Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Dollar and Treasuries slip after jobs data
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 6 2010 08:44 | Last updated: August 6 2010 13:38
http://www.ft.com/cms/s/0/a2d0b6ec-a125-11df-bdea-00144feabdc0.html


Friday 13.35 BST. Markets took a swift turn away from risk after the US job report showed a larger-than-expected loss of jobs.

The economy lost 130,000 jobs in July, more than the 125,000 jobs expected. That was offset by only 71,000 private jobs created, versus an expectation of 90,000. The unemployment rate, however, held steady at 9.5 per cent.

In the moments following the report, the US dollar dipped to Y85.43 against the yen, again nearing its 15-year low. Benchmark US Treasury yields fell to near their year-low at 2.87 per cent. Futures for the S&P 500 index also dipped, showing an open down 0.9 per cent.

The FTSE All-World stock index is still up 0.1 per cent, thanks to rising prices in Europe after solid gains in China. Government bonds are being sold off as investors switch to riskier assets such as stocks and oil, and the yen is softer as views on the US economy stabilise.

Though the top line was not supportive of risk-taking, the average workweek, however, did increase, suggesting that economic activity overall was not slowing.

“The key aspect of the report may once again be the average workweek, expected to be unchanged,” said Marc Otswald, strategist at Monument Securities. “If demand is tailing off ... there must be some risk that this may show up in a slightly softer profile to weekly hours.”

The report will be most carefully watched as an indicator of how likely it is that Ben Bernanke, US Federal Reserve chairman, will advocate a loosening of monetary policy in next week’s Fed rate announcement. Mr Bernanke in the past has said that consumer spending will need to take over from business investment as the economy’s key driver going forward. Jobs, for obvious reasons, are critical part of spending.

“Given the increased focus on the possibility that the Federal Reserve may resort to further policy action to counter a weak jobs market, the risks around Friday’s payroll release seem asymmetric. A soft report could trigger a heavier round of buying of rates,” said Roman Maranets, macro equity strategist at Goldman Sachs.

Trading volume has overall been light, as traders prepared for the US report. Only news that China’s stress tests, confirmed today to be testing a sharp decline in property prices, will extend beyond banks to cement and steel companies gave a small lift to stocks in Asia and Europe.

But while economic news in those regions has been more encouraging of late, there is still widespread uncertainty. Jean-Claude Trichet, European Central Bank president, said on Thursday that he had not changed his opinion that growth in Europe would be “moderate and uneven”, leaving the ECB’s core interest rate unchanged.

As if to underscore the point, today a report on Germany’s industrial output was disappointing, showing a dip instead of an expected rise, though output is still expanding. But the FTSE Eurofirst 300 index is still up 0.4 per cent, but the euro is flat against the yen and credit-default swaps on European debts are slightly more expensive.

The Market Eye

The reaction to the jobs report will be just as important as the number itself. With markets marking time for the past two weeks, the basic set-up has remained static: Global and US stocks have recovered half of what they have lost since April. Bonds yields, however, are not much higher than their lows for the year, and many benchmarks such as Japanese 10-years and US two-years are at or near record low yields. Nothing has seemed to move them – yet.

If the jobs number is worse than expected, can bonds really fall much further? Will stocks, which have been supported by strong earnings coming amid record low valuations, really give up their gains? Already they have been pricing in a pretty poor outlook; it could hardly be much worse.

And if the number is better than expected, can stocks really gain much with bonds currently pricing in deflation? As James Mackintosh pointed out in the Short View, bond investors have a seriously dim view, already priced below expected inflation. That could be setting them up for a bloodbath – or it could position them as the ultimate umpire of risk appetite.

• Europe. Shares have lost some of their gains at open, though are still trading higher. The broader Eurofirst 300 index opened at 0.7 per cent, and is now up 0.4 per cent. The UK’s FTSE 100 index is up 0.7 per cent, and Germany’s Dax index is up 0.4 per cent.

Italy and Spain reported their GDP growth for the quarter. Both matched expectations, with Italy growing 0.4 per cent and Spain growing 0.2 per cent year-over-year. But they are the laggards of the eurozone, which is expected to grow 0.6 per cent. Traders were unmoved by getting the bad news first. Indices of top companies in Spain and Italy are up only slightly.

Gains are spread widely across sectors, with mostly defensive shares lagging. However, consumer discretionary shares are the leading losers, with marked weakness in beer and spirits groups such as Diageo and Heineken. Some fear that the run-up in wheat prices – and subsequent shortage following Russia’s ban on exports – could lead to higher costs for substitutes like corn and barley.

• Asia. Trading was mixed as the FTSE Asia-Pacific stock index rose 0.3 per cent. Japan’s Nikkei 225 average fell 0.1 per cent after being one of the best-performing markets in the world on Thursday. The Nikkei has been closely tied to the yen of late, because a more expensive yen weighs on Japan’s critical export sector companies.

Chinese stocks gained after some conditions of the proposed bank “stress tests” were released. They include sharp 60 per cent drop in the potentially overheating property market.

The mainland Shanghai composite index added 1.4 per cent, and Hong Kong’s Hang Seng index rose 0.6 per cent. Hutchison Whampoa, the conglomerate run by Li Ka-Shing, topped forecasts and gave an upbeat view on the rest of 2010. The Chix index, a volatility gauge similar to the Vix in the US, fell to its lowest level since 2007.

“Fears in the Chinese market have been eased as international investors respond to signals that the central government is retreating from moves made earlier in the year to cool the local economy,” said Jonathan Masse, senior portfolio manager at AlphaShares.

Australia’s S&P/ASX 200 index was flat in spite of the Reserve Bank of Australia stating that economy “has performed broadly in line” with expectations, led by investment from mining and commodity companies. The RBA did warn, however, that “uncertainty about the global economy has risen”, and did not raise its forecasts.

• Currencies. The yen was weaker, after gaining slightly on Thursday, down less than 0.1 cent against the dollar to Y85.90. It has been volatile since rising beyond Y86 to the US dollar, within just 1 yen of a 15-year high. Traders believe that beyond Y85, Japan’s central bank could justify intervention to slow the currency’s rise.

Risk appetite was muted, judging by commodity-linked currencies. Against the US dollar the Australian dollar was down 0.1 per cent , as was the Canadian loonie. The New Zealand dollar was up just 0.1 per cent against the yen.

The euro is up 0.1 per cent to $1.3162 to the dollar. The pound is softer by 0.2 per cent, to $1.5856. Both were were flat on Thursday after the ECB and BOE held steady on interest rates, a somewhat disappointing outcome after improving economic indicators had raised limited hopes of a round of tightening.

• Debt. Benchmark “safe-haven" government debts yields are slightly higher. The Japanese 10-year bond is up 2 basis points, now several points off its lowest yield since 2003, reached earlier in the week as fears for global growth escalated.

Ten-year US Treasury bond yields are up 1 basis point and German Bunds up 2 basis points, though both hovering near their low points for the year. Bond yields have generally not kept up with rising stock prices, suggesting a more bearish outlook. Fresh supply coming next week in the US in the form of Treasury auctions could also drive pricing action.

“Peripheral” European debt yields were lower after Italy reported GDP growth of 1.1 per cent in the second quarter versus last year, matching expectations. That overcame worries after Romania cancelled an auction of debt when the market asked for a much higher interest rate.

• Commodities. Benchmark crude trading was shallow and volatile. It is now down 0.3 per cent to $81.75. Oil has defied the weakness in equity markets thus far in August, hanging on to its highest level since early May, above $81.

Crude has been supported by growth hopes, but supply issues loom. Prices for shipping oil have dropped to their lowest since last December, according to MF Global, as demand continues to drop from its June 4 peak.

Gold has recently regained its status as the ultimate safe haven. The precious metal is up 0.1 per cent, to $1,194, still off the $1,200 mark it reached early in the week.

Follow the Global Market Overview on Twitter at @telisdemos






US economic adviser Romer steps down
By Edward Luce in Washington
Copyright The Financial Times Limited 2010
Published: August 6 2010 03:19 | Last updated: August 6 2010 03:19
http://www.ft.com/cms/s/0/849fa864-a0fc-11df-badd-00144feabdc0.html


Christina Romer, head of the Council of Economic Advisers, on Thursday became the second prominent member of Barack Obama’s economic team to resign following last week’s departure of Peter Orszag, the White House budget director.

Ms Romer, who will return to her job teaching economics at the University of California at Berkeley, said in a statement on Thursday evening that it had been “the honour of a lifetime” to serve Mr Obama.

The departing CEA chief is strongly rumoured to be under consideration to replace Janet Yellen as the next head of the San Francisco Federal Reserve. Ms Yellen was recently nominated to be vice-chairman of the US Federal Reserve in Washington.

Ms Romer, who also came to prominence as a frequent defender of the Obama administration on Sunday morning TV shows, cited family reasons for her decision.

She was a key part of the daily economic briefing that Mr Obama received, which also includes Tim Geithner, the Treasury secretary, and Lawrence Summers, director of the National Economic Council.

“Christy Romer has provided extraordinary service to me and our country during a time of economic crisis and recovery,” Mr Obama said in a statement. “While Christy’s family commitments require that she return home, I’m gratified that she will continue to offer her insights and advice as a member of my Economic Recovery Advisory Board.”

Ms Romer’s departure is likely to add to the sense of flux in Mr Obama’s economic team, which is spearheaded by Mr Summers, who is by far the most experienced economic figure in the administration. Aides to Mr Summers say he has no plans to change jobs.

In a statement issued to the Financial Times, Mr Summers said: “Christy has been an extraordinary friend and colleague at the White House. From jobs and recovery to health care and financial reform, she has been central to everything the Administration has done in the economic area. Our loss is the economics profession’s gain. I will look forward to drawing on her advice.”

Her departure comes at an awkward moment for Mr Obama who is struggling to convince a disenchanted American electorate that he is on the side of Main Street rather than Wall Street. With lacklustre July jobless numbers expected to come out on Friday morning, Mr Obama’s administration faces a rocky few months in the build-up to the November mid-term elections.





Wheat prices surge after Russia ban
By Javier Blas and Jack Farchy in London and Catherine Belton in Moscow
Copyright The Financial Times Limited 2010
Published: August 6 2010 08:43 | Last updated: August 6 2010 08:43
http://www.ft.com/cms/s/0/b064cd1c-a129-11df-bdea-00144feabdc0.html


Wheat prices extended their rally on Friday, surging another 6 per cent, after Russia on Thursday imposed a ban on grain exports, triggering panic in commodities markets and sending wheat prices to their highest level since the 2007-08 global food crisis.

Wheat prices were heading towards a 25 per cent increase on the week, opening the door to a sharp increase in the price of everyday staples such as bread and flour.

The market was frenetic on Friday amid talk of contract defaults following the ban, and as food companies and importing nations scramble to find alternative supplies.

Vladimir Putin, Russian prime minister, on Thursday announced the ban on all the country’s grain exports, effective within 10 days, after a severe drought devastated crops and wildfires spread across the country.

The move, which caught traders and food producers by surprise, pushed the price of wheat to its highest level in two years and evoked memories of the last time the Soviet Union suffered a catastrophic crop failure in 1972.

“There is full-blown panic in the European grain market,” a senior trader said.

On Thursday, European wheat prices rose more than 12 per cent to hit a peak of €236 a tonne on record trading volumes. US wheat futures jumped by their daily limit to $7.85 a bushel and are up more than 80 per cent since mid-June, the fastest rally in nearly 40 years.

On Friday, US wheat futures extended their rally, adding another 6.4 per cent to $8.35 a bushel, after hitting earlier an intraday high of $8.41 a bushel.

“Bottom line – no sign of a top as yet,” said Richard Feltes at brokerage MF Global in Chicago. “We think wheat end users are still short and at risk for further price gains,” he added, echoing a view widely held among grain traders.

Other trader added prices could continue to move higher next week amid panic buying, but added that from a supply and demand point of view, prices probably have already risen enough. “That does not mean the rally is going to stop,” he added.

The rally is triggering fears that food price inflation could take off and that the world could even suffer a repeat of the 2008 food crisis should the big shortfall in wheat output persist. “Soaring grain prices have brought food inflation back to centre stage,” said Joachim Fels of Morgan Stanley in London.

Prices of other crops including barley, corn and rapeseed also jumped sharply.

Shares in some of the world’s largest food companies tumbled on fears they would struggle to pass on all the increased costs of buying wheat to millions of households already suffering the effects of the financial crisis. However, several companies have already said they plan immediate price rises on goods, such as bread and biscuits.

Unilever, the British consumer goods group, dropped 5.2 per cent, while General Mills, one of the world’s largest food companies, was 2.5 per cent lower. Nestlé fell 2.1 per cent. But the shares of trading companies such as ADM and Bunge surged on the prospect of more businesses exporting wheat from the US.

On Thursday, Mr Putin told a cabinet meeting: “I think it would be expedient to introduce a temporary ban on export grains and other agricultural goods.”

“We cannot allow an increase in domestic prices and we need to maintain the number of cattle.”

The ban would take effect from August 15 and last until December 31, a spokesman for Mr Putin said.

The worst drought in more than a century in the Black Sea region has led to widespread alarm. Forecasts for the Russian grain crop have been falling daily, with the agriculture ministry’s most recent projection at 70m-75m tonnes, down from 85m tonnes a fortnight ago.

Last year, the harvest was 100m tonnes.

Traders at Glencore, the world’s largest commodity trading company, on Tuesday warned the crop could fall to about 65m tonnes.

Cargill, the world’s biggest trader of agricultural commodities, criticised Moscow’s move. “Such trade barriers further distort wheat markets by making it harder for supplies to move from areas of surplus to areas of deficit, and by preventing price signals from reaching wheat farmers,” it said.

Arkady Zlochevsky, president of the Grain Union lobby group, said that the swift imposition of the ban risked undermining Russia’s reputation as a reliable supplier.

Mr Putin said the government would disburse Rbs35bn ($1.17bn) in subsidies to agricultural producers. He added that Russia would use its grain stores for distribution without auction to regions in need.





Italian growth edges up in second quarter
By Guy Dinmore in Rome
Copyright The Financial Times Limited 2010
Published: August 6 2010 12:15 | Last updated: August 6 2010 12:15
http://www.ft.com/cms/s/0/a5063e5a-a143-11df-bdea-00144feabdc0.html


Italy’s economy is continuing to emerge slowly from its worst post-war recession as figures released on Friday showed that GDP grew 0.4 per cent in the quarter to June, from the first three months of 2010.

Istat, the official statistics agency, said second-quarter GDP was up 1.1 per cent year on year, in line with forecasts. The centre-right government forecasts 1.1 per cent growth for 2010. First-quarter GDP also grew by 0.4 per cent.

Italy is the first major eurozone economy to release second-quarter figures, and its results indicate that a broader recovery is continuing. Economists said Italy, with a large export sector, is benefiting from the faster recovery in Germany, one of its main markets.

Economists said consumer demand remained weak in Italy but companies were rebuilding inventories. Istat said industrial production in June was 0.6 per cent up on May and 8.1 per cent ahead of a year ago. It did not give a complete breakdown of GDP in its preliminary report.

Some economists have expressed concern that the €25bn austerity package approved by parliament last month, covering 2011 and 2012, will damp GDP growth. The government denies this and says it is committed to cutting back its budget deficit, which a spokesman said on Tuesday would fall to 4.6 per cent of GDP by the end of 2010.









RBS reports first-half profit of £9m
By Adam Jones
Copyright The Financial Times Limited 2010
Published: August 6 2010 08:52 | Last updated: August 6 2010 08:52
http://www.ft.com/cms/s/0/a0ce8702-a125-11df-bdea-00144feabdc0.html


Royal Bank of Scotland on Friday posted a small profit for the first half of 2010 as a decline in loan loss charges offset a second-quarter slowdown in its investment banking arm.

The state-controlled bank said it made a net profit of £9m in the first six months of 2010, a swing back from a loss of £1.04bn in the first half of 2009. The rebound reflected a year-on-year drop in impairment losses on loans and securities, which fell by a third to £5.16bn.

However, impairments in its core business were actually slightly higher in the second quarter than in the first, following a deterioration in the quality of the Irish commercial property loan portfolio belonging to its Ulster Bank subsidiary.

RBS’s profit was also aided by a big reduction in credit market investment losses and a £553m gain on the redemption of some of its debt.

Stephen Hester, RBS chief executive, blamed economic and market uncertainty for the slowdown in its investment banking arm, where underlying revenues and profit in the second quarter were both down by roughly a third from the first quarter.

RBS also revealed that the UK financial regulator last month launched a probe into the sales of a bond fund by its private bank, Coutts. The investigation relates to the sale of the ALICO (American Life Insurance Company) Premier Access Bond, which was issued by US insurer AIG.

Coutts has come under fire from some of its clients, including Keith Mills, who founded the Air Miles loyalty scheme, over the sale of investments issued by AIG, which had to be rescued by the US government during the financial crisis.

“It led everyone from companies to investors to sit on their hands,” he said, adding that investment banking revenues were by their nature volatile.

But unlike Barclays, which said on Thursday that it had seen a pick-up in investment banking activity in the second half of July, RBS said it had seen no abatement of the sluggish conditions.

Mr Hester said: “The trends in July suggested the subdued trends of the second quarter were continuing.”

RBS said it remained cautious in the near term about the state of the UK economy but Mr Hester played down the likelihood that the country might slip back into recession.

Shares in the banking group, which have been strong performers in recent weeks, rose 1.3 per cent to 52.65p in early morning trading on Friday.






AIG adjusted profits beat expectations
By Suzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: August 6 2010 14:26 | Last updated: August 6 2010 14:26
http://www.ft.com/cms/s/0/4ce028c6-a157-11df-bdea-00144feabdc0.html


American International Group, the troubled insurer that was bailed out by the government, on Friday reported a $2.7bn second-quarter loss, or $3.96 per share, compared to to net income of $1.8bn, or $2.30 common share, in the second quarter of 2009.

The company’s losses came mainly as a result of writedowns on operations it plans to sell to MetLife.

Excluding those charges of about $3.3bn, AIG would have earned $1.3bn or $1.99 per share, compared with $1.1bn in the second quarter of 2009. Analysts expected earnings of 99 cents per share, according to Thomson Reuters. AIG shares rose 2.4 per cent in pre-market trading.

Continuing insurance operations earned $2.2bn. The Mortgage Guaranty operating unit earned $226m and the Asian Life Assurance unit, known as AIA, earned $604m. Fair value gains on Maiden Lane III were $358m.

AIG said it saw improvements in other businesses it plans to keep, including Chartis, its property and casualty division, and the financial services unit, which was at the heart of the company’s financial troubles.

AIA, whihc was to be sold to Prudential until the deal fell apart in June, was also profitable. AIG now plans to spin off the unit through a public stock offering.

Robert Benmosche, AIG’s president and chief executive, said: “AIG’s continuing insurance operating results remain solid, while the company continues to execute on its restructuring plans and prepares for separation from the US government.”



Allianz profits from consumer appetite
By James Wilson in Frankfurt
Copyright The Financial Times Limited 2010
Published: August 6 2010 09:58 | Last updated: August 6 2010 09:58
http://www.ft.com/cms/s/0/ffa3c242-a12f-11df-bdea-00144feabdc0.html


Returning consumer demand for life insurance and other investment products helped Allianz, Europe’s largest insurer, increase sales and operating profits in spite of the shadow cast during the first half of the year by the eurozone sovereign debt crisis.

The German group said consumers were “showing an increased appetite for investment products in general” but said financial service providers faced an uncertain environment, with markets “likely to remain susceptible to noise”.

“Our base scenario is that in the coming years the necessary consolidation efforts of the highly indebted countries – not only those within the Euro area, but also outside – will weigh on the economic prospects and as a consequence growth will be more moderate than in the years before the crisis,” Allianz told shareholders.

Allianz’s 23 per cent increase in operating profits to €2.2bn ($2.9bn) in the second quarter of the year exceeded expectations and Michael Diekmann, chief executive, said the company remained on track to meet its operating income target of between €6.7bn and €7.7bn this year.

Revenues grew by 14.5 per cent to €25.4bn in the quarter, helped by stronger life insurance sales and a 43 per cent jump in the asset management business, although sales in the largest property and casualty insurance business were flat.

Quarterly operating profits in property and casualty insurance rose 28 per cent to €1.1bn on improved underwriting and investments. However, life and health fell 28 per cent to €713m. Allianz’s asset Management segment more than doubled its quarterly operating profit to €516m.

Net income in the quarter fell from €1.9bn to €1.1bn. In 2009 Allianz earned €666m from selling shares in the Industrial and Commercial Bank of China, compared with €115 million in the second quarter of this year. Non-operating income was also affected by a €264m fall in the value of warrants held in The Hartford, the US insurer in which Allianz invested in 2008.

Allianz said its sovereign bond exposure in Portugal, Ireland, Greece and Spain – countries at the centre of concerns about eurozone sovereign debt – was € 9.4bn at the end of June, with unrealised losses of €900m. Allianz’s total investments in sovereign and other debt are almost €400bn.

Shares in Allianz rose 1.1 per cent in early trading to €91.20.






Washington Post quadruples profits
© Reuters Limited
August 6, 2010
http://www.ft.com/cms/s/0/f5193a4a-a15d-11df-bdea-00144feabdc0.html


August 6 – The Washington Post Company’s quarterly profits quadrupled, driven by strength in its broadcasting and education segment.

For the second quarter, the newspaper publisher’s net income from continued operations rose to $94.2m, or $10.25 per share, from $21.2m or $2.25 per share, a year ago.

Net income for the second quarter excludes Newsweek results.

Earlier this week, the company said it would sell Newsweek to 91-year-old audio equipment magnate Sidney Harman, who promised to retain most of the US weekly’s 350 employees and give it a couple of years to reverse losses.

Revenue grew 11 per cent to $1.2bn. Revenue for the television broadcasting division increased 24 per cent to $82.6m.

Revenue at its educational unit rose 15 per cent to $747.3m.

The newspaper publishing division saw its revenue rise 2 per cent to $172.7m during the quarter.

Shares of the company closed at $408.61 Thursday on the New York Stock Exchange.





Fannie Mae reports lower quarterly loss
BySuzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: August 6 2010 03:27 | Last updated: August 6 2010 03:27
http://www.ft.com/cms/s/0/efcdac7e-a0ea-11df-badd-00144feabdc0.html


Fannie Mae reported its smallest quarterly loss in three years on Thursday, suggesting it will need less government aid than had been expected.

The company which, along with Freddie Mac, provides financing for nearly 90 per cent of home loans being issued in the US, lost $1.2bn in the second quarter, compared with a $11.5bn loss in the first quarter. In the second quarter of 2009, Fannie lost $14.8bn.

The narrower loss is a rare positive for the struggling housing market and could make it easier for Barack Obama’s administration to tackle reform, analysts said. The overhaul of the agencies is expected to be the next big battle in Washington, with the administration scheduling a conference for August 17 to discuss the issue.

“For more than a year, Treasury secretary Timothy Geithner has been asking for patience on housing finance reform so that the discussions don’t disturb the fragile state of the mortgage market,” said Jim Vogel of FTN Financial. “This is the first big step towards that stability.”

Fannie Mae’s losses could increase if house prices drop further. The company said it expected home prices to decline slightly for the remainder of the year before stabilising in 2011.

Newer loans are performing far better than loans issued during the credit boom from 2005 to 2008, the company said. Those loans continue to account for the majority of Fannie’s losses, for which the company has set aside reserves. New vintages, underwritten in 2009 and 2010, are going bad at the slowest pace in more than a decade, Fannie said.

Fannie Mae’s provision for credit losses plus foreclosed property expenses declined to $4.9bn from $11.9bn in the first quarter, mainly as a result of those slower delinquency rates, which totalled 4.99 per cent as of June 30, compared with 5.47 per cent as of March 31.

The company added it was losing less on each loan that defaulted and that a change in its computer model showed it had already set aside enough money to cover any shortfalls.

Fannie and Freddie were taken over by the government in 2008. Since then, the companies have accepted $145bn in taxpayer aid. As part of the arrangement, they are required to pay dividends to the Treasury, which for Fannie, totalled $1.9bn in the quarter. Partly to continue meeting those dividend payments, Fannie requested a further $1.5bn from the Treasury during the quarter, but that is far less than the $8.4bn the company received at the end of the first quarter.