Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Stocks sell off ahead of Fed meeting
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 10 2010 08:53 | Last updated: August 10 2010 15:15
http://www.ft.com/cms/s/0/bfc81c8e-a44c-11df-abf7-00144feabdc0.html


Tuesday 15.00 BST. Stocks are lower, commodities are falling and the dollar is rising as markets prepare for a potential disappointment if the US Federal Reserve decides to hold steady at its monetary policy meeting later on Tuesday.

A preview for the market came earlier, when the Bank of Japan made no change to its monetary policy, sending Asian markets tumbling. The BoJ, under pressure of late as a rising yen has raised fears for Japan’s export-centric economy, neither added liquidity to the economy or changed its economic outlook at its policy meeting earlier on Tuesday.

Stocks are lower across the globe, as investors had come to hope that central banks would help stimulate a hot summer’s flagging global economic recovery. The S&P 500 index has opened bracingly lower, now down 1.2 per cent, bringing the FTSE All-World stock index to a 1.6 per cent decline on the day.

“Markets have been increasingly pricing in additional quantitative easing measures as soon as today,” said Jim Reid, strategist at Deutsche Bank. “The worst near-term development for markets is thus likely to be a meeting that suggests that no additional measures are currently needed.”

There was also disturbing economic news in China, with a report showing that its trade surplus surged in July to an 18-month high, amid weak domestic demand. Shanghai shares had their worst performance since June.

The dollar rallied against the euro and pound, and to a lesser extent against the yen. The market’s steep short position against the greenback is unwinding as falling expectations of a cut in rates decreases the potential carry yield for the dollar.

Bond markets, however, have been hesitant as traders attempt to suss out exactly what the Fed might do at its afternoon US meeting. It is widely speculated that it could buy bonds – that’s “quantitative easing” – in order to inject liquidity into the banking system, either outright with new money or by rolling over proceeds from maturing securities it purchased earlier.

The emerging consensus, however, is that the Fed may begin to signal such a shift is coming – but won’t actually do anything until later in the year.

“Market opinion appears to suggest that on balance, we may not find out today, but the consensus does appear to favour some renewed policy stimulus in the months ahead,” said Neil Mellor, currency strategist at BNY Mellon in London.

Markets have set up for the Fed meeting by sending 10-year and 5-year Treasuries to their lowest yield for the year, betting that the US central bank would buy middle-dated bonds to, in the words of James Bullard, a regional Fed president, halt a deflationary “Japanese-style outcome”.

But Asia’s decline in equities following the BoJ decision was paired with a sell-off in Japanese bonds. Typically bonds would rally as investors sell risky assets and buy “havens”. Yet bond traders had been preparing for the possibility that the BoJ would purchase bonds in a bid to put cash to work in the economy.

US bond traders may now be facing a Japanese-style outcome of their own.

“While the statement will fundamentally support the current low level of yields, the market might be a bit disappointed when the Fed fails to announce further easing. Hence, the risk-reward is for higher yields going into the meeting,” said Signe Roed-Frederiksen, senior analyst at Danske Bank.

• Europe. UK data are rolling in ahead of the Bank of England’s own big day, the release of its inflation report on Wednesday. Home prices dipped for the first time in a year in July but the trade balance narrowed in June to the lowest level in four months. The BoE is anticipated to raise its inflation forecast but cut growth predictions. The UK’s FTSE 100 index is outperforming Europe slightly, falling 0.6 per cent.

The broader FTSE Eurofirst 300 index is down 1.3 per cent, with nearly all sectors tumbling, led by a decline in mining companies. A disappointing earnings report and profit warning by Tui Travel, the holiday bookings group, raised fears for the consumer sector and knocked other tourism groups such as InterContinental Hotels and Thomas Cook. Germany’s Dax is also lower by 1.1 per cent.

• Asia. Hopes for China’s economy had helped mainland stocks rally to their highest level in months in recent weeks. However, a big disappointment landed today, when China’s imports were reported to have increased by only 22.7 per cent in July – a big number, but well behind the 53 per cent growth in June.

China’s mainland Shanghai Composite index tumbled 2.9 per cent, dropping the index to its lowest level of the month. Hong Kong’s Hang Seng index was down 1.5 per cent. For both, it was the worst-one day drop since late June.

The rest of the region was also knocked by the BoJ disappointment. Singapore’s central bank also forecast growth to be flat in the second half of the year. The Nikkei 225 average fell 0.2 per cent. Australia’s S&P/ASX 200 index was also down 1.2 per cent, and India’s Sensex fell 0.3 per cent.

• Currencies. Markets were broadly selling risk, as measured by commodity and carry-trade pairs. The Australian and Canadian dollars are 1 per cent lower against the US dollar. The New Zealand dollar and South African rand are down 1.1 per cent against the yen.

However, the yen is growing weaker against the dollar, dropping 0.2 per cent to Y86.13. Earlier it was stronger by 0.3 per cent, to within 1 yen of its 15-year low against the greenback. The yen-dollar trade stands to unwind quickly if the Fed disappoints, however, with huge short positions accumulating against the dollar. Covering those shorts would see the yen tumble sharply.

The euro and pound continued to dip from four-month highs, adding to Monday’s losses. The euro was down 0.8 per cent against the yen, to Y112.73 and down 1 per cent against the US dollar to $1.3091. The pound slipped 1.2 per cent, to $1.5714 against the greenback.

• Debt. Bonds were generally flat as investors set up for the US Fed’s decision, which would have a large effect on the Treasury market. Ten-year US Treasury yields are down 1 basis point to 2.81 per cent, a fresh 2010 low. Two-year bonds were up 2 basis points, however, off their record lows. The flatter curve at the front suggests diminished expectations of near-term rate hikes.

The yield on the Japanese government 10-year bond rose 2 basis points to its highest mark since mid-July, at 1.04 per cent. It has since fallen to trade flat on the day.

The pound can point to a poorly-bid auction of long-dated UK gilts. The bid-to-cover ratio – a measure of investor demand – dropped to 1.56, from 1.87 in the previous auction. Gilts have been highly supported, and a key driver of the pound, as easily tradable haven bonds in recent months. Ten-year Gilts were up 2 basis points to yield 3.26 per cent.

• Commodities. Benchmark crude oil, after paring its gains late on Monday, is down 2.5 per cent in this session to $79.43 a barrel. Analysts said it could fall lower on China’s disappointing import news, but was supported for the time being ahead of US inventory data later today. Overall commodities also dipped, with the Reuters-Jefferies CRB index falling 1.1 per cent.

Gold has served as a gauge of the likelihood of paper money flooding into the economy as central banks stimulate their economies. It is at its low for the day, down 0.6 per cent to $1,192 an ounce, suggesting a decreasing view of inflation risk.

Wheat prices are down 1.3 per cent, as the threat of food inflation driven by a shortage of wheat in Russia eases slightly.

The Market Eye

With the pound possibly coming apart – down 1.2 per cent today, now having given up all its August burst of gains following a weak Gilt auction – and the euro falling too, there’s a strong chance the market is setting up for a bout of European weakness. August and the latter half of July have been very good for investors seeking European returns. But peripheral European spreads have shot back out after narrowing for the past week. CDS rates, which price the cost of insurance against default, are rising. Today, Irish 2-year bond yields are up 22 basis points, with swaps adding 15bp, after the largest bank warned of bad loans piling up. European financials, whose recovery have underpinned the euro, are becoming riskier too, markets say. The closely watched credit-default swap measure for banks, Markit’s iTraxx Senior Financials index, has ticked up to pre-stress tests levels, rising 4 basis points today to 125.5 bp. With the Fed’s “will they go lower saga?” nearly over, traders may becoming less endeared to European assets.

Follow the Global Market Overview on Twitter @telisdemos






Wall St turbulence hits big US banks
By Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: August 9 2010 19:28 | Last updated: August 9 2010 19:28
http://www.ft.com/cms/s/0/2ce46cc0-a3e2-11df-9e3a-00144feabdc0.html


Goldman Sachs and Morgan Stanley each suffered at least 10 days of trading losses in the second quarter, underlining how turbulent markets have cast a pall on Wall Street since April.

The banks’ trading results deteriorated sharply from the first three months of the year, before uncertainty about the US economy, European sovereign debt and the fate of new financial industry regulation sapped investors’ confidence.

Goldman’s traders had lost money on 10 separate days during the second quarter, the bank disclosed on Monday in a filing with the US Securities & Exchange Commission.

On three occasions, they posted shortfalls of at least $100m. Goldman earned at least $100m on 17 days.

The bank’s traders, along with their counterparts at JPMorgan Chase, made money on every single business day during the first quarter, a first for each.

Goldman’s trading desk recorded a profit of at least $25m on each of that quarter’s 63 working days, making more than $100m a day on 35 occasions.

The first quarter is traditionally Wall Street’s strongest, providing up to one-third of the sector’s annual profits, and market volatility would push many corporate and institutional clients to the sidelines not long after the next period began.

Goldman said last month that revenue from trading and principal investing had tumbled during the second quarter, led by an 89 per cent decline in equity trading. The bank suffered an uncharacteristic blow-up earlier in the period, when it could not hedge against exposures to stock market turbulence in time to avoid losses.

In Monday’s filing, Goldman also confirmed that both the UK Financial Services Authority and Finra, the US securities industry’s self-regulating body, were investigating whether the bank had properly disclosed that it had been the target of an SEC probe into its mortgage-backed securities business. Finra declined to comment.

Last month Goldman settled the SEC’s charges that it had misled investors in a collateralised-debt obligation, agreeing to pay a $550m penalty.

Goldman reported revenue of $6.55bn from its trading and principal investing businesses during the second quarter, compared with $10.8bn in the same quarter one year earlier.

Morgan Stanley’s traders lost money on 11 days during the second quarter. The bank reported losses of between $50m and $75m twice, but never lost more than $75m on any one day.

Its traders posted gains of at least $100m on six days.

In the first period, Morgan Stanley’s trading desks recorded daily losses on four times. They pocketed at least $90m on 16 days. The bank’s sales and trading operations had revenue of $3.66bn during the second quarter, including debt-valuation adjustments, or gains taken to account for widening spreads on Morgan Stanley’s own bonds.

Goldman’s shares have dropped 7.9 per cent since the start of the year, while Morgan Stanley’s are down 7.4 per cent, amid concerns that the regulatory and political backlash against Wall Street will crimp banks’ future profits.






US worker productivity falls unexpectedly
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: August 10 2010 14:54 | Last updated: August 10 2010 14:54
http://www.ft.com/cms/s/0/f70a02e8-a479-11df-abf7-00144feabdc0.html


US productivity fell in the second quarter for the for the first time in more than a year, as output from already squeezed workers stalled amid slowing economic growth.

Labour department figures showed that non-farm worker productivity fell at an annual rate of 0.9 per cent in the second three months of the year after surging by a revised 3.9 per cent in the first quarter. The decline was the first since late 2008 and was unexpected by economists, who expected a small rise.

The data come ahead of the Federal Reserve’s decision over whether to take steps to further stimulate the economy amid growing fears about a double-dip recession. Economists and investors are waiting to see if the Fed will reverse its strategy of shrinking its balance sheet and instead invest in mortgage assets or Treasury bonds.

The recent stretch of accelerating productivity revealed cost-conscious companies trying to produce more while using less labour as the US battled recession.The decline in productivity was the result of workers seeing their hours expand, with output growing at a slower pace amid fragile consumer demand.

“Looking ahead, slower growth in output will prompt companies to continue to focus on aggressive approaches to cost-cutting,” said Joshua Shapiro, chief US economist at MFR. “This will heighten obstacles to a convincing labour market recovery.”

Last week, government figures showed that US non-farm payrolls fell by 131,000 in July thanks to a decline in government employees and weak private sector hiring.

In the second quarter, businesses expanded their workers’ hours by 3.6 per cent while worker output grew by just 2.6 per cent. The jump in hours was the biggest since the beginning of 2006.

The growth in hours could be a healthy sign for future hiring, as companies tend to give existing employees more work before making new hires.

Nariman Behravesh, chief economist at IHS Global Insight, said the decline in productivity was actually positive for the labour force because it meant that employers had exhausted their workers and would begin hiring more aggressively as demand gradually grew.

However, stretched workers continued to cope with weak wages in the second quarter of the year. Hourly pay fell by 0.7 per cent from the first quarter, while from the same period a year ago wages have climbed by just 1 per cent.

Economists at RDQ Economics noted that during the past 10 years productivity grew at an average rate of 2.5 per cent and that lulls were expected after post-recession surges in output.

“On the one hand, faster productivity growth boosts competitiveness and is the source of real wage gains,” said RDQ’s John Ryding and Conrad DeQuadros.

“On the other hand, faster productivity gains raise the bar that real GDP growth must cross in order to generate increases in employment.”

Meanwhile, small businesses are growing increasingly wary of an economic slowdown. The National Federation of Independent Business said on Tuesday that optimism at small companies fell to a four-month low in July as hopes for a swift recovery dimmed.






Freddie seeks $1.8bn from US Treasury
By Suzanne Kapner and Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: August 9 2010 15:52 | Last updated: August 10 2010 02:01
http://www.ft.com/cms/s/0/801221f4-a3c3-11df-a100-00144feabdc0.html


The magnitude of the problems facing the US mortgage market came into stark relief on Monday as Freddie Mac, the home loan group, said it needed an additional $1.8bn from the taxpayer.

The latest request brings the amount of federal aid spent to rescue the company and its sibling, Fannie Mae, to $148.3bn since the financial crisis began.

Analysts expect that amount to double before the housing market recovers some time over the next decade, making the bail-out of Fannie and Freddie the most expensive of the government rescues.

With the Wall Street reform bill now signed into law, the future of Fannie and Freddie – and the ballooning cost of their bail-out – is set to take centre stage in Washington.

Tim Geithner, US Treasury secretary, will lead a conference next week on how to reform US housing finance.

The battle is politically fraught for Democrats as they try to hang on to congressional seats in the November elections.

If they do too little, Republicans can accuse them of standing by while Fannie and Freddie stealthily add to the federal deficits.

Neither company is included in the federal budget, although they were taken over by the government in 2008 and their losses continue to accrue to taxpayers.

Mr Geithner has said that he is loath to take aggressive action to restructure the system while the housing market remains fragile. In the absence of a market for private mortgage-backed securities, the two government-backed agencies are financing more than 90 per cent of the home loans issued today.

Although Fannie’s and Freddie’s losses have been shrinking in recent quarters as the number of loans going into foreclosure has stabilised, neither company is expected to turn profitable until at least the middle of next year.

When factoring in dividends that the companies must pay to the Treasury on senior preferred stock issued as part of their rescue, they will not be profitable “for the foreseeable future”, said Rajiv Setia, an analyst at Barclays Capital.

Their losses could worsen if the US housing market suffers another reversal, a growing concern as economic growth falters.

“This could likely be a temporary respite from bigger losses down the road,” said Mark Zandi, of Moody’s economy.com.

Barclays estimates that Fannie and Freddie have already worked their way through about 75 per cent of their bad loans.

But the stubborn unemployment rate could weigh on homeowners’ ability to pay their mortgages, possibly increasing default rates.

Freddie said it lost $6bn in the second quarter. In the same period a year ago it lost $840m.








Pentagon’s ‘endless money’ era ends
By Daniel Dombey in Washington and Jeremy Lemer in New York
Copyright The Financial Times Limited 2010
Published: August 10 2010 02:51 | Last updated: August 10 2010 02:51
http://www.ft.com/cms/s/0/316ba40c-a40a-11df-a872-00144feabdc0.html


Robert Gates, US defence secretary, on Monday announced what could be the biggest cuts to the Pentagon bureaucracy since September 11, as he declared that the era of “endless money” had come to an end.

Mr Gates announced cuts of almost 30 per cent on outside contractors, and curbs on military intelligence agencies and his own staff, as well as the proposed abolition of a military command and a reduction in the ranks of generals and admirals in Europe and beyond.

The cuts would lead to the loss of thousands of jobs but could be fiercely resisted in Congress.

“The culture of endless money that has taken hold must be replaced by a culture of savings and restraint,” Mr Gates told a press conference. But he added: “My greatest fear is that in economic tough times that people will see the defence budget as the place to solve the nation’s deficit problems, to find money for other parts of the government.”

The US’s looming fiscal crunch is almost certain to end the breakneck expansion in military expenditure that has nearly doubled the base defence budget in 10 years to $549bn (€414bn, £345bn) for 2011. When the wars in Iraq and Afghanistan are taken into account, total spending is more than $700bn a year.

Although he did not specify a figure for total savings from his latest move, the Pentagon chief’s goal is to find enough savings from reduced overheads to increase core defence spending by 2 to 3 per cent a year with only a 1 per cent annual rise in the overall budget.

Painting a dark picture of the global landscape, Mr Gates said slashing the budget overall would be “disastrous” at a time when the world was becoming more unstable.

Among his announcements, Mr Gates said he would propose the scrapping of the US Joint Forces Command, which employs 2,800 military and civilian officials, and 3,000 contractors at a cost of at least $240m a year. He added he would close the Pentagon’s $340m Business Transformation Agency.

The defence secretary announced spending cuts of 10 per cent a year for the next three years on private sector contractors, who account for 39 per cent of total workforce costs, not including contractors in Iraq and Afghanistan.

Mr Gates expects the Pentagon to thin down senior positions in parts of the world such as Europe, where cold war command structures remain in place, leading to the elimination of at least 50 posts reserved for generals or other top military officials and 150 civilian posts over the next two years.

He announced a freeze over the next three years in the number of positions in his own office and in defence agencies and combatant commands, as well as reduced expenditure on advisory studies for the Department of Defence and on intelligence contracts.

The announcements form part of a broad push by Mr Gates to restrain and reallocate spending. Last year he cut high-profile projects such as new orders of the F22 fighter jet and in June ordered his services to find $100bn of savings over the next five fiscal years.








Skype begins move to list on Nasdaq
By David Gelles in San Francisco
Copyright The Financial Times Limited 2010
Published: August 9 2010 15:19 | Last updated: August 10 2010 06:21
http://www.ft.com/cms/s/2/71bfbbb4-a3c0-11df-a100-00144feabdc0.html


Skype has filed for an initial public offering, setting up what could be one of the biggest technology IPOs of the year.

The move would complete a rapid journey for the company, which less than a year ago was a subsidiary of Ebay.

Shares will be listed on the Nasdaq later this year, according to a filing with the Securities and Exchange Commission.

Skype’s document says it plans to raise up to $100m (£63m) in the offering. But the final sum, which could be much higher, will depend on the offer price and amount of equity.

The company traded hands last year at a valuation of $2.7bn and says its performance has improved since then.

Ebay sold Skype last November after a series of legal disputes between Skype’s management, its founders and Ebay. In the end, Ebay received $1.9bn for the company and retained a minority stake, short of the $2.6bn it paid for the company in 2005.

The new owners included Silver Lake Partners, the Canada Pension Plan Investment Board, and Andreessen Horowitz, a venture firm led by Netscape founder Marc Andreessen.

Skype’s founders, Niklas Zennstrom and Janus Friis, also joined the investment group after suing with claims that their company, Joltid, retained Skype’s key technology.

In the year to June 30, the company’s registered users rose from 397m to 560m. But most use the service for free. Just 8.1m pay, and those who do are expected to spend an average of $96 each this year

“We believe the scale, global distribution and growth of our user base provide us with powerful network effects, whereby Skype becomes more valuable as more people use it, thereby creating an incentive for existing users to encourage new users to join,” the company said in its filing.

Skype, which last year became the largest carrier of international calls, generated $406.2m of revenues in the first six months of 2010 but net income of just $13.1m.

To improve margins, Skype said it would focus on expanding its services for businesses and its advertising and licensing.

“We will continue to develop new monetisation models for our large connected user base,” it said. “We currently generate a small portion of our net revenues through marketing services (such as advertising) and licensing, which we expect will grow as a percentage of our net revenues over time.”

Skype’s filing comes a week after Demand Media filed for its own IPO, and could signal an opening in the long-stagnant market for public offerings.

Goldman Sachs, JP Morgan and Morgan Stanley are underwriting the Skype IPO. Citi, Credit Suisse and others are also taking part.







China trade surplus widens further
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: August 10 2010 06:40 | Last updated: August 10 2010 08:18
http://www.ft.com/cms/s/0/0d5d0d32-a43f-11df-abf7-00144feabdc0.html


China’s trade surplus jumped in July to its highest level in 18 months, raising new questions about whether the country’s currency remains undervalued despite government efforts to introduce a more flexible exchange rate.

The trade surplus for July increased to $28.7bn, well ahead of the $20bn recorded the month before and significantly higher than analyst forecasts, according to data released on Tuesday.

The pace of increase in exports actually fell last month to 38.1 per cent year-on-year, down from 43.9 per cent in June. However, import growth slowed even more, moving up 22.7 per cent against 34.1 per cent in June.

The rising trade surplus will increase the political pressure on Beijing to appreciate its currency more rapidly.

Earlier in the year, Beijing was able to point to a series of much smaller monthly surpluses – and a trade deficit in March – as evidence that the economy was already rebalancing and was much less dependent on exports. However the figures over the last three months suggest that the surplus in the second half of the year is likely to be much larger.

Yet the slowdown in import growth in China could also be a reflection of a significant cooling in the domestic economy, which would make policymakers in Beijing more reluctant to strengthen the currency sharply.

“The two developments will only add to Washington’s insistence on a stronger renminbi and to Beijing’s resistance,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong. This could lead to a new push in the US Congress to pass measures penalising Chinese exports, especially as the November mid-term elections approach.

China signalled a major shift in exchange rate policy in late June when it said it would abandon the de facto currency peg it had operated for the previous two years against the US dollar. But since then there has been only very modest movement in the exchange rate, with the renminbi rising 0.78 per cent against the US dollar.

The pace of slowdown in the Chinese economy in the second half will be heavily affected by what happens in the property market, which the government has tried to cool after a period of feverish speculation in many cities.

House prices last month in the country’s 70 largest cities remained flat compared with June, according to figures released on Tuesday, although on a year-on-year basis the pace of increase slowed from 11.4 per cent in June to 10.3 per cent.