Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


US farmers to benefit from failing wheat crops
By Jack Farchy
Copyright The Financial Times Limited 2010
Published: August 12 2010 15:09 | Last updated: August 12 2010 19:57
http://www.ft.com/cms/s/0/c04c5268-a615-11df-9cb9-00144feabdc0.html


US farmers will reap the benefits from failing crops round the world, the US Department of Agriculture said on Thursday as it forecast the country’s second-largest wheat exports in 15 years, worth billions of dollars.

The USDA cut sharply its forecast for global wheat production following Russia’s worst drought in more than a century and lower output in the European Union, Ukraine and Kazakhstan.

But it predicted that US farmers would harvest a bumper wheat crop, leaving them well-placed to meet the needs of importing countries, which have been scrambling to secure new supplies after Moscow banned all grain exports last week.

“There is no question this is an opportunity for us and we’re going to take advantage of it,” said Tom Vilsack, US agriculture secretary, on Wednesday.

The US wheat belt extends from Texas and Kansas to Montana and North Dakota.

US wheat futures jumped more than 5 per cent to $7.34½ a bushel, although they remained below the two-year peak of $8.41 hit last week in the aftermath of Russia’s decision to ban exports.

The USDA cut its forecast for global wheat output by a hefty 2.3 per cent to 645.7m tonnes in its closely watched monthly report, but said the world was not facing a repetition of the 2007-08 food crisis. There was “no global shortage of food grains”, it said.

The boom for US farmers is lifting the outlook for the country’s agribusiness companies. Shares in Archer Daniels Midland, the trading house, have rallied 15 per cent since mid-June. John Deere, the manufacturer of tractors and combines, is up 10 per cent, while Monsanto and DuPont, which sell seeds, have also risen.

Falling wheat production outside the US would make the country’s crop “competitive in key Middle East and North Africa markets”, the USDA said.

The region imports about a quarter of the world’s cereal, and countries such as Egypt, the world’s biggest wheat buyer, have already made large purchases of US wheat.

The USDA raised its forecast for international wheat sales from the US by 20 per cent to 32.6m tonnes.

Apart from a surge during the 2007-08 food crisis, that would be the highest level of US exports since 1995-6. At current prices, the value of those wheat exports could reach $8bn (€6.2bn).

The world’s reliance on the US to supply its staple agricultural commodities could put pressure on the country’s export facilities.

The country is set to produce bumper harvests for other crops, with farmers predicted to bring in the largest ever hauls of soyabeans and corn.

At the same time, China will import record amounts of soyabeans this year, according to the USDA’s forecasts. It is also expected to import significant amounts of corn for the first time in more than a decade.

Dan Basse, president of AgResource, a Chicago-based consultancy, said US export infrastructure would feel the strain: “It is going to be a struggle and at some point it will limit the ability of the US to supply the full demand.”





Fannie and Freddie’s bond market upheaval
By James Rickards
Copyright The Financial Times Limited 2010
Published: August 12 2010 23:43 | Last updated: August 12 2010 23:43
http://www.ft.com/cms/s/0/3e726a68-a640-11df-8767-00144feabdc0.html


A strange fog has enveloped the bond market. Once, the strength of a bond was based on the reputation of its issuer. But a change began in 2008, as Fannie Mae and Freddie Mac verged on bankruptcy, and legislation was rushed through the US Congress to restructure them. The political importance of these institutions created a new world, one in which a bond’s performance is determined by the reputation of its holders.

Next week the US Treasury hosts a major conference to discuss Fannie and Freddie’s future. But to understand how they changed the rules, we must return to the circumstances of their restructure. Such things are normally straightforward. Equity is wiped out, assets are revalued and the gap in the balance sheet is uncovered. Bondholders take a “haircut” – meaning a lower than expected return – or a principal reduction. Some principal converts to equity, management is replaced; voilà, life goes on.

But for Fannie and Freddie none of that happened. Both institutions were bankrupt. Today their stock trades at a steep discount, but it still trades. Those who held their debt took no haircut at all. Their assets were never fairly revalued and the balance sheet was replenished with taxpayer funds. Why the different treatment?

One reason is that Russia and China were among the largest holders of Fannie and Freddie bonds. Recall in 2008 that Russian tanks were rolling into Georgia, while the US was utterly dependent on China to purchase its debt. In Moscow a haircut on Fannie or Freddie debt would have been seen as financial warfare. China’s dismay at losing money might have had even more daunting results, given its power to alter the structure of US interest rates at the touch of a keyboard. So, unusually, the identity of the holders, not the condition of the issuer, determined the bond’s fate.

From there the trend continued. In 2009, during the Chrysler bail-out, hedge funds holding Chrysler debt wanted a normal bankruptcy, but were brushed aside by the Obama administration in its rush to accommodate trade union allies. One could have imagined a completely different outcome, if the company in distress had been non-union, or if Chrysler’s bonds had been more heavily owned by union pension funds instead of hedge funds. But the pattern remained, namely that it is the holder’s identity that mattered.

Much the same pattern was seen in Greece, where a rescue came because the debt holders were vulnerable European banks. More typical sovereign debt restructures, as seen in Brazil and Mexico in the 1980s, followed different rules. And while these are just the best-known cases, further examples are not hard to find. Take real estate debt, which is treated differently depending on whether it is owned by a bank or a private fund – largely because banks can raise capital cheaply, courtesy of the Federal Reserve’s close-to-zero interest rates.

This new trend is defended as good policy. We should not, the thinking goes, offend the Russians, or the Chinese. Jobs at Chrysler are worth preserving. European banks must be saved from the threat of a Greek sovereign default. Maybe, but maybe not. For there will be a big price to pay for this kind of outcome by diktat.

Moral hazard is only the most obvious threat. More insidious is what economists call “regime uncertainty”. This ungainly phrase refers not to a political regime, but to laws that allow all players in a market to follow the same rules. Price discovery is difficult in normal markets. But when geopolitics, expediency and short-term concerns overlay them, it is little wonder that equity inflows are drying up, corporations are hoarding cash and mergers and acquisitions have ground to a halt.

Here lies the crux. Policy, whether it be printing money, guarantees or deficit spending, can prop up asset values for a while. This may even be useful in a liquidity crisis. But a solvency crisis is another thing. The longer policy distorts markets by ignoring fundamentals, the longer those reliant on market signals will sit on their hands. The Fed’s recent decision to continue asset purchases shows there is no exit once this path is chosen. As we approach the second anniversary of the Fannie and Freddie bailouts, are we better off? Values cannot recover until they first hit bottom. In short, our economies would be growing more robustly today if we had taken our medicine in 2009.

The writer is a writer, economist, lawyer and investment adviser





German growth lifts eurozone GDP up 1%
By Stanley Pignal in Brussels and Ben Hall in Paris
Copyright The Financial Times Limited 2010
Published: August 13 2010 07:26 | Last updated: August 13 2010 11:18
http://www.ft.com/cms/s/0/c5d8bb2e-a69f-11df-8d1e-00144feabdc0.html


Germany on Friday reasserted itself as the economic growth engine of the eurozone, after gross domestic product expanded at a stellar 2.2 per cent rate in the second quarter compared with the previous three months.

The spurt underpinned GDP growth across the eurozone of 1 per cent, also boosted by a better-than-expected showing from France, which grew at 0.6 per cent.

Buoyant German exports, aided by a decline in the value of the euro, helped Europe’s largest economy record its fastest expansion since reunification in 1990, equivalent to an annualised rate of more than 8 per cent.

“Superman is wearing black, red and gold this year, Germany’s national colours,” said Carsten Brzeski at ING, but warned: “At some stage he’ll become Clark Kent again. The economy can’t keep growing at this rate.”

In the same period, US growth slowed to 0.6 per cent quarter-on-quarter and Britain’s GDP expanded by 1.1 per cent using methodology from Eurostat, which released the seasonally-adjusted figures in conjunction with national authorities.

Both Germany and France also raised their growth estimates for the first quarter: up 0.3 points to 0.5 per cent for Germany, and 0.1 points to 0.2 per cent in the case of France.

But a sanguine headline figure in the eurozone concealed deep cracks within the 16-member currency bloc.

In contrast to Germany, the region’s so-called “peripheral” economies – including Greece, Ireland, Spain and Portugal – struggled notably in the second quarter, which was defined by soaring sovereign debt yields in the wake of the Greek bail-out.

Preliminary figures on Thursday showed Greek GDP falling 1.5 per cent in the second quarter, the seventh consecutive period of contraction. Italy grew at 0.4 per cent, and Spain and Portugal at a mere 0.2 per cent.

As a result, Germany alone accounts for the bulk of the expected rise in growth across the entire region.

Its strong performance raised spirits in the markets, with the Eurofirst 300 index up 0.5 per cent on Friday morning. The euro also rose modestly against the dollar.

Nevertheless, the second-quarter data mark the first period since the start of the downturn that the eurozone has grown at a rate much higher than 1.5 per cent a year – its average since the single currency was founded in 1999.

That is also the point at which the bloc starts to create jobs, according to labour market experts. Unemployment in the eurozone has been stable at 10 per cent in the past few months and has yet to experience a meaningful decline.

The German boom will help the entire eurozone, according to Julian Callow of Barclays Capital: “The result should assist the process of German deficit reduction and in turn foster a climate where Germany is yet better able economically and politically to offer support to other euro area economies that might require assistance.”

The last two quarters have seen quarter-on-quarter growth well beneath that figure – even with Friday’s revisions – partly because unusually harsh weather in Germany hampered economic activity.

But few expect the heady rate of growth during the second quarter to be carried through to the end of the year.

For one, the euro has rallied modestly since its end-June level of €1.23 to the US dollar, to about €1.30, partly cancelling out the benefits for the export-oriented manufacturing sector in particular.

The growth spurt experienced by Germany is partly due to one-off factors, such as pent-up demand from the winter season and the earlier economic recovery in its Asian and American export markets.

With consumer confidence still relatively low in Europe, there has been little sign so far of a pick up in domestic demand, which economists are looking for as a signal of a sustained recovery. But appetite for consumption is likely to be curtailed by fiscal tightening measures being unveiled in most eurozone member states.

A breakdown of how Germany achieved its stellar growth will not be available until the end of the month, which left economists poring over other countries’ figures.

France’s better-than-expected performance was due to a rebound in investment after eight consecutive quarters of contraction and a much bigger than expected increase in household consumption.

Christine Lagarde, finance minister, said France had entered a “virtuous circle” of growth. “Business are beginning to invest and build up their stocks, progressively creating jobs, which is good for incomes and household consumption.”

Laurence Boone, chief economist at Barclays Capital France, said the breakdown of the GDP figures was “somewhat surprising” because it was growth boosted by a 0.4 per cent increase in household consumption, which had been expected to be flat given unemployment and impending fiscal retrenchment. Meanwhile, despite the fall of the euro during the second quarter, exports were down.

Ms Boone said the French economy was on course to grow by 1.5 per cent this year, with business investment possibly offsetting weaker consumption in the second half.

“This outturn, however welcome, should not distract from the fragility of French growth,” said Alexander Law, chief economist of Xerfi, a consultancy in Paris. “Purchasing power remains under strain, industry has recently shown signs of fatigue and investment is only just beginning to pick up after two years of dearth. In these conditions, we anticipate a difficult second half due to flagging internal demand.”





Greece and Ireland spark fresh investor concern
By Richard Milne in London and Kerin Hope in Athens
Copyright The Financial Times Limited 2010
Published: August 12 2010 19:16 | Last updated: August 12 2010 20:52
http://www.ft.com/cms/s/0/96f4d10c-a63c-11df-8767-00144feabdc0.html


Concerns intensified about the health of peripheral eurozone countries on Thursday following weaker than expected growth from Greece and a near-doubling in interest rates paid by Ireland compared with three weeks ago.

German benchmark market interest rates fell to record lows as investors fled to safe haven assets, in a week that has seen the spreads between Bunds and Greek, Portuguese, Irish, Italian and Spanish debt rise sharply.

“It is an interesting little warning sign this week. The problems have not gone away, the cracks have just been papered over,” said Gary Jenkins, head of fixed income at Evolution Securities.

Greece sank deeper into recession in the second quarter, according to provisional data released on Thursday. The Greek statistics service estimated the economy shrank 3.5 per cent in the three months to the end of June compared with the same period last year and 1.5 per cent compared with the first three months of this year.

“The second half of 2010 will be difficult ... There’s been a very steep decline in construction and the fourth quarter won’t be supported by tourism revenues,” said Platon Monokroussos, a senior economist at EFG Eurobank.

Problems in Ireland have also come into focus with fresh concerns about its banking sector and market rumours of the European Central Bank intervening to buy Irish bonds. The ECB declined to comment.

Ireland, which has been held up as a model performer for its deep early budget cuts, on Thursday sold €500m of six-month bills at an average yield of 2.458 per cent, against one of 1.367 per cent on July 22. It also sold €500m of nine-month bills.

The yield on Irish 10-year bonds stabilised but the spread over German Bunds has widened by 51 basis points since Friday and came close to a record high earlier this week.

“Ireland has done almost all it can and it still is vulnerable. It is quite a worrying prospect long term for the peripherals,” said Jim Reid, a bond strategist at Deutsche Bank.

The general move in the market away from riskier assets in the aftermath of weak economic data in the US and China has also hurt peripheral eurozone countries’ bonds and caused the relative optimism that followed the bank stress tests in Europe in July to evaporate.

The so-called Euribor-Eonia spread, a common measure of banking sector risk in Europe, climbed to its highest level since September yesterday while the cost of insuring against default by European banks on their debt also rose. Many investors are bracing themselves for more turmoil in the eurozone in the coming months.

“In the next 18 months we are expecting a further escalation of the crisis because we continue to see record issuance from peripheral countries into a shrunken investor pool. It is unclear whether we are at that point yet,” said Justin Knight, European bond strategist at UBS.

But other analysts argued that the safety net agreed by European leaders earlier this year should mitigate the danger of sudden trouble. “The danger of this turning into an imminent systemic meltdown are not there as we have the backstop stability program. But it is able to cause wobbles and mass volatility,” said Mr Reid.






AgBank IPO officially the world’s biggest
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: August 13 2010 11:25 | Last updated: August 13 2010 11:25
http://www.ft.com/cms/s/0/ff7d528c-a6bc-11df-8d1e-00144feabdc0.html


Agricultural Bank of China officially completed the world’s largest ever initial public offering on Friday by fully exercising its over-allotment quota, bringing the total amount raised by the bank to about $22.1bn.

But claiming that title has been an arduous task for the bank, its underwriters and state-controlled Chinese institutional investors, who have struggled to keep AgBank shares in Shanghai and Hong Kong above the IPO price for the first 30 days of trading to avoid a claw-back of the over-allotment quota.

AgBank began trading on July 15 in Shanghai and July 16 in Hong Kong in the midst of volatility and poor market sentiment. The stock barely rose above its issue price in either market in its first week.

In Hong Kong the bank’s shares have fared better since then but in Shanghai, the price has dropped back to the issue price of Rmb2.68 over the last week.

The bank’s dismal trading debut raised fears that its shares could fall low enough to require the bank’s underwriters to claw back some of the pre-sold over-allotment, known as the greenshoe, which would have jeopardised its bid to be the world’s largest IPO.

The bank earlier announced its Hong Kong over-allotment had been fully exercised by July 29 and people familiar with the situation said the Shanghai portion had also been fully exercised by the market close on Friday.

By fully exercising the 15 per cent greenshoe quota in both markets, AgBank has eclipsed domestic rival Industrial and Commercial Bank of China, which raised about $21.9bn in 2006 in what was the world’s largest IPO until now.

If AgBank’s shares had fallen much below their issue prices of Rmb2.68 in Shanghai and HK$3.20 in Hong Kong, the bank’s stabilisation agents – Goldman Sachs in Hong Kong and China International Capital Corp in Shanghai – would have stepped in to support the price in what would have amounted to a claw-back of some or all of the over-allotment greenshoe quota.

AgBank said earlier this month that its stabilisation agent in Hong Kong had spent some HK$630m ($81m) buying shares in the open market at the issue price of HK$3.20 in an effort to stop them dropping too low in their first week.

In Shanghai, a number of state-controlled institutional investors have been very active in the market, supporting the shares at their issue price despite heavy selling pressure from ordinary investors.

Analysts said that it was obvious that state-controlled fund managers were propping up AgBank’s shares on orders from the bank, the regulator and the government.

The bank has also been helped by its highly unusual early inclusion in the main official Shanghai stock indices at the end of last month, which meant managers of index-tracking funds had to buy its shares.

“There’s no way AgBank’s shares would have been allowed to fall below the IPO price in the first month but now the bank has achieved its goal [of executing the world’s largest IPO] the price will probably drop below Rmb2.68 next week,” said one analyst who asked not to be named.





Oracle sues Google over Android
By Richard Waters in San Francisco
Copyright The Financial Times Limited 2010
Published: August 13 2010 01:41 | Last updated: August 13 2010 01:41
http://www.ft.com/cms/s/2/d95fbb12-a671-11df-8767-00144feabdc0.html


Oracle on Thursday filed a copyright and patent infringement claim against Google over its Android operating system, opening a legal war between the Silicon Valley giants over the fast-growing smartphone software platform.

The lawsuit, filed in Federal court in San Francisco, accuses Google of breaching seven patents that Oracle assumed when it acquired Sun Microsystems earlier this year.

The patents relate to the widely-used Java software, which Sun developed so that developers could write applications that could run on many different operating systems. Eric Schmidt, Google’s chief executive officer and a former chief technology officer at Sun, once headed the Java development team.

In a statement, Oracle said that Google had “knowingly, directly and repeatedly infringed Oracle’s Java-related intellectual property.” Parts of the Java technology were included in the “stack”, or package of software that makes up Android, according to Oracle.

Introduced on phones less than two years ago, Android has grown rapidly to become one of the most widely used smartphone operating systems. It plays a key role in Google’s efforts to ensure its foothold in the mobile world, guaranteeing a channel for its search and advertising services and providing a hedge in case it is ever barred from rival smartphones like the iPhone or BlackBerry.

Android is based on a foundation of open-source software, which is freely distributed and can be used without needing to buy a licence. According to Oracle, however, some key elements of Java have also been added to the operating system.

The lawsuit marks Oracle’s first attempt to exert its rights over Java since it acquired Sun in January. Larry Ellison, chief executive officer, justified the Sun acquisition largely on the grounds that it brought Oracle control of Java.

Many mobile and other technology companies pay relatively small amounts to licence Java to run on large numbers of devices, and there were concerns in some quarters when Oracle bought Sun that it would seek to wring more money from its control of the software.