Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Investors  turn to linkers and gold to hedge uncertainty
By David Oakley and Michael Mackenzie
Copyright The Financial Times Limited 2010
Published: September 3 2010 22:23 | Last updated: September 3 2010 22:23
http://www.ft.com/cms/s/0/c3f9fb60-b793-11df-8ef6-00144feabdc0.html


In 2002, Ben Bernanke deemed deflation such a threat to the US economy that he referred to Milton Friedman’s “helicopter drop” – the figurative notion of handing out cash to the public to stop falling prices – in one of his most memorable speeches.

Today deflation is arguably a graver threat, as US inflation is much lower now than it was then. This poses big problems not just for the US Federal Reserve chairman but for investors too. One of the best gauges of inflation in the US, the Cleveland Fed inflation measure, shows the US closer to deflation than at any time since 1990.

Yet fears that prices could rocket in two or three years still trouble many investors, not least because leading commentators believe further rounds of quantitative easing – the buying of bonds to stimulate the economy – are looking more likely on both sides of the Atlantic.

In recent weeks, many fund managers have responded by rushing into two asset classes that are likely to perform well in either scenario: index-linked government bonds and gold.

Inflation-linked bond yields in the US, UK and the eurozone are trading around all-time lows, while gold prices have soared to record highs as they are also considered worthwhile assets to hold in a deflationary environment.

Indeed, index-linked bonds in the biggest three markets of the US, UK and France are trading with negative yields – something that has never happened until this year as fund managers seek out the safest assets to preserve cash.

Gold, meanwhile, has soared to about $1,250 a troy ounce, more than 100 per cent higher than levels of only three or four years ago. Since the start of the year, gold has surged by 12 per cent. These two asset classes are seen as attractive in either a deflationary or inflationary climate, making them popular with fund managers who have little idea how the global economy will unfold.

Deflation may be considered a more near-term problem. But inflation concerns rise over the medium to long term because of the dangers of central bankers over-egging their response to the threat of falling prices.

Jim Leaviss, head of retail fixed interest at M&G Investments, says: “There are few assets that give you protection against inflation and deflation.”

US Treasury inflation-linked securities (Tips) are one. An investor who buys Tips is guaranteed par value of 100 at maturity, even in the event of deflation. So if a fund manager buys at 100, he is protected against both deflation and inflation.

Although index-linked bonds in the UK, France and other markets do not have this protection against deflation, they are still seen as a good bet by many fund managers in a deflationary scenario as they are likely to outperform other assets such as equities.

In other words, a sharp reversal of the world economy would probably see fund managers take heavy losses on equities, commodities and on many foreign exchange markets. In short, linkers or gold are seen as likely to outperform.

John Wraith, fixed income strategist at BofA Merrill Lynch Global Research, says: “As Ben Bernanke has said, the outlook is very uncertain. In fact, there is more uncertainty about the global outlook than at any time I can remember. Such a climate favours anything that will best preserve capital, such as highly rated conventional or index-linked government bonds and gold.”

Other strategists say the odds of deflation are still low, making a safe asset that traditionally protects against inflation a good buy. Alex Li, strategist at Deutsche Bank, calculates the odds of deflation in the US at about 23 per cent based on real yields – which take into account inflation – over five years and about 14 per cent on real yields over 10 years.

But breakeven rates, the difference between yields on conventional government bonds and inflation linked bonds – considered the market’s best measure of inflation – suggests moderate inflation over the next few years.

For example, for benchmark 30-year bonds, breakeven rates are more than 2 per cent in the US and France and above 3 per cent in the UK, suggesting inflation will average in excess of 2 per cent annually for the next 30 years in all three economies.

A low-growth, low-inflationary environment is likely to see conventional government bonds and linkers climb higher with their yields falling further. Gold could benefit in such a climate too.

Mr Wraith says: “We now live in a world where there is likely to be very little growth and low inflation for at least the next several years. That would keep downward pressure on conventional government bond yields in particular.”

If growth falters or economies move closer to deflation, index-linked bonds could see further upside too.

“While index-linked bonds will perform less well if investors anticipate a long period of low inflation, real yields too can certainly fall further from here if growth worries intensify.”




Walsh hints at Indian investment after BA and Iberia complete their merger
By Pilita Clark in Mumbai
Copyright The Financial Times Limited 2010
Published: September 4 2010 12:05 | Last updated: September 4 2010 12:05
http://www.ft.com/cms/s/0/18438d86-b80b-11df-86d7-00144feabdc0.html


A newly merged British Airways and Iberia would be “very interested” in investing in an Indian airline, BA chief Willie Walsh said on Saturday as he announced a groundbreaking code-share deal with India’s Kingfisher Airlines.

“Without question this is a market for the future,” said Mr Walsh, who is set to head the new International Airlines Group company to be formed under the Iberia merger due to be finalised by the end of this year.

“The ambition of IAG is to pursue further opportunities for consolidation and I can certainly let you speculate that IAG would be very interested in participating in the Indian market,” he told reporters in Mumbai on his second trip to the city in a month.

“It’s too early for me to say for definite, given the new company hasn’t yet gone into action, that would be early next year,” he added. “But the ambition of the new company would be to pursue further consolidation and this is a very important market.”

India lets international investors own stakes in its airlines, but not foreign carriers. There has been talk of changing the law however, as local carriers including Kingfisher and rival Jet Airways seek funds to expand in one of the world’s fastest growing aviation markets.

British Airways, which counts India as its second biggest international market after the US, has been working on its relationship with the upscale Kingfisher for some time.

The UK flag-carrier sponsored Kingfisher’s recent move to join the Oneworld global alliance and on Saturday, Mr Walsh revealed the two airlines had agreed to a code-share deal – BA’s first with an Indian airline.

The new agreement, due to start on September 15, will give each carrier more access into each other’s local markets, allowing passengers to fly far more seamlessly on a range of new routes, such as London-Mumbai-Goa or, heading the other way, Mumbai-London-Paris.

Instead of having to book separate tickets on each airline, one ticket will be available on each carrier’s website; luggage will be checked all the way through; frequent flyer miles used for the full trip and each airline will offer access to its lounges.

The move should help ward off the growing threat both BA and Indian airlines face from fast-growing Middle East airlines such as Emirates of Dubai and Etihad of Abu Dhabi, which have been expanding their presence throughout India in recent years, especially in its secondary cities.

Emirates is seen as a particular threat, especially since it announced in June it was ordering 32 more Airbus A380’s, the world’s largest passenger jet, on top of the 58 it had already said it would buy.

The move has led some to wonder if the ambitious airline could end up transforming the long haul aviation market as much as successful budget carriers such as Dublin-based Ryanair have revolutionised short distance markets.

Mr Walsh is well aware of the challenge in India, one of the world’s fastest growing aviation markets.

“I think Emirates will be looking with envy at us today as we announce our new relationship with Kingfisher,” he said.






Renminbi dispute looks set to haunt Sino-US economic talks
By Geoff Dyer in Beijing and Edward Lucein Washington
Copyright The Financial Times Limited 2010
Published: September 3 2010 21:22 | Last updated: September 3 2010 21:22
http://www.ft.com/cms/s/0/5ae50304-b793-11df-8ef6-00144feabdc0.html


President Barack Obama’s top economic adviser will arrive for talks in Beijing this weekend, just as the simmering argument about the Chinese currency and global imbalances threatens to heat up again.

Lawrence Summers, dir ector of the US National Economic Council, is part of a White House delegation that includes deputy national security adviser Thomas Donilon. They will focus on foreign policy as well as economic issues in talks with Chinese officials.

The long dispute about the renminbi diminished over the summer after the Chinese central bank announced in June that it would abandon its de facto peg to the US dollar.

The decision, which was welcomed at the time in Washington, followed intense pressure from the White House, which argued that China’s currency was significantly undervalued.

Since then, however, the Chinese government – facing heavy domestic lobbying by the export sector against a stronger currency – has let the renminbi rise by only 0.3 per cent against the dollar, raising the risk of fresh criticism in the US, especially from Congress.

“The approaching November [US] elections and the need for politicians to search for some kind of scapegoat could put China in a precarious position and could lead to a rise in harmful trade rhetoric,” said Pierre Gave, head of research at the GaveKal consultancy in Hong Kong.

In June, the Obama administration persuaded frustrated Democratic legislators to postpone pushing ahead with a bill that would target China for its alleged currency undervaluation because the White House wanted China’s support for a UN resolution targeting Iran, which it received.

But since then the US trade deficit has jumped sharply – almost half of which is attributable to a surge in Chinese imports.

Yesterday’s anaemic US em ployment figures, showing that another 27,000 manufacturing jobs were lost in August, raises the chance that Charles Schu mer, the New York senator sponsoring the China currency bill, will seek to push it through the Senate when it returns in 10 days time.

“The bill itself would only be symbolic since it would urge the Obama administration to do something that it doesn’t want, or have, to do,” says Fariborz Ghadar, head of global business studies at Penn State University. “But it would lead to a real decline in relations with China.”

The potential for a new trade dispute has grown amid signs that global macro­economic imbalances could be getting worse again. Chinese officials could argue earlier this year that the big external surpluses of recent years were a thing of the past. Indeed, a rare trade deficit was recorded in March.

However, the trade surplus has rebounded and economists are expecting another large monthly surplus for August above $25bn (€19bn, £16bn) when figures are out next week. At the same time, the US trade deficit has begun to widen recently. Some analysts foresee a further deterioration in July’s trade data next week.

Although the US Congress has discussed a number of bills in recent years that aimed to take action against China over is currency policy, analysts believe that legislation might have a realistic chance of passing this time.

Ever since Beijing unveiled its new foreign exchange policy in June, officials have stressed that there would be no rapid exchange-rate movements. Beijing has also pushed back against fresh pressure from the US by raising doubts about the dollar’s position as the main global reserve currency.

In an article yesterday, Hu Xiaolian, central bank deputy governor, wrote of the potential risks to China’s foreign exchange reserves from a loss of confidence in the US currency.

“Once a reserve currency becomes unstable, there will be quite large depreciation risks for assets,” she wrote.

“A diversified international currency system will be more conducive to international economic and financial stability.”

The re-emergence of the currency issue comes after sharp exchanges between Washington and Beijing recently about US-led naval exercises off South Korea and over disputed islands in the South China Sea.