Today's financial News Courtesy of the Financial Times

Today's financial News Courtesy of the Financial Times

Yen hits 15-year high versus US dollar
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 11 2010 09:04
http://www.ft.com/cms/s/0/56a25ad8-a516-11df-b734-00144feabdc0.html


Wednesday 13.25 BST. The yen has touched a 15-year high versus the US dollar, following the Federal Reserve’s decision to return to the markets to keep providing stimulus to an increasingly troubled US economic recovery.

Haven assets are seeing strong demand across the board, though interest has tapered later in the session. As the yen finally broke through to its strongest point since 1995 – at Y84.79 to the dollar, which it has been nearing for weeks – many benchmark government bonds saw record low yields.

But reaction is easing as investors digest the Fed’s move. While Ben Bernanke, chairman, said the Fed was lowering its outlook for near-term US growth, it would add to its balance sheet. Instead, as was reported earlier, the Fed will convert expiring mortgage-backed securities it purchased earlier into Treasuries, keeping the balance sheet at $2,300bn.

Stock markets are strongly reacting to the rising likelihood of deflation and slowing growth represented by the Fed’s downgraded outlook. That view has been furthered by economic gloom in Europe and Asia. China reported that industrial production was expanding at its slowest rate since mid-2009, and Japanese machinery orders rose much slower than expected.

And Mervyn King, governor of the Bank of England, in his inflation outlook said price growth would slow to below-target levels. The UK also saw a stark drop in consumer confidence and falling employment growth. Like the Fed, the Bank announced that quantitative easing would be continued, but not extended to new levels.

Global stocks are tumbling, with the FTSE All-World index dropping 0.8 per cent. Futures markets are pricing in a 0.5 per cent decline in the S&P 500 index. Crude oil prices are also tumbling, a sign of pessimism about growth.

The record prices for the yen and bonds are also not a surprise, given that those assets have floated at or near record levels for the past few weeks. The yen has already eased off its record low, despite what traders say is a lack of support all the to Y75 versus the dollar.

“If the markets are in fact concerned about US growth, the dollar’s weakness is overdone. The Fed is indicating greater concern about US growth and people are starting to price in the knock-on effects on the global economy,” said Raghav Subbarao, currency strategist at Barclays Capital.

In fact, the Fed’s move may auger some relative calm for the US. That was already in evidence on Tuesday, when US stocks rallied following the Fed's decision, paring their losses by the market’s close. Futures are expecting a relatively stronger performance in US equities, a decline of just 0.5 per cent versus the 1.2 per cent drop in the FTSE Eurofirst 300 index at the moment.

The dollar is surging against the euro as investors acknowledge the risks for the export-reliant eurozone of a strong currency. The single currency is nearing $1.29, which would be its lowest level since before the European bank stress tests last month.

Long-term bonds, despite the rally in shorter- and middle-dated bonds, have also not been in as strong demand in trading following the Fed’s move. That suggests some worries about inflation – rather than deflation – persist despite the more uncertain short-term outlook.

• Europe. The FTSE 100 index has dropped 1.5 per cent, not sharply affected by the unemployment report or the Bank’s view. Germany’s Dax is down by 1.7 per cent. Basic materials, closely tied to demand in China, and cyclical technology and financial shares are the laggard sectors.

• Asia. The Nikkei 225 average fell 2.7 per cent as the yen jumped following the Fed decision. A stronger yen has weighed on Japanese export companies. Japan also said that industrial orders rose only 1.6 per cent in July, versus a forecast of 5.5 per cent growth.

Chinese shares were also lower on the poorer industrial growth figures. The mainland Shanghai Composite index was down by 0.5 per cent and the Hang Seng index in Hong Kong dropped 0.8 per cent, falling lower as it neared close.

• Currencies. The yen has since bounced off its low of Y84.79, and is now down 0.7 per cent at Y84.90. The euro is down 1.2 per cent at $1.3009.

The pound is especially hard hit following a jobs report in which the decline in jobless claims slowed, and the Bank of England’s inflation report. The pound is down 1.1 per cent, at $1.5680, after falling more than 1 per cent in the previous session.

Risk appetite is generally sharply in decline. The New Zealand dollar is off by 1.5 per cent against the yen and the Australian dollar is down by 1.3 per cent against the US dollar. Both currencies closely track commodities and interest rates, which rise with growth hopes. The yen is surging 1.6 per cent against the euro to Y110.74.

• Debt. The German 10-year Bund is the sharpest mover, with the yield falling 6 basis points to 2.48 per cent. Japanese 10-year yields are down 2 basis points to 1.01 per cent, at one point touching a new seven-year low at 1.003 per cent.

The US bond complex is seeing tapering demand at the moment. US 10-year Treasuries are down 4 basis points to 2.73 per cent yield, off their lowest point of year hit earlier in the session. Five- and seven-year bond yields also earlier touched 2010 lows but were rising. US two-year bonds fell to yields of 0.4977 per cent before recovering to 0.51 per cent.

An auction on Tuesday saw 3-year bonds bought at their lowest-ever yield at auction amid strong demand. A further auction of 10-year bonds, part of $74bn in total to be sold this week, is expected later in the session.

Gilt yields are also falling sharply, with 10-year bonds down 8 basis points to yield 3.18 per cent, their lowest since April 2009 following the Bank’s dovish outlook. An auction on Tuesday saw long-dated gilts pricing at below-market yields, though not strongly in demand by investors.

• Commodities. Benchmark crude oil is falling further past $80 a barrel, now at $79.28, down 1.2 per cent after a dip of nearly 2 per cent on Tuesday.

Gold, in one of the few signs of reassurance, is up just 0.1 per cent at $1,203 an ounce. Bullion interests investors as the risk of monetary inflation rises and the Fed’s relatively cautious move has evidently not sparked deeper inflation fears.

Follow the Global Market Overview on Twitter @telisdemos





Fed downgrades recovery outlook
By James Politi in Washington and Michael Mackenzie in New York
Copyright The Financial Times Limited 2010
Published: August 10 2010 19:26 | Last updated: August 11 2010 01:07
http://www.ft.com/cms/s/0/0567152a-a49c-11df-8c9f-00144feabdc0.html


The US Federal Reserve on Tuesday took a first step toward extending its crisis-era monetary policy regime, as it downgraded its view of the economic outlook amid rising fears of a “double-dip” recession.

Meeting in Washington, Fed monetary policymakers agreed to begin reinvesting more than $150bn (£95bn) in annual proceeds from maturing mortgage-backed and agency securities into Treasury debt, halting plans to allow a natural shrinkage of the $2,300bn balance sheet the US central bank built up during the recession.

The move signals a significant shift in thinking at the Fed, which only a few months ago was tilting towards tightening monetary policy to fend off inflation as the economic recovery gathered strength. Fed officials significantly downgraded their economic outlook, saying the “pace of recovery in output and employment has slowed in recent months” and was likely to be “more modest” than anticipated in the near term.

When the Federal Open Market Committee last met in June, it said the economic recovery was “proceeding” and was likely to advance at a “moderate” pace. The reinvestment of proceeds from the expiring securities does not in itself represent an easing of monetary policy, since it simply allows the size of the Fed’s balance sheet to remain steady.

The decision could be reversed relatively easily by the Fed if the economy improves over the next few months. But it does signal that the bias of monetary policy has decisively shifted away from tightening towards easing – a potential precursor to large-scale asset purchases like those carried out during the financial crisis if conditions deteriorate further.

Indeed, the Fed left room to be more aggressive, saying, as it did in June, it would “continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability”.

Interest rates were kept at their target range of 0-0.25 per cent, and the Fed maintained its pledge to hold them there for an “extended period”.

Stocks pared some of their losses, Treasury yields fell further while the dollar trimmed gains after investors digested the FOMC’s statement.

The S&P 500 was down 0.6 per cent, after falling as much as 1.4 per cent in early trade. Equity markets had closed lower in Asia, Europe and London ahead of the Fed meeting. The yield on 10-year Treasury notes dropped to 2.77 per cent from 2.82 per cent. The dollar index was up 0.3 per cent on a trade weighted basis to its main rivals at the close of New York trading. Earlier on Tuesday, the US Treasury sold $34bn three-year notes at a record low yield of 0.844 per cent amid strong demand.







US regulators tighten control over Wall St
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2010
Published: August 11 2010 01:00 | Last updated: August 11 2010 01:00
http://www.ft.com/cms/s/0/c8883df2-a4b7-11df-8c9f-00144feabdc0.html


US regulators have increased their scrutiny of the country’s largest banks in recent months, digging deeper into riskier activities and pushing institutions to conduct more rigorous “stress tests” of their financial health.

Wall Street executives say that since the end of the financial crisis examiners from the Federal Reserve, the main banking watchdog, have become tougher and more detailed in their policing of large financial institutions.

“They are all over us,” said a senior Wall Street banker. “They want to see a lot more detail and are demanding a lot more information.”

The tighter oversight is part of the authorities’ efforts to reduce the chances of another financial crisis as devastating as the last one by closing regulatory gaps that allowed banks to take on huge risks and unsustainable amounts of debt.

The overhaul of US financial rules that became law last month gives the Fed sweeping powers to oversee a wide range of companies – from banks to insurers and hedge funds – whose failure would endanger the financial system.

Regulators such as the Fed and the Securities and Exchange Commission have been criticised for failing to curtail the excesses that led to the implosions of Lehman Brothers, AIG and Bear Stearns and forced the government to inject funds into Morgan Stanley, Goldman Sachs, Citigroup and Bank of America.

The New York Fed, which oversees most large financial groups, declined to comment on its scrutiny but executives said the tougher policing centred on the severity of internal stress tests and more detailed probes of banks’ profits. Federal examiners have asked banks for more details on the profitability of different businesses, such as trading, capital markets and investment banking, rather than focusing on group-wide balance sheets as in the past, bankers said.

The deeper analysis indicates authorities now recognise that before the crisis rising bank profits were often coupled with an increase in hidden risks. Before the turmoil, for example, regulators paid little attention to the increase in the amount of mortgage-backed securities on banks’ books.

Bankers say regulators are also putting pressure on them to be more pessimistic in stress tests aimed at measuring banks’ ability to respond to economic shocks.

The Fed’s new stance is similar to the more intrusive approach adopted by the UK’s Financial Services Authority last year.





Bank downgrades UK growth outlook
By Daniel Pimlott
Copyright The Financial Times Limited 2010
Published: August 11 2010 11:32 | Last updated: August 11 2010 11:39
http://www.ft.com/cms/s/0/a72116a0-a52c-11df-b734-00144feabdc0.html


The Bank of England on Wednesday revised down its forecasts for UK GDP growth over the next few years and now expects inflation to be above target until well into 2012.

The lower growth forecasts come as global growth has shown signs of slowing and in the face of the problems in Europe.

Higher inflation forecasts reflect in part the rise in valued-added tax slated by the government to hit from next January, as well as the fact that the Bank has consistently underestimated how strong inflation is going to be.

“Risks to growth remain weighted to the downside,” the Bank’s quarterly inflation report notes.

Mervyn King, the governor, denied that the downgrade to growth forecasts was the result of the government’s austerity Budget.

“I don’t think much of the softening can be linked to the Budget and it is offset... by the smaller downside risks” that a more rapid path of fiscal consolidation produces, he said.

He said growth forecasts were only being reduced slightly, but it is hard to be clear by exactly how much the forecasts have changed because the Bank refuses to publish the hard numbers for its predictions until a week after the inflation report.

In its last forecast in May, the Bank’s central view was that growth would be 1.7 per cent this year and 3.4 per cent next year, assuming that interest rates and the level of quantitative easing remained unchanged. In the August report, however, growth over the next couple of years appears to be somewhat lower.

The report notes that the lower growth projection reflects “the softening in business and consumer confidence, the faster pace of fiscal consolidation and a slower improvement in credit conditions.” But it adds that the downside risks are lower because of the faster fiscal tightening.

Inflation, on the other hand, is now viewed as being above target throughout the whole of next year, but in the Bank’s central view with unchanged monetary policy, it dips below its 2 per cent target around the middle of 2012.

Previously the Bank had expected inflation to drop below 2 per cent around the end of this year. The Bank still believes that inflation will drop below the target over the forecast period “once the effects of higher VAT have dropped out of the 12-month comparison... as persistent spare capacity continues to weigh on costs and prices.”

Mr King said that the surprisingly high inflation was the “consequence of large price level shocks” – including the collapse in sterling, rises in VAT and volatile commodity prices. “Monetary policy can do little about short-run movements in inflation,” he added.

But he said that there was a risk that inflation expectations could rise as a result of the persistently above-target inflation, which would be “costly” to deal with.

Yields on benchmark government 10-year gilts fell to a fresh 16-month low and the pound fell against the euro after the release of the report, as investors bet that the Bank could yet ease monetary policy further.

Analysts at Capital Economics said that the inflation forecast was “more dovish than expected” and the projection that inflation was set to fall below target in two years time implies “that the [monetary policy] committee thinks that a policy loosening is more likely to be needed than a tightening.”





Retail banking helps ING triple profit
By Michael Steen in Amsterdam
Copyright The Financial Times Limited 2010
Published: August 11 2010 11:07 | Last updated: August 11 2010 11:07
http://www.ft.com/cms/s/0/4d6fabe6-a52a-11df-b734-00144feabdc0.html


ING, the Dutch banking and insurance group, reported a surge in net profit on Wednesday thanks to a tripling of operating profit in retail banking and lower loan loss provisions.

The group, which had to be bailed out by the Dutch government during the financial crisis, is gradually splitting its insurance and banking operations to comply with demands set by regulators in Brussels to offset the state aid that it received.

ING said it still expected the insurance business to be operating “on an arm’s length, stand-alone basis” by the end of the year.

Echoing recoveries by other banks that were hit hard in the financial crisis, ING’s second-quarter earnings boost came in ahead of analyst expectations. That recovery has mostly been recorded among lenders with strong retail operations rather than in investment banking, where trading profits have fallen across the board.

ING, which reported a jump in group net profit for the quarter to €1.09bn ($1.03bn) from €71m a year earlier, said its strong retail banking performance was driven by higher interest margins on savings, a growth in client balances and lower bad loan provisions and costs. The underlying profit for retail banking tripled to €944m, ING said.

The insurance operations, by contrast, reported an underlying loss of €115m compared with a profit of €242m a year ago. This was mainly due to the sharp decline in equity markets in the second quarter, which hit ING’s US variable annuity business, but the operating result also declined.

The group has said it will prepare for an initial public offering of the insurance division but is also open to an outright sale of the business.









China shows further signs of slowing
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: August 11 2010 04:56 | Last updated: August 11 2010 08:21
http://www.ft.com/cms/s/0/98f852a0-a4fa-11df-8d8c-00144feabdc0.html


China’s economy continued to slow last month as efforts to cool the property market and reduce energy consumption began to bite, even as consumer price inflation rose further.

The rates of increase for industrial production, fixed asset investment and retail sales each fell last month, while new banks loans and money supply growth also slowed.

However, inflation jumped to 3.3 per cent, higher than the 3 per cent target the government has set for the year and up from 2.9 per cent the month before. In contrast, factory-gate inflation fell back from 6.4 per cent to 4.8 per cent.

The latest figures come a day after data showing a sharp decline in the pace of growth in imports in July, adding to signs that demand is waning.

Most economists argue that China is witnessing a controlled slowing from the potential overheating of earlier in the year, rather than a new slump. “The key data point to a moderate slowdown rather than a sharp downturn,” said Brian Jackson at Royal Bank of Canada.

But the pace of the slowdown has caught some analysts by surprise and is prompting calls for the government to shift course and unwind some of its tightening policies. “We believe this level of broad money supply growth is clearly too restrictive as it will put more downward pressure on domestic demand growth in the near future,” said Helen Qiao and Yu Song at Goldman Sachs in a note.

The year-on-year rate of increase of industrial output fell from 13.7 per cent in June to 13.4 per cent last month, while the growth rate of urban fixed asset investment cooled to 24.9 per cent compared with 25.5 per cent the same period last year.

Retail sales increased by 17.9 per cent year-on-year, down from 18.3 per cent in June. Taking into account inflation, the 14.6 per cent real increase was the lowest since February last year. Year-on-year growth in the M2 measure of money supply softened from 18.5 per cent to 17.6 per cent, while the volume of new bank loans was Rmb533bn ($78.7bn), down from Rmb603bn in June.

Most economists said the rise in consumer prices was temporary and partly caused by recent flooding disrupting food supplies. But one of the principal risks facing China in the coming months is a sharpening spike in inflation, which would reduce the government’s room to support the economy if the slowdown gathers pace.

“The highest reading since October 2008 for the CPI is a reminder that the price for China’s monetary stimulus has not yet been paid and inflationary pressures are not far below the surface,” said Tom Orlik of Stone & McCarthy in Beijing.