New Zealand’s central bank sliced half a percentage point off its benchmark interest rate on Thursday in an effort to limit the short term economic impact of last month’s devastating earthquake in Christchurch, the FT reports. Economists said the cut to an “emergency low” of 2.5 per cent was twice as big as expected and designed to support the nation’s fragile economic recovery.
South Korea’s central bank has raised interest rates for the second time in three months as it battles to control rising inflation, the FT writes. The base rate was raised 25 basis points to 3 per cent. Inflation has ripped through the government target ceiling of 4 per cent to hit 4.5 per cent in February, soaring from 3.3 per cent in November. In recent weeks, South Korea has suffered a 20 per cent rise in the price of the staple Korean lunch. In central Seoul, the cost of a spicy cabbage stew or bean paste soup with rice has risen to Won6,000 ($5.37) from Won5,000. Nationwide food prices rose 21 per cent in February compared with a year earlier. Prices for fresh fruit rose 67 per cent. House prices grew at their fastest pace in almost three years and energy prices were up 17 per cent. Central banks in China, India, Brazil have raised interest rates recently amid higher inflation. Thailand’s central bank lifted its key rate on Wednesday by a quarter percentage point to 2.5 per cent.
The US trade deficit grew wider than expected in January, as record exports could not offset the effects of soaring oil prices and growing domestic demand, government figures showed on Thursday, the FT reports. The trade gap widened by 14.9 per cent to $46.3bn, up from a revised $40.3bn in December, according to the commerce department. Wall Street analysts had expected the deficit to grow to a more modest $41.5bn. Imports surged by 5.2 per cent to $214.1bn because of higher oil prices and greater domestic appetite for industrial supplies, cars and consumers goods. Oil accounted for about a fifth of the widening trade gap. The rise in imports outpaced that of exports from the US, which grew by 2.7 per cent to a record $167.7bn in January. The US exported more industrial materials, food and capital goods.
The equity market bull rally is starting its third year with a tantrum, the FT reports. The Wall Street‘s S&P 500 has dropped 1.7 per cent, and at one point fell below the 1,300 mark, after anxiety over the Middle East and concerns about slowing global growth clattered risk assets in Asian trading. Worse than expected US initial jobless claims have not helped sentiment. European bourses followed the trend. The FTSE 100 in London was lower by 1.6 per cent, with miners under severe pressure following further selling in industrial metals after Chinese trade data pointed to slower demand for some raw materials. The FTSE Eurofirst 300 index lost 1.1 per cent. To make matters worse, the festering eurozone fiscal crisis has again burst upon the scene with a downgrade of Spain’s credit rating by Moody’s to Aa2 with a negative outlook. This has caused the euro to drop 0.9 per cent to $1.38 and caused a flight into Bunds. The spread between the yields on Spanish bonds and Bunds has widened and Madrid’s Ibex index is down 1.4 per cent as the country’s banking stocks get hit. The FTSE All-World index is down 1.7 per cent, the dollar is once again attracting haven flows and US Treasuries are also seeing demand. Even investors’ erstwhile favourites like gold and silver are suffering from heavy selling as previously successful bets are cut back. Worries about growth and the eurozone are providing some benefit, however. Brent crude has come off its high and is down 0.5 per cent to $115.35 a barrel. The rest of the commodities complex is down 1.6 per cent, as measured by the Reuters-Jefferies CRB index. That is the sharpest one-day fall since November.
For the commute home, or while worrying about what Friday may bring,
– ‘What if the stock market was a bond?’ Read more
This will sound familiar.
The problem: FX-reserves-hoarding countries, often collectively referred to as “China” (though there are plenty others), bought USDs either to artificially hold down their currencies and boost exports or to defend against the kinds of outflow-driven busts that were prevalent in the late 1990s. They invested said USDs in US treasuries and agencies, which held down real interest rates in the US, which then led to the property BOOM. Read more
FT Alphaville recently checked out a presentation on emerging market debt by DB Advisors, the institutional asset management arm of Deutsche Bank.
We’re always a bit wary when we pop in to these buyside discussions — not that we don’t appreciate the information we pick up (and the free coffee), but there is invariably a heavy element of book-talking going on. Read more
You’re familiar with SWFs — and the damage they can cause in the wrong hands — but on Thursday Bloomberg carried news of what we’ll call a Sovereign Health Fund (SHF):
The Gulf Cooperation Council plans to set up a fund worth more than $10 billion, Kuwait’s foreign minister said, to help the rulers of Bahrain and Oman appease popular protest movements.
Before young whippersnappers like the EFSF waltzed in on the market for supranational financing, there were the multilateral development banks (MDBs).
You know the institutions we mean: the EIB, EBRD, IADB, ADB and others — most of which also, of course, bear the letters AAA. Read more
Parliamentary privilege is a wonderful thing.
John Hemmings MP asked this in the Commons on Thursday morning (via the Telegraph): Read more
A dozen banks. Including eight cajas. And €15.15bn.
From the Bank of Spain on Thursday: Read more
Now there’s a title, from a new BIS working paper, to catch one’s eye.
In it, the authors tackle the issue of information asymmetry in the securitisation process — or the basic idea that the holders or creators of a security might have better information about the investment than potential buyers. Read more
FT Alphaville suggested on Wednesday that Dodd-Frank is likely to be a bigger boon to the shadow banking system than — as others have suggested — to European banks.
We’re still getting our heads around the right approach toward shadow banking (and how best to define it) but a couple of insights from recent speeches on the topic caught our attention and may be of interest. Read more
By this point, the assets of the Libyan Investment Authority are frozen in just about every major financial jurisdiction. Except, of course, Libya.
So, a quick question. Is a sovereign wealth fund financing a war? Read more
On Wednesday, we drew attention to a Standard Chartered report which claimed that as much as 550kt of copper was stockpiled in bonded warehouses in Shanghai by late February — the majority of it being used as collateral for securing financing deals.
A clever inflation hedge, if you will. Read more
Live markets commentary from FT.com
Europe’s central bank is in a tight spot when it comes to rates and mortgages.
That much we know. Read more
Shares in TalkTalk Telecom Group, Britain’s second-biggest broadband provider, are sharply higher on Thursday morning.
Rex Tillerson, chief executive of ExxonMobil, has attacked Bob Dudley, his counterpart at BP, over his assessment of the lessons from the Deepwater Horizon disaster last year, says the FT. The cause of the accident was “a breakdown of management oversight of that well”, Mr Tillerson said, “and that breakdown of management oversight rests in the lap of one company, principally.” Tillerson’s comments reflect a division in the industry over how to respond to last year’s oil spill and the pressure for tighter controls on offshore drilling, ahead of a March 18 meeting to discuss regulator proposals to make the industry set up its own offshore standards body.
Renewed acceptance of a so-called covenant-lite loans “may be laying the groundwork for painful fallout from the next credit downturn,” Moody’s has warned, according to the FT. To the surprise of many observers, covenant-lite loans had a lower instance of default during the financial crisis than loans with traditional terms — likely because only stronger borrowers were able to borrow on cov-lites’ generous terms in the first place. New covenant-lite loans have soared this year as investors have poured money into low-rated, or leveraged, corporate loans as hedges to rising interest rates. However, Moody’s says, low rates themselves have masked the risks of cov-lite loans.
Libya’s main oil terminal was in flames through Wednesday night after Gaddafi loyalists bombed the complex, in an escalation that pushed Brent above $115 a barrel, the FT reports. The Es Sider terminal attack is the first against a critical oil facility, but Libyan officials played down the risk to supplies, saying it affected only a 200,000 barrels diesel storage facility rather than the much more significant 500,000 barrel crude oil facility nearby. Meanwhile, US intelligence officials say that Gaddafi has access to tens of billions of dollars in Libyan bank deposits to pay his troops, indicating he can sustain attacks on the rebels for a while yet, the NYT reports.
US bank use of debt to juice up returns in their trading books is almost twice that of the average hedge fund, according to a report from JPMorgan, says the FT. Hedge funds have been steadily reducing their leverage since 2008, the report found. In contrast, bank leverage has remained sharply elevated. The bank’s analysts estimated leverage using a proxy based on the higher volatility of trading returns versus the volatility of the underlying assets that were invested in. For banks, the ratio of these measures stood at 1.5, having peaked in the second quarter of last year at 2.2. For the average hedge fund it was just 0.7.
China posted its biggest trade deficit in seven years in February, at $7.3bn versus predictions of a $4.95bn surplus, Reuters says. The Lunar New Year holiday had been expected to sway data but the extent of the slowdown in Chinese trade took markets by surprise. The New Year effect is shown by January’s very strong surplus, as companies frontloaded trade before the holiday, notes FT Alphaville. Nevertheless, the data also reveal some pressures from commodity price increases in the last year, suggesting that without the boom in prices, China may have registered a surplus and not a small deficit during the first two months of 2011.
Federal prosecutors have said that their insider trading case against Raj Rajaratnam boiled down to his “greed and corruption”, reports the FT. “The defendant often knew tomorrow’s business news today,” said Jonathan Streeter, an assistant US attorney, who delivered the government’s opening salvo. John Dowd, an attorney for Mr Rajaratnam, responded, saying his client was merely conducting research on behalf of his clients. Arguing insider trading cases is difficult, and Rajaratnam’s prosecutors will need to keep jurors focused on the evidence throughout the case, notes the WSJ.
The markets are all a-flutter with news of China’s ‘shock’ trade deficit.
The People’s Republic posted a deficit of $7.3bn in February, its biggest in seven years, according to Reuters. Initial reaction was swift, with Asian stocks tumbling. Read more
A contentious measure restricting collective bargaining rights for many public sector workers has been pushed through the Wisconsin Senate late on Wednesday, ending a stalemate which has shut down the state legislature — for now, the FT reports. Senate Democrats fled the state in protest at the measure, leaving the vote without a quorum. Republicans eventually found a way around the impasse by stripping out financial sections from the bill and approving curbs on collective bargaining. Public opposition to the measure has grown in strength even as other states from Ohio to Kansas prepare similar laws to curb unions, Reuters says.
BNY Mellon’s Simon Derrick briefly mentioned the carry trade last week.
This Thursday, the currency strategist is back with more detail Read more
Moody’s has downgraded Spain’s sovereign credit rating to Aa2 from Aa1 with a negative outlook, citing fears that costs for recapitalising the country’s ailing savings banks will ‘considerably exceed’ Spanish government forecasts, reports FT Alphaville. The rating agency said that the costs were likely to total €40-50 billion, beyond its estimate of €17 billion in December, and the €20 billion prediction of Spanish officials. In a stressed scenario, the costs may rise to €120 billion, the agency added. The downgrade comes on the same day the Bank of Spain tells lenders how much capital they will need to raise, reports Bloomberg.
Canada’s banks are split on whether to support the proposed tie-up of the London and Toronto stock exchanges, the FT reports. Four of the country’s six biggest banks – Toronto-Dominion, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank – are working on a public statement expressing doubts about the deal, although Royal Bank of Canada and Bank of Montreal will support it. Several banks are shareholders in an alternative trading system that competes with the Toronto exchange, and may propose for it to be merged with TMX instead. In any case, the banks’ opposition shows that LSE-TMX is generating far more resistance than first thought.
It’s not quite as forceful as the Greek response — not yet anyway — but Spain has hit back at Thursday’s Moody’s downgrade.
Via Reuters: Read more