Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Stocks in choppy trade as US data disappoint
By Telis Demos in London and Hannah Kuchler in New York
Copyright The Financial Times Limited 2010
Published: August 25 2010 09:14 | Last updated: August 25 2010 19:56
http://www.ft.com/cms/s/0/5ea164e2-b018-11df-939d-00144feabdc0.html


Wednesday 21.40 BST. Global shares finished a day of volatile trading in negative territory in spite of a last minute rebound on Wall Street. US data on goods orders and home sales added more evidence of a slowing economy and pushed US stocks down for most of the session.

Traders had started the global session by halting the yen’s rise to 1995 levels after Japanese officials stepped up their so-called verbal intervention to stem the currency’s ascent. Yoshihiko Noda, finance minister, said he was considering “appropriate action” on what he described as “one-sided” moves in the yen.

But after the US data reports, the yen briefly back into positive territory – though it has since resumed its fall, now down 1 per cent. After choppy trading in the US markets, with the Dow Jones Industrial Average at one point struggling to hold the 10,000 level, a late day rebound left Wall Street closing in positive territory. The S&P 500 index closed up 0.3 per cent, paring the losses on the FTSE All-World stock index, which is now down 0.5 per cent.

Data showed that new home sales fell 12.4 per cent in July, bringing sales to their lowest in a month in the history of the data series. Economists had expected sales to be flat after a 12 per cent rise in June. On Tuesday, existing home sales fell by the most in 15 years.

Durable goods orders overall were up just 0.3 per cent, below a forecast of 1.6 per cent – and nearly 4 per cent lower without transportation purchases included. Traders’ reaction was much stronger to the goods report, having already had their housing expectations lowered.

“Terrible, just terrible,” said Jonathan Basile, economist at Credit Suisse, said of the goods report. “Core capex orders were the eye-opener,” he said, pointing to an 8 per cent decline in company spending on expansion, the lowest level since January 2009.

Earlier, Tokyo’s Nikkei average plunged further into one-year low territory. European stocks began the day lower after Ireland’s credit rating was downgraded late on Tuesday, and are falling further as markets anticipate more poor US economic news.

The “downgrade of Ireland...won’t help restore already shaky investor risk appetite with respect to the European financial system,” said Michael Hewson, market analyst at CMC Markets.

Yields on German Bunds continued to plunge as well, in spite of an expectations-beating Ifo business climate survey. The yield on ten-year Bunds are again at record lows, while the yield premium for Irish debt is at an all-time high. Portugual, however, successfully sold bonds – suggesting fear had not yet spiked to crisis levels.

Even though the Federal Reserve lowered its growth forecast in early August, sparking a sell-off, economists are still adjusting their expectations further downwards. Markets are preparing for a potentially disappointing revision of second-quarter GDP figures on Friday, as well as the Institute of Supply Management index and the non-farm payroll report at the beginning of September.

Forecasters expect the US GDP to have grown by just 1.5 per cent in the second quarter, lower than the 2.4 per cent growth originally measured, thanks to a rise in the trade deficit shipping more income overseas and disappointing manufacturing data.

Regional factory indices in Philadelphia and now Richmond have shown declines in activity; Chicago is set to report on August 31. A decline in the ISM to below 50 would indicate that US manufacturing was no longer expanding – a step on the path to the “double dip” recession so feared by markets.

☼ Factor to watch: Attention for the moment will now primarily turn to Ben Bernanke, US Fed chair, speaking at Jackson Hole on Friday. To some extent he may have pre-empted his speech by surreptitiously taking to reporters, but it will be closely watched nonetheless. ☼

• Currencies. The yen’s intervention debate is a tug-of-war between the more dovish government finance ministry and the cautious Bank of Japan. A report in the Tokyo newspapers suggested that the BoJ may convene an extraordinary meeting to discuss some kind of monetary stimulus.

“The BoJ might consider additional policy easing measures before giving in to pressure from the government to intervene in the markets,” said Raghav Subbarao, currency strategist at Barclays Capital.

But analysts at Brown Brothers Harriman said no other countries have stepped up to offer any assistance in curbing their own currencies’ declines, so any BoJ intervention would likely be unilateral and thus ineffective, they concluded.

The US dollar – itself still a reserve currency and safe haven – is mostly gaining against non-yen pairs. The greenback is stronger by 0.2 per cent against the euro, at $1.2652, reversing earlier weakness but was weaker against sterling.

• Europe. Overnight, the rating agency Standard & Poor’s had downgraded Ireland to AA- and warned that its outlook was still negative, even at that level. “[Rising] budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility,” the agency said.

Irish spreads against German bunds pushed further beyond their May highs, though yields on German bonds themselves were slightly higher following a steep decline on Tuesday. Shares of the Bank of Ireland are down 5 per cent, and Allied Irish Bank shares are lower by 5.5 per cent.

The UK’s FTSE 100 index was down 0.9 per cent, in spite of BHP Billiton’s strong quarterly profit report. The FTSE Eurofirst 300 index was down by 0.8 per cent – less than half its peak loss of the day – with the blue-chip German Dax index down 0.6 per cent, and France’s CAC 40 index down 0.9 per cent.

• Asia. The Nikkei 225 average fell 1.7 per cent, to its lowest since April 2009. Shanghai’s composite index fell 2 per cent after defying regional weakness to rise on Tuesday, and Hong Kong’s Hang Seng fell 0.3 per cent.

Australia’s S&P/ASX 200 index also fell 1.4 per cent. Since the weekend election, which ended in a hung parliament, the market has fallen 3 per cent after treading water in the immediate aftermath, with the falling led by mining companies for fear that Julia Gillard, prime minister, may be able to push her mining tax through after all. The index is now at its lowest since early July.

• Debt. Yields on core bonds are easing and in some cases rebounding from their decline. The 10-year US Treasury yield is up 5 basis points to 2.54 per cent, after hitting 2.48 per cent, its lowest in over a year. German Bund yields were down 4bp, having earlier fallen 7 bp to new record low yield of 2.14 per cent.

Yields on 5-year US Treasuries rose after a $36bn auction, up 6 basis points to yield 1.38 per cent. On Tuesday an auction of 2-year US Treasuries was successful in a market where bonds were in ascent, but demand for the issue was not as strong as recent months. The US Treasury has 10-year bonds to sell later this week.

Irish bonds hit a record-high spread with Bunds. Spreads rose as much as 14bp on Tuesday, and were up 22bp on Wednesday. Credit default swaps on Irish bonds are also at record levels, though flat for the Wednesday session. Spreads on other European peripheral debts are also on the rise with yields on Greek bonds up 38bp.

Portugal, however, sold €1.3bn of bonds, more than it had originally set out to sell, but at demand levels behind Ireland’s auction last week.

• Commodities. Crude oil prices started to rise from their 11-week low, defying gloom in Europe and the US to climb 1.6 per cent to $72.80. Oil bulls are supported over the long-term by fears of inflation as governments intervene in the US and Japan.

Gold is benefiting from hedge funds buying it as a long-term bet against the inflationary affects of intervention in Europe, the US and Japan. On Wednesday it is up 0.8 per cent and rising to $1,240 to trade near its early August high, just $20 off its nominal all-time high.

Additional reporting by Song Jung-a in Seoul

Follow the Global Market Overview on Twitter: @telisdemos





US tax swoop faces banking backlash
By Vanessa Houlder in London and Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: August 25 2010 19:55 | Last updated: August 25 2010 19:55
http://www.ft.com/cms/s/0/a45955ea-b076-11df-8c04-00144feabdc0.html


The US Treasury is close to issuing rules to force banks worldwide to hand over up to 5m Americans’ account de tails in an assault on tax evasion that financial institutions say is unworkable.

Tens of thousands of banks, fund managers, in surers and hedge funds face having to give the names of US clients with at least $50,000 of assets to the Internal Revenue Service under the Foreign Account Tax Compliance Act, passed in March.

Institutions are stepping up lobbying ahead of guidance from the US Treasury on implementation of the law. One said: “Every country, every representative body has this on its radar.”

They argue that the legislation will cost them billions of dollars in compliance costs and expose them to the risk of flouting dom estic laws on data protection. Many countries do not allow bank details to be given to a foreign state.

Aileen Barry, director of DLA Piper law firm, said the legislation was “absolutely impossible to implement as it stands”.

The Treasury has re sponded to criticisms, saying it wanted “to implement this new law in a manner that minimises any potential impact on cross-border investment and existing financial relationships”.

An official said the department was in the “final stages” of preparing guidance. “Addressing offshore tax evasion helps level the playing field and create a fairer system for all taxpayers,” the official said.

The legislation follows outrage over the UBS tax evasion affair – in which Switzerland’s biggest bank was forced to hand over the names of thousands of Americans holding offshore accounts – and comes amid a drive to close the record-high US budget deficit.

The US Congress joint committee on taxation says the law could prevent the evasion of $8.7bn of taxes over the next decade. The rules take effect in 2013, but will apply to certain payments from derivatives from this year. Banks are pressing for a light touch – for example, by the Treasury limiting the scope to bank customers they have “reason to believe” are US citizens – be cause of the difficulty in get ting all customers to prove they are not American.

A Geneva-based representative body called American Citizens Abroad said it feared that US citizens would become “pariahs”, with foreign banks closing their accounts to avoid costly requirements.

Banks face a stiff non-compliance penalty: a 30 per cent tax on income from all their US investments.

The rules could drive smaller financial institutions out of the US market to escape the impact of the withholding tax, say industry groups.








Sales of new US homes hit record low
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: August 25 2010 15:14 | Last updated: August 25 2010 19:13
http://www.ft.com/cms/s/0/c195472c-b04e-11df-939d-00144feabdc0.html


A precipitous drop in sales of new homes and signs of weakening business investment on Wednesday reinforced rising anxiety about the US economy’s wavering recovery.

Growing uncertainty is keeping both buyers and sellers on the sidelines of the housing market and fading government stimulus efforts have washed away demand for new homes.

New home sales fell by 32.4 per cent in July year-on-year to a record low adjusted annual rate of 276,000, commerce department figures showed. Median house prices also fell, declining by 4.8 per cent to $204,000 in July.

New home sales fell 12.4 per cent between June and July, missing projections that they would be flat during the month, or even creep higher. The steepest falls were in the north-east and west, where they were down 25.4 per cent.

A glut of unsold homes, rising foreclosures, unemployment and stringent access to credit all mean weak sales will linger, said Mitchell Hochberg, of Madden Real Estate Ventures.

A string of downbeat indicators has heightened fears of a second recession. Economists at Goldman Sachs said this week that the chance of a “double-dip” recession was between 25 and 30 per cent.

Meanwhile, US demand for long-lasting goods such as machinery, computers and electronics was surprisingly weak last month. This suggests that business investment, which helped to return the country to growth, could have slowed and become a drag on the economy.

Orders for durable goods rose by 0.3 per cent to $193bn (€152bn, 125bn) from June to July, commerce department figures showed, failing economists’ expectations of a 3 per cent increase.

The disappointment was compounded by the fact that “core” orders, which exclude volatile bookings for transportation equipment, fell by 3.8 per cent, reflecting more widespread and underlying fragility.

“The magnitude of the weakness in July is disappointing, particularly given that prospects for capital spending would appear to be dimmer now than they were two months ago,” said Michelle Girard, an economist at RBS Economics Research. “These figures will no doubt fuel concern that the manufacturing sector is losing momentum quickly.”

Orders for machinery fell by 15 per cent last month, computers and electronics orders declined by 2.4 per cent, and transport-related orders rose by 13.1 per cent.

The rise in transportation orders was lifted by a 76 per cent surge in orders of commercial aircraft, as Boeing boosted production during summer air shows.

The durable-goods data hit hopes for recovery because manufacturing had been a key driver of growth. BNP Paribas economists said business investment was being held back by US economic uncertainty, volatile exchange rates and a deceleration of world trade.

During the last quarter, robust business demand helped the US economy to grow at an annualised rate of 2.4 per cent, with business investment up by 29 per cent annualised over the previous quarter.

But revised figures on Friday are expected to show the economy grew by only 1.4 per cent in the second quarter.





US chains beef up meals to lift profits
By Greg Farrell in New York
Copyright The Financial Times Limited 2010
Published: August 25 2010 22:07 | Last updated: August 25 2010 22:07
http://www.ft.com/cms/s/0/2a71e414-b084-11df-8c04-00144feabdc0.html


Fast-food chains in the US are rolling out more expensive premium products after two years of relentless focus on lower priced meals in the hope of recouping profit margins surrendered during the recession of 2008 and 2009.

McDonald’s is selling a “smokehouse deluxe” burger in Canada priced at more than US$5.00 at close to 100 restaurants in the province of Ontario.

Burger King, meanwhile, has been selling its “BK fire-grilled ribs” meals for $8.99 in the US for the past three months. On their own, six-rib portions retailed for $5.69 and eight-rib servings for $7.19.

“The chains have talked about a barbell strategy,” says Scott Hume, editor of BurgerBusiness.com, emphasising a pricing plan which divides products into two categories, premium and value.

“They’re staying with that, but moving the weights on the high end, wanting to see how much elasticity there is on price.”

For McDonald’s, the market leader, to go through the $5 barrier is a significant move,
Mr Hume says. “You never want to price a burger above $4.99 in quick service restaurants,” he says. “It has always been a pullback number for consumers.”

The experimentation with a premium menu reflects some confidence on the part of the biggest fast-food chains, as well as a competitive thrust aimed at the casual dining sector.

“Two years ago, it wasn’t as prevalent for everyone to have a dollar menu,” says Jeffrey Bernstein, restaurant analyst at Barclays Capital. “The two ends of the barbell were not as pronounced.”

The recession of 2008 and 2009 forced most fast-food chains to expand their low-priced offerings, especially since a significant portion of their customers were people most affected by the economic slowdown in the US. In quarterly earnings calls, McDonald’s, Burger King and other chains have cited the stubbornly high US unemployment rate as a drag on North American sales.

“None of these companies want to do value menus 24-7,” says Mr Bernstein. “If they knew that everyone would come in and just buy the dollar item and get their drink at home, they wouldn’t keep the value menus. It’s a loss leader. In the past six months, companies have been trying to ease up on the value push”.

McDonald’s foray into high-margin products includes the introduction this year of smoothies and frappes, which have supplanted milk shakes as premium-priced drinks.

The push into more expensive items comes at a time when inflation has returned to food prices, after a period of deflation.

“We’re seeing commodity cost pressures come back into play”, says Mr Bernstein. “Favourable commodity trends allowed chains to cut costs in the past year or two. Now it’s forcing companies to offer more premium products”.

As for the pricing trend, Mr Hume predicts that “five dollars will be the new $2.99”.





Apple nears deal over TV downloads
By Kenneth Li in New York
Copyright The Financial Times Limited 2010
Published: August 25 2010 19:59 | Last updated: August 25 2010 19:59
http://www.ft.com/cms/s/0/7eca8c3e-b073-11df-8c04-00144feabdc0.html


Apple is close to securing deals with News Corp’s Fox and Disney’s ABC television networks to offer digital downloads for 99 cents ahead of the launch next month of a device to stream shows to TV sets, people familiar with the plans said.

Such deals would be a coup for Apple, which failed to convince content owners to slash rates for the sale of TV programmes ahead of the iPad launch this year.

It also failed to secure the creation of a subscription service, which would have offered top shows through the iPad for a monthly fee.

A broad array of content owners including CBS and pay-TV networks such as Time Warner’s Turner have also resisted the TV plan in its current configuration.

Apple will offer TV show rentals 24 hours after their initial airing and make them available for 48 hours after a customer starts playing the download.

The launch of TV rentals will coincide with the introduction of the latest Apple TV device on September 1. It is expected to significantly improve on earlier models by running software applications such as video games made for Apple’s iPhone and iPad, a person familiar with the plans said.

Apple’s current Apple TV device has failed to capture consumer interest without the availability of more content and at better prices, analysts have said.

“We find the potential to run video game apps on a TV set most intriguing, as it has been proved in the marketplace that there is large market for casual gaming at inexpensive prices,” said Shaw Wu, an analyst at Kaufman Bros.

Media companies have been wary of Apple’s move into television, fearing a repeat of the computer maker’s impact on the music industry, where it also initially charged 99 cents for single songs from an album.

Apple this year aimed to convince media companies to let it sell TV shows for 99 cents. Although some initially agreed in principle to participate, media companies backed out of the talks over fears the pricing structure would upset the lucrative but fragile economics of the television business.

Pay-TV owners generate revenue from selling advertising and collecting fees from distributors. Free-to-air networks such as CBS and Fox have pushed distributors for fees in recent years.

Apple, News Corp, Time Warner and CBS declined to comment. Disney was not available for comment.

Additional reporting by Joseph Menn in San Francisco and Matthew Garrahan in Los Angeles