Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Uncertain outlook limits risk appetite
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 5 2010 09:39 | Last updated: August 5 2010 12:09
http://www.ft.com/cms/s/0/5ddf9586-a061-11df-a669-00144feabdc0.html


Thursday 12.05 BST. Improved confidence about US economic growth has given some backbone to buyers of risk, but anticipation of key economic reports – including interest rates in Europe and the labour market in the US – are keeping a lid on gains.

A strong rebound in Japanese shares has led the FTSE All-World stock index higher. The broad index is up 0.5 per cent. Japan’s Nikkei average was nearly 2 per cent stronger. European stocks are seeing small gains, while futures contracts for the S&P 500 index in the US are pricing in a slightly higher open.

The yen-dollar trade has been volatile, with the yen now rising. In previous sessions, the yen has advanced to near-15 year highs following doubts about the US economy, which led to traders pricing in the likelihood of further monetary easing by the US Federal Reserve.

The yen’s advance slowed on Wednesday after US service industry activity was shown to have risen more than expected, and a private measure of jobs showed that the US economy was still adding jobs. Traders greeted the news as a sign that Friday’s crucial non-farm payroll report would show continued recovery in the labour market.

Meanwhile, rates were held steady by the Bank of England, as expected. It also made no change to its quantitative easing program. The pound was still higher after the decision, however, as was the euro ahead of the European Central Bank’s own rate announcement.

But the news was not as good in the rest of the world, which has led traders to be tentative risk-takers. New Zealand – which has previously raised interest rates as it grew quickly – said its unemployment rate had risen more than expected, sparking a sell-off of its currency. South Korea said that it was watching downside risks to its own expansion, and investors in Brazil overnight were surprised to see only mild signs of inflation. Inflation is a risk to the economy but also a sign of growth.

After reports on Wednesday showed that eurozone and UK services industry activity and retail sales in Europe had been softer in July, traders were selling off ahead of German industrial orders data. However, a strong earnings report by Barclays, one of the world's biggest banks, led a turnaround in sentiment.

The generally stronger flow of stronger European data stemming from an accelerating recovery in Germany has raised some expectations that Jean-Claude Trichet, ECB president, could signal the beginning of an exit from loose monetary policy. The euro has risen sharply in recent weeks, to above $1.32, where it has held in recent trading despite this week’s slowdown in data.

☼ Factors to watch. Another signpost ahead of Friday’s US jobs report is coming later in the session, as the US reports weekly jobless claims. The four-week average of claims, considered a less volatile and better indicator, will be closely watched. It fell more than expected last week, which spurred some buying but not enough to break the US’s S&P 500 index out of its range. ☼

• Europe. The FTSE Eurofirst 300 index is up 0.5 per cent. Cyclical sectors like oil and gas and industrials are leading gains, while banks are flat, in spite of Barclays’ results. The UK’s FTSE 100 index is up 0.5 per cent, and Germany’s Dax index is 0.8 per cent higher.

With earnings season winding down, and the story mostly told – earnings were stellar, with beats-to-misses for quarterly profits nearly 3:1 among large European companies – the ability of company reports to move markets may become more limited.

In fact, analysts at UBS were recommending a shift into such cheaper sectors after shares across Europe reached a three-month peak earlier this week. In downgrading the autos sector in particular, Nick Nelson, European equity strategist at UBS, said:

“As sovereign risk came to the fore, investor moved into European exporters. But more recently we have seen some of the trends and expectations in the first half of this year reverse. European economic data has begun to surprise positively,” he said. “Whilst the autos will still benefit from a weaker euro in 2010, this benefit is unlikely to be to the same extent as expected in May and June.”

• Asia. The FTSE Asia Pacific index was up 0.6 per cent, led by Japan’s Nikkei 225 average, which added 1.7 per cent, reversing a sharp decline in the previous session while the yen was surging. A stronger yen makes Japan’s exports more expensive, and several companies have warned that their second-half earnings will be hit.

Growth throughout the region is in focus. Japan’s trade minister said the government was weighing further stimulus to the economy. South Korea warned that it faced downside risks, especially to consumers, after a 2 percentage point drop in store sales growth.

“Leading indicators point to downside risks both domestically and externally,” said Goohoon Kwon, economist at Goldman Sachs, in a note on South Korea earlier today.

As a result, shares were generally lower in emerging Asia. Seoul’s Kospi 200 index was down 0.3 per cent. Hong Kong’s Hang Seng index was lower for much of the session but climbed to end flat in late trading. Shares fell in China, with the Shanghai composite index 0.7 per cent lower, and Mumbai’s Sensex was down 0.2 per cent.

• Debt. Japanese 10-year bonds lifted from seven-year lows reached on Wednesday to yield 1.05 per cent, a rise of 4 basis points. South Korean 10-year bonds were slightly higher, up 4 basis points to 4.84 per cent, but remain near their lows for the year as inflation pressures slow. US and German bonds were both down 1 basis point in yield.

Spain’s auction of €3.5bn in 3-year bonds was successful. The amount was at the top of its range, but the coupon rate it had to offer to offer was lower than the previous auction: 2.28 per cent versus 3.32 per cent at last month’s sale.

European “peripheral” benchmark bonds were in demand, with yields falling on two-year Greek and Portuguese debts. However, credit markets were signally higher risk: Credit-default swap prices on Greek debt rose 24 basis points, and was higher on Spanish credits as well.

• Currencies. Risk appetite was selective. The yen reversed its decline yesterday and moved higher against the dollar. It is up 0.2 per cent at Y86.12. It was also up 1 per cent against the New Zealand dollar after New Zealand’s surprise jump in unemployment.

Other export currencies were mixed. The Canadian dollar was up 0.6 per cent against the US greenback, but the Australian dollar was down 0.1 per cent.

The euro and pound are climbing against the dollar, with the single currency reversing a decline, now up 0.5 per cent to $1.3219, after the gap between rising European interbank lending rates and falling US rates reached its highest since last September. Sterling was flat ahead of the BOE meeting, at $1.5891.

• Commodities. US WTI crude oil was down 0.4 per cent to $82.11 a barrel. Oil has faltered as growth rates in faster-growing countries such as Brazil and China have eased, though the price has been supported by supply concerns. Potential disruptions in the North Sea and Gulf of Mexico have helped keep it above $82.29 as other risky assets have corrected.

Gold, which has tracked risk appetite of late, was up just 0.1 at $1,195 an ounce.

Follow the Global Market Overview on Twitter at @telisdemos






Dollar faces gathering headwinds
By Jack Farchy in London, Robert Cookson in Hong Kong, and Lindsay Whipp in Tokyo
Copyright The Financial Times Limited 2010
Published: August 4 2010 18:49 | Last updated: August 4 2010 18:49
http://www.ft.com/cms/s/0/d0fee1fa-9fe6-11df-8cc5-00144feabdc0.html


Only a few weeks ago, the dollar was powering towards its highest levels in four years, the beneficiary of widespread gloom about Europe’s debt crisis and rising optimism about the US recovery.

Since then, investors have soured on the world’s largest economy. The dollar has tumbled 9 per cent on a trade-weighted basis in two months, and on Wednesday fell to Y85.29, within a whisker of a 15-year low.

The sickly euro, by contrast, has recovered sharply, rising above $1.32 on Wednesday to a three-month high. Sterling is now at its highest for six months and approaching $1.60. “If the currency markets were a human being it would be locked up in a lunatic asylum at the moment,” says David Bloom, head of currency strategy at HSBC. “One moment it is extreme joy, the next moment extreme sadness. It’s extraordinary. We’re just swinging violently from one extreme view to another.”

A wave of weak economic data, including disappointing jobs figures, and expectations of further monetary easing by the US Federal Reserve to head off the risk of a double-dip recession have been the main drivers of the dollar’s fall.

Investors fear the US recovery, undermined by anaemic demand in spite of evidence of improving corporate earnings, could be about to peter out or, worse, go into reverse.

The slide in the dollar over the past week, in which it has fallen by more than 2 per cent against a basket of currencies, was triggered by the spectre of deflation. James Bullard, president of the St Louis Federal Reserve, said the US was “closer to a Japanese-style outcome today than at any time in recent history”.

Those comments, and remarks by Fed chairman Ben Bernanke on Monday that there remained a “considerable way to go” before the US made a full recovery have increased expectations of further easing by the Federal Reserve. Fed officials are debating whether to maintain the size of the balance sheet by reinvesting money from maturing government bonds.

Traders say the currency and government bond markets are now pricing in just such a move when the Fed meets on Tuesday. “It feels like you’re in a boxing match, it’s round number nine and they’ve softened you up for a blow,” Mr Bloom says. “If they do something on ‘quantitative easing’ the market will already have got its head around it. They’ll have softened us up.”

As investors pull money out of the greenback, they are betting the recovery in other parts of the world will outpace that of the US. Asian countries, expected to enjoy stronger growth than the debt-burdened west, have enjoyed strong inflows of funds in recent months.

In July, net inflows from foreign institutional investors into the Indian equity market totalled $3.8bn. The Korean and Taiwanese equity markets each received net inflows of more than $2bn last month. These flows have boosted the region’s currencies. The Singapore dollar is flirting with a record high, while the Indonesian rupiah and the Malaysian ringgit have risen to their highest in more than a year.

The conditions are building, too, for a return of the dollar “carry trade”, in which investors take advantage of low US borrowing costs to invest in higher-yielding assets elsewhere. Given the weaker outlook for the country’s economy, US interest rates are expected to stay on hold at least until late 2011. Hans Redeker, head of currency strategy at BNP Paribas, says his bank’s measure of “carry risk” has peaked, an auspicious signal for for carry traders.

In addition, Volatility has also fallen in the past two months, providing the stable conditions needed for a successful carry trade.

One dollar carry trade has involved buying Indonesian bonds. Foreign ownership of Indonesian bonds has risen to a record, while bond yields – which move inversely to prices – have fallen to record lows. Estimating the size of the dollar carry trade is an inexact science. Tim Lee at Pi Economics, a consultancy, says the dollar carry trade may now be worth more than $750bn, approaching the size of the yen carry trade at its peak in 2004-07. A revival of the carry trade would put further downward pressure on the US currency. In the short term, though, the currency’s direction is likely to be determined by the Fed’s action on Tuesday, with traders saying anything short of a move to ease policy further is likely to disappoint the market.

Tomorrow’s US non-farm payrolls data, a closely watched set of jobs figures, will therefore assume even more importance than usual. Consensus forecasts are for a rise in the unemployment rate.

Some investors are speculating that Asian policymakers could support the dollar. The yen’s surge has strengthened the view in the markets that the authorities might react. Yoshihiko Noda, Japan’s finance minister, on Wednesday said the yen’s moves had been “somewhat one-sided”, adding that he was “closely watching market moves”.

But analysts and traders are not expecting the finance ministry to directly buy dollars to weaken the yen, a move it has not made since 2004 – not least because G7 countries have been encouraging exchange rate flexibility, especially in China.

Also, even though on a nominal level the yen is approaching highs it has not seen since 1995, on a real trade-weighted basis it is a different story.

BoJ data compiled by UBS show the real trade-weighted yen exchange rate is far lower than its early 1990s highs.

In the longer term, the success of the dollar carry trade will depend on the US economy remaining weak while the world around it continues to power ahead.

“It is a bit of a tightrope,” says Mr Lee. Any deviation from the current picture of stagnating growth in the US would cause the dollar carry trade to be unwound, pushing the greenback higher, he says. “If you’re a real bull and you think we’re just in the early stage of a recovery you have to assume interest rate rises are going to come sooner. But if we’re going back into severe recession, then we’ll go back into severe risk aversion and the carry trade will be unwound because everyone will be pulling in leverage.”

Mr Redeker at BNP Paribas says: “This is a summer market, this is a carry trade environment ... By autumn, it will be a perfect opportunity to bet against it.”






Intel agrees anti-trust settlement with US
By Richard Waters in San Francisco and Stephanie Kirchgaessner in New York
Copyright The Financial Times Limited 2010
Published: August 4 2010 01:03 | Last updated: August 4 2010 01:03
http://www.ft.com/cms/s/2/53878274-9f53-11df-8732-00144feabdc0.html


US regulators on Wednesday announced a settlement of charges against Intel that they said would go further in limiting the chipmaker’s anticompetitive conduct than earlier moves in Europe and Asia.

The agreement marked the resolution of the most prominent antitrust case brought since the Obama administration took office, although the Federal Trade Commission, which brought the case, is an independent agency.

It is also set to bring down the curtain on a decade-long series of antitrust investigations around the world into how Intel uses its dominance of the PC microprocessor market to restrict competition, particularly from smaller rival Advanced Micro Devices.

Jon Leibowitz, chairman of the FTC, roundly denounced Intel over what he called its “unfair, deceptive and anticompetitive conduct”, and said the settlement would bring quick benefits for consumers.

However, some industry experts questioned whether the regulators would be in a position to enforce some of the more technical aspects of the agreement, leaving doubts about its effectiveness.

Echoing steps already taken by European, Japanese and South Korean regulators, the FTC said the settlement would prevent Intel from threatening penalties against customers that buy chips from other companies, or paying them to buy only its own chips.

Mr Leibowitz said the US regulators had also gone further than their counterparts elsewhere by extending the restrictions on Intel beyond the core processors of computers to also include graphics chips and chipsets, which bundle a number of different chips in a single product.

Among the extra requirements are a stipulation that Intel must use an open industry standard to make it easier for other chipmakers to connect their own products to its chips.












ECB leaves rates on hold for 15th month
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: August 5 2010 12:45 | Last updated: August 5 2010 12:45
http://www.ft.com/cms/s/0/eccd4f14-a06f-11df-a669-00144feabdc0.html


The European Central Bank left its main interest rate unchanged on Thursday at a record low of 1 per cent for the 15th consecutive month.

The decision, at a meeting of the ECB’s governing council in Frankfurt, was expected. Eurozone inflation has picked up recently but at 1.7 per cent in July was within the ECB’s target of an annual rate “below but close” to 2 per cent.

With the economic recovery across the 16-country region remaining weak, inflationary pressures in the pipeline appear firmly under control, and financial markets have not priced in a rise in ECB interest rates until well into 2011.

Extended periods of unchanged interest rates have become part of the ECB’s tradition since it was formed 12 years ago. The main policy rate was left unchanged at 2 per cent for more than two years prior to December 2005, when the ECB last started a policy tightening cycle.

Early last year, as the global economic crisis intensified, the ECB slashed official borrowing costs further and faster than ever before, and also started pumping large amounts of liquidity into the eurozone banking system.

In the US, the Federal Reserve has left open the option of further steps to stimulate the economy, especially if the world slips into a “double dip” downturn later this year. But financial markets still believe the next move by the ECB will be to tighten monetary policy. The eurozone’s monetary guardian has voiced little concern about deflation in continental Europe, and after a tense few months Europe’s monetary union appears to have stabilised.

Eurozone gross domestic product figures next week are likely to show that the region’s economy expanded strongly in the second quarter – possibly faster than the US in the same period – powered by Germany’s industry-led revival.

Nevertheless Jean-Claude Trichet, ECB president, is likely to remain cautious when he gives a press conference on Thursday afternoon. The strengthening euro could curb exports, raising further questions about the sustainability of the eurozone’s recovery. At the same time, the ECB is braced for what could prove a significant US slowdown in the second half of this year and does not expect the eurozone to escape unscathed.










Barclays rises 44% to £3.95bn in first half
By Adam Jones
Copyright The Financial Times Limited 2010
Published: August 5 2010 08:47 | Last updated: August 5 2010 08:47
http://www.ft.com/cms/s/0/29549b6c-a058-11df-a669-00144feabdc0.html


Barclays reported a 44 per cent increase in first-half profit on Thursday, although its results were clouded by second-quarter revenue and profit declines at Barclays Capital, its investment banking arm.

The banking group said pre-tax profit for the first six months of 2010 had been £3.95bn, up from £2.75bn a year earlier and better than analyst expectations. The increase was fuelled by a drop in loan loss charges, which fell by about a third on a year-on-year basis, reflecting the stabilising UK economy.

Adjusted pre-tax profit – a measure that strips out several distorting accounting items – rose 22 per cent to £2.96bn. John Varley, chief executive, said the group’s profit growth amid continued economic and market uncertainty had been “pretty reassuring”.

However, BarCap has been struggling to match its strong revenue performance in the first half of 2009. Its second-quarter top-line income, a revenue measure, was £3.28bn, 38 per cent down on the same period in 2009.

The year-on-year revenue drop had been 26 per cent in the first quarter – a performance that had unnerved investors when its first-quarter figures were published in April.

Meanwhile, BarCap’s underlying pre-tax profit fell by a quarter to £978m in the second quarter, although it still rose 32 per cent to £2.55bn for the first half.

Bob Diamond, Barclays president and head of BarCap, blamed factors including the UK election and the passage of new financial regulation in the US for sluggish investment banking activity in May and June.

Nevertheless, he asserted that BarCap’s revenue performance had been good compared with investment banking peers.

He also said some of the political and economic uncertainties had lifted in recent weeks, making clients less risk-averse. “We have clearly seen in the second half of July more activity in the market,” he said.

A second interim dividend of 1p a share has been announced, making 2p for the first half, compared with no first-half dividend a year earlier.

Barclays shares, which have risen strongly in recent weeks, fell 1.9 per cent to 333.3p in early morning trading on Thursday.








US banks braced for slump in profits
ByFrancesco Guerrera and Michael MacKenzie in New York
Copyright The Financial Times Limited 2010
Published: August 4 2010 21:56 | Last updated: August 4 2010 22:16
http://www.ft.com/cms/s/0/51d50eba-9fee-11df-8cc5-00144feabdc0.html


US banks with Wall Street operations are bracing for a slump in trading profits this year after the third quarter got off to a poor start, with global economic uncertainty and Europe’s sovereign debt woes leading to a slowdown in market activity in July.

Executives said volumes and profitability last month were even lower than during the sluggish second quarter, with hedge funds particularly reluctant to take big bets on equities and debt.

Trading activity picked up a little in recent days after the release of European banks’ “stress tests”. However, deepening fears of a permanent end to the trading boom that supported financial groups’ earnings after the financial crisis are prompting some banks to consider laying off traders.

“July was a miserable month for trading,” one senior banker said. “If August and September don’t rebound sharply, banks will be forced to cut jobs.”

The squeeze in trading profits highlights the rising importance of groups’ consumer and commercial banking operations, whose performance is improving as the economy heals.

Wall Street executives and analysts blamed the poor showing in July both on a fall in trading volumes as small investors, hedge funds and institutions sat on the sidelines, and on a squeeze in margins amid fierce competition among banks.

The lack of activity led many banks to miss internal targets for trading revenues in both fixed income commodities and currencies – a key recent driver of profitability – and equities.

“Across the majority of asset classes and exchanges, volumes in July have receded to generally the lowest level of the year,” said Richard Repetto, an analyst at Sandler O’Neill & Partners. “While historically, activity can begin to slow in July, it is unusual to see an industry-wide retreat in volume like this in an earnings announcement month.”

Federal Reserve data show that corporate bond transactions between Wall Street dealers and customers has been sliding since the end of June, running at $103bn, against $131bn in May.

Market watchers said the fallout from the “flash crash” in US equities markets on May 6, fears over the global economy and the run-up to Europe’s stress tests prompted investors to move away from riskier assets.

John Brady, senior vice-president at MF Global, said: “A lot of the drop we have seen in trading volumes during June and July follows violent changes in markets during the preceding months.”

Retail investors have also shunned stocks. US equity mutual funds have been hit by 12 straight weeks of outflows totalling $40.7bn, says the Investment Company Institute.