Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Firming dollar inspires stock and commodity selling
By Jamie Chisholm, Global Markets Commentator
Copyright The Financial Times Limited 2010
Published: October 11 2010 03:45 | Last updated: October 12 2010 09:06
http://www.ft.com/cms/s/0/6bb787d2-d4db-11df-b230-00144feabdc0.html


Tuesday 09:00 BST. Signs that the dollar may be stabilising after falling to 9-month lows is encouraging a sharp bout of profit-taking in riskier assets.

The FTSE All-World equity index is down 0.7 per cent and industrial commodities are softer, while US Treasury benchmarks yield the least since January 2009.

Traders have long been using the US dollar as a proxy for risk appetite: its decline a signal that markets were relaxed about global economic growth, and its rise a gauge of haven flows as sentiment deteriorated.

But recently this relationship has adopted a more forceful driver. The greenback has come more to reflect hopes for further US quantitative easing – a strategy from the Federal Reserve which many market participants believe provides an implicit support for stock markets.

It is this “Bernanke put” that has allowed equities in the US to shrug off decidedly unimpressive economic data over the past few weeks and power to five-month highs, gaining 11 per cent in the process. Equally, the CRB index, a commodities benchmark, is at two-year highs.

But Tuesday’s early action suggests traders may now be questioning this neat dynamic – unless, of course, it is just a brief burst of profit taking. Either way, US equity futures are down 0.6 per cent and European bourses have started on the back foot.

The FTSE Eurofirst 300 is off 0.7 per cent and London’s FTSE 100 is lower by 0.8 per cent, weighed down by the heavyweight mining sector. Sentiment has been further damaged by Asia’s negative reaction to Monday’s late news that Beijing was raising capital requirements for some major banks, in order to cool lending – raising fears that one of the world’s main economic engines could slow.

Mainland China stocks are firmer, however, reflecting the fact that they have already underperformed global benchmarks by about 20 per cent so far in 2010.

Factors to Watch. Early in the European session, the UK will reveal its September consumer price data.

Later, in the US, the third-quarter earnings season gets back under way. Chip bellwether Intel will deliver its numbers after the closing bell.

Before that, traders will be able to get an insight into the deliberations at the Federal Reserve's Open Market Committee’s rate-setting meeting in September when the minutes are released. With markets expecting more quantitative easing at the November meeting, any suggestion that the FOMC was unsure of the need for such action may come as a blow to some.

Asia-Pacific. Shares are trading sharply lower as the yen’s strength weighs on Japanese exporters, while commodity shares in Australia are falling after a recent string of gains.

The FTSE Asia-Pacific Index is down 1.4 per cent, hobbled by weak performances in Tokyo – back after Monday’s holiday – and Sydney, off 2.1 per cent and 1.3 per cent respectively.

South Korea’s Kospi index is down 1.2 per cent and India’s Sensex is off 0.9 per cent after the pace of industrial output growth in August disappointed.

Chinese shares are mixed. The Shanghai Composite is up 1.2 per cent, while the Hang Seng in Hong Kong is tracking the regional trend with a 0.4 per cent decline.

Forex. The dollar is pushing away from 9-month lows on a trade-weighted basis, with traders apparently reluctant to sell the US unit ahead of the release of the FOMC minutes. The DXY, as the dollar index is known, is at 77.74, up 0.3 per cent. The yen is again inching up versus the buck, however, up 0.2 per cent to Y81.95, just above 15-year highs.

The euro is down 0.5 per cent at $1.3809 and the Aussie dollar, a good gauge of investor risk appetite, is down 0.5 per cent to $0.9784.

The renminbi is slightly weaker – down 0.07 per cent against the dollar to Rmb6.6729 – after officials in Beijing made a point of saying that currency flexibility does not necessarily mean the renminbi will rise.

Commodities. Agriculture prices remain firm after the sharp rises of the past two sessions. But metals are seeing profit taking as a slightly more risk-averse mood envelopes the broader market. Copper, the sector benchmark, is pulling back from near two-year peaks, down 1.4 per cent to $8,200 a tonne.

Oil is down 1 per cent to $81.38 a barrel, while gold is off 0.5 per cent to $1,346 an ounce.

Rates. The US sovereign debt complex is back on line following Monday’s Columbus Day holiday and buyers are moving back in. The yield on the 10-year Treasury is down 5 basis points to a fresh 21-month low of 2.35 per cent as investors continue to reason that the Fed will be purchasing government paper as part of its expected quantitative easing programme. The US will auction $33bn of new 3-year notes later on Tuesday.

Peripheral eurozone spreads relative to Bunds continue to contract as investors become more relaxed about the bloc’s fiscal difficulties, despite another day of strikes in France reminding markets of some resistance to austerity measures.

Americas. Attendance in the US was thinned on Monday by the Columbus Day holiday and the three main equity indices put in a suitably quiet performance as traders lacked fresh catalysts in the way of economic data or important corporate results. The S&P 500, Nasdaq Composite and Dow Jones Industrial Average all finished with gains of less than 0.05 per cent.

Canada was closed for the nation’s Thanksgiving holiday, while activity in Brazil was also meagre as many took an extra day off ahead of Tuesday’s official holiday. The Bovespa still managed a gain of 0.2 per cent, however, in keeping with the mildly positive moves elsewhere in the region.

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




Blow to plans for dealing with bank crisis
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: October 11 2010 23:01 | Last updated: October 11 2010 23:01
http://www.ft.com/cms/s/0/fd62a344-d56f-11df-8e86-00144feabdc0.html


Regulators are struggling to create a global mechanism that could wind down a big financial institution without the disruption caused by Lehman Brothers’ collapse in 2008.

The US is due on Tuesday to propose its own so-called “resolution” regime that would allow officials to stabilise a big, distressed bank, sell off assets over time and force creditors to take a discount on the value of their debt, without taxpayer money or market disruption.

But policymakers attending meetings around the International Monetary Fund and Institute of International Finance criticised the US regime and cast doubt on whether anything but a modest set of principles could be agreed at the Group of 20 meeting in Seoul next month.

Paul Tucker, deputy governor of the Bank of England, said it was a “mistake” by the US to equate keeping a seized bank open with a bail-out. He questioned whether the system could work if no buyers were on hand to pick up some assets.

Mr Tucker said he thought employees would stop coming to work at an institution slated for closure. “And I suspect that even if it’s risk-free, some counterparties will move away because what’s the point of dealing and placing money with an institution that has no future?” he said.

European policymakers want to allow “open bank resolutions” that keep an institution running, but the US is opting for a system of mandatory liquidation, partly because the multibillion dollar bail-outs of AIG and Citigroup created immense political pressure for creditors, shareholders and executives to bear financial responsibility. The US is also far less enthusiastic than some Europeans on the introduction of instruments such as “contingent capital” and “bail-ins”, designed to convert debtholders’ stakes in a bank into more loss-absorbent equity when it gets into trouble.

Lael Brainard, the senior Treasury official responsible for international affairs, said that “more analysis” was needed of bail-in instruments and they should serve only as “complements to effective resolution frameworks”.

But more important than US scepticism might be a lack of investor appetite, according to some bankers and investors meeting in Washington.

“I’m severely concerned,” said Raj Singh, chief risk officer at Swiss Re. “That’s not the kind of bet I’m buying into when I’m buying into bank debt: who’s really going to fund all these things that people are talking about in these resolution mechanisms? It certainly won’t be people like us.”

Phillipp Hildebrand, chairman of the Swiss central bank, said international regulators and policymakers meeting at the Basel committee and Financial Stability Board would define “core ingredients” that should be included in national resolution regimes and over time work to harmonise them.

“Cross-border resolution is very hard,” he said. “If you try to build a beautiful, global resolution regime I think we‘ll be at it for a very, very long time.”





US cities face big public pension deficits
By Nicole Bullock in New York
Copyright The Financial Times Limited 2010
Published: October 12 2010 05:04 | Last updated: October 12 2010 05:04
http://www.ft.com/cms/s/0/7adbf6e8-d58b-11df-8e86-00144feabdc0.html


Big US cities could be squeezed by unfunded public pensions as they and counties face a $574bn funding gap, a study to be released on Tuesday shows.

The gap at the municipal level would be in addition to $3,000bn in unfunded liabilities already estimated for state-run pensions, according to research from the Kellogg School of Management at Northwestern University and the University of Rochester.

“What is yet to be seen is how this burden will be distributed between state and local governments and whether the federal government will be called upon for bail-outs,” said Joshua Rauh of the Kellogg School.

The financial demands of unfunded pension promises come as state and local governments grapple with years of falling tax revenue related to the recession.

The combination has raised concern that defaults, which are historically rare in the $2,800bn municipal bond market where local governments obtain money, could now rise.

“The bondholders would be competing with the pension beneficiaries for scarce government resources,” Mr Rauh said.

Current pension assets for plans sponsored by Philadelphia can only pay for promised benefits through 2015, while Boston and Chicago would deplete their existing funds by 2019.

Cincinnati, Jacksonville, Florida and St Paul have current pension assets that can only pay for promised benefits through 2020.

Local governments use unique accounting methods that many, such as Mr Rauh, believe understate obligations. Based on his estimates, which use US Treasuries as the benchmark, each household already owes an average of $14,165 to current and former municipal public employees in the 50 cities and counties studied.

“Philadelphia has the most immediate cause for concern, as the city can pay existing promises with existing assets only through 2015,” Mr Rauh said, assuming an 8 per cent annualised return, the most common benchmark for municipal plans.

In New York City, San Francisco and Boston the total is more than $30,000 a household and, in Chicago, it tops $40,000.

Taxpayers in these areas risk not only local tax increases and service cuts to pay for benefits, but potentially some of the bill for the $3,000bn unfunded obligations at the state level, the researchers say.

“The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities, as residents can potentially move elsewhere to escape the situation,” Mr Rauh said.

The research examines 77 pension plans sponsored by 50 major cities and counties and covering about 2m workers, which is estimated to be two-thirds of workers covered by local pensions. Researchers then extrapolated the results – an unfunded liability of about $5,300 per worker – to come up with the total estimate of $574bn.