Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


Fresh US recovery fears hit Asian stocks
By Telis Demos in London and Song Jung-a in Seoul
Copyright The Financial Times Limited 2010
Published: August 19 2010 09:45 | Last updated: August 20 2010 04:04
http://www.ft.com/cms/s/0/9e55d874-ab5f-11df-abee-00144feabdc0.html


Friday 03.45 BST. Asian stock markets tumble after overnight losses on Wall Street as weak US jobs market data cast a shadow on the global economic recovery while the higher yen continues to hurt Japanese exporters.

The Dow Jones Industrial Average plunged 1.4 per cent on Thursday after jobless claims unexpectedly rose to their highest level since November 2009.

Japan’s Nikkei stock average slides 1.2 per cent. Australia’s S&P/ASX 200 sheds 1.0 per cent ahead of Saturday’s election, South Korea’s Kospi composite is off 0.3 per cent while New Zealand’s NZX-50 is down 0.6 per cent.

Canon drops 2.3 per cent, Sony sheds 1.9 per cent and Toyota is 1.5 per cent lower despite expectations that the Bank of Japan may have an emergency meeting soon to tackle the rising yen. The yen hits a two-month high against the euro at Y109.02, its highest level since July 1. The yen is trading at Y85.40 against the dollar, down slightly from Y85.39.

Sharp drops 2.4 per cent on a local media report that the company plans to cut liquid crystal display panel production for one to two months.

BHP Billiton is off 1.1 per cent and Rio Tinto drops 1.8 per cent after a local news report that the companies have concluded that their pending production joint venture would be blocked by regulators.

Regional technology plays are also trading lower, in line with their US peers. Hynix Semiconductor is off 0.9 per cent, LG Display loses 1.4 per cent and Samsung Electronics eases 1.0 per cent. Elpida Memory is 1.6 per cent lower.

Oil and energy stocks are lower on weaker oil prices. Japan Petroleum Exploration sheds 0.8 per cent and SK Energy loses 0.8 per cent.

Thursday’s data showed US jobless claims rose to the psychologically significant 500,000 level last week, above the forecast of 476,000, and bringing the four-week moving average up by 9,000 claims.

“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.

And the drumbeat of bad US news kept on. The Philadelphia Fed’s gauge of factory activity fell to its lowest level in a year, and the Congressional Budget Office projected that the US’s 2014 budget deficit would reach $1,300bn, slightly higher than its forecast in March.

Government bond yields are falling further into uncharted territory. The US Federal Reserve also announced its first purchases of Treasuries, buying $3.6bn.

The yield of 10-year US Treasuries hit a new 11-month low of 2.57 per cent. Yields on 30-year US bonds were down a whopping 10 basis points, to 3.64 per cent, and German 30-year bond yields were at a fresh all time low, just below 2.98 per cent.

“The current low levels of bond yields would be consistent with the prospect of a very long period of near-zero, short-term interest rates, low or negative inflation, and lacklustre returns on riskier assets that increase demand for the safety of government bonds,” said Julian Jessop, chief international economist at Capital Economics.

“[We] see no compelling reason why bond yields cannot fall further in the US and Europe from their current levels, without this amounting to a bubble.”

Sentiment did not improve following a fresh mega-bid. Intel agreed to buy McAfee, security software developer, for nearly $8bn, but the market didn’t like the deal. Intel shares dropped 3.2 per cent, and the US’s technology-heavy Nasdaq Composite index, which normally loves a deal, is down 1.6 per cent.

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.

The Bundesbank also 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.

Investors remain fundamentally sceptical, and of late have been much keener to follow bad news. Outflows from US equity funds continued in July and August, despite a relative uptick in shares, and despite a rise in flows to emerging market stocks.

“The hate retail investors have for US equities runs deep,” said Vincent Deluard, executive vice president at TrimTabs Investment Research. “Beefy rallies, robust profits, and record cash stashes on Wall Street stand in sharp contrast to foreclosures, declining incomes, and job losses on Main Street.”

Trading has also entered a summer lull, exacerbating any moves. Volumes over the past five sessions were the lowest since last December.

• Europe. The UK's FTSE 100 index was down 1.7 per cent, with consumer firms in media and airlines among the top declining sectors. Bank shares were volatile following mixed reports. Basel III capital rules were found to likely not dramatically impact economic growth. But with yield curves flattening, bank profits will probably weaken going forward.

The broader FTSE Eurofirst 300 index was down 1.5 per cent. Germany’s Dax was down 1.8 per cent. The blue-chip German index has slipped nearly 5 per cent after reaching a 2010 high in early August, following its forecast-beating second quarter growth.

• Currencies. Fear is driving dollar strength. The euro is down 0.3 per cent, to $1.2820. It has fallen since beginning August near $1.34, as investors switched back into the dollar and yen as worries about the European “periphery” countries rose.

Earlier, the pound reversed its multi-day tumble after the UK economic data. It had 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. But it is now almost flat against the dollar to $1.5595 and down 0.2 per cent to £0.82225 against the euro.

The Canadian dollar is falling 1 per cent against the greenback after seeing its strongest exchange rate in a week, as speculation of a Bank of Canada rate hike in September fades.

• Debt. “Havens” were also seeing selling pressure early. Japanese benchmarks rose from their all-time low yield. The yield on 10-year JGBs was up 2 basis points to 0.93 per cent.

That reversed after the US jobless claims report. Yields on the 10-year US Treasury bond are down 6 basis points at 2.57 per cent. German 10-year Bunds were down 3bp to 2.31 per cent, after rising 4bp earlier – seeing a fresh all-time low.

Spreads on 10-year sovereign bonds in Greece, Ireland and Portugal were wider. Yet earlier, other European risk measures eased: Interbank lending rates were little changed overnight, have risen in recent days. Borrowing from the European Central Bank reached 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 down by 1.4 per cent, following supply glut warnings, to $74.37. 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.

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 0.2 per cent to $1,231 an ounce.

Follow Global Market Overview on Twitter: @telisdemos





The Fannie and Freddie effect is here long term
By Francesco Guerrera
Copyright The Financial Times Limited 2010
Published: August 20 2010 18:01 | Last updated: August 20 2010 18:01
http://www.ft.com/cms/s/0/388ff654-ac78-11df-8582-00144feabdc0.html


The unexpected questions are always the hardest. This week, as I was looking forward to cocktails after a busy day at a conference that fancies itself as the “Davos of Italy”, an Italian financier pulled me to one side and asked in hushed tones: “What will happen to Fannie Mae and Freddie Mac?”


I bid a silent farewell to the martinis and braced for a long discussion of the mess known as US housing finance. My interlocutor, a real estate investor, was concerned about the future of the two government-controlled behemoths that subsidise the bulk of US mortgages.

This week’s summit on their fate did little to allay his concerns, thanks to its failure to offer concrete solutions. Here is the problem: Fannie and Freddie have been the high priests of the religion of home-ownership.

Government-backed but publicly traded, the two “companies” funded and securitised masses of mortgages – $5,400bn-worth at the last count – keeping rates low for America’s homebuyers.

So far, so good. Fannie and Freddie made money by exploiting their government guarantee to raise cheap funds; millions of households were able to buy a brick-and-mortar piece of the American dream; and bankers and real estate agents fed at the trough of a booming housing market.

The system worked as planned until September 7, 2008 when the Bush administration was forced to take direct control of Fannie and Freddie just as they were drowning in a sea of falling house prices and soaring mortgage defaults.

The seizure – euphemistically called “conservatorship” – has cost taxpayers some $150bn so far but independent forecasters put the final bill at around $380bn. More worryingly, nobody in Washington seems to know what to do with Fannie and Freddie. Wind them down? Recapitalise them and re-release them back into the wild of capital markets? Break them up?

President Obama has promised a plan early next year, but here some thoughts:

1) Stop lying to taxpayers. At present, an accounting trick keeps Fannie and Freddie off the federal balance sheet. The financial hanky-panky must stop. Bringing their cost on to the government’s books would focus the minds of policymakers and force them to come up with long-term, economically-sound solutions.

2) Stop lying to homebuyers. Owning a house is not a God-given right. Recent evidence suggests that much-touted social benefits (more stable communities, less crime etc) and investment returns of homeownership have been exaggerated. By contrast, the risks of pumping cheap credit into the housing market are self-evident: bubbles inflate and then burst with devastating effects, particularly for poorer households. As an experiment in social equality, government’s interference with the housing market has failed.

3) Let banks be banks. A nasty side effect of Fannie and Freddie’s dominance of the mortgage market was that lenders shied away from mainstream borrowers and fell in love with subprime. Reining in government intervention in the mortgage market would reduce the risk of banks causing another financial meltdown.

4) Encourage rent-to-own programmes. The US authorities spend an estimated $4 per person per year on average to subsidise home ownership, but only $1 per person annually on affordable rents. Redressing the balance and encouraging less affluent households to rent with a realistic path to ownership could create a viable half-way house without the all-or-nothing risk of outright home purchases.

Shutting down Fannie and Freddie is impractical because it would lead to a plunge in house prices. But dithering over the status quo and persevering with a distorted market that rewards reckless behaviour by consumers and banks could be just as disastrous – and more long-lasting.

● This is my last On Wall Street. After more than three years, I am shifting to a new weekly column from September.

francesco.guerrera@ft.com