Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times



Poor US jobs data open way for stimulus
By Robin Harding, Alan Beattie and James Politi in Washington
Copyright The Financial Times Limited 2010
Published: October 8 2010 20:24 | Last updated: October 8 2010 21:49
http://www.ft.com/cms/s/0/eae5ee70-d30c-11df-9ae9-00144feabdc0.html


Worse-than-expected September jobs figures underlining the US economy’s chronic weakness has removed the last major hurdle to a new stimulus programme by the Federal Reserve.

News that the US lost 95,000 jobs in September pushed the dollar briefly below 82 to the yen for the first time since 1995, a development that analysts say could become entrenched as a result of the widely expected stimulus.

Low demand in rich countries is prompting fears of a global currency war, an issue which is likely to dominate debate among finance ministers gathering in Washington for the International Monetary Fund’s annual meeting.

With the dollar set to remain weak, the likes of Japan and Brazil may intervene in markets to limit wild swings in their currencies and protect exports.

Tim Geithner, US Treasury secretary, said the global recovery could be undermined by lack of progress on lifting domestic demand “in countries running external surpluses and by the extent of foreign exchange intervention as countries with undervalued currencies lean against appreciation”.

Jean-Claude Juncker, chairman of the group of eurozone finance ministers, complained about the weakness of the dollar and the undervaluation of the Chinese renminbi. “The euro is too strong today,” he said. “I don’t think the dollar is in line with underlying fundamentals.”

Discord over currencies had mainly come with the US and others complaining about China’s manipulation of the renminbi but the more general slide in the dollar recently has alarmed more governments.

A number of Fed officials have said that the US central bank should act soon unless the economic data improve. The September jobs report represented the last opportunity for the data to get better before the Fed’s next rate-setting meeting at the start of November.

If the Fed does act, it is likely to buy hundreds of billions of dollars in Treasury bonds – the strategy known as quantitative easing – in an effort to drive down long-term interest rates. Lower interest rates on US assets relative to other countries tend to weaken the dollar.

Stephen Wood, a senior market strategist at Russell Investments, said Friday’s jobs data “at a minimum take away the ammunition from the hawks and reinforce the argument of advocates of quantitative easing” on the Federal Open Market Committee.

The main surprise in the report was a 76,000 fall in local government jobs. It suggests that the effects of last year’s $787bn fiscal stimulus are starting to fade.

The private sector created a modest 64,000 jobs, most of them in services, well below the 300,000-400,000 a month needed to keep up with population growth and tackle rapidly the 9.6 per cent unemployment rate.





‘Bernanke put’ risk for shareholders
By Michael Mackenzie in New York and David Oakley in London
Copyright The Financial Times Limited 2010
Published: October 8 2010 19:21 | Last updated: October 8 2010 23:26
http://www.ft.com/cms/s/0/c0c362a6-d304-11df-9ae9-00144feabdc0.html


Don’t fight the Fed. That is the mantra driving financial markets now.

As the prospect of another super-sized dose of cheap money from the world’s most powerful central bank has gained traction, the dollar has tumbled. Almost everything else, be it Brazilian government debt, the Thai baht, UK gilts, gold or the price of crude, is rising.

Equities, though, are among those assets that have felt the biggest impact from rising expectations that the Federal Reserve, under chairman Ben Bernanke, will revive emergency efforts to pump money into the US economy through the process known as quantitative easing – in other words, buying government bonds and other assets to stimulate bank lending.

Since the Fed’s last policy meeting in September opened the door to another round of bond purchases, being dubbed QE2 in financial markets, all the main global stock indices – S&P 500, FTSE 100, the FTSE Eurofirst 300 and the Nikkei 225 Average – have rallied strongly. Emerging market equities have surged, too, boosted by the idea that the money created by the Fed’s buying of bonds will end up in other assets worldwide.

Some respected investors, including David Tepper, the billionaire hedge fund investor who runs Appaloosa Management have publicly extolled the virtue of a “Bernanke put” for the stock market. Mr Tepper, for his part, has taken to the airwaves arguing that, .should the economy weaken further, then the Fed’s embrace of renewed monetary easing should protect equities from the risk of losses. The central bank’s stance, in other words, amounts to an equity put option for investors.

Weaker than expected US jobs data on Friday only reinforced speculation that the Fed might resume its asset purchase programme when its interest rate-setting committee meets in November to prevent sustained disinflation and a feared double-dip recession.

Some investors believe that the Fed itself has been encouraging that belief. Speeches by Fed officials have drawn attention to its unhappiness with America’s fragile economic recovery and the fact that core measures of inflation sit below the bank’s targeted level. There is a widespread view the Bank of England could also act.

“Some market participants believe that QE is not a good idea from a fundamental view, but Bernanke believes it and, as a result, we view QE as a certainty,” says Richard Tang, head of fixed income, forex and equity sales, Americas at RBS Securities.

As those expectations have hardened, so the relationship between equities and US Treasuries, which have tended to move in opposite directions this year as investors’ appetite for risk has fluctuated, has reversed. Now stocks and bonds are rising together.

One reason for this is the falling dollar: a cheaper US currency is good for S&P 500 companies, who derive half their revenues from outside America.

Another reason is that a heavy dose of quantitative easing, assuming it is successful, will not only support the bond market, but lower borrowing costs for households and companies, stimulating growth.

“QE is as much about falling yields as it is about weakening the dollar,” says Dominic Konstam, global head of rates research at Deutsche Bank.

Since the Fed’s policy meeting last month, the dollar has tumbled 4 per cent on a trade-weighted basis, hitting a succession of 15-year lows against the yen. It has lost 5 per cent of its value against the euro, too.

In turn, dollar-denominated commodities such as oil have soared. Crude is up 10 per cent, while gold has risen nearly 5 per cent, to a record high this week of $1,364 a troy ounce.

The S&P is back above 1,160 and is at its highest level since May, while US Treasury yields have fallen back to below their lows of August. The 10-year note yields less than 2.4 per cent, its lowest level since January 2008.

The question now is how long this rally in stock markets and dollar-denominated asset classes will continue. For stock markets bulls, much is riding on the Fed delivering QE2 on a scale that justifies the run-up in share prices. The problem is nobody knows how big any asset-buying programme might be.

Too small and the market will be disappointed. Too big and sharply higher inflation may follow. Beyond questions about the scale and scope of QE2 – or the “Bernanke put” – a bigger risk for investors is that quantitative easing fails.

Tony Crescenzi, portfolio manager at Pimco, says the effectiveness of quantitative easing is “a major unknown even for the Fed, as few truly know the effect that a given amount of QE will have on financial conditions, and few truly know the impact that any loosening of financial conditions will have on the economy”.

The pessimists point to Japan, where quantitative easing has failed to stimulate the economy, or the stock market, over the past decade. Some analysts argue that, if US banks remain reluctant to extend credit, then the Fed is unlikely to prevent a prolonged period of anaemic growth, or even another recession.

There is no guarantee that QE2 will work, says Ken Wattret, chief eurozone economist at BNP Paribas. In Japan’s case, deflation – falling prices and economic stagnation – was the outcome. He adds however: “The difference in the US and the UK is that they have moved much more quickly than the Japanese did and the financial injections have been much greater. This means the chances of success are much higher, which is good news for equities.”

Mr Tepper, and other fund managers betting on a Fed-inspired recovery rally, will be hoping so.







US economy in pain after house price crash
By Robin Harding in Washington
Copyright The Financial Times Limited 2010
Published: October 8 2010 20:24 | Last updated: October 8 2010 20:24
http://www.ft.com/cms/s/0/c3b92dd4-d30d-11df-9ae9-00144feabdc0.html


There is a fairly straight line between a weak US jobs report and the fears about currency manipulation occupying global finance ministers as they assemble in Washington this weekend for the annual meeting of the International Monetary Fund.

A slow recovery in the US increases the chance that the Federal Reserve will launch a new round of quantitative easing. That would lower long-term US interest rates and weaken the dollar – a boon for US exporters but not for countries whose economies rely on exports in the other direction. They may intervene to lower their own currencies in turn.

For all concerned, therefore, the questions are how weak is the US recovery and what does that say about how much quantitative easing the Fed might want to do?

“The jobs data are soft and going nowhere – there’s just no momentum,” said Paul Ashworth, senior US economist at Capital Economics in Toronto. More than a year into the recovery, the economy ought to be creating 300,000 to 400,000 jobs a month if it is to bring the 9.6 per cent unemployment rate down with reasonable speed.

The private sector is creating a modest number of jobs: it added 64,000 people to payrolls last month, and the figures for July and August were revised upward by a total of 36,000. There is little in such figures to suggest the US economy could dip back into recession.

Most economists think the problem is the legacy of a house price crash that left households with big loans backed by much less valuable property. As a result, they need to rebuild their savings. More jobs are essential to increase the incomes that consumers have to drive the economy onward.

That is why Friday’s payrolls numbers were disappointing on a number of fronts. First, there was no real increase in either hours worked or average hourly earnings. Companies usually increase the hours of their existing workers before they take on more staff.

Second, the change in employment by industry did not encourage hopes of a surge in consumption. The loss of 76,000 jobs in local government speaks of further pain to come as last year’s fiscal stimulus wears off, although Mr Ashworth points out that state and local tax revenues have begun to turn around.

But another 21,000 job losses in construction suggest the housing sector has still not hit the bottom, while the industries that are creating jobs – such as the 34,000 added by bars and restaurants in September – are not known for high pay.

Third, over the past two months the number of people who worked part-time because they could not find a full-time job rose by 943,000. That does not affect the overall unemployment rate but does show the lack of demand for workers.

Finally, the Bureau of Labour Statistics (BLS) said when it revises the employment numbers next year it is likely to find there were 366,000 less jobs in March 2010 than it initially thought.

The reason for the revision will be crucial. If it turns out that even more jobs were lost in 2009 than previously thought, that will not be too bad. But if it turns out that the recovery in jobs early this year was weaker than the BLS first thought, that would imply the momentum of the economy is even weaker.

With little in the data to suggest an improvement is on its way, the world’s finance ministers are likely to have a lot to talk about.






Currency concerns dominate IMF meetings
By Alan Beattie and Chris Giles in Washington and Michiyo Nakamoto in Tokyo
Copyright The Financial Times Limited 2010
Published: October 8 2010 20:23 | Last updated: October 8 2010 23:57
http://www.ft.com/cms/s/0/da5dfb94-d30a-11df-9ae9-00144feabdc0.html


Policymakers at this weekend’s International Monetary Fund meetings in Washington warned about a currency war and the dangers of failing to co-operate to cut global imbalances.

Dominique Strauss-Kahn, IMF managing director, told the meeting on Friday that the fund would seek to issue “spillover reports” showing how each country’s policies were affecting others – raising the prospect of another attempt to co-ordinate the policies of the large economies to reduce global imbalances.

“The idea that there is an absolute need in a globalised world to work together may lose some steam,” Mr Strauss-Kahn said.

“That is why we need more initiatives on systemic stability.”

Officials familiar with the plans said they would probably involve the IMF conducting the annual Article 4 health-checks of five big economies – the US, China, Japan, the eurozone and the UK – simultaneously, with the IMF’s managing director personally involved, and then publishing analyses of the impact of each economy on the others.

The debate on currencies has focused on the Chinese exchange rate, which Beijing has allowed to rise only slowly by intervening in the currency markets.

Zhou Xiaochuan, governor of the People’s Bank of China, said the definition of a currency war was not clear but added: “The difference is that for China we view it as gradualism ... rather than shock therapy.”

But the prospect of renewed quantitative easing by the Federal Reserve has weakened the dollar against other currencies. The Bank of Japan’s announcement this week that it would pursue weaker monetary policy appears to have been outweighed by speculation that the Fed will return to pushing more dollars out into the markets.

The countries that make up the Group of Seven leading economies, due to meet on Friday evening, have generally focused their criticism on China and declined to blame each other for misalignments in currencies.

Tim Geithner, US Treasury secretary, this week declined to criticise Japan for its intervention against the yen last month, which Tokyo has portrayed as a stabilisation of disorderly markets.

On Friday Yoshihiko Noda, Japanese finance minister, said the intervention was “aimed at curbing excessive foreign exchange movements, not meant to guide[the yen] to a certain level over the long term”.

The currencies issue seems likely to dominate next month’s meeting of heads of government of the G20 countries, meeting in South Korea.

George Osborne, UK chancellor of the exchequer, said on Friday: “We do need to move towards more market-oriented exchange rates that reflect fundamentals, and the G20 and IMF have a role in helping make that come about.”

The G20 has asked the IMF to assess its member countries’ economic policies and how they will contribute to global rebalancing.



Investors offered a slice of Facebook
By Courtney Weaver and Miles Johnson
Copyright The Financial Times Limited 2010
Published: October 8 2010 22:46 | Last updated: October 8 2010 22:46
http://www.ft.com/cms/s/2/a44cf36c-d313-11df-9ae9-00144feabdc0.html


One of Facebook’s biggest backers is poised to offer City investors a rare chance to take an indirect stake in the social networking site via the London listing of a subsidiary worth up to $5bn (£3.1bn).

Mail.ru (formerly known as Digital Sky Technologies) is Russia’s largest internet group, and also owns about 10 per cent of privately held Facebook. It intends to float a subsidiary – also called Mail.ru – that includes the majority of the company’s Russian assets and part of the Facebook stake. Marketing to potential investors will start as early as Monday.

Mail.ru’s largest investors are Alisher Usmanov, the Russian oligarch and Arsenal football club’s second-biggest shareholder, and two associates: Yuri Milner, the group’s chief executive and a former physicist, and Grigory Finger, a Russian businessman.

The company has hired Goldman Sachs, JPMorgan and Morgan Stanley to run the listing, and held an analyst meeting earlier this month to prepare marketing material, people close to the company said.

Virtually unknown outside Russia until it purchased an initial 2 per cent stake in Facebook last year, Mail.ru has quietly become a fixture in Silicon Valley. It is a key shareholder of groups ranging from ICQ, an instant messaging service purchased from AOL, to Zynga, the online games provider and creator of Facebook game FarmVille.

The IPO will offer a stake of about 25 per cent in the London listed subsidiary. The subsidiary will include about a quarter of the group’s shareholding in Facebook, and stakes in Russia’s two biggest social networking sites, Vkontakte and Odnoklassniki, and Mail.ru, the country’s largest e-mail provider.

DST purchased a 2 per cent stake in Facebook for $200m last year, valuing the social networking site at $10bn, and is now estimated by analysts to have increased its stake to about 10 per cent by buying shares from Facebook employees. The remainder of the group’s stake will remain in the hands of DST Global, its holding company for foreign assets.

The group decided to include part of the Facebook stake in the listing to generate more interest in the company among global investors.

People close to Mail.ru warned the group could still choose to postpone its listing if market conditions deteriorated.

Mail.ru and its three advisers declined to comment.

The City listing is expected to be the biggest flotation from the former Soviet Union since Russian developer PIK’s $1.9bn offering before the crisis, and comes after regional peers dropped plans for London listings amid poor market conditions earlier this year.

In April, Uralchem, the Russian fertiliser producer, pulled a $600m London listing, while Prof Media, the Russian media group controlled by oligarch Vladimir Potanin, cancelled its $1bn City offering.

Bankers working on Russian offerings said that a successful float for Mail.ru might open doors for issuers that might not otherwise make it.

The listing by Mail.ru is one of at least three City listings by Russian companies expected before the end of the year.