Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


US and China factory data spur risk rally
By Jamie Chisholm, Global Markets Commentator in London
Copyright The Financial Times Limited 2010
Published: September 1 2010 08:20 | Last updated: September 1 2010 17:57
http://www.ft.com/cms/s/0/8559ed8c-b588-11df-a65e-00144feabdc0.html


Wednesday 17:30 BST. The first fall in US private sector payrolls since January has not been able to shift traders from the belief that a fresh month deserves a sunny disposition, as positive manufacturing data out of America and Asia provides risk assets with a good start to September.

After falling 3.5 per cent in August, the FTSE All-World equity index is up 2.7 per cent, commodities are firmer and bond yields sharply higher. The S&P 500 on Wall Street is up 2.7 per cent.

The more optimistic mood appears predicated on a highly selective focus on some well-received economic data over the past 24 hours. With investors so gloomy of late about US, and thus, global economic prospects, any suggestion that things are not quite as bad as feared was likely to be clung to like a long-lost comfort blanket.

Tuesday’s better-than-expected US consumer confidence report has been followed by news that activity in China’s manufacturing base picked up last month, temporarily salving fears that the world’s production engine was spluttering.

Upbeat factory reports from India and Russia have provided further joy, while data showing Australia’s economy grew more than forecast last quarter was seen as confirming demand for the nation’s raw materials remains robust.

The Market Eye - Snapshot
With the Dow up more than 200 points, traders appear to have dismissed the cautious reaction to the soft European PMI data, and the frankly disturbing ADP report, and are focusing on the Asian and US factory numbers. Bulls will argue that stocks were in oversold conditions and August left markets too downbeat about global economic prospects. Besides, they say, a big chunk of US corporate earnings come from abroad, so the health of the US economy is not the be all and end all. But today’s action has a taste of classic new-month herd buying: the kind of move that can quickly evaporate once the underlying bearish trend re-establishes itself and investors note the Chinese PMI numbers are “not all that”.

Finally, a stronger-than-forecast reading of US manufacturing has caught bears on the hop.

The bullish mindset has so far not been checked by a batch of worrying data. Perhaps most significant is news that the ADP Employer Services report showed 10,000 jobs were lost in the US during August, against expectations for a 19,000 gain.

It is the first fall for this measure since the start of the year. It comes after July’s growth was revised lower and may lead some analysts to question whether the government’s labour market report on Friday will deliver the consensus forecast net gain of 41,000 jobs

In addition, the manufacturing reports out of Europe proved disappointing, with UK and eurozone activity growth at 9-month and 6-month lows respectively.

A reminder that consumers are finding the going tough was provided by a report showing German retail sales fell unexpectedly in July.

● Asia. Global traders may have welcomed signs of renewed vigour in China’s factories, but the Middle Kingdom’s investors appeared thoroughly unexcited by the news. The Shanghai Composite lagged behind the region, turning an initial bounce into a 0.6 per cent decline, possibly on the realisation that a move in the official factory index from 51.2 to 51.7 is not all that enthralling.

The FTSE Asia-Pacific index is up 1.5 per cent, reflecting a 1.2 per cent rebound in Tokyo following the Nikkei 225’s 3.6 per cent decline in the previous session. Sydney revelled in the GDP numbers and a move higher in raw materials, pushing the S&P/ASX 200 up 2.1 per cent. The Hang Seng in Hong Kong gained 0.4 per cent. India’s Sensex added 1.3 per cent.

The Vital Statistics

State Street’s global investor confidence index fell 4.4 points in August to 92.1. The drop in the GICI provides “evidence that institutional investors remain non-committal in the face of a weaker macroeconomic backdrop,” said the US financial services group. “August marks the fifth consecutive month that the Index has remained below the neutral level of 100.”

● Europe. New fund money went to work at the beginning of the month, encouraged by the Asian and US PMI’s and a solid start on Wall Street. The FTSE Eurofirst 300 is up 2.7 per cent, while the FTSE 100 in London rose 2.7 per cent, with resource stocks to the fore on global demand hopes.

● Forex. The yen is pausing just shy of its 15-year high versus the dollar as the unit’s haven attraction is curtailed. The yen/dollar, which appears to have taken over from the euro/dollar cross as the proxy for risk appetite, has pulled back from an early dip below Y84 and is now 0.3 per cent weaker at Y84.48.

The dollar is down 0.9 per cent on a trade-weighted index, while the euro is up 1 per cent to $1.2802.

Sterling hit a three-week low against the euro and is now down 0.2 per cent to 82.80p after the UK manufacturing PMI report was less upbeat than hoped.

● Debt. The more upbeat mood is reducing demand for haven bonds, causing yields to vigorously snap back from multi-year and record lows. The yield on the US 10-year note is up 12 basis points at 2.59 per cent, while Bunds are up 10bp at 2.21 per cent. The US long-bond is being particularly hard hit, adding 15bp to 3.67 per cent.

Traders are suggesting that the complex is also displaying disappointment that Tuesday’s release of the Federal Reserve rate-setting minutes did not contain more explicit pointers to further quantitative easing.

Portuguese benchmarks are steady after Lisbon saw strong demand for the auction of €1bn worth of 6- and 12-month notes – though it had to pay higher coupons than seen in a previous sale.

● Commodities. The improvement in Chinese manufacturing and the news out of Australia have provided a boost to industrial commodities, helping push the Reuters-Jefferies CRB index up 1.6 per cent. Oil is higher by 3 per cent at $74.04 a barrel as broader risk appetite trumps news of a large rise in inventories.

Gold remains close to its nominal intraday high of $1,265, however, as fans of the metal remain wary of alternative assets. The bullion is down just 0.1 per cent on the session to $1,246, supported by a falling dollar.

“Whether it is new debt worries from the Eurozone or the QE2-supporting data from the US, the yellow metal remains bolstered on its path towards $1,330 by mid Q4,” says Ashraf Laidi, chief market strategist at CMC Markets.

Follow Jamie Chisholm’s market comments on Twitter: @JamieAChisholm






US bank profits return to pre-crisis levels
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2010
Published: August 31 2010 21:36 | Last updated: September 1 2010 03:50
http://www.ft.com/cms/s/0/18c27ba4-b537-11df-9af8-00144feabdc0.html


The healing of the US banking sector picked up pace in the second quarter with lenders’ profits rebounding to pre-crisis levels amid falling loan losses, according to official data on Tuesday.

However, the earnings performance masked the wide gap between resurgent large banks and their struggling smaller rivals. During the quarter, the number of banks considered at risk of failure by regulators surged to the highest level in 17 years as the sluggish economy continued to take its toll on local lenders.

The 7,000-plus commercial banks overseen by the Federal Deposit Insurance Corporation reported total profits of $21.6bn in the three months to June, a sharp swing from the $4.4bn loss suffered by the sector a year ago, the regulator said.

The aggregate profit number – the highest quarterly earnings total since the third quarter of 2007 – underlines the recovery of an industry that needed billions of dollars in government help to survive the financial crisis.

“Nearly two out of every three banks are reporting better year-over-year earnings,” said Sheila Bair, chairman of the FDIC, which insures the deposits of 7,830 US banks. “As long as economic conditions remain supportive, most institutions should maintain profitability.”

Big institutions were the primary driver of the improved earnings as lower defaults on loans prompted them to reduce provisions.

Uncollectable loans fell $214m during the quarter, their first decrease since the last three months of 2006 and yet another sign that the financial health of companies and consumers is slowly getting better. Big banks responded to the improving conditions, especially for business loans, by reducing reserves by $11.8bn during the quarter – a 4.5 per cent fall on a year ago.

But smaller rivals suffered. The FDIC list of “problem banks” – lenders deemed at risk of failure – rose from 775 to 829 during the period, the highest number since March 1993.

The regulator does not reveal the banks on the list but the fact that total assets of the lenders fell while their numbers rose suggests more small institutions got into trouble in the quarter.

Better profitability did not translate into more loans – a fact that could deepen political hostility towards the sector. Aggregate loans and leases fell by $95.7bn, or more than 1 per cent, amid big drops in construction and credit card loans.

Mortgage loans were also down as lenders remained cautious about increasing their exposure to the fragile US housing market. Figures on Tuesday showed US home prices rose more than expected in June, but the pace of the climb slowed for the first time in 16 months.

The contraction in lending contributed to the fifth quarterly fall in banks’ assets in the past six quarters, as lenders shrink their balance sheets.






US companies cut 10,000 jobs in August
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: September 1 2010 13:49 | Last updated: September 1 2010 15:37
http://www.ft.com/cms/s/0/4a21719e-b5c5-11df-a65e-00144feabdc0.html


Private-sector employment in the US fell for the first time this year in August, underscoring fears that a recovery in the labour market is faltering, but a surprise rise in manufacturing activity offered a glimmer of hope for the sputtering economy.

Businesses shed 10,000 workers last month, according to ADP Employer Services. That was the first monthly decline since last December and failed to meet economists’ projections that hiring would edge higher.

The US private sector added a revised 37,000 jobs in July.

“The decline in private employment in August confirms a pause in the recovery already evident in other economic data,” ADP said in its report.

In August, the manufacturing sector was hit the hardest, with businesses that produce goods cutting 40,000 workers. Construction workers felt the brunt of that decline, with 33,000 losing their jobs as the housing market stalled.

The troubles facing the housing market were highlighted by a separate commerce department report on Wednesday that showed construction spending falling by 1 per cent to an annual rate of $805.2bn in July. That was the lowest level in 10 years and left spending off by more than 10 per cent from a year ago.

The US services sector continued its run of strength, however, adding 30,000 workers and marking its seventh consecutive monthly increase.

But small and medium-sized businesses were under the most pressure in August, cutting 5,000 and 6,000 jobs respectively. Hiring at big companies was flat during the month.

“Demand growth has slowed, largely triggered by the spring plunge in stock prices, and cautious companies are responding by holding fire on hiring,” said Ian Shepherdson, chief US economist at High Frequency Economics.

The ADP report is closely watched as a foreshadower of Friday’s government non-farm payrolls figures, which are expected to show that the US economy shed 131,000 workers but that the private sector added 42,000 employees.

Meanwhile, the Institute of Supply Management said on Wednesday that manufacturing activity in the US accelerated in August, as its index rose from 55.5 in July to 56.3. Readings above 50 signal expansion and analysts were predicting that growth slowed in the sector.

Strength in the factory sector was fuelled by increased production and employment, but new orders grew more slowly in August.

“This number decidedly does not fit with a double-dip scenario,” said Alan Ruskin, strategist at Deutsche Bank, who noted that growing import orders show that domestic demand is holding up.




Fuld accuses Fed of worsening crisis
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: September 1 2010 14:22 | Last updated: September 1 2010 16:44
http://www.ft.com/cms/s/0/f9a8ec8a-b5c7-11df-a65e-00144feabdc0.html


Richard Fuld, the former chief executive of Lehman Brothers, will later on Wednesday accuse the Federal Reserve of worsening the financial crisis by allowing his investment bank to fail in 2008.

In the most vigorous defence yet of his actions at the helm of Lehman, Mr Fuld’s prepared testimony lays much of the blame at regulators, saying the government pushed his firm into filing for bankruptcy and denied it the same access to Fed credit that other banks were allowed.

He says that the weekend before the collapse in September 2008 the Fed allowed greater access to its credit facilities: “Only Lehman was denied that expanded access.”

He adds: “I submit, that had Lehman been granted that same access as its competitors, even as late as that Sunday evening, Lehman would have had time for at least an orderly wind down or for an acquisition which would have alleviated the crisis that ensued.”

The collapse of Lehman roiled markets and Mr Fuld has been castigated widely for taking on too much risk and engaging in off-balance sheet financing that gave investors a flawed impression of the company’s health. He acknowledges that he made mistakes but adamantly insists that “there was no capital hole” at Lehman.

Mr Fuld accuses the Fed of failing to get a grip of the crisis in March 2008 and said the central bank should have allowed investment banks access to cheap government credit earlier, which “might have lessened the need for additional government intervention”.

Scott Alvarez, the Fed’s general counsel, also testifing at the FCIC hearing, said however that the Fed had no confidence that it would have been paid back had it opened up credit to Lehman.

”I think they failed not because the government wasn’t willing to help them but because they were a victim of the circumstances and the economy and some bad decisions that they had made in the years leading up to this that they did not have time to unwind or get out of,” he said.

Ben Bernanke, the Fed chairman, testifies on Thursday




GM’s US sales sag 25% in August
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2010
Published: September 1 2010 17:03 | Last updated: September 1 2010 17:03
http://www.ft.com/cms/s/0/c740d78c-b5de-11df-a048-00144feabdc0.html


General Motors’ sales in its core US market sagged in August, potentially complicating its bid to drum up investor support for its forthcoming public share issue.

Sales fell 25 per cent from August 2009, when demand was bolstered by the Obama administration’s cash-for-clunkers scrappage incentives.

More worrying however, was a 7.2 per cent decline from July. Low-margin sales to car-rental operators and other fleet owners climbed to 28 per cent of the total, from 25 per cent in July.

“August was definitely what we call ‘one of those months’,” said Don Johnson, head of US sales operations.

Mr Johnson said that consumers remained cautious amid an unexpectedly slow revival in employment. In the longer term, however, he predicted, “there is pent-up demand building which will eventually be released when the economy gets a firmer footing”.

Other carmakers were due to report August sales later on Wednesday. Almost all were likely to be lower than a year earlier due to the cash-for-clunkers incentives.

JD Power, a consultancy, estimated that August sales would total less than 11.4m units at a annual rate, down from 11.5m in July and 14.1m in August 2009.

Based on reports from almost 9,000 dealers, it said that retail sales slowed markedly in the final week of the month, pushing the annual rate below 8.5m vehicles.

“There hasn’t been enough horsepower behind the recovery to motivate consumers to regain their confidence and purchase vehicles at a higher rate,” said Jeff Schuster, JD Power’s head of global forecasting. He added that some buyers may be delaying purchases in anticipation of special deals over the coming Labour Day long weekend.

GM filed a draft prospectus for an initial public offering with US and Canadian regulators last month. The US and Canadian governments currently hold 72 per cent of GM’s equity.

It cautioned that despite a pick-up in demand since late last year “many of the economic and market conditions that drove the (earlier) drop in vehicle sales, including declines in real estate and equity values, increases in unemployment, tightened credit markets, depressed consumer confidence and weak housing markets, continue to impact sales”.

If the recent revival falters, the prospectus warns, “our results of operations and financial condition will be materially adversely affected”.

Despite the soft market in August, Mr Johnson said GM was sticking to its estimate of total industry sales of 11.5m to 12m this year. “We’re not right now panicking about the trend of the industry”, he said, dismissing the possibility of a big increase in discounts and other incentives to woo buyers.

GM is banking on the launch of much-heralded new models in coming months to help boost its sales, especially the small Chevrolet Cruze sedan and the Buick Regal, a North American version of the Opel Insignia.