Posts from Wednesday Jul 20 2011

Happy Birthday, Dodd-Frank

Is there any point in getting a one year-old a birthday present? It’s a question of etiquette that has stumped FT Alphaville for many years. Should you just get the parents something? Or put something in trust for when they grow up? Spend it on a six-pack to get you through the wailing cacophany of a birthday party? What to do?

A similar pickle presents us with the Dodd-Frank Act, which was signed into law by President Obama on July 21, 2010. It may look harmless — or indeed downright right cute — but what if it grows up to be a monster that would have made Doris Lessing proudRead more

US earnings and debt hopes propel rally

The US earnings season helped bolster the rally in riskier assets after Apple joined IBM in delivering better than expected results, reports the FT’s global market overview. The FTSE All-World index was up 0.7 per cent, with the FTSE Eurofirst 300 up 1.1 per cent as traders pushed the region’s banking sector higher by 3.4 per cent on waning sovereign debt exposure worries. Wall Street’s S&P 500 was a little bit more tentative, having charged ahead by 1.6 per cent in the previous session. It had been volatile around the baseline and finished the day down less than 0.1 per cent. Commodities were broadly firmer – Brent crude was up 1 per cent to $118.16 a barrel – helped by a 0.5 per cent dip for the dollar index. The euro was up 0.5 per cent to $1.4215 as the market waits to see if any concrete proposals to stem the eurozone debt crisis can emerge from Thursday’s special EU summit. The 30-year US bond yield was down 11 basis points to 4.19 per cent as traders repriced a lower risk of default and 10-year note yields were down 5 basis points to 2.87 per cent, nearing their low for the year of 2.81 per cent.

Sovereign debt fears hit flows at BlackRock

Investor worries over sovereign debt slowed asset inflows into BlackRock, the world’s largest money manager, in the second quarter, reports the FT. BlackRock lifted second-quarter profits 43 per cent from the same period last year as profitable asset inflows offset client redemptions in low-fee products. But the fund manager indicated that recent asset inflows to the core business have slowed in uncertain ­markets.

China raises Xinjiang protest death toll

China on Wednesday raised the death toll to 18 from a clash at a police station in the restive far western region of Xinjiang, saying that 14 “rioters” died along with two policemen and two hostages in the worst violence there in more than a year, according to the FT. Government officials previously said at least four people were killed in what they described as a terrorist attack. But the Germany-based exile group World Uighur Congress said it was an attack on unarmed protesters.

Cnooc to acquire Opti Canada for $2.1bn

China’s state-owned Cnooc has agreed to acquire Opti Canada, a bankrupt Calgary-based oil sands producer, for $2.1bn, including debt, underscoring the growing role of Chinese companies in the Alberta industry, reports the FT. Opti filed for credit protection a week ago after failing to find a buyer. Cnooc, China’s largest offshore oil and gas producer, will pay $34m to Opti’s shareholders, equal to 12 cents a share. The rest of the purchase price will be channelled to Opti’s creditors.

Investors warned of Chinese bond risks

It is well known that international bond investors have loaned tens of billions of dollars to Chinese companies in recent years and that some of those companies, notably Sino Forest and China Forestry, are now in distress. Less well known, however, is the fact that almost every Chinese borrower that has tapped the international markets for funds has done so through a circuitous route that exposes investors to considerable risk, says the FT. “Even if the bondholders get their money back in five years, they are not being paid an appropriate rate of return,” says Tom Jones, co-head of Asia for Alvarez & Marsal, the restructuring firm.

White House open to temporary debt deal

The White House said it was open to a short-term increase in the US borrowing limit to give “a few more days” for negotiations over a broad fiscal package, reports the FT. “If both sides agree to something significant, we will support the measures needed to finalise details”, Jay Carney, White House press secretary, told reporters in a briefing held shortly before Barack Obama, the president, was set to hold a new round of separate meetings with Democratic and Republican leaders in Congress.

Gillard vows questions for News Corp

Julia Gillard, Australia’s prime minister, took aim at Rupert Murdoch on Wednesday, saying his Australian subsidiary must answer “hard questions” in light of the UK phone hacking scandal. Amid calls for an inquiry into Australia’s media industry, Ms Gillard warned News Corp’s local subsidiary, News Limited, that it had a responsibility to be transparent, writes the FT. “When there has been a major discussion overseas, when people have seen telephones hacked into, when people have seen individuals grieving … then I do think that causes us to ask some questions here in our country,’ she said.

Further further reading

For the commute home,

Michael Burry posing with black swans. Read more

Sarkozy and Merkel in 11th hour talks

Nicolas Sarkozy, the French president, rushed to Berlin on Wednesday night in an attempt to hammer out a new Greek rescue plan that could include €71bn in bail-out funds from international lenders and a €50bn tax on eurozone banks, proceeds from which would be used to buy back 20 per cent of Greece’s €350bn in outstanding debt, reports the FT. The proposals, included in a rescue plan circulated by the European Commission ahead of an emergency summit on Thursday, also include a bond exchange programme under which private owners of Greek debt would be encouraged to swap their current holdings for new 30-year bonds.

  Read more

Chinese patent problems

Here’s a chart posted a couple of weeks ago by economist Mark Perry, based on data from different regions’ patent offices and collected by the World Intellectual Property Organization:

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The central bankers’ worry lists

Looks like there’ll be no sleep at Jackson Hole.

Courtesy of Morgan Stanley’s global economics team, two tables that list and rank each major central bank’s current “challenges”. Read more

Italy’s break(ing) even point…

… is not until a whopping 300 bps rise in interest costs across the yield curve, from today’s levels, according to Morgan Stanley.

In a note out Wednesday MS’s Daniele Antonucci and Elaine Lin ask how sustainable is Italian government debt? Read more

Euro-Tarp, abridged

Not just sovereign debt: there’s also vague talk afoot that the EFSF might be directed to purchase bank equity. So we liked this guide to the (weak) pros and (strong) cons from Nomura. Cut out and keep!

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A commercial real estate mini-pop

Just one month after registering a new index low, an eye-catching top line from Moody’s:

The Moody’s/REAL Commercial Property Price Index (CPPI) measured a 6.3% increase in May, the first positive move in six months and the largest one-month increase since the inception of the index. Read more

Are EFSF bond purchases safe?

Buyback — boondoggle! It’s a noun phrase we’re used to here on FT Alphaville, following this seminal 1989 paper, by Messrs Rogoff and Bulow.

The boondoggle is the tendency for market purchases of distressed sovereign debt to subsidise creditors, by offering them a way out at greater recompense than if they were recovering on defaulted debt. Read more

Goldman: debt ceiling debacle already hurting economy

We’ve all heard of the bad things that await should the debt ceiling not be raised or if the US’s sovereign rating is downgraded.

But any impact of the Washington quarrel on the US economy now is harder to spot. A note out Tuesday from Goldman Sachs, however, argues that the prolonged negotiations are having a detectable influence on the US consumer. Read more

Italy’s record-busting, CDS-moving week

We know that Italian bond yields reached record highs last week.

But did you know that the country made some CDS history too? Read more

Ford’s shapeshifting asset-backed securities

Citigroup published a note on Thursday lauding the asset-backed securities (ABS) market for “continuing to exercise leadership in capital market solutions.”

One for Private Eye but please bear with us as Citi goes on to discuss the fascinating and appropriately named Fuel (Ford Upgrade Exchange Linked) notes issued by Ford Motor Credit. Read more

Greek contagion quote du jour

Markets are saying pretty much what I’m saying too: that Greece is doing what it can, but that Greece is not going to be able to carry the weight of all of Europe and the other problems that Europe has…

George Papandreou, from Bloomberg. ‘Sorry, but we just can’t bail out Germany…’ Although note how often the periphery is seceding (to borrow a phrase) from the troubles of the (Italian and Spanish) core these days? Read more

The CoCo cap – a mere €150bn?

The CoCo death spiral is the process by which the expectation of a swathe of bank-issued Contingent Convertible (CoCo) debt converting into equity can exacerbate share price declines.

– We constructed a valuation model calibrated on the CoCos of Lloyds and CS. Read more

Markets Live transcript 20 Jul 2011

Live markets commentary from 

Dear Uncle Trichet

Doing the rounds in the City of London on Wednesday morning.

Dear Uncle Trichet, Read more

When doves don’t cry – BoE edition

The minutes of the last MPC meeting are out and here’s the price action in the Great British Krona.

 Read more

Bank of America swings to $8.8bn loss

Bank of America on Tuesday sought to address concerns that it might need to raise capital, providing more information about its plans to meet Basel III capital requirements as the bank revealed a net loss of $8.8bn for the second quarter, reports the FT. Costs of settling cases related to lax real estate lending more than outweighed underlying improvement in credit trends, with the US’s largest bank reporting a net loss of 90 cents a share in the second quarter, compared with net income of 27 cents a share in the same period last year. The results contrasted with the fortunes of Wells Fargo, the US’s fourth-largest lender, which also on Tuesday posted a 29 per cent rise in second-quarter profit to $3.9bn, as write-offs of bad loans fell and the bank drew down $1bn in reserves against future losses. BoA’s results were in line with guidance given in June when the bank announced it had settled claims with investors in mortgage bonds at its Countrywide unit, agreeing to pay $8.5bn to holders of some 530 securities. At the time, it said the quarter would see a further $5.5bn charge to cover other claims.

Prime minister set for Commons showdown

David Cameron is set to face a gruelling Commons interrogation on Wednesday over new revelations about his links to Rupert Murdoch’s media empire and claims that he turned a blind eye to the phone-hacking affair, the FT reports. The prime minister cut short a trip to Africa on Tuesday to give a Commons statement and lead an emergency debate on the scandal, with Labour claiming he repeatedly ignored warnings about phone hacking and its implications for Andy Coulson, his former press chief and ex-editor of the News of the World. Meanwhile, it emerged that Neil Wallis, former deputy editor of the News of the World, provided unpaid advice to Mr Coulson before the 2010 election, in addition to his £1,000-a-day part-time PR contract with the Metropolitan Police. One Tory official said Mr Wallis – arrested last week over hacking allegations – had “probably” also visited Downing Street. It was unclear precisely what services the man known as “the Wolfman” provided for Mr Coulson and, indirectly, for Mr Cameron.

Greek borrowing costs surge to fresh highs

Greek borrowing costs jumped to euro-era highs after a European Central Bank council member said that a short-term “selective default” by Greece might not have “major negative consequences”, the FT reports. The comments by Ewald Nowotny, Austria’s central bank governor, sparked a jump in two-year Greek borrowing costs of nearly 5 percentage points to 39.24 per cent at one point, one of the biggest daily leaps since the country joined the single currency. The Austrian central bank later clarified Mr Nowotny’s remarks, saying he was fully in agreement with the position of Jean-Claude Trichet, ECB president, who has warned that any default by Greece would result in its bonds not being accepted by the ECB as collateral. This helped the Greek bond market regain some of the losses, with two-year yields easing back to 39.02 per cent, up 4.55 percentage points on the day. Greek two-year bond yields have risen by about 12 percentage points since the start of July because of uncertainty over a second bail-out for the country.  Meanwhile in Spain, borrowing costs also surged as the country sold €3.79bn ($5.4bn) of 12-month bonds at an average yield of 3.702 per cent, significantly higher than the 2.695 per cent paid last month.

Robust BHP output bodes well for profits

BHP Billiton said iron ore production rose for an 11th consecutive year, in a market update that underlines confidence the mining giant will next month report a near doubling in financial full-year net profits to $23bn, the FT reports. Shares in the Anglo-Australian listed miner rose nearly 2 per cent to A$43.44 by the Sydney close on Wednesday after BHP said that in addition to iron ore it had set annual production records for the period ended June in manganese ore, parts of its nickel unit and in natural gas. BHP’s natural gas division was boosted by a maiden contribution from the $4.7bn acquisition earlier this year of Arkansas-based shale gas assets from Chesapeake Energy of the US. The miner last week placed another large bet on the US shale gas industry when it announced an agreed $12.1bn for Houston-based developer Petrohawk. The miner’s annual production of iron ore rose 8 per cent to 134m tonnes, while growth of 7 per cent in the four quarter compared with the third came in spite of a disruption caused by a train derailment.

FICC trading brings Goldman in short

Goldman Sachs has been through the legal and regulatory wringer for two years now but its weak performance last quarter came from the heart of the business – fixed-income trading, the FT reports. JPMorgan Chase and Citigroup beat analysts’ expectations with their second-quarter results last week. Goldman’s came in short, with a 53 per cent year-on-year plunge in fixed income, currency and commodities revenues to $1.6bn doing the damage. The bank reported overall earnings of $1.1bn, or $1.85 a share, and announced 1,000 job cuts. Analysts had expected profit of $2.27 a share. “It’s one of the very, very few quarters since our [initial public offering in 1999] that we’ve underperformed in FICC but we did,” acknowledged David Viniar, chief financial officer. He said there had been no “impairment” to the group’s franchise, but added: “I don’t want to sugar coat things – I think we underperformed.” That is as far as the mea culpa went. Mr Viniar said Goldman had made a conscious decision to reduce its risk exposure, as the sovereign debt crisis in Europe worsened, and it was not yet clear whether that was right or wrong.

US earnings and debt hopes propel rally

Global technology stocks were rebooting the rally in riskier assets after Apple joined IBM in delivering better than expected results, the FT reports. The more ebullient mood was also founded on hopes that signs of progress in US negotiations on raising the government debt ceiling sharply reduces the chances of a technical default by Washington – an event whose fallout investors have had difficulty extrapolating. In addition, stronger than forecast US housing data on Tuesday provided a morsel for growth optimists to chew on, while an easing of eurozone stresses was also providing cud for the bulls. The FTSE All-World index was up 0.5 per cent, with the FTSE Eurofirst 300 up 0.6 per cent as traders price in the extra gains from Wall Street’s 1.6 per cent advance overnight. S&P 500 futures pointed to Wall Street putting on another 0.2 per cent at the opening bell.