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It seems the doves are turning the market tide.*
Given the problems immediately facing debt markets and the Fed — S&P, debt ceiling, end of QE2 — you might have missed that the market’s implied probability for the Fed’s eventual move toward tightening has shifted considerably in just the last week or so. Read more
There’s been plenty of hurly-burly lately over forecasts of default rates in the municipal bond market.
But what of recovery amounts, should muni bonds default? Read more
The two biggest foreign holders of US Treasuries appear to be taking diverging views of Standard & Poor’s stark warning on the US debt rating. S&P on Monday cut its outlook on US debt – which maintains the top triple A rating – from “stable” to “negative” for the first time since it started rating the US 70 years ago. While Japan played down concerns about US creditworthiness after the decision, China’s foreign ministry on Tuesday urged Washington to protect investors in its debt. “We hope the US government will take responsible policies and measures to safeguard investors’ interests,” it said. The Chinese government has repeatedly called on Washington not intentionally to debase its currency and to protect the interests of foreign investors in its bonds. China’s foreign reserves increased by $197bn in the first quarter to $3,050bn, exceeding the symbolic $3,000bn mark for the first time. The reserves are the world’s largest by far and although their exact composition is regarded as a state secret, about two-thirds are believed to be invested in US dollar assets. According to US data, China held $1,154.1bn in US Treasuries at the end of February, making it the largest foreign holder of US debt ahead of Japan’s $890.3bn. The Federal Reserve is the largest overall holder of US Treasuries with $1,368bn on its books.
The initial shock from S&P’s warning on US debt has largely faded. Asian equity markets tumbled, but US and European shares rallied alongside the euro and US Treasuries, reports the FT. The FTSE All World equity index is up 0.6 per cent, held back by heavy losses in Japanese and Chinese stocks as the region got a chance to react to New York’s 1.1 per cent stumble overnight. The FTSE Asia Pacific index lost 1 per cent, falling for a third day. The S&P 500 on Wall Street rose 0.6 per cent, however, as well-received earnings rom Goldman Sachs and Johnson & Johnson cancel out a disappointing forecast from Texas Instruments and encourage traders to revert to the bullish tack. Sentiment is also being supported by a firmer than anticipated US housing starts report. Commodities – Brent crude’s 0.3 per cent decline aside – are recovering some of their recent losses and the reduction in risk aversion is seeing the dollar weaken and Bund yields give up a chunk of Monday’s big dip. US sovereign debt is seeing modest buying. The price of gold in spot markets in New York has neared $1,500 an ounce, with a few futures traders venturing to $1,500.50. But the spot price has not quite broken the psychological threshold, thus far topping out at $1,499.32. Riskier growth and commodity-linked currencies also bounced back, with the Brazilian real up 0.9 per cent versus the dollar. The Swedish krona and Norwegian krone were up 1.3 and 1.1 per cent, respectively, against the greenback.
Nasdaq OMX and IntercontinentalExchange have offered a $350m reverse break fee and lined up $3.8bn in committed bank financing as part of a fresh approach to buy NYSE Euronext, after the operator of the US exchange rebuffed their initial bid in favour of a merger with Deutsche Börse, reports the FT. The move highlights Nasdaq-ICE’s confidence, only weeks after unveiling their counter-bid, that their proposal stands a better chance of passing antitrust scrutiny faster than the German-US deal can overcome antitrust issues in Europe.
Strong revenues in Goldman Sachs’ newly created investments and lending arm saw the bank lift first-quarter net income above Wall Street’s expectations, reports the FT. Even with much of its business hit by regulatory and economic uncertainty, Goldman still made strong gains in the new unit, which houses stakes in companies such as Industrial and Commercial Bank of China as well as the loans it extends to clients. It was created earlier this year to make its financial reporting more transparent.
Singapore has made a bid to become the first overseas hub for trading renminbi, marking a new stage in the internationalisation of the Chinese currency, the FT reports. The Monetary Authority of Singapore said Beijing would soon appoint a Chinese bank to clear renminbi trades in the city state – a move that would enable Singaporean banks to directly access onshore renminbi rather than having to route transactions via Hong Kong or commercial banks on the mainland. “It’s a huge development,” said Mirza Baig, a Singapore-based currency strategist for Deutsche Bank. “Think of a clearing bank as a pipeline that flows between Singapore and mainland China. Singapore won’t need to go through Hong Kong any more.” Almost 7 per cent of China’s international trade was settled in renminbi in the first quarter of this year, up from almost zero two years ago, official data showed this week.
Jonathan Macey, a law professor at Yale University, has an op-ed in Tuesday’s WSJ arguing that the SEC’s definition of insider trading is too strict and at odds with Supreme Court precedent. (Hat tip Stacy Marie-Ishmael.)
Using the ongoing Galleon case as an example, Macey says there is an important distinction between Raj Rajaratnam allegedly bribing Rajiv Goel for tips on Clearwire and other allegations that “accuse Mr. Rajaratnam of simply talking to people and then trading”. Read more
Live markets commentary from FT.com
President Barack Obama’s job approval by Americans is down seven points to 47 per cent, according to a Washington Post-ABC News poll. The economic outlook has driven pessimism, with the highest percentage of respondents citing a worsening economy in two years. Fifty-seven per cent disapproved of the President’s handling of the economy, his highest negative rating on policy. President Obama nevertheless remains ahead of all Republican challengers. S&P’s negative outlook on US debt will steal the show this week despite voters’ economic malaise however, with the President taking his $4,000bn deficit reduction on the road, the FT says.
Attorneys for Raj Rajaratnam have rested their case in his insider trading trial, without calling the Galleon founder to the stand, the WSJ reports. Although people close to Rajaratnam said he had told them he would testify after his arrest, calling the main defendant is relatively rare given the risks from cross-examination. Prosecutors responded to the defence on Monday by playing a new recording of phone conversations between Rajaratnam and Danielle Chiesi, a former Bear Stearns hedge fund manager, in which the two discuss trading in Advanced Micro Devices. The prosecution alleges that Rajaratnam received insider tips about AMD.
The Federal Reserve will likely continue reinvesting maturing asset-backed securities into Treasuries even after ending QE2 on schedule in June, Bloomberg reports. Reinvesting to replace around $17bn of debt per month would keep the Fed’s balance sheet at the same size and retain some stimulus amid a fragile economic outlook. Analysts expect Fed chairman Ben Bernanke to discuss the reinvestment programme at his first press conference on April 27, but see few signals that it will be phased out before the end of the year. The Fed’s return to recycling ABS into Treasuries in August sparked investor fears of deflation. The Fed announced QE2 in November.
Treasury yields closed lower on the day Standard & Poors warned that it might cut the United States’ AAA rating, FT Alphaville says. That’s an indication of deflationary and liquidity trap effects in the market, as investors look to the impact on growth of deficit cutting, and also price in fewer supplies of future Treasuries for purposes of quality collateral. Other observers have different explanations. The bond market sees S&P’s action as a spur to budget discipline, Brad DeLong writes in the FT. Goldman’s Jan Hatzius argues that lower growth from austerity implies easier monetary policy, complicating Treasury yields even further, FT Alphaville adds.
Japan, the second-largest foreign holder of Treasuries, has said that US government debt remains an ‘attractive product’, despite S&P’s negative outlook, according to the FT. Japan held $890.3bn in US Treasuries at the end of February, compared to China’s $1,154bn, according to Bloomberg data. The country also accounted for almost two-thirds of Asian demand in the last year, as Japanese institutions sought higher returns than on domestic government debt. However, the move by Dagong, a Chinese rating agency, to downgrade the US AAA rating last year is looking weirdly prescient, Beyond Brics says.
Citigroup will sell a $12.7bn portfolio of subprime loans, MBS and corporate bonds in order to comply with bank capital rules on risk, reports the FT. The decision, revealed in the bank’s first-quarter results, led to Citi to take a $709m pre-tax charge but enables it to sell the assets into a recovering market for distressed debt and to prepare for Basel III’s phase-in of new risk-weightings for assets. Three-quarters of the portfolio has already been sold at prices above the levels at which Citi valued them on its balance sheet. The move offers a rare public look at bank efforts to shrink their balance sheets, with Barclays also having revealed plans to wind up Protium, a toxic asset portfolio supported by a Barclays loan.
Apple has filed a suit against Samsung Electronics alleging that the company’s Galaxy smartphones and tablets infringe patents on the iPhone and iPad, Bloomberg says. Samsung ‘slavishly’ copied Apple designs with earlier products less redolent of iPad features, the suit argues, according to Reuters. The suit pits the tablet market’s two largest competitors each other and marks a new stage in litigation over smartphones, says the FT. Apple’s relatively small portfolio of patents puts it at a disadvantage to rivals. The Samsung case is the first Apple has brought over ‘trade dress’ or product appearance. Its suit even covers the Nexus S phone, a Google Android product that has no Samsung software, Daring Fireball notes.