Today's Financial News Courtesy of the Financial Times
Risky assets steady as jobless claims slow
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 26 2010 10:19 | Last updated: August 26 2010 16:51
http://www.ft.com/cms/s/0/f5dc24ce-b0df-11df-bce8-00144feabdc0.html
Thursday 16.30 BST. A bout of optimism is losing steam, as a brief jump in risky assets amid bargain hunting and better-than-expected US jobless claims is fading as markets anticipate seismic data from the US.
The FTSE All-World index is up by 0.6 per cent, though the S&P 500 index has given up opening gains to trade flat to slightly lower. Earlier, Japan’s Nikkei 225 average earlier saw its first gains this week and lifted from a one-year low, and European shares are solidly higher.
New claims for jobless benefits were 473,000 last week, lower than the previous month’s 500,000 claims and below expectations of 490,000. The four-week moving average for claims, however, continued to rise.
The yen is falling slightly, less than 0.1 per cent, away from a 15-year high reached on Tuesday. Investors are pausing in their rush to low-return, low-yielding assets as US Treasury bonds join other government bonds in selling off – though only modestly.
On Wednesday, US durable goods sales were weak across the board, and sales of new homes in the US in July were the slowest on record by some measures. A bit of bidding action has also returned, Dell said it had reached a new agreement with 3Par, beating back a last-second bid by Hewlett-Packard. The S&P 500 index is expected to rise 0.5 per cent, as priced by futures contracts.
Trading has been tentative all session heading into a summit of leading economic policymakers beginning on Thursday in the US. The meeting of central bank heads at Jackson Hole – including Jean-Claude Trichet of the European Central Bank, Ben Bernanke of the Federal Reserve and Masaaki Shirakawa of the Bank of Japan – promises to generate headlines.
Speculators are waiting to see if the BoJ is able to gather any assistance for potential yen intervention, and a speech by Mr Bernanke on Friday will be closely watched for evidence that “quantitative easing lite" will become full-blown “QE2”.
In the meantime, Asian sentiment was aided by hawkish comments from the Bank of Korea, which urged “vigilance against the awakening of inflation expectations”, which are a key sign of quickening growth.
And European trading picked up following an increase in consumer sentiment in Germany – where increased consumption in the face of austerity measures could help other European economies.
Traders shrugged off a confirmation of preliminary Spanish gross domestic product readings, with the final numbers showing 0.2 per cent growth in the second quarter. Spain is expected to contract in the near term, thanks to austerity measures, but expand in 2011.
But many strategists are hesitant to believe the selling is over – it may be merely on pause as growth expectations are lowered. The US’s own GDP revisions are set for Friday. Economists at Goldman Sachs say weak durable goods orders and a rising trade deficit mean second-quarter growth should be revised down from 2.4 per cent to 1.2 per cent. Looming for September are the US’s non-farm payroll figure and manufacturing activity index.
“Risk-off trading mentality looks likely to persist into the autumn and in this volatile environment where swings in market sentiment are frequent and sharp, we continue to highlight ... plays that favour countries with strong fundamentals over weak,” said currency analysts at Brown Brothers Harriman.
The Market Eye
Why, with growth expectations now their lowest this year, and markets saying that growth is key to company performance, should the S&P 500 index still be above its low for the year? Part of the answer is likely that expectations of a mid-term rally, or a sudden correction in a bond bubble, are keeping speculators in the market. But there’s also evidence from futures markets that speculators just aren’t playing the game right now. To wit – the volume of shorting on US exchanges was at its lowest since January 2010, according to figures from TrimTabs Investment Research.
“We suspect hedge funds could hit the market with severe selling pressure in September,” said Vincent Deluard, executive vice-president at TrimTabs. “[Positioning] patterns indicate that hedge funds were mostly on the sideline during summer.” Certainly, there’s no evidence yet that buyers are returning: Equity funds have seen outflows for an astonishing 17 straight months. The worry is, sellers will come back sooner.
• Europe. The UK’s FTSE 100 index is 0.9 per cent higher. Engineering group Amec reported a 36 per cent jump in profit in the quarter. Crédit Agricole said its corporate and retail banking earnings improved, in spite of its Greece debt exposures. Retailer L’Oreal leads all gainers after reporting record operating margins for the second quarter. France’s blue-chip CAC 40 index is up 1 per cent, and Germany’s Dax is higher by 0.2 per cent.
• Asia. Alongside the Nikkei, which added 0.7 per cent, shares in China gained. The Shanghai Composite Index was up 0.3 per cent, and the Hong Kong Hang Seng index was flat.
Australia’s S&P/ASX 200 index rose 0.8 per cent, stepping back from the six-week low it saw on Wednesday. Shares tumbled in the days following Australia’s hung parliament, as independents seeking to join prime minister Julia Gillard’s coalition backed the controversial mining tax.
• Currencies. The euro and sterling were stronger against the dollar, suggesting a decent rebound in risk appetite. The euro is up 0.4 per cent to $1.2708, and sterling is up 0.5 per cent to $1.5550.
The yen is at Y84.61 against the dollar, off its 15-year high mark around Y83 reached on Tuesday. It is also falling against higher-yielding growth currencies: the Aussie and Kiwi dollars are up 0.4 per cent versus the yen.
In a move that may damp down expectations of intervention for the yen, Japan is now facing the prospect of its third prime minister in a year after Ichiro Ozawa, a Democratic heavyweight, said he would challenge Naoto Kan for his chair. Political turmoil will make it difficult to pull off the complex manoeuvre of intervening in the currency market. The Bank of Japan has been much less dovish than the government.
• Debt. Government bonds are seeing slightly higher yields as investors turn to riskier assets. The Japanese 10-year bond yield was up 3 basis points to 0.95 per cent. The yield on German 10-year Bunds is flat, at 2.15 per cent, remaining at its all-time low point.
Spreads on Portuguese debt are narrowing following a successful sale on Wednesday. Portugal sold more bonds than it intended and investor demand was solid. That counteracted a sharp rise in spreads for Greek debt, and a record-high spread for Irish bonds after Standard & Poor’s downgraded the country.
Ireland, in fact, sold €400m of short-term bills at yields of 1.98 per cent, versus 2.81 per cent at the last such auction. Buyers placed bids for 10 times as much debt as was sold. Whatever growth worries investors may have, their confidence in the ECB’s ability to protect sovereign debt has not been shaken.
An auction of $35bn of five-year notes saw strong demand, pricing at their lowest yield ever in an auction. Benchmark 10-year US Treasury yields are now down 1 basis point as stocks turn to a loss. The 10-years are yielding 2.53 per cent, near their 19-month low yield of 2.49 per cent from Tuesday.
• Commodities. Oil prices are rising further, after crude demand held up for most of an otherwise risk-off session on Wednesday, in spite of what analysts at Cameron Hannover called “appalling” US supply data. US crude supplies increased year over year by 4m barrels, to 14.5m barrels, according to the Department of Energy.
In general, oil prices have held up better than stocks in 2010. That may be setting them up for a sharp correction at some point. Cameron Hannover analysts said “long-term support, oversold pressures and a mild rally in the euro” helped oil on Wednesday, but added: “The fundamental and economic underpinnings only eroded further, though.”
US benchmark crude is $73.56 a barrel, up 1.4 per cent. That is lifting off a two-month low touched earlier in the week.
Gold reversed after the jobless claims report and is flat at $1,239 an ounce.
Additional reporting by Song Jung-a in Seoul
Follow the Global Market Overview on Twitter: @telisdemos
US mortgage delinquencies decline
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: August 26 2010 14:39 | Last updated: August 26 2010 16:46
http://www.ft.com/cms/s/0/3742900c-b10c-11df-bce8-00144feabdc0.html
The mortgage delinquency rate in the US eased in the second quarter of this year but a rise in short-term delinquencies signalled that more foreclosures could be in the pipeline, the Mortgage Bankers’ Association said on Thursday.
The mortgage delinquency rate declined from 10.06 per cent in the first quarter to 9.85 per cent in the second quarter, as homeowners succeeded in modifying their loans. The inventory of homes in foreclosure also declined in the second three months of the year, falling to 4.57 per cent of all US houses, the first such decline since 2006.
In spite of the improvement, there were worrying signs that it might be temporary. Short-term delinquencies, which account for loans 30 days past due, rose to 3.51 per cent from 3.45 per cent of all homes in the first quarter. Those are closely tied to initial jobless claims, which have been on the rise recently.
“Ultimately the housing story, whether it is delinquencies, homes sales or housing starts, is an employment story,” said Jay Brinkmann, MBA’s chief economist. “Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in the delinquency numbers.”
Last week, new claims for unemployment insurance stepped back from a nine-month high, offering some needed relief for the strained US labour market.
Initial jobless claims declined by 31,000 to 473,000, labour department figures showed on Thursday. That was a bigger decline than Wall Street analysts had expected as states reported fewer job cuts in the construction and manufacturing sectors.
“Typically, such an elevated reading is nothing to cheer about, but in the context of the past few weeks that saw claims jump sharply above the psychologically damaging 500,000 level, today’s drop is encouraging,” said Omar Sharif of RBS Economics Research.
Economists said that jobless claims need to fall to the low 400,000 level before the economy can sustainably create jobs. When claims punched through the half-million mark last week it raised fears that employment progress was reversing and that a double-dip recession was more likely.
Private sector hiring has been weak in recent months and analysts project that next week’s non-farm payrolls report will show further deterioration in August.
“The fading in the labour market recovery, which has seen private payrolls rise by just 50,000 per month in the three months to July, is here to stay,” said Paul Dales, US economist at Capital Economics.
The number of Americans continuing to claim jobless benefits fell by 62,000 to 4.456m, as more idle workers saw their unemployment insurance expire.
States that showed the most improvement included California, Indiana and Pennsylvania.
Bush tax cuts for the rich must go
By John Podesta and Robert Greenstein
Copyright The Financial Times Limited 2010
Published: August 24 2010 20:39 | Last updated: August 24 2010 20:39
http://www.ft.com/cms/s/0/41ed6e4c-afad-11df-b45b-00144feabdc0.html
Congress can kill two birds with one stone when President George W. Bush’s tax cuts expire in December. It can – and should – extend cuts for strapped middle-class families while America digs its way out of recession. It should also let the tax cuts for the wealthiest 2 per cent of households expire, as a wide range of economists recommend, to make a sizeable dent in the nation’s unsustainable longer-term budget deficits.
Our leaders face the enormous challenge of navigating economic policy through a narrow channel. The president and Congress must provide near-term support for an economy still struggling to recover from a devastating recession, while simultaneously addressing longer-term structural budget deficits. Extending the middle-class tax cuts but permitting tax cuts for the wealthy to expire on schedule supports both goals.
Yet some conservatives, many of whom cite red ink to oppose emergency measures such as a temporary extension of unemployment insurance that would hardly affect longer-term deficits, are threatening to block the extensions of middle-class tax cuts unless Congress also includes about $750bn in tax relief over the next decade for the top 2 per cent of earners, whose average annual income is $800,000. Unfortunately, a few centrist Democrats are joining the conservative stampede to extend the Bush tax cuts for this sliver of households.
Those who think this would be good for the country should think twice. It threatens the nation’s fiscal health. Extending high-income tax cuts would signal to financial markets that our political system is incapable of comprehending, let alone beginning to address, our long-term debt problem. Allowing these tax cuts to expire, on the other hand, would shrink deficits and debt by about $830bn over the coming decade. Moderates considering a temporary extension of the high-end tax cuts should remember that if such an extension is enacted, the next Congress – which will include more proponents of making all the Bush tax cuts permanent – will likely extend the tax cuts again, setting the stage for them ultimately to be made permanent.
In spite of the blow to fiscal discipline, some argue that extending tax cuts for the top 2 per cent is critical for creating jobs and sustaining recovery. Yet the Congressional Budget Office ranked extending these cuts dead last out of a range of options for boosting the economy. CBO analysis indicates that just $13bn in state fiscal relief is more effective than the $40bn price tag of extending the high-income tax cuts for a year.
Proponents of high-income cuts also claim that their expiry would hurt small businesses and cause them to stop hiring. That’s a red herring. Only 3 per cent of businesses would be affected, and many of these are corporate law firms, financial partnerships, and the like – not what most people think of as small businesses. Furthermore, small businesses’ hiring decisions are overwhelmingly driven by two factors: demand for their products and access to credit, not whether the top marginal rate is 35 per cent or 39.6 per cent. Over the long term, soaring deficits and debt will pose the biggest danger to small businesses by driving up interest rates and raising the cost of new investment.
Had the tax cuts actually resulted in the creation of millions of jobs and impressive economic growth, proponents of extending cuts for the top brackets might have some justification. But although tax cuts for the top were a central element of Mr Bush’s “trickle down” programme his approach generated unimpressive job growth, increased inequality, no gain in income for typical working-age families, and soaring deficits. Only 4.7m private-sector jobs were created from June 2001, when the principal Bush tax cuts were enacted, to the onset of the recession, and most of those were wiped out in the last year of the Bush presidency. Median income for working-age families was actually $2,100 lower in inflation-adjusted terms in 2007 than it had been in 2000. The federal balance sheet had turned, even before the economic downturn hit, from a healthy surplus to an ocean of red ink.
Compare that to the 1990s, after taxes on high-earners were raised in both 1990 and 1993. The Clinton administration oversaw the creation of 21m private sector jobs, an $8,000 increase in median income for working-age families, a 34 per cent expansion of GDP and a federal budget that went from record deficits to the first surplus in 30 years and the promise of surpluses for years.
Ironically, many of the same voices calling to extend the high-end Bush tax cuts warned that Clinton’s tax increases on well-to-do Americans would cripple the economy and continue to insist that tax cuts magically pay for themselves. Given that the facts show otherwise, their credibility on fiscal matters should be considered on par with BP’s safety record.
By letting the tax cuts for the top 2 per cent of households expire on schedule, policymakers can continue to help middle-class families while harvesting low-hanging fruit on deficit reduction. We cannot afford to let blind ideology and rabid partisanship threaten sensible economic policy.
John Podesta is the president and chief executive of the Center for American Progress and former chief of staff to President Bill Clinton. Robert Greenstein is the founder and executive director of the Center on Budget and Policy Priorities.
Dell trumps HP with higher bid for 3Par
By Joseph Menn in San Francisco
Copyright The Financial Times Limited 2010
Published: August 26 2010 14:04 | Last updated: August 26 2010 16:48
http://www.ft.com/cms/s/2/183ca972-b111-11df-bce8-00144feabdc0.html
Data storage maker 3Par on Thursday accepted a sweetened offer from Dell that narrowly topped Hewlett-Packard’s bid earlier this week.
3Par said it agreed to sell itself to the world’s third-biggest personal computer maker for $24.30 a share, just above the $24 or $1.6bn HP offered.
Dell had emerged as the winner after an initial round of bidding at $18 a share, and 3Par’s rapid acceptance of the new offer, itself disclosed only on Thursday, suggested that the target company was inclined to stick with that first choice.
“Dell’s desire for 3Par is driven, in part, by its belief that 3Par, with its architecturally superior utility storage solution, is important to Dell’s customers and will enhance its position in cloud-based storage applications,” Fremont, California-based 3Par said.
The two companies amended their initial takeover agreement, increasing the breakup fee to $72m and keeping the expiration of a cash tender offer for 3Par shares at September 20, the latest point at which HP could respond.
HP didn’t get far enough in its own talks with 3Par to have an automatic right to re-bid, according to people familiar with the discussions.
The Silicon Valley technology company declined to comment ahead of a board decision on whether to re-enter the fray.
Dell’s modest overbid, while more than double 3Par’s market value from before the first merger agreement, disappointed speculators who had since sent the stock flying on the bidding contest. 3Par shares slipped 1.83 per cent to $26.27 in early trading as both Dell and HP gained slightly.
Dell said it was committed to data-management offerings based on industry standards and said that “storage at the forefront of this strategy . . . Dell believes that its global brand and broad global customer reach will dramatically accelerate 3Par’s revenue growth.”
The competition over 3Par, which is not profitable, underscores a surge in technology acquisitions and the importance of data storage and analysis as big businesses shift to cloud architecture that keeps the booming amount of information they collect in remote locations.
Customers need access to that data from a variety of places and devices. They also want to perform more analysis on the information and do so without spending a great deal on power consumption and other operating costs.
Dell has already completed one big deal in data storage with the 2007 acquisition of EqualLogic. It has a large agreement to resell storage leader EMC’s wares, but people close to both companies said this week they expect that relationship to continue.
While larger in overall sales than Dell, HP isn’t perceived as being as strong in storage.
Global dealmaking in technology overall sector has risen by 60 per cent this year, according to Dealogic data, even as market volatility and ailing confidence in the economy has helped stifle an M&A recovery in some sectors.
That resurgence has been led by the US, where deal volumes have almost doubled relative to 2009 because of big transactions, including Intel’s move last week to buy McAfee for $8bn.
Additional reporting by Alan Rappeport and Helen Thomas in New York
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