Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Traders buy all but the dollar on cheap money hopes
Copyright The Financial Times Limited 2010
Published: October 4 2010 05:58 | Last updated: October 5 2010 18:12
http://www.ft.com/cms/s/0/cf577414-cf63-11df-9be2-00144feab49a.html


Tuesday 18:05 BST. US and European traders piled indiscriminately into an eclectic swathe of assets on hopes that a prolonged era of cheap money would continue to spur speculation in financial markets.

Stocks surged to the top of recent ranges, gold and tin hit new highs, and short-term bond yields flirted with record lows after investors reasoned that further easing by the Bank of Japan would be followed by similar largesse from the US Federal Reserve as central banks loosen monetary policy in attempts to boost faltering growth.

US 10-year bond yields remain close to multi-month lows even as oil, a prime inflationary source, approaches $83 a barrel.

Earlier in the session, the BoJ said it had cut its benchmark interest rate to between zero and 0.1 per cent. The central bank also said it would consider spending Y5,000bn to buy assets, adding to its current Y30,000bn cheap loan facility.

The possibility of more quantitative easing by the Fed is hitting the dollar. The unusual logic of the market was exemplified by the US currency being rewarded with a fresh 8-month low following news that the nation’s service sector expanded more than expected in September – an outcome one would expect to have marginally reduced the chances of QE.

A surprise decision by the Reserve Bank of Australia to keep interest rates on hold – many had expected a rise – may have served to remind investors that central bank largesse is founded on concerns about the health of the global economy.

Indeed, other service sector highlights on Tuesday have been pretty poor. For example, growth in India’s service sector fell to a 10-month low; that of the eurozone hit a six-month trough; while Spain saw contraction at a faster pace than expected.

But investors don’t seem bothered for now. The S&P 500 on Wall Street is up 1.9 per cent having burst through the 1,150 resistance level.

The FTSE All-world equity index is up 1.6 per cent, with traders pushing to the back of their minds a very busy week jammed full of potential market-moving catalysts.

The Market Eye

No one really wins when there is a war – not even a currency one, where interventions, at the least, can create destabilising distortions. Brazil on Monday hit back at the hot money inflows that last week pushed the Real relative to the dollar to a two-year high, by doubling a tax on foreign purchases of local bonds. The Real initially fell today – pushing back above R$1.70 – but has pared its losses and is now at R$1.6793. The market seems unconcerned about all this as long as the dollar is falling. But traders should recognise that the forex fighting – the US, Japan and the eurozone clearly want lower currencies – is a sign that nations think they need to protect their corner. Countries tend to be less bothered about a strong currency in good times. This is an increasingly worrying sign.

As well as more monetary policy decisions in Europe and the UK, traders will face US third-quarter earnings season kicking off with a report from Alcoa, the aluminium producer, on Thursday, as well as the US non-farm payrolls on Friday.

Europe. European bourses could not really decide what to make of the early news out of Japan, only really finding their feet after US futures picked up steam once traders across the Atlantic started placing bets.

The FTSE Eurofirst 300 was up 1.4 per cent and London’s FTSE 100 closed up 1.4 per cent, as banks moved higher, and after a reading of UK services was better than expected.

Forex. The yen immediately fell once the scale of the BoJ stimulus was revealed, dropping 0.7 per cent versus the dollar at Y83.98. The initial shock is wearing off a touch, however, as the dollar displays broad weakness and the yen is now up 0.1 per cent at Y83.27. The Japanese unit remains off 1 per cent versus the euro at Y115.16, however.

The US dollar index, which tracks the buck against a basket of its peers, has resumed its slide following Monday’s hiatus and is off 0.8 per cent at 77.83, its lowest level since late January. The euro is up 1.1 per cent at $1.3830.

Rates. The yield on 10-year Japanese government bonds flirted with 7-year lows following the BoJ move, dipping 3 basis points to 0.90 per cent.

Two-year Treasury yields hit a record low on Monday, touching 0.40 per cent, as concerns about US growth left many investors convinced that the Fed will provide more monetary stimuli. Two-year yields are today at 0.41 per cent and 10-year benchmarks are down 1 basis point at 2.47 per cent.

Eurozone peripheral sovereign debt is seeing further signs of stress, with Ireland's 10-year yield up 14 basis points to 6.50 per cent and Portugal’s benchmark’s up 16 basis points to 6.31 per cent, as the mini-rally of the last few sessions comes to a halt.

Commodities. Metals are firmer, supported by the weakening dollar. Copper is up 1.7 per cent to a two-year high of $3.72 a pound in Nymex trading, while tin hit a record high of $26,000 a tonne in London, up 4 per cent. Oil remains near two-month highs, up 1.6 per cent at $82.80 a barrel.

Gold is up 1.9 per cent at $1,340 an ounce, a new nominal peak, as the prospect for more QE is catnip to gold bugs. Silver has hit a new 30-year peak of $22.69 an ounce.

Asia-Pacific The Nikkei 225 closed up 1.5 per cent, as exporters were boosted by the falling yen, but Asian shares generally were having difficulty gaining ground as they tracked Wall Street’s losses overnight.

Risk appetite was in retreat as gloomy economic indicators from the US dominated sentiment, leaving the FTSE Asia-Pacific index up just 0.2 per cent. China remains closed for a holiday, but the Hang Seng in Hong Kong eked out a 0.1 per cent advance as investors note Monday’s move to a 10-month high left the benchmark looking overbought.

Australia’s S&P/ASX 200 fell 0.4 per cent, with worse losses being trimmed after the RBA’s decision to stay its hand.

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






Brazil raises tax on foreign inflows to 4%
By Jonathan Wheatley in São Paulo
Copyright The Financial Times Limited 2010
Published: October 4 2010 22:31 | Last updated: October 4 2010 23:01
http://www.ft.com/cms/s/0/0a5d4b48-cffe-11df-bb9e-00144feab49a.html


Brazil has imposed fresh controls on inflows of foreign capital in an escalation of what Guido Mantega, finance minister, recently described as a “currency war” between the world’s leading economies.

Mr Mantega, speaking in Brasília after markets closed on Monday evening, said Brazil would increase to 4 per cent a financial transactions tax (IOF) on money entering the country to invest in fixed income instruments, from the previous rate of 2 per cent, with effect from Tuesday.

Brazil’s currency, the real, gained 4 per cent against the US dollar between August 31 and Friday’s close, rising from R$1.75 to the dollar to R$1.68. It weakened sharply during late trading on Monday to close at R$1.70 after the finance ministry said Mr Mantega would make an announcement later in the evening.

Mr Mantega said the measure was designed to prevent further appreciation of the currency but it would not apply to money entering Brazil to invest in equities or as foreign direct investment in the real economy.

However, analysts questioned whether taxing fixed income alone would have the intended effect.

“Picking and choosing like this makes it very ineffective,” said Tony Volpon of Nomura Securities in New York. “To achieve lasting change they would have to impose one IOF on everything. That would be a strong message that they really want to stop the flows.”

He said investors would find ways to get round the tax by bringing money into Brazil to invest in equities and then trading across into fixed income investments.

Much less money enters Brazil to be invested in fixed income instruments, such as government debt, than to be invested in equities.

Furthermore, many investors taking advantage of the “carry trade” – resulting from the spread between interest paid on Brazilian government debt, of at least 10.75 per cent a year, and the cost of borrowing overseas, of about half a percentage point per year – do so through transactions in derivative instruments that do not entail bringing foreign currency into Brazil.

Mr Volpon said it was likely that Brazil’s move was largely symbolic, to respond to growing concern among the country’s exporters about the strength of the real and to show other nations that it was serious about responding to the depreciation of several other of the world’s major currencies.

“Brazil is saying that if China and Japan can do what they are doing and the US can do quantitative easing, which devalues the dollar, then we’re not going to sit here and take it,” he said.







Rehn warns on threat from strong euro
By Joshua Chaffin in Brussels
Copyright The Financial Times Limited 2010
Published: October 5 2010 11:55 | Last updated: October 5 2010 17:11
http://www.ft.com/cms/s/0/5cd8dc4a-d065-11df-afe1-00144feabdc0.html


Europe’s fledgling economic recovery could suffer if the euro is undercut by other currencies, the European Union’s economics chief warned as China rebuffed fresh pleas to allow the renminbi to strengthen.

The warning from Olli Rehn, Europe’s commissioner for economic and monetary affairs, reflected a growing concern that moves by other nations to restrain their currencies in order to boost exports was taking its toll on Europe’s competitiveness.

“If the euro continues to bear a disproportionate burden in the adjustment of global exchange rates, the recovery of the euro area might be weakened,” Mr Rehn said in Brussels after meetings Wen Jiabao, China’s prime minister, during an EU-Asia summit.

Jean-Claude Juncker, chairman of the eurozone group of finance ministers, said both sides agreed that a currency war would be destructive and was to be avoided. He described the meetings as “open, frank but nevertheless friendly”.

While reiterating his praise for Beijing’s announcement in June that it would allow more exchange rate flexibility, Mr Juncker complained that “the potential of this decision has not been sufficiently exploited”.

Mr Juncker and Mr Rehn, along with Jean-Claude Trichet, president of the European Central Bank, had repeated their call for China to allow “an orderly, significant and broad-based appreciation” of its currency.

But Mr Wen, who did not attend the press conference, did not agree, according to Mr Juncker. The Chinese leader issued a statement on Monday calling instead for “relative stability” in global exchange rates.

Beijing’s exchange rate policy has not stoked the same anger in Europe as it has in the US, where the House of Representatives recently passed a bill that would punish China for the alleged undervaluation of the renminbi. That divergence is in part owing to the fact that Europe does not suffer the same yawning trade deficit as the US.

But European policymakers are increasingly voicing concern as the euro strengthens against the dollar and, by extension, the renminbi, placing manufacturers at a disadvantage. Adding to their concern, Japan, South Korea and Brazil have also moved to hold down their currencies.

Nicolas Sarkozy, the French president, warned on Monday that “monetary imbalances put a risk on all economies ... the question of a new monetary system is on the table”.






Ireland warned on possible downgrade
By John Murray Brown in Dublin
Copyright The Financial Times Limited 2010
Published: October 5 2010 09:27 | Last updated: October 5 2010 11:04
http://www.ft.com/cms/s/0/d8b43d64-d056-11df-afe1-00144feabdc0.html


Ireland’s debt has been put on review for a possible downgrade by Moody’s, the credit rating agency, over concerns about the increased budget deficit and the slow pace of the recovery.

Moody’s said the three month review could lead to a downgrade from Aa2 to Aa3. However it warned that if the agency believed debt ratios were unlikely to stabilise in a three-to-five year period, Ireland could be moved straight to a single A rating.

Moody’s said the move was prompted by “increased uncertainty” over Ireland’s financial position following additional bank recapitalisations last week . It noted “the clouded outlook for the recovery of domestic demand” and said Ireland’s interest burden was set to rise significantly as a result of increased borrowing.

“Taking these three factors in account, Ireland is on a trajectory toward lower debt affordability over the next three to five years,” said Dietmar Hornung, Ireland analyst at Moody’s.

Ireland’s cost of borrowing has reached record highs in recent weeks, prompting the country’s debt agency to suspend bond auctions until the new year.

Moody’s said “a further rise in borrowing costs since our last action in July would – if sustained – negatively affect debt dynamics.”

The review will focus on Ireland’s planned four-year fiscal plan, set to be announced in early November.

But Moody’s described the ambition to bring the budget deficit within three per cent of gross domestic product by 2014 as “challenging”. It said the growth forecasts underpinning government debt projections “now look overly optimistic.”

Moody’s said it would complete its review in three months. Ireland is currently rated by Moody’s at Aa2. It said the country was being put on a review for a possible downgrade of one notch.

Separately, the National Asset Management Agency, which issues government backed bonds as consideration for the distressed loans it buys off Irish banks, has also been put on review for possible downgrade of its Aa2 rating.








US services sector gathers momentum
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 5 2010 15:44 | Last updated: October 5 2010 15:44
http://www.ft.com/cms/s/0/e55c3ff6-d085-11df-afe1-00144feabdc0.html


The US services sector gathered momentum in September as new export orders and employment picked up in a sign that the recovery could be regaining its footing.

The Institute of Supply Management’s non-manufacturing index rose to 53.8 per cent from 51.5 per cent in August. Readings greater than 50 signal expansion and September’s result was stronger than Wall Street analysts predicted.

Although business activity and production softened in September, the services sector was boosted by growing new orders and a rise in hiring. According to ISM, executives continue to feel “mixed” about business conditions with a “slight majority” reflecting optimism.

Joshua Shapiro, chief US economist at MFR, said the figures added to evidence that “while the recovery remains a weak one, a double-dip is not in the offing”.

Most industries reported growth last month, led by management and support services, information services and scientific and technical businesses. Mining, public administration and education services contracted.

Businesses slashed inventories in September and paid more for the materials that they purchased. The latter is a sign that disinflation, a concern among policymakers at the Federal Reserve, may be less of a threat than feared.

The US economy could become more dependent on the resilience of the services sector if manufacturing continues to cool. Last week, ISM said manufacturing activity fell to its lowest level this year in September.






IMF says sovereign risk a threat to recovery
By Alan Beattie in Washington
Copyright The Financial Times Limited 2010
Published: October 5 2010 14:03 | Last updated: October 5 2010 14:03
http://www.ft.com/cms/s/0/6ae9d55a-d06f-11df-afe1-00144feabdc0.html


The rising threat of instability from sovereign debt problems has worsened conditions in the global financial system over the past six months despite a reduction in writedowns of assets, according to the International Monetary Fund.

In its twice-yearly global financial stability report, the fund on Tuesday reduced slightly its estimate of crisis-related bank writedowns between 2007 and 2010, cutting it to $2,200bn from the previous estimate of $2,300bn made in April.

The move was driven by a reduction in the estimates of losses because of falls in securities prices, and the fund said that banks had now recognised more than three-quarters of those total losses.

But the progress in cleaning up balance sheets was overshadowed by sharp rises in sovereign risk as the Greek crisis spilled over into other European government debt and threatened to derail the global recovery. In recent weeks, credit spreads on Irish and Greek government debt have again been trading at high levels, suggesting that investors continue to doubt the solvency of their public finances.

In Europe, the IMF said, “sovereign risks remain elevated as markets continue to focus on high public debt burdens, unfavourable growth dynamics, increased rollover risks, and linkages to the banking system”.

While the rescue package for Greece and adoption of tough fiscal packages in countries such as Portugal and Spain have reduced the risk, the system remains vulnerable.

“Higher downside macroeconomic risks, sovereign financing pressures, and intensifying funding strains could produce a difficult environment, requiring adept policy manoeuvring,” the report said.

The fund was more sanguine about the US, where it said financial stability had improved, although continued weakness in real estate markets posed a threat.

“To a large extent, the apparently modest capital needs of US banks reflect the large scale of government-sponsored enterprises and other government interventions without which those needs would have been substantially higher,” the fund said. “This highlights the extent to which risk has been transferred from private to public balance sheets, as well as the need to address the burden placed on public institutions.”

The report was much more optimistic about emerging market financial systems, which it said had weathered sovereign and banking crises in advanced economies well. But strong capital inflows might cause increased volatility, the IMF said.