Posts from Monday Feb 21 2011

Mideast tensions weigh on sentiment

Increasing political turmoil in the Middle East and North Africa was growling in the ear of investors, pushing oil and gold prices sharply higher and nudging risk assets down from cyclical highs, reports the FT’s global market overview. Selling in Europe accelerated after Americans awoke to newscasts describing the increasingly precarious situation in Libya. Italian equities, with their heavy exposure to their southern Mediterranean neighbour, were particularly badly hit. Wall Street was shut for Presidents’ Day, but S&P 500 futures were trading electronically and were off 0.9 per cent from the 32-month peak hit on Friday. This relatively meagre reaction suggests that, though wary, traders remained fairly phlegmatic regarding the conflagration in the Middle East – with most betting that it will not derail the recovery for the global economy and thus the strong rally in stocks and commodities over the past several months. However, the reaction of the oil price on Monday, with Brent crude up 2.4 per cent to a two-and-a-half year high of $105.21, clearly points to raised concerns that the violence in Libya, a leading producer, could crimp supplies. The FTSE All World index was down 0.3 per cent, the dollar was seeing some haven buying and gold rediscovered its geopolitical correlation and was again trading above $1,400 an ounce.

Eurozone inflation pressures build

Eurozone inflation pressures have seen the biggest jump in almost a decade as record German manufacturing growth and soaring business confidence power an economic rebound across the region, according to closely-watched surveys, reports the FT. Prices charged by eurozone companies rose this month at the fastest rate since July 2008, according to purchasing managers’ indices. The acceleration in output price pressures was the biggest since the series started in 2002.

News Corp adds Shine to the family

Rupert Murdoch’s News Corp announced on Monday that it was buying his daughter Elisabeth’s television production company – Shine Group – for £415m ($673m) including debt, reports the FT. Ms Murdoch, 42, will take a seat on the board of News Corp for the first time since 2001. At that time, she fell out with the management of British Sky Broadcasting, which is part-owned by the US media group and where she was a senior executive, and left to found Shine. BSkyB – of which News Corp is trying to buy the 60.9 per cent it does not own – has 13 per cent of Shine shares, Sony Entertainment has 20 per cent, Ms Murdoch 53 per cent and the rest is divided among management.

Stokes launches $4bn Australia media merger

West Australian Newspapers has agreed to buy Seven Media Group in a deal valued at A$4.1bn (US$4.2bn) including debt, creating one of Australia’s top media groups with interests spanning television, print media and internet platforms, reports the FT. The deal, announced on Monday, is led by Kerry Stokes, the billionaire chairman of West Australian Newspapers, whose Seven Group Holdings already owns a 45 per cent stake in Seven Media. Kohlberg Kravis Roberts, the US private equity group, also owns 45 per cent in Seven Media.

CIC and Blackstone team up in Japan

China Investment Corp, the country’s main sovereign wealth fund, has teamed up with Blackstone to buy a Japanese property loan portfolio from Morgan Stanley at a steep discount to its face value of $1.1bn, according to sources familiar with the matter, reports the FT. The deal, which was agreed last year, represents a change in style for CIC as the fund grows more sophisticated. CIC and Blackstone paid about 35 cents on the dollar for the portfolio, which includes both current and non-performing loans, sources said. CIC put up most of the money, they added.

Alibaba chiefs go in wake of online frauds, the world’s largest online marketplace for trade between businesses, has replaced its chief executive after sales staff were found to have helped set up fraudulent online shopfronts, reports the FT. David Wei, chief executive, and Elvis Lee, chief operating officer, both resigned on Monday to take responsibility for the “systemic breakdown in our company’s culture of integrity”, Alibaba said. The company said an internal investigation found that more than 2,000 of its “China Gold Suppliers” – companies certified by Alibaba as legitimate, credible businesses – had engaged in fraud against buyers, and that about 100 field sales people had allowed the fraudsters to evade its verification measures.

Shutdown fears raise hopes for US budget

The tense budget standoff in Washington could open the door to a compromise between Republicans in the Senate and the White House that would allow both parties to avert a potentially disastrous shutdown of the government, reports the FT. Such a deal, which would likely entail some of the spending cuts proposed by Republicans in the House of Representatives, could represent a win for Barack Obama, president, and senior Republicans in the Congress, who are more wary of the political ramifications of a shutdown than their Tea Party-backed colleagues. The commonly held wisdom in Washington has been that Republicans have more to fear from a shutdown than their Democratic colleagues.

BP in $7.2bn deal with India’s Reliance

BP is to make a $7.2bn thrust into India by taking 30 per cent stakes in vast but difficult natural gas blocks controlled by Mukesh Ambani, the country’s richest tycoon, reports the FT. The deal with Reliance Industries, potentially worth up to $20bn and subject to government approval, comes on the heels of a $16bn share swap with Rosneft, the Russian state oil company, and marks the latest stage of BP’s recovery since last year’s Gulf of Mexico disaster.

Gaddafi’s rule appears increasingly fragile

Muammer Gaddafi’s four-decade grip on power in Libya appeared increasingly fragile on Monday after protests against his regime reached the capital, Tripoli, and the opposition claimed to have gained control of Benghazi, Libya’s second-largest city, reports the FT. The popular uprising against Colonel Gaddafi’s regime, initially centred in Benghazi and other eastern cities, swept across Libya. Clashes were reported in Tripoli, the capital, for a second day on Monday, with dozens of people reportedly killed. Exiled opposition figures and activists said they feared another violent crackdown from the regime as it sought to maintain control of the capital. The FT reports also that major international oil companies and their sub-contractors are evacuating staff from the country.

From Libya to Saudi Arabia

Definitely the strangest sovereign rating action we’ve seen in a while:

Fitch Ratings has downgraded Libya’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB’ from ‘BBB+’ and placed them both on Rating Watch Negative (RWN). The Short-term foreign currency IDR has also been downgraded to ‘F3’ from ‘F2’ and the Country Ceiling has been downgraded to ‘BBB’ from ‘BBB+’…

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Gaddafi exposure, via a SWF

Can political unrest bring down a sovereign wealth fund?

It might pay to ask the question on Monday for a number of companies who have the Libya Investment Authority on their holders lists. Read more

TBTF, Greek banks datapoints

Generally a poor outlook for the chances of a merger between National Bank of Greece and Alpha Bank on Monday, for quite a few reasons: an awkward history of past attempts, disputed valuation, plus …

… the small matter of both banks’ Greek government bond holdings. Read more

Markets Live transcript 21 Feb 2011

Live markets commentary from 

Exposure in Gaddafi’s Libya

As the Great Socialist People’s Libyan Arab Jamahiriya comes crashing down, despite regime attempts to butcher demonstrators — here’s a timely reminder on corporate exposure.

Much of it, as you’d expect, is concentrated in oil production. (Output at the country’s Nafoora oil field had stopped on Monday due to strikes, incidentally.) Read more

Huawei U-turn on US deal saves blushes

Huawei’s unexpected decision to capitulate to US demands to unwind a $2m patent deal has spared the Chinese telecommunications equipment maker from a potentially devastating judgment from President Barack Obama on the threat the company posed to US security, the FT says. Huawei revealed on Friday night that it would comply with the recommendations of a secretive US government panel that reviews foreign transactions, known as Cfius, and divest patents it acquired from 3Leaf last May. AFP reports that Huawei said it had changed its mind due to US lawmakers’ concerns over the security implications of the deal, accusing it of having links to the Chinese army and Taliban.

Diageo acquires Turkey’s Mey Icki for $2.1bn

Diageo said on Monday it has agreed to buy Turkish spirits company Mey Icki Sanayi Ve Ticaret for £1.3bn ($2.1bn)the Wall Street Journal reports, in a deal that would give the global drinks giant access to a vast distribution network in the fast-growing nation. The purchase, from investment firms TPG Capital and Actera, will be funded through existing cash resources and debt. It will be earnings per share accretive by approximately 1 per cent in the first year and profit positive in year five using a 13 per cent weighted average cost of capital, the WSJ notes. RTT adds that TPG had been considering an initial public offer for Mey Içki, according to reports..

Thousands protest Wisconsin’s union plan

Protesters on Sunday converged on Wisconsin’s state Capitol, Madison, for a sixth day of demonstrations over Governor Scott Walker’s plan to limit the union rights of the state’s public employees, the FT reports. The issue has made Wisconsin a lightning rod for progressives and conservatives, transforming the state’s normally sleepy capital into a national ideological battleground. However, Paul Krugman says what’s happening in Wisconsin isn’t about the state budget, but about power.

Gaddafi’s son warns of civil war danger

In the first comments by a member of the Libyan regime since security forces fired on thousands of mourners in Benghazi, the oil-rich nation’s second city, Seif al-Islam Gaddafi, the influential younger son of Muammer Gaddafi, blamed the crisis on a foreign “plot against Libya” and warned that if the violence continued the country would descend into civil war, the FT says. Bloomberg reports that violence has flared in Yemen, Djibouti and Bahrain as governments have sought to crack down on calls for reform. According to the Wall Street Journal thousands of protesters also took to the streets in Morocco on Sunday to demand changes to the nation’s constitution.

Middle East tensions weigh on sentiment

Increasing political turmoil in the Middle East and North Africa is growling in the ear of investors, pushing oil and gold prices higher and nudging risk assets down from cyclical highs, the FT reports in its rolling global markets overview. The US market is shut for Presidents’ Day, but S&P 500 futures are trading electronically and are down 0.1 per cent from the 32-month peak hit on Friday. Such a minimal reaction in US futures suggests traders remain phlegmatic regarding the conflagration in the Middle East – with most betting that it will not derail economic recovery and thus the strong rally in stocks and commodities over the past several months. However, the reaction of the oil price on Monday, with Brent crude up 1.2 per cent to $103.79, points to raised concerns that the violence in Libya, a leading producer, could crimp supplies.

Chinese steer clear of ‘Jasmine Revolution’

Online calls for a Middle East-inspired “Jasmine Revolution” in China attracted more police and journalists than would-be protesters on Sunday, the FT reportsThe Wall Street Journal says Chinese authorities nevertheless detained dozens of political activists after an anonymous online call for people to start a ‘Jasmine Revolution’ by protesting in 13 cities. Ahead of the planned protests, more than 100 activists across China were taken away by police, confined to their homes or went missing, according to the Information Center for Human Rights and Democracy. plans $500m initial offering plans to list in the US this year in a deal that could make the Chinese company one of the world’s first social networking sites the public can invest in, reports the FT. The company plans to raise about $500m in an offering managed by Deutsche Bank, Morgan Stanley and Credit Suisse, said people close to the situation. MarketWatch adds that Renren’s offering would also ride a wave of interest in potential internet IPOs, including local commerce site Groupon, and Facebook, which earned a $50bn valuation under a recent round of private capital fundraising with Goldman Sachs Group.

G20 strikes compromise on global imbalances

The world’s leading finance ministers and central bankers overcame Chinese objections at the weekend to strike a compromise deal meant as a first step towards tackling global economic imbalance, the FT says. France secured agreement at a Paris summit of the G20 group of countries on indicators that would be monitored to avert future economic crises. But China successfully blocked greater scrutiny of its massive foreign exchange reserves and the use of exchange rates as an indicator. FT Alphaville notes that Bank of England governor, Mervyn King, has outlined his own views on global imbalances.

Moody’s forecasts ‘distress’ for muni markets

Moody’s expects defaults and distress in the $3,000bn US municipal bond markets but does not anticipate a broad “crisis of confidence”, says the credit rating agency’s chief executive. “There may be additional defaults in the municipal sector. There certainly is going to be distress in the municipal sector,” said Raymond McDaniel, chairman and chief exec of Moody’s, in an interview with the FT. “But we differentiate that from a broad-based systemic problem.” Meanwhile, Investment News adds that financial advisers are concerned a report last week saying the SEC is investigating how muni bond funds price risk in their portfolios may cause investors to rush for the exits.

Fears remain for US federal shutdown

Senators from both leading parties expressed hope on Sunday that a budget deal could be reached by early March, but any details were lacking and fears remained that the US could face a 1990s-style shutdown of the federal government, the FT reports. On Saturday, the Republican-controlled House of Representatives voted to approve $61bn in spending cuts from a bill to fund the government for the rest of the fiscal year, which ends on September 30. But Democrats and Barack Obama’s administration are opposing the measures, on the grounds that such fiscal retrenchment could damage the US recovery. With the government funded only through March 4, the government could run out of money if lawmakers fail to act, but both sides have been urging compromise, Reuters adds.

From imbalances to imploding banks

Here’s a chart to ponder as regulators continue their forensics of the financial crisis:

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Waitrose vs Webvan

Advantage Delia at pixel time:

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CoCos at dawn

Moody’s on Monday:

For both securities, there is a persistent challenge for investors: how to determine the potential for loss when the triggers resulting in equity conversion are not transparent and allow for significant regulatory discretion. This same difficulty in predicting the loss associated with contingent capital securities is why we have decided not to rate such securities at this point in time. In addition, investors are taking equity risk with the upside limited to the return of principal at redemption or maturity.

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A problem for Portugal, charted

From Bank of America Merrill Lynch’s Thanos Vamvakidis (a former IMF economist) — a chart to kick off a week that looks like it might be heavy on eurozone newsflow:

Further reading

Elsewhere on Monday,

– Why Bahrain could trigger a new financial crisisRead more

Pink picks

Comment, analysis and offerings from Monday’s FT,

Clive Crook: In a flap over America’s deficit
Washington is quarrelling its way to a government shutdown, but not to a remedy for its fiscal problems, writes the FT’s US columnist. The reason is simple. Despite the noise and fuss, few politicians in Washington care that much about cutting public borrowing. They care about other things far more, and it might take another financial calamity to change their minds. They are working on that. Read more