Posts from Tuesday May 24 2011

China faces worst drought in 50 years

Chinese authorities will step up the release of water from the Three Gorges Dam in a bid to tackle a drought in southern China which has put pressure on drinking water, crops, shipping lanes and electricity production in what is traditionally China’s most water-abundant region, the FT reports. The monsoon rains that usually flood southern China’s middle Yangtze river in spring did not come this year, and officials say rainfall in Hubei, Jiangxi, Anhui, Jiangsu and Zhejiang is at its lowest level in more than 50 years.

Markets stabilise but traders still cautious over eurozone

Buyers are tentatively returning to selected risk assets as some investors speculate that Monday’s sell-off on eurozone debt worries and global growth concerns was a bit excessive, reports the FT. The FTSE All-World equity index is up 0.3 per cent, most commodity prices are higher and “safer” vehicles such as the dollar are struggling to make headway. The FTSE Eurofirst 300 rose 0.2 per cent and Chinese stocks bounced back as miners and general industrials pick up the baton from fading defensive stocks. However, gains for growth-focused positions are muted and characterise the session more as one of stabilisation than rebound. The rally fractured late in the session, with the S&P 500 index slipping 0.1 per cent and Treasury bonds in demand, despite the weaker dollar and upswing in commodity prices. The factors that on Monday helped smack down the Reuters-Jefferies CRB commodity index by 1.4 per cent and the S&P 500 by 1.2 per cent, to a five-week low, are still lurking. The euro is up 0.4 per cent at $1.4102, just above a two-month trough, as the market continues to absorb the recent developments in the eurozone fiscal and sovereign debt mess. News that Greece is trying to move ahead with some privatisations may be helping a little bit to salve anxiety in that regard.

Moody’s restokes euro contagion fears

Moody’s, the US rating agency, warned on Tuesday that a Greek sovereign default would could spark contagion as it would have major implications for the eurozone, possibly leading to downgrades across the continent that would deepen the debt crisis, the FT writes. It said adverse credit rating implications would not be limited to Greece, but to other stressed European sovereigns, Greek banks and other financial institutions and corporates in the currency zone. The impact on Greek credit ratings would depend on the extent of the default, but would most likely cause the country’s credit rating to fall seven notches from B1 to Ca, or eight notches to C, although not to default. It added that the Greek banking sector would require recapitalising to offset banks’ losses on Greek government bonds, and continued liquidity support from the European Central Bank.

Kan targets structural issues after quake

Japan’s devastating earthquake and tsunami have created an opportunity to address structural problems which undermined the economy for two decades, according to Naoto Kan, Japan’s prime minister, reports the FT. In his first interview since the March 11 disaster, Mr Kan defended his handling of the resulting crisis at a crippled nuclear power plant and dismissed criticism that his government is moving too slowly to rebuild the battered north-east coast. The prime minister was speaking ahead of his departure for a series of G8 meetings and summits in Europe, where he will seek to reassure international leaders that Tokyo is on track to stabilise the Fukushima Daiichi plant.

Greek assets could go to ‘fund of experts’

European leaders are pushing to impose measures that would ensure the Greek government lives up to its promise to deliver €50bn ($70bn) in privatisation proceeds, amid scepticism that Athens can carry out the sell-offs, the FT reports. The privatisation plan, spelt out in detail for the first time by the Greek government on Monday, has become a central issue in Europe-wide deliberations over how to overhaul Greece’s faltering €110bn bail-out programme.

Further further reading

For the commute home,

– Why cities keep growing while companies eventually die (HT Stacy-Marie Ishmael). Read more

What do you mean, CCPs might be thinly capitalised?

Via Bloomberg (H/T Chris Whittall):

Lawmakers in the [European] Parliament voted that clearinghouses should have to hold capital of at least 10 million euros ($14.1 million) to absorb possible losses…

 Read more

A journey round Alpha Bank’s ECB collateral

Stunning disclosures on sovereign exposure and ECB collateral from Alpha Bank, one of Greece’s bigger lenders, on Tuesday. This is rare detail on the real pressure points that are arising from a Greek debt restructuring.

The disclosures are found within Alpha’s first-quarter results — in particular this investor presentationRead more

Swaptions on sovereigns? A snapshot [updated]

We know that trading in CDS index options is getting bigger and bigger. Investors want to bet on volatility of protection levels on credits, not just the protection itself. It’s a logical evolution.

How big on a particular day though? Read more

The UK is concerned about banks that warehouse commodities

Yikes. This is hot off the wire on Tuesday:


An insight into the real business of ETF trading

We’ve already written about how city veteran Terry Smith of the Fundsmith Equity Fund doesn’t like ETFs and why he’s worried about the extent to which they are shorted.

But what’s really interesting about his Tuesday blog post entitled ‘ETFs – worse than I thought’ is this enlightening snippet he’s come across — thanks largely to who he is — about how the funds are really utilised and traded by the ‘smart side’ of the financial industry. Read more

What lies in Greek bank subsidiaries

We all remember the Vienna Initiative, right?

European banks promised to capitalise subsidiaries in emerging Europe in 2009. Governments didn’t collapse from bank runs. It turned out, in general, not bad at keeping some rubbish balance sheets ticking over. Read more

Terry Smith doesn’t like ETFs

Uh oh.

Terry Smith, City veteran, pugnacious former director of Collins Stewart and manager of the Fundsmith Equity Fund, has turned a critical eye onto one of our favourite subjects — exchange traded funds. Read more

Markets Live transcript 24 May 2011

Live markets commentary from 

You’ve been Dagonged — UK edition

BEIJING, May 24 (Xinhua) — China’s first domestic rating agency, Dagong Global Credit Rating Co. Ltd., on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the United Kingdom by one level to A+ from previous AA- with “negative” outlook.

The Chinese rating agency said the downgrade reflected the UK’s deteriorating debt repayment capability. Read more

Obama flies in to consult ‘essential’ US ally

Barack Obama flew into London on Monday night at the start of a state visit to Britain intended to demonstrate that the UK-US axis is “an essential relationship” for both countries and for the whole world, the FT reports. The grandiose aspirations for the visit will be echoed in the lavish royal reception being laid on for the US president and his wife Michelle at the start of their two-day visit to London. On Tuesday, the couple will receive a ceremonial welcome, gun salutes, a guard of honour and state banquet. Political talks and a presidential address to both houses of parliament follow on Wednesday. David Cameron hopes to be able to show that he and Mr Obama are aligned on the need for tough action on budget deficits, a political weapon he is likely to deploy against a Labour party with historic links to the US Democrats.

SEC probes forex practices of custodian banks

Federal securities regulators are taking a deeper look at the role of big banks in executing currency trades for clients, reports the Wall Street Journal. The paper has previously focused on the extent to which Bank of New York Mellon charged client non-preferential rates. The Securities and Exchange Commission is now said to be examining whether two major banks made proper representations to pension-fund clients about how their currency trades would be handled and priced. The issue in particular surrounds “custody” banks—which handle securities and back-office tasks for institutional investors— which are overcharging public pension funds for trading in the $4,00bn-a-day foreign-exchange market.

Treasury set to make small profit in sale of AIG stock

American International Group and its largest investor, the US Treasury, are poised to raise at least $8.7bn through a sale of stock on Tuesday, handing the federal government a small profit on the deal, people familiar with the matter said. The FT reports that AIG and the Treasury plan to issue the shares at $29-$29.30 each on Tuesday. The offering attracted enough demand to meet Treasury’s goal of selling 300m shares. As of late Monday, officials had ruled against selling more, they said. The price range would ensure that the Treasury will make money on its first attempt to shed some of the AIG holdings it inherited during the financial crisis. The government, whose $180bn bail-out left it with a 92 per cent stake, needs to sell each share for at least $28.73 to break even on the bail-out. “If the government wants to do the next tranche quickly, they need to place and price it right,” said Scott Sweet, senior managing partner of IPO Boutique, an investor advisory firm.

More banks targeted in New York probe

The New York state attorney-general’s probe into mortgage practices at large banks has expanded to include Royal Bank of Scotland, UBS, JPMorgan Chase and Deutsche Bank, bringing the number of banks under scrutiny to seven, people familiar with the matter say, the FT reports. Eric Schneiderman, the state’s top lawyer, has sought informal meetings with executives from the four banks as part of the office’s investigation into the securitisation and marketing of mortgage securities, these people say. The meetings are expected to take place over the next few weeks. Previously the state investigators had requested meetings with Morgan Stanley, Goldman Sachs and Bank of America. Morgan Stanley executives visited the attorney-general’s office last week, and other meetings are under way, people familiar with the matter said. Mr Schneiderman succeeded Andrew Cuomo as the state’s attorney-general this year. His probe into mortgage practices is separate from the effort by 50 state attorneys-general to try to negotiate settlements with banks over their foreclosure practices.

Markets stabilise but traders still cautious over eurozone

Buyers were tentatively returning to selected risk assets as some investors speculated that Monday’s sell-off on eurozone debt worries and global growth concerns was a tad excessive, the FT reports. The FTSE All-World equity index was up 0.3 per cent, most commodity prices were higher and “safer” vehicles such as Treasuries, the dollar and the Swiss franc were struggling to make any headway. Wall Street stock futures pointed to a 0.3 per cent advance at the open, while assets with a high risk-positive correlation, such as the Australian dollar, were in demand. The FTSE Eurofirst 300 was higher by 0.3 per cent as miners and general industrials picked up the baton from fading defensive stocks. Gains for growth-focused positions were muted, however, characterising the early session more as one of stabilisation than rebound. This was because the factors that on Monday helped smack down the Reuters-Jefferies CRB commodity index by 1.4 per cent and the S&P 500 by 1.2 per cent, to a five-week low, were still lurking.

Ryanair attacks Scottish flight suspension

Ryanair, Europe’s largest low-cost airline, said on Tuesday that it “strongly objected” to advice from Irish authorities not to operate flights to Scotland as many other airlines chose to suspend their Scottish services because of the threat from volcanic ash, the FT reports. As the carrier sought a meeting with the Irish Aviation Authority to have the restriction lifted, the company said the cancellation of flights into or out of Glasgow Prestwick, Edinburgh or Aberdeen until at least the early afternoon was “unnecessary”. As the carrier sought a meeting with the Irish Aviation Authority to have the restriction lifted, the company said the cancellation of flights into or out of Glasgow Prestwick, Edinburgh or Aberdeen until at least the early afternoon was “unnecessary”. A statement on the Dublin-based carrier’s website said: “Ryanair … believe that there is no basis for these flight cancellations and will be meeting with the IAA on Tuesday morning to have this restriction on Ryanair flights removed as a matter of urgency.”

And now Goldman says the commodities correction is over [updated]

Having been proven right about their prediction of a rather substantial correction in commodities  earlier this month, Goldman Sachs is now out with a new view.

A bullish view. Read more

Goldman warns of significant China slowdown

FT Alphaville reports that Goldman Sachs has cut its China GDP estimates for this year and next, citing concerns about weaker US growth, higher oil prices and of course inflation. “Our new GDP estimates show a significant slowdown in 2Q11 to 8.0% qoq (significantly below trend), then recovering towards trend in 3Q11 at 9.0% and returning to trend in 4Q11 at 9.3%.,” the bank wrote. Separately, Goldman Sachs has also forecast an end to the current commodities corrections. It now sees Brent oil prices trading at $130 per barrel by 2012. Read more

Moody’s on Her Majesty’s bail-in

No fewer than fourteen UK banks and building societies placed on review for downgrade by Moody’s on Tuesday — plus negative outlooks for Barclays and HSBC:

Bank of Ireland (UK) plc (Baa3/P-3); Co-Operative Bank plc (A2/P-1); Coventry Building Society (A3); Lloyds TSB Bank plc (Aa3); Nationwide Building Society (Aa3/P-1); Newcastle Building Society (Baa2/P-2); Norwich & Peterborough Building Society (Baa2/ P-2); Nottingham Building Society (A3); Principality Building Society (Baa2/P-2); Royal Bank of Scotland plc (Aa3); Santander UK plc (Aa3); Skipton Building Society (Baa1/P-2); West Bromwich Building Society (Baa3/P-3); Yorkshire Building Society (Baa1/P-2).

 Read more

Further reading

Elsewhere on Tuesday,

– A Mexican stand-offRead more

Pink picks

Comment, analysis and other offerings from Tuesday’s FT,

Steven Rattner: Valley’s euphoria is tech bubble version 1.5 Here we go again, writes Rattner, former counsellor to the US Treasury secretary. Barely more than a decade since the last internet bubble deflated, valuations for digital businesses are again rocketing skyward, a frothiness eerily similar to the last round of irrational exuberance. Measured against the late 1990s, the current internet boom could have a good run ahead of it — but a correction in valuations could still be painful. Read more

Snap news

Breaking pre-market news on Tuesday,

– Moodys to review UK bank ratings — statementRead more

Yandex IPO prices at top of range

Yandex, Russia’s largest search engine, on Monday raised $1.3bn and priced at the top of its expected range in a US initial public offering, reports the FT. At $25 a share, the company is valued at some $8bn, with an earnings multiple – about 60 times net income – higher than Google’s, but below that of Baidu, China’s top search site. The shares will begin trading on Tuesday on the Nasdaq. Its  debut matches the recent success of other internet IPOs, notably LinkedIn, but also Renren, China’s largest social network, and Demand Media, the web content provider. But, in a cautionary signal, shares in LinkedIn dropped on Monday for the second straight session as investors sought to lock in big gains from last Thursday’s debut. The stock fell as much as 9.8% in New York to a low of $84, still well above its listing price of $45 a share, before closing at $88.30. Yandex, says DealBook, will be an “important test for the market”, while DealJournal says LinkedIn’s success ‘bodes well’ although ‘investors remain very choosy’ about IPOs.

Lehman creditors urged to reveal positions

A group of hedge funds and pension funds opposing the Lehman estate’s bankruptcy plan has asked  US bankruptcy court to force many Lehman Brothers creditors – including banks such as Goldman Sachs – to reveal their current holdings of the defunct investment bank’s debts, reports the FT. The so-called Ad Hoc group of creditors, including hedge fund Paulson & Co, bond fund Pimco, and the Calpers retirement fund, were themselves compelled by the court, at the behest of Lehman, to disclose their holdings in March after filing their own plan of organisation. In court filings on Monday night, the Ad Hoc creditors argued the banks and hedge funds may have interests not known to the court, and said some entities may be using “a multitude of attorneys” to hide the fact they are coordinating their efforts.

UK MPs hit Kraft deal with Cadbury

Irene Rosenfeld, chief executive of Kraft Foods, has defended her company’s handling of the £11.7bn acquisition of British chocolate brand Cadbury last year amid fresh criticism from UK politicians, reports the FT. A UK parliamentary committee issued a report on Monday highlighting “significant concerns” about the Cadbury takeover and sharply criticised Rosenfeld’s refusal  to appear before recent hearings into the deal. Kraft “steered close to a contempt” of parliament in its correspondence with the business select committee, said Adrian Bailey, who chairs the parliamentary group. He said the “sorry episode” of Rosenfeld’s non-attendance at a recent hearing “overshadowed what could have been a positive discussion” over Cadbury’s future. It was the third time the US chief executive had turned down an invitation to attend a parliamentary hearing – despite being offered the option of video conferencing. But Rosenfeld told the FT last week she had sent the “best, most knowledgeable representatives” to the hearings.