Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Eurozone debt crisis leaves investors wary
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: September 27 2010 03:47 | Last updated: September 30 2010 13:10
http://www.ft.com/cms/s/0/4dd71c22-c9dd-11df-b3d6-00144feab49a.html


Thursday 13:00 BST. The eurozone’s debt crisis is the focus of investor attention after Dublin gave details of its bail-out of Anglo Irish bank and Moody’s downgraded Spain’s credit rating.

The FTSE All-World equity index is down 0.2 per cent, following a poor performance in Asia as concerns about eurozone sovereign debt risk hurt financials in the region and a soft close on Wall Street encouraged end of quarter profit taking.

Many major Asian exchanges were finished for the day by the time the statement on Anglo Irish was released. The reaction in Europe to Ireland’s central bank putting a €34bn tab on the cost of rescuing beleaguered Anglo Irish bank has been fairly phlegmatic, however.

Even though the news comes at a time of heightened anxiety about the eurozone's fiscal position following Wednesday’s rash of anti-austerity protests, the figures revealed provided clarity and were in line with expectations, and this has allowed some easing of market stress gauges.

Irish government bond prices are edging higher, while the cost of insuring Ireland's’ sovereign debt against default – as measured by credit default swaps – has dropped 7 basis points to 467 basis points. Meanwhile, the euro has reversed early losses, and bunds are edging lower as their haven attraction diminishes.

The Market Eye

The wholesale “risk-on/risk-off” trade has been less reliable of late, but one of its components, the dollar’s inverse correlation to equities, is making a stirring comeback. Traders have noted that a dip in the dollar index coincides closely with a move higher for the S&P 500. There is some sense to this. A falling dollar is good for US exporters, and a declining buck may also be a sign that investors are not scrambling for perceived currency havens, which they tend to do in times of stress. However, an important factor behind the dollar’s recent decline to 8 month lows is a falling yield differential with major currency peers as markets price in further QE. That’s a symptom of a struggling economy, which is not good for stocks unless one believes the extra liquidity will flow into equities regardless.

Whatever one’s view, according to 4Cast, the one-month correlation between the dollar index and the S&P 500 is a negative 0.92 – with minus 1 showing perfect negative correlation – and these trends have a habit of intensifying as more market participants track and act on them.

Dollar and US equities

Even Spanish bonds are gaining ground as investors considered the Moody’s downgrade to have been already discounted by the market.

The FTSE Eurofirst equity index has pared initial losses and is now off just 0.2 per cent, while London’s FTSE 100 is down 0.2 per cent. Dublin stocks are up 0.1 per cent, though AIB shares are off 28 per cent to €0.40.

US equity futures are down 0.2 per cent. This suggests Wall Street will start the last trading day of the month on the back-foot, but it would still leave US stocks up nearly 9 per cent this month. It would mean that a decidedly mixed few weeks of economic data and the prospect of US Federal Reserve support had helped deliver the best September since 1939.

Magnifying glass

Factors to Watch. In the US, traders will have to tackle the latest weekly initial unemployment claims report and the September Chicago purchasing managers’ index. Mainland China and Hong Kong markets will be closed on Friday for the National Day holiday. This will thin trading in the region – a perfect time for the Japanese Ministry of Finance to try a spot of yen intervention just before the european day gets going, perhaps.

Asia Pacific

Asia-Pacific. Shares retreated as renewed concerns about Europe’s debt crisis hammered financial shares in early trading. The FTSE Global Banks index is down 0.6 per cent.

The FTSE Asia-Pacific index is down 0.6 per cent, with Japan’s Nikkei 225 1.9 per cent lower as a strengthening yen hurt exporters and a profit warning from Nintendo spooked techs.

Australia’s S&P/ASX 200 off 1.3 per cent. South Korea’s Kospi rose 0.3 per cent and New Zealand’s NZX-50 lost 1.5 per cent.

The Shanghai composite rose 1.7 per cent as property stocks shrugged off new real estate lending restrictions. This left the mainland benchmark up 11 per cent for the third quarter, but it is still one of the worst performing exchanges so far this year, with a drop of nearly 21 per cent as concerns about the central bank’s clampdown on speculative activity continue to nag domestic investors. Hong Kong fell 0.1 per cent on Thursday

Forex Forex. The single currency fell swiftly as traders first absorbed the statement out of Dublin on Anglo Irish bank, losing 0.5 per cent to $1.3560. However, the single currency soon rebounded when investors realised the AIB news contained no shocks, and it is currently up 0.1 per cent at $1.3632. A fall in Germany’s unemployment rate to 7.5 per cent in September may be helping with euro strength.

The euro’s revival curtailed a rally in the US dollar index – which tracks the buck against a basket of its peers. The DXY, as it is known, is down 0.2 per cent to 78.63, earlier hitting a fresh eight-month low as the prospect of more Federal Reserve quantitative easing weighs on the currency.

Beijing responded to the US House of Representatives voting for measures to penalise China for keeping its currency weak by allowing the renminbi to fall 0.1 per cent from its recent highs to Rmb6.6903 versus the dollar on Thursday. Beijing later warned that the House bill could damage relations between the two nations.

Meanwhile, the yen hit its strongest level relative to the greenback since Tokyo intervened to hobble its ascent two weeks ago. The Japanese unit is up 0.4 per cent to Y83.37 versus the dollar and up 0.4 per cent to Y113.63 against the euro.

Rates

Rates. Eurozone peripheral sovereigns are rallying following the AIB statement. Ireland’s benchmark 10-year yields are down 14 basis points to 6.45 per cent; Portugal’s benchmark’s are off 13bp to 6.22 per cent; and Spain’s 10-years are down 7bp to 4.11 per cent.

US Treasury yields continue to move lower on expectations for further monetary easing and following a successful batch of auctions during the week. The 10-year benchmark yield is down 3 basis points at 2.48 per cent.

Commodities. Industrial metals are mixed, with copper little changed at $8,057 a tonne. Oil is adding to the previous session’s strong gains following a report that US refiners had cut activity back to April levels, today rising 1 per cent to 78.60 a barrel.

Gold is up 0.3 per cent at $1,312 an ounce, having hit a new nominal record of $1,314.85. Silver is at a new 30-year high of $22.02 an ounce.

Americas

Americas. On Wednesday, the S&P 500 in New York took several runs at the 1,148 mark but could not break through, thereby establishing in traders’ minds another resistance point to target. The benchmark eventually finished down 0.3 per cent as financials struggled but energy stocks were boosted by a rising oil price.

US equity mutual funds saw yet another week of outflows – now running at 21 straight weeks, according to the Investment Company Institute.

Strong oil shares were also one of the main reasons that Canadian equities claimed a two-year high. A bounce for Research In Motion, the maker of BlackBerry smartphones, also helped to push S&P/TSX composite up 0.9 per cent to 12,382.

And energy was also a main driver in Latin America. A 3 per cent jump for Petrobras led Brazil’s Bovespa up 0.6 per cent, with banks also lending support. The FTSE Latin America index climbed 0.6 per cent.

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





Moody’s cuts Spain’s credit rating over growth fears
By Victor Mallet in Madrid
Copyright The Financial Times Limited 2010
Published: September 30 2010 08:24 | Last updated: September 30 2010 08:50
http://www.ft.com/cms/s/0/15ab40fe-cc61-11df-a6c7-00144feab49a.html


Moody’s, the credit rating agency, downgraded Spain’s government bonds on Thursday, citing weak economic growth, a deterioration of financial strength and higher borrowing needs.

The downgrade by Moody’s by one notch from its top rating of AAA to Aa1 makes it the last of the three big rating agencies to downgrade Spain as a result of the global economic crisis.

The downgrade, which was also applied to Spain’s Fund for Orderly Bank Restructuring, known as Frob from its Spanish initials, comes with a stable outlook.

“Over the next few years, the Spanish economy is likely to grow by only about 1 per cent on average,” Kathrin Muehlbronner, a Moody’s vice-president and lead analyst for Spain, said in a statement issued by the agency.

Although the downgrade was anticipated in the financial markets, it will disappoint Elena Salgado, Spanish finance minister, who had hoped that Moody’s would diverge from Standard & Poor’s and Fitch and leave Spain in the top tier of creditworthy nations.

Apart from sluggish growth prospects, Moody’s cited Spain’s challenges in reducing its annual budget deficits, which the government has said it will cut from 11.1 per cent of gross domestic product in 2009 to 6 per cent of GDP next year, and 3 per cent in 2013.

“Although Moody’s expects the government to broadly achieve its fiscal targets both this year and next, a further reduction in the deficit beyond 2011 is likely to require more fundamental spending reforms than the government has so far tabled,” Moody’s said in a statement.

But the rating agency said Spain’s determination to tackle immediate fiscal problems was the reason it limited the downgrade to just one notch and kept the outlook stable.

Moody’s said “raising Spain’s low productivity levels and improving international competitiveness” were vital challenges for the future.







Ireland unveils bank rescue package
By John Murray Brown in Dublin and Miles Johnson in London
Copyright The Financial Times Limited 2010
Published: September 30 2010 09:31 | Last updated: September 30 2010 10:44
http://www.ft.com/cms/s/0/d8578e16-cc69-11df-a6c7-00144feab49a.html


Ireland will take a majority stake in its second-largest bank as part of a fresh multibillion-euro bail-out for the country’s lenders, prompting the government to redraft its budget plans.

Allied Irish Bank, the country’s second-largest bank, plans to raise €5.4bn ($7.4bn) in a share sale to be underwritten by an Irish sovereign wealth fund. The government also announced on Thursday that the current Dan O’Connor, chairman, and Colm Doherty, acting managing director, are to step down.

The cost of bailing-out Anglo Irish Bank is set to reach €34bn ($46bn) as the central bank announced additional capital injections for the bank at the centre of Ireland’s disastrous property crash.

The regulator said the final bill for Anglo would be €29.3bn. A further capital injection under what it called “severe hypothetical stress scenario” would lift the total to €34bn if commercial property prices, having fallen 65 per cent from peak values, stayed at those levels for 10 years.

In addition, Irish Nationwide Building Society will need €2.7bn, bringing its total bail-out to €5.4bn.

The bail-out costs will lift the fiscal deficit from the planned 11.75 per cent of gross domestic product in 2010 to 32 per cent. This compares with the Maastricht treaty guidelines of 3 per cent.

Patrick Honohan, the central bank governor, said the higher cost of the recapitalisations would require a “reprogramming” of the budget plans.

Ireland's economic woesMeanwhile, the National Treasury Management Agency, the Irish government’s debt agency, announced that it was suspending its bond auctions planned for October and November and would return to the markets in the first quarter of 2011.

“Yes, of course these figures are horrendous, but they can be managed over a 10-year period and they will be managed,” said Brian Lenihan, the finance minister. He pointed out that the interest bill on the €34bn was €1.7bn a year, compared with an underlying budget deficit of around €19bn. “So I think that figure has to be put in context. There is a very wide gap between our expenditure and our revenue which is not accounted for by the banking crisis.”

But he acknowledged as a result of the additional bail-out costs a “significant additional adjustment” in the fiscal consolidation plan would be required when the government comes to frame the 2011 budget in early December.

Mr Lenihan made clear senior bondholders would be repaid in full but he said “legislative arrangements” would be introduced to address the position of the €2.5bn of subordinated bondholders at Anglo Irish.

The Irish bond markets rose on Thursday as views grew that Dublin was tackling its banking problems in a sensible and responsible way.

Earlier this week yields on Irish 10-year government bonds hit a record high, while the annual cost to insure Irish bonds against default also jumped to its highest ever level.

On Thursday the yield on Irish 10-year government bond fell 12 basis points to 6.47 per cent. The cost to insure Irish government bonds against default fell to $467,000 to insure $10m of debt over five years and the extra premium Dublin pays to borrow in the markets over Germany narrrowed 11 basis points to 4.37 per cent.

Shares in Allied Irish, however, tumbled on the news, falling 18 per cent. Bank of Ireland, which Ireland’s central bank said was not in need of new capital, dropped 6 per cent.

Allied Irish’s share sale will be fully underwritten by Ireland’s state pension fund, the National Pensions Reserve Fund Commission, with up to €3.7bn available from its cash reserves to buy shares.

Allied Irish shares will be underwritten at a fixed price of €0.50 a share, or a 9.4 per cent discount to its closing price on Wednesday.

Additional reporting by David Oakley in London






US Congress backs action on renminbi
By James Politi and Daniel Dombey in Washington
Copyright The Financial Times Limited 2010
Published: September 29 2010 19:30 | Last updated: September 30 2010 04:59
http://www.ft.com/cms/s/0/c5f2495c-cbef-11df-bd28-00144feab49a.html


The US House of Representatives passed legislation that would punish China for undervaluing its currency and harming the competitiveness of US manufacturers and exporters, in a move that could heighten trade tensions between the two countries.

China quickly attacked the legislation on Thursday as contrary to WTO rules and “a new move of the US’ rising trade protectionism.” In a statement distributed through state media, a spokesman for the Ministry of Commerce said China “has never undervalued the yuan exchange rate to gain a competitive edge.”

Although the bill’s fate remains unclear, since it still needs to move through the Senate and be approved by Barack Obama, US president, its bipartisan passage in the House by a wide 348-79 margin reflects growing frustration with China’s economic policies.

“If China wants a strong trading relationship with the United States, it must play by the rules,” Nancy Pelosi, Democratic speaker of House, said ahead of the vote on Wednesday.

Some of the rhetoric was even stronger. “They cheat to steal our jobs,” said Mike Rogers, a Republican from Michigan, while Dana Rohrabacher, a Republican from California, attacked China’s “clique of gangsters” that was doing “great damage to the people of the United States of America”. Most Republicans supported the legislation, as did almost all Democrats.

The Obama administration has preferred to pursue a policy of engagement in an effort to persuade China to allow the renminbi to strengthen, and could see its negotiating position enhanced by mounting congressional pressure.

The Treasury department said: “Today’s vote clearly shows that lawmakers have serious concerns about the issue. The president and Secretary Geithner share those concerns. They have both said repeatedly that China needs to allow a significant, sustained appreciation over time.”

But critics have warned that the more aggressive measures in the currency legislation may not be effective in reducing the US’s trade deficit with China and a more confrontational stance could be counterproductive, since it could lead to retaliation and higher prices for US consumers. “I don’t question the problem, I question the remedy,” said Jeb Hensarling, a Texas Republican.

The legislation would allow the US to use estimates of currency undervaluation to calculate countervailing duties on imports from China and other countries.

An amendment by Sander Levin, Democratic chairman of the ways and means committee, who shepherded the bill through the House, watered down the bill recently to make it more likely to survive a challenge at the World Trade Organisation, helping it garner more support. Republicans had been concerned that the bill might be inconsistent with global trade rules.

This week, Chuck Schumer, the New York senator who has been leading congressional efforts to pass China currency legislation since 2005, vowed to push forward with a bill in the upper chamber during the “lame-duck” session between the November midterm elections and the seating of new members in January.

“This issue cannot wait for another year for a new Congress,” he said. “China’s currency manipulation would be unacceptable even in good times. At a time of almost 10 per cent unemployment, we simply will no longer stand for it,” added Mr Schumer.

Meanwhile, in another sign of US alarm at China’s growing economic clout, the House approved a bill to cut dependence on Chinese “rare earth” minerals by providing seed capital for US producers. Rare earths are vital for high technology products in the defence and green energy sectors.

China and the US have recently been sparring over poultry exports, with China this week upholding steep tariffs on US chicken imports, and the WTO ruling on Wednesday against the US in a fight over a ban on Chinese chicken that followed the outbreak of bird flu in Asia and has since been lifted.

Beijing removed the dollar peg from the renminbi – which was put in place during the financial crisis – in June. But since then, its currency has appreciated only slightly.

The vote on China currency was one of the last items on the congressional agenda before the midterm elections.

Other issues, such as the expiry of more than $3,000bn of Bush-era tax cuts, proved too contentious for any bipartisan consensus to emerge.

Additional reporting by Jamil Anderlini in Beijing



AIG reaches deal to repay US taxpayer
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: September 30 2010 13:21 | Last updated: September 30 2010 13:21
http://www.ft.com/cms/s/0/38341b48-cc87-11df-a6c7-00144feab49a.html


AIG has agreed to repay the US government the remains of the $182bn rescue package provided by the Treasury during the financial crisis by early next year.

The agreement, which will see the Treasury swapping debt for stock, will allow the US insurer to exit the government’s rescue scheme earlier than previously expected.

AIG said it would repay the Federal Reserve Bank of New York credit facility, retire Treasury interests in AIA, the Asian business, and Alico, the life insurance business, and extricate itself from Troubled Asset Relief Programme by swapping debt for stock that the Treasury can later sell.

“This is a pivotal milestone as we deliver on our long-standing promise to repay taxpayers, and we thank the American people for their support,” said Robert Benmosche, AIG’s chief executive, in a statement. “We are very pleased that this agreement vastly simplifies current government support of AIG, sets forth a clear path for AIG to repay the FRBNY in full, and sets in motion the steps for the US Treasury to exit its ownership of AIG over time.”

AIG, which was bailed out with $182bn of public money in 2008, said it owes the Federal Reserve Bank of New York through a credit facility, also holds preferred interests totalling about $20bn in special purpose vehicles related to AIA and Alico, the life insurer which is being sold to MetLife.

Meanwhile, AIG, which has $49.1bn of Tarp preferred shares outstanding, will give the Treasury 1.655bn shares of its common stock. It will also issue up to 75m of warrants with a strike price of $45 a share to existing common stockholders.

Once this is complete, Treasury will have a 92.1 per cent stake in AIG, which it is expected to gradually sell-off in the open market.

“The exit strategy announced today dramatically accelerates the timeline for AIG’s repayment and puts taxpayers in a considerably stronger position to recoup our investment in the company,” said Treasury Secretary Tim Geithner.

Shares of AIG rose by 0.43 per cent to $37.61 in pre-market trading after the agreement was announced.

AIG said separately on Thursday that it would sell its two Japanese life insurance units to Prudential Financial for $4.8bn.

“With this plan, we remain on track to emerge with one of the largest, most diversified property and casualty companies in the world, a leading US life insurance and retirement savings operation, and other businesses that enhance this nucleus,” Mr Benmosche said. “As our results this year underscore, AIG’s core businesses are financially strong, well-managed enterprises that are well-positioned to deliver long-term value to all of our stakeholders.”





Congressional ‘net neutrality’ deal falls apart
By Stephanie Kirchgaessner in Washington
Copyright The Financial Times Limited 2010
Published: September 30 2010 01:01 | Last updated: September 30 2010 01:01
http://www.ft.com/cms/s/0/bb91b25a-cc1b-11df-bd28-00144feab49a.html


Negotiations over “net neutrality” legislation fell apart along partisan lines, prompting calls from a top Democratic lawmaker to say that the Federal Communications Commission must act to regulate broadband companies.

In an unusual statement, Henry Waxman, the Democratic chairman of the House energy and commerce committee, said a deal that had support from cable and phone companies, as well as consumer advocates, were scuppered after his Republican counterpart said he could not support the proposal.

Mr Waxman said the proposal was designed to protect net neutrality, the principle that internet service providers may not intentionally hinder or favour the delivery of content, over the short term. It would have prohibited wireless carriers from blocking websites and prevented phone and cable groups from “unjustly or unreasonably” discriminating against any lawful internet traffic.

It would also have protected phone and cable companies from regulation of their high-speed internet services by the FCC, the media regulator, for two years. Julius Genachowski, FCC chairman, proposed issuing new regulations after the FCC was stripped of its authority over high-speed service in a court ruling this year.

Telecom insiders were sceptical of the announcement by Mr Waxman, who said the deal had fallen apart because Joe Barton, a Republican congressman, said he could not support it. They viewed it as a ploy designed to force telecom and cable companies to put pressure on Republicans to support the agreement.

Telecom and cable groups adamantly oppose any move to impose new regulations on them by the FCC, and Mr Waxman’s deal would give them short-term certainty that the FCC would remain at bay.

“Under this proposal, both sides would emerge as winner. Consumers would win protections that preserve the openness of the internet, while the internet service providers would receive relief from their fears of [regulation],” Mr Waxman said.

He added that he had made clear that the proposal would only move forward with Mr Barton’s support. Mr Waxman also dangled a carrot in front of the cable and telecom industry, suggesting it was still possible to pass the legislation after November’s midterm election – the so called lame-duck session of Congress.

He said failure to pass legislation meant that the FCC would have to act.

Mr Barton said Mr Waxman’s effort was a “tacit admission” that the FCC was going down the wrong path and that regulations would stifle investment and create regulatory overhang.

“I have consulted with Republican leadership and members of the energy and commerce committee, and there is a widespread view that there is not sufficient time to ensure that chairman Waxman’s proposal will keep the Internet open without chilling innovation and job creation,” he said.





Nintendo delays launch of 3D console
By Jonathan Soble in Tokyo
Copyright The Financial Times Limited 2010
Published: September 29 2010 11:45 | Last updated: September 29 2010 18:47
http://www.ft.com/cms/s/2/e0e2fbd8-cbb0-11df-a4f5-00144feab49a.html


Nintendo has said it will be unable to deliver the 3D version of its DS portable games console in time for the Christmas shopping season.

The delay contributed to a slashing by the Japanese company of its full-year earnings forecast.

The 3DS is Nintendo’s most significant product launch since it introduced its motion-sensing Wii home system in 2006.

Prototypes of the machine which, unlike a 3D television set, does not require users to wear 3D glasses have been well received at trade shows.

With its main rivals, Sony and Microsoft, selling their own motion controllers this Christmas, Nintendo will be the only major console maker without new hardware on store shelves.

Satoru Iwata, president, said Nintendo had decided it could not supply enough 3DS handheld game players this year.

“It’s a fact that this affected our full-year outlook,” he said on Wednesday as Nintendo cut its net profit forecast for the financial year to March from Y200bn ($2.4bn) to Y90bn.

Nintendo said the 3DS would go on sale in Japan on February 26. It will cost Y25,000, a significant premium over current DS models which sell for between Y12,000 and Y16,000. The company did not fix a start date for overseas sales.

It scaled back its projection for all DS models this financial year to 23.5m units from 30m.

The company first made public its plans for a 3D handheld console in March. Atul Goyal, a technology analyst at investment group CLSA, said the early disclosure had deepened Nintendo’s problems by deterring would-be buyers of existing models.

“Look at Apple, which announces new products a month before they go on sale,” he said. “Nintendo is just cannibalising its own products.”

Many analysts were expecting the company to cut its earnings guidance due to slowing sales of the Wii, which is responsible for two thirds of its revenues.

The potential for widespread 3D gaming has emerged only this year with the introduction of 3D televisions. Sony is selling a 3D upgrade for its PlayStation 3 home console, but Nintendo will be the only maker offering a portable 3D machine.

Although the 3DS has been praised by reviewers, it is unclear whether the introduction of 3D features will stem an accelerating shift away from specialised portable consoles.

Many are choosing to download low-cost games to multi-purpose devices such as Apple’s iPhone and iPad.

Shares in Nintendo ended down 2.9 per cent following the announcement.