Posts from Thursday Sep 30 2010

Ecuador leader flees ‘attempted coup’

Rafael Correa, Ecuador’s leftwing president, fled for his safety on Thursday after declaring an attempted coup d’etat by the opposition, police and armed forces, the FT reports. “It is a coup attempt led by the opposition and certain sections of the armed forces and police,” Mr Correa said before seeking refuge from rioting police officers in a Quito hospital. “ Whatever happens to me I want to express my love for my family and my homeland.” As Ricardo Patino, his foreign minister, pleaded with thousands of protesters in Quito’s central plaza to support the president who remained trapped in the hospital, Mr Correa said he was considering dissolving parliament and calling snap elections to restore order.

China frees three Japanese

China has released three of the four Japanese citizens arrested in the midst of a diplomatic standoff last week for allegedly entering a prohibited zone and videotaping military targets, the FT reports. Chinese state media said the three were released on Thursday morning after they admitted violating Chinese law and “showed regret for their mistake”. But the fourth Japanese national, identified as Sada Takahashi, is still being held under house arrest for further investigation into charges of illegally videotaping military targets. Japan’s foreign minister demanded the quick release of the remaining detainee. The four people, employees of Japanese construction company Fujita, were detained last week at the height of a fierce quarrel between Beijing and Tokyo over Japan’s detention of a Chinese fishing boat captain in disputed waters in the East China Sea.

Japan and S Korea report output drop

Industrial output in both Japan and South Korea declined last month, signalling that Asia’s rebound from the global downturn may be losing steam, reports the FT. The seasonally adjusted, month-on-month declines in part reflect slowing growth in exports for two of Asia’s most advanced economies due to tepid western demand as well as the tapering off of domestic stimulus measures but Tokyo and Seoul also face distinct challenges. Japan is struggling with stagnant domestic demand which prompted the government this week to begin planning a supplementary budget of up to $55bn while the Bank of Japan is thought to be considering adopting additional easing measures when it meets next week. In Seoul, by contrast, the finance ministry is confident in the Korean economic recovery and the Bank of Korea is seen as potentially raising rates as early as October to curb rising inflationary pressure.

China hits back at US action on renminbi

Beijing has hit back at the bill passed by the US House of Representatives that would punish China for the alleged undervaluation of the renminbi, saying it violates global trading rules and could damage relations between the two countries, reports the FT. The House voted 348-79 on Wednesday to approve the bill, heightening the already tense bilateral ties. The legislation would allow the US to use estimates of currency undervaluation to calculate countervailing duties on imports from China and other countries.  China’s reaction was relatively restrained, in part reflecting the obstacles the bill faces before it can become law, although Chinese officials made it clear there would be repercussions if the measure was approved. Yao Jian, a commerce ministry spokesman, said China’s trade surplus with the US was not the result of its currency.

IMF warns on spending cuts

Moves by governments to slash spending to reduce debt burdens will have unusually damaging effects on growth because of the weak global economy, according to IMF research, the FT reports. Excerpts from the IMF’s twice-yearly economic outlook, to be published in full ahead of next week’s annual IMF-World Bank meetings, argue that some studies have underestimated the contractionary effects of rapid cuts in government spending. The IMF takes aim at the conclusion in these studies that fiscal consolidation can boost economic growth.

Democrats regain hope of keeping Senate

Democrats are beginning to grasp at small straws of hope that the 2010 midterm polls will not prove a “wave election” after all, with a growing number of Senate races putting the upper chamber at least beyond the Republican party’s reach, the FT reports. The evidence is patchy and electoral analysts still predict that the Republicans are likely to take control next month of the House of Representatives, where, unlike in the Senate, only a simple majority is needed to push legislation through. But there is evidence that a number of Senate races that had previously been seen as leaning towards the Republicans – including in California, Washington state and Delaware, where the Republicans last month nominated Christine O’Donnell, a Tea Party icon – are now moving beyond the opposition’s reach. In addition, a poll this week showed that Harry Reid, the Senate majority leader, may be pushing ahead of Sharron Angle, his Tea Party opponent, in Nevada. Taken together it means the Democrats will probably retain control of the Senate, where they have 59 of the 100 seats.

US data dispel early eurozone caution as gold hits $1,315

The eurozone’s debt crisis was the focus of early attention after Dublin gave details of its bail-out of Anglo Irish Bank and Moody’s downgraded Spain’s credit rating, the FT reports. However, traders’ initial caution gave way to a perverse kind of optimism following better-than-expected reports on US unemployment claims and business activity in the Midwest. The S&P 500 index fell 0.3 per cent – which was in some corners greeted as a sign that ‘good news is bad news’. An improving US economy means the Federal Reserve will not have to pump liquidity into the economy, which would mean a flood of money is not coming into risky assets. Of course, there were mitigating factors, such as rising tensions between China and the US, following US lawmakers’ vote to get tougher on China’s currency revaluation. The renminbi, in a move some saw as political, eased from its highest level since China in July allowed the currency to float in a wider daily band.

AIG exit plan set to deliver a profit

The US government took a major step towards ending two years of taxpayers’ assistance to AIG, clinching a deal that could enable the US Treasury to sell its huge stake in the insurer at a profit, reports the FT. The move sent AIG shares higher on Thursday amid investors’ hopes that the company will re-emerge as a standalone entity after 24 months as a ward of the state. It boosted the government’s chances of recovering for taxpayers the unprecedented amount of aid doled out to the corporate sector during the crisis. Tim Geithner, US Treasury secretary, said the plan would substantially speed up AIG’s repayment of the $182bn it received during the crisis.

Cost of Irish bank bail-out put at €50bn

The total cost of Ireland’s banking crisis could rise as high as €50bn as the central bank on Thursday announced additional capital injections for both Anglo Irish Bank and two other institutions, the FT reports. The moves will lift this year’s budget deficit to a record 32 per cent of gross domestic product, ten times the European Union guidelines for eurozone members. Brian Lenihan, finance minister, told a Dublin press conference the bank bail outs would “bring closure and finality to the banking problems in Ireland”. But he acknowledged as a result of the bank rescue costs the December budget plans for 2011 “will require to be upped and will require significant adjustment.” The fiscal cost of the bank recapitalisations – the amount which will have to be borrowed – was put at €34bn by Mr Lenihan.

Previewing the ISM report

Will there be a another expectations-beating ISM report in the US on Friday?

The August PMI report was surprisingly healthy, though it also followed two months of declines and was almost exactly at the median and mean of the prior twelve months. And the welcome increase in its employment component was obscured by that same day’s ADP report, which indicated that manufacturing jobs had contracted in the month. Read more

SEC charges State Street employees

The SEC has charged two employees of State Street with misleading investors over their subprime exposure.

According to the SEC order, John Flannery and James Hopkins marketed a fund that was mostly invested in RMBS as an alternative to a money market fund. Read more

The biggest hedge funds in the US…

Out from AR magazine just moments ago is their annual ranking of the biggest hedge fund managers in the US. Unsurprisingly, Bridgewater is still number one. Surprisingly, it has increased its lead by a significant margin.

The firm now manages a titanic $50.9bn according to AR. Its nearest rival is JP Morgan – the bank – which manages around $41.1bn in hedge funds connected to its Highbridge business. Read more

So why is Ireland taking a break from selling bonds?

And now for some more on Ireland’s missing bond sales.

To be sure, it’s not every day that a government puts a final price tag on bailing out its banks (and hence potential liabilities) — and then cancels a pair of bond auctions that might help towards financing those liabilities. Read more

Analysts know how (if not when) to hold’em

Analysts, as we’ve noted, tend to be an optimistic bunch — except in the aftermath of recessions, when they tend to overcompensate.

But their bearishness, when it finally does arrive, doesn’t always translate into the expected “sell” ratings for companies. Read more

Better Paid

Typical. You can clear out staff, send in a new chief executive and make a massive shift to safer operations — but in the end, floating the possibility that you’ll restore the dividend is what really moves you up in the market:

Strange meddling

There’s something odd in this Wall Street Journal article about Tim Geithner’s meddling in the affairs of the independent regulators.

Not the infighting and turf wars within the Financial Stability Oversight Council — that was bound to happen sooner or later. Rather, it’s the specific issue in which Treasury apparently decided to involve itself that is peculiar. Read more

Tepco and ‘unusual price movements’ in Japan

Question: why would a stable, big Japanese company with huge cashflow, a high credit rating, a dividend yield on its shares of 2.9 per cent and ready access to debt markets — where its bonds trade at yields of under 0.5 per cent — want to launch a straight equity issue of Y555bn, or $6.65bn?

Indeed, many investors and analysts asked the same question after Tokyo Electric Power, or Tepco, Japan’s biggest utility company, announced plans for the monster share issue — the first such issue in nearly 30 years. The lead underwriter for the issue is Nomura, Japan’s biggest broker. Read more

Markets Live transcript 30 Sep 2010

Live markets commentary from 

Yes, the yen is up – or the dollar is down

We know this is getting repetitive, but well, yes, the yen — was back on the rise, or rather, the dollar was showing renewed weakness on Thursday as the Japanese currency headed for its highest level since Tokyo’s September 15 intervention in currency markets.

This despite growing speculation that Tokyo may be preparing to intervene again in currency markets, after its mid-September intervention initially succeeded in bringing the yen down from Y82.88 to Y85.87. This morning it’s back at Y83.80 to the USD. Read more

UK Treasury to probe high-frequency trading

The UK Treasury has commissioned a study into the practice in markets of ultra-fast automated trading because of concerns that a computer-generated error could have “significant impact” on the economy, reports the FT. The move is a sign of rising concern about the rapid growth of computer algorithms and so-called “high-frequency trading”, which allows traders to buy and sell shares, derivatives and foreign exchange in fractions of a second. The practice now accounts for up to 60 per cent of US equity markets, while the London Stock Exchange estimates that more than a quarter of its trades are driven by high-frequency trading. But it has generated controversy in the wake of the “flash crash” in the US on May 6, when the Dow Jones index plunged 1,000 points in 20 minutes before recovering.

Moody’s cuts Spain’s credit rating over growth fears

Moody’s, the credit rating agency, downgraded Spain’s government bonds on Thursday, citing weak economic growth, a deterioration of financial strength and higher borrowing needs, reports the FT. The downgrade by Moody’s by one notch from its top rating of AAA to Aa1 makes it the last of the three big rating agencies to downgrade Spain as a result of the global economic crisis. The downgrade, which was also applied to Spain’s Fund for Orderly Bank Restructuring, known as Frob from its Spanish initials, comes with a stable outlook. “Over the next few years, the Spanish economy is likely to grow by only about 1 per cent on average,” Kathrin Muehlbronner, a Moody’s vice-president and lead analyst for Spain, said in a statement issued by the agency.

Ireland unveils bank rescue package

Ireland will take a majority stake in its second-largest bank as part of a fresh multi-billion euro bail-out for the country’s lenders, prompting the government to redraft its budget plans, reports the FT. Allied Irish Bank, the country’s second-largest bank, will need €3bn in addition to the conversion of the government’s existing €3.5bn preference share investment, lifting the state’s stake in the lender to more than 90 per cent. The government also announced that the current chairman, Dan O’Connor, and acting managing director, Colm Doherty, are to step down. The cost of bailing-out Anglo Irish Bank is set to reach €34bn ($46bn) as the central bank on Thursday announced additional capital injections for the bank at the centre of Ireland’s disastrous property crash. For more see FT Alphaville.

The LTRO roll-over continues [updated]

Thursday’s European liquidity update is brought to you by the European Central Bank’s special six-day fine-tuning refinancing operation.

The op’s taking place, as we’ve noted before, to coincide with about €225bn worth of maturing Long-Term Refinancing Operations (LTROs). Read more

Euro pares losses after Dublin unveils bank rescue

The eurozone’s debt crisis was the focus of investor attention after Dublin gave details of its bailout of Anglo Irish bank and Moody’s downgraded Spain’s credit rating, the FT’s global market overview reports. The FTSE All-World equity index was down 0.1 per cent, following a poor performance in Asia as concerns about eurozone sovereign debt risk hurt financials in the region and a soft close on Wall Street encouraged end of quarter profit taking. Many major Asian exchanges were finished for the day by the time the statement on AIB was released. The reaction in Europe to Ireland’s central bank putting a €34bn tab on the cost of rescuing the beleaguered lender has been fairly phlegmatic, however.

Spanish stats — meddle or muddle?

A highly damaging — and deeply anonymous — piece of analysis started making the rounds on Wednesday, reports FT Alphaville. Sent from a specially-created Gmail account, with no named author(s), it explores “discrepancies” within published Spanish GDP figures. It questions Spain’s official GDP statistics for the period between 2007 and 2009, suggesting the national statistics office may have understated the country’s decline in growth by as much as 14.2 per cent. Read more

Ireland takes a break from the bond market

Ireland’s final estimate for its bailout of Anglo Irish — €29.3bn total gross cost, or €34.3bn in a stress scenario — is striking enough. So is confirmation that the government will take a majority stake in Allied Irish Banks.

Then again, Irish finance minister Brian Lenihan’s statement on these new bank capital needs really brought home the biggest implications of all — for the long-term position of Ireland’s debt. Read more

Moody’s strips Spain of its last AAA

Just breaking — some early morning sovereign stress for Spain.

Moody’s, the last major rating agency to rate Spain at triple-A, has downgraded the country to Aa1. Standard & Poor’s and Fitch already have it at the AA level. The Moody’s statement below: Read more

Further reading

Elsewhere on Thursday,

– Three Fed officials, three divergent viewsRead more

Pink picks

Comment, analysis and other offerings from Thursday’s FT,

John Gapper: Facebook is not a punk’s drama
Punk. Billionaire. Genius. That is the three-word description of Mark Zuckerberg, the founder of Facebook, in the film account of how he took a social networking site from a Harvard dormitory to a valuation of $30bn in seven years, writes the FT’s John Gapper. The Social Network, the Aaron Sorkin-scripted film that opened this week to critical acclaim, tells the story of how he fell out with the Winklevoss twins, two fellow students who believed he had stolen the idea for Facebook from them, and later squeezed out Eduardo Saverin, his co-founder. But it does pose a disturbing question about entrepreneurs. Must they be “punks” and “assholes”, as she calls him in the first scene, to succeed? Read more

Snap news

Breaking pre-market news on Thursday,

– Ireland puts maximum Anglo Irish bailout cost at €34.3bn — statementRead more