Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Investors find hope in Bernanke comments
By Michael Mackenzie in New York, Michael Hunter and Peter Garnham in London and Song Jung-a in Seoul
Copyright The Financial Times Limited 2010
Published: August 27 2010 10:16 | Last updated: August 27 2010 17:48
http://www.ft.com/cms/s/0/12aa46de-b1b3-11df-ad4d-00144feabdc0.html


Friday 17.45 BST. Investors are ending the week feeling a little better about stocks and are less keen on government bonds, but the moves on Friday are classic signs of tired markets squaring the ledger ahead of the weekend.

There was initial reluctance to take up risky positions on Friday, after Ben Bernanke said the Federal Reserve was prepared to provide additional economic stimulus in a sign that the US economy looked unready to be weaned off special measures.

But, oversold equity markets caught a break as investors decided to focus on the glass half-full side of Mr Bernanke’s remarks. Namely, that the threat of a double dip and deflation for the world’s top economy remains a distant proposition for now.

Coupled with a softer-than-feared downward revision to US second quarter growth data, equity markets have staged quite a bounce from their lows. At midday in New York, the FTSE All World index is up 0.8 per cent, and has reversed its drop of 0.6 per cent just after Mr Bernanke spoke.

On Wall Street, the S&P 500 has risen 1 per cent, after dropping as much as 0.7 per cent and while the turnaround is a nice way to end the week, the benchmark is still lower 1.3 per cent since Monday and from a technical perspective sits well below its 50-day, 100-day and 200-day moving averages.

While stocks prosper, it’s a different story for the dollar and Treasury bonds.

In the immediate aftermath of the release of the speech, the dollar rose against the euro and the pound, but lost ground against the yen. That has subsequently reversed, with the dollar down 0.3 per cent on a trade weighted basis.

Some of the biggest reaction came on US government bond markets, where the yield on 10-year Treasuries increased the most since June, up 13 basis points, to 2.63 per cent. The two-year note yield rose 3 basis points to 0.55 per cent, after touching the record low of 0.4542 per cent on Aug. 24.

Mr Bernanke’s words, spoken at the annual gathering of the world’s central bankers at Jackson Hole, Wyoming, were being seen as a sign that the central bank was not imminently poised to take drastic action despite the lingering threat of a double dip recession.

But back at Jackson Hole, hopes for imminent action to ward off a double dip were disappointed.

Mr Bernanke’s speech did not offer any idea when the current policy of “quantitative easing-lite” will become full-blown “QE2”.

Still, the Fed is ready to pump up the volume with QE, should the economy deteriorate significantly.

“Fed Chairman Bernanke outlined the tools available for additional easing, but signalled that the Fed is not ready to re-engage yet,” said economists at Bank of America Merrill Lynch. “That said, if the outlook deteriorates, and the risk of deflation increases, the Fed has the ability and willingness to restart QE.”

Bond traders said the back up in yields reflected disappointment that greater bond buying by the Fed was not imminent. That said, dealers think 2.70 per cent is support for 10-year Treasury notes and that buying on the dips is the right strategy. Next week marks the end of the month, and that will fuel buying of Treasuries by money managers balancing their portfolios, while the August employment report also beckons.

The economy was in focus earlier on Friday after US GDP was revised down to show growth of 1.6 per cent in the second quarter, down from initial estimates of 2.4 per cent.

• Europe Earlier in the session, an upwards revision to UK second-quarter growth came as a welcome starter to the day’s full menu of economic fare.

The second reading of gross domestic product data showed the UK economy grew by 1.2 per cent, the fastest quarterly growth the UK has seen since 1999. This is up from a first print of 1.1 per cent and growth of just 0.3 per cent in the same period a year ago.

The FTSE 100 failed to hold modest intraday gains after Mr Bernanke’s remarks hit the tape. But after slipping 0.7 per cent to its low for the session, the benchmark stormed home to close up 0.9 per cent.

UK gilt yields are higher after the upbeat economic news, with two-year yields up 2 basis points at 0.65 per cent, off a record low of 0.57 per cent on Tuesday. The yield on 10-year Gilts has edged up 2 basis points to 2.91 per cent.

Analysts said that investors had largely discounted the stronger GDP data and were still fretting about the impending government cutbacks and betting the economy could not maintain such a pace of growth.

“We continue to believe GDP growth will average around 1.5-2 per cent over the next three years or so, which is not going to be inflationary,” said James Knightley, economist at ING. “Therefore, while our house view is for the first Bank of England rate hike to come in late 2011, the risks are skewed to it being pushed into 2012.”

In Europe, the FTSE Eurofirst 300 index booked a gain of 0.6 per cent after dropping as much as 0.9 per cent. The yield on 10-year Bunds has enjoyed a nice round trip, dropping down to 2.10 per cent and then climbing to 2.20 per cent, up 6 basis points on the day.

● Asia. Asian stock markets pared early losses but still had a weak day overall as investors continued to worry about the faltering global economic recovery.

Tokyo stocks took an initial hit from a combination of concerns about a global double-dip recession, a stronger yen, and a poor day for Wall Street. But shares recovered as the yen softened, with the news that Naoto Kan, Japanese prime minister, would hold a news conference to talk about the yen again reviving talk that currency intervention might yet materialise.

The Nikkei ended up 1 per cent, with Sony rising 2.7 per cent while Canon gained 1.3 per cent. Toyota Motor reversed to end the day with gains, after initially dropping more than 1 per cent on the recall of another 1.1m vehicles in the US and Canada.

Australian shares recovered to finish 0.3 per cent higher. Intoll gained 1.4 per cent to A$1.48 after the Canada Pension Plan Investment Board agreed to buy the Australian toll-road operator for A$3.44bn ($3bn).

● Currencies. Currencies remain in tight ranges after Mr Bernanke’s speech and the US GDP data. The yen has eased to Y85.14 against the US dollar, from its 15-year high of Y83.57 on Tuesday. So far this year, the dollar has lost 9 per cent against the yen.

Against the euro, the dollar is weakening and is at $1.2769, from a six-week high of $1.2599 reached on Tuesday.

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 with Ichiro Ozawa, a Democratic heavyweight, challenging Naoto Kan for his chair as head of the ruling party. Political turmoil will make it difficult to pull off the complex manoeuvre of intervening or passing a stimulus package.

Meanwhile, the yen eased slightly after Mr Kan said he was ready to take “bold” action on the yen “when necessary” and urged the Bank of Japan to implement “expeditious” monetary policy measures.

Mr Kan said he would meet Masaaki Shirakawa, the Bank of Japan governor, after he returns from the US where he is attending a meeting of central bank heads. Mr Kan, who returns to Japan on Monday, also said that additional economic stimulus measures would be ready by August 31.

Analysts said the comments did not come as a surprise to the market and, taken together, raised the possibility for central bank easing soon.

●Commodities. Gold fell to a session low of $1,231.75 an ounce only to rise back through $1,240 in New York, while crude oil has bounced from a low of $72.04 a barrel to reach $74.21, up 85 cents on the day.

Additional reporting by Lindsay Whipp in Tokyo





Editorial: China’s renminbi goes slowly global
Copyright The Financial Times Limited 2010
Published: August 26 2010 22:34 | Last updated: August 26 2010 22:34
http://www.ft.com/cms/s/0/f00f6a22-b154-11df-b899-00144feabdc0.html


Great power shifts are usually accompanied by changes in the international reserve currency. So it is telling that China is taking steps to broaden the use of the renminbi among international investors. Dominance of the global economy, Beijing believes, goes hand-in-and with dominance of the global monetary system.

Measures to internationalise the renminbi are nothing new. Hong Kong banks have offered offshore renminbi accounts for more than six years, and currency swap agreements with foreign central banks have been in place since 2000. But they have accelerated in recent months. Restrictions on offshore transfers have been eased and a programme allowing companies to settle cross-border trades in renminbi expanded. Last week’s decision to open up domestic bond markets was particularly significant. Until then there were few investment opportunities for international holders of renminbi.

These are, however, only small steps. Whether China will be able to stomach the rest of the renminbi’s journey to reserve currency status is far from clear.

A reserve renminbi would have to be fully convertible, on the capital account as well as the current account. But this would imply opening up China to the whims of global capital – precisely what it has been protecting itself against (as its huge foreign exchange reserves attest). Freer capital flows may also prove destabilising for domestic banks, creating liquidity bubbles in good times and choking off the credit supply as conditions deteriorate. No longer would the banking sector be an effective instrument of macroeconomic policy, as it has been during the crisis with its government-induced lending sprees. It would be a source of, and not a remedy to, increasing economic volatility.

Even less palatable for the government is the prospect of losing control over the renminbi. Maintaining a currency peg in the face of massive capital inflows is extremely difficult. And if increasing foreign demand for the renminbi pushes up its value, China’s export-led growth model – which relies on an undervalued currency – may become unsustainable.

China will become the world’s largest economy in the next few decades. It is natural that the renminbi eventually attains reserve currency status. China should not push this process forward prematurely, lest it destabilises its economy. But the sooner it starts the domestic reforms that will prepare it for such a shift, the easier it will find its new international role.







Banks back switch to renminbi for trade
By Robert Cookson in Hong Kong
Copyright The Financial Times Limited 2010
Published: August 26 2010 17:55 | Last updated: August 26 2010 17:55
http://www.ft.com/cms/s/0/182a2b70-b130-11df-b899-00144feabdc0.html


A number of the world’s biggest banks have launched international roadshows promoting the use of the renminbi to corporate customers instead of the dollar for trade deals with China.

HSBC, which recently moved its chief executive from London to Hong Kong, and Standard Chartered, are offering discounted transaction fees and other financial incentives to companies that choose to settle trade in the Chinese currency.

“We’re now capable of doing renminbi settlement in many parts of the world,” said Chris Lewis, HSBC’s head of trade for greater China. “All the other major international banks are frantically trying to do the same thing.”

HSBC and StanChart are among a slew of global banks – including Citigroup and JPMorgan – holding roadshows across Asia, Europe and the US to promote the renminbi to companies.

The move aligns the banks favourably with Beijing’s policy priorities and positions them to profit from what is expected to be a rapidly growing line of business in the future.

The phenomenon will accelerate Beijing’s drive to transform the renminbi from a domestic currency into a global medium of exchange like the dollar and euro.

Chinese central bank officials accompanied StanChart bankers on a roadshow to Korea and Japan in June. The bank held similar events in London, Frankfurt and Paris.

Lisa Robins, JPMorgan’s head of treasury and securities services for China, said there had been a “spike in interest” from international clients.

An increasing number of Chinese companies have been asking foreign trading partners to accept renminbi as payment, said Carmen Ling, Hong Kong head of global transaction services at Citi.

BBVA, Spain’s second-biggest bank, is also drawing up plans for a global marketing campaign that will focus on Latin American companies that export to China.

Banks started establishing renminbi trade settlement operations in mid-2009, when Beijing introduced a pilot scheme allowing companies to use the renminbi for trade outside China.

The scramble has intensified in recent months as Beijing has substantially expanded the scheme – from a handful of Asian countries to the whole world – and introduced other liberalisations to its currency regime.

Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year – about 20 times the Rmb3.6bn recorded in the second half of 2009.

But those figures remain tiny compared to the $2,800bn worth of goods and services that were traded across China’s borders last year, most of which was settled in dollars or euros.

With renminbi trade settlement volumes expected to increase rapidly, banks are under pressure to establish a foothold in the nascent market and demonstrate to Chinese officials that they are committed to the scheme.

China has taken several steps in recent months to boost the international use of its currency and to establish Hong Kong, the special administrative region, as the global centre for offshore renminbi business.

McDonald’s, the US burger chain and icon of globalisation, took advantage of the new rules this month when it became the first foreign multinational to issue renminbi-denominated bonds in Hong Kong.








Surprise slowdown in US credit card losses
By Suzanne Kapner in New York
Copyright The Financial Times Limited 2010
Published: August 26 2010 22:00 | Last updated: August 26 2010 22:00
http://www.ft.com/cms/s/0/611b1210-b14c-11df-b899-00144feabdc0.html


US credit-card losses are falling faster than expected, with the six largest card issuers expected to earn nearly $10bn more in the coming 12 months than predicted, says a study by Moody’s.

Historically, US credit-card write-offs have tracked the unemployment rate. But for the first time in a decade, loans considered uncollectible by lenders are falling faster than the jobless rate, prompting analysts to revise earnings models.

The divergence from past experience reflects bank efforts to weed out risky borrowers, moves by consumers to pare back debts after the excesses of the past decade and new credit card rules intended to discourage reckless lending.

“We are getting back to an old-fashioned basis of lending, providing credit only to people who have the ability to repay,” said Curt Beaudouin, an analyst at Moody’s.

The agency expects the six leading credit card issuers to earn nearly $10bn more in pre-tax profits in the 12 months from July than it forecast in March: $2.7bn for Citigroup; $2.6bn for JPMorgan Chase; $2.5bn for Bank of America; $931m for Capital One; $552m for American Express and $658m for Discover.

However, the improving picture for banks highlights the macro-economic dilemma faced by US policymakers, because it points to continuing limits on consumer credit and a corresponding weakness in demand.

“The tightening of lending standards by credit-card issuers in combination with a trend to deleverage by US consumers will have major ramifications going forward for economic growth,” Mr Beaudouin said.

The Federal Reserve’s statistics on credit card loss rates show only two previous instances when they did not track the unemployment rate: the mid-1990s when issuers expanded into subprime debt, and a decade later when rules made it harder for borrowers to file for bankruptcy protection.

During the 1991 and 2001 recessions, write-offs did not start falling until unemployment abated. However, Moody’s expects credit-card write-offs will fall from 9.3 per cent in July to 6 per cent in a year’s time. It expects unemployment to remain above 9 per cent during that period.

“It’s a surprise,” said Beth Ann Bovino, a senior economist at Standard & Poor’s. “Those two readings tend to go hand in hand.”

Credit-card loan balances at the six lenders have dropped 20 per cent since their peak in the second quarter of 2008, to $544bn, according to Credit Suisse. The six lenders reported combined pre-tax profits of $28bn in the 12 months ending in June, making the additional $10bn in anticipated pre-tax profits from credit cards significant. Citigroup was the only one to lose money, with a $6.8bn pre-tax loss.







Intel warns amid global PC slowdown
By Chris Nuttall
Copyright The Financial Times Limited 2010
Published: August 27 2010 16:39 | Last updated: August 27 2010 16:39
http://www.ft.com/cms/s/2/0b5fa670-b1f0-11df-b2d9-00144feabdc0.html


Intel issued a sales warning on Friday, confirming that the PC industry suffered a global slowdown in the third quarter.

The world’s biggest chipmaker provides processors for four out of every five PCs sold, but customers such as HP and Dell have been reporting softening consumer demand for their products since July.

Trading in Intel’s shares was halted in New York after it issued a statement saying third-quarter revenues were now expected to be around $11bn, down from around $11.6bn forecast in its second-quarter earnings report in July.

When trading resumed, Intel shares were up 1.4 per cent to $18.44.

“Revenue is being affected by weaker than expected demand for consumer PCs in mature markets. Inventories across the supply chain appear to be in-line with the company’s revised expectations,” the statement read.

The warning is in contrast to a strong rebound from recession by the Silicon Valley company which said the second quarter was the best in its history when reporting in July.

Intel also reduced its gross margins forecast by one percentage point to 66 per cent.

Analysts have been trimming their estimates for Intel in recent weeks as PC makers in the US have been disappointed by sales in the “back-to-school” season. Both HP and Dell have reported weakening demand and Acer said its July shipments were 38 per cent lower than June’s, while US PC sales were down 15 per cent on average, according to analysts.

A further deterioration was reported in the first week of August and PC makers are expected to begin cutting prices to try to boost demand.