Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Dollar and bond yields fall on QE hopes
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: October 4 2010 05:58 | Last updated: October 6 2010 17:01
http://www.ft.com/cms/s/0/cf577414-cf63-11df-9be2-00144feab49a.html


Wednesday 16:35 BST. Core government bonds are surging and European bourses are adding to the previous session’s strong gains, tracking Asia’s move to 26-month highs as traders continue to welcome the investment opportunities provided by central banks’ ultra-loose policies.

Wall Street started the new session mixed, after news the US private sector shed 39,000 jobs in September. However, the S&P 500’s meagre 0.1 per cent decline is in keeping with the current mood, where the impact on risk appetite of economic setbacks appears mitigated by the belief among some that the Federal Reserve stands poised to support markets. US 2-year Treasury yields are at record lows on just such a belief.

“Simply put, when bad news can’t take you meaningfully lower [in equities]… that’s good news in our book,” says Christopher Verrone of Strategas Research in a note to clients addressing the equity markets’ recent resilience.

The FTSE Eurofirst 300 is up 0.4 per cent and London’s FTSE 100 closed up 0.8 per cent, with banks and resource groups to the fore. The FTSE All-World index is up 0.6 per cent to a fresh five-month high, while gold and tin have hit new records following Tuesday’s decision by the Bank of Japan to launch another vast stimulus package.

Many traders have become convinced that the BoJ move increases the chances of more quantitative easing from the US Federal Reserve – with some even speculating that the Fed may follow the BoJ’s lead and look at purchasing equity assets in the form of exchange traded funds.

Hopes for such an efficient-market-busting backstop has allowed investors to put to the back of their minds worrying developments in the forex markets, where talk of a damaging “currency war” grows ever more shrill.

For now, it seems that the US is winning the race to the bottom, with the dollar sitting at eight-month lows – a slide which, handily for bulls, also boosts risk appetite, particularly for dollar-denominated commodities.

But the corollary of the buck’s decline is record low short-term – and multi-month low long-term – Treasury yields. Here investors are betting on more Fed buying and/or that the economy is sufficiently weak that the Fed will struggle to contain deflationary forces, even as the Reuters-Jefferies CRB basket of commodity prices hits a near 10-month high.

Investors appear to have given up trying to square all these circles. And traders won’t care.

Forex. Traders are on watch for another possible intervention by the Japanese authorities as the yen creeps touches a new 15-year high relative to the dollar of Y82.77. The yen is currently at Y82.81, from Y83.18 late in New York. It is trading at Y115.18 per euro, from Y115.14. Amongst emerging markets currencies, the Taiwan dollar has hit a two-year high with a government report later this week expected to show stronger exports.

The dollar is at fresh eight-month lows on a trade-weighted basis as the prospects of further Fed easing weigh, dipping another 0.4 per cent to 77.45. The euro is up 0.5 per cent versus the dollar at $1.3910, mainly reflecting dollar weakness, having earlier gained little benefit from news of stronger-than-expected German industrial orders in August.

Rates. The US 10-year note is stronger following the ADP employment data, pushing the yield down 10 basis points to 2.37 per cent, the lowest since January 2009. Two-year yields are down 2 basis points to a record low of 0.383 per cent. Five-year debt at one point also hit a record low yield of 1.12 per cent.

The 10-year Japanese government bond yield is down 6 basis points to a 7-year low of 0.84 per cent as investors foresee more BoJ buying.

Eurozone peripheral spreads with Bunds are mostly tightening as worries about the funding of fiscal deficits get pushed to the back burner. However, Ireland’s benchmark bond yields are up 1 basis point to 6.52 per cent after Fitch downgraded the Republic’s credit rating on concerns about the banking system.

Commodities. Gold has hit another record high of $1,349.80 as the prospect for more debasement of paper currencies drives some investors into the bullion. Gold is currently up 0.6 per cent to $1,347 an ounce. Silver has hit a fresh 30-year high of $23.06 an ounce.

Industrial metals are also continuing their strong run. Tin hit a new record of $26,790 a tonne and is now up 0.9 per cent at $26,200, while copper claimed a 26-month high of $8,326 a tonne and is currently up 0.6 per cent at $8,246.

Oil is up 0.8 per cent at $83.40 despite US inventory data showing more supply than expected.

Asia-Pacific. Stocks were in demand after positive data from the US service sector and as investors reason that the latest easing by the Bank of Japan could be followed by similar largesse from Fed .

The FTSE Asia-Pacific Index has gained 1.6 per cent to its highest best level since July 2008. Japan’s Nikkei 225 advanced 1.8 per cent while South Korea’s Kospi rose 1.3 per cent. Australia’s S&P/ASX 200 gained 1.7 per cent while New Zealand’s NZX-50 added 0.5 per cent.

In Tokyo, shares were higher after the Bank of Japan on Tuesday, pledging to hold interest rates at virtually zero until deflation is defeated and announcing a plan to set up a $60bn fund to buy government bonds and other assets. China was shut for a national holiday, but the Hang Seng in Hong Kong was not immune to the buoyant mood, gaining 1.1 per cent.

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





US private sector sheds 39,000 jobs
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 6 2010 14:01 | Last updated: October 6 2010 14:01
http://www.ft.com/cms/s/0/da6aff4e-d141-11df-8422-00144feabdc0,s01=1.html


US businesses shed workers for the first time in eight months in September as slowing output has hampered the economy’s ability to create jobs.

Companies cut 39,000 workers last month, according to the ADP National Employment Report. Economists had predicted an increase in private sector employment and the data added to fears of a stalled recovery.

“The decline in private employment in September confirms a pause in the economic recovery already evident in other data,” ADP said on Wednesday. “There simply is no momentum in employment.”

Recent figures from the Institute of Supply Management have indicated that the manufacturing sector is starting to cool. Meanwhile, high rates of foreclosure continue to put pressure on home prices and sales.

The disappointing data initially rattled US investors, and S&P 500 Futures, which had risen 0.4 per cent ahead of the release, slightly pared their gains and were up 0.1 per cent to 1,155.80. The yield on US 10-year Treasuries was down 6 basis points to 2.41 per cent shortly after the report.

Cuts at businesses that produce goods were to blame for the September decline, with 45,000 workers losing their jobs. An increase of 6,000 workers in the services sector was not large enough to offset the struggles facing construction firms and manufacturers.

Joshua Shapiro, chief US economist at MFR, said the figures were “indicative of a painfully slow healing process in the labour market as cost-cutting remains a key part of corporate business plans”.

ADP’s report is seen by analysts as a harbinger of the government’s official non-farm payrolls data, which will be released on Friday. That is expected to show that payrolls were flat in September, with the unemployment rate holding steady at 9.6 per cent.




US cities feel tax hit on real estate bust
By Nicole Bullock in New York
Copyright The Financial Times Limited 2010
Published: October 6 2010 18:01 | Last updated: October 6 2010 18:01
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The fiscal situation for US cities is the worst it has been in at least 25 years and the problems are intensifying, research released on Wednesday shows.

The National League of Cities, which surveyed finance officers in 338 cities from April to June, found that property tax revenues are just beginning to decline in what was an anticipated, but delayed response to the collapse of the real estate market in the last few years.

Cities are reporting a 3.2 per cent decline in revenues and a compensatory 2.3 per cent cut to spending for fiscal 2010, the largest spending cuts and loss of revenue since the survey began in 1985.

“While the recession might have officially ended on the national level, cities are in the eye of the storm and the problems are intensifying,” said Christopher Hoene, director of the NLC’s centre for research and innovation.

The national US recession ended in June of 2009 and a consensus is cautiously building that fiscal 2010, which ended June 30, 2010 for many state and local governments, was the revenue trough for states.

But the nuances of property taxes mean that it takes time for housing price assessments to catch up to market value. As a result, cities will still be feeling the full effect of the downturn in 2011 and possibly years to come, the NLC predicted.

“The real estate market has not recovered,” said Michael Pagano, dean of the college of urban planning and public affairs at the University of Illinois at Chicago. “Property tax receipts are expected to continue to decline over the next 2 to 3 years.” And by 2012, commercial real estate values may also be “challenged,” he said, potentially adding further pressure.

For fiscal 2010, property taxes were seen falling 1.8 per cent versus a rise of 4.2 per cent in 2009. Cities rely, to differing degrees, on property, sales and income tax.

The punishing effect of the recession has raised concern about defaults in the $2,800bn municipal bond market, where states and municipalities raise money. Recent warnings of a bankruptcy filing for the city of Harrisburg, the capital of Pennsylvania, has further focused attention on the matter.

States also are able to push some of their pain down to the local level by slashing aid to cities. Some 61 per cent of finance officers told the NLC state aid levels decreased the health of the local economy.

Still, defaults and bankruptcies are rare for US cities and they have largely been avoided in the latest downturn as well with painful cuts to jobs, infrastructure projects and basic services.

“Cities are facing very serious financial hurdles right now in providing basic services,” Mr Pagano said.

Ronald Loveridge, the mayor of Riverside, California and the acting president of the NLC, said that his city has had to make tough decisions, such as reassessing the number of police officers on patrol. In an extreme example, Maywood, California, this summer opted to contract out police and other basic services to save cash.







Treasury puts cost of rescue effort at $29bn
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: October 5 2010 23:49 | Last updated: October 5 2010 23:49
http://www.ft.com/cms/s/0/4439c7b4-d0d1-11df-a426-00144feabdc0.html


The US Treasury forecast that the core of the financial rescue would cost $29bn, a fraction of initial estimates, but acknowledged it would lose “substantial” money supporting the mortgage system.

With expiry of new payments from the $700bn troubled asset relief programme last Sunday, senior Obama administration officials have declared the rescue effort a success and the most cost-effective support to the banking system in several decades of crises.

Tim Geithner, US Treasury secretary, wrote to Congress on Tuesday to defend the programme. He noted it was launched as a bipartisan effort and that “many have lost sight of the pressing need for this initiative ... and criticised its successful implementation”.

Tarp alone should cost about $50bn, the Treasury said, down from initial estimates of more than $300bn and the last estimate by the non-partisan Congressional Budget Office of $66bn. Including returns generated from additional Treasury support to AIG, the insurer whose turnround has been quicker than expected, the cost was now pegged at $29bn.

The Treasury released the letter and cost estimate on Tuesday as part of a report on Tarp, which is marking its second anniversary.

With an unemployment rate close to 10 per cent and sluggish growth in the US economy, officials have been reticent in trumpeting the success of Tarp. But the restructuring at AIG and forthcoming sale of shares in General Motors have encouraged them to reject more forcefully the notion that it was a wasteful Wall Street bail-out.

Qualifying the success, the report notes that the government is likely to “incur substantial losses from Fannie Mae and Freddie Mac”, the mortgage guarantors seized in 2008.

But the Treasury argues that the cost will be offset by its own investments in mortgage-backed securities and increased remittances to the government from the Federal Reserve, which also bought large quantities of MBS to boost liquidity.







Wall Street downbeat on bank earnings
By Francesco Guerrera and Andrew Edgecliffe-Johnson in New York
Copyright The Financial Times Limited 2010
Published: October 5 2010 23:03 | Last updated: October 5 2010 23:03
http://www.ft.com/cms/s/0/5f14c266-d0b1-11df-8667-00144feabdc0.html


Wall Street’s sentiment towards Goldman Sachs and Morgan Stanley has turned sharply bearish over the past month with analysts’ estimates for the banks’ third-quarter earnings plunging amid a slump in trading activities.

The poor performance of the trading operations – a key driver of the two banks’ recovery after the financial crisis – will intensify questions over their business models and deepen fears of job cuts across the financial industry.

Analysts have slashed their forecasts for Morgan Stanley’s third-quarter results by more than 73 per cent in the past 30 days, according to Thomson Reuters’ StarMine.

Goldman’s consensus estimate has fallen by more than a quarter since early September and is now forecasting the lowest quarterly earnings per share, excluding exceptional items, since November 2008.

Sri Raman, StarMine’s quantitative analyst, said Goldman’s results, due on October 19, could still come in below the consensus numbers because five of the 22 analysts covering the bank were yet to lower their predictions.

“If they don’t all revise their estimates, we would expect Goldman to miss [the consensus forecast],” he said. “That is a bold prediction because Goldman has a history of always beating expectations.”

StarMine estimates that Goldman’s earnings could come in more than 16 per cent below the current EPS consensus of $2.52. In the same period last year, Goldman earned $5.25 per share.

The consensus estimate for Morgan Stanley is $0.15 per share, compared with the $0.38 EPS recorded in the third quarter of 2009.

Goldman and Morgan Stanley declined to comment, but executives said they expected most analysts to fall into line before the results. Financial sector analysts tend to move later than colleagues covering other sectors because bank earnings are more volatile.

Macroeconomic woes and political uncertainty have kept investors on the sidelines, prompting analysts to become more and more pessimistic during the quarter about the profitability of trading operations.

“Anxiety stemming from a waning economic recovery and uncertainty over the mid-term elections left clients paralysed and trading desks fell silent during the quarter,” wrote Brad Hintz of Bernstein’s Research in a recent note that lowered estimates for Morgan Stanley and Goldman Sachs.

StarMine weights analysts’ forecasts according to their past accuracy and gives more emphasis to those who make early calls or “bold” estimates, which differ strongly from the mean.

It estimates that its methodology has had an 80 per cent success rate over the past 10 years in predicting the direction in which estimates will move for highlighted stocks.

Mr Raman said this quarter’s reporting season should see earnings of North American companies rise on average by 23.8 per cent year on year, building on the 38 per cent growth seen in the second quarter.








IMF chief warns on exchange rate wars
By Alan Beattie in Washington
Copyright The Financial Times Limited 2010
Published: October 5 2010 21:53 | Last updated: October 5 2010 21:53
http://www.ft.com/cms/s/0/304e7430-d0c1-11df-8667-00144feabdc0.html


Governments are risking a currency war if they try to use exchange rates to solve domestic problems, the head of the International Monetary Fund has warned.

The comments by Dominique Strauss-Kahn came before the yen fell as a result of the Bank of Japan shifting towards quantitative monetary easing, cutting its key interest rate and proposing a new fund to buy government bonds and other assets.

“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Mr Strauss-Kahn told the Financial Times on Monday.

“Translated into action, such an idea would represent a very serious risk to the global recovery . . . Any such approach would have a negative and very damaging longer-run impact.”

The yen dropped against the dollar on Tuesday after the BoJ announced its decision. Government bonds, stocks and gold prices all rose on the expectation that central banks of the world’s biggest economies would embark on a round of quantitative easing.

In recent weeks several major economies have taken measures to relieve upward pressure on their currencies. Japan intervened in the currency markets to sell yen for the first time in six years. Brazil has threatened intervention to hold down the real, and on Monday doubled a tax on foreign purchases of bonds in an attempt to reduce inflows.

Last week Guido Mantega, Brazil’s finance minister, warned of a currency war. “We have seen reports that some emerging countries whose economies face big capital inflows are saying that maybe it is time to use their currencies to try to gain an advantage, particularly on the trade side,” Mr Strauss-Kahn said. “I don’t think that is a good solution.”

Mr Strauss-Kahn was speaking ahead of the annual meetings of the IMF and World Bank in Washington this weekend, at which the troubled global economy and the imbalances in current account deficits are likely to feature prominently.

European policymakers said they had disagreed with Wen Jiabao, the Chinese premier, after meetings in Brussels.

Jean-Claude Juncker, chairman of the group of eurozone finance ministers, said there was a “divergence of analysis” between the Chinese and the European authorities. “We think the Chinese currency is broadly undervalued,” he said.

This week Mr Wen said China would buy Greek government bonds as a sign of confidence in the country’s ability to escape default. But economists said Chinese purchases of bonds would also push up the euro against the renminbi.




German industrial orders surge 3.4%
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2010
Published: October 6 2010 12:51 | Last updated: October 6 2010 12:51
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Germany saw a surge in manufacturing orders in August, boosting hopes that Europe’s largest economy will still power growth across the continent even as the euro strengthens and the US recovery splutters.

Orders rose by a larger than expected 3.4 per cent in August compared with the previous month, the Berlin economic ministry said on Wednesday. That reversed a 1.6 per cent fall in July and showed that considerable momentum remained behind Germany’s economic pick-up.

The data came as members of the European Central Bank governing council gathered in Frankfurt for Thursday’s interest rate setting meeting, where they are expected to debate the pace at which they can unwind exceptional measures taken to support the economy since the collapse of Lehman Brothers in 2008.

Germany’s economy is likely to face strong headwinds in coming months. Global growth is slowing and expectations of further quantitative easing by the US Federal Reserve has driven the euro sharply higher – posing a further threat to German exports.

Against the dollar, Europe’s single currency is at its highest for eight months. On a trade-weighted basis, the euro has risen by about 4 per cent since the beginning of September.

However, eurozone policymakers have taken comfort from signs that Germany’s recovery is broadening. Unemployment has been falling for more than a year and government spending has also supported domestic demand. Moreover, the latest orders data showed the strongest impulse coming from countries that share the euro – rather than countries such as China. Eurozone orders for German manufacturing goods leapt 13.8 per cent in August compared with the previous month.

The economics ministry warned that the monthly data were volatile and distorted by the timing of large orders. But taking July and August together, orders were still 2 per cent higher than in the previous two months – and almost 20 per cent higher than a year before.

Alexander Koch, economist at UniCredit in Munich, argued the underlying trend showed a loss of dynamism “after the exceptionally vibrant first half of this year” but the pace of expansion in orders was still strong by historical standards.

Germany’s economy expanded 2.2 per cent in the second quarter compared with the previous three months. Growth is thought to have been slower in the third quarter, but to have remained positive.







GE to acquire Dresser for $3bn
By Sylvia Pfeifer in London
Copyright The Financial Times Limited 2010
Published: October 6 2010 15:31 | Last updated: October 6 2010 16:23
http://www.ft.com/cms/s/0/862086a2-d155-11df-8422-00144feabdc0.html


General Electric, the US conglomerate, continued its drive to expand its energy business, reaching a $3bn deal to buy Dresser, a Texas-based maker of gas engines used to power oil and natural gas production.

The deal is the latest in a series of acquisitions over the past 10 years by GE, whose energy business generated $40bn of revenues in 2009. Dresser’s portfolio includes technologies for gas engines, control and relief valves as well as control solutions for gas and fuel distribution.

“Dresser is a great fit for the GE business model,” said John Krenicki, vice chairman of GE and president and chief executive of GE Energy. “Dresser’s technology complements our existing gas engine portfolio . . . Eighty-five percent of Dresser’s revenue is from energy customers, and it has developed a large installed base of equipment, which is a big reason why 40 per cent of its total revenue is derived from aftermarket service offerings, and there is a lot of room for future expansion.”

News of the deal came as GE confirmed it had also made an offer for Wellstream, the UK oil and services company, but that it had been rejected.

GE said in a statement that it had offered 750p a share, valuing Wellstream at £755m. It said the offer was subject to due diligence and could be reduced, noting that it was “disappointed” that Wellstream had not accepted the proposal.

“GE is disciplined in its acquisitions and, as such, there can be no certainty that it will take any further action,” it added.

The company’s statement came after speculation that GE was the mystery suitor for Wellstream. GE, which is being advised by Goldman Sachs, made its approach through VetcoGray, its Aberdeen-based oil services arm.

“GE’s approach looks a tad cheeky in our view and its rejection may flush out another approach. Another suitor may break cover now that GE has laid its cards on the table and indicating that 750p is the upper end of its price range,” said Keith Morris, analyst at Evolution Securities.

“With both its plants working close to capacity we see Wellstream as capable of making about 80p of earnings. Therefore an 800p take-out price would only amount to about 10 times potential earnings – hardly a stretch with the sector forward price/earnings ratio of 15 times.”

Other potential bidders for Wellstream are National Oilwell Varco and Saipem, which is part-owned by Italy’s Eni.

Newcastle-based Wellstream announced last month that it was the subject of several bid approaches. The company has manufacturing bases in the UK and Brazil and is the world’s second-largest supplier of flexible pipelines for the oil and gas sector.

One of its main attractions to potential bidders is its exposure to Brazil, which is investing heavily in exploration. Petrobras, the Brazilian energy group, raised $70bn (£44bn) last month to fund the development of offshore fields.

Takeover speculation has swirled around Wellstream for several months. In July, the company issued a profit warning, followed in August by the announcement of a drop in first-half pre-tax profits from £25.7m to £10.6m. Wellstream declined to comment on Wednesday. The company is being advised by NM Rothshild and Credit Suisse.

Shares of GE rose by 1.64 per cent to $16.78 in mid-morning trading in New York. Wellstream shares fell 16p to 764p.





Fitch downgrades Ireland’s debt rating
By John Murray Brown in Dublin
Copyright The Financial Times Limited 2010
Published: October 6 2010 14:37 | Last updated: October 6 2010 14:40
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Ireland’s debt rating has been downgraded by Fitch, with a further downgrade more than likely in the next two years, the credit rating agency said on Wednesday.

The downgrade of Ireland's long term debt from AA- to A+ reflects “the exceptional and greater-than-expected” cost of recapitalising the country’s banks, announced last week.

The agency has also changed its outlook on Irish debt from stable to negative which it says “implies a slightly greater than 50 per cent probability of a further downgrade over a 12-24 month horizon”.

The negative outlook reflects “uncertainly regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort.”

Fitch said the rating could be downgraded further “if the economy stagnates and broad-based political support for and implementation of budgetary consolidation weakens”.

The downgrade is a further blow to Ireland. The country is reeling from the fiscal impact of a property crash which this year will result in the largest primary deficit in the European Union at 11.9 per cent of gross domestic product.

When the cost of bank bail-outs – which Fitch estimates at €45bn ($62.5bn) – is included, the general government deficit, as measured by the European Commission, rises to 32 per cent of GDP, more than 10 times the fiscal guideline for countries in the eurozone.

Fitch says Ireland “still retains considerable financial flexibility” with a cash buffer of €20bn and uncommitted funds of €14bn held by the National Pension Reserve Fund – a sovereign wealth fund.

It says that while the economy has weakened, the underlying budget position remains on target, and Fitch expects a “further strengthening”of the fiscal consolidation effort when Brian Lenihan, finance minister, presents his four-year budget framework in early November.

Fitch also predicted the National Asset Management Agency, which is buying the impaired property loans of Irish banks, will break even over the long term given the aggressive discounts applied to the loans acquired. The discounts average 58 per cent of book value compared with the original forecast of 30 per cent.

Fitch said the drag on growth from the collapse of the construction boom “has mostly run its course”. But it said continuing distress in the housing and commercial real estate markets, household deleveraging and the uncertain global economic outlook “weigh on growth prospects and fiscal outlook”.