Posts from Tuesday Jul 5 2011

Rally hobbled as eurozone fears nag

Another wobble in the “peripheral” European economies has sent risk-takers fleeing, putting an exclamation point on the end of a Greek relief rally, the FT reports. Late on Tuesday, Moody’s, the US rating agency, cut Portugal’s sovereign bonds an additional four notches to “junk”, citing the risk that Greece’s bail-out by European authorities will mean that any future aid to Lisbon will require costly private-market participation. Moody’s is the first of the big three agencies to give Portugal that mark. The euro has fallen 0.8 per cent to $1.4417, and as low as $1.4397. It was already hobbled by earlier concerns about the Greek debt crisis following S&P’s warning that plans to roll over Athens’ IOUs could be deemed a selective default. The European Central Bank’s attempts to skirt around the Greece issue was getting short shrift. And just to add to the uncertainty surrounding the eurozone fiscal mess, Finland has said, according to Reuters, that it wants guarantees against participation in any new bail-outs in the bloc and wants to see investors share more of the burden. A jump in the dollar, now up 0.5 per cent on a trade-weighted basis, is driving losses across equities and commodities. Wall Street’s S&P 500 index is back in the red after climbing to positive territory earlier in the day. Fixed income markets are also signalling concern. US 10-year Treasury yields are 4 basis points lower at 3.14 per cent. Credit default swap prices are rising across the eurozone periphery and spreads with Bunds are widening, both expressions of heightened angst.

China’s women show taste for fast cars and whisky

As western luxury brands rush to tap the Chinese market they are having to unlearn gender stereotypes associated with the products they sell, writes the FT. Chinese women buy more whisky and fast cars than their western counterparts, for example, while men purchase more face creams and bags. Coach, the US leather brand, says men represent 45 per cent of the $1.7bn Chinese market for luxury bags and accessories, compared with 15 per cent globally.

WTO rules against China exports

The World Trade Organisation on Tuesday ruled against China’s practice of limiting its exports of raw materials, handing a victory to the US and the European Union in a closely watched trade dispute, the FT writes. The edict from a WTO judicial panel, responding to a complaint from the EU, US and Mexico, said China’s imposition of export duties and quotas on a variety of metal ores and other materials were illegal under WTO rules. By setting a precedent, the decision also strengthens the hand of the EU and US in their related campaign to prevent Beijing restricting the exports of rare earth materials, which are vital components in a number of high-tech products and are produced almost exclusively in China. Karel de Gucht, Europe’s trade commissioner, said the verdict would help to create a more level playing field for raw materials. “I expect that China will now bring its export regime in line with international rules. Furthermore, in the light of this result China should ensure free and fair access to rare earth supplies,” Mr De Gucht said.

Kan under pressure after minister quits

Japan’s minister responsible for leading reconstruction of Japan’s tsunami-devastated north-east coast has resigned, dealing a new blow to embattled prime minister Naoto Kan and further complicating the government’s reconstruction efforts, the FT reports. Ryu Matsumoto’s downfall after just nine days in the job came after the release of video showing him giving the governor of one of the worst hit prefectures a peremptory lesson in Japanese meeting etiquette. Mr Matsumoto could not contain his annoyance after Yoshihiro Murai, governor of Miyagi Prefecture, arrived a few minutes late for a meeting to discuss recovery from the March 11 disaster.

Further further reading

For the commute home,

- An (overly simplistic) argument that Margaret Thatcher wasn’t such a small government devotee after all. Read more

Workaholics forced to take time off

South Korean companies are employing extreme measures in their efforts to keep workaholic employees out of the office during their compulsory annual two-week holiday, reports the FT. “If an employee does come in, he will find he has been locked out of his computer system,” says Kim O-hyun, a manager at a Shinhan Financial Group branch in Seoul. Such strong-arm tactics at Shinhan, the country’s biggest bank by value, have made it the beacon in a government-backed campaign seeking to turn such two-week “refresh holidays” into a national standard. Two-week holidays are almost unheard of in the attritional business culture of South Korea, home to the longest working hours and highest suicide rate in the developed world. Instead of recharging their batteries with a holiday, Korean employees often prefer to work through in return for bonus pay and kudos.

Currency wars not over, says Brazil

Brazil is preparing a range of additional measures to stem the damaging rise of the real as the global currency war shows no signs of ending, according to Guido Mantega, the country’s finance minister. Speaking to the Financial Times in London, Mr Mantega said the Group of 20 leading economies was still a long way from achieving its goal of agreeing new guidelines for managing currencies, there were “struggles between countries” such as the US and China, and the global currency war was “absolutely not over”. Slow growth and low interest rates in advanced economies continued to put upward pressure on Brazil’s currency, Mr Mantega said, forcing the authorities to consider further intervention in currency and derivatives markets to limit over-shooting. “We always have new measures to take,” he told the FT, indicating on the sidelines of an investor conference that these would not be pre-announced, but would include market intervention. On Tuesday, the Brazilian central bank also announced a spot auction to buy US dollars in another move to boost foreign exchange reserves and stem the upward pressure on the real.

Corporates spending like it’s the 50s

The US equity gang at Credit Suisse, having previously warned us that the current profits expansion is starting to look a bit long in the tooth, are back with a new note about corporate spending decisions.

In a nutshell, CS argue that the unwillingness of US companies to spend more on capital and labour represents a kind of insurance policy against the perceived uncertainty of economic conditions in the next few years. Read more

The great wall of Chinese worry

The big holes in Chinese local government balance sheets are back — and bigger than first thought, according to Moody’s.

As widely reported this morning, the rating agency reviewed the National Audit Office’s report on local government debt and concluded that it underestimates banks’ NPL exposure. Read more

Moody’s downgrades Portugal on… Greece fears

Well, sort of. The full rationale behind Portugal’s downgrade to Ba2 from Baa1, with negative outlook, is pasted below.

Moody’s offers two main reasons. The second is Portugal’s ongoing high-debt-low-growth mash-up. This you know about. Read more

Italian wobbles del giorno

It’s just one day, but Tuesday ended in very poor fashion for Italy’s government bonds. The 10-year benchmark bond yield had breached five per cent at pixel time.

In CDS-land Italy was back close to 200bps, according to Markit’s intraday report (the blue line shows liquidity — high, essentially): Read more

About those Reckitt bid rumours

No doubt about Tuesday’s bid rumour du jour – Reckitt Benckiser.

 Read more

Raid Fort Knox!… and other debt ceiling solutions

By Izabella Kaminska and Cardiff Garcia

How does one buy time when trying to avoid a US debt ceiling-related default? Read more

The same crisis, again and again

Here’s a great collection of charts from Société Générale on Greece, Ireland, Portugal, and the short-term treadmill that binds them all (click to enlarge):

No sooner had the Greek parliament said yes to the Medium-Term Fiscal Strategy (MTFS), than the question was raised; “where next?” The weaker member states are still battling to attain public debt sustainability and address structural growth issues. Even in the best case scenario, this will take years. And with weak growth and unemployment set to climb higher, this is likely to prove an uphill battle. Looking ahead, we see opportunity for a period of calm in the debt crisis, but this will in all likelihood prove short-lived. Each quarterly EU/IMF loan tranche comes with a new review for Greece, Portugal and Ireland, and markets will remain concerned that targets could be missed… Read more

Bob’s World is back

April was the last time we heard from Nomura’s Bob ‘the bear’ Janjuah.

Since then he’s picked up a fancy new title – Head of Tactical Asset Allocation — and following pressure from clients, has relaunched ‘Bob’s World’, the publication that made his name at RBS. Read more

Shadow ratings go dark at S&P

Rating agency Standard & Poor’s might be making headlines when it comes to Greece, but it’s also been roiling a much smaller corner of the market — Collateralised Loan Obligations (CLOs).

Creditflux’s Mike Peterson has a great scoop on a letter sent last month by S&P’s head of US credit. In it, James Parchment tells the agency’s clients that S&P will no longer shadow rate companies with revenue of more than $499m. For companies with turnover between $200m and $499m the agency will only give shadow ratings, or “credit estimates,” six months after the loan is issued. Read more

Stress testing bailouts, not banks

It’s a little over a week until we get the results of Europe’s second round of stress tests.

Here on FT Alphaville we’ve often wondered what’s the point, given that every one seems to think that the assumptions used by the stress test administrators, the European Banking Authority, are too lax. Read more

Overnight sovereign defaults? It must be the super-credible ECB

Alternative title: The European Central Bank — true maestros of ratings shopping, as bad now as the Fed in the crisis.

There’s a further element to the central bank’s sudden rediscovery of its ability to pick the single best rating produced by agencies for the valuation of collateral, thus allowing it to accept Greek bonds if one rating agency at least keeps the country out of default during a rollover. It’s this idea that some agencies would keep Greece in selective default for only a bit anyway. Read more

Markets Live transcript 5 Jul 2011

Live markets commentary from FT.com 

‘Collective amnesia’ on mortgage reform

German financial consultant Achim Dübel doesn’t mince his words.

Last week he spoke to a group of European politicians, including representatives from the UK, Spain and Germany, to talk mortgage reform. In particular, he was presenting a new paper, written together with Marc Rothemund, and published by the Centre for European Policy Studies (CEPS). It’s a big deal given the current consumer protection debate on European mortgages, and the European Commission’s recent interest in the cost and benefits of various mortgage credit policies. Read more

SEC under pressure over reverse mergers

US authorities have stepped up scrutiny of Chinese groups listed on their shores but remain hamstrung by a lack of access to data and limits to what they can do should they find wrongdoing, says the FT. While a horde of reverse merger stocks have been delisted by the SEC recently, critics have pointed to the agency’s poor record in working with local Chinese regulators to acquire documentation. Meanwhile, US auditor regulators are also limited as inspectors are unable to enter China to examine auditing firms located there, despite the resignation of auditors from at least two dozen of the companies involved in the reverse mergers scandal.

Microsoft forges Bing deal with Baidu

Baidu, China’s biggest search engine by revenue, has 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, says the FT. While advertising revenue from the deal would accrue to Baidu, the deal marks a victory for Microsoft in its bid to increase its stake in the Chinese market beyond its 1 per cent share, especially after Google’s relative departure from China. Google retains around 19 per cent of China’s search market but has not seen growth, according to Bloomberg.

C&W Worldwide gets amber topped

From Tuesday’s FT:

Mr Pluthero and Ian Gibson, finance director designate, are set to receive performance shares in 2011-12 worth three times their salaries, which are £675,000 and £400,000 respectively. Read more

Pimco’s inflation bet pays off

Pimco has bested Morgan Stanley in opposing bets on the direction of 30-year Treasury inflation-protected securities, the WSJ reports. The loss for Morgan Stanley is a blow to its efforts to build a more active bond trading desk. Pimco bought up 30-year Tips, tapping into rising concern that low interest rate have stoked long-term US inflation. A contrasting bet on inflation rising in the short term and falling further out saw Morgan Stanley short 30-year Tips and buy nominal 30-year Treasuries, reversing the trade for five-year bonds. Falling oil prices eventually undid the trade in addition to Pimco applying pressure via 30-year Tips buying, sources said.

Spin-offs on the rise for US companies

A rising number of US ­companies have moved to streamline operations this year through asset sales and spin-offs in a bid to remedy lacklustre stock ­market valuations for ­conglomerates, the FT reports. Spin-offs accounted for about half of ­global dealmaking, up slightly on last year, according to Dealogic data. In the US, such activity is up more than 40 per cent on the first half of 2010. A so-called “conglomerate discount” has increasingly weighed on companies during the recovery, leading firms to divest assets at the same time as the private equity industry re-emerges to buy them.

Debt ceiling negotiators grope for tax deal

Democrats have proposed $400bn of tax “revenue increases” as part of fiscal negotiations on raising the debt ceiling, although Republicans are adamant that tax itself should not be raised, says the WSJ. Revenue increases could come from eliminating tax breaks for families, or by changing tax accounting methodology for small firms. A White House proposal to remove high-income tax breaks would raise $290bn in the next decade but Republicans have said it is a non-starter. Ultimately both sides are closer on a deal than thought, Reuters says. Medicare changes and adjustments to inflation indexing of benefits could yield $500bn on the spending side, bringing a large bipartisan deal in sight.

And the winning SPR bids are…

Presenting, the SPR Awards summary, via the US Department of Energy.

It’s a vivid account of who bought what in last month’s emergency $30m barrel oil release: Read more

Chinese banks may be hiding $540bn debt

China’s banks are exposed to a third more local government debt, or $540bn, than state auditors have accounted for, Moody’s has warned, according to Bloomberg. The lack of documentation for the debt may indicate a greater risk of default, with non-performing loans rising to almost ten per cent of the exposure, the rating agency said. Moody’s added that the government lacked a ‘clear master plan’ to deal with banks’ losses on the loans. China quietly rolled out $463bn of policies back in early June to ease local government debt burdens, combining central government paying off some loans, but the problem lies in the lack of cashflow from the debt for banks, FT Alphaville says.

ABS, CDS and various other acronyms in Australia

Your daily dose of financial innovation, right here.

Flexi ABS Trust 2011-1 may be a structured finance deal you’ve never heard of, but it’s making waves amongst securitisation types in Australia. Put simply it’s the first ever Australian deal to bundle interest-free payment plans for retail goods like jewellery, gym equipment, furniture and the like, according to Moody’s. Read more

Paulson sitting on $550m of Lehman bond gains

Paulson & Co has made more than $550m from recoveries in the value of bonds it bought in Lehman Brothers after its default, the FT reports. The fund made more than 2,000 trades buying $6.8bn of face-value debt for $890m in the two and a half years after September 15, 2008. Under Lehman’s final bankruptcy agreement, owners of bonds will receive 21.1 cents on the dollar, versus the 17.4 cents proposed initially by the Lehman estate. Mr Paulson’s funds hold the bonds at an average of 7.3 cents on the dollar. If Paulson can gain recoveries of 26 cents — the market price based on the view that Lehman’s assets will rise in value — the profit on the position will increase to $780m.