South Korean regulators have vowed to strengthen scrutiny of foreign banks in the country after issuing institutional warnings to HSBC and Crédit Agricole over their currency derivatives trading, reports the FT. The Financial Supervisory Service said it warned the two foreign banks for illegally outsourcing derivatives trading operations to their offices in Hong Kong or Singapore over the past year. It also asked the banks to punish several employees involved in the illegal activities by reducing their pay.
India’s economic growth slowed for the fifth consecutive quarter as rising interest rates and paralysis in the scandal-plagued government curbed company investment, reports the FT. The economy grew more slowly than expected – 7.8 per cent in the fourth quarter of the April to March financial year – and at its slowest pace for five quarters. For the full 2010-11 financial year, India’s growth was 8.5 per cent, just below the 8.6 per cent government prediction, but up from the 8 per cent annual growth it had registered to March 2010. Investment growth for the year was a 0.4 per cent, evidence that companies are feeling the pinch from steadily rising interest rates – as the government battles to control persistently high inflation – as well as numerous bottlenecks delaying projects.
Japanese industrial production showed signs of bottoming out in April after a record fall in March due to the earthquake and tsunami which disrupted global supply chains, reports the FT. Output rose a seasonally-adjusted 1 per cent in April, from the record decline in March, the government said on Tuesday. Companies surveyed by the government expect production to rise 8 per cent in May and another 7.7 per cent in June, suggesting a possible rapid recovery in production. Barclays Capital said the government forecasts suggested that output could return to pre-quake levels by June, helped largely by the transport sector. Even with production recovering, economists forecast that the Japanese economy will probably contract for a third consecutive quarter in the three months through to the end of June, as supply-chain disruptions persist. The economy may also be impacted by power outages during the summer due to the Tokyo Electric nuclear crisis.
Eurozone inflation has dipped unexpectedly but the fall is unlikely to be sufficient to prevent the European Central Bank from pressing ahead with a further interest rate rise, probably in July, the FT reports. Annual inflation in the 17-country region fell to 2.7 per cent in May from 2.8 in April, according to a preliminary estimate by Eurostat, the European Union’s statistical office. The deceleration suggested inflation pressures had lost intensity after recent falls in oil prices. However, the annual rate remains above the ECB’s “below but close” to 2 per cent goal and economists warned the dip would prove temporary. Eurozone inflation would rebound during the summer on the back of energy and food price trends, reaching 3 per cent or higher in September, predicted Fabio Fois, of Barclays Capital.
Nokia shares tumbled almost 18 per cent on Tuesday after the Finnish mobile phone maker issued a profit warning, heightening investor concern over the future of Europe’s biggest technology company, the FT reports. Nokia said second-quarter sales and operating margins would be “substantially below” previous guidance because of lower-than-expected volumes and prices. The warning increased the sense of crisis surrounding Nokia as it continues to lose market share to the Apple iPhone, devices using Google’s Android operating system and low-end Chinese manufacturers. Stephen Elop, Nokia chief executive, said 2011 was “going to be a difficult year to get through” as Nokia makes the painful transition to a new strategy based on using Microsoft’s Windows Phone software in its handsets. “This shows that Nokia really is under attack from all sides,” said Geoff Blaber, analyst at CCS Insight, a telecoms research firm.
US equities ended the day strongly despite disappointing US data, the FT reports. But caution looms as demand rises for Treasury bonds, and industrial commodities are weakening. Days ahead of the anticipated US non-farm payroll employment report on Friday, the May Chicago PMI fell to 56.6, against median expectations of 62.8 and down from April’s reading of 67.6. Meanwhile, the Conference Board’s index of consumer confidence for May dropped to 60.8 from 66 in April and against median expectations of 67. The readings initially pared earlier gains on US equity markets, which had been buoyed by prospects of another bail-out for Greece.European stocks also fell back from their highs, with the FTSE Eurofirst 300 ending higher by 0.9 per cent. US Treasuries also rallued on the US data, with 10-year notes hitting their lowest yields of the year at 3.048 per cent, a decline of 3 basis points. But stocks and oil were still being supported by reports that the European Union was drafting a second bail-out package for Greece and that Germany was backing away from a restructuring of Greek debt. Tech stocks in particular rallied after Apple and Intel announced new products and service – new tablet PC chips for Intel, an iCloud application for Apple. The sector led the S&P 500 to end higher by 1.1 per cent. Commodities rallied, though the move was losing steam during US trading, with Brent crude up $2.32 a barrel at $116.40, helped by a weaker dollar.
Apple has taken the unusual step of pre-announcing a broad push into online services, as it seeks to reinforce its consumer gadgets with a stronger presence in the “cloud” services on which they increasingly rely, writes the FT. The US consumer technology company also broke with normal practice by revealing that Steve Jobs, who has been on medical leave since January, would appear publicly next week as part of the announcement of what it dubbed the iCloud.
For the commute home,
– A review of Too Big to Fail, the movie. Read more
Below are a few slides, charts and graphs that piqued our interest from the Boston Consulting Group’s latest annual wealth report — see the press release if you just want the main points.
Rich people: “We back!” Global wealth was up last year, and is projected to keep climbing: Read more
Shares in Nokia down 18 per cent at pixel time, after scrapping all guidance and warning on profits again. Read more
First, it was Allied Irish Banks, and a capital structure which had egregiously flipped to favour equity over credit.
Now, as of Tuesday, it’s spread to Bank of Ireland: Read more
Greece has been bailed-out, the FT reports.
Michael Robinson over at the BBC’s World Service has been investigating high global commodity prices in a series entitled Bubble Trouble?
In this week’s episode Robinson looks at the copper market and in particular the scale of potential copper shenanigans that may or may not be going on in the market. Read more
The US housing double-dip — it’s official:
Data through March 2011, released today by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined by 4.2% in the first quarter of 2011, after having fallen 3.6% in the fourth quarter of 2010. The National Index hit a new recession low with the first quarter’s data and posted an annual decline of 5.1% versus the first quarter of 2010. Nationally, home prices are back to their mid-2002 levels. Read more
The effects of stubborn inflation and persistently low bond yields charted for the benchmark 10-year US Treasury, by Reuters’ financial graphics-guru Scotty Barber:
Live markets commentary from FT.com
Cyprus is one of the weirder cases of this disease Europe has called ‘Greek exposure’. Tiny sovereign debt, big bank gearing to Greece. All wrapped up in a web of offshore deposits.
Fitch cut the sovereign rating of Cyprus to A- from AA- on Tuesday (in line with S&P and Moody’s, but a large downgrade: two notches) based on Greece exposure. Read more
The troubled TV set-top box maker has a new chairman.
It’s Allan Leighton, the former boss of Asda and non-executive chairman of the Post Office. Read more
Markets across Europe were moving higher on Tuesday morning…. Read more
The following is the formula for a properly structured warrant tied to Japan’s Nikkei index — which would (we presume) be easy enough to hedge for its issuer:
(Closing Level – Strike Level) x Index Currency Amount / Exchange Rate. Read more
Reports that the EU is drafting a second bail-out package for Greece, and that Germany is backing away from a restructuring of Greek debt, revived peripheral sovereign bond markets and the euro, sending the single currency to its highest level in three weeks, the FT reports in its rolling global market overview. Jean-Claude Juncker, head of the eurogroup of finance ministers, ruled out a “total restructuring” of Greek debt and said a decision on further aid for Greece would be made by the end of June. The euro topped $1.44 to the dollar at $1.4410, climbing above its 55-day moving average of $1.4334, 0.5 per cent higher than Monday’s close. In Europe, equity markets rallied with the FTSE Eurofirst 300 up 0.7 per cent with Greek financial stocks up 3 per cent. German April retail sales rose 0.6 per cent month-on-month, short of expectations. However, Germany’s Dax still managed healthy gains of 1.6 per cent.
The Pentagon has concluded that computer sabotage coming from another country can constitute an act of war, in a finding that opens the door for the US to respond using traditional military force, the Wall Street Journal reports. The Pentagon’s first formal cyber strategy, portions of which are expected to become public next month, represents an early attempt to grapple with a changing world in which a hacker could pose a significant threat to the US. A hacking attack on Lockheed Martin, the largest US defence contractor, was disclosed at the weekend, the FT says, exposing lingering security flaws. The WSJ adds that the recent hacking incidents at Lockheed, as well as public broadcaster PBS, show how widespread corporate breaches have become and underline how any organisation can become a victim.
Christine Lagarde, the French finance minister, began a tour on Monday to lobby support among the big emerging economies for her bid to become managing director of the IMF, the FT reports. She vowed in Brasília to “universalise” the organisation. Lagarde is regarded as the frontrunner for the post but Brazilian support would be an important stepping stone to rallying other developing countries around her candidacy. Seperately, the FT says that developing countries — “less practised at the art of the IMF stitch-up” have failed to reach consenus on a new IMF head. The Wall Street Journal adds that after her stop in Brazil, Lagarde is scheduled to visit countries including China, India, and Saudi Arabia.
The debt levels of private equity buy-outs are creeping up, prompting early warnings by industry executives concerned about another credit-driven takeover binge, the FT says. Banks had in several cases offered loan packages to private equity buyers that would make debt levels equal seven times a company’s operating profit, a level rarely seen in the wake of the credit crisis, industry insiders said. Joseph Schull, European head of US private equity group Warburg Pincus, warned that his industry should not repeat mistakes made during its heyday in 2006 and 2007, when some companies were bought with excessive loan packages.
Benchmark government bond yields in the US, UK, Germany and Japan have fallen unexpectedly over the past seven weeks as investors take fright at weakening economic prospects and the still-critical eurozone debt crisis, reports the FT. The fall of 14 to 15 per cent in 10-year yields, the benchmark market interest rates for government bonds, has coincided with a sharp fall in inflation expectations in the same countries. Such a big move in bond markets is significant because the vast majority of investors at the start of 2011 thought government bond yields would rise consistently over the course of the year as economic growth normalised. USA Today notes that “the economic recovery that barely exists in the eyes of many Americans” is now two years old, with the Great Recession, having officially ended in June 2009.
US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance, the FT reports. The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25 per cent in December 2008. The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate. The Investment Companies Institute calculates that last year the industry waived $4.5bn of fees to maintain the fixed $1 per share net asset value of funds. See also FT Alphaville posts.
The US justice department is considering a shake-up of the guidelines used in approving takeovers of US companies, pointing to a possible shift in antitrust policy under the Obama administration, the FT says. The DoJ is considering revising the so-called merger remedies guidelines to reflect developments in antitrust practice, said people with knowledge of the moves. The update is expected to include a greater discussion of behavioural or conduct remedies, which impose changes on how a business operates on an ongoing basis, they added.
It’s gone all quiet in the other letters that make up a certain eurozone peripheral acronym…
Spain and Italy have both been contenders for the next eurozone hotspot, of varying degrees. And while Spanish and Italian banks have both been rushing to raise capital or prefund in recent months, to help stave off, or prepare for, peripheral contagion, they seem to have had varied success with their efforts. Read more
A prominent Facebook investor and director accused Wall Street of undervaluing the LinkedIn initial public offering earlier this month, contributing to the doubling of its shares on opening day, the FT reports. Peter Thiel, an early Facebook investor and co-founder of PayPal, said banks did not understand the full potential of the latest internet companies and warned that the next Silicon Valley darlings would negotiate hard when their turn comes to go public. LinkedIn was priced at $45 a share by Morgan Stanley, Bank of America Merrill Lynch and JPMorgan Chase, raising $352m. DealBook meanwhile notes that money manager BlackRock has weighed into the debate, accusing banks of overpricing IPOs to gain more fees.
Elsewhere on Tuesday,
– Happy birthday, Dow. Read more