Posts from Tuesday Sep 7 2010

Gillard clinches power in Australia

Australia’s 17-day political deadlock has ended with Julia Gillard’s centre-left Labor government securing a second term after winning support from two independent parliamentarians, reports the FT. An election last month delivered Australia’s first hung parliament in decades, forcing Ms Gillard, prime minister for less than three months, to rely on independent and Greens MPs to form a minority government. She clung to power after securing 76 of the 150-seat lower house, compared to the 74 garnered by Tony Abbott’s Liberal-National coalition.

Allies told to shift Afghan focus

The US and its Nato allies should begin an immediate large-scale withdrawal from southern Afghanistan, moving to a policy of “containment and deterrence” against the Taliban and al-Qaeda while focusing on narrower political goals for the country, says a leading foreign affairs think-tank, reports the FT. In an analysis of Afghan policy, which comes ahead of a critical US review at the end of this year, the International Institute for Strategic Studies said on Tuesday that Nato strategy was “too ambitious, too removed from the core security goals that need to be met, and too sapping of diplomatic and military energies needed both in the region and elsewhere”. Unveiling a blueprint for withdrawal of Nato forces from southern Afghanistan, the institute said it was unlikely al-Qaeda would return in force if Nato left. The think-tank said it was “not . . . axiomatically obvious that an Afghanistan freed of an international combat presence in the south would be an ­automatic magnet for al-Qaeda’s concentrated reconstruction”.

Vodafone puts China Mobile stake up for sale

Vodafone is preparing to sell its 3.2 per cent shareholding in China Mobile as the UK mobile phone group demonstrates determination to dispose of its minority stakes, reports the FT. Vodafone has appointed Rothschild to supervise the sale of the China Mobile stake, which is worth almost $6.8bn based on the Chinese mobile operator’s share price. At least some of the proceeds generated by the sale are likely to be returned to shareholders, some of whom have been pressing Vodafone to dispose of its minority stakes.

Barroso calls on Europe to accelerate reform

Europe must accelerate the pace of structural reform over the next year to consolidate an uneven economic recovery, José Manuel Barroso told the European parliament in his first “state of the union” address, the FT reports. The European Commission president regularly addresses the parliament, but the state of the union format was intended to capture some of the sizzle of the US president’s annual speech to Congress and to energise Mr Barroso’s political programme. Mr Barroso said on Tuesday that European Union economic growth would be higher than forecast this year and that concerted action had allowed the bloc to withstand the test of the economic crisis. But he urged member states and MEPs to use the breathing room to push for deeper reforms on several fronts, from economic governance to the bloc’s financial and energy sectors.

World Bank backs investment in global farmland

The World Bank has backed the practice of countries selling large tracts of agricultural land to overseas investors, but is urging host countries to demand much more from investors to increase farming productivity and peoples’ livelihoods, the FT reports. In a long-awaited report on the so-called “global farmland grab”, the multilateral donor organisation warns about the risk of the deals, particularly the “limited recognition of local rights” and “highly centralised approval processes”.

Eurozone fears send investors to havens

Investor worries over the eurozone have deepened, hitting the markets of the single currency’s weaker economies and sparking a flight to the safety of US Treasuries, German bunds, the yen and the Swiss franc, the FT reports. Global equities lost ground and the euro weakened on Tuesday, while European bank stocks came under pressure as doubts over the continent’s financial system resurfaced were sparked amid a revival of concerns that stress tests in July understated lenders’ holdings of risky government debt. German calls to water down regulatory rules to ease pressure on banks also hit sentiment.. Concerns over the eurozone. Ben May, European economist at Capital Economics, warned: “The turn in the markets shows how vulnerable they are to worries about the health of the eurozone. European banks and the lack of recovery in the peripheral markets are a big worry for investors, who still have grave doubts about the eurozone.”

Obama to push business tax breaks

President Barack Obama is stepping up his campaign to regain the political initiative on the economy, preparing to announce on Wednesday a plan allowing companies to write off all capital investments until the end of next year, the FT reports. The proposal, the latest in a string of ideas the president is unveiling this week, is aimed at showing voters before the November 2 Congressional elections that his administration is taking decisive action to repair the ailing economy. But it is unlikely that the measures, which also include the extension of a research and development tax credit and $50bn of infrastructure spending, will be passed by Congress before the elections, if at all. Democrats stand to lose control of the House of Representatives and perhaps the Senate as well, as voters express disappointment with the Obama administration’s failure to bring down the unemployment rate and boost growth.

UK bank shake-up sets up reform face-off

The surprise departure of two of Britain’s top bank executives has raised the stakes in the heated debate over the industry’s future in London, with new leaders at Barclays and HSBC set to face off with the government over bank reforms, the FT reports. The abrupt resignation of Stephen Green, HSBC’s executive chairman, for a role in government and Barclays’ unexpectedly swift promotion of Bob Diamond, one of the world’s best-paid investment bankers, to replace John Varley as chief executive has intensified speculation about the groups’ commitment to the UK amid an inquiry into whether big banks should be broken up.

China vows to treat foreign business fairly

The man expected to become the next leader of China’s ruling Communist party has responded to a growing wave of complaints from foreign investors by assuring them the country will remain an open and fair place for them to do business, the FT reports. Xi Jinping, a vice-president and the heir apparent to Hu Jintao, told an investment forum on Tuesday his government was taking “vigorous steps” to ensure China “remains the most appealing destination for investment in the world”. His comments come amid increasingly outspoken criticism of China’s business environment from investors in numerous sectors and from a broad range of countries.

So much for “better than expected”

As if we hadn’t already rained on the expectations-beating parade of recent economic news, along comes this new chart from the Conference Board:

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Back in May, Barry Ritholtz posted an interesting chart of the S&P 500 priced in gold:

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Missing links

We’re just making our way through the new BIS quarterly review, but here’s a lovely piece of chart porn that caught our eye:

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Dividend Black Friday

By now, most investors the world over will be aware of the disruptive events that occurred on May 6 — a day that has come to be known as the ‘flash crash’.

What most investors might not be so well aware of, however, are the strange occurrences that transpired the day after in the fledgling exchange traded dividend futures market in Europe. Read more

Mmm, European yield stew

The bright side of bulging peripheral bond-bund spreads, courtesy of the strategists at Nomura (emphasis ours):

…as central bank policy provides more substantial support for the economy – especially via extensions of QE and liquidity measures – we see increasing carry opportunities in higher-yielding assets, e.g. investment grade credit and lower credit government bond and swap curves (EM and peripheral Europe)…

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Basel Schadenfreude

Was this the day bank stocks died?

Sighted in Tuesday’s market – a much bigger Basel III attack than on Monday’s victim, Barclays. Read more

De La Rue: licensed to kill money (Updated)

Oh my.

The goings on at the world’s banknote printer of choice, De La Rue, are beginning to take on mystery thriller dimensions. Read more

These are the voyages of the starship QE2

This is a Vulcan death grip:

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Markets Live transcript 7 Sep 2010

Live markets commentary from 

Bank of Bob (BOB.L)

No sign of a strong reaction to Tuesday’s news that Diamond Bob is to become CEO of Barclays:

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As ye stress-test, so shall ye reap

The folly (via the WSJ)…

The template asked for banks to disclose their “gross” and “net” exposures to sovereign risk in each E.U. country. Most banks’ disclosures didn’t define “gross” and “net” beyond saying that the latter were “net of collateral held and hedges”…

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Mining taxes, yen rates — or, when politics matter

The uglier – and in some cases, the more ridiculous – a country’s politics become, the more serious become some of the issues.

At least, that would seem to be the lessons from Australia and also Japan, in light of the political paralysis that has been gripping both countries of late while urgent reforms are left unaddressed. Read more

AIG edges AIA closer to Hong Kong listing

AIG will apply to Hong Kong regulators to list its Asian life insurance unit on September 21 with the aim to raise $15bn, sources familiar with the matter have told Reuters. The insurer has already appointed no fewer than eleven investment banks to manage AIA’s float, indicating its concern to get it away amid market volatility, the Daily Telegraph recently reported. Talks with the UK insurer Prudential over a takeover of AIA collapsed earlier this year, forcing AIG back to its original plan of an Asian listing.

Stocks rally fades with summer’s demise

European bourses tracked declines in Asia on Tuesday, with a return to full post-summer trading providing a challenge to ebullience seen since the start of September, the FT reports. Wall Street will open lower by 0.4 per cent, according to US equity futures. Financial stocks took damage in Europe on reports that recent stress tests had failed to hold banks’ feet to the fire on their government debt exposures. A grimmer take on US economic data is also likely to reign, with Goldman Sachs’ Jan Hatzius predicting that the Fed will eventually commit to $1,000bn of quantitative easing, FT Alphaville observes.

Stress tests haunt Europe’s banks again

Surprise — European regulators’ recent stress tests of the continent’s banks understated their holdings of risky sovereign debt, according to fresh data compiled by the WSJ. Banks decline to define ‘gross’ and ‘net’ exposure to government debt, figures asked of them by regulators, beyond noting ‘net’ as ‘net of collateral held and hedges’. Exposures borne by banks’ subsidiaries were also discounted, while short positions on debt were subtracted from gross holdings, whittling figures down overall. Meanwhile, yields on risky European government debt are back to the levels of the May crisis, reports Bloomberg.

Brave new world of bankruptcy trading

Bankruptcy courts used to be about giving creditors of ailing businesses a better chance at being repaid, the WSJ reports. But now hedge funds and other investors have turned them into ‘bankruptcy exchanges’, in which companies’ distressed debt is bought up at a discount and traded upon, prompting a debate over rules on what creditors to a bankrupt firm should disclose about their trading of its debt. Typically, funds will open short positions on a firm ahead of delays in its restructuring in the bankruptcy courts, the Journal says.

August sees hedge funds struggling

Hedge fund managers are facing growing pressure to deliver stronger performance in the last four months of the year, following another month of mixed results in August, according to the FT. The average hedge fund returned 0.17 per cent in August, according to preliminary month-end numbers from Hedge Fund Research. By contrast, the average fund was up 1.29 per cent this year until the end of July. Big-name fund managers have struggled to gain traction in particular, with global macro dividing winners from losers. Brevan Howard’s macro trading was flat through August, but Autonomy Capital’s macro fund returned 0.71 per cent.

Citi under fire over deferred tax assets

Pressure is mounting on Citigroup over its approach to $50bn of deferred tax assets, the FT reports. Analysts argue that it should set aside funds to cover them, a move that would weaken its balance sheet strength — DTAs account for a third of its tangible equity. Citi has countered that future earnings will be enough to justify keeping the assets on its books. But now a former SEC chief accountant has said Citi’s position ‘defies imagination and logic’, adding to calls made by analyst Mike Mayo for the bank to sort out its position. The issue is dogging Citi now probably because of a sharper regulatory environment, FT Alphaville has previously noted.

Goldman still expects a further $1 trillion of QE

More Bah! Humbug! from Goldman’s chief economist Jan Hatzius.

Although last week’s economic data makes a big “QE2” announcement from the Fed unlikely at the September 21st FOMC meeting, Hatzuis still believes more unconventional monetary easing is on its way, via a $1,ooobn purchase of Treasuries – because we are still in a soft patch. Read more

Obama unveils infrastructure plan

President Barack Obama has lifted the lid on a six-year plan to rebuild US infrastructure with an initial $50bn investment, Reuters reports. New tax cuts for businesses are also planned. No new jobs will be created until 2011 under the plan, which is likely to be quashed in Congress ahead of mid-term elections in November. Patience is thinning fast with policy interventions by the White House, the FT reports, while the WSJ predicts an anti-incumbent wave will sweep seats away from the Democratic party in November, based on new polling.

About that Ocado short squeeze

Er, is that it?

Anyone expecting Tuesday’s trading statement from Ocado – its first as a listed company – to trigger a big short squeeze is going to be disappointed. Read more