Posts from Monday Jul 18 2011

US deficit talks focus on least challenging deal

For months, Republican and Democratic politicians have been describing the vote on the US debt ceiling as the chance for the country to enact a package of fiscal reforms that would put it on course for a sounder financial future, writes the FT. But with less than two weeks to go before the US might default on its debt, a hard reality is sinking in fast in Washington. The big money in the budget is likely to remain untouched. Reuters agrees, writing that a plan B is being urgently assembled.

Shelved IPOs create logjam in Europe

The logjam of initial public offerings is building in Europe, after almost $10bn of flotations were shelved in the first half of the year due to market volatility and investors’ disillusionment with recent listings, says the FT. Bankers say the real figure of scrapped IPOs is even higher than the statistics suggest, as many companies have had to quietly drop plans after preliminary talks with investors.

Hanlong Mining bids A$1.2bn for Sundance

China’s Hanlong Mining has offered A$1.2bn (US$1.3bn) to acquire Sundance Resources, an Australia-listed miner with iron ore assets in Cameroon and the Congo, underlining China’s growing appetite for African resources, reports the FT. Hanlong, which already holds 18.6 per cent of Sundance, offered 50 Australian cents per share for the rest of the company, conditional on approval from the Sundance board and regulators.

SMIC’s future unclear after Wang resignation

Investors in Semiconductor Manufacturing International (SMIC) expressed shock on Monday at a boardroom drama that has once again left China’s biggest contract chipmaker by sales with an uncertain future, reports the FT. Shares fell almost 10 per cent in Hong Kong in reaction to a rare public feud between two state-owned shareholders of SMIC that has broken out over the past 18 days. It began when Jiang Shangzhou, SMIC chairman, died in late June and culminated in the resignation last week of David Wang, SMIC chief executive.

Murdochs take $1bn hit on share falls

The value of the Murdoch family’s shareholding in News Corp has fallen by $1bn since the political firestorm erupted over the phone-hacking scandal at the News of the World, writes the FT. A 4.3 per cent slide in News Corp’s shares on Monday to $14.97 in New York left them down 17.4 per cent, or $8.3bn, since July 4, when news broke of the Millie Dowler hacking. The share fall came as Rupert Murdoch, News Corp chairman, and his son James braced for what looked likely to be a bruising appearance before a UK parliamentary committee on Tuesday. James’ BSkyB role is being increasingly questioned by investors, says Reuters.

Suzuki questions VW alliance

Suzuki Motor has called into question its co-operation with Volkswagen, as tensions between the two partners flared again on Monday, reports the FT. Suzuki and Volkswagen formed a partnership in 2009 to co-operate in small cars and new technologies. However, reports of tensions between the partners soon emerged. Yasuhito Harayama, Suzuki executive vice-president, confirmed on Monday that the groups have not co-operated on any projects in the 19 months since the alliance was formed.

Risk assets weak as gold hits $1,600

Risk assets started the week on the back foot, with sentiment battered by worries over eurozone and US sovereign debt issues, reports the FT’s global market overview. The FTSE All-World equity index was down 1.5 per cent as European bourses see heavy losses. The FTSE Eurofirst 300 was off 1.8 per cent, with banks suffering as investors got the first chance to discount details of the latest European bank stress tests. Wall Street’s S&P 500 was sporting a fall of 0.8 per cent. Gold was best reflecting the anxiety stalking dealing rooms. The precious metal hit another record at $1,605.00 an ounce, as investors sought alternatives at a time of fiscal uncertainty. Treasuries continued to provide a haven for funds in times of broader market angst. Ten-year yields were down 3 basis points at 2.92 per cent. Benchmark Bund yields were down 7 basis points to 2.64 per cent, near an eight-month low, with investors apparently not hopeful that this week’s eurozone summit will deliver anything concrete to halt the bloc’s sovereign debt contagion. The euro was thus again under pressure, falling 0.1 per cent to $1.4110, while the dollar index was up 0.3 per cent as commodity currencies such as the Swedish krona and Australian dollar sold.

The price of distressed defeased treasuries

When it comes to what may or may not happen should the US be downgraded, it’s all about the collateral.

(And perhaps the GSEs.) Read more

Further further reading

For the commute home,

- Bill Clinton wants you!… to paint your roofRead more

Consumption conundrums continued

David Leonhardt’s weekend column in the New York Times on the despondency of the US consumer has justifiably received a lot of play in the interwebs.

Here’s his main argument: Read more

The good, the bad, and the ugly, News Corp edition

You’ve heard of good banks, bad banks, and toxic assets.

What about a good, bad and a toxic News Corporation? Read more

A touch of anglo-periphery contagion

Adding to the sharp moves in Italian and Spanish banking stocks on Monday were also some rather sharpish slides in the UK banking sector — just ahead of the close of trade.

 Read more

So stressed we’re suspended

Europe’s biggest fallers by the end of Monday’s trading — and notice a similarity with the moves in Spanish and Italian sovereign debt?

 Read more

Collective action problem du jour

Chart from SocGen’s stress test note:

 Read more

Carson Block drinks beer, leaves questions

The Globe & Mail continued its coverage of the Sino-Forest story by sharing a few beers and a Cobb salad with Carson Block.

In a “dude”-laced interview with Andy Hoffman published Saturday, Block reiterates his belief that Sino-Forest is a “fraud”. Read more

Tabb: HFT makes up a third of OTC energy swap trading

Attention over-the-counter (OTC) energy traders who think there’s no prominent high frequency trading (HFT) presence in their section of the market.

A Tabb Group research piece on how HFT practices are likely to creep into credit default and interest rate swaps once the market becomes centrally cleared, automated and standardised has made a striking discovery over the course of its data gathering. Read more

Even more Greek exposure, at local banks

Actually, to put a number on it, the Greek banking system and the two biggest Cypriot lenders possess €13.8bn more exposure to the Greek sovereign than we thought they did, according to stress test disclosures.

We’ve noted the contrast between those disclosures and previous estimates below. The exercise has a Mr Creosote feel about it. We already knew that Greek banks were dangerously stuffed with debt from their own sovereign and sovereign default was a major threat at €42.1bn of estimated exposure, never mind at €54.4bn. Read more

Is the debt ceiling drama really all about the GSEs?

You’re looking at an excerpt from the 2008 Housing and Economic Recovery Act. That’s the thing which created the Federal Housing Finance Agency (FHFA), which is currently charged with regulating the US’s massive Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Read more

The Italian panic, seconda parte [updated]

Italian and Spanish 10-year bond yields — both north of 6 per cent at pixel time (chart via Reuters):

 Read more

BTPs, the ECB and the SMP

Monday, 3.30pm (CET) is the time.

The time when the ECB releases the data on bond purchases settled in the first part of last week under its Securities Markets Program (SMP). Read more

Markets Live transcript 18 Jul 2011

Live markets commentary from FT.com 

The UK economy: it’s the supply, stupid

Don’t panic.

With all the talk of ratings downgrades for the US, and actual real-life here-and-now downgrades in some of the eurozone peripherals, have we all been sufficiently worried about the UK? It was not so long ago that it was the subject of a negative outlook from S&P’s, after all. Read more

UK banks and the stress test

Barclays sounded reasonably chipper when the stress test results were released late on Friday afternoon.

- BARC SAYS THROUGHOUT THE STRESSED PERIOD BARCLAYS REMAINS PROFITABLE AND ITS CAPITAL RESOURCES INCREASE. Read more

Markets teeter on US default cliff

The US bond market may be sending a false signal to Washington that it is unconcerned by the prospect of default should wrangling politicians fail to raise the Federal debt ceiling, the FT reports. “This is a very linear event, it’s like walking to the edge of a cliff – you either stop at the edge or go over,” said Ira Jersey, US interest rate strategist at Credit Suisse. “People in Washington can point and say the market is not worried as there is little reaction so far, but the market is waiting until just before the deadline.” While the consensus in the bond market is for a last-minute deal ahead of the August 2 deadline, sentiment may start faltering later this month when the market is asked to absorb hefty new debt sales. Separately, White House budget director Jack Lew said on Sunday, that there had been “activity and progress” on a deal to raise the US debt ceiling, but there was little sign that Republicans and Democrats were much closer to an agreement, the FT reported. China, meanwhile, has said it expects that the US will be able to resolve its debt-ceiling impasse without triggering a default, according to advisers to the central bank and government. China is the biggest foreign creditor to the US.

US aircraft makers struggle to fill back-orders

US airlines contemplating a splurge of spending on new aircraft may struggle to secure the jets they want, according to senior industry executives, as record backlogs at leading manufacturers such as Boeing and Airbus squeeze out new orders, the FT reports. Since the start of the year a number of US airlines have begun to examine their fleets, spurred by high fuel costs. American Airlines is in private talks with manufacturers to buy several hundred jets, while Delta Air Lines has publicly asked makers to pitch for a fleet of up to 200 aircraft. Still, US carriers have left it late to begin re-fleeting. Airbus and Boeing are ramping up production as fast as they can, aiming to produce more than 40 of their workhorse single-aisle aircraft every month by 2012 and 2014 respectively. And while they are eager to win extra business, record order books mean that production slots are limited. Bernstein Research estimates that at current rates it will take Airbus and Boeing between seven and eight years to work through their backlogs.

Tesco to trial loyalty card at US operation

Tesco is poised to trial a version of its successful Clubcard loyalty scheme in the US, as it strives to stem losses at its Fresh & Easy chain, the FT reports. Tim Mason, chief executive of Fresh & Easy, said the business, which currently has 176 stores and will have 214 by the end of February next year, was ready to support a loyalty scheme. It will be known as the Friends of Fresh & Easy card, but will be based on Clubcard. Mr Mason, who played a pivotal role in the introduction of Clubcard in the UK, said: “Clubcard has always been, from the very first day we launched it, the icing on the cake, not the cake itself, and so, therefore, you have to have an established business that is delivering every day for customers before introducing it.” He denied the loyalty card represented a strategic U-turn for Tesco’s US business, which has concentrated on delivering the lowest prices to customers rather than giving a discount through points earned with a loyalty scheme.

News Corp unlikely to face rapid action in US

News Corp is facing heightened legal risks in its home US market over the phone hacking and police bribery scandal after the arrest of Rebekah Brooks, the former News International chief executive, but legal analysts believe US authorities are unlikely to take rapid action against the company, the FT reports. The debate on the chances of the largely British scandal affecting News Corp’s US directors or businesses remained split along party political lines on Sunday. The “startling” UK allegations raised questions about whether News Corp had violated the US Foreign Corrupt Practices Act, Senate majority whip Dick Durbin, Democrat of Illinois, told NBC’s Meet the Press. He called for congressional hearings and said the Federal Bureau of Investigation needed to “follow through” with an investigation it opened last week. The moves coincide with the resignation of Britain’s top police official on Sunday. Sir Paul Stephenson commissioner of the Metropolitan Police Service left saying that Scotland Yard’s links with News International at a senior level had made it difficult for him to do his job, according to the New York Times.

Doubts over Chinese steel output

China is underreporting the amount of steel it makes by about 40m tonnes a year – roughly the amount made by Germany – according to a new analysis that provides insights into the recent high prices for the main raw material used by the world steel industry, the FT reports. Detective work by Meps, a UK steel consultancy, indicates that Chinese steel output last year was 672m tonnes – nearly half of the world output – as opposed to the 627m tonnes reported by the Chinese authorities. Behind the underreporting, according to Peter Fish, Meps managing director, is that plants that Beijing would like to shut down because they are not economical and produce too much pollution have stayed open to meet local demand. Regional data-gathering bodies around China have disguised the fact the mills are still churning out metal by declaring that output is lower than is the case. According to Mr Fish’s analysis, the higher-than-reported steel production creates extra demand for iron ore – the main constituent of steel – and has been one factor keeping prices of the commodity at unprecedented highs, eating into steelmakers’ profit margins globally.

Swiss firms use franc’s strength for acquisitions

The Swiss franc’s rally may have inflated costs and shaved profits for domestic Swiss firms, but some companies are now hoping to use the strength of the currency as an acquisition weapon instead, reports the WSJ. Last week’s $1.2bn takeover of US-based biocides firm Arch Chemicals by Swiss-based Lonza is the latest such move to capitalize on the franc’s record levels against the euro and dollar. Lonza Chief Executive Stefan Borgas said the deal was “facilitated” by the strong franc and should help the chemicals maker reduce its dependence on Switzerland, where more than 30 per cent of its employees are based, says the WSJ. Arch has $1bn in sales, compared to $3bn  at Lonza. Analysts now expect more transactions in the pharma, food and energy sector in the coming months. Among those being eyed is a proposed move by Nestlé to buy Chinese candy maker Hsu Fu Chi International. The Swiss franc has surged 8 per cent against the euro and 15 per cent against the dollar this year.

Drought cripples southern US farms

Half of US farmer Dahlen Hancock’s cotton fields are dead. The other half are clinging to life, reports the FT. The 5,800 acres he farms near Lubbock, Texas, are half irrigated and half at the mercy of the clouds. And the past nine months have been the driest in Texas on record. The Lone Star state is at the epicentre of a once-in-a-generation drought stretching from Arizona to Florida. The US’s southern underbelly is scorched like meat on a grill. The drought has spawned wildfires, turning grasslands to ash. In Texas, the leading cotton producer in the US, 59 per cent of the cotton crop is in poor condition or worse. Harvests of hard winter wheat, prized for yeasted breads, have plummeted in Kansas, Oklahoma and Texas as yields and acreage contracted. Ranchers cannot feed their cattle on parched pastures.