Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Gold targets $1,300 on QE2 fears
Copyright The Financial Times Limited 2010
Published: September 20 2010 07:26 | Last updated: September 22 2010 16:41
http://www.ft.com/cms/s/0/0163b8c2-c470-11df-b827-00144feab49a.html


Wednesday 16:35 BST. The belief that the US Federal Reserve has opened the door to future quantitative easing to aid the economic recovery has pushed gold to a new high and is battering the dollar.

Traders had wanted the Fed to move towards another bout of easing, QE2 as it has become known, when it delivered its policy decision on Tuesday.

However, by inferring that Fed chairman Ben Bernanke may soon take to the air in his money-dispensing helicopter, investors recognise they are implicitly accepting a dour view of US economic prospects.

This investing dichotomy has left traders unsure how to play riskier assets. This nervousness has been seen in US and European trade, where two normally closely and positively correlated asset classes, stocks and commodities, have moved in opposite directions.

On Wall Street, the S&P 500 is down 0.6 per cent, not helped by a weaker than forecast reading on July house prices, while the Reuters-Jefferies CRB index, a raw materials benchmark, is up 0.1 per cent despite a drop for crude.

US debt remains in demand after the Fed’s open market committee said that “inflation is likely to remain subdued” as the economy continued to be weak, and that it is “prepared to provide additional support” in the form of buying Treasuries to provide cash to lenders if needed.

The Market Eye

In the short term, the stock market doesn’t know what to do with QE2, writes Telis Demos in New York. When the Fed said it was entering the market back in August, global equities cratered after a strong July. This time, however, Wall Street has shrugged. On the bullish hand, there is the dollar element: more liquidity means lower rates and less demand for the greenback, which is helpful to exporters – hence the rise in industrials even as the S&P fell. There is also the (almost conspiratorial) link between the Fed’s easy stance and the S&P’s staying above 1,000, as investors and companies in love with bonds are forced into stocks in search of yield.

In the bear’s view, traders may simply see the fundamental economic weakness of which QE is simply a symptom. “People know that the Fed’s monetisation isn’t a solution, and that the fundamental issues are still there,” said Nicholas Colas, chief market strategist at BNY ConvergEx Group. “As you work through the risks – the election, uncertain economics, strange valuations – you don’t come up with a compelling buy sign. It’s logical to think of equities taking a rest.”

Forex. The US dollar index, which tracks the buck against a basket of its peers, is sliding 0.7 per cent to 79.89. This takes the DXY, as it is known, to its lowest reading in six months, a function of the shrinking yield differentials that may have supported the greenback in the past.

The dollar is at a 10-month low versus the Swiss franc, having breached parity.

The Ministry of Finance in Japan may be spitting feathers at the Fed’s QE flirtation, because the dollar’s decline is eroding a chunk of last week’s intervention fall in the yen. The Japanese unit is up 0.8 per cent versus the dollar to Y84.42, though it is lower relative to the euro.

The euro is making hay from the dollar’s wobble – also boosted by Tuesday’s well-received eurozone debt sales – and has broken above its 200-day moving average of $1.3212, a potentially bullish sign. The single currency is currently up 1 per cent to $1.3382, a near five month high.

Rates. US Treasuries are adding to the previous session’s heavy gains, when buying was concentrated in 10-years and 5-years, as traders expected the Fed to buy middle-dated bonds should it set sail on QE2.

The US 10-year yield is off 6 basis points today at 2.52 per cent, down from 2.8 per cent less than two weeks ago. Two-year yields are little changed at 0.42 per cent, having earlier in the session hit a fresh all-time low of 0.407 per cent.

UK gilts are the star performers in the sector, with 10-year benchmark yields plunging 14 basis points to 2.98 per cent as dovish Bank of England minutes prompt talk of further stimulus.

Eurozone peripheral bond yields are generally stable or slightly lower but remain at elevated levels in the case of Greece, Portugal and Ireland. A €750m auction of 4- and 10-year Portuguese paper required higher yields to attract investors. Credit default swaps of eurozone debt are widening, contrasting with the performance of the underlying bonds.

Commodities. Gold has hit a new nominal high of $1,296.1 and is currently up 0.3 per cent at $1,289an ounce as some investors feel that Mr Bernanke’s “printing” of money debases fiat currencies, provides more funds for speculation, and may eventually lead to inflation.

Industrial metal prices are firmer as those denominated in dollars benefit from the buck’s weakness rather than any apparent supply/demand factors. Copper is close to a 5 month high, up 2.3 per cent at $7,844 a tonne. Oil is down 0.7 per cent to $74.46 a barrel, however, after data showed a surprising build in US inventory.

Europe. The FTSE Eurofirst 300 is down 1.4 per cent, with general industrials leading the declines in response to news of weak eurozone industrial orders during July. The FTSE 100 in London is off just 0.4 per cent, as the soft dollar helps commodities and thereby mining groups.

Asia-Pacific. Trading was thin with important bourses in the region on holiday. South Korea remains closed for the full moon festival and Shanghai is on holiday for the mid-autumn festival; indeed, the latter is shut for the rest of the week.

Tokyo has been unable to provide much of a lead. The Nikkei 225 fell 0.4 per cent as a strengthening yen again harms exporters. Hong Kong rose 0.2 per cent to a five-month high as property shares rally, helping to push the FTSE Asia-Pacific index up 0.5 per cent.

Follow the market comments of Jamie Chisholm in London and Telis Demos in New York on Twitter: @JamieAChisholm and @telisdemos






Fed hints it could buy more bonds
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: September 21 2010 19:34 | Last updated: September 21 2010 21:14
http://www.ft.com/cms/s/0/87cb65de-c5a8-11df-ab48-00144feab49a.html


The Federal Reserve has opened the door to buying billions of dollars of Treasury bonds in a further programme of quantitative easing by making a substantial change to the policy statement issued after its September meeting.

The rate-setting Federal Open Market Committee said on Tuesday that it “is prepared to provide additional accommodation if needed to support the economic recovery”, displaying a bias towards easing absent from its last policy statement.

Fed officials are considering adding to the $2,350bn of assets on its balance sheet to drive down long-term interest rates and stimulate an economy that is not growing fast enough to bring down unemployment.

The Fed has come under growing pressure to act after economic growth weakened over the summer to a level that is too slow to reduce unemployment.

Total payrolls have increased by only 723,000 so far this year and the unemployment rate remains stuck at 9.6 per cent. Growth in the second quarter of 2010 slowed to an annualised pace of 1.6 per cent.

Jim O’Sullivan, chief economist at MF Global in New York, said the statement signalled that the Fed now had a bias towards easing policy: “It probably means that it takes [economic] strength to stop them from triggering a move rather than needing new weakness.”

A Fed-watcher at a leading hedge fund said: “This was broadly expected, although given the political implications of an easing just after the Congressional elections, getting ahead of the curve now would have been advantageous.”

The FOMC cut its assessment on inflation, saying “measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability”.

FOMC members have been willing to tolerate the slowdown so far because they expect growth to accelerate next year to an above-trend rate of more than 3.5 per cent. Any sign that growth is not speeding up would be a trigger to take further action for many of them.

A minority of more hawkish FOMC members, such as Jeffrey Lacker, of the Richmond Fed, and Richard Fisher, of the Dallas Fed, set a higher bar for further action. But their views are unlikely to sway the committee if Ben Bernanke, Fed chairman, supports action.

The FOMC kept the federal funds rate in its range of 0 to 0.25 per cent. The vote was 8-1 in favour of the decision.

Thomas Hoenig, president of the Kansas City Fed, dissented, saying the extended period language “was no longer warranted and will lead to future imbalances to undermine stable long-run growth”.





Summers to quit Obama’s team
By Edward Luce, Tom Braithwaite and James Politi in Washington and Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: September 21 2010 23:06 | Last updated: September 22 2010 00:28
http://www.ft.com/cms/s/0/66750532-c5c8-11df-b53e-00144feab49a.html


Larry Summers, the Obama administration’s top economic adviser, will step down after the November midterm elections and return to Harvard University, the White House said on Tuesday.

Mr Summers’ exit would mark the third high-profile departure from President Barack Obama’s economic team since July. Tim Geithner, Treasury secretary, planned to stay on to help the president build a new economic team, senior administration officials said.

Mr Summers served as president of Harvard from 2001 to 2006, before departing amid controversy. He had previously served as Treasury secretary from 1999 to 2001.

“I will always be grateful that at a time of great peril for our country, a man of Larry’s brilliance, experience and judgment was willing to answer the call and lead our economic team,” Mr Obama said in a statement. “Over the past two years, he has helped guide us from the depths of the worst recession since the 1930s to renewed growth.”

As director of the National Economic Council, Mr Summers was a key architect of the US response to the recession and the financial crisis, including last year’s $787bn fiscal stimulus. But the Obama administration’s record on the US economy has been mixed, with the recovery failing to take off amid high unemployment, a large budget deficit and slow growth.

In that context, the White House has been facing increasing pressure to revamp its approach to economic policy, and speculation has been rife that Mr Obama may choose a senior member of the business community to replace Mr Summers in an attempt to counter criticism that its policies are too harsh on corporate America.

White House officials said Mr Summers had originally intended to stay in his job for only one year but was persuaded last December by Mr Obama to stay on. Harvard University has a two-year rule of absence after which tenure lapses. Mr Summers’ wife, Elisa New, is an English professor at Harvard and never moved to Washington.

“I will miss working with the president and his team on the daily challenges of economic policymaking,” Mr Summers said. “I’m looking forward to returning to Harvard to teach and write about the economic fundamentals of job creation and stable finance as well as the integration of rising and developing countries into the global system.”








US mortgage loan demand falls
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: September 22 2010 14:58 | Last updated: September 22 2010 14:58
http://www.ft.com/cms/s/0/e3720f62-c645-11df-9cda-00144feab49a.html


Demand for home loans in the US fell last week, with refinancing and purchasing declining as the housing market continues to wobble.

The Mortgage Bankers Association said on Wednesday that mortgage loan volume fell by 1.4 per cent last week, dropping to its lowest level in six weeks. Purchases were off by 3.3 per cent and refinancing fell by 0.9 per cent.

Mortgage applications have fallen for three weeks running.

The Federal Reserve said on Tuesday that home construction remains “depressed” as it described a slowing economic recovery.

Interest rates on 30-year fixed rate mortgages fell to 4.44 per cent from 4.7 per cent, MBA said. The 4.43 per cent rate reached last month was the lowest in more than 30 years.

However, in spite of such low rates refinancing increased to account for 81.1 per cent of total applications, up from 80.5 per cent the week before.

The US housing market faced the spectre of a “double-dip” after the expiration of government stimulus measures last spring but recent figures on sales and housing starts have offered hope that the sector is starting to stabilise.

“The post-tax credit plunge in housing activity, both sales and construction, is over, but we do not expect to see a strong recovery any time soon,” said Ian Shepherdson, chief US economist at High Frequency Economics. “Activity will likely creep higher as great affordability pulls people into the market, but that’s about the best we can hope for in the foreseeable future.”






Portuguese debt yields jump after auction
By David Oakley in London and Peter Wise in Lisbon
Copyright The Financial Times Limited 2010
Published: September 22 2010 11:35 | Last updated: September 22 2010 17:14
http://www.ft.com/cms/s/0/9a775c12-c628-11df-9cda-00144feab49a.html


Investors demanded record high yields to buy Portuguese debt on Wednesday as Lisbon scaled down the amount of money it had hoped to borrow in bond markets amid persistent worries over the health of the country’s economy.

Portugal issued €750m in four-year and 10-year bonds, at the low end of its targeted range, after debt managers had told investors they hoped to raise €1bn.

But demand for the bonds was strong as many investors were prepared to take the risk on the Portuguese economy in return for record high yields, which are nearly 4 percentage points more than German bunds for 10-year bonds.

Portugal and Ireland, which issued €1.5bn in bonds on Wednesday, are increasingly seen as the problem countries for the eurozone, apart from Greece, which is already reliant on emergency loans from the international community.

Lisbon had to pay 6.24 per cent to borrow €300m in 10-year bonds, a record high since the launch of the euro in 1999, and 4.69 per cent to borrow €450m in four-year bonds. The yields demanded were at about the levels Portugal would have to pay if it decided to borrow from the eurozone bail-out fund, the European Financial Stability Facility.

Richard Batty, investment director of strategy at Standard Life Investments, said: “This shows Portugal has a lot of problems. Portugal cannot go on paying higher and higher yields. It is not sustainable and makes it much harder for the country to reduce its budget deficit. Investors are only willing to take a chance on Portugal for very high returns.”

Gary Jenkins, head of fixed income at Evolution, said: “In a way the auction has been a success as the Portuguese have raised the money, but they are only able to do so at a very high cost and only because investors know that the European Central Bank is there to support the markets if necessary.”

The yields compared with rates of 5.31 per cent for the 10-year bonds at the last auction in August and 3.62 per cent for four-year bonds at the previous offering in July.

Both auctions were well subscribed, with the 10-year covered 4.9 times and the four-year covered 3.5 times. Debt managers, however, cut back what they had hoped to raise because of the high yields demanded by investors. Lisbon is already ahead in its fundraising schedule.

Investor concerns about Portugal centre on the government’s failure to implement reforms to turn round its stagnating economy. The financial markets have grown increasingly sceptical about the prospects of the country meeting its target of cutting the budget deficit from a record 9.4 per cent of gross domestic product in 2009 to 7.3 per cent this year.





Moves to weaken yen not over, says Kan
By Mure Dickie and Michiyo Nakamoto in Tokyo
Copyright The Financial Times Limited 2010
Published: September 21 2010 23:00 | Last updated: September 21 2010 23:00
http://www.ft.com/cms/s/0/9a1fa2dc-c5ac-11df-ab48-00144feab49a.html


Japan stands ready to intervene again in foreign exchange markets, but also plans to put in place broader economic and monetary policies that will help to weaken the yen, according to Naoto Kan, the prime minister.

In an interview with the Financial Times, Mr Kan stressed that Tokyo’s yen-selling intervention last week was forced by “drastic” exchange rate moves, a reference to the 15-year highs Japan’s currency hit against the dollar following his victory in a ruling party leadership battle.

Mr Kan said there was a “common recognition” among G20 nations that overly rapid currency movements were undesirable and that he would seek to promote understanding of Japan’s action in New York this week.

While some European and US politicians have criticised Tokyo for acting unilaterally, Mr Kan made clear his government was ready to continue to intervene alone if necessary.

In his first interview since becoming prime minister in June, he said: “If there is a drastic change (in the currency), such intervention is unavoidable”.

But Mr Kan stressed that Tokyo wanted to create a “total” package of measures to expand domestic demand and encourage a more appropriate currency level. One possibility, he said, was to use the yen’s strength to invest in natural resources overseas, adding that continued efforts by the Bank of Japan to set appropriate monetary policy were also essential.

“I think it is necessary to combine economic policy and monetary policies that will be conducive to ... a (yen exchange rate) slightly lower than the current level,” Mr Kan said.

The prime minister waved aside suggestions that Tokyo’s intervention made it harder to persuade China to allow the renminbi to rise against the dollar.

Tokyo was suffering from drastic currency movements while concerns about Beijing centred on the maintenance of its dollar peg despite sustained economic growth, Mr Kan said. “I think the issues of China’s renminbi and Japan’s yen are completely different.”

Mr Kan’s visit to New York comes at a difficult time with Beijing demanding the immediate release of a Chinese fishing boat captain detained after clashes with Japan’s Coast Guard near disputed islands.

In spite of growing tensions, Mr Kan said: “I think that if it is dealt with calmly, it is entirely possible this will be a temporary problem.”

Mr Kan will on Wednesday give a speech to a UN summit on the Millennium Development Goals at which he will highlight Japan’s contribution with initiatives which involve healthcare policies for mothers and babies and an approach to basic education known as “School for All”

He said he would focus on two new initiatives that are intended to tap Japan's rich experience in social policy for the benefit of developing and poor nations.





Obama faces challenge on renminbi push
By Geoff Dyer in Beijing
Copyright The Financial Times Limited 2010
Published: September 22 2010 10:47 | Last updated: September 22 2010 10:47
http://www.ft.com/cms/s/0/8e68458c-c577-11df-9563-00144feab49a.html


President Barack Obama will have a new opportunity to raise the pressure on China over its exchange rate policy when he meets Wen Jiabao, the Chinese premier, in New York on Thursday.

But US efforts to influence China have not been helped by Mr Obama’s other top-level guest on Thursday, Naoto Kan, the Japanese prime minister, who last week ordered an intervention in the currency market to weaken the yen.

Mr Obama used a town-hall style meeting on Tuesday to forcefully enter the exchange rate debate, calling on Beijing to do much more to raise the value of the renminbi.

“They have said yes in theory, but in fact they have not done everything that needs to be done,” Mr Obama said about China’s move to appreciate the renminbi since June.

“What we’ve said to them is you need to let your currency rise in accordance to the fact that your economy’s rising, you’re getting wealthier, you’re exporting a lot.”

Mr Obama’s personal intervention follows a distinct sharpening of the administration’s tone over the last two weeks, forcing the spotlight again onto Beijing’s conservative management of its currency and increasing the risk that the dispute could eventually lead to a trade war.

It comes amid predictions by political analysts that legislation linked to China’s currency policy could pass at least the House of Representatives in the coming weeks.

From the point of view of the White House, the good news is that the new bout of pressure appears to have had some impact on China’s behaviour.

Ever since Lawrence Summers, the president’s top economics advisor, visited Beijing two weeks ago, the pace of appreciation has increased. The renminbi has now strengthened by 1.8 per cent against the US dollar since June.

Yet the rhetoric from Beijing remains opposed to large concessions. Even policy-makers who are sympathetic to the idea of a stronger currency have spoken out against giving in to US pressure.

“China will not go down the path Japan took and give in to foreign pressure on the issue of the yuan’s exchange rate,” Li Daokui, a member of the central bank’s monetary policy committee, said at the weekend. “The US should pay much more attention to its own problems. What has the US done while we have been reducing our trade surplus?”

In a statement on Tuesday, the Chinese foreign ministry said it would be “unwise and also near-sighted” for the US to use legislation to pressure China over its currency.

Some observers think that recent renminbi strength is a tactical gesture on Beijing’s part, rather than the start of an important trend. Eswar Prasad, a former IMF China economist now at Cornell university, says Beijing has turned small adjustments in the exchange rate into “an art form”, generating considerable market excitement over modest movements. However, he believes that the current political mood might not be receptive to such tactics.

“This escalation could easily spin out of control as election season in the US draws near, especially if China refuses to make any conciliatory moves or even retaliates,” he says.

US officials have said they will also try and garner support from other members of the G20 to increase the pressure on China, yet that effort has not been helped by Japan’s move last weak to weaken the yen.

Fearing that the strength of its currency would expose its exporters to fiercer competition from China and South Korea, Tokyo had two choices – to join the US public campaign about the renminbi or intervene in the foreign exchange market to push the yen lower. Already embroiled in one diplomatic dispute with Beijing over the arrest of a Chinese fishing boat captain, Mr Kan decided against antagonising Beijing any further.

Naoto Kan, in an interview with the Financial Times, on Tuesday rejected suggestions that the intervention had made it harder to pressure China over the renminbi.