For the commute home,
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In the sober world of debt investing, few products are racier than perpetual bonds. With no maturity date, they allow the issuing company to pay the money back any time it wants. And now, few sectors come with more danger signs than Chinese property, as Beijing clamps down on the market to curb soaring house prices, writes the FT. So many bond investors were stunned last week when Sino-Ocean Land, a Chinese property developer with no credit rating, raised $400m from a dollar-denominated perpetual bond at a coupon of 10.25 per cent. “It’s a risky industry and a risky structure,” says Guy Stear, Hong Kong-based credit analyst at Société Générale.
The presence of the Chinese military for the first time at top-level US-China talks “can reduce the dangerous risks of misunderstanding and miscalculation”, according to Hillary Clinton, secretary of state, reports the FT. The annual dialogue, which opened in Washington on Monday with about 20 ministerial-level officials from each country, includes a joint session with military officers and diplomats. Both the Obama and Bush administrations have tried to institutionalise greater dialogue with the People’s Liberation Army, but contacts have repeatedly been cut off by Chinese protests over such issues as US arms sales to Taiwan. With the growth of the Chinese navy and a gradual extension of its power beyond Taiwan into the Pacific and Indian oceans, US officials say the potential for both co-operation and clashes with the US is rising.
Japan has cleared a hurdle in its effort to rebuild damaged cooling systems at the crippled Fukushima nuclear station, after tests showed radiation levels at a newly unsealed reactor building were low enough for technicians to work inside, the FT reports. The radiation levels could help Tepco, which operates the plant, meet its goal of bringing three damaged reactors to a safe “cold shutdown” by the end of the year. Tepco has been battling to bring the situation under control at Fukushima Daiichi power plant, some 240km north of Tokyo, since Japan’s March 11 earthquake and tsunami disasters. The company previously said establishing a stable flow of coolant water through the reactors was crucial. Tepco said nine nuclear experts entered the No 1 reactor building on Monday for the first time since the crisis erupted.
Greece last week took the unusual step of appointing a high-profile public prosecutor, renowned for unmasking a deadly leftwing terrorist group 10 years ago, to lead a fresh crackdown on tax evasion, reports the FT. The choice of Ioannis Diotis to head the revamped financial police force signals a tough new approach, according to the finance ministry, which has tasked the new tax police chief with raising at least €15bn ($21.5bn) each year from tax dodgers over four years. But the move suggests to some analysts that hope has once again triumphed over experience. The revamp of Athens’ €110bn financial rescue package proposed at the weekend, barely a year after it was agreed, points to the country’s stubborn problems with implementing the bail-out conditions set by the European Union and the International Monetary Fund.
Investors are moving back into selective growth-focused assets as hopes for the US economy encourage buying of recently battered commodities, the FT reports. Copper and oil, the global industrial benchmarks that endured heavy selling last week after fears of slowing demand triggered wholesale dumping of previously rampant resources, are up 1.6 per cent to $4.03 a pound and 5.2 per cent to $102.25 a barrel, respectively. The switch in sentiment may partly be the result of bottom fishing after the Reuters-Jefferies CRB commodities basket fell 9 per cent in the previous five sessions. However, it is primarily because of relief at much stronger US jobs data than expected on Friday. This news went some way to countering recent evidence that the world’s biggest economy was faltering in the face of higher raw material prices and the tightening of monetary policy in many large developing nations. Peripheral woes The euro may have been in and out of positive territory during Monday’s session but investors were always extremely wary of eurozone peripheral debt. The cost of insuring Greek, Portuguese and Irish sovereign debt against default rose at the outset and are at or near record levels as investors expect Athens will have to restructure its bond payments. Greek CDS are up 131 basis points to 1,467bp, Portugal’s are higher by 26bp to 660bp and Ireland 29bp to 682bp. Bond spreads for the three nations relative to Bunds are also widening as Berlin’s debt attracts haven flows. Meanwhile, the generally more upbeat mood in the broader market is reducing the attraction of Treasuries, with 10-year yields up 1bp to 3.16 per cent. Stocks are more mixed on Monday, however. Asia was firmer in parts after it inherited the US jobs news: Hong Kong added 0.8 per cent, Shanghai rose 0.3 per cent and Sydney also gained 0.3 per cent as miners rebounded on firmer metals prices. The S&P 500 in New York is up 0.5 per cent, still more than 1 per cent below this month’s closing cyclical high of 1,360.
By David Gordon, Sean West and Helen Fessenden of Eurasia Group. The views expressed are strictly their own.
With all eyes on the Gang of Six, naïve hopes of a deficit deal are blossoming in Washington. The problem is that that likely deals are unlikely to be meaningful. Read more
If in the long run we’re all dead, in the short run we’re all disease-ridden invalids blinded by incandescent temptation, staggering around with little idea of what we’re doing.
Real Time Economics commented on Monday on the difference between the recent movements of onion vs corn prices:
While prices of many agricultural commodities have soared, farmers received just 7.49 cents for a pound of onions in April, down from 29.9 cents a year ago, in part due to a big harvest. Futures trading in onions — unlike other farm goods — is banned, which prevents the pungent bulb from being used as an investment vehicle.
After our smart-alecky writeup of the last quarterly economics blogger survey, the good people at the Kauffman Foundation asked FT Alphaville to participate in the Q1 2011 edition, and we obliged.
As Barry Ritholtz noted in the comments to our prior post, the survey has a limited sample and isn’t meant to represent the views of the economics blogosphere at large (which would be impossible, obviously) — but the roster of bloggers who do participate are a savvy bunch, and we were glad to be in their company. Read more
At this point, extra EU loans to Greece would be dead money, susceptible to debt haircuts pari passu with private creditors.
But if you’ve got to do a one-off fiscal transfer, and an entire currency union is at stake… Read more
Here’s something you might have missed during last week’s (UK) holiday.
Michael Cembalest has made a retraction. JPMorgan’s private banking chief investment officer (and reportedly the only JPM-er who refused to do business with Ponzi-schemer Bernard Madoff, according to Forbes) has a new view on the roots of the US subprime debacle. Read more
Fresh from S&P on Monday:
Standard & Poor’s Ratings Services today said that it has lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to ‘B’ and ‘C’, from ‘BB-‘ and ‘B’, respectively… Read more
If CSR, the maker of Bluetooth chips, was looking for an excuse to revise or (possibly) ditch its unpopular £418m all-share acquisition of Zoran, it has just been handed one.
Live markets commentary from FT.com
Or, losers in a Greek debt restructuring.
Some estimates courtesy of JPMorgan’s flows and liquidity team: Read more
Copper and oil, the global industrial benchmarks that endured heavy selling last week, were up 1.9 per cent and 3 per cent respectively in Asian and European trading, the FT reports. There is however little sign of conviction in trades, with investors either bottom-fishing in the shadow of last week’s collapse – or marking relief at Friday’s US jobs data. Goldman Sachs analysts are nevertheless optimistic that the magnitude of the rout leaves room for further price gains in the year’s second half, says Bloomberg, following its now notorious call for clients to underweight commodities last month.
Another day, another piece of gloomy data from the UK economy.
This time it’s real estate. Read more
Investors looking to profit from competing bids for NYSE Euronext are hesitant to build large positions until closer to a July shareholder vote on its agreed tie-up with Deutsche Börse, according to the FT. While NYSE’s board has twice rebuffed a rival offer by Nasdaq and ICE, the two intend to make a hostile offer. However, hedge funds that would normally be attracted to arbitrage the gap between the two offers have failed to show up. They cite the likelihood that Deutsche Börse may offer inducements to close the 11 per cent gap – as of Friday’s close – between the offers, in addition to uncertainty over how antitrust regulators will view the two deals.
A glut of foreclosed homes pushed house values down 3 per cent in 2011’s first quarter from the previous three months, their biggest decline since late 2008, according to the WSJ. Home values fell 1.1 per cent from February to March alone, marking 57 consecutive months of decline. Fannie Mae and Freddie Mac sold 94,000 foreclosed homes in the first quarter, 23 per cent more than the previous quarter. In addition to foreclosure effects, tax credits have also now worked their way out of the system and further revealed poor underlying demand. According to Zillow.com, almost a third of home-owners are underwater.
The price action in Greek government bonds on Monday morning:
The Securities and Exchange Commission is considering a proposal to move more trading on to exchanges from alternative venues such as “dark pools”, drawing sharp criticism from banks and many trading firms, reports the FT. The SEC said that a ‘trade at’ rule could force dark pool operators to improve on the displayed market price, after concerns that rising off-exchange volumes have made trading more expensive overall. Market-makers including Knight have attacked the proposal, arguing that it was ‘completely nuts’ for the SEC to penalise dark pools when exchanges were merging into monolithic trading venues.
Banks are renewing billions of dollars in letters of credit for municipal bonds, relieving fears that issuers would struggle to refinance without the credit guarantees, the WSJ reports. Eighty-five per cent of the $13.5bn in letters of credit expiring in the first quarter were renewed or replaced, according to a Moody’s report. However, a further $50bn is set to expire in the second and third quarters, and banks are less willing to lend in the long term, the FT says. The large amount of expiring letters of credit is tied to the 2008 collapse of the market for auction-rate securities issued by municipalities, which forced issuers to sell variable-rate debt backed by credit enhancements instead.
Apple is now the world’s most valuable brand, surpassing Google to reach an estimated value of more than $153bn, according to a global brands agency, says Reuters. According to Millward Brown’s BrandZ Top 100 rankings, Apple has increased its brand value by $137bn, or 859 per cent, since 2006, the FT says. That contrasts with Apple’s stock market capitalisation of $319.4bn, which is almost five times higher than in 2006. Google’s market capitalisation is $172.4bn. The other big upset of the rankings is Amazon’s edging out of Walmart as the most valuable retail brand, with its brand value rising 37 per cent despite a market capitalisation five times smaller than Walmart, says Advertising Age.
The world’s largest commodity hedge fund racked up losses of $400m from last week’s collapse in oil prices, the FT reports. London-based Clive Capital, which manages $5bn of client money, said it was down 8.9 per cent on the week, in a letter to clients. “The move in Brent represented about a 5 standard deviation move, while WTI was a 4 standard deviation move,” Clive added. Other commodity funds, including Astenbeck Capital, are thought to have experienced double-digit losses in their portfolios, according to investors. While there’s no single cause of oil’s fall last week, a series of stop-loss orders from computer trading turned a maelstrom of negative factors into a rout, says Reuters.