Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Jittery investors keep ‘havens’ in demand
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 18 2010 09:37 | Last updated: August 18 2010 12:01
http://www.ft.com/cms/s/0/52a14bf2-aa97-11df-80f9-00144feabdc0.html


Wednesday 11.50 BST. Markets’ fickle August continues, as a brief rally in risky assets is snuffed out and “haven” assets such as the Japanese yen and US Treasuries are once again in demand.

The FTSE Asia-Pacific Index is up 0.6 per cent after Japanese shares rose off their lows for the year, following news that Naoto Kan, Japan’s prime minister, will outline stimulus plans as early as next month.

However, fears for the global economy continue to weigh, as investors demand yen and other insurance against further slowing. Long-term German Bund yields have fallen below 3 per cent for the first time ever.

The FTSE Eurofirst 300 index is down 0.3 per cent. The US’s S&P 500 index is being priced in the futures market to change little.

After a volatile two weeks, world stocks stand flat for the month. The significant gains have been in the yen and government bonds, as investors take the view that rate rises in the US, Europe, the UK and Japan remain a distant prospect.

Wall Street on Tuesday enjoyed sharp gains, driven by positive results from retailers Home Depot and Walmart. Concerns about the US recovery eased after figures showed industrial output in July jumped twice as much as forecast, and produce prices rose, causing US Treasuries to shoot up in yield.

But while panic may have subsided, risk appetite is hardly healthy and the economic recovery is still on a weak footing. Economists across Wall Street have been lowering their consensus growth estimate from 2011, tumbling from about 3 per cent to closer to 2 per cent.

In fact, US investors are as nervous as ever about their investments in US stocks, according to the Bank of America Merrill Lynch survey. They are even more bearish on Japanese shares, though actually turning positive on Europe. Volumes in US trading are averaging their lowest since February 2009.

Even in Australia, an election is seeing the opposition party pledge austerity measures to reduce the country’s fiscal deficit. Australia has been a rare economic bright spot, thanks to strong demand for its raw materials.

The market is also preparing for a rash of figures on the US housing market, including the number of people who are refinancing their mortgages, a key source of cash for US consumers. Investors ought to also keep watch on the US discussion over the future of Fannie and Freddie, if only to see realise precarious the market is.

On Tuesday, the number of building permits was reported to have risen in July but not as strongly as anticipated, as the overhang of an expired tax credit continues to damp the market.

“The second-quarter jump in residential investment was the classic ‘dead cat bounce’. More pain is likely ahead in the third quarter,” said Tom Porcelli, US market economist at RBC Capital Markets in New York.

• Europe. The UK’s FTSE 100 index is down 0.7 per cent, with banks and energy firms leading the decline. Vestas, the Danish wind energy leader, is down 20 per cent after missing its earnings targets and reducing its forecast. The alternative energy sector is the lead decliner on the Eurofirst 300. Germany’s Dax index is also down 0.2 per cent.

• Asia. Australian shares fell 0.1 per cent, dragged down in part by a dip in BHP Billiton shares after the mining group turned hostile with its $39bn bid for Potash Corp, the Canadian fertiliser group. Chinese shares also dipped. The mainland Shanghai Composite index fell 0.2 per cent and the Hong Kong Hang Seng index slipped 0.5 per cent.

China’s outlook is as difficult to gauge as the US’s at the moment. Neil Mellor, currency analyst at BNY Mellon in London, cited a report that China will likely extend more loans to already troubled localities in order to stimulate industry – even as property values keep rising, despite efforts to tamp down prices.

“Recent data highlight the fine line that the government is treading in tackling dual speed trends in its economy,” said Mr Mellor.

Japan, however, rose 0.9 per cent, leading Asia overall higher. The Nikkei 225 average has swung back and forth as Japanese officials move closer to deciding whether to intervene to stem the yen’s advance. A rising yen hurts the earnings of Japan’s core export companies.

• Debt. Government benchmarks are in demand, Yields on Japanese 10-year bonds are down 4 basis points to 0.91 per cent, a fresh seven-year low, as Japan considers stimulus measures.

A 10-year Bund auction saw the lowest-ever yield of 2.37 per cent, and in post trading yields fell to 2.33 per cent, the record low.

However, spreads against “peripheral” debts still narrowed as fears in debt markets ease. Portugal sold more bonds than it anticipated at an auction of short-term debt. Three-month bills commanded just half the yield versus a previous auction, while 12-month bills saw yields rise slightly.

That adds to well-received Spanish and Irish bond auctions. The Irish auction went well enough that Bank of Ireland, one of the country’s biggest banks, is considering coming to market with a €1.5bn deal.

Ten-year US Treasuries are down 3 basis points to 2.61 per cent, with similar gains across the curve. German 10-year Bunds are lower by 1 basis point, to 2.35 per cent.

• Currencies. The dollar, after strengthening on Tuesday, has resumed its slide. The yen is up by 0.3 per cent against the US dollar at Y85.28. The euro is also slightly stronger at $1.2884.

Sterling is also stronger by 0.4 per cent, to $1.5644, after the UK’s Bank of England revealed that its monetary policy committee voted 8-1 to hold rates steady. As expected, Andrew Sentance voted to raise rates, suggesting the BoE had not become measurably more dovish.

The Australian dollar has been tumbling, following the stronger yen and the possibility of austerity measures. The Canadian dollar, however, is higher after a boost in oil prices on Tuesday.

• Commodities. Benchmark US crude oil is falling, down 1.3 per cent to $74.80 a barrel, returning to one-month lows after rising on Tuesday. Though the growth outlook is stabilising, inventory figures from the American Petroleum Institute this week showed builds across all geographies. Inventory from the US Department of Energy come later in this session.

Gold is stopping for profit-taking after a rally to six-week highs but within $50 of its nominal all-time high. Bullion is down 0.1 per cent at $1,222 an ounce.

Follow the Global Market Overview on Twitter: @telisdemos






Geithner calls for housing finance reform
By James Politi and Suzanne Kapner in Washington
Copyright The Financial Times Limited 2010
Published: August 17 2010 14:54 | Last updated: August 17 2010 18:23
http://www.ft.com/cms/s/0/949b9afa-aa04-11df-8eb1-00144feabdc0.html


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.








US matches Indian call centre costs
By James Lamont in New Delhi and Joe Leahy in Mumbai
Copyright The Financial Times Limited 2010
Published: August 17 2010 19:12 | Last updated: August 17 2010 21:44
http://www.ft.com/cms/s/2/0f6d8f76-aa29-11df-9367-00144feabdc0.html


Call centre workers are becoming as cheap to hire in the US as they are in India, according to the head of the country’s largest business process outsourcing company.

High unemployment levels have driven down wages for some low-skilled outsourcing services in some parts of the US, particularly among the Hispanic population.

At the same time, wages in India’s outsourcing sector have risen by 10 per cent this year and senior outsourcing managers based in the country command salaries above global averages.

Pramod Bhasin, the chief executive of Genpact, said his company expected to treble its workforce in the US over the next two years, from about 1,500 employees now.

“We need to be very aware [of what’s available] as people [in the US] are open to working at home and working at lower salaries than they were used to,” said Mr Bhasin. “We can hire some seasoned executives with experience in the US for less money.”

The narrowing of the traditional cost advantage is also spurring other Indian outsourcers to hire more staff outside India.

Wipro, the Bangalore-based IT outsourcing company, started to recruit workers in Europe, the Middle East and Africa during the global economic downturn. Suresh Vaswani, joint chief executive of Wipro Technologies, forecasts that half of his company’s overseas workforce will be non-Indians in two years, from the current 39 per cent.

India is still expected to retain the overall cost advantage, particularly in more sophisticated software outsourcing.

Observers say that while the cost of some senior positions may have equalised with the US and certain call centre services may be more cost-effective to set up in depressed areas of the US, this phenomenon may not outlast the US downturn.

Even after a tripling in numbers, Genpact’s US workforce would still be only about a ninth of its total staff. The former in-house outsourcing unit of US multinational General Electric has operations in Chicago, Pennsylvania, Tennessee and New York.

The move to expand operations in the US also comes as protectionist rhetoric against outsourcers rises in Washington. Last week, Charles Schumer, a US senator, described Indian IT outsourcing companies unflatteringly as “chop shops”, a term referring to places where stolen cars are dismantled for their parts.

Mr Bhasin said Indian outsourcers needed to be more sympathetic to the deep economic woes in the US, not least because US business had helped India’s outsourcing industry “piggy-back” on its success.




Dell shareholders in protest vote over chairman
By Richard Waters in San Francisco
Copyright The Financial Times Limited 2010
Published: August 18 2010 03:33 | Last updated: August 18 2010 03:33
http://www.ft.com/cms/s/2/0ef88ce4-aa6a-11df-9367-00144feabdc0.html


A substantial minority of the shareholders of Dell, the world’s third-biggest PC maker, have backed an investor protest aimed at pressuring the company’s board into stripping founder Michael Dell of the title of chairman.

The evidence of shareholder unrest over how Dell is run comes less than a month after the company and Mr Dell, who also serves as chief executive officer, settled separate fraud complaints with the Securities and Exchange Commission.

According to an official Dell filing late on Tuesday in the US, holders of 25.1 per cent of shares voted at the company’s annual meeting last week withheld their support for Mr Dell’s reappointment as a director. The protest vote was sizeable given the automatic reinstatement most US directors receive.

The securities regulator alleged that Dell and its founder failed to disclose payments the company received from Intel in return for an exclusive agreement to use only that company’s chips in its machines. The company paid $100m to settle the claim, while Mr Dell personally paid $4m, though neither admitted to the charge.

The personal fraud charge lodged against one of the tech world’s most prominent executives left some shareholders uneasy about the way the company’s board is run. Besides being chairman and Dell’s largest shareholder, with an 11.7 per cent stake, Mr Dell returned as chief executive officer three years ago.

Two big trade union pension funds, belonging to the AFL-CIO and the American Federation of State, County and Municipal Employees, called for a protest vote from Dell’s shareholders at the annual meeting as a way to force a change in the company’s governance.

“Based on the allegations in the SEC’s complaint against our company and Michael Dell, we believe that shareholders would be better served by the removal of Michael Dell as… chairman,” the union letter said. By withholding support for Mr Dell’s reappointment as a director, “you can encourage the board of directors to appoint a new chairman,” it added.