Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Fed minutes and earnings cheer stocks
Copyright The Financial Times Limited 2010
Published: October 11 2010 03:45 | Last updated: October 13 2010 16:15
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Wednesday 16:15 BST. Global stocks are nearing 6-month highs as a good start to the US third-quarter earnings season and the increased likelihood of more quantitative easing from the Federal Reserve bolster demand for riskier plays.

The FTSE All-World equity index is up 1.5 per cent to 209.3, its best level since April, gold has hit a new record and the dollar is falling, after traders got what they wanted from the minutes of the latest Federal Reserve meeting.

The Fed’s notes said that a majority of members viewed their September discussion as an acknowledgment that looser policy would be needed “before long”: a strategy, known as QE2, that many investors reckon will support asset prices and, hopefully, reinvigorate the weak economic rebound.

Also contributing to Wednesday’s upbeat mood are better than expected figures from JPMorgan Chase. The bank has added to a good start to the earning season, which yesterday saw solid numbers from CSX, the railroad, and Intel, the chip bellwether.

In Europe, Dutch chip equipment maker ASML also delivered strong Q3 earnings and a positive view of trading for the rest of the year.

The Market Eye

The difference in yield between US 10-year and 30-year bonds has hit a record 140 basis points as traders reckon the Fed is more likely to purchase short and medium-dated debt to stimulate the economy and as muttering about inflation in the longer term begins to grow.

The S&P 500 on Wall Street is up 1 per cent to a fresh five-month high. The Vix volatility index, a gauge of investor anxiety, is down 1.2 per cent to 18.7, its lowest level since late April.

On a more worrying note, investors will need to keep an eye on the continuing verbal skirmishes in the global “currency war”. The latest to lock horns are the Japanese and South Koreans, with Tokyo arguing Seoul will come under increasing scrutiny for its attempts to depress the won.

Perhaps news that China’s trade surplus fell to a five-month low in September may curtail pressure on Beijing to let the renminbi appreciate.

Europe. The FTSE 100 in London is at its best level since April, up 1.6 per cent to breach the 5,700 mark once again, as resource stocks are marked sharply higher. Banks initially proved a drag, as Standard Chartered’s $5.3bn cash call left the sector struggling to make gains. However, financials perked up once the JPMorgan news hit the ticker.

The FTSE Eurofirst 300 is up 1.6 per cent, with all sub-sectors higher. The electronic and equipment sector is up 2.8 per cent.

Forex. The dollar is again on the back foot – though off its lows – as the prospects for a further liquidity injection by the Fed harms the currency. The US dollar index, which tracks the buck against a basket of its peers, is down 0.3 per cent to 77.05, just above 9-month lows.

The yen is hovering above 15-year highs relative to the greenback, currently flat at Y81.80. The euro is up 0.4 per cent to $1.3976, have baulked at the $1.40 level.

Sterling is down 0.2 per cent versus the euro to 88.17p after UK jobs data pointed to future labour market weakness, according to analysts.

Rates. It is better to travel than arrive. US sovereign bond investors responded to confirmation that the Fed was minded to adopt more QE by taking profits on Tuesday. The yield curve edged higher and steepened as longer-term debt suffered the heaviest selling.

That move is being extended on Wednesday as the buoyant mood elsewhere also reduces demand for sovereign havens. The 10-year note yield is up 3 basis points to 2.46 per cent.

An auction of $33bn worth of three-year bonds on Tuesday saw a record low yield, at 0.569 per cent, but demand was not as strong as at recent auctions. Indirect bidders, which include foreign governments, were down, and the bid-to-cover ratio – a measure of investor demand – was its lowest since February. The US will auction $21bn of new 10-year notes later on Wednesday.

Eurozone peripheral debt continues to improve, with Greek 10-year yields at 8.68 per cent, the first time they have been below 9 per cent in four months, according to Bloomberg data.

Commodities. Industrial resources have resumed their ascent as the dollar shows renewed weakness. Copper is up 0.4 per cent to $8,370 a tonne, having earlier hit a new two-year high of $8,415 a tonne. Oil is up 1.4 per cent to $82.75 a barrel.

The Reuters-Jefferies CRB commodities benchmark is up 1 per cent to a new 2-year high of 300.8 as a broad swathe of resources gained ground.

Gold has jumped to a new nominal high of $1,374.2 an ounce, and is currently up 1.6 per cent to $1,371 an ounce, as more QE chatter adds to the metal’s attraction for paper currency doomsters.

Asia-Pacific. Shares rose with sentiment brightening after Japanese machinery orders increased more than expected and chipmakers gained ground on Intel’s results.

The FTSE Asia-Pacific Index is up 0.7 per cent as investors also respond to the Fed’s QE2 hints. Japan’s Nikkei 225 gained 0.2 per cent and Australia’s S&P/ASX 200 added 0.04 per cent. South Korea’s Kospi, which has a heavy chip weighting, climbed 0.4 per cent, while

Shanghai advanced 0.7 per cent, and Hong Kong rose 1.5 per cent, following the $650m IPO of Mongolian Mining, Mongolia’s largest exporter of coking coal.

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






FDIC chief puts case for losses by creditors
By Tom Braithwaite in New York
Copyright The Financial Times Limited 2010
Published: October 13 2010 00:58 | Last updated: October 13 2010 00:58
http://www.ft.com/cms/s/0/6c8ed896-d656-11df-81f0-00144feabdc0.html


Creditors and derivatives counterparties of a future failing institution such as AIG or Lehman Brothers should expect to suffer losses on the value of their holdings, the Federal Deposit Insurance Corporation said on Tuesday.

Sheila Bair, chairman of the FDIC, said the regulator was proposing a “significant narrowing” of its power to choose which creditors of a group seized by the government should suffer losses.

But Ms Bair said: “This ability we have to differentiate among creditors has created some angst, we were told ... We do want to reassure creditors that it will be rarely used.”

The financial reform legislation passed by Congress in July gives a new power to the FDIC to seize and wind down a failing systemically important group, adding to the regulator’s existing authority to resolve failing banks.

Part of the failing group would be placed in receivership and the FDIC made clear on Tuesday that shareholders, subordinated debtholders and long-term bondholders would have to take what they could get. Shareholders could expect to be wiped out while other stakeholders low down the capital structure also faced losses.

But the FDIC would transfer potentially valuable parts of the business and seek to sell them. The regulator might choose to make payments to keep the group going, such as settling electricity bills, and potentially paying other creditors to “maximise franchise value”.

Mike Krimminger, a senior policy adviser at the FDIC, said “vast billions of dollars” could be protected in this way. Even the managers of the Lehman estate estimated there was something in the order of $73bn of value destroyed simply because they didn’t continue valuable operations.”

But on payments to counterparties, a crucial and vexed issue in the controversial bail-out of AIG, Ms Bair said the FDIC was unlikely to provide money.

“I think that would only happen if we had clear bids from interested acquirers that said we would be willing to pay more if you don’t impose losses on those sorts of creditors,” she said. “That would strictly be a mathematical test.”

Counterparties would be paid for positions secured with adequate collateral, but the FDIC would mark to market any riskier collateral such as mortgage backed securities, she said.

International banks including Société Générale and domestic groups including Goldman Sachs were paid par value by the US government as it sought to cancel AIG’s derivatives contracts with its counterparties during the 2008 bail-out.

The FDIC’s proposal will now be put out for public comment and the Treasury and the Federal Reserve will weigh in before a final resolution regime is in place next year.

The resolution regime was designed as an important mechanism to end the problem of banks deemed “too big to fail”, which benefit from lower costs of funding while in business because creditors believe the government would rather bail them out if they look to be failing rather than risk market disruption.

Although there is broad international agreement that resolution authorities are necessary, there remains a great deal of scepticism that a large crossborder institution such as Citigroup could be resolved credibly in the short term.

Paul Tucker, deputy governor of the Bank of England, told a conference held by the Peterson Institute on the sidelines of the weekend’s International Monetary Fund meetings that the FDIC’s aversion to “open bank resolutions” was a mistake.

“Because there you are a government agency and you are left opening and running Lehman the following morning for weeks. And I suspect people stop coming to work. 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.






China’s foreign reserves rise by $194bn
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2010
Published: October 13 2010 06:04 | Last updated: October 13 2010 14:08
http://www.ft.com/cms/s/0/3863cb1a-d6d0-11df-98a9-00144feabdc0.html


China’s foreign exchange reserves rose a record amount in the third quarter thanks to capital inflows and a persistently large trade surplus that adds weight to complaints Beijing is intentionally undervaluing its currency.

The reserves, already by far the largest in the world, increased by $194bn in the past three months to $2,650bn, eclipsing the previous record rise of $178bn in the second quarter of 2009.

The recent strengthening of the euro and yen against the US dollar explains some of the rise because China’s reserves are expressed in dollars but invested in a range of currencies and assets. But the record build-up also provides evidence of an undervalued renminbi and will bolster the case of trade partners calling for faster appreciation in the currency.

“With hostilities in the currency war already declared, a record increase in FX reserves in the third quarter and a near record haul for exporters in September hangs a target around the neck of China’s exchange rate regime,” said Tom Orlik, an economist at Stone & McCarthy in Beijing.

China’s trade surplus narrowed in September but the moderation is unlikely to placate external critics. The surplus hit $16.9bn last month, below August’s $20bn but still uncomfortably high for deficit countries, such the US, which accuse China of undervaluing its currency to support domestic industry.

Exports rose to $145bn, up 25.1 per cent in September from the same month last year and only slightly lower than July’s record high, while imports were up $128bn, an annual increase of 24.1 per cent.

In August, imports grew 35.2 per cent from a year earlier while exports expanded by 34.4 per cent.

Last month, the US House of Representatives passed legislation that would impose heavy tariffs on imports from countries deemed to be intentionally undervaluing their currencies. Many of China’s other trade partners have weighed in amid accusations that Beijing’s intervention in its currency could set off a “currency war” of competitive devaluations around the world.

Under intense pressure from the US, China reacted in mid-June by loosening a de facto peg to the US dollar that was introduced after the onset of the global financial crisis.

Although it has appreciated slightly faster recently, Beijing has still allowed the renminbi to rise only 2.4 per cent since June 19, prompting calls in the US for punitive measures even from those who previously favoured a softer approach.

In response, Wen Jiabao, the Chinese premier, last week told the US and Europe to stop pressing China and said a rapid renminbi appreciation would lead to widespread factory closures and serious social unrest in his country.

China’s overall trade surplus for the first three quarters fell 10.5 per cent from the same period last year, according to customs data released on Wednesday.

But the $120.6bn surplus for the first nine months is still seen as too high and an indicator of one of the most serious structural imbalances in the global economy. “The fall in China’s trade surplus is unlikely to do much to reduce international pressure on China to move faster on the currency, and Wednesday’s data suggest that Beijing has plenty of scope to allow appreciation in the months ahead,” said Brian Jackson, Royal Bank of Canada economist.






JPMorgan net income jumps 23%
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: October 13 2010 12:40 | Last updated: October 13 2010 14:42
http://www.ft.com/cms/s/0/a6dd3404-d6b8-11df-98a9-00144feabdc0.html


JPMorgan Chase said on Wednesday that its third-quarter profits surged by 23 per cent from a year ago as the bank slashed its provision for credit losses.

Net income at JPMorgan rose to $4.4bn, or $1.01 a share, from $3.6bn in the same quarter a year ago. That beat analysts expectations and lifted JPMorgan’s shares 0.37 per cent to $40.55 in early trading.

Jamie Dimon, JPMorgan’s chief executive, said that in spite of the decline in credit costs, mortgage and credit card portfolios continued to bear high net charge-offs.

“If economic conditions worsen, mortgage credit losses could trend higher,” Mr Dimon warned.

Last month, JPMorgan said it would halt thousands of home foreclosures while it investigates accuracy of court documents rubber stamped by employees.

In its investor presentation, the bank acknowledged that foreclosure affidavits were not properly notarised or reviewed but said that “underlying foreclosure decisions” were justified. Defending its process, JPMorgan said it makes every effort to help homeowners avoid foreclosure and that the average borrower has been delinquent for 14 months before the foreclosure sale is complete.

“The proper response if mistakes are found is to address them individually – which we will do; avoiding further damage to an already weak housing market should be a priority,” JPMorgan said.

Revenues fell by 15 per cent to $24.3bn on lower transaction fees due to weaker trading results. The bank was also hit by a $1.3bn increase in its litigation reserves, which were inflated by mortgage-related matters.

Profits in the investment banking division fell by 33 per cent to $1.3bn and revenues were down by 29 per cent to $5.35bn. That decline was offset by improvements in its retail financial services division and card services.

The bank’s overall profits were boosted by the reduction in its provision for credit losses, which was down by 67 per cent from a year ago to $3.2bn. JPMorgan said it saw improved delinquency trends in its credit card business and better credit quality in its commercial and industrial loan portfolio.

Mr Dimon said that the bank’s balance sheet was well positioned to meet new capital requirements being developed by regulators. Its tier one capital ratio – a measure of financial strength – rose from 10.2 per cent a year ago to 11.9 per cent in the third quarter of this year.