Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Europe struggles as China factory data lift Asia
By Jamie Chisholm in London and Song Jung-a in Seoul
Copyright The Financial Times Limited 2010
Published: September 27 2010 03:47 | Last updated: September 29 2010 14:20
http://www.ft.com/cms/s/0/4dd71c22-c9dd-11df-b3d6-00144feab49a.html


Wednesday 13:00 BST. European stocks are struggling to make headway as investors seem reluctant to load up on riskier assets as a strong quarter draws to a close.

A firm showing in Asia has helped push the FTSE All-World equity index up 0.3 per cent to a near five-month high and gold has hit a new record, with investors in both assets exercised by hopes and fears respectively about what further central bank quantitative easing could mean for the investing environment.

The All-World has risen 14 per cent since the start of July – primarily on hopes that the US economy can avoid a double-dip, and the Federal Reserve stands ready to help if required – and wary traders recognise that such a gain may tempt some fund managers into a bout of profit-taking in the past few days of the quarter.

US equity futures are lower by 0.1 per cent and Treasuries little changed. The FTSE Eurofirst 300 stock index is down 0.2 per cent, despite news of a surprising uptick in eurozone business sentiment.

The european banks index is down 1 per cent on nagging concerns about the sector’s health, even though institutions needed to borrow less than was expected at the ECB’s latest longer-term refinancing operation – a trend that would usually demonstrate diminished stress in the system.

The FTSE 100 in London is off 0.1 per cent and Madrid is lower by 0.8 per cent as Spain suffers a general strike.

The Market Eye

Some people have suddenly gone very bearish on volatility – and by implication, pretty bullish on stocks. The put/call options ratio for the CBOE’s Vix, a measure of expected equity market volatility, on Tuesday spiked to 2.83, compared to an average of 0.75 over the past 12 months. This may mean there has been a sharp net rise in those who think the Vix will shortly move lower from its current level around 22, a trend that usually coincides with a rising stock market. It’s a bold bet given the S&P 500’s storming September and October’s reputation for scares.

Factors to Watch. A thin day for economic data later in the global session, with little of note on the slate from the US. Television images of European anti-austerity strikes may knock sentiment, while later lawmakers on Capitol Hill will vote on whether to pass a bill to put pressure on China to allow the renminbi to rise – a move that could exacerbate trade tensions.

Asia-Pacific. Stock markets moved higher, taking their lead from a firm finish on Wall Street and after the Bank of Japan’s Tankan survey shows better-than-expected business sentiment. A better-than-expected performance by China’s manufacturing sector in September has added to the positive mood.

The FTSE Asia-Pacific index is up 0.8 per cent to a five-month high and Japan’s Nikkei 225 climbed 0.7 per cent, with gains curtailed by a strengthening yen. South Korea’s Kospi rose 0.6 per cent higher. However, Australia’s S&P/ASX 200 has edged down 0.5 per cent, with banks proving a drag on fears the market for mortgages was slowing. New Zealand’s NZX 50 has lost 0.1 per cent.

Chinese stocks were mixed despite news that HSBC’s China Purchasing Managers’ index showed that manufacturing expanded faster this month than in August, reducing fears that recent monetary tightening had hobbled the sector. The Shanghai Composite index fell just 0.03 per cent, while Hong Kong added 1.2 per cent, the latter happier to follow the global trend.

Rates. Core government bonds are steady following their strong advance over the last few sessions.

A US auction of five-year notes on Tuesday saw a record low yield of 1.26 per cent, with strong bidding from direct and indirect bidders, suggesting a large fundamental demand for the bonds. In trading, they fell 6 basis points to 1.23 per cent, an all-time low, but are today at 1.26 per cent.

Ten-year US bond yields are up 1bp at 2.48 per cent, close to the lowest yield since January 2009. The US will auction $29bn of new seven-year notes later on Wednesday.

Ten-year gilt yields, which fell sharply on Tuesday after Adam Posen of the Bank of England’s monetary policy committee said it was time for more quantitative easing, are down 1bp to 2.92 per cent following news UK service sector output fell for a second month running in July.

Japanese government 10-year yields are down 3bp to 0.93 per cent, just 2bp shy of a seven-year low, as investors price in the chances of more stimulus measures to revive the economy.

Irish, Portuguese and Greek benchmark yields are little changed, but still near record highs, as fiscal worries linger.

Forex. The yen seems to have used the kerfuffle surrounding talk of currency wars and the dollar’s QE-induced slide to eight-month lows to slip furtively back below the Y84 level versus the buck. The move is unlikely to have gone unnoticed by Japan’s Ministry of Finance, however, and traders will be on their toes for any further bout of intervention to weaken the yen.

Today the Japanese unit is up 0.3 per cent to Y83.62 against the dollar and up 0.3 per cent to Y113.79 versus the euro. The US dollar index – which tracks the buck against a basket of its peers – is down 0.2 per cent to 78.78, close to eight-month lows.

Commodities. Gold has hit another nominal high, printing a spot trade at $1,313.20 an ounce in Asian dealing. It is currently up 0.1 per cent at $1,308 as some in the market forecast that investors’ loss of faith in central banks will deliver further strong gains for the bullion over coming months. Silver has breached $22 an ounce, a fresh 30-year peak, and is now trading at $21.80.

The positive manufacturing report out of China has lent support to industrial metals. Copper is up 0.6 per cent at $8,030 a tonne, the first time it has cracked the $8,000 mark since April. Oil is up 0.2 per cent at $76.33 a barrel ahead of US inventory data published later today.

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





Currencies clash in new age of beggar-my-neighbour
By Martin Wolf
Copyright The Financial Times Limited 2010
Published: September 28 2010 22:46 | Last updated: September 28 2010 22:46
http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html


“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.” This complaint by Guido Mantega, Brazil’s finance minister, is entirely understandable. In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. They fear the results.

This is not the first time for such currency conflicts. In September 1985, now 25 years ago, the governments of France, West Germany, Japan, the US and the UK met at the Plaza Hotel in New York and agreed to push for depreciation of the US dollar. Earlier still, in August 1971, the US president Richard Nixon imposed the “Nixon shock”, levying a 10 per cent import surcharge and ending dollar convertibility into gold. Both events reflected the US desire to depreciate the dollar. It has the same desire today. But this time is different: the focus of attention is not a compliant ally, such as Japan, but the world’s next superpower: China. When such elephants fight, bystanders are likely to be trampled.

First, as a result of the crisis, the developed world is suffering from chronically deficient demand. In none of the six biggest high-income economies – the US, Japan, Germany, France, the UK and Italy – was gross domestic product in the second quarter of this year back to where it was in the first quarter of 2008. These economies are now operating at up to 10 per cent below their past trends. One indication of the excess supply is the decline in core inflation to close to 1 per cent in the US and the eurozone: deflation beckons. These countries hope for export-led growth. This is true both of those with trade deficits (such as the US) and of those with surpluses (such as Germany and Japan). In aggregate, however, this can only happen if emerging economies shift towards current account deficit.

Second, private sectors are working in just this direction. In its April forecasts (soon to be updated), the Washington-based Institute for International Finance suggested that this year the net flow of external private finance into the emerging countries would be $746bn (see chart). This would be partially offset by a net private outflow from these countries of $566bn. Nevertheless, with a current account surplus of $320bn as well, and modest official capital inflows, the external balance of the emerging world, without official intervention, would be a surplus of $535bn. But, without the intervention, that could not happen: the current account must balance the net capital flow. The adjustment would go via a higher exchange rate. In the end, the emerging world would run a current account deficit financed by a net inflow of private capital from the high-income countries. Indeed, that is precisely what one would expect to happen.

Third, this natural adjustment continues to be thwarted by the build-up of foreign currency reserves,. These sums represent an official capital outflow (see chart). Between January 1999 and July 2008, the world’s official reserves rose from $1,615bn to $7,534bn – a staggering increase of $5,918bn. This increase was, one might argue, a form of self-insurance after earlier crises. Indeed, reserves were used up during this crisis: they shrank by $472bn between July 2008 and February 2009. No doubt, this helped countries without reserve currencies cushion the impact. But this use of reserves was a mere 6 percent of the pre-crisis level. Moreover, between February 2009 and May 2010, reserves rose by another $1,324bn, to reach close to $8,385bn. Mercantilism lives!

China is overwhelmingly the dominant intervener, accounting for 40 per cent of the accumulation since February 2009. By June 2010, its reserves had reached $2,450bn, 30 per cent of the world total and a staggering 50 per cent of its own GDP. This accumulation must be viewed as a huge export subsidy.

Never in human history can the government of one superpower have lent so much to that of another. Some argue – Komal Sri-Kumar of the Trust Company of the West, in Tuesday’s Financial Times, for example – that such management of the exchange rate is not manipulative, contrary to views in the US Congress, since adjustment can occur via “changes in domestic costs and prices”. This argument would be more convincing if China had not worked hard and successfully to suppress the natural monetary and so inflationary consequences of its intervention. In the meantime, the inevitable adjustment towards current account deficits in the emerging world is being shifted on to countries that are both attractive to capital inflows and unwilling or unable to intervene in the currency markets on the needed scale. Poor Brazil! Could we even be seeing the starting gun for the next emerging market financial crisis?

John Connally, Nixon’s secretary of the Treasury, famously told the Europeans that the dollar “is our currency, but your problem”. The Chinese respond in kind. In the absence of currency adjustments, we are seeing a form of monetary warfare: in effect, the US is seeking to inflate China, and China to deflate the US. Both sides are convinced they are right; neither is succeeding; and the rest of the world suffers.

It is not hard to see China’s point of view: it is desperate to avoid what it views as the dire fate of Japan after the Plaza accord. With export competitiveness damaged by its soaring currency and pressured by the US to reduce its current account surplus, Japan chose not the needed structural reforms, but a huge monetary expansion, instead. The consequent bubble helped deliver the “lost decade” of the 1990s. Once a world-beater, Japan fell into the doldrums. For China, self-evidently, any such outcome would be a catastrophe. At the same time, it is difficult to envisage a robust configuration of the world economy without large net capital flows from the high-income countries to the rest. Yet it is also hard to imagine that happening, on a sustainable basis, if the world’s biggest and most successful emerging economy is also its largest net exporter of capital.

What is needed is a route to these needed global adjustments. That will demand not just a will to co-operate that now seems sorely lacking, but greater imagination about both domestic and international reforms. I would like to be optimistic. But I am not: a world of beggar-my-neighbour policy is most unlikely to end well.

martin.wolf@ft.com







Dubai’s Emaar to launch $375m bond
By Simeon Kerr in Dubai, Robin Wigglesworth in Abu Dhabi and Anousha Sakoui in London
Copyright The Financial Times Limited 2010
Published: September 29 2010 13:20 | Last updated: September 29 2010 14:20
http://www.ft.com/cms/s/0/f8e19118-cbbf-11df-a4f5-00144feab49a.html


Dubai’s Emaar Properties is set to launch a convertible bond of $375m with an option up to $500m, as the real estate company seeks to bolster its finances amid a continuing property slump in the emirate, people aware of the matter say.

The five-year bond, with indicative pricing of 7.25-8.25 per cent, has received strong interest, two people involved in the deal say. The conversion premium is 20-30 per cent.

The property giant, which drove the growth of the real estate market after the emirate opened to foreigners in 2003, has weathered the Dubai financial crisis better than other developers. But it remains affected by the real estate crash, which has seen valuations at least halved since 2008.

“The money will be used to pay back some of its short-term debt and general company spending,” said one person aware of the deal. “It may be mildly dilutive to shareholders but it is cheap debt,” he added.

Details of the transaction have yet to be released. The company declined to comment.

Emaar, the most widely traded stock on the Dubai Financial Market, is expected to announce the issue – the first convertible bond in the UAE since 2008 – later on Wednesday.

The developer, which built the Burj Khalifa tower in central Dubai, the world’s highest, has expanded into other markets, including an ill-fated foray into the US via John Laing Homes. In June the developer handed over non-Middle Eastern rights to Hamptons International, a property agency, to Countrywide, a UK estate agency.

The move comes amid rising optimism about Dubai’s ability to access credit markets as the government prices a $1.25bn bond on Wednesday.

But the extent of oversupply in the real estate market remains one of the city’s biggest headaches as it tries to forge an economic recovery.

Consultants believe that demand is unlikely to match supply for the next few years, potentially driving prices lower.

The government says the real estate regulator is cancelling 495 projects, around half of the total planned in the city.

Courts are full of hearings launched by buyers and contractors battling developers in an attempt to recover funds from properties that look like they may never be completed.








Junk buying fuels ‘yield chasing’ fears
By Aline van Duyn in New York
Copyright The Financial Times Limited 2010
Published: September 28 2010 20:26 | Last updated: September 28 2010 20:26
http://www.ft.com/cms/s/0/fd58cb58-cb33-11df-95c0-00144feab49a.html


Retail investors in the US have sharply increased their direct buying of junk bonds in the third quarter of the year, providing evidence of a trend of “yield chasing” that is worrying regulators.

Finra, which regulates US securities firms, said the trend was a concern given the risks involved in this part of the corporate bond market.

Corporate bond trading activity analysed by Finra shows that the ratio of buying relative to selling of junk bonds by retail investors has jumped in the last quarter. Junk bonds, also called high-yield bonds, are sold by companies with ratings below investment grade, a category which has a higher risk of default.

For retail trades, defined by Finra as transactions of $100,000 or less, this “buy-sell trade ratio” jumped to over 1.2 in the third quarter, more than double the level it was at in the second quarter.

In contrast, the high-yield “buy-sell trade ratio” for institutional investors fell in the third quarter to close to zero, indicating a more “neutral” stance towards junk bonds by professional investors than their retail counterparts, Finra said.

Steve Joachim, executive vice president at Finra, said the strong buying by retail investors was a “concerning trend” because of the impact on these investors’ investment portfolios “when the market does turn”.

“Investors are doing some yield chasing,” Mr Joachim said. He added that Finra had already reminded bond dealers of their duties to warn investors of risks.

This included alerting investors to factors which might affect the value of corporate bonds, such as changes in credit ratings.

Mr Joachim, speaking last week at a Bond Dealers of America conference in Dallas, said the daily trading volumes by retail investors had also risen sharply.

He said the average number of daily high-yield bond trades had more than doubled since the beginning of 2009 to over 4,000 per day. Average daily retail trades of investment grade corporate bonds had fallen in that period from over 18,000 per day to 12,000.

Record low official interest rates and plunging yields on US government bonds has led to a sharp increase in investor demand for corporate bonds. Investors have put a record amount of money into funds investing in corporate bonds and companies have sold record amounts of new debt to tap into this.

The poor performance of equity markets in the last decade has fuelled this trend as investors seek a regular stream of income and assets that are more likely to retain their value.

Even though the yields paid on high yield bonds are close to historic lows, the average yield pick-up paid by companies relative to US Treasury debt remains higher than before the credit crisis.







AIG ready to discuss Treasury exit plan
By Tom Braithwaite in Washington and Francesco Guerrera in New York
Copyright The Financial Times Limited 2010
Published: September 29 2010 00:23 | Last updated: September 29 2010 00:23
http://www.ft.com/cms/s/0/b1eed1fa-cb27-11df-95c0-00144feab49a.html


AIG’s board is set to finalise a restructuring plan on Wednesday that would increase the US Treasury’s stake in the insurer to about 90 per cent as a step toward an eventual government exit.

People close to the situation said AIG directors were expected to formally discuss for the first time the Treasury’s plan to convert $49bn in preferred shares into common stock. This would raise the government’s stake from the current 80 per cent, while diluting the holdings of existing shareholders.

To make up for this dilution, the government would offer the outside shareholders warrants giving them the right to buy AIG shares in the future at a discount to the current price.

People familiar with the situation said the plans were fluid but added that issuing warrants, rather than common stock, would enable AIG to keep its share count down while offering some solace to diluted shareholders.

“This would give other people the chance to buy shares on the cheap as well,” said a person familiar with the deal. A second person familiar with the plan said the warrants would pay off only after the government had made money.

The Treasury is expected to sell its AIG stock in the market over a period, as it has with its investment in Citigroup. AIG and the Treasury declined to comment.

Approval of the plan by the AIG board would mark a significant step in freeing the insurer of government control and repaying taxpayers for the $182bn of public money used to buttress the group at the peak of the crisis in 2008.

Official estimates of the government’s ultimate loss range from $36bn to $50bn but AIG executives and officials hope the plan will deliver a better outcome. The restructuring includes the repayment of loans to the New York Federal Reserve Bank, partly with proceeds from next month’s planned initial public offering of Asian subsidiary AIA.

The plan comes as the Treasury this week prepares to end payments from the $700bn troubled asset relief programme and announce that it now expects a much lower loss, and perhaps even a profit, on the investments that helped shore up the financial system in 2008 and 2009.

AIG has warned investors in filings that the conversion of the government’s preferred stock into common equity could result in a severe dilution in the value of the holdings of non government shareholders. The plan for warrants represents an attempt to cushion the blow.

People involved with the restructuring plan, developed over several months by AIG, the New York Fed and the Treasury, have been surprised at the resilience of AIG stock.




Japanese business optimism grows
By Lindsay Whipp in Tokyo and Justine Lau in Hong Kong
Copyright The Financial Times Limited 2010
Published: September 29 2010 03:18 | Last updated: September 29 2010 11:50
http://www.ft.com/cms/s/0/b545a012-cb69-11df-95c0-00144feab49a.html


Japanese manufacturers were more optimistic about business conditions in September than economists had expected, but the Bank of Japan’s closely watched quarterly Tankan business survey has painted a gloomy picture ahead.

Chinese manufacturers were also upbeat about business in a separate survey which should help ease fears of a hard landing. China’s economy is set to overtake Japan’s in annual output for the first time this year while the latter battles to maintain anaemic growth.

The surprise optimism among businesses in Japan was helped by the remaining effects of economic stimulus and other extraordinary factors such as the hot weather, economists said. However, lacklustre underlying demand exacerbated by years of deflation has taken its toll on the domestic economy over the years, leaving it a less attractive business destination compared with its emerging market neighbours.

The government is planning a supplementary budget of around $55bn to shore up the domestic economy and help create jobs. Economists say the economy needs long-term structural reforms and corporate tax reform to spur a domestic revival.

“Breakfast in the Orchid room at the Okura [Hotel] used to be a who’s who [of international business people],” said Steve Bernstein, chief executive of Oppenheimer Investments Asia over in Japan on a business trip. “A few weeks ago it was almost empty.”

The survey of business conditions, released on Wednesday, put large manufacturers’ confidence at 8 on a diffusion index. A positive number reflects an excess of optimists over pessimists. Economists had expected a survey result of 6.

The Tankan forecasts a return to pessimistic territory of minus 1 in the coming months after registering only two quarters of optimism since mid-2008.

HSBC’s China purchasing managers’ index rose from 51.9 in August to a five-month-high of 52.9 this month, thanks to higher survey readings of production and new business. In July, the index fell below the key 50 threshold which separates expansion from contraction.

The downbeat outlook by Japanese businesses underscores the challenges that companies face improving profits in the face of slowing underlying demand in some of Japan’s most important export markets, with the additional pain of the yen’s persistent gains to 15-year highs, while domestic demand looks lacklustre.

Exporters worry about losing competitiveness in major markets, particularly to peers in South Korea and Germany which have had the advantage of weaker currencies, the former of which has benefited from intermittent intervention.

Japan’s finance ministry intervened in the markets for the first time in more than six years earlier this month, but the currency has since been creeping back toward the pre-intervention high.

Tankan respondents have accordingly adjusted their exchange rate expectations higher since the last survey in June, forecasting the yen will trade at an average Y89.44 against the US dollar between October and next March.

This rate however would be much lower than the current Y83.71 and the average market rate of Y88.99 seen since April, suggesting that there is room for further damage to sentiment, economists said.

The pessimistic outlook does not mean the economy is headed back into recession, just slower growth, some economists stressed. This is mainly because employment conditions and production capacity have not worsened.

However, all eyes will be on the Bank of Japan early next month to see if it introduces additional easing, following a local report saying it is considering new measures. Governor Masaaki Shirakawa reiterated earlier in the week that the central bank will take appropriate measures if necessary.

Barclays Capital said the Tankan results alone did not call for additional monetary easing. But Kyohei Morita, chief Japan economist, said there was a 60 per cent chance that the central bank would take further easing measures because of “yen appreciation, deteriorating consumer/business sentiment, slowing exports, pressures to coordinate with fiscal policy and the possibility of additional easing by the Fed”. The latter could result in further dollar weakness.





BA, Iberia and AA set to start sharing revenue
By John O’Doherty
Copyright The Financial Times Limited 2010
Published: September 29 2010 09:17 | Last updated: September 29 2010 09:41
http://www.ft.com/cms/s/0/f3a0852a-cb96-11df-a4f5-00144feab49a.html


The long-awaited revenue-sharing agreement between British Airways, Iberia and American Airlines could begin as early as next week, after BA announced on Wednesday that the final agreement to begin the venture had now been signed.

Under the terms of the agreement, a share of the revenue from a transatlantic flight booked by one of the three carriers will redound to that carrier, even if the flight is not ultimately operated by that carrier.

The commercial co-operation will extend to all transatlantic flights operated by the three airlines on routes between Mexico, Canada or the US; and all countries in the European Union as well as Norway and Switzerland. The three airlines estimate the combined value of their transatlantic business is worth $7bn (£4.4bn) in annual revenues.

The revenue sharing will begin in October, although British Airways declined to specify the exact date.

The agreement will help place the Oneworld alliance, of which Iberia, American and BA are part, on an equal footing with other airline alliances, such as Star Alliance and SkyTeam.

Both Star and SkyTeam have already received approval from the US Department of Transport to operate a transatlantic consortium, and have been doing so for years, although those partnerships are operating without the approval of European regulators, who are examining the deals.

Oneworld secured approval from the US Department of Transport in February of this year. The final hurdle for the transatlantic deal came in July, when competition authorities in Brussels approved the tie-up.

That approval from Brussels came at the same time as another decision approving the separate issue of an outright merger between BA and Iberia.

Shares in BA rose 0.4 per cent, or 1p, to 246.2p in early trading; and in Madrid, shares in Iberia gained 0.2 per cent, or less that a cent, to €2.88.