Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Investors pull back from risk assets after Japan data
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 16 2010 09:03 | Last updated: August 16 2010 12:06
http://www.ft.com/cms/s/0/3e719816-a903-11df-9e4c-00144feabdc0.html


Monday 11.50 BST. The risks of a slowing global economy and potential deflation remain at the centre of traders’ attention, as government bond yields see fresh lows.

The selling began when Japan said gross domestic product grew at an annualised rate of just 0.4 per cent in the second quarter, much less than the 2.3 per cent growth forecast by economists. The rising yen was also said to be a concern for future Japanese growth, according to economists. Japanese 10-year bonds fell to their lowest yield since 2003.

Asian shares touched three-month lows, though they regained ground towards the end of the session as Chinese shares rallied, with China’s GDP now having surpassed Japan’s to make it the world’s second-largest economy.

Then figures in the eurozone showed that energy and commodities were propping up inflation. Overall prices rose 1.7 per cent since last July, but core consumer prices fell 0.5 per cent in the past month – suggesting still-sluggish activity in many sectors – while the rising headline may push the European Central Bank to tighten policy, threatening the recovery.

The risk of deflation has been central in markets’ minds of late, with government bond yields seeing record low levels. US 10-year bonds are already seeing fresh one-year lows this morning, with the yield falling 3 basis points to 2.65 per cent. European benchmark German Bunds are down 3 basis points to yield 2.36 per cent, a fresh all-time low.

As bond yields tumble, the FTSE All-World stock index is flat, with European shares currently down 0.4 per cent. The dollar is lower against the yen and euro, and US stock futures are pricing in a 0.3 decline in the S&P 500 index.

“Fears about the state of the global economic recovery will still be the major issue. Last week’s ‘QE lite’ by the Federal Reserve and the downbeat inflation report by the Bank Of England have left many investors fearful of the dreaded double-dip recession,” said James Hughes, market analyst at CMC Markets.

Though the US consumer prices index showed a similar month-to-month uptick – the first in four months – in a report on Friday, UK price rises are expected to slow. US producer prices are forecast by economists to have expanded at a faster rate, but US manufacturing and industrial economic data have consistently disappointed of late.

Anxiety about the US economy has been expressed in the dollar market, as well as in bonds. Short positions on the greenback reached a 2010 high last week.

☼ Factors to watch: The return of earnings? Big retailers Walmart, Lowe’s and Home Depot, and PC-makers Dell and Hewlett-Packard, report this week. Earnings had helped give a floor to shares in July, when global stocks rose to three-month highs. However, at this point, with the growth story so much in focus, earnings may just not matter much unless they are blockbuster-good. ☼

• Europe. Shares were down, but did not have a strong direction. The UK’s FTSE 100 index has finally turned round after leading shares in European markets to slight gains despite a broader pull-back in risk last week. It is down 0.2 per cent. BP is the biggest drag on the FTSE index, while large miners and retailers offered some support.

The broader FTSE Eurofirst 300 index was dragged down by oil and gas and the utilities sector, while retailers outperformed following Hennes & Mauritz strong earnings. Bank of Ireland and Allied Irish Banks are two of the top 10 decliners across Europe as they fight the perception that troubled loans may sink them. Ireland’s Iseq index is down 0.6 per cent and has now fallen 6 per cent since last week.

• Asia. The Nikkei 225 average was down 0.6 per cent after the Japanese GDP figures. Australian shares followed suit, falling 0.5 per cent on the S&P/ASX 200 index.

Chinese shares were the driver of a rebound in risk-appetite towards the end of the Asian session, rising 2.1 per cent in Shanghai and 0.5 per cent in Hong Kong. Goldman Sachs strategists recommended staying longer Chinese shares, on the theory that they would outperform relative to developed markets given China’s more effective monetary policy tools.

• Currencies. In trading, the dollar is lower against the yen by 0.7 per cent, at Y85.63. The yen has traded in a range of around Y85-Y86 since the Fed’s decision to continue its monetary stimulus programme, rather than beginning to wind it down as previously anticipated.

Risk appetite, as judged by currencies, has overall turned negative, with commodity currencies tumbling. The Australian dollar is 0.3 per cent weaker against its US namesake, and the Canadian dollar is down 0.2 per cent. Carry trades are unwinding as well, with the New Zealand dollar 1.1 per cent lower against the yen.

The euro has reversed its weakening from the end of last week against the dollar, when peripheral economies were in the spotlight after Germany’s strong GDP growth was not enough to erase worries about slowing Greek, Spanish and even French growth.

The single currency is higher by 0.4 per cent, to $1.2804 – though it is lower by 0.7 per cent against the Swiss franc, suggesting European economic anxiety has not diminished.

• Debt. US 30-year bond yields are down 8 basis points to 3.79 per cent, their lowest since April 2009, while US 2-year bonds are litte changed. The flatter curve suggests investors are expecting a more prolonged recession that will keep rates lower for longer.

Ten-year German Bund yields are down 3 basis points as European shares lose steam, at a record low yield of 2.36 per cent. Japanese 10-year bond yields are down 5 basis points to 0.94 per cent, a fresh seven-year low.

Ireland, in the spotlight since Bank of Ireland and Allied Irish Banks said that their bad loan portfolios were still under strain, has seen its credit-default swap prices and bond yields rise. The CDS market is pricing it as the second highest default risk of the so-called “peripheral! eurozone nations, behind Greece.

Ireland’s 10-year bonds are now yielding 302 basis points more than German 10-years, just short of the 305-point peak in May. An auction of 4- and 10-year bonds on Tuesday will be closely watched.

• Commodities. US benchmark crude oil is up 0.3 per cent at $75.61 a barrel, bouncing off one-month lows reached during Friday’s session. It has been losing steam in European trading, after picking up during Chinese trading, and continued rising as the dollar was weakening.

Gold is up 0.6 per cent to $1,222 an ounce, as bullion traders react to Japan’s GDP figures and price in slower growth in the US, much of Europe and China. The precious metal has risen to two-month highs in the past week of trading.

Additional reporting by Song Jung-a in Seoul

Following the Global Market Overview on Twitter: @telisdemos





Chinese economy eclipses Japan's
By Lindsay Whipp in Tokyo and Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: August 16 2010 03:39 | Last updated: August 16 2010 10:46
http://www.ft.com/cms/s/0/935ac446-a8d7-11df-86dd-00144feabdc0.html


The Chinese economy eclipsed the Japanese economy in size in the second quarter after Japan posted poor economic growth figures for the period, increasing the chances that China will officially overtake Japan as the world’s second-largest economy for the year.

The Japanese economy grew at an annualised, seasonally-adjusted pace of 0.4 per cent in the three months ended June. That was much lower than the revised 4.4 per cent growth rate recorded for the first quarter and well below the 2.3 per cent expected by economists.

“The symbolism of this moment is far greater than its actual significance,” according to Eswar Prasad, a professor at Cornell University and former head of the IMF’s China division. “In terms of both influence and dynamism, China outstripped Japan a long time ago.”

Japanese economic output in the second quarter was $1,288bn compared with Chinese economic output of $1,337bn, according to a Japanese government official. But the official cautioned that the comparison was inappropriate because China, unlike Japan, does not produce seasonally adjusted data.

China’s quarterly output actually overtook Japan’s in nominal terms in the fourth quarter of last year and since then China has continued to grow rapidly while Japan’s recovery has stalled. Over the first half of 2010, however, Japan maintained its position as the world’s number two economy.

The head of China’s foreign exchange reserve administration last month said China had already overtaken Japan as the world’s second-largest economy. Economists in China point out that while Japan reports detailed and generally accurate economic data, China potentially under-reports its economy by as much as a fifth.

In terms of purchasing power, a more meaningful measure of economic strength, China overtook Japan as the world’s second-largest economy nearly a decade ago. If the European Union is counted as a single economy, then China remains at number three and will stay at that position for some time.

“Using measures such as PPP [purchasing power parity], Japan’s economy is already smaller than China’s,” said Chiwoong Lee, an economist at Goldman Sachs. “Given its potential growth rate going forward it would be just a matter of time before it overtakes Japan anyway [based on market prices]”.

While China has made great strides towards replacing Japan as the second biggest economy, on a per capita basis it lags far behind other large economies because of its huge population and it is still regarded as a relatively poor country. Japan’s per capita gross domestic product is still more than ten times larger than China’s $3,600.

Meagre Japanese growth in the second quarter also raises questions about the strength of its economic recovery. By comparison, the US economy expanded at an annualised rate of 2.4 per cent in the second quarter, while Germany grew at 9.1 per cent, its fastest pace since reunification.

The Japanese economy grew more slowly in the second quarter on the back of stalling consumer spending, falling public investment and slower exports. Net export growth slowed but remained solid and was the main contributor to growth for the period.

“Japan is an export driven country and [these figures show that] without fiscal stimulus, there’s no real domestic demand,” said Goldman’s Mr Lee. “Strong exports for Germany is not helpful for Japan, as it suggests that global demand is OK,” he said, noting that the two countries compete to sell machinery to China, with Berlin getting an advantage from the weak euro.

Slower export growth is a challenge for Japanese companies at a time when the yen is trading close to a 15-year high against the dollar, as risk averse investors pile into the currency. Although authorities have stepped up verbal intervention, analysts are sceptical that direct intervention from the finance ministry is likely.

Monday’s economic growth figures could add to pressure on policymakers to find other ways to deal with slowing growth and the impact of the stronger yen on the recovery. Last week, the central bank kept its economic assessment unchanged and did not announce any further easing measures.

Investors were spooked by the GDP numbers and the Nikkei index fell 0.6 per cent to 9,197, closing in on the psychologically important 9,000 level.






Call for careful overhaul of US mortgage lending
By Suzanne Kapner in New York and James Politi in Washington
Copyright The Financial Times Limited 2010
Published: August 15 2010 20:59 | Last updated: August 16 2010 10:21
http://www.ft.com/cms/s/0/8aba0a36-a8a5-11df-86dd-00144feabdc0.html


The US does not intend to wind down completely Fannie Mae and Freddie Mac, the large government-sponsored mortgage companies that are eating up billions of taxpayer dollars, given the fragile state of the housing market.

Administration officials say that any credible proposal to overhaul the government-sponsored enterprises (GSEs), as Fannie and Freddie are called, would need to include a “thoughtful approach” to prevent house prices from dipping lower.

Fannie and Freddie buy or guarantee more than 90 per cent of loans currently being issued. Without government backing some large investors have said they would stop buying mortgage bonds, a development that would be catastrophic for the housing market and the broader economy.

The overhaul of Fannie and Freddie remains one of the most challenging problems of the financial crisis and one that was noticeably absent from the reform regulation signed into law earlier this summer.

Pressure is building on the Obama administration, which has promised to submit a proposal to Congress by January, to find a solution. Since being taken over by the government in 2008, Fannie and Freddie have absorbed nearly $150bn in aid, making them by far the costliest part of a bail-out that rescued carmakers and financial institutions.

The Treasury has been canvassing a wide array of private sector bankers and public policy experts, many of whom are listed to speak at a conference tomorrow, which will be chaired by Tim Geithner, Treasury secretary, and Shaun Donovan, the secretary for housing and urban development.

Treasury officials have been reading more than 300 comments received in response to seven questions posted earlier this year in a public forum. No one wants to see the GSEs survive in their current form, but neither do they want to upset the mortgage market at such a crucial time. Beyond that there is little agreement on how to proceed.

Conservatives argue that the private markets, not the government, should provide financing for home loans. But liberals say the government should have some role. They point out that the private markets seized up during the credit crisis.

“It’s clear there is no good short-term solution,” said Barclays Capital’s Rajiv Setia.

Last month Mr Geithner promised that an overhaul of Fannie and Freddie would bring “fundamental change” and that they would not survive “in anything like their current form”.

But he added: “I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.”







US banks get securities buy-back window
By Francesco Guerrera and Justin Baer in New York
Copyright The Financial Times Limited 2010
Published: August 15 2010 23:05 | Last updated: August 15 2010 23:05
http://www.ft.com/cms/s/0/c7d6443e-a8a0-11df-86dd-00144feabdc0.html


The Dodd-Frank financial reform bill has opened a 90-day window for banks to buy back $118bn (€92bn) in high-cost securities, a move that would enable them to replace the instruments with cheaper capital but is likely to cause tensions with regulators and investors.

Wall Street executives and lawyers say several banks are considering redeeming “trust preferred securities” (Trups) – a hybrid of debt and equity – by taking advantage of a clause triggered by the new rules.

Trups – equity instruments that pay interest like bonds – became popular in the financial crisis when banks sold more than $40bn-worth to investors ranging from Warren Buffett to small savers. Financial groups are interested in buying back the securities because Trups are an expensive form of capital. Banks needed to offer high interest rates to entice investors.

Banks have an extra incentive to redeem Trups because the new law states that they will no longer count as tier one capital – a key gauge of financial strength – from 2013.

The banks can buy back the securities now because most Trups’ contracts state that a legal change gives issuers three months to redeem them at face value. The removal of Trups from tier one capital amounts to such an event, lawyers say.

“It is a big issue,” said a top US lawyer. “The question for banks is: do you want to keep paying high interest rates knowing that Trups are going to lose their status as tier one?”

However, some executives counter that redeeming Trups could upset regulators, who are against reductions in bank capital, and investors, who bought them to hold for the long term.

“Banks may find it desirable to redeem Trups but they have to think about what they are going to say to investors next time they want to raise capital,” said Chip MacDonald at law firm Jones Day.

The dilemma over Trups is emblematic of the regulatory morass faced by banks trying to navigate the effects of the new US law as well as ongoing uncertainty over new international capital standards.

Moody’s estimates that US banks have about $118bn of Trups outstanding. The securities account for a significant part of tier one capital at lenders like Bank of America, JPMorgan Chase, Morgan Stanley and Citigroup, according to the credit rating agency.

Additional reporting by Nicole Bullock in New York