Today's Financial News Courtesy of The Financial Times

Today's Financial News Courtesy of The Financial Times


China factory growth boosts markets
By Jamie Chisholm, Global Markets Commentator.
Copyright The Financial Times Limited 2010
Published: September 27 2010 03:47 | Last updated: October 1 2010 15:28
http://www.ft.com/cms/s/0/4dd71c22-c9dd-11df-b3d6-00144feab49a.html


Friday 15:10 BST. Stocks are starting the new quarter on the front foot, after an upbeat survey of China’s manufacturing sector eases concerns the world’s second-biggest economy was struggling to emerge from its mid-year sticky patch.

The FTSE All-World index is higher by 0.6 per cent, adding to last quarter’s 14 per cent advance, as many stock investors remain optimistic about the prospects for global growth, or that central banks remain poised to provide support if required.

The S&P 500 index on Wall US is up 0.4 per cent as the market’s new favourite inverse risk proxy, the dollar, hits fresh eight month lows. Better than forecast US consumer sentiment and spending data appear to be cancelling out a report showing a slowing in the country’s manufacturing expansion.

News of an $18bn joint venture between Chinese refining major Sinopec and Spain’s energy giant Repsol, have added to the positive mood, with traders reasoning the tie-up is indicative of the strong demand for resource assets and another example of a developing M&A trend as financial markets recover and corporate animal spirits return.

The FTSE Eurofirst 300 is up 0.1 per cent and London’s FTSE 100 is up 0.8 per cent as oil and gas groups feed off the Repsol deal. Industrial metal prices are higher and oil is back above $80 on global demand hopes.

The Market Eye

It’s back. The US third quarter earnings season will kick off next Thursday with a report from Alcoa, the country’s biggest aluminium producer. Analysts expectations of earnings growth have come down since the start of July, when they expected profits to advance 25.6 per cent. They now think companies will see earnings growth of 24 per cent for the third quarter, according to Thomson Reuters, as mixed economic data over the period has dulled optimism.

Now, stock market bulls may see the pull back in earnings expectations and reason that this is good news for equities because it means the bar has been sufficiently lowered so as to all but guarantee a slew of positive surprises. Indeed, cleverly managing expectations is considered an important part of the corporate skill-set - note how 75 per cent of the S&P 500 beat forecasts in the second quarter. However, it makes it more difficult to argue the market is underestimating how companies have performed during a period that has seen the S&P 500 rise 11 per cent.

However, some stress gauges continue to flash red; with core sovereign debt yields still near multi-month lows and gold again hitting a new nominal peak.

In addition, survey’s of UK and eurozone factory activity have shown growth at 10- and 8-month lows, and German retail sales fell unexpectedly in August, a reminder that many developed economies are struggling to gain traction.

Factors to Watch. A very busy day for potential market-moving data. The first of each month sees the release of manufacturing surveys covering the major economies. After China and the eurozone the next most important is the US.

Asia-Pacific. Stock markets were mostly higher, led by Japanese shares on expectations that the Bank of Japan will take additional steps towards monetary easing at its policy meeting next week.

The FTSE Asia-Pacific Index climbed 0.6 per cent. Japan’s Nikkei 225 closed up 0.4 per cent, even as Japan’s August core consumer price index fell 1.0 per cent from a year ago and investors fear the strong yen could worsen the deflationary spiral.

South Korea’s Kospi Composite has added 0.2 per cent and New Zealand’s NZX-50 advanced 1.1 per cent. However, Australia’s S&P/ASX 200 lost 0.1 per cent , held back by a soft banking sector.

Sentiment improved in the region after data showed that China’s official purchasing managers’ index rose in September, easing concerns of a potential slowdown in the economy. Markets in Hong Kong and China are closed for a public holiday.

Forex. No sign yet of the Japanese authorities’ intervening on Friday to weaken the yen as it hovers just above Y83 to the dollar. Verbal intervention was provided by Naoto Kan, prime minister, who said the government would keep taking decisive action to curb the yen’s advance – but this had little impact.

The yen is currently up 0.2 per cent versus the dollar at Y83.31, though down 0.6 per cent relative to a broadly strengthening euro at Y114.40. The euro is up 0.7 per cent to $1.3731 as the single currency continues to get a lift from the clarity provided on Thursday regarding Ireland’s banking bailout.

The dollar index, which tracks the buck against a basket of trade partners’ currencies, has hit a fresh eight-month low, and is now down 0.6 per cent at 78.31, as the prospect of more Federal Reserve quantitative easing weighs on the currency. William Dudley, president of the New York Fed, today said that “further action is likely to be warranted” by the central bank unless the economic outlook improves.

Rates. Confirmation that deflation continues to stalk Japan was not exactly shocking news and was therefore unable to push government bond yields beyond recent lows. The 10-year JGB yield is up 3 basis points to 0.97 per cent, even as expectations increase that Tokyo will adopt further monetary stimuli shortly.

US 10-year yields are poised just above new 20-month lows, with bond investors clearly unconvinced by Thursday’s positively spun economic data and still expecting the Fed’s QE2 to dock. The benchmark note yield is up 5 basis points to 2.56 per cent.

Eurozone peripheral bond yields are again pulling lower as sovereign debt angst subsides following Ireland’s well-received clarification of its banking difficulties. Ireland’s 10-year notes are now sporting a yield of 6.59 per cent, down 15 basis points, according to Reuters data.

Commodities. Many metals are at, or approaching multi-year, and record highs as traders welcome the upbeat China manufacturing survey. Copper hit a new two-year peak, up 1.5 per cent to $8,155 a tonne, while tin is up 2.5 per cent to $24,900 a tonne, just several hundred dollars shy of a record price, as miners can’t keep up with demand.

Oil is up 1.5 per cent to $81.18 a barrel on similar growth hopes. Gold has hit another new nominal high of $1,317.80 an ounce and is currently up 087 per cent to $1,315, following a burst of end-of-quarter profit taking on Thursday which briefly took the bullion below $1,300.

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




Irish face bill of €50bn for bank rescue
By David Oakley in London and John Murray Brown in Dublin
Copyright The Financial Times Limited 2010
Published: September 30 2010 09:31 | Last updated: September 30 2010 22:49
http://www.ft.com/cms/s/0/d8578e16-cc69-11df-a6c7-00144feab49a.html


Ireland has pledged to inject extra capital into its stricken financial sector as fears rose that the total cost to save its banks could rise as high as €50bn, more than a third of 2009 national income.


In the latest attempt to rescue its financial system, Irish ministers promised a renewed crackdown on public spending on top of the austerity packages that have been introduced. Despite what Brian Lenihan, finance minister, acknowledged were “horrendous” costs to clear up the bust left by the country’s property-fuelled boom, bond markets rallied and European policymakers praised Dublin for its efforts to draw a line under its banking problems.

Allied Irish Banks, one of its beleaguered lenders which needs an additional €3bn, will test the market further with an equity placing open to all shareholders. But the issue is being fully underwritten by the National Pension Reserve Fund, meaning the government will effectively buy all the shares and could end up owning 90 per cent of the stock. Mr Lenihan insisted on Thursday Ireland did not need to return to the capital markets until June next year, which gives the country breathing space to restore its finances.

He added Ireland will need a bigger fiscal adjustment in its 2011 budget than the €3bn that was earmarked earlier.

World podcast
David Gardner and Gideon Rachman discuss how Ireland can extricate itself from crisis

“I don’t expect that hospitals will have to close or schools will have to close, but I do expect a fundamental reappraisal of the public sector will have to take place in which we secure absolute value for money in the delivery of services,” Mr Lenihan said.

The rescue costs for this one bank represent a staggering 21 per cent of Irish GDP, more than the entire bill for sorting the Japanese banking crisis of 1997 and almost twice the cost of the Finnish crisis in the early 1990s.

Investors warned that Ireland may still be forced to turn to the eurozone bail-out fund, the European Financial Stability Facility, even if it succeeds in delaying such a move until the middle of next year at the earliest. Some investors are also sceptical over how Ireland will pay for its financial clean-up, although officials stress the country’s pension fund has assets of €24bn, most of which is liquid assets or cash that it can use to help its banks.

But Ireland’s apparent ability to finance itself in the short term has given some analysts confidence that the country can ride out the crisis.

Gary Jenkins, head of fixed income research at Evolution, said: “This shows Ireland is not Greece. The big difference between Ireland today and Greece in May is that Ireland is fully funded and has no need to return to the bond market soon.

“They are in a difficult financial position, but at least they have some time to restore market confidence.”

Ireland cancelled two debt auctions in October and November as it has already funded itself this year by borrowing €20bn ahead of schedule.

The country has already injected about €32.6bn into banks and building societies. Anglo Irish Bank will receive an additional €6.4bn, rising by another €5bn in the event of unexpected losses, and Irish Nationwide Building Society will receive another €2.7bn.

The Irish bond markets rallied after falling three days in a row, sparking a rally in other peripheral eurozone bond markets. The euro also rose against the dollar, but Irish banking stocks fell. Irish 10-year bond yields, which have an inverse relationship with prices, fell nearly a quarter of a point to 6.37 per cent. The extra cost Ireland has to pay over Germany to raise money also narrowed more than quarter of a point to 4.29 per cent.







Eurozone jobless data remain stubbornly high
By Stanley Pignal in Brussels
Copyright The Financial Times Limited 2010
Published: October 1 2010 12:43 | Last updated: October 1 2010 12:43
http://www.ft.com/cms/s/0/63bf0de6-cd44-11df-ab20-00144feab49a.html


Unemployment in the eurozone remained at record levels in August, dashing hopes that rapid economic growth in the second quarter would translate into rapid improvements in the labour market.

The jobless rate in the currency bloc stayed put at 10.1 per cent , where it has been since May, according to revised figures from the European Commission’s statistical arm. It had previously estimated a 10 per cent rate.

The revision brings the unemployment rate to its highest level since the euro was introduced in 1999.

The eurozone-wide number conceals sharply differing situations between the 16 countries that use the euro.

“Core” countries such as Germany and the Netherlands have relatively low unemployment rates, of 6.8 per cent and 4.5 per cent respectively, which have continued to fall in recent months as their economies have performed well.

By contrast, in the so-called “peripheral” countries such as Spain (20.5 per cent) and Ireland (13.9 per cent), unemployment has been rising from an already-high base.

French joblessness rose 0.1 per cent to 10.1 per cent.

Policymakers had hoped that the second-quarter growth spurt in the eurozone would cause the jobless rate to fall after thirty months of increases or flatness. The unemployment rate stood at 7.2 per cent at the start of 2008.

Economists say prospects for unemployment are mixed in the coming months.

“Surveys point to further improvement in employment in the region as a whole,” says Emilie Gay of Capital Economics, a consultancy. “Despite sharp falls in the headline composite purchasing managers’ index [a survey of industrial sentiment], the employment index continued to nudge up in September, suggesting a pick-up in private sector annual employment growth.”

But she warned that any improvement in private sector employment would be at least partly offset by public sector job cuts as austerity measures kicked in.

This will probably affect “peripheral” countries by the end of 2010, with most “core” countries delaying public spending cuts until the start of 2011.

Howard Archer at IHS Global Insight pointed to weaker than expected eurozone GDP growth as a cause for concern. “At the very least, eurozone labour markets are unlikely to see major overall improvement for some time to come, so unemployment is likely to remain relatively high,” he said.





US manufacturing hits lowest level this year
By James Politi in Washington
Copyright The Financial Times Limited 2010
Published: October 1 2010 15:54 | Last updated: October 1 2010 15:54
http://www.ft.com/cms/s/0/6fe5a992-cd6a-11df-ab20-00144feab49a.html


A key measure of health in the US manufacturing sector declined last month to its lowest level of the year, but still consistent with continued expansion in the US economy.

The Institute for Supply Management’s report on manufacturing showed that the pace of growth in the sector slowed from 56.3 in August to 54.4 last month, which was just slightly below economists’ forecasts of a drop to 54.5.

The manufacturing industry has been among the bright spots in the US economic recovery, hitting a peak on the ISM index in April as companies rebuilt their inventories in order to meet growing demand from consumers and businesses. But with growth slowing in the second half, that momentum has predictably waned.

In September, many of the index’s components declined, with new orders falling from 53.1 to 51.1, production decreasing from 59.9 to 56.5, and employment down from 60.4 to 56.5. Nevertheless, a reading of 50 separates an expansion of activity from a contraction, signalling that manufacturing businesses are still growing.

“The ISM headline number does fit in the in the sweet spot where data is inconsistent with a double dip, but not too strong to short circuit Federal Reserve quantitative easing expectations,” said Alan Ruskin, an economist at Deutsche Bank, referring to the possibility that the US central bank could buy more government debt to shore up the recovery.

One element of the ISM index that experienced a big increase was the prices component, which rose from 61.5 in August to 70.5 last month because of the impact of higher commodity values. Meanwhile, the exports index fell slightly to 54.5 while imports remained steady at 56.5.







US spending and incomes grow
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 1 2010 14:17 | Last updated: October 1 2010 15:54
http://www.ft.com/cms/s/0/c5d657d4-cd56-11df-ab20-00144feab49a.html


US consumers picked up their spending in August, taking advantage of higher incomes, in a hopeful sign for the biggest driver of the US economy.

Personal consumption expenditures rose by 0.4 per cent from July to August, commerce department figures showed on Friday. That was stronger than economists predicted and matched the rise from the prior month.

Spending was outpaced by incomes, which rose by 0.5 per cent. That was the biggest jump since last December and shows renewed confidence among businesses, many of which froze salaries during the recession.

Consumer spending is closely watched because it accounts for about 70 per cent of economic activity in the US. An August rise in spending is good news for retailers seeking to capitalise on the back-to-school shopping season, however data earlier this week revealed that consumer confidence remains shaken amid high unemployment.

Separately on Friday, the Thomson Reuters/University of Michigan index of consumer sentiment showed that confidence fell less than expected in September, declining from 68.9 in August to 68.2.

Alan Ruskin, strategist at Deutsche Bank, said that the spending figures would be likely to provide a small boost to third-quarter gross domestic product, lifting growth above 2 per cent.

“This fits with a subpar lethargic recovery but equally is very far from a double dip,” Mr Ruskin said.

With incomes rising faster than purchases, the US savings rate ticked up from 5.7 per cent to 5.8 per cent in August.

Meanwhile, the commerce department’s closely watched gauge of prices was muted in August, holding steady at 1.5 per cent. That remains below the Federal Reserve’s inflation target and supports the Fed’s argument that additional stimulus measures could be needed if disinflation or deflation sets in.

In minutes from its policy meeting released last month the Fed said it would, “provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate”.






AIG exit plan set to deliver a profit
By Francesco Guerrera in New York, Tom Braithwaite in Washington and Henny Sender in Hong Kong
Copyright The Financial Times Limited 2010
Published: September 30 2010 13:21 | Last updated: October 1 2010 00:14
http://www.ft.com/cms/s/0/38341b48-cc87-11df-a6c7-00144feab49a.html


The US government took a major step towards ending two years of taxpayers’ assistance to AIG, clinching a deal that could allow the US Treasury to sell its huge stake in the insurer at a profit.

Tim Geithner, Treasury secretary, celebrated a restructuring plan that “dramatically accelerates” AIG’s repayment of government support.

Days before the two-year anniversary of the passage of the main $700bn government bail-out fund, Mr Geithner told the Washington Ideas Forum that losses on the rescue effort should fall below $50bn and that “overwhelming financial force” had saved the financial system.

He gave some credit to those Republicans who backed the rescue and signalled that the Obama administration could work with the party if it won a majority at November’s congressional elections.

The AIG deal will see the US Treasury exchange its $49.1bn in preferred shares into a 92.1 per cent stake in AIG to be sold in the coming months. AIG shareholders will receive warrants to buy more shares to cushion the blow of the dilution caused by the Treasury’s conversion.

Shares in the company rose on Thursday amid investors’ hopes that the company would re-emerge as a standalone entity after 24 months as a ward of the state. It boosted the government’s chances of recovering for taxpayers the unprecedented amount of aid doled out to the corporate sector during the crisis, including $182bn to AIG in debt, equity and credit lines.

The New York Federal Reserve, which has lent AIG $20bn and is entitled to $26bn from the sale of the insurer’s assets, will be repaid by the end of March 2011, leaving the Treasury as the company’s sole government paymaster.

Robert Benmosche, AIG’s chief executive, called the deal “a pivotal milestone” and, in an interview, said the company was ready to raise funds after a long absence from the markets.

A “limited” debt issue could come next month, followed by a share offering of about $2.5bn towards the end of the first quarter of 2011 if credit rating agencies upgrade AIG’s rating to at least single A.

Under the plan, AIG will issue common shares to Treasury in the first quarter of 2011. Discounting accrued interest, the Treasury would break even at $28.70. On Thursday the shares rose by more than 4 per cent to $39.10, giving the taxpayer a paper profit. AIG is expected to repay the $20bn it owes the New York Fed by using internal resources as well as the proceeds from the pending sale of Alico, its international life insurance operation, to MetLife and the Hong Kong listing of AIA, its Asian life assurer.









Fed could move toward greater inflation targeting
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: October 1 2010 15:33 | Last updated: October 1 2010 15:33
http://www.ft.com/cms/s/0/fe753938-cd66-11df-ab20-00144feab49a.html


The Federal Reserve could adopt an explicit inflation target like that of the UK in order to keep up public expectations of future price rises, one of the most influential regional Fed presidents has said in a speech.

William Dudley, the head of the Federal Reserve Bank of New York, said that being more explicit about the Fed’s goal “could help anchor inflation expectations at the desired rate” and “clarify the extent to which the current level of inflation falls short of that rate”.

Mr Dudley’s remarks are important because the Fed’s last policy statement focused heavily on inflation running below the levels it thought consistent with its mandate. Taken together they suggest that the Fed may be moving towards greater inflation targeting even if it does not adopt an explicit numerical goal.

Inflation targeting has long been controversial within the Fed, not least because it is hard to make compatible with the Fed’s dual mandate from Congress on growth and inflation.

Mr Dudley also raised the prospect of an even more controversial policy: a price level target in which the Fed promised to allow higher inflation in future years in order to make up for any below target inflation while interest rates are stuck at zero.

“One possibility would be to keep track of inflation shortfalls when the federal funds rate is constrained by the zero bound, as is the case today. For example, if inflation in 2011 were a 0.5 percentage point below the Fed’s inflation objective, the Fed might aim to offset this miss by an additional 0.5 percentage point rise in the price level in future years,” Mr Dudley said.

He set himself clearly in the camp that judges further easing is necessary to boost the economy.

“We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long,” Mr Dudley said.

He also said that the risk of the Fed losing credibility or suffering losses from interest rate moves if it expands its balance sheet further are not a prohibitive barriers to such a move.





UAL and Continental complete merger
By Jeremy Lemer
Copyright The Financial Times Limited 2010
Published: October 1 2010 15:32 | Last updated: October 1 2010 15:32
http://www.ft.com/cms/s/0/61b547b2-cd63-11df-ab20-00144feab49a.html


United Airlines and Continental Airlines completed their $3.2bn all-stock merger on Friday, creating the world’s largest carrier measured by revenues.

Shares in the combined company, United Continental Holdings, began trading on the New York Stock Exchange on Friday and rose about 1 per cent to $23.66, under the ticker UAL.

Overall the new carrier will have revenues of about $35.4bn in 2011, according to analysts, and about 80,000 employees. It will operate about 5,800 flights every day, serving 371 airports around the world.

The merger leapfrogs Continental and United into the top spot as the world’s biggest carrier, overtaking Delta Air Lines, which claimed the position in 2008 after merging with Northwest Airlines.

Since that merger, a wave of consolidation has swept the global airline industry as managements have turned to scale and size to combat volatile oil prices and a deep recession.

The two companies have skipped through the usually complex antitrust regulatory process since they announced their intention to merge in May, obtaining approval from the European Commission in July and the main US authorities in August.

But executives expect the integration process to take up to a year and half as the two companies align schedules, work rules and procedures and apply for a single operating licence from the Federal Aviation Authority.

Until then the operating subsidiaries, United and Continental, will continue to work separately and customers will continue to interact with their old airline brands and the old websites and kiosks.

“We have been moving quickly but thoughtfully on our integration planning, and I’m pleased with the progress we’ve made. We have a lot of hard work ahead,” said Jeff Smisek, formerly chief executive of Continental, who will lead the new company.

One of the most important outstanding issues for the new management team will be securing a new contract with its pilots. Analysts estimate it will cost the company about $400m to bring the contracts into line, and note that discussions over the outsourcing of flying to third parties may yet cause severe friction.

As part of the merger terms, Glenn Tilton, chief executive of United, will become chairman of the combined board – a 16-member team that includes six independent directors from each of the original companies as well as two union representatives.

United and Continental predicated their merger on the basis that they could extract synergies of between $1bn and $1.2bn, of which about $300m to $400m should come from costs savings.

Analysts have been more sceptical. In a note to clients, Jamie Baker of JPMorgan said that in the Delta merger, the most recent example of a big tie-up, he could not find evidence for the $1.5bn in synergies claimed by management.

“Our analysis shows that Delta operating margins, excluding fuel and associated hedging, have been roughly identical to the industry … since the merger,” he said, cautioning investors against applying “lofty multiples” to the UAL synergy targets.