had been held back by problems at a company that made seats for its commercial aircraft.

The manufacturer’s net income in the quarter was $787m or $1.06 per share, down from $998m or $1.41 per share in the same period a year earlier, but above Wall Street consensus forecasts of about $1.01 per share. However, revenues came in below expectations at $15.6bn, down from $17.1bn last year and below analysts’ average forecasts of about $16.1bn.

The fall in earnings compared with last year was expected. Boeing said this month that it had delivered 114 commercial aircraft in the second quarter, generating revenue of $7.4bn, down from the 125 aircraft and revenue of $8.4bn it had delivered in the same period a year earlier.

Boeing said the lower deliveries were in part explained by “anticipated seat supplier challenges”. The aircraft maker said this month that it would no longer use seats from Koito, a Japanese supplier, after that company admitted it had falsified test results on as many as 150,000 seats on 1,000 aircraft. That has delayed aircraft deliveries.

For the full year, Boeing forecasts commercial deliveries of 460-465 aircraft, down from 481 last year.

Revenues were also lower in the second quarter on the defence, space and security side, which accounts for half of the company’s income. Revenues came in at $8bn, down from $8.7bn in the same period last year.

Operating margins in both commercial and defence were lower than in the second quarter of last year.

Boeing reported earnings a week after winning 103 orders worth about $10bn at the Farnborough International Airshow – behind Airbus, the US’s company’s bigger European rival, which won 130 contracts at a list price of $13bn. Demand for Boeing’s jets was led by aircraft-leasing companies buying single-aisle 737s.

In addition, SpiceJet, the low-cost Indian airline, said this week it had ordered 30 Boeing 737s worth $2.3bn at list prices.

Boeing warned this month that it might have to delay further first deliveries of its 787 Dreamliner, which is already two-and-a-half years behind schedule because of problems in Boeing’s supply chain and design flaws. The company had planned to deliver the aircraft by the end of this year, but said it might now have to push that back into the first month of 2011.

At the same time Boeing has also hinted that it might need to delay delivery of its new 747-8 model.

After the multiple delays to the 787 schedule damaged Boeing’s credibility with Wall Street, the market has warmed again to the manufacturer. Citigroup upgraded Boeing to “buy” from “hold” this month, raising its price target for the shares to $80 from $73, after Deutsche Bank initiated coverage last month with a “buy” recommendation.

In its previous earnings report, Boeing said it was expecting higher revenue next year compared with 2010. “We see 2010 as the year of overall economic recovery within the industry and 2011 a year where airlines return to profitability,” Randy Tinseth, vice-president of marketing for Boeing’s commercial arm, said at the time. “As a result, we anticipate an increase in demand for airplanes in 2012 and beyond.”

With that outlook in mind, the company plans to ramp up production of its 737 aircraft to 34 a month from 31.5 by 2012 and to increase production of its wide-bodied 777 model from five per month to seven per month by the middle of next year and of its 747 from 1.5 aircraft per month to two per month by mid-2012.

Boeing shares were up 0.4 per cent in pre-market trading at $68.89.




LG profits tumble as handset unit struggles
By Christian Oliver in Seoul
Copyright The Financial Times Limited 2010
Published: July 28 2010 07:37 | Last updated: July 28 2010 07:37
http://www.ft.com/cms/s/2/12df4ff6-9a10-11df-8346-00144feab49a.html


LG Electronics, the world’s third-largest maker of mobile phones, said on Wednesday that operating profit had plunged 90 per cent in the April-June quarter, hauled down by a loss at its handset division as it struggled to keep up with rivals in the smartphones race.

While the South Korean mobile phone maker promised “modest growth” in the third quarter, the dismal results are likely to fuel debate over the extent to which LG, as well as other big exporters, could be further undermined in the second half by slowing demand from Europe and China.

LG has been trailing Apple and local rival Samsung Electronics in the race to unveil compelling smartphones. While Samsung has rushed out its Galaxy S smartphone to compete with Apple’s iPhone, LG’s ambitious plans have yet to gain traction.

“LG does not have a smartphone that defines its brand. They jumped into the smartphone market very late, trying to catch up with competitors who started one or two years earlier,” said Ha Eun-mi, an analyst at HI Investment and Securities in Seoul.

Overall, operating profit in the second quarter sank 90 per cent to Won126bn ($107m), which LG blamed on the heavy investment it was pouring into research and development and marketing expenditure. Its handset unit posted an operating loss of Won120bn, from a Won620bn profit in the second quarter last year.

LG’s strategy was to compete for the luxury niche, including expensive “feature” phones such as the Prada, in conjunction with the fashion house. Though praised for their design, these Prada phones and later LG multimedia models lacked the iPhone’s wide-ranging computer-style features.

The handset maker is counting heavily on the success of a smartphone, based on Google’s Android operating system, that it is due to launch this quarter.

LG has vowed to overtake Samsung Electronics as the world’s second-biggest maker of handsets by 2012. Currently, it has only about 10 per cent of global share, compared with Samsung’s 20 per cent. LG said earlier this year that it was devoting 30 per cent of its mobile phone research and development labour force to work towards a breakthrough in smartphones, in which it only has about 1 per cent of the global share.

Televisions also bit hard into profits because LG sells 40 per cent of its televisions in the weakening euro area while facing costs in dollars.

LG, which also makes household appliances such as refrigerators and washing machines, is highly dependent on international markets remaining robust. It is aiming to sell 1m 3D televisions this year, a quarter of the global market.

Samsung Electronics, the world’s biggest technology company, will post results on Friday. Analysts believe it could be on track to deliver higher net profit than the top 19 Japanese electronics companies combined this year.

LG shares slid 3 per cent after the results, compared with a 0.3 per cent rise for the overall market.

Additional reporting by Kang Buseong




BBVA reports lift from foreign franchises
By By Mark Mulligan in Madrid
Copyright The Financial Times Limited 2010
Published: July 28 2010 07:52 | Last updated: July 28 2010 13:21
http://www.ft.com/cms/s/0/33ed6824-9a13-11df-8346-00144feab49a.html


A slight pick-up in domestic activity and growth in its foreign franchises helped Spanish bank BBVA beat analysts’ forecasts on Wednesday as it posted a 19.5 per cent year-on-year drop in second-quarter net profits.

The bank, Spain’s second-biggest by market value, said profits for the three months to the end of June were €1.3bn ($1.69bn, £1.1bn), compared with about €1.6bn for the same period last year. Gross income, however, was €5.6bn, up 1.6 per cent, as lending and funding growth and a reduction in non-performing bad loans pointed to weak recovery in the sector.

For the first half, net profits were down 9.7 per cent at €2.53bn, compared with forecasts of €2.45bn in a Reuters analysts’ poll.

BBVA, which emerged among the country’s most solvent lenders in last week’s European Union bank stress tests, said strength in Latin America had partially offset sluggish domestic business. Total lending across the group grew 4 per cent, to €348.9bn, while net interest income also grew year-on-year, by 1.2 per cent to €6.9bn.

“This is the first positive year-on-year change in trend in the loan book in the last four quarters," BBVA said.

Credit quality also improved as new non-performing loans fell 6.7 per cent between the first and second quarters, leaving the bank's bad loans ratio at 4.2 per cent at the end of June, from 4.3 per cent at the end of the first quarter. It was the first quarterly decline since 2006.

In Spain, however, bad loans as a percentage of total lending were 5 per cent, down from 5.1 per cent at the end of the March, but compared with 3.7 per cent at the same stage last year.

In addition to a slightly improved trend in BBVA's domestic business, overseas operations were solid, with year-on-year profits growth in Mexico of 24 per cent, to €451m, in the second quarter.

BBVA said credit quality across the region had also improved quarter-on-quarter.

The bank’s core capital stood at 8.1 per cent at the end of June.

Analysts have said the positive effects of the stress tests should ease funding conditions for Spanish banks.

BBVA on Wednesday tested this out, placing its first senior unsecured bond since the start of the sovereign debt crisis, raising more than €1bn over five years at spreads of around 175 basis points. Last week, it sold a three-year €2bn covered bond at a spread of 195 basis points over mid-swaps.

Shares in BBVA were 0.8 per cent higher at €10.66 in afternoon Madrid trading.