Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Renewed recovery hopes stiffen resolve
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 17 2010 09:01 | Last updated: August 17 2010 21:42
http://www.ft.com/cms/s/0/511e94f4-a9cc-11df-8eb1-00144feabdc0.html


Tuesday 21.20 BST. A levelling of economic fears, helped by a possible stimulus package in Japan and continuing industrial growth in the US, has given backbone to risk-takers.

After jumping to historically low yield levels across the world, government bond prices are softer. Yields on benchmark US Treasuries and German Bunds are rising.

The yen’s rise has also been halted, with the Japanese currency falling against the US dollar. The FTSE All-World stock index is up 1.1 per cent, with Europe building off a higher start in Asia. The S&P 500 index closed up 1.2 per cent after rising as much as 1.7 per cent.

Company news in part drove the strong flows into stocks. Potash, the Canadian fertiliser group, surged 28 per cent after it sad that mining giant BHP Billiton made an “inadequate” $39bn approach. Walmart, the world’s biggest retailer, raised its full-year forecast and shares rose 1.2 per cent. M&T Bank led S&P 500 shares, after it renewed talks with Spain’s Santander to combine their operations in the US.

While uncertainty still clouds much of the US economy’s outlook, at least one sector of strength – manufacturing – is still expanding at a good enough clip to give pause to deflation fears. And in July, producer prices rose in line with expectations, and industrial output grew 1 per cent.

Investors in particular seemed to be easing off their harsh judgment of European “peripheral” country risks. In a closely watched auction, Ireland sold all of its planned €5.1bn of four- and 10-year bonds, though it had to pay a higher-than-expected yield. But spreads of Irish yields versus German Bund yields have narrowed from near their crisis highs.

“We saw quite strong auctions today, seeing especially Ireland performing quite well. Investors had found the spread was just too wide against German bonds,” said Lars Tranberg Rasmussen, senior analyst at Danske Bank.

Earlier, Japan’s government was reported to be considering a fresh round of stimulus to help its flagging economy, as its quarterly gross domestic product growth has slowed to below-trend levels. Later in the day, the prime minister confirmed he would be meeting to discuss the outlines of a new package.

Economists at Morgan Stanley raised their outlook for growth in China – now officially the second largest in the world – forecasting that the economy would indeed expand 10 per cent this year, as had been expected before the recent bout of slowing in the US, China and Europe.

“In light of moderation in growth and receding inflationary pressures, we believe the policy cycle has troughed and will likely turn growth-supportive by [the fourth quarter]. In particular, the pattern of sequential growth momentum suggests that a soft landing is well under way,” wrote Qing Wang and Steven Zhang in a report.

• Europe. The UK’s FTSE 100 index rose 1.4 per cent, with almost all sectors rising after the UK’s inflation report. The just-above-target pace of inflation raised hopes that the Bank of England would not raise rates to slow the economy. UK financials are leading the way, with HSBC rising 1.5 per cent.

The pan-European FTSE Eurofirst 300 index added 1.1 per cent. Germany’s Dax index was up 1.6 per cent, despite a downturn in German investor confidence. Irish shares are up 1.6 per cent, after falling nearly 6 per cent in the past two weeks following troubles in its banking sector. Allied Irish Banks shares were up 5.6 per cent and Bank of Ireland was 5.5 per cent higher.

• Asia. Japanese shares underperformed, with the Nikkei 225 average falling 0.4 per cent, as the recent strength of the yen – which threatens Japan’s export-centric economy – continued to weigh.

The rest of the region was stronger. Mainland China’s Shanghai Composite index rose further, after a more than 2 per cent gain on Monday. It is higher by 0.4 per cent, while Hong Kong’s Hang Seng index is up 0.1 per cent. Australian shares were higher; the S&P/ASX 200 index added 0.9 per cent.

• Currencies. The yen is weakening against the dollar, down 0.2 per cent at Y85.49. Japan’s economics minister said the yen’s rise would need more than words to slow – the clearest threat yet of intervention, which could keep traders from extending the yen’s gains.

A growing short position against the dollar – now at its biggest since 2009 – means that selling pressure will remain for the greenback. But it could also see a swift jump if shorts are forced to cover in a rapidly rising market.

Risk appetite improved in commodity and growth markets. The Canadian dollar is up 1 per cent against its US counterpart, and the South Korean won is up 0.9 per cent against the US dollar.

The euro was stronger against the dollar by 0.4 per cent to $1.2879, and stronger by 0.8 per cent against the Swiss franc following the peripheral auctions.

Sterling began falling during US trading, and is now down 0.6 per cent at $1.5576 against the dollar.

• Debt. Stronger yields on short-term Spanish bonds further indicated an easing of fears for the eurozone “periphery”. Yields were lower than at the previous auction, and demand was much stronger. German Bunds were 3 basis points higher, off their record low yields reached on Monday, to 2.36 per cent.

In the US, yields on 10-year US Treasuries are higher after falling almost 10 basis points on Monday – up 7 basis points to 2.63 per cent. Thirty-year bonds are also seeing higher yields, adding 5 basis points to 3.76 per cent. Parts of the US yield curve on Monday flattened to their lowest level since March 2009, a sign of sharply falling economic prospects.

• Commodities. Benchmark US crude oil, which has closely tracked global economic sentiment of late, is up 0.6 per cent to $75.71 a barrel.

Gold, which is pushing against a six-week high, is up a fraction at $1,225 an ounce. As monetary stimulus programmes are discussed, inflation hawks are pushing gold closer to its nominal highs seen earlier this year.

Follow the Global Market Overview on Twitter: @telisdemos





US housing starts make modest rebound
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: August 17 2010 14:34 | Last updated: August 17 2010 14:34
http://www.ft.com/cms/s/0/e4b2d846-a9fa-11df-8eb1-00144feabdc0.html


The pace of new home construction in the US made a modest rebound in July but builders remained under pressure as the housing market struggles to gain momentum.

Separate reports on Tuesday showed that US wholesale prices rose for the first time since March, easing fears that slowing economic growth will lead to deflation, and that industrial production rebounded in July with a stronger than expected performance from the manufacturing sector.

Housing starts rose 1.7 per cent to an adjusted annual rate of 546,000, commerce department figures showed on Tuesday. However, that was weaker than economists had expected and the prior month was revised to show a drop of 8.7 per cent, which was much worse than estimated.

Compared with a year ago, housing starts have fallen 7 per cent as the withdrawal of government support has created a lull in activity in the sector.

In July, the monthly rise was concentrated in multi-family housing, where construction was up 17.3 per cent. Building of single family homes dropped 4.3 per cent.

Growing building activity in the north-east, where housing starts surged 30.5 per cent, fuelled most of the rebound in construction in the US. In the midwest, construction rose 10.7 per cent, while it fell in the south and was flat in the west.

Economists argue over the importance of new home construction as the market looks to get its footing. A surplus of new housing while the sector is saddled with foreclosed homes will put more downward pressure on home prices. However, when construction stalls it means demand has waned and builders face more pressure.

On Monday, the National Association of Homebuilders said its measure of confidence had fallen unexpectedly this month, from 14 to 13 on its index, the lowest level since March 2009. Builders said they felt less optimistic about the next six months and the ongoing uncertainty facing the market.

That uncertainty was underscored by a July decline in building permits, which fell 3.1 per cent from June to 565,000. Permits signal future construction and are down 3.7 per cent year-on-year.

The housing data come as Tim Geithner, Treasury secretary, and Shaun Donovan, housing secretary, meet investors, bankers and public policy experts in Washington to discuss the future of housing finance and Fannie Mae and Freddie Mac.

Meanwhile, the labour department’s producer price index rose 0.2 per cent in July from June. It has climbed 4.2 per cent in the last year.

Food, trucks and pharmaceutical products helped lift prices last month. Core producer prices, which factor out volatile swings in food and energy, rose 0.3 per cent.

The Federal Reserve said earlier this month that underlying inflation had been trending lower in recent quarters and that it would likely remain “subdued” for some time. Last month’s rise in wholesale prices should buttress the Fed’s argument that it can keep to its near-zero monetary policy while maintaining price stability.








Geithner calls for housing finance reform
By James Politi in Washington and Suzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: August 17 2010 14:54 | Last updated: August 17 2010 18:23
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The US should tread cautiously as it seeks to overhaul Fannie Mae and Freddie Mac, Tim Geithner, Treasury secretary, said on Tuesday, citing the need to maintain low mortgages rates in a tough housing market.

Speaking as host of a conference on reform of the lossmaking government-sponsored enterprises (GSEs), Mr Geithner said it was important to “begin the process of weaning the markets away from government programmes and make room for the private sector to get back in the business of providing mortgages”.

But he added: “We need to continue working to keep overall mortgage rates low. As we go through this transition, it is important that consumers maintain access to credit at attractive rates. The planned wind-down of the GSEs portfolios should be done in a careful way.”

Reform of Fannie Mae and Freddie Mac, which have incurred losses of about $150bn (€117bn, £96bn) for the US since being placed under government control in 2008, was left out of the massive financial regulatory overhaul bill enacted last month, but has since risen to the top of the economic and financial policy agenda.

The Obama administration is expected to propose its own reform plan in January, and Mr Geithner said there was a “strong case to be made for a carefully designed guarantee in a reformed system”. Without such support, “future recessions could be more severe”, with greater home price declines and damage to financial wealth.

At the conference, panellists that included left- and right-leaning academics, bankers and private investors seemed to agree on the need for an explicit government guarantee. However, its structure and scope was a matter of wide debate.

Ingrid Gould Ellen, a professor of urban planning and public policy at New York University, said guarantees should be limited to plain vanilla mortgages that met specific underwriting standards and should only kick in to cover catastrophic losses.

Alex Pollock, of the American Enterprise Institute, a conservative think- tank, and an advocate of privatising the mortgage market, agreed there could be a role for government guarantees, as long as they were limited to conforming mortgages and did not exceed median regional house prices. This would ensure they helped lower- income, rather than wealthy people, buy homes.

Mr Pollock also argued for breaking Fannie Mae and Freddie Mac into three pieces. One part should be privatised, one should be merged into the Department of Housing and Urban Development, and one, containing bad loans made during the housing boom, should be wound down.

But Bill Gross, founder of Pimco and manager of the world’s largest bond fund, said it was “unrealistic” to think the private market was going to come back in a significant way. “For better or worse, the government is part of our future in terms of the mortgage market.”

Participants also called for a rebalancing of housing policy to focus more on affordable rentals. The government spends about $4 per person to subsidise home ownership, but only $1 per person on affordable rents, one panellist said.

But not everyone agreed that the limits of ownership had been tested. Lewis Ranieri, credited with creating the modern mortgage securitisation market, said policy makers were missing a key opportunity to solve the foreclosure crisis by creating a large, national rent-to-own programme. “This is a once in a lifetime opportunity” to give people a chance to own a home, he said.







Home Depot sales rise in US stores
By Jonathan Birchall in New York
Copyright The Financial Times Limited 2010
Published: August 17 2010 14:31 | Last updated: August 17 2010 20:21
http://www.ft.com/cms/s/0/8692ea4e-a9ff-11df-8eb1-00144feabdc0.html


Home Depot, the largest US home improvement retailer, yesterday reduced its sales growth forecast for the full year, saying an expected increase in demand from professional contractors had failed to materialise amid continued weakness in the housing market.

The retailer, which operates almost 2,000 superstores across the US, cut its forecast for full-year sales growth to 2.6 per cent, from 3.5 per cent. But it left its earnings guidance essentially unchanged, saying it was continuing to see improvements in operating performance and was gaining market share.

Lowe’s, its smaller and habitually more optimistic rival, on Monday stuck to its full-year sales outlook, saying it hoped a slow second quarter would be offset by increased demand as the economy recovers.

But Frank Blake, Home Depot’s chief executive, said that despite the uncertain economic climate “we are seeing our business return to sales growth, and the hardest-hit parts of the country start to stabilise, so we will continue to invest and position our business for recovery”.

The retailer reported that sales at its US stores rose 1 per cent on a comparable basis against the same period last year, its second consecutive increase in quarterly comparable sales after four years of falling sales.

However, it saw continued weakness in high-value orders of $900 – one-fifth of its business – which were down 4.9 per cent against the quarter a year ago.

Customers continued to focus spending on items such as plumbing and roofing repairs, or small flooring or bathroom improvements, rather than large discretionary projects.

Craig Menear, head of merchandising, said the retailer was expecting to benefit in the second half of the year from customers spending on restoring lawns and grass after the hot summer. But overall, he said “we think that they will continue to focus on the maintenance and repair and simple updates around their homes”.

Home Depot cut its forecast for full-year sales growth to 2.6 per cent from 3.5 per cent previously. But it raised its full-year earnings forecast by 2 cents to $1.90.

Mr Blake noted that the retailer’s efforts to predict demand were becoming increasingly difficult because of volatility in the macroeconomic data, such as housing sales or housing repair investment, that it might traditionally have used.

Like many US retailers, Home Depot has stopped opening new stores since the start of the recession and focused on improving the return of its existing network, through initiatives including establishing new regional distribution centres and efforts to improve store service.

Home Depot’s shares, which rose above $35 after its first-quarter results in May, increased more than 4 per cent to $28.70.








Beijing looks to broaden renminbi use
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: August 17 2010 14:34 | Last updated: August 17 2010 14:34
http://www.ft.com/cms/s/0/81500cea-a9fc-11df-8eb1-00144feabdc0.html


China will allow foreign central banks and overseas lenders substantially to increase investment in its domestic interbank bond market, in a move aimed at encouraging internationalisation of the Chinese currency.

The People’s Bank of China, the central bank, said on Tuesday that it had launched a pilot project to allow more foreign access to its largely closed domestic interbank bond market to “encourage cross-border renminbi trade settlement” and “broaden investment channels for renminbi to flow back [to China]”.

Foreign central banks, lenders in Hong Kong and Macao that already conduct renminbi clearing and overseas banks involved in renminbi cross-border trade settlement will be allowed to participate in the Rmb19,500bn ($2,870bn) interbank bond market.

Beijing is trying to encourage use of the renminbi for trade as part of a long-term plan to promote it as a reserve currency and reduce China’s exposure to the US dollar, now used for most Chinese trade.

“This is an integral part of pushing the internationalisation of the renminbi,” said Wang Tao, chief China economist at UBS. “In order to encourage foreign institutions to get involved in renminbi settlement, you need to give them somewhere to invest.”

This will be the first time that non-resident institutions are permitted in China’s biggest bond market to trade government and corporate debt. Foreign financial institutions are currently only able to invest renminbi they already hold onshore.

The only other channel through which non-residents can access Chinese capital markets is through a small and highly restricted scheme that allows approved foreign institutions to buy Chinese-listed equities and bonds traded on the stock exchanges.

Analysts said the pilot programme for the interbank market would still be subject to restrictive quotas handed out by the PBoC to foreign lenders banks and central banks.

By the end of June about Rmb20bn worth of China’s cross-border trade was denominated in renminbi, a fraction of the country’s Rmb9,400bn in total exports last year.

“If they don’t allow people who accumulate renminbi to make proper investments, the internationalisation of the renminbi will quickly hit a wall,” said Zhang Zhiming, an analyst at HSBC. “So the central bank will probably allow the quotas to grow quite quickly.”

Non-resident institutions and individuals that hold renminbi are currently only able to deposit them with Chinese and Hong Kong banks.

Although there is only a relatively tiny amount of renminbi held outside the country, the demand for Chinese bond investments is expected to be high as the currency continues its gradual appreciation.

In June, China expanded a renminbi cross-border trade settlement pilot scheme to every country in the world and to 20 Chinese provinces and municipalities, allowing companies to invoice and settle imports and exports in renminbi rather than US dollars.

Beijing has also signed currency swap agreements with central banks and monetary authorities in seven countries, with agreements totalling a little over Rmb800bn.






Walmart sales hit after remodelling of stores
By Jonathan Birchall in New York
Copyright The Financial Times Limited 2010
Published: August 17 2010 14:13 | Last updated: August 17 2010 21:19
http://www.ft.com/cms/s/0/bdd00e20-a9f9-11df-8eb1-00144feabdc0.html

Walmart suffered its fifth successive decline in sales in the second quarter, hit by weak economic conditions and a rare operational misstep by the world’s largest retailer.

The company sounded a cautious note on trading outlook, saying the slow economic recovery would continue to affect its largely low-income customers. However, it expected sales at its core US business to start growing again by the holiday quarter to January 31.

The retailer said comparable sales at its more than 3,500 Supercenters and discount stores had fallen 1.8 per cent during the second quarter against a year ago. Net US sales were flat at $64.6bn, in spite of new store openings and a costly remodelling programme, dubbed Project Impact, aimed at increasing store productivity and sales.

Walmart admitted that efforts to give its stores a cleaner, less cluttered feel by clearing promotional merchandise from its store aisles had hurt sales.

Tom Schoewe, chief financial officer, said: “It’s obvious that we got a little bit too aggressive and took too much of the assortment out.”

The stock reduction measures included removing some less popular national brands from its shelves and clearing out the stacked promotions that traditionally dot the wide walkways across its large format stores.

Bill Simon, the newly appointed head of Walmart’s US stores, said the retailer was restoring products to its stores, and had returned to a focus on “everyday low prices” across its range, after steep price promotions earlier in the summer failed to deliver the expected lift in sales.

He said he was confident that steps “will restore top line sales growth by the fourth quarter”, while noting “it will take time to see significant changes in our [comparable sales] and that the US economy remains challenging.”

Walmart’s US inventory levels rose 4.4 per cent in the quarter, as it started restocking, but remain “well below” the levels of July 2007 and July 2008.

Mr Simon took over from Walmart’s former US head, Eduardo Castro-Wright, at the start of July.

Mr Castro-Wright, who now heads the company’s global e-commerce effort, presided over a dramatic overhaul of the US store network, including the drive to lower inventory that used to be piled high on upper shelves across its stores.

John Fleming, the chief merchandising officer who played a leading role in the rebranding of Walmart’s US stores under Mr Castro-Wright, also stood down in July.

Walmart’s overall business reported earnings that were slightly above Wall Street’s expectations of 97 cents per diluted share, up 3.6 per cent from the year ago period at $3.59bn. Total sales rose 2.8 per cent to $103bn on Tuesday.

Its global performance was boosted by strong comparable sales growth in Mexico and Central America, up 2.7 per cent; in Brazil, up 3.1 per cent; and in China, up 6.1 per cent.

International sales rose 11 per cent to $25.9bn. During the quarter, Walmart’s international store growth again exceeded growth in the US. It also announced a £778 ($1.12bn) deal to acquire 193 locations in the UK from Denmark’s Netto.

Walmart warned that customers at its UK Asda stores were expected to face “a challenging 12 to 18 months” as a result of government spending cuts and tax increases.