Posts from Wednesday Feb 23 2011

US inflation expectations push higher

The twin pressures of Middle East tension, which drove the price of US crude oil to $100 a barrel, and rising expectations of inflation hit risky assets hard for the second straight session, reports the FT’s global market overview. The FTSE All-World equity index was down 1 per cent, while concerns about supply disruption pushed US crude to $100 a barrel, and Brent crude well north of $110, as traders priced in production shut-downs in Libya. Inflation expectations were also rising sharply, with US five-year Treasury “breakeven” rates, or the spread between inflation-linked and straight notes, the highest since July 2008. Sterling was up 0.3 per cent to $1.6187 after the Bank of England’s minutes of its February monetary policy meeting showed more members than expected advocating a rise in interest rates. The S&P 500 on Wall Street was down 1 per cent, with sentiment damaged by fears the consumers and companies might be squeezed by rising prices. US traders were also watching a 10 per cent fall in Hewlett-Packard shares following the tech group’s disappointing results, and a weak report on US house prices. US 10-year yields hit a three-week low on Tuesday – dropping 13 basis points to 3.45 per cent – as investors sought “safety”. But on Wednesday a spot of profit-taking kicked in and the benchmark was flat at 3.46 per cent.

Wilmar under pressure as margins squeezed

Wilmar International, the world’s largest palm oil processor, reported a 30 per cent fall in net profit for the year to December as margins were squeezed by the fast-rising cost of raw materials combined with tight controls on prices for food oils in China, where much of its output is sold, reports the FT. The disappointing results compared with sharply improved numbers from Olam International, a rival Singapore agricultural producer and trader, which last week reported a 63.5 per cent increase in net profits to S$141.9m ($110.7m) for its first half to December.

Christchurch starts to rebuild from wreckage

Almost 200 frustrated people are bunking down on the floors of two large halls at Burnside high school, one of five refuge centres set up in Christ­church to cater for those displaced by the deadly earthquake, reports the FT. French and Japanese tourists who fled collapsing hotels rub shoulders with homeless local people. They all struggle for some private space amid the challenges of limited sanitation, distressed children and cold, wet weather.

Japan’s budget battle sets scene for 2011

With little more than a month before the end of this financial year, Japan’s preparations for the 2011 budget are turning into a Y92,412bn ($1,117bn) game of chicken, reports the FT. Opposition parties are threatening to block essential budget-related legislation unless the ruling Democratic party abandons benchmark policies, such as its generous child allowances, or calls an election. But Naoto Kan, the embattled prime minister, is standing firm in the hope that voter disapproval of his opponents’ brinkmanship will force them to give way

D Bank faces Seoul prop trading ban

South Korea has banned Deutsche Bank’s Seoul branch from proprietary trading on its own account for six months, ruling the German lender manipulated the Seoul stock market last year to profit from collapsing share prices, reports the FT. Seoul’s regulators on Wednesday said Deutsche Bank’s local securities unit would not be able to trade shares and derivatives on its own account from April. They also asked prosecutors to investigate five senior Deutsche Bank executives from Hong Kong, New York and Seoul saying the bank reaped Won45bn ($40m) in profit by exercising put options after it sold some Won2,400bn ($2.2bn) of shares on November 11.

Indian rally raises pressure on Singh

Pressure mounted on Manmohan Singh, India’s prime minister, as thousands of workers marched in the capital to protest against inflation, reports the FT. The opposition has been seeking to capitalise on the weakening position of Mr Singh, who is reeling from a spate of corruption scandals that threaten to undermine his reputation for integrity. His ability to manage the economy is also being called into question as India battles the highest inflation of any major Asian economy.

Libya shutdowns send oil soaring

Oil prices surged by more than $6 a barrel as violence in Libya knocked out at least half the country’s production, according to industry executives, reports the FT. Brent oil futures, the global pricing benchmark, jumped 5 per cent to more than $111 a barrel – a 2½-year peak, while Nymex West Texas Intermediate, the US benchmark, hit $100 a barrel for the first time since October 2008. “It is increasingly looking as if this is the real deal in terms of a supply shock,” said JBC Energy, a Vienna-based consultancy.

Saudi’s $36bn bid to beat unrest

King Abdullah of Saudi Arabia announced financial support measures, worth an estimated SR135bn ($36bn), in a bid to avert the kind of popular unrest that has toppled leaders across the region and is now closing in on Libya’s Muammer Gaddafi, reports the FT. The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed.

Further further reading

For the commute home or while urgently buying plane tickets,

– An interview with the Epicurean Dealmaker. Read more

Illinois pension bond sale – not a disaster

From the WSJ on Wednesday afternoon, provisional details of Illinois’ delayed $3.7bn pension bond sale:

Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said.

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Ireland LLC

Here’s an unexpected press release from the Irish Funds Industry Association:

Irish Funds Industry Continues Expansion

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Barbarians, back at the gate

KKR announced Wednesday that Q4 2011 net income rose 39 per cent to $714.6m from $515.3 m in Q4 2010. This nudged us into thinking back to 2007:

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Why you really can’t swap Libyan oil for Saudi

Apart from the prospect of $220 a barrel…

Much discussion on Wednesday of whether Opec could pump more oil from the Arabian peninsula to make up for Libya going offline — so we thought these pointers from Barclays Capital’s Amrita Sen might help: Read more

Nomura’s $220-a-barrel crisis oil call

Talk about an oil shock.

Nomura’s commodity analysts, led by Michael Lo, are calling for oil at $220 a barrel, if both Libya and Algeria were to stop oil production. Oil’s currently around $108. Read more

Citi sees free lunch in Greek basis (almost)

That would be free μεσημεριανό in Greek.

And it’s not our translation — Citigroup credit strategist Hans Lorenzen actually uses the word in his latest note. In it, Lorenzen recommends investors jump on the negative basis which currently exists between Greek bonds and CDS on those bonds. Read more

Diplomacy by US Treasuries

Here’s a year-old quote from the Inner Workings blog of the Asia Times:

Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee … There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

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Russia, the oil opportunist

From Nomura’s Jim McCormick, net exports of oil as a percentage of GDP for a range of emerging markets. No wonder Russia plans to sell that Eurobond on Thursday.

Markets Live transcript 23 Feb 2011

Live markets commentary from 

Boosting Saudi supply

Supply of government cash to hose down dissent, that is.

While many argue that Saudi Arabia and its oil reserves remain in little danger of being rocked by unrest, King Abdullah perhaps disagrees. Read more

Markets Live: Special edition

Save the date.

On Monday, February 28, Robin Freestone, the chief financial officer of our parent company Pearson, will be appearing on Markets LiveRead more

HCA planning $4.3bn offering

HCA, the US hospital group taken private in one of the largest leveraged buy-outs ever in 2006, is planning on raising as much as $4.3bn in an initial public offering next week, the FT says. It would be the largest US private equity-backed IPO ever, topping the recently completed Nielsen and Kinder Morgan IPOs. The company and its owners plan to sell 124m shares at a range of $27 to $30 a share, with an option to sell an additional 18m. The offering is set to price next Tuesday. NYT DealBook reports that after a tepid turnout in 2010, there has been a modest uptick in buyout-backed offerings this year.

Libya worries linger but selling slows

Selling of riskier assets is less frenetic than witnessed during the previous session, but the mood among investors remains extremely cautious as many erstwhile winning trades continue to be trimmed on worries about how the political turmoil in Libya and other nations in the region will play ou, the FT reports in its rolling global market overview. The FTSE All-World equity index is down 0.2 per cent, while concerns about supply disruption has pushed oil to fresh two-and-a-half year highs, but traders are now adopting a more selective strategy. Meanwhile, FT Alphaville adds that minutes from the Bank of England’s last Monetary Policy Committee showed three members voting for a rate rise, and sent sterling higher on Wednesday morning.

Nasdaq weighs its own NYSE bid

A week after a rival, New York Stock Exchange parent NYSE Euronext, announced a $10bn deal to combine with Deutsche Börse, Nasdaq has been scrambling to find a partner to survive the changing exchange landscape, the Wall Street Journal reports, citing people familiar. Nasdaq is assessing whether it can compete against Deutsche Börse to buy the NYSE. If it decides it can’t mount a strong rival bid, the New York company is looking to buy another exchange or sell itself to avoid marginalisation in the wake of the tie-up between the NYSE and its German suitors, the people said.

Libyan chaos threatens to spark oil crisis

Libya’s oil output has plunged by at least a fifth as foreign companies have shut down production, running the risk of turning the political crisis in the Middle East into an oil crisis, according to the FT. Oil prices surged on Tuesday after Eni of Italy and Repsol YPF of Spain, the largest oil producers in Libya, said they were shutting down output. Traders said two of the four oil ports in the country were also closed, and refineries have also been affected. Reuters adds that Brent crude futures are still rising in early trading on Wednesday, going up by $1 to $106.78 per barrel on growing fears that unrest in Libya could spread to other top oil producers in the region and cut output. ABC News says the average price of US gasoline is this week is $3.19 per gallon — the highest average February price since the government started keeping track in 1990.

Deutsche, Blackstone in CMBS revival

Deutsche Bank is orchestrating the first true UK property securitisation since the onset of the credit crunch in a sign of revival in the market, reports the FT. Property bonds for a deal involving US buyout group Blackstone are backed by loans to Chiswick Park in west London, one of the UK’s largest office parks, and the £300m securitisation is expected to come to the market by mid-year. Reuters adds that Europe’s commercial mortgage-backed securities (CMBS) market has been comatose for more than three years, and sources say the deal could be “attractive” to investors.

Move to cap sugar price volatility

The world’s largest sugar exchange and top traders are mulling “circuit breakers” to cap the recent surge in price volatility, the FT reports, citing people familiar with the discussions. The move comes as the sugar market has been suffering the largest one-day price swings in 30 years. The ICE Futures US exchange and the World Sugar Committee, an advisory group of top traders, are setting up a working group to agree on the new “circuit breakers”. The system, already in place in equity and other commodities markets, will interrupt trading when prices move beyond a certain limit.

Walmart hit by US sales decline

Walmart, the world’s largest retailer by sales, said on Tuesday that comparable sales at its US stores fell for the seventh consecutive quarter, despite predicting a turnround in sales declines at its largest and most profitable business, the FT says. The retailer said comparable sales – at stores open at least a year – fell by 1.8 per cent against the same period last year. Net sales in the US also fell by 0.5 per cent in the three months to the end of January, to $71.1bn. Walmart’s overall fourth-quarter earnings of $5.02bn, however, were boosted by continuing strong growth in its international business.

Chicago Fed casts doubt on tightening

The Federal Reserve should be in no hurry to tighten monetary policy despite better growth prospects, a leading Fed policymaker has told the FT. “While I’m very pleased at the improvements in the economy I think it’s going to continue to be a while before we’re safely past these conditions,” said Charles Evans, president of the Chicago Fed. Meanwhile, a new working paper from a group of Chinese and Swiss academics, published as a preprint, argues the Fed reacts to the stock market and follows it. For instance, when the stock market rallies, the Fed tends to progressively increase its rates as an attempt to calm down the ‘overheating engine’ and vice versa.

Georgia lender seeks counsel over sale

Synovus Financial, a Georgia-based lender with a market value of about $2bn, has sought advice from investment bankers on its strategic options, including a possible sale, the FT reports, citing people familiar with the matter. Synovus’s choices include issuing additional stock to raise capital, selling itself, or standing pat as it inches closer to breaking even, the people said. The company, hindered by its exposure to troubled construction loans in Florida and its home state, has struggled to return to profitability.

The third dissenter

The much-awaited February Bank of England minutes are out — and lo and behold — it looks like Monetary Policy Committee member Andrew Sentance was right.

They were more interesting than usual. Read more