Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


US labour market fears spark sell-off
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 19 2010 09:45 | Last updated: August 19 2010 14:19
http://www.ft.com/cms/s/0/9e55d874-ab5f-11df-abee-00144feabdc0.html


Thursday 14.00 BST. The US labour market remains in a slump, as jobless claims rise past expectations, sending risky assets lower and prompting a fresh sell-off of the US dollar.

The FTSE All-World stock index is up 0.2 per cent, but falling quickly. The FTSE Eurofirst 300, volatile all session, tumbled to a loss after the figures were released. Futures on the S&P 500 index are now pricing in a 0.1 per cent loss, after earlier forecasting a more than 0.5 per cent gain.

The news was tempered by a fresh bid: Intel has agreed to buy McAfee, security software developer, for nearly $7.7bn. Futures are still pricing in slight gains for the Nasdaq Composite and Dow Jones Industrial Average.

Shares were higher before the announcement, following signs of strength for the UK economy. Germany’s Bundesbank also raised its forecast for German growth in the second half of the year after an expectations-beating performance thus far.

Now, government bond yields are falling, and gold is rising. Benchmark 10-year US Treasury yields fell 3 basis points to trade flat, as did benchmark German Bunds. Long-term US bond yields have fallen to a fresh 2010 low yield, at 3.72 per cent, although long-term German bonds are staying above their all-time low reached on Wednesday.

Earlier, hopes for potential stimulus package in Japan reversed the rise of bonds and the yen, and helped lift shares across Asia and sending the yen lower against the dollar. The government is also considering stimulating the economy to combat deflation, with Naoto Kan, prime minister, set to present details in September. Economists predict that the BoJ will likely act, but not until next month.

The Market Eye
Japan may now only be the world’s third largest economy – behind rising China – but its investors’ cash has played a big role in markets of late. Japanese investors have been voracious consumers of US Treasury bonds, buying them at a record rate and helping push yields to record-lows.

Japanese retail investors, a famously aggressive bunch of leveraged speculators in currencies, have also been stalwart supporters of the dollar, betting it will rise against the surging yen, according to positioning data. Meanwhile, investors in US markets last week had their largest net short position of the year, according to the CTFC, against the dollar.

That balancing out has helped bring some measure of calm to risk appetite, as the yen pushed to 15-year highs against the dollar in early August but has struggled to move further. If stimulus is successful in leading bearish Japanese cash flows to reverse, it could signal a shift in sentiment across global markets.

Then the Bundesbank raised its 2010 gross domestic product growth forecast to 3 per cent, from 2 per cent. And in the UK, shoppers had a surprisingly spry July, even as growth in public borrowing slowed more than expected thanks to improved business tax receipts.

But when US jobless claims rose to 500,000 for last week, above the forecast of 478,000, and bringing the four-week moving average up 8,000, risk-takers lost their nerve. Without a pick-up in growth in the US, the world’s largest economy, the rest of the world cannot hope for any substantial rebound.

“This report indicates that the pace of firings and layoffs has increased and is a negative signal for the employment report in two weeks’ time,” said Michael Gapen, economist at Barclays Capital.

• Europe. The UK's FTSE 100 index is down 0.4 per cent, reversing an earlier gain. Cyclical energy firms and banks lead the decliners. Bank shares were volatile following a mixed report in which Basel III capital rules were found likely to impact economic growth, but not as dramatically as many expected.

The broader FTSE Eurofirst 300 index is up 0.1 per cent. Germany’s Dax is down 0.3 per cent. The blue-chip German index has slipped nearly 4 per cent after reaching a 2010 high in early August, following its forecast-beating second quarter growth.

• Asia. The Nikkei 225 average jumped 1.3 per cent, rising further from its lows of the year reached earlier this month, led by strength for export-orientated technology and automakers. Chinese shares reversed a dip from Wednesday. The mainland Shanghai Composite rose 0.8 per cent and the Hong Kong Hang Seng index added 0.9 per cent.

India’s Sensex index was up 0.9 per cent, after inflation reports showed price growth easing, leading hopes that the central bank would not continue its aggressive tightening course.

Australia’s S&P/ASX 200 index lagged, rising just 0.1 per cent, as investors mark time ahead of Saturday’s election, in which Julia Gillard, incumbent prime minister, is promising a mining tax and the conservative opposition is advocating an austerity programme.

• Currencies. As the dollar sells off the euro is stronger, rising 0.3 per cent to $1.2893 against the dollar. The euro has still fallen since beginning August above $1.30, as investors switched back into the dollar and yen as worries about the European “periphery” countries rose again.

The pound has reversed its multi-day tumble after the UK economic data. It has fallen after the Bank of England said it would not raise rates, and did not appear any closer to doing so in the minutes detailing its decision. Sterling is up 0.4 per cent against the dollar, to $1.5657, and up 0.1 per cent to £0.8231 against the euro.

The Canadian dollar is falling after seeing its strongest exchange rate in a week. Traders feared that the US Federal Reserve’s loosening would force the Bank of Canada to follow suit. However, an anticipated rise in Canada’s CPI, to be reported tomorrow, is moderating that fear.

“Market pricing continues to lean toward a rate hike at the BoC’s September 8 meeting, but it will likely be a close call,” said Amelia Bourdeau, G10 currency strategist at UBS.

• Debt. Japanese benchmarks rose from their all-time low. The yield on 10-year JGBs are up 3 basis points to 0.94 per cent.

Other “havens” were also seeing selling pressure, though that reversed after the US jobless claims report. Yields on the 10-year US Treasury bond are flat at 2.63 per cent per cent. German 10-year Bunds are up just 1bp to 2.34 per cent, after rising 4bp earlier.

Spreads on 10-year sovereign bonds in Greece, Ireland, Spain and Portugal are wider. Yet other risk measures eased: Interbank lending rates were little changed overnight, have risen in recent days. Borrowing from the European Central Bank reaching a three-month high on Tuesday and Wednesday, but has declined today.

• Commodities. The price of a barrel of US crude gave up gains, and is now higher by 0.1 per cent, in spite of dire supply warnings, to $75.45. The US Department of Energy said US crude stocks were at a record high last week, following the private American Petroleum Institute’s own figures showing a jump in surplus supplies. Crude fell to less than $74, its lowest since early July.

Gold jumped after the jobless report, adding to a six-week high, as investors fear for the global economy and the possible longer-term inflationary consequences of stimulus in the US. Bullion is up 0.5 per cent to $1,234 an ounce.

Additional reporting by Song Jung-a in Seoul

Follow Global Market Overview on Twitter: @telisdemos






Washington to enforce health reform
By Anna Fifield in Washington
Copyright The Financial Times Limited 2010
Published: August 18 2010 22:00 | Last updated: August 18 2010 22:00
http://www.ft.com/cms/s/0/c5e5bab2-aae7-11df-9e6b-00144feabdc0.html


The federal government will step in to ensure that the Obama administration’s healthcare reforms are implemented in every state, Kathleen Sebelius, the health secretary, said, amid growing resistance to the changes in some parts of the US and an inability to act in others.

The implementation of the reform package, which aims to see 26m uninsured Americans obtain medical coverage by 2014, remains on track in spite of complications, Ms Sebelius told the Financial Times in its View from DC video series.

“The way the bill is written, it really is a state-based programme with the federal government providing the back-up,” she said.

“So if a state opts not to set up a risk pool, we do it here at the department. If the state opts not to regulate their insurance market, we do it.”

But, mindful of rightwing criticism that the reforms amount to European-style “socialism”, she added: “It is not a federal takeover, it’s really a partnership.”

The first results of the reform package, passed in March after a long and bitter legislative fight, are beginning to kick in. High-risk insurance pools have been created in many states, allowing people with pre-existing conditions such as cancer or HIV to be covered, and pensioners who have overpaid for prescription medicines are now receiving $250 rebate cheques.

Insurers will soon be barred from declining to cover children with pre-existing conditions and young adults will be able to stay on their parents’ policies until they are 26.

The biggest changes, however, will not come until 2014, when states will have created insurance ex-changes that will allow individuals and small businesses to use their combined leverage to win better deals from private insurance companies. States have primary responsibility for implementing many of the changes, such as creating the exchanges and enforcing many of the consumer protections in the new law.

However, some big states, including California and Florida, said they did not have the legal authority to enforce the new consumer protection standards, while others face such severe budget crises that they will struggle to pay for provisions, such as the expanded Medicaid services for lower-income groups, required under the law.

Ms Sebelius’s department this week awarded $1m each to 45 states to help them improve oversight of health insurance premium increases and rein in excessive rate rises.

Separately, more than 20 states are challenging a mandate that requires almost all Americans to have some form of insurance by 2014 as unconstitutional. A judge in Virginia has said a challenge brought by the state’s attorney-general can proceed, while Arizona, Florida and Oklahoma will soon follow in Missouri’s footsteps by holding yes-or-no referendums on the mandate.

In Texas, the state with the highest proportion of uninsured, Rick Perry, the governor, has vowed “to do everything in our power to fight this federal excess and find ways to protect our families, taxpayers and medical providers from this gross federal overreach”.

Analysts said the friction with the states could cause problems.

“Federal/state relations is one of the biggest challenges to implementing healthcare reform,” said Diane Rowland, executive vice-president of the Kaiser Family Foundation, a non-partisan health policy group. “Many of the states are facing fiscal crises and they have real capacity issues. Plus, 37 of the governors are up for re-election [in November] so there could be substantial turnover at the top in many states,” she said.

But Ms Sebelius, who was previously governor of Kansas and the state’s insurance commissioner before that, said none of the road-bumps would slow down the reform process.

“I think the time change for [health insurance] exchanges is very realistic. What we know is that states are already beginning to work on [the changes],” she said. “The legal challenges will work their way through ... It doesn’t slow anything down. This is the law of the land.”








GM filing begins road back to market
By John Reed in London
Copyright The Financial Times Limited 2010
Published: August 18 2010 21:21 | Last updated: August 19 2010 00:40
http://www.ft.com/cms/s/0/67d61304-ab05-11df-9e6b-00144feabdc0.html


General Motors, the US government-controlled carmaker, rescued from collapse by American and Canadian taxpayers last year, began its return to public ownership when it filed for an initial public offering in New York and Toronto.

GM said the number of shares and the price range for the IPO had not yet been determined, but the issue is expected to be one of the largest in history.

It could raise between $12bn and $16bn from selling common stock representing about a fifth of existing equity holders’ ownership, according to people familiar with the matter.

The carmaker is also expected to sell about $3bn of mandatory convertible securities, those people added. This will raise new money for the company.

The issue will mark an unusually swift return to public markets for the 102-year-old carmaker, which reorganised in bankruptcy last year with the help of more than $60bn of loans and equity from the US and jointly the Canadian and Ontario governments, which now own 61 per cent and 11 per cent of the company respectively.

GM said that it had filed a Form S-1 with the US Securities and Exchange Commission for the IPO, to consist of both common stock held by its shareholders and Series B mandatory convertible preferred stock. The mandatory securities would be converted into common stock at a fixed date in the future, after about three years.

The amount sold will depend on market conditions in the final months of the year, with GM and the Treasury still aiming for a sale in the fourth quarter.

It remains unclear how much of the government stake will be sold and therefore how much of taxpayers’ outlay will be recouped at this stage.

Morgan Stanley, JPMorgan, BofA Merrill Lynch and Citigroup will lead the offering. Goldman Sachs, Barclays Capital, Credit Suisse, Deutsche Bank, RBC Capital Markets and UBS will also be underwriters.

The roadshow is likely to include trips to international investors, reflecting the diversity of GM’s pre-bankruptcy shareholder base.

The share offer’s reception and the spotlight it throws on GM’s business will have significant repercussions for President Obama’s administration as it heads toward a hotly contested midterm Congressional election.

In the prospectus, GM revealed that its US and international pension plans were more than $27bn in deficit at the end of 2009.

GM also admitted its disclosure practices and internal control over financial reporting were “currently not effective” and could hurt its finances and business in the future.





Barclays deal ‘raises questions of fairness and justice’
By Stephanie Kirchgaessner in Washington
Copyright The Financial Times Limited 2010
Published: August 18 2010 21:15 | Last updated: August 18 2010 21:15
http://www.ft.com/cms/s/0/b3248176-ab03-11df-9e6b-00144feabdc0.html


A $298m settlement struck by Barclays with the US Department of Justice over sanctions violations added to public perceptions that white-collar crime received lighter treatment in the legal system than other offences, an American judge claimed on Wednesday.

US district judge Emmet Sullivan approved the settlement but questioned the justice department’s decision to negotiate a so-called deferred prosecution with the UK bank, which in effect allows Barclays to be on probation for two years without pleading guilty to the charges.

“The public has very little confidence in white-collar crime prosecutions. It’s proceedings like these [that raise questions about] fairness and justice. Why are the financial institutions being treated like this? People plead guilty to criminal conduct. This bank isn’t being asked to do that,” he said.

Judge Sullivan added: “They can pay for their justice – that is what the public sees.”

Under the terms of the deal, Barclays may not dispute the DoJ’s charges, including that the bank knowingly stripped names of sanctioned countries – Iran, Cuba, Sudan and Burma – from transactions to evade detection. In all, the bank funnelled hundreds of millions of dollars in illegal payments from 1995 to 2006, prosecutors alleged.

“If other banks saw that the government was being rough and tough and that bank executives had to stand before a judge and plead guilty, it might be a powerful deterrent,” Judge Sullivan said.

He also said Barclays shareholders – “normal” people, as he put it – would bear the financial brunt of the company’s wrongdoing, suggesting it might be more appropriate to dock the pay of the company directors.

Though Judge Sullivan said it was not his job to “micromanage” the DoJ, the criticism – adding to two recent cases involving Bank of America and Citigroup in which judges criticised the handling of securities cases – puts pressure on the DoJ as it negotiates settlements.

Lanny Breuer, assistant attorney general at the DoJ, said: “Banks like Barclays will not be permitted to disregard sanctions put in place by the US government. When corporations self-disclose their criminal wrongdoing to us, as Barclays did, they will not get a pass, but we will take their disclosure, co-operation and remedial efforts into consideration.”

Under the DoJ’s “principles of prosecution of business organisations”, deferred prosecution agreements are considered “important middle ground” between declining prosecution and obtaining the conviction of a corporation.

Barclays said it was making “substantial investments” in payment and screening technology following the US investigation and that it was conducting mandatory sanctions training for more than 100,000 staff.






Intel to acquire McAfee for $7.7bn
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: August 19 2010 13:57 | Last updated: August 19 2010 13:57
http://www.ft.com/cms/s/2/ee61f8ae-ab8f-11df-abee-00144feabdc0.html


Intel, the US chipmaker, said on Thursday that it would acquire McAfee, the antivirus software company, in a $7.68bn deal that would enhance its ability to combat hacking and viruses as it pushes deeper into mobile computing.

The cash deal offers McAfee shareholders a 60 per cent premium above the company’s closing stock price on Wednesday. Shares of McAfee surged by 58.30 per cent to $47.38 in pre-market trading on Thursday, while Intel’s shares dropped 2.19 per cent to $19.16.

“With the rapid expansion of growth across a vast array of internet-connected devices, more and more of the elements of our lives have moved online,” said Paul Otellini, Intel’s chief executive. “In the past, energy-efficient performance and connectivity have defined computing requirements. Looking forward, security will join those as a third pillar of what people demand from all computing experiences.”

The California-based Intel said the deal would help it to serve the security needs of customers through a combination of hardware and software as more devices such as smartphones, televisions, medical technology and cash machines go online.

McAfee, which is also based in Santa Clara, California, will become a subsidiary of Intel and report to its Software and Services Group. It had $2bn in revenues last year and employs 6,100 workers.

“We believe this acquisition will result in our ability to deliver a safer, more secure and trusted internet-enabled device experience,” Dave DeWalt, McAfee’s chief executive said in a statement.

Goldman Sachs advised Intel on the deal and McAfee was advised by Morgan Stanley.







S Korean treasuries sought by China
By Jamil Anderlini in Beijing, Song Jung-a in Seoul and Lindsay Whipp in Tokyo
Copyright The Financial Times Limited 2010
Published: August 18 2010 16:07 | Last updated: August 18 2010 16:07
http://www.ft.com/cms/s/0/3752e7a0-aad0-11df-80f9-00144feabdc0.html


China more than doubled its direct holdings of South Korean treasury bonds in recent months as it turned to regional markets to invest some of its $2,450bn in foreign exchange reserves in currencies other than the US dollar and the euro.

Chinese holdings of the treasury bonds stood at Won3,990bn ($3.4bn) by the end of the June from Won1,870bn at the end of last year, according to the South Korean Financial Supervisory Service, the country’s financial watchdog.

The composition of China’s foreign exchange reserves, the largest in the world, are a closely guarded secret. The only Chinese investor allowed to make sizeable offshore bond purchases is the State Administration of Foreign Exchange (Safe), which manages the reserves under the central bank.

Safe’s relatively small expansion into Korean government debt coincides with its purchase of a record Y1,733bn ($20.3bn) of Japanese bonds in the first half of the year, according to Japanese government data. That was almost seven times its total purchases for 2005.

The bulk of China’s reserves have always been invested in US dollar securities, mostly Treasury bonds. But as the reserves have grown rapidly in recent years, Safe has been moving into other currencies and assets.

“The euro had been the key diversification tool for reserve managers in recent years but clearly the events since the end of last year have made the euro less attractive,” said Richard Yetsenga, HSBC’s global head of emerging markets foreign exchange strategy.

“It makes sense that Asian central banks have been looking at other diversification plays and Korea is an obvious choice.”

China appeared to trim its holdings of US Treasuries by $32.5bn in May and by $24bn in June, according to US government data. But analysts cautioned the drop did not necessarily signal a large-scale diversification. They said monthly US Treasury data does not identify the original source of investment, so Safe may have increased its US holdings through offshore subsidiaries and third-party fund managers.

US and Chinese officials both say fears that Beijing may dump US dollar assets are misplaced because there is no other market that is large or liquid enough to absorb China’s enormous holdings. “China will only reduce its US dollars by a very small amount and it will not have much impact on the market,” said Ding Zhijie, of Peking University.

Chinese Korean bond purchases accounted for more than one-fifth of foreign inflows into the market in the first half of this year, compared with 10 per cent last year.