Posts from Thursday Jan 13 2011

Brisbane faces ‘postwar’ scale rebuild

The Australian state of Queensland is facing a reconstruction task of “postwar proportions”, Anna Bligh, the state’s premier, said as large parts of Brisbane remained under floodwaters, the FT reports. Levels in the Brisbane River, which runs through the state capital, peaked on Thursday almost a metre lower than had been predicted, but Ms Bligh said more than 20,000 homes and commercial properties had been inundated in what was the state’s worst natural disaster on record.

US and Japan focus alliance on N Korea and China

The US and Japan are seeking to overcome frictions over a controversial military base amid growing concerns about North Korea’s belligerence and China’s growing assertiveness, reports the FT. Visiting Tokyo, Robert Gates, US defence secretary, said recent actions by North Korea meant relations with Japan were more important than ever despite strains over a US base on Okinawa. Tokyo and Washington are also preoccupied by China’s growing military clout and assertiveness.

S Korea raises rates in inflation ‘war’

South Korea has unexpectedly lifted interest rates in part of what President Lee Myung-bak has called his all-out war” against inflation, the FT reports. Seoul is attacking inflation with the same gusto that characterised its successful measures to confront the economic downturn. South Korea’s central bank lifted the base rate by 25 basis points to 2.75 per cent, at the same time as the country revealed measures to control prices of foods and basic services. It will cut tariffs on fish imports, accelerate purchases of powdered milk, keep slaughterhouses working longer than normal and monitor the cost of pre-school education. The measures complement earlier plans almost to double the supply of 16 food staples and expand the remit of the Fair Trade Commission to combat price fixing.

Top US banks to reveal improved quarterly earnings

Big US banks are poised to report higher quarterly profits after the release of billions of dollars in reserves set aside for bad loans, the FT reports. The fourth-quarter earnings season for the industry, which kicks off with results from JPMorgan on Friday, is expected to show improving bottom lines from a year ago when many financial institutions were still grappling with mounting credit losses. Apart from the release of provisions for bad debts, loan balances increased during the last three months of 2010 after eight straight quarterly declines, according to Barclays Capital analysts.

Hawkish Trichet comments boost euro

The euro surged higher on Thursday, hitting a one-month high against the Swiss franc after Jean-Claude Trichet, president of the European Central Bank, warned of inflationary risks in the eurozone, the FT reports. Mr Trichet struck a hawkish tone after the central bank’s policy meeting – at which it left its main lending rate at 1 per cent – emphasising that the ECB was prepared to raise interest rates to keep prices stable. “Risks to the medium-term outlook for price developments are still broadly balanced, but could move to the upside,” he said. Mr Trichet said in the near-term, there was a risk that eurozone consumer price inflation could temporarily increase further after jumping to 2.2 per cent last month, above the ECB’s 2 per cent target.

China eases rules on renminbi

China took a further step towards increasing its currency’s global role, allowing domestic companies to move renminbi offshore for investment purposes, the FT reports. The shift came as the People’s Bank of China allowed the currency’s daily trading reference point to strengthen through the Rmb6.6 per dollar level for the first time on Thursday, a day after Tim Geithner, US Treasury secretary, reiterated concerns about China’s currency policy. The renminbi, which many of China’s trading partners believe is undervalued, will feature in discussions next week between Hu Jintao, Chinese president, and Barack Obama, his US counterpart, in Washington. Companies have been allowed to use the renminbi to settle international trade transactions since July 2009, under an initiative to reduce Beijing’s reliance on the US dollar. According to the PBoC, mainland companies can now use the renminbi to launch businesses overseas and fund acquisitions.

Muni-ETFs at the Vanguard

Sign-of-the-times news from the municipal bond world on Thursday (report from Reuters):

Vanguard Group canceled plans to open a line of tax-exempt bond exchange-traded funds as municipal bond prices tumbled and index tracking concerns hit competitors’ ETFs. Read more

Further further reading

For the commute home,

Merkel and Sarkozy, Europe’s odd couple. See also our caption competitionRead more

Caption competition! [we have a winner]

From the New York Times:

 Read more

Double or quits? The structural unemployment question

The cyclical vs structural debate raised a lot of heat and not a great deal of light during the summer. But in the last week or so wise minds have returned to the issue.

In a syndicated column, Raghuram Rajan cited research that ostensibly suggested the demise of housing-related jobs represents a structural break in the US labour market: Read more

Vox populi, vox stulti — US-China datapoint

FT Alphaville is not sure which set of Americans to worry about, as per these survey results from the Pew Research Center:

Either the 47 per cent who think China (GDP per capita in PPP terms in 2010: $7,517) is a bigger economic power than the United States (GDP, etcetera, $47,131)… Read more

Cashing out of De La Rue

Interesting developments in the De La Rue takeover saga.

From Thursday’s Daily TelegraphRead more

Sweet, squeezed euro nostalgia


Rates markets to Trichet — ‘OK, we’re reminded’. Read more

The acrid smell of burnt fingers…

… in the Spanish banking sector:

 Read more

Loan loss reservations, US bank earnings

Did you think US banks’ 2010 results would actually mean something?

Silly you. Don’t you know their earnings — like those from 2009 — will be skewed by falling loan loss provisions set aside to cover bad debt. Just look at their forecast impact on JPMorgan’s full-year earnings, expected to be a record $16.7bn. Read more

Changing China’s biggest bank account?

To tell the story of China’s biggest bank account it helps, perhaps, to start with a story about certain, smaller, Chinese bank deposits. So. Meet Zhang Meifang.

Ms Zhang is, or rather was, an official at the Jiangsu Province Finance Bureau. Read more

Markets Live transcript 13 Jan 2011

Live markets commentary from 

The graphic, gigantic, European bailout fund

An illustration by Citigroup, who reckon Europe’s Financial Stability Facility (EFSF) needs to be increased to at least €1,000bn to cover peripheral funding needs:

 Read more

Commerzbank’s complicated capital boost

Commerzbank mystery, solved.

 Read more

Portugal hasn’t escaped bailout yet

It’s all about the borrowing costs for Portugal, as it tries to avoid going to Europe for a sovereign debt bailout, the FT says. Following a successful auction of government bonds on Wednesday, some investors think that Portugal may well be able to go it alone after all. However, Portugal paid a yield of 6.71 per cent for its 10-year bonds, close to the 7 per cent level that many in the market see as the bailout threshold. Furthermore, Portugal’s central bank estimates the government will have to pay an average yield of 6.6 per cent on long-term debt this year and 6.2 per cent in 2012. Not least, the FT also reveals that banks in the country are also more reliant than ever on emergency funding from the European Central Bank. Portugal’s bailout story is far from over.

ITT break-up another blow for conglomerates

ITT, one of the pioneering conglomerates of the 1960s, plans to break itself up again following a previous demerger in 1995, the FT reports. Investors strongly welcomed the plan to split ITT into three separate firms focused on aerospace and defence, water management and industrial products, a move taken under the shadow of federal defence spending cuts. About half of ITT revenues had been drawn from the defence sector. There is a bigger — or smaller — story here, the WSJ adds: investors no longer trust executives to manage a series of businesses efficiently under one roof, and instead prefer to gain exposure to diversification by holding several different stocks. The age of the conglomerate behemoth — ITT was once a major hotels and car rental player as well — is long past.

Sale or spinout for MySpace

News Corp considers a spinout of MySpace as ‘the most logical route’ for ridding itself of the failing social network company, even as half of staff received their marching orders yesterday, Bloomberg reports. The plans were outlined by MySpace CEO at the staff meeting on Wednesday, and might involve News Corp helping to fund the spun-out business and the granting of stock to employees. A source familiar with matter has told Reuters that venture capital or private equity financing sources may be brought in to invest, altering MySpace’s current ownership structure.

Germany backs bigger Europe rescue fund

Germany is backing proposals to give new powers and lending capacity to the $577bn eurozone rescue fund, even if that means increasing its financial guarantees, people familiar with the issue in Berlin and Brussels have told the FT. Officials were not prepared to confirm precisely what additional tasks would be given to the rescue fund, but buying sovereign bonds in the secondary market and issuing short-term lines of credit to member states facing liquidity difficulties have both been proposed. Enlarging the fund has been controversial among eurozone countries like Germany — who are at pains to maintain its AAA-rated status and to avoid moral hazard over indebted sovereigns accessing the fund.

Eurozone semantics: yes, no, jein…

For a nation famed for precision and definitive positions, it might be almost reassuring to know that Germany has a word that combines “yes” (ja) and “no”, (nein) to mean, well, “yes-no”: jein.

But sometimes, you have to wonder… Read more

US China currency legislation off the boil, for now

Tim Geithner, the Treasury secretary, used a speech on Wednesday to insist that China must reduce unfair subsidies, stop the theft of intellectual property, liberalise investment — and let its currency appreciate, the FT says. The wider focus chimes with indications from Republican politicians that they will not not push pending legislation designed to punish China for undervaluing the renminbi. Instead, look for a more comprehensive China trade bill to appear in Congress soon, Reuters reports, noting that attacks focused on the Chinese currency are likely to remain subdued so long as the US economy keeps showing modest improvement.

Stocks and oil look to fresh post-crisis highs

The FTSE All-World equity index has hit its highest point since August 2008 as investors buy into optimistic projections for global growth and as worries about the eurozone sovereign debt crisis temporarily abate, reports the FT. Commodity shares have led the charge in Asian and European markets, with US-traded oil flirting with $92 a barrel. The CRB index — a basket of key commodities — is at a 26-month high. Falling crude inventories and cold snaps in the US Northeast have supported the oil price in recent days, says Reuters — and it appears that Opec oil producers have grown comfortable with the prospect of $100 a barrel, the FT adds.

AIG close to stock offering milestone

American International Group expects to close a major agreement with the government on Friday regarding the launch of a ‘re-IPO’ that will release it from federal ownership imposed during its 2008 bailout, the WSJ reports. AIG is preparing to pay down and terminate a $21bn credit reserve facility and issue warrants to private shareholders this week, ahead of converting preferred shares held by the Treasury into common stock. The move will create a $3.6bn charge for AIG this quarter. The insurer has also finalised the $2.16bn sale of a key Taiwanese asset ahead of Friday’s recapitalisation, the FT says. On Thursday the government will interview banks hoping to underwrite an expected $10bn secondary stock offering due in May, Reuters reports.

Adventures in Portuguese bond shorts

Short-selling specialist DataExplorers has an interesting update on borrowing interest in Portuguese government bonds — which rallied on Wednesday on the back of a closely-watched and relatively successful auction of €1.25bn worth of debt.

From a Wednesday research pieceRead more

Crop harvests presage global food shock

The world has moved a step closer to a food price shock after the US government surprised traders by cutting stock forecasts for key crops, sending corn and soyabean prices to their highest level in 30 months, according to the FT. Analysts warn that the latest revision to US and global stocks means there is no further room to allow for weather problems. Crops in Argentina and Brazil, to be harvested soon, look fragile due to dryness. Stocks-to-demand for US corn have fallen to a 15-year low, while domestic stocks-to-demand for soybeans are at their lowest in half a century. The rise in prices has aided agribusiness, with Cargill reporting a tripling of profits in its latest trading update, the WSJ reports.

Further reading

Elsewhere on Thursday,

– So, are London’s bankers paid too much? Read more