Posts from Monday Jul 4 2011

Risk rally slowed as S&P warns on Greece

Standard & Poor’s lobbed a spanner into the works of the latest risk rally, after the rating agency warned that a debt rollover plan for Greece would place the country in selective default, the FT reports. But the intervention caused only a mild reaction as the bullish undertow of recent sessions was curtailed but not fully displaced. The euro turned tail on the S&P news and European bourses – the FTSE 100 aside – were initially struggling to gain much traction. But activity has been meagre as the US is closed for the Independence Day holiday. Electronically traded S&P 500 futures are down 0.1 per cent. The latest moves come after stocks had delivered a sharp rally last week – their best 5-day bounce in 11 months – as two irritants received some soothing balm. The FTSE All-World equity index gained more than 5 per cent as investors hoped that the passing of austerity measures in the Greek parliament reduced the chances of default for Athens. Meanwhile, US manufacturing data came in better than expected and calmed some of the nerves about a slowdown in the world’s biggest economy and soft patches elsewhere.

CDB $10bn fund to target Asian SMEs

China Development Bank, one of the country’s largest state-owned banks, is emerging as an increasingly active overseas investor, using its $10bn CDB capital fund to take stakes in private equity and hedge funds, the FT reports. In its latest move, the CDB fund is seeking to develop its expertise in and understanding of intellectual property associated with lending to small and medium-sized companies, a market Chinese banks have never felt comfortable with due to the risk of default. According to people close to the situation, CDB, through its fund, is set to become a cornerstone investor in MP Pacific Harbor Capital, an Asian credit fund that lends to SMEs across Asia in which New York hedge fund MatlinPatterson has joined local lender Pacific Harbor. Matlin Patterson, which was originally part of Credit Suisse’s global distressed team, has almost $10bn under management, while Pacific Harbor is led by Warren Allderige, a veteran of decades of lending in Hong Kong, including at both the ill-fated Lehman Brothers and Peregrine.

Yingluck strikes Thai coalition deal

Yingluck Shinawatra, whose party won an overwhelming victory in Thailand’s elections at the weekend, has consolidated her grip on power, announcing a coalition that will control almost 60 per cent of the lower house, reports the FT. Ms Yingluck, flanked by the leaders of the five-party coalition, appeared at her first formal news conference as prime minister-designate on Monday to announce the pact. With more than 90 per cent of the vote counted, the Electoral Commission forecasts that Ms Yingluck’s Puea Thai party will hold 265 of the 500 seats in the lower house. With the four other parties, she is likely to be able to command 299 seats. Ms Yingluck said the coalition would have “enough stability” to run the government. Despite misgivings a few weeks ago when Puea Thai started to rise in the polls, markets welcomed its victory with the SET index up 4.8 per on Monday.

MPs quit India Congress party over state row

India’s ruling Congress party has suffered another setback after nine of its members of parliament resigned in protest at New Delhi’s failure to carve a new state of Telangana from the existing state of Andhra Pradesh, the FT reports. The resignation on Monday of the nine MPs from the Telangana region has roughly halved the size of the Congress-led coalition’s parliamentary majority at a time when the administration of Manmohan Singh is fighting to regain the initiative aftercorruption scandals. “It is a serious headache, among a whole lot of other headaches,” said E. Sridharan, director of an institute for the study of India at Pennsylvania university in the US. Besides the MPs, 73 members of the Andhra Pradesh state legislative assembly – including 39 Congress members, of whom 11 are ministers in the state cabinet – also resigned, highlighting the strength of local feeling about the Telangana issue.

Japan mayor keeps nuclear shutdown at bay

The mayor of a small town in Japan has signed off the restart of two nuclear reactors, in a decision that could help avert a complete shutdown of Japan’s nuclear power stations, the FT reports. The decision by the mayor of Genkai, a town in Saga prefecture in southwestern Japan marks the first time the mayor of a reactor-hosting municipality has signed off on a restart since the March 11 tsunami. Meltdowns at three reactors at Fukushima Daiichi atomic station after the tsunami have turned a large swath of public opinion against nuclear power, and the government has promised a comprehensive energy-policy review. But so far, authorities in Tokyo have forced only one other atomic plant to close. Instead, it is local governments that have thrown up the biggest hurdles for the eight regional utilities in Japan that rely on nuclear power.

Microsoft strikes search deal with Baidu

Baidu, China’s biggest search engine by revenue, on Monday announced a partnership with Microsoft that would allow its users to see English-language search results generated by Bing, the US company’s search engine, writes the FT. No financial considerations were involved in the deal, which will see Bing’s search results labelled and integrated into Baidu’s search results from later this year. Any advertising revenue generated as a result of the improved search results will go to Baidu as it controls the site. However, the deal will help Microsoft promote Bing in the world’s biggest internet market, where it has less than a 1 per cent market share, according to research firm Analysys International. By contrast, Baidu controls more than three-quarters of the Chinese market while Google still holds 19.6 per cent, despite losing market share after the US company partially retreated from China last year. Google moved its China web search to its Hong Kong site last March after confronting Beijing over censorship issues.

S&P deals blow to Greek bail-out plan

French and German banks’ plan to roll over their holdings of Greek debt suffered a blow on Monday as Standard & Poor’s, the credit rating agency, said the move would amount to a default, reports the FT. The proposal to provide up to €30bn ($43.6bn) in financing for Greece had been made conditional on rating agencies not downgrading Greece’s debt. But S&P said on Monday that any rollover would be a “distressed” transaction and thus lead to Greece’s rating being lowered to selective default. There was no immediate reaction from the Greek finance ministry to the S&P statement. French officials said they were not unduly concerned by the move, which had been anticipated. “It should have no immediate impact on the CDS [credit default swap] markets,” one said. The German government also had no official comment. But civil servants said they had factored in the eventuality of a so-called ratings event from the beginning.

Knight Vinke tries to set the record straight on Comet

Knight Vinke has responded to weekend reports that it wants the sale of Comet, the UK arm of Kesa Electricals, dropped with a rare public letter.

 Read more

Quantitative greasing of another kind?

Title shamelessly stolen from Chris Cook, who’s applied the term to the IEA’s “easing” of tight oil markets by releasing reserves.

What we refer to though is the direct depression of bond yields, via the sheer weight of petrodollars (for example Saudi Arabia’s gigantic foreign assets) recycled into buying those bonds. Read more

Things affected by a US downgrade

The list comes to us from Moody’s, which looks at the possible ratings impact of a US sovereign downgrade in Monday’s structured finance quick check. Now the credit rating agency has said before that it will place the US government’s triple-A rating on review for downgrade if there’s no “demonstrable progress” on the debt ceiling talks. Unsurprisingly, a downgrade of the US would have a ripple effect on a number of other assets which are directly linked to the fortunes of the States.

Let’s get the quirky stuff out of the way first. The Israeli bonds, we think, are USAID bonds issued by the State of Israel in the early 2000s and fully guaranteed by the USA. The Egyptian bond is another US-guaranteed issue apparently done earlier this year in an effort to plug Egypt’s budget gap after the spring uprising. Read more

Now you see it now you don’t – collateral transformation

It’s an answer — of sorts — to the $2,200bn dollar question. Read more

The sovereign ratings in this restaurant are terrible. And such small portions! [updated]

Ratings don’t kill sovereigns — ratings users do.

There’s an aphorism we’d like observers to remember, as we digest S&P’s warning that the French banks’ Greek debt rollover plan is a sovereign default. Of course S&P will now be attacked for being just one unaccountable rating agency holding the eurozone to ransom, it should appreciate the solidarity of the euro, we should regulate for a good, honest, wholly European challenger, tout suite!, and so on. Read more

Shadow currencies lurking behind a new dollar smile

G3 currencies are just so … démodé.

Where once the US dollar, euro and yen indisputably dominated global currency trading, there are now alternatives. The S3 currencies. So says UBS strategist Syed Mansoor Mohi-uddin in a short note. Read more

Markets Live transcript 4 Jul 2011

Live markets commentary from 

Sell in May and go away and come back on…

….. err Independence Day.

That seems to be the view at several big houses, which have either upgraded equities on Monday or urged their clients to buy in the wake of last weeks’ powerful rally. Read more

Barclays and the VZZ implosion [updated]

(*Please see below for response from Barclays.)

It was launched with a loud fanfare from Barclays about being an enhanced antidote to the decaying effect of the Vix future roll. Read more

Marcus Agius – Right or wrong? [updated]

The current depressed share prices of Western banks reflect the nervousness and uncertainty of investors as to where the final decisions in this extended round of regulatory reform will end up. More capital may reduce the probability of a bank failing but it can never reduce this probability to zero. And talk of bank investors being prepared to accept utility-type returns is completely unrealistic – Marcus Agius, chairman of Barclays, June 29th, 2011.

We aren’t the only people who find it a little surprising that Aguis is speaking on behalf of investors. Read more

Exxon’s Montana oil spill claims questioned

The governor of Montana has questioned Exxon Mobil’s assurance that an oil leak in the Yellowstone river is confined to a 10-mile area, reports Reuters. Governor Brian Schweitzer said it would be impossible to confirm the true extent of the spill until small boats were sent out. Exxon has so far used aircraft overflights to survey the pipeline leak. The company has said that ‘very little soiling’ of river banks was likely beyond the 10-mile radius, but Montana officials believe that the spill could reach the Missouri river, with floods hampering clean-up, reports the WSJ.

Brazil supermarket merger hits turbulence

The Brazilian government has turned cautious over a merger of the country’s biggest supermarket, Pao de Acucar, and Carrefour of France, the WSJ reports. The government’s development bank warned that $3bn it had pledged towards the deal was conditional on parties conducting the transaction ‘on the premise of a friendly understanding.’ Casino, a Carrefour rival and controlling stakeholder of Pao de Acucar, has called the deal ‘illegal’ and begun arbitration proceedings. Carrefour’s board has nevertheless pressed forward with approving the merger, part of the company’s plan to boost its share in emerging markets, Reuters says.

Republican hint at ‘mini-deal’ on debt ceiling

Republican Senator John Cornyn of Texas has conceded that his party may tolerate a short-term settlement with the White House before the deadline for raising the debt ceiling passes in August, Bloomberg says. While the GOP would continue to press for a bigger long-term fiscal deal, the concession may offer respite for holders of Treasuries. July threatens to be a volatile month in the US bond market if a deal does not materialise, says the FT. The closer the debt ceiling deadline looms, the greater the risk that Treasury trading becomes less liquid, say traders.

Trading of Citi falls after reverse stock split

Citigroup’s one-for-10 reverse stock split, widely predicted to have a big impact on US equity trading volumes when it was carried out in May, has so far hit off-exchange trading much harder, according to the FT. Off-exchange volumes have dropped 6.5 per cent in June compared with April, whereas overall US equity volumes rose 3 per cent over the same period. Citi had represented about 6 per cent of US daily trading volumes in 2011. Since the reverse split, its share of trade is negligible. However, split also hit off-exchange dark pools’ tendency to trade on sub-penny pricing quirks in Citi’s shares, reducing volume.

S&P says Greek rollover plan is default

A French proposal for banks to roll over Greek governments bond would be considered a “distressed” debt exchange and prompt the Greek sovereign’s ratings to be placed in selective default, S&P has warned, according to Reuters. FT Alphaville has excerpts from the ratings agency’s statement. The move by S&P all but scuppers the rollover proposal in its current form, which involved banks reinvesting 70 per cent of their maturing Greek debt into new 30-year bonds and placing the remaining cash into a special purpose vehicle designed to guarantee the bonds. It is also likely to further heighten European scrutiny and scepticism of rating agencies, the FT says.

LSE courts Nasdaq ‘merger of equals’

The London Stock Exchange would be open to considering a merger of equals with Nasdaq OMX in the first sign that the British bourse could yet turn its attention to securing its future in another big merger after its attempted tie-up with Canada’s TMX Group collapsed, the FT says. Nasdaq’s chief executive, Bob Greifeld, is considering an approach for the LSE but people familiar with the matter said advisers were not yet formally involved. Nor had Mr Greifeld spoken with his counterpart at the LSE, Xavier Rolet. However, the prospect of the combination revives the vision of a transatlantic exchange powerhouse first pushed by Mr Greifeld five years ago when he made a failed bid for the LSE.

The Sovys are here! The Sovys are here! [updated]

We speak of the market for sovereign yield spread futures (Sovys) — a product designed by CME Group and aimed squarely at the heart of cash bonds and credit default swaps, as a new way to trade sovereigns.

First trades were made on Thursday of last week. Read more

The French proposal, c’est un défaut sélectif, says S&P

This isn’t very helpful.

S&P says the French proposal to collateralise a Greek rollover – so popular it’s been likened to a toxic CDO – would amount to selective default under its criteria. Read more

Further reading

Elsewhere on Monday,

Munger’s parodyRead more

Pink picks

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

Giuliano Amato and Guy Verhofstadt: A plan to save the euro
Europe is losing a war between its elected governments and unelected rating agencies. Governments are trying to govern, but the rating agencies still rule. Electorates know this, which is why some European Union member states oppose fiscal transfers to others. The answer is not less Europe, but more, write Amato and Verhofstadt, former heads of government in Italy and Belgium. A conversion of a share of national debt to EU bonds would stabilise the current crisis. Read more

Snap news

Breaking pre-market news on Monday,

– S&P says Greek rollover plan may put Greece in select default — reportRead more

Asian stocks and euro rise on Greece deal

Asian equities climbed a fifth consecutive session on Monday, led by Chinese stocks, Reuters reports, and the euro inched higher as some near-term risks receded about Greece’s funding for the rest of the year and fears of a sharp slowdown in China also eased. Equities and the euro are extending rallies that helped pare losses in the second quarter after finance ministers authorized an €8.7bn payout to Greece, Bloomberg says. However European leaders failed to agree on a €120bn bail-out package for Greece, the FT notes. The Thai baht also rose after the election of Yingluck Shinawatra, former prime minister Thaksin Shinawatra’s sister.

Roaming data costs to fall in Europe

The average cost of using smartphones and tablets when travelling in the European Union will be more than halved under new plans from Brussels that will delight customers but deliver a big blow to mobile operators, the FT reports. The strict regime of price caps on mobile phone roaming within the EU is to be extended by four years to 2016, the European Commission will announce this week. It wants eventually to abolish premium charges for roaming data and voice services. In a setback to mobile operators, which had lobbied to stave off further regulation of what remains a lucrative segment, new price caps will from next year be imposed on data downloads as well as on voice calls and SMS messages.