Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Faltering risk appetite boosts Treasuries
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: October 4 2010 05:58 | Last updated: October 4 2010 16:35
http://www.ft.com/cms/s/0/cf577414-cf63-11df-9be2-00144feab49a.html


Monday 16:35 BST. Risk appetite is being challenged in a choppy session as important market gauges paint a somewhat confusing picture for investors.

US and European equities are flat as traders struggle to justify pushing stocks further ahead following their recent good run and desks absorb some mixed US home sales and factory data.

Two-year Treasury yields have hit a record low, touching 0.40 per cent, as concerns about US growth leaves many investors convinced that the Federal Reserve will provide more monetary stimuli. Meanwhile the dollar, of late the market’s favourite inverse proxy for risk appetite, is bouncing firmly of recent 8-month lows.

However, other signals are suggesting a more optimistic view of economic prospects – particularly for developing countries. Asia stocks’ moved to near-two-year highs on the back of last week’s uptick in China’s manufacturing sector, while oil is approaching $82 a barrel, the highest in two-months

For now, in terms of US and European equities, the more negative slant is holding sway. The FTSE All-World equity index is down 0.6 per cent, while metals are moving lower. The S&P 500 on Wall Street is down 0.08 per cent, the FTSE Eurofirst 300 is off 0.6 per cent and London’s FTSE 100 closed lower by 0.7 per cent.

Traders may be excused for displaying a reluctance to add to racier bets, because they face a very busy week, jammed full of lurking catalysts. As well as monetary policy decisions in Australia, Japan, Indonesia, Europe and the UK, markets will face US third-quarter earnings season kicking off with a report from Alcoa, the aluminium producer on Thursday, and the US non-farm payrolls on Friday.

The Market Eye

Conditions in the european interbank lending market continue to “normalise”, writes Jamie Chisholm. The key three-month Euribor rate, used as a gauge of banks’ appetite for lending, climbed on Monday to 0.953 per cent, its highest in 14 months, and close to the European Central Bank’s 1 per cent lending rate. Last week, financial institutions borrowed less than forecast during ECB liquidity operations – €133bn against €225bn maturing – a sign that the central bank was having to provide less support to the market.

Forex. The yen was initially lower against the dollar and the euro, as advances for Asian stock markets lured investors back into equities from the relative safety of the Japanese currency. However, the yen found its footing as European stocks pared early gains and is now down just 0.1 per cent versus the dollar at Y83.35 and higher by 0.6 per cent relative to the euro at Y114.06.

The US dollar index, which tracks the buck against a basket of its peers, is bouncing sharply off the eight-month lows it hit last week as signs of further debate within the Federal Reserve regarding monetary stimulus perhaps tempt some traders to rein back bets on more quantitative easing. The DXY is up 0.5 per cent at 78.44, having hit 78.03 on Friday.

The euro is down 0.7 per cent to $1.3685 despite comforting words on eurozone assets over the weekend from China’s premier Wen Jiabao.

Rates. US Treasuries are again in demand, pushing benchmark yields to fresh eight-month lows, as a disagreement seems to be emerging between currency and bond investors about the prospects for US yield differentials relative to peers – at least for now. The 10-year yield was down 5 basis points to 2.47 per cent at one stage, the lowest since mid-January, but are now down 3bp at 2.48 per cent. The two-year note hit a record low of 0.403 per cent and is now down 2bp at 0.407 per cent.

The Wen Jiabao comments also seem to be helping the “peripheral” eurozone sovereign debt complex. Ireland’s 10-year yields are down 26bp to 6.35 per cent and the Greek equivalent is down 14bp to 10.19 per cent, according to Reuters data.

Commodities. Industrial metals are faltering following their recent good run on the back of hopes for strong demand out of developing nations such as China. Copper is flitting in and out of positive territory and is currently down 0.5 per cent to $8,056 a tonne, still just shy of Friday’s intraday two-year peak. Similar demand optimism is driving has been driving oil of late, and today crude is up 0.3 per cent at $81.85 a barrel.

Gold is down 0.1 per cent at $1,314 an ounce, still close to its nominal high of $1,320.80.

Asia-Pacific. Stocks in the region rose close to their best levels in more than two years early in the session as investors were encouraged by gains for Wall Street on Friday following upbeat US consumer sentiment and spending data, while a weaker yen initially boosted Japanese exporters. However strength faded into the close for some exchanges as traders become more cautious given recent gains.

The FTSE Asia-Pacific Index is up 0.2 per cent, with Japan’s Nikkei 225 giving up a greater than 1 per cent advance to record a 0.3 per cent decline. Investors were cautious and overall trading was light ahead of the Bank of Japan’s policy decision on Tuesday. Many expect that Japan’s central bank may deliver more monetary easing as the country’s economic recovery falters.

South Korea’s Kospi advanced 0.1 per cent, buoyed by a 14th consecutive session of net foreign buying. Australia’s S&P/ASX 200 rose 1 per cent, boosted by commodity stocks, and New Zealand’s NXA-50 added 0.5 per cent, both closing before the pullback elsewhere in the region.

In Hong Kong, the Hang Seng reached its highest point so far this year, up 1.2 per cent, but mainland Chinese markets are closed much of this week for a holiday.

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





US housing shows signs of stabilizing
By James Politi in Washington and Telis Demos in New York
Copyright The Financial Times Limited 2010
Published: October 4 2010 16:47 | Last updated: October 4 2010 16:47
http://www.ft.com/cms/s/0/acbcfaca-cfc5-11df-a51f-00144feab49a.html


The US housing market showed further signs of stabilization on Monday after the National Association of Realtors’ index of pending home sales rose by 4.3 per cent in August.

In spite of record low mortgage rates, Americans have been reluctant to buy homes and invest in property during the recovery, amid high unemployment, difficulty securing mortgages, and fresh memories of the decline in house prices during the crisis.

The US housing market received temporary boosts late last year and early this year when the government was offering an $8000 tax credit to first time homebuyers, but the sector took a big dive again this summer as the economy slowed and the benefit lapsed.

Now, it appears that the housing sector is regaining some ground, albeit from very low levels and at a very slow pace. Although the August pending home sales index – which measures contracts agreed but not closed – has risen for two consecutive months, it remains 20.1 per cent below its level in August of 2009.

The gains in August pending home sales were concentrated in the regions that have been most affected by the housing boom and bust. In the South, sales rose by 6.7 per cent, while in the West they increased by 6.4 per cent in August. In the Midwest, the gains were more muted, with the index rising by 2.1 per cent, while sales declined in the Northeast by 2.9 per cent.

“To be sure, housing continues to face considerable headwinds that will likely keep the sector depressed well into 2011,” economists at RBS said on Sunday in an analysis on the post tax credit housing environment. “Still, while there have been peaks and valleys in both the home sales and housing starts data since late last year, it seems that, for the most part, the underlying pace of housing activity has remained largely steady, albeit at historically low levels.”

“Attractive affordability conditions from very low mortgage interest rates appear to be bringing buyers back into the market,” said Lawrence Yun, chief economist of the NAR said on Monday. “However, the pace of a home sales recovery still depends more on job creation and an accompanying rise in consumer confidence.”

Last week, Standard & Poor’s Case-Shiller index showed that the rebound in home values slowed in July, with home prices in 20 large US cities up 3.2 per cent compared to a year earlier. In June, they posted a 4.2 per cent increase compared to the previous year.

In a separate report, new orders for manufactured goods in August declined by 0.5 per cent from July, by $2.2bn to $408.9bn, according to the US commerce department. Economists had expected a drop of 0.4 per cent.

Orders have fallen for three of the past four months, and August’s drop was faster than the 0.1 per cent decline in July. There was growth in core capital goods orders, by 5.1 per cent, reversing a 5.3 per cent decline last month.

However, inventories have also begun to pile up, suggesting that many of the goods ordered did not leave warehouses. The ratio of inventories-to-shipments for durable goods rose 2 per cent.

“It appears as if the inventory cycle’s main upward impetus is behind us and output growth is therefore going to be mostly dependent on final demand expansion, which has been anaemic,” said Joshua Shapiro, chief US economist at MFR.






Swiss to impose tougher standards on banks
By Haig Simonian in Zurich
Copyright The Financial Times Limited 2010
Published: October 4 2010 08:47 | Last updated: October 4 2010 12:07
http://www.ft.com/cms/s/0/be2acbd0-cf83-11df-a51f-00144feab49a.html


UBS and Credit Suisse will have to accumulate billions of francs in extra capital under proposals from a Swiss expert group on the role of banks deemed “too big to fail.”

The recommendations will oblige Switzerland’s two top banks to maintain supplementary national capital standards far in excess of the Basel III rules agreed by international regulators last month.

The proposals will oblige the banks to hold total capital equivalent to 19 per cent of the risk weighted assets on their balance sheets, based on their current figures.

Under the proposals, the first 10 per cent of capital will have to be strictly defined “common equity” – meaning capital of the highest quality. The requirement is three percentage points more than the 7 per cent proposed under Basel III for banks to pay bonuses.

The revised “Swiss Finish” is similar to the 10 per cent figure aired recently by British regulators for the country’s most “systemically relevant” banks and may presage a round of capital raising by banks in major markets.

However, UBS and Credit Suisse will be required to maintain a further 9 per cent in the form of “contingent capital” – bonds that convert into equity when a bank’s core capital ratio falls below a certain level – and other securities with a capacity to absorb losses at times of stress.

The use of significant amounts of continent capital under the Swiss recommendations comes alongside stricter definitions of core capital and curbs on the use of assets, such as deferred tax credits, that fell into disrepute in the financial crisis.

Under the Swiss proposals, the capital standards will come in three tiers. An initial minimum requirement reflects exactly the 4.5 per cent common equity – the strictest form of capital – required by Basel III.

Secondly, UBS and Credit Suisse will have to maintain a further “buffer” of 8.5 per cent, of which a minimum 5.5 per cent must be common equity. Finally, there will be a third element, called a “progressive component”, of up to 9 per cent, depending partly on the banks’ balance sheet sizes and market shares and which can be composed of continent capital.

Credit Suisse on Monday said it had prepared for the “very tough” measures and expected to meet the new rules by the time they come into operation in 2019. UBS last week said it also expected to meet any new standards, although that would require a prolongation of the dividend freeze introduced in the credit crisis.

While significantly toughening capitalisation, the committee has stopped short of demanding drastic structural changes to Switzerland’s two top banks. However, the experts stress the need to safeguard the banks’ crucial roles in the country’s payments system, retail banking and credits to smaller companies, with suggestions on how endangered operations could be wound down.

UBS and Credit Suisse have said they will pare their balance sheets, forecast to mushroom under Basel III’s stricter definitions, to help meet the new rules.

UBS said it expected its risk weighted assets to double to SFr400bn ($411.2bn) under the Basel III definitions. However, the bank would take action to cut the total to about SFr300bn. Credit Suisse has revealed a similar SFr400bn total, but not given any forecasts of measures to reduce this.

The committee’s recommendations, which were unanimous, are presented as a draft law, meaning they could be enacted by early next year. However, members stressed their findings represented a package, and would be invalid if picked apart in parliament.








JPMorgan reopens New York gold vault
By Jack Farchy in London
Copyright The Financial Times Limited 2010
Published: October 3 2010 21:04 | Last updated: October 3 2010 21:04
http://www.ft.com/cms/s/0/45911b64-cf17-11df-9be2-00144feab49a.html


JPMorgan has reopened an underground gold vault in New York that was mothballed in the 1990s, in the latest sign of the soaring appetite for bullion.

Investors are piling money into gold in record quantities, pushing the price on Friday to a record nominal high of more than $1,320 a troy ounce. That has made the vaulting business highly lucrative, since banks often charge a small percentage of the value of the gold stored.

Many commercial banks dismantled their vaults in the 1980s and 1990s. But now they are rushing to build: JPMorgan recently built a vault in Singapore, while Deutsche Bank and Barclays Capital are considering opening new vaults in London.

The demand for storage comes as investors are buying physical gold rather than investing in precious metals futures or mining equities. Private investors hold about 30,000 tonnes of gold, according to the consultancy GFMS – more than a sixth of the world’s gold and, for the first time in modern history, more than central banks.

The vault reopened by JPMorgan last month joins a handful of others in Manhattan, including those owned by HSBC and the Bank of Nova Scotia, and the largest gold depository, the Federal Reserve Bank of New York’s facility, which holds reserves from 36 countries .

The surge in demand for physical gold has been underpinned by the emergence of exchange-traded funds that are backed by bullion. JPMorgan keeps the gold of BlackRock’s iShares Gold Trust, which holds almost 100 tonnes of bullion, worth $4.2bn. “There is growing interest from ETFs and other fund institutions as well as from corporates and high net worth individuals to store precious metals,” said Peter Smith, head of JPMorgan’s vaulting service.

Many historic vaults cannot be reopened as they have been converted into restaurants: one New York vault built in 1902 for John Pierpont Morgan is now home to a steakhouse.





Ireland’s economic outlook worsens
By John Murray Brown in Dublin
Copyright The Financial Times Limited 2010
Published: October 3 2010 19:29 | Last updated: October 4 2010 15:01
http://www.ft.com/cms/s/0/99938b70-cf17-11df-9be2-00144feab49a.html


Ireland’s economic outlook worsened on Monday as the country’s central bank cut its growth forecast for this year, with gross domestic product now set to increase 0.2 per cent against previous forecasts of 0.8 per cent.

The slowing economy will compound the challenges the Fianna Fáil-led government faces in framing this year’s budget, which is critical to restoring investor confidence in Ireland’s fiscal consolidation plan.

After a Fianna Fáil backbencher at the weekend raised concerns about the upcoming cuts, a government minister has for the first time publicly acknowledged it may not have the numbers to get its budget through parliament, which could lead to an early general election.

Pat Carey, minister of state for community, equality and gaeltacht (the Irish speaking region) affairs, said it was not “beyond the bounds of possibility” that the government would not be able to get the December budget through parliament, adding that in that event “we would be in a different scenario”.

Publishing its revised forecasts, the central bank said the recovery was unbalanced, because it was driven mainly by exports, as domestic demand continued to stall. It added “the continuing weakness of investment remains a considerable drag on growth”. Ireland’s economic woes will be further underlined with exchequer returns for the third quarter published later on Monday which are set to confirm a further deterioration in the fiscal deficit.

After announcing further bank bail-outs last week, the government said the deficit would hit 32 per cent of national income this year or 10 times the Maastricht fiscal guidelines for eurozone members. But stripping out the bank rescue costs, which officials say do not affect Ireland’s borrowing requirement this year as they have already been paid for using 10 year promissory notes, the underlying fiscal deficit forecast has been revised to 11.9 per cent this year, as against 11.6 per cent forecast at the time of last year’s budget.

Were the government to fail to secure parliamentary backing for the budget it would lead to the automatic resignation of Brian Cowen as prime minister. He would then have to seek a dissolution of parliament from the president. Fresh elections would then have be held within 28 days.

The budget is normally voted on in several stages – with some excise changes having to be approved on the day, while the finance bill containing the detailed tax changes and the social welfare bill usually are not debated until the new year.

But opposition politicians say any one of those votes could be the trigger for a general election.