Posts from Tuesday Jul 12 2011

Volte-face on won as Seoul fights inflation

First the Brazilian real, now the South Korean won has hit multi-year highs. The reason? Seoul has performed an about-turn because its policy of pursuing a weak won, which helped large export-focused conglomerates such as Samsung and Hyundai roar out of the downturn, has served its purpose, the FT reports. South Korea is now permitting a steady appreciation of the currency, which hit three-year highs against the US dollar last week, as policymakers fret that they spoiled exporters for too long with low interest rates. Government officials are shifting their attention to combating inflation and lifting anaemic domestic consumption. The notoriously volatile won is the world’s fifth-fastest appreciating currency against the US dollar this year, rising 6.3 per cent, the same amount as Brazil’s booming real. It has soared 46 per cent since March 2009. On Monday, it edged down 0.1 per cent to close at 1,058 to the greenback. “The government appears to have switched its priority from boosting exports to fighting inflation. The won will probably continue its rise but will face strong resistance at 1,050 for the time being,” says Ko Kyu-yeon, a trader at Korea Exchange Bank.

Singh reshuffles Indian cabinet

Indian prime minister Manmohan Singh completed a limited cabinet reshuffle on Tuesday, disappointing those hoping for a significant shake-up that might lift the flagging fortunes of the governing coalition, the FT reports. The government’s second reshuffle this year was seen as an opportunity to bring in younger ministers and talent from outside of the government to fend off perceptions of policy paralysis and draw a line under a damaging telecoms scandal. However, Mr Singh’s changes were confined to switching ministers from one ministry to another, while key posts – including finance, foreign and interior – were left alone. Shekhar Gupta, editor of the Indian Express newspaper, characterised the reshuffle as merely changing “the batting order”. Notable among the changes was the move of Jairam Ramesh, from the country’s environment ministry to the post of rural development minister. During his time as environment minister, Mr Ramesh had won the support of many green activists for subjecting industrial projects to intense scrutiny.

A change in Pimco strategy?

Has Bill Gross ditched his “long-short-long position” on US Treasuries?

Pimco on Tuesday published the latest holdings of its flagship Total Return Fund. The statistics are accurate as of 30 June. They show that Gross has increased TRF holdings of Treasuries to 8 per cent from the 5 per cent listed at the end of May. Read more

Jailed Chinese tycoon bids for Ark Royal

Huang Guangyu, a Chinese tycoon serving a 14-year fraud sentence in a Beijing prison, has put in a bid for the retired UK aircraft carrier HMS Ark Royal with the aim of turning her into a floating exhibition hall and hotel, the FT reports. The entrepreneur has often surprised business rivals by his ability to exert influence far beyond the confines of his prison cell. Backed by a group of loyal cronies, he has prevented the dilution of his controlling stake in Gome Electrical Appliances and orchestrated a perfectly executed management coup this spring that tightened his grip over the Hong Kong-listed retail group he founded in 1987. Ark Royal is a light aircraft carrier that played a leading role in the Iraq invasion and was in service for 25 years. She is among a number of vessels put up for auction by the UK Ministry of Defence this year, including her sister carrier, HMS Invincible, which was sold for scrap in a £2m deal this spring, as reported by local media. The MoD’s disposal services authority will strip Ark Royal of her weapons, communications systems and other advanced military equipment before handing her over to the eventual buyer, according to its website. But a Chinese bid is still likely to stumble in the face of political sensitivity.

China’s foreign reserves climb by $153bn

China’s foreign exchange reserves, already the world’s biggest, soared again in the second quarter, adding to inflationary pressure and highlighting the risks in Beijing’s policy of holding down the value of its currency, writes the FT. Reserves are a key indicator of central bank intervention in the currency market because they reflect how much foreign exchange it has purchased in order to stabilise the renminbi. After jumping $197bn in the first quarter, reserves were up another $153bn in the second quarter. That influx of cash compounds China’s inflation troubles. Consumer prices were up 6.4 per cent in the year to June, the highest in three years. Although many analysts expect inflation to slow over the remainder of the year, the accumulation of reserves lays the groundwork for a continuation of fast money growth and so will limit the scope for any easing of price pressures. “The current intervention of the People’s Bank of China has been piling up more and more foreign exchange reserves. This is not sustainable,” said Li-Gang Liu, head of China economics at ANZ Bank.

Ireland downgrade cuts rally short

Eurozone woes returned, in the form of a late-day downgrade of Irish debt to “junk”, to clip a late-session rally sparked by supportive Federal Reserve minutes, the FT reports. Notes from the Federal Reserve revealed a split among members on the timing of the exit from “quantitative easing”, boosting US stocks and knocking the dollar back. According to the Fed minutes, some members said that if “growth remained too slow to make satisfactory progress … it would be appropriate to provide additional monetary policy accommodation”. Ben Bernanke, Fed chairman, is usually presumed to be an adherent of such dovish thinking. Given last week’s job report, plus the potential of eurozone contagion, that scenario is gaining credibility. But throughout the session the predominant theme was the eurozone’s precarious fiscal position, which drained risk appetites across markets and initially caused flight to perceived havens, such as German Bunds and gold, which hit a record high in euro and sterling terms.

Fed officials divided on further stimulus

Some policymakers at the US Federal Reserve have proposed further monetary stimulus if economic growth remains weak, marking the Fed’s first serious discussion of easing since the US economy hit a “soft patch” in the spring, the FT reports. According to the minutes of its June meeting, “Some participants noted that, if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate, and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation.” Further monetary action would be likely to mean more quantitative easing, similar to the $600bn QE2 round of asset purchases that the Fed completed at the end of June, aimed at driving down long-term interest rates. The economy grew at a disappointing annualised rate of only 1.9 per cent in the first quarter, and the second quarter also has been weak, with jobs growth near to a standstill in May and June. The minutes suggest that the rate-setting Federal Open Market Committee would be deeply split over any move towards further easing amid an “unusually uncertain” outlook for both employment and inflation.

Further further reading

For the commute home,

- Four charts explaining the economic debacle. Read more

Moody’s downgrades Ireland to Ba1 from Baa3

As goes Portugal, so goes Ireland, which is now in junk territory.

The ratings agency cites implementation risks to Ireland’s austerity programme but the main reason — like with its 6 July Portugal downgrade — is the presumed involvement of private creditors as a precondition to a second bailout. Read more

FOMC minutes from the June 21-22 meeting

These minutes weren’t as interesting as those from the previous meeting, which preceded the first Fed press conference.

But there were a few semi-notable bits, which we list below. Read more

Correlation is back (with a vengence)

ConvergeEx Group’s Nicholas Colas has noted something “remarkable” this month when it comes to correlation:

...the rally in the S&P 500 of 3.8% over the past four weeks has come with HIGHER industry sector correlations. That’s unusual for U.S. equity markets, which have tended towards lower correlations in rising markets and clustered returns when things get ugly. Read more

Suing the Murdoch ‘family candy jar’

A crisis is a terrible thing to waste — even in litigation.

Amalgamated Bank of New York and Central Laborers Pension Fund in March filed a writ against News Corp, alleging that its purchase of Elisabeth Murdoch’s Shine company was “nepotistic”. Read more

Time to increase the buyback Mr Murdoch?

You won’t be needing the News Corp cash pile for BSkyB.

RTRS-UK GOVT WILL SUPPORT OPPOSITION MOTION ASKING NEWS CORP <NWSA.O> TO WITHDRAW BSKYB BID-PM SPOKESMAN Read more

No, the ECB can’t prop up Italy

We won’t know if it really did happen, not until next week’s figures on Securities Markets Programme purchases. (Current total: €74bn)

But since there was plenty of rumour on Tuesday that the European Central Bank (via the Bank of Italy) intervened to buy Italian bonds from a terrified secondary market, mind if we point something out in the interim? Read more

US trade gap widens, meaning unclear

The news on Tuesday that the US trade gap in May widened to its largest point in more than two years won’t alleviate concerns about an expected disappointment in Q2 GDP, but the news isn’t quite as bad as the headline number would suggest.

Here’s a graph from Calculated RiskRead more

The fiscal union put

Is nothing sacred anymore?

Yields on 10-year German Bunds are rising on Tuesday (up to 2.704 at pixel time, from 2.523 at 8am London time) as those on 10-year Italian government retreat from over 6 per centRead more

Not bad for an octogenarian

Rupert Murdoch has taken action to prop up the News Corp share price.

 Read more

Eurozone CDO – we have a mezzanine problem

The EFSF is like a CDO. So is the entire eurozone — an analogy which has been made ad nauseum.

The point being that the eurozone is now all about sharing and portioning its members’ debt. Read more

Presenting… the ESM Treaty

Remember November 29, 2010 — the time before July 2011 that Italian debt was massively sold by long-only investors? Germany probably triggered it a bit by calling for the creation of the European Stability Mechanism (ESM), a bailout mechanism involving burden-sharing for sovereign bonds.

Roll on 11 July 2011 and we have a signed treaty for… the ESM!Read more

Where’s the biggest Italian exposure?

Competition time.

Which European banks have the greatest exposure to Italy? Read more

Markets Live transcript 12 Jul 2011

Live markets commentary from FT.com 

How quickly things change, Italy edition

Remember when investors used to think German debt was riskier than Italian debt?

Bank of America Merrill Lynch does: Read more

Doing the right thing in the eurozone

What was it Winston Churchill said about the Americans? They could always be counted on to do the right thing after they exhausted all the other options.

Could same could be said about Eurozone finance ministers, who are now considering using the European Financial Stability Facility mechanism to directly purchase government bonds — about seven months after the idea was first floated. Read more

The Italian panic — rationalisation del giorno

This one from Credit Suisse’s Andrew Garthwaite:

We believe that the reasons investors have targeted Italy are: (a) last week’s fiscal proposals were a bit disappointing (€40bn of tightening but mostly post March 2013 elections); (b) the issue of Fininvest trying to limit paying its fine limits credibility of the government; (c) if investors are looking to hedge against the Euro sustainability, then CDS are no longer seen as worthwhile (there could be a non-CDS triggering default) and thus they short Italian bond spreads. Read more

News Corp loses $7bn in market value

News Corp’s loss of $7bn in market value over four trading days shows investor concerns that a probe into alleged phone hacking by journalists at one London newspaper could have a broader impact on the company, according to Bloomberg. The slide is far out of proportion with the lost profits from closing the News of the World tabloid or from delaying the acquisition of tBritish Sky Broadcasting Group, some analysts say.  Rupert Murdoch desperately tried to keep alive his bid to take full control of BSkyB on Monday, the FT says, as his company was hit by fresh allegations his newspapers accessed the family health records and bank accounts of Gordon Brown when chancellor and prime minister. Meanwhile Reuters says that legal experts believed News Corp could become the subject of a bribery probe in the US, pointing to the Obama administration’s stepping up of bribery law enforcement in the past two years.

Deutsche asks court to throw out US lawsuit

Deutsche Bank and its MortgageIT unit are seeking dismissal of a $1bn suit by the US government claiming they lied to qualify thousands of risky mortgages for a government insurance program, Bloomberg says. The US claims Deutsche Bank and MortgageIT falsely certified that they properly assessed the default risk of borrowers, qualifying loans for insurance by the HUD, according to a complaint filed May 3 in Manhattan federal court. TheUS sued under the False Claims Act, which permits it to seek triple damages and penalties of more than $1bn.

German banks attack publication of stress test data

German banks have launched a stinging attack on the imminent publication of highly detailed information about their holdings, claiming these could worsen the sovereign debt crisis and encourage “targeted speculation,” the FT reports. The European Banking Association plans on Friday to release detailed debt holdings data for 91 of the European Union’s largest banks including 13 from Germany as part of its much anticipated stress tests. Bloomberg adds that accountants Ernst & Young have said the tests won’t improve European bank funding as the ‘adverse’ scenario they apply doesn’t include a potential sovereign default. The EBA has said the tests will give “unprecedented insight about Europe’s bank, Reuters says.

Is fiscal union the only answer?

It’s panic stations in the eurozone again on Tuesday.

But this time a new theme is emerging when it comes to potential resolution. Read more

US to tackle housing slump – again

The Obama administration is ramping up talks on how to revive the housing market, which is weighing on the economic recovery — and possibly the president’s re-election in 2012, the Wall Street Journal reports. Last year, advisers considered several housing-policy prescriptions but rejected them in favor of letting the market sort things out. Since then, weak demand and a stream of foreclosed properties have put renewed pressure on home prices, prompting concern within the White House. Policy ideas include having taxpayer-owned mortgage giants Fannie Mae and Freddie Mac relax their rules for loans to investors, allowing those buyers to vacuum up excess housing inventory. Officials also could sweeten incentives for banks to reduce loan balances for borrowers who are underwater, or owe more than their homes are worth.

Euro slides as sovereign debt woes mount

The eurozone’s precarious fiscal position remains the predominant theme across markets, draining risk appetite and causing flight to perceived havens such as German Bunds, the FT reports in its rolling global markets overview. Early trading in the European session suggests the anxiety is just as intense as that witnessed on Monday, when global stocks had their worst one-day performance since the Japanese earthquake hit on March 11. The euro is down 1.3 per cent to $1.3865 and off 2.3 per cent to Y110.09, while the dollar index is up 0.8 per cent to 76.53. The Australian dollar and South Korean Won are down 0.9 per cent and 0.8 per cent, respectively, relative to the buck. The Swiss franc has hit a record versus the euro. Yields on benchmark Bunds are down 13 basis points to 2.54 per cent, a seven-month low as investors scramble to park funds in liquid, “safe” assets. US equivalent yields are down 8bp to 2.84 per cent as Italian 10-year yields breach 6 per cent for the first time in the euro era. The cost of insuring peripheral eurozone debt against default is rising to record levels and stocks are under the hammer.