Posts from Wednesday Jan 19 2011

Cyclical highs wave goodbye as Goldman disappoints

Disappointing results from Goldman Sachs have provided the excuse for a burst of profit taking on Wall Street and in Europe after stocks earlier in the session hit fresh cyclical highs, reports the FT’s global market overview. The FTSE All-World equity benchmark was down 0.4 per cent to 222.50. It had briefly touched 224.47, its best level since August 2008, after a strong performance in Asia where investors were still basing strategies on hopes for a strong US earnings season after robust numbers overnight from Apple and IBM. But disappointing earning results from Goldman Sachs and Citigroup led the US markets off their high on Thursday. The benchmark S&P 500 index was 1 per cent lower, its biggest one-day drop since November. Commodity prices also turned tail – despite a weaker dollar, which tends to provide support to the complex. Copper hit a record but is now lower, while oil has given up early gains. Materials groups have led the S&P 500 index lower. The sector is down 2 per cent. The dollar was weaker, breaking its negative correlation to risk appetite, with the dollar index down 0.7 per cent to 78.48, close to a nine-week low.

Yosano warns on Japan debt

Japan has hit a “critical point” where it risks losing investor confidence if politicians fail to agree on how to rein in the ballooning national debt, a cabinet minister has warned. “We face a dreadful dream that one day the long-term interest rate might rise,” Kaoru Yosano, the new minister for economic and fiscal policy, told the FT. “So we have to be very careful [to] ensure the credibility of our economy and the credibility of our government.” His stark comments highlight government determination to introduce a sweeping reform of the tax system that would include a hike in the 5% consumption tax.

Apple faces pollution storm in China

A group of 36 Chinese environmental groups has accused Apple of failing to address concerns over pollution and worker health issues in factories supplying components for its gadgets, reports the FT. In a report to be published on Thursday, the groups rank Apple last in a list of 29 multinational technology companies based on how each company dealt with inquiries about pollution and occupational health hazard incidents at factories in their supply chain.

Main Street banks outshine Goldman

The diverging fortunes of Main Street and Wall Street were highlighted as a trading slump hit Goldman Sachs’ fourth-quarter results, while Wells Fargo and US Bancorp benefited from the gradually healing fortunes of US consumers, reports the FT. Goldman surprised investors by reporting lower-than-expected revenues in the last three months of the year as a sharp fall in income from fixed income trading was only partially offset by a rise in investment banking activity. Shares in Goldman had fallen more than 2 per cent by early afternoon in New York on Wednesday after it reported fourth-quarter earnings per share of $3.79, down 54 per cent from a year ago but in line with analysts’ forecasts. Its $8.6bn in revenues for the quarter, however, fell shy of Wall Street expectations.

Vietnam set to shun major economic reforms

Vietnam looks set to continue on a path that favours rapid short-term growth and support for often uncompetitive state-owned enterprises over substantive economic reform, after the ruling Communist party’s eight-day national congress came to a close on Wednesday, reports the FT. The party selected Nguyen Phu Trong, chairman of the country’s increasingly vocal national assembly, as its next leader and re-appointed Nguyen Tan Dung, the prime minister, to the all-important politburo, signalling that he is likely to carry on for a second term.

India pushes for national microfinance rules

India’s central bank experts have called for a nationwide regulatory regime for microfinance institutions – including a cap of 10 per cent to 12 per cent on microlenders’ interest margins – to facilitate the extension of credit to poor borrowers while preventing exploitation, reports the FT. The proposals, which are likely to serve as the framework for new Reserve Bank of India rules for the sector, come as the microfinance industry struggles to survive an intense regulatory backlash prompted by mounting concern that overlending by aggressive, for-profit microlenders has created serious hardships for the very poor borrowers they claim to be trying to help.

Export orders worth $45bn signed

US and Chinese officials touted a $45bn package of export deals on Wednesday to coincide with the state visit of Hu Jintao, the Chinese president, but the largest contract was in fact a reiteration of a previously announced order, notes the FT. US companies have been critical of China in the past 12 months, pressing the administration of Barack Obama to toughen defence of their intellectual property rights and their ability to access lucrative Chinese government procurement contracts. To smooth the waters, the Chinese president met the chief executives of high- profile US companies on Wednesday such as Jeff Immelt of General Electric, Steve Ballmer of Microsoft and Lloyd Blankfein of Goldman Sachs. The export package includes a $19bn order for Boeing aircraft, 70 extra contracts involving 12 US states worth $25bn and a series of investment deals. Combined, the deals will support about 235,000 US jobs, the White House said.

Too big to fail, fail?

Those worried that Dodd-Frank was overly-cautious in tackling ‘Too Big To Fail’ issues are unlikely to be comforted by the concentration limits study released on Tuesday by the Financial Stability Oversight Council (FSOC).

Quick background — Dodd-Frank prohibited a financial company from merging with or acquiring another firm, if the result was a company with over 10 per cent of the “aggregate consolidated liabilities” of all firms. Read more

Obama and Hu struggle to make headway

The US and China squared off over a series of contentious diplomatic, economic and business disputes in a White House summit, in meetings that the two sides hope will stabilise fractious bilateral ties, reports the FT. At a press conference on Wednesday with Hu Jintao, China’s president, which was marred by translation problems, Barack Obama urged Beijing to end discrimination against US companies and respect human rights, including in Tibet. The US president lauded China’s rise, which he said was due to the “Chinese people” and the long-standing US military presence in Asia which had maintained stability. Mr Hu, in his first extended press conference in a western country, said Beijing wanted to work with the US on global issues but said ties should be based on “mutual respect”.

Further further reading

For the commute home, or your flight to Beijing,

– The case for businesses to demand the government discount for IPOs. Read more

2011 is the year of accounting ‘condorsement,’ Fitch says

This is meant to be the year of accounting convergence.

You’re probably already yawning by now — but wait! This is important. Read more

Oil shock 2.0, or, the benchmark wars

Concerns are mounting that $100 oil prices, if hit, could be enough to dislodge the precarious global recovery — thrusting the world economy back into recession, or even worse, into another global financial crisis.

But while that is certainly a legitimate worry, there may actually be another equally pressing one rearing its ugly head too. Read more

Reflections on the weirdo Greek debt plan

So would the weirdo Greek restructuring plan being previewed in German paper Die Zeit work?

Harvinder Sian, RBS’s rates strategist, reckons it might help, but utlimately something more radical would be needed. Read more

The Pomo flip

The Federal Reserve bought $7.72bn worth of US Treasuries on Wednesday, and specifically $675m of Cusip No. 912828PL8 and some $7bn of Cusip No. 912828PQ7.

Why do we bring it up? Read more

Weirdo Greek debt restructuring

To see one story on Wednesday about an imminent restructuring of Greek debt may be regarded a misfortune. To see two…

Via ReutersRead more

Capital ratios – for realsies

Who needs Basel III’s quantitative impact study? Standard & Poor’s on Wednesday published their own review into the capital positions of the world’s 75 biggest banks.

S&P’s risk-adjusted capital (RAC) positions are supposedly much closer to upcoming Basel III requirements than current regulatory capital needs under Basel II … Read more

Vallejo’s exit plan: cuts, more cuts and haircuts

Those who believe municipal or state bankruptcy is a clean and simple option may want to take a peek at the city of Vallejo’s proposal to exit court control of its finances. Details from Bloomberg on Wednesday:

The city would pay general unsecured creditors about 5 percent to 20 percent of their claims, according to court papers filed in U.S. Bankruptcy Court in Sacramento, California’s capital. The creditors, who include retirees and former employees, will be paid $6 million over two years, according to the filing.

 Read more

Please give generously…

… just £5 a day keeps an FT Alphaviller in coffee and sandwiches at Pret a Manger:

Mr Hu’s trip to Washington

Some thoughts from emerging market specialist, Ashmore…

… On Chinese president Hu Jintao’s visit to America: Read more

Old Lady conspiracy theories

It’s sometimes said that conspiracy theories are really a back-handed compliment to belief in the power of government. Because they can’t possibly be that incompetent, can they?

And so we turn to the Bank of England’s 2 per cent inflation target. Read more

Are rating agencies backing away from Re-Remics?

A £30bn re-Remic ratings “error” from S&P.

A tightening of re-Remic ratings standards from Fitch. Read more

Even more Spanish banking negativity

Lucky Spain.

Spanish banks’ funding via European Central Bank repo facilities dwindled late last year as the financials made use of a new (repo) agreement with LCH.ClearnetRead more

More on the widening WTI-Brent spread

Reuters is running an interesting story on Thursday that throws further light on the widening WTI-Brent spread, which when we last looked was at $6.42 a barrel.

The newswire claims oil trader Hetco has taken control of the first eight North Sea Forties crude oil cargoes loading in February and two Brent cargoes. Read more

Markets Live transcript 19 Jan 2011

Live markets commentary from 

Cargill agrees $24bn spin-off of Mosaic

Cargill, the largest privately held US company, has agreed to spin off its 64 per cent stake in fertiliser producer Mosaic in a $24.3bn deal that could satisfy a restive shareholder, the FT reports. The grain-trading-to-hedge funds Minnesota company has owned a majority of Mosaic since its 2004 creation. The announcement comes as rising global food demand and strained supplies have sent the price of fertiliser soaring. The 146-year-old Cargill is still controlled by about 80 members of the Cargill and MacMillan families. It said that the transaction would keep it privately held and satisfy the “diversification and distribution needs” of charities formed after the 2006 death of Margaret A Cargill, a shareholder and granddaughter of founder William Cargill. Her charitable trusts, which owned 17 per cent of the company, had been lobbying to sell the stake.

China’s bond purchasing games

Beyond the spotlight glaring on China’s leader Hu Jintao as he kicks off his US visit are some intriguing movements in Beijing’s foreign reserves management.

First, we had China’s pledge to buy eurozone bonds amid its recent charm offensive in Europe. Read more

Cost of Portuguese debt rises to unsustainable levels

Portugal’s cost of borrowing brushed close to euro-era highs on Tuesday as Germany resisted calls to bolster the eurozone’s bail-out fund for heavily indebted economies on the continent’s periphery, the FT reports. Portuguese bond yields jumped above 7 per cent – a level that Lisbon has admitted is unsustainable – after concerns rose that the eurozone crisis could worsen, following comments from Wolfgang Schäuble, the German finance minister. Mr Schäuble appeared to put the brakes on plans to increase the size and scope of the €440bn ($588bn) European financial stability facility, at the end of ministerial meetings in Brussels, saying “It cannot be that European solidarity just means that six countries carry solidarity and the others profit.” Mr Schäuble’s comments also hit other peripheral bond markets, with yields rising sharply in Greece and Ireland and a bond auction in Belgium.

Risk assets hit fresh cyclical high

Another day, another fresh cyclical high for many risk asset benchmarks as optimism over US corporate earnings and hopes for an easing of eurozone sovereign debt tensions bolstered the bulls, reports the FT. The FTSE All-World equity benchmark was up 0.4 per cent to its best level since August 2008. Commodity prices were higher, with copper hitting a record, and the dollar weaker as the “risk-on” trade was applied with gusto. US stock futures pointed to the S&P 500 opening up fractionally to a new 27-month peak just shy of 1,300, boosted by strong results from Apple and IBM after the closing bell on Tuesday. Meanwhile, the euro breached $1.35 for the first time since November as traders bet that last week’s “peripheral” bond auctions and international verbal support meant the eurozone sovereign debt contagion had been halted, thus removing a stain on the global recovery narrative that has delivered a startling rally since the autumn. The S&P 500 is up 24 per cent since September 1.

Eurozone bond syndication, for and against

Now here’s a twist in this year’s tale of eurozone sovereigns trying to refinance their large burdens of debt.

Belgium and Spain have been busy with syndicated sales of government debt (in both cases, 10-year benchmarks) this week. Syndication should be seen as a strong positive for both sovereigns right now, and it largely is, given that they get cheaper rates. Except, markets really seem to be really resenting ’em for using it. Read more

US pins hopes on Hu visit

The US and China will attempt to reset a relationship marred by a series of diplomatic and economic disputes during a visit to Washington by Hu Jintao, China’s president, billed as the most important bilateral summit in decades, the FT reports. The opening of the four-day state visit by Mr Hu was clouded on Tuesday by Taiwan’s conduct of crare missile tests, a reminder of Beijing’s perennial pressure on Washington to curtail arms sales to Taipei. The visit will mix lavish protocol for Mr Hu with what is likely to be a much tougher tone in private from an Obama administration that has steeled itself to take a more assertive line with Beijing.