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James Vernon, the chief operating officer and co-founder of Brevan Howard, the world’s fourth-largest hedge fund, is to leave the firm, the FT reports. Mr Vernon – whose surname counts for the ‘v’ in Brevan – intends to “pursue other interests” and will leave in September, the publicity-shy hedge fund told investors in a monthly update sent out earlier this week. Mr Vernon’s will be the most senior departure from the firm since it was set up nearly a decade ago. Jean-Philippe Blochet, another founding partner, left in autumn 2009, but did not hold a senior management role. Several other, more junior partners, have left the firm in recent months. Brevan Howard is the world’s largest dedicated macro hedge fund – a style of investing that includes some of the industry’s biggest names, including George Soros, Louis Bacon and Paul Tudor Jones.
Speculation about the content of a second Greek bail-out package has delivered a brutally volatile session, with the euro and European bank stocks falling on fears of a selective default by Athens before rallying sharply again in the belief that the EU was finally getting to grips with the eurozone’s fiscal difficulties, the FT reports. While all this to-and-froing has been going on, traders were also having to reconcile disappointing economic data from China, Europe and the US, with some more generally positive corporate earnings reports and a $29bn bid in the healthcare sector. The upshot of all these competing factors is that the FTSE All-World index is up 1.4 per cent, as the equity and currency risk on/off switch, which has taken a fearful whacking for much of the session, is presently flicked to the positive. This has allowed investors to focus on the one piece of economic news that is supportive – a slightly better than forecast Philadelphia Fed business index. The euro is up 1.2 per cent to $1.4387, having earlier touched $1.4140, and the dollar index is down 0.9 per cent. Wall Street’s S&P 500 has closed with a gain of 1.4 per cent, when at one point a fall of 0.5 per cent was on the cards. The FTSE Eurofirst 300 is up 1.2 per cent, with the region’s banking index turning a 1.2 per cent loss into a 4 per cent gain as worries about sovereign debt exposure recede. Spreads on “peripheral” eurozone sovereign debt have narrowed and credit default swap prices for the region have fallen back, even though an auction of Spanish debt earlier in the day proved expensive for Madrid.
Japan posted an unexpected trade surplus for the first time in three months, adding to signs that manufacturers are recovering from the huge disruption caused by the March 11 earthquake and tsunami, reports the FT. Japan returned to a narrow trade surplus of Y70.7bn ($898.4m) in June, compared with a market forecast for a deficit of Y150bn, data from the finance ministry showed. The pace of the decline in exports slowed to 1.6 per cent to Y5,775.9bn, compared with double-digit falls in the previous two months. Meanwhile, imports rose 9.8 per cent to Y5,705.2bn, a smaller increase from May’s 12.3 per cent rise. Companies so far appear to be coping with power restrictions during peak times by shifting some production to weekends, as the crisis continues at the Fukushima Daiichi plant and while other nuclear facilities remain offline following regular checks amid a lack of political clarity over restarting them. However, it is unlikely to be plain sailing for Japanese exporters. There remain concerns about power shortages ahead, particularly during the peak summer month of August.
China’s manufacturing sector could be heading for its first contraction in a year as new orders drop and factories battle against persistent inflation, according to a survey published on Thursday, the Financial Times. The HSBC flash purchasing managers’ index for China, designed to provide an early snapshot of industrial conditions, has fallen to 48.9 in July, the lowest in 28 months. The final figure for this month will be published on August 1. A reading below 50 would denote a retrenchment in activity. The weak PMI added to concerns that sustained monetary tightening by the government is weighing on growth, but analysts cautioned against overreacting, saying that the world’s second largest economy was still poised to perform strongly in the second half. Qu Hongbin, chief China economist with HSBC, said that “resilience of consumer spending and continued investment in a massive amount of infrastructure projects” would prop up the country’s growth at about 9 per cent over the rest of year. China’s economy expanded 9.6 per cent in the first half, making it the fastest-growing major economy in the world.
Iran has threatened to block supplies of oil to India because of $5bn in unpaid fees that are blocked due to international sanctions against Iran. Indian refiners have started looking for oil sources in different markets as Iran says it will block supplies for the month of August, people familiar to the matter in New Delhi told the Financial Times. “The Iranians usually allocate our oil supplies a month in advance of the due date and this month (July) they haven’t, so we don’t expect them to send us oil,” a company executive at one Indian refining group said. “We have started procuring oil from other markets, mainly in the Middle East,” the executive added. India, the second largest buyer of Iranian oil after China, owes as much as $5bn for crude already delivered, but the money is stuck in an escrow account because India can not transfer the dollar-denominated payments without falling foul of the US Treasury.
Morgan Stanley reported a lower-than-expected quarterly loss, as strong investment banking results and a surprising contribution from its trading activities helped lift revenue by 17 per cent, the FT reports. The bank’s shares surged 9.3 per cent to $23.74 by midday in New York, reflecting the progress made in reviving a fixed-income trading arm severely damaged by the financial crisis, and on combining its wealth-management business with Citigroup’s Smith Barney. “These are unquestionably challenging markets but our focus is and must be on methodic and resolute forward progress with an ever-increasing eye on those things which we do control,” James Gorman, Morgan Stanley’s chief executive, said during a conference call with analysts. Morgan Stanley took a charge of $1.7bn, or $1.02 a share, on the conversion of preferred stock by its largest investor, Mitsubishi UFJ Financial. Converting the stake into common stock will save Morgan Stanley $780m a year in preferred-dividend payments and improve the bank’s capital ratios. Including the item, the bank reported a net loss of $558m, or 38 cents a share. Morgan Stanley had earned $1.6bn, or $1.09 a share, a year earlier. Revenue jumped to $9.28bn from $7.96bn, also comfortably beating expectations. Morgan Stanley’s flagship institutional securities arm reported a $1.46bn profit, down 9 per cent from a year ago. Revenue climbed 15 per cent.
European leaders agreed a further bail-out for Greece worth €109bn (£96bn), a third of which will come in the form of debt swaps or rollovers by private sector bondholders, the FT reports. The agreement to involve private sector creditors is a political victory for Angela Merkel, Germany’s chancellor, but one that will almost certainly lead to the first default on eurozone bonds since the creation of the single currency. At a momentous summit in Brussels anxiously awaited by investors, eurozone heads of government quickly reached agreement to lower interest rates on rescue loans to all three countries in bail-out programmes. Greece, Ireland and Portugal would pay about 3.5 per cent – 100-200 basis points lower than at present. They also agreed to extend the repayment schedules from 7 ½ years to 15 -30 years. In addition, they gave the bloc’s €440bn bail-out fund, the European financial stability facility, new powers to help countries not currently in bail-outs, including precautionary lines of credit and the ability to recapitalise any struggling bank in the eurozone. The EFSF will also be able to buy bonds on secondary markets in “exceptional” circumstances and subject to the approval of the European Central Bank. President Nicolas Sarkozy of France said the changes were tantamount to the creation of a European monetary fund. In addition, eurozone leaders agreed to a smaller scale bond buy-back plan worth €12.6bn. Private holders of Greek bonds will provide €37bn to Greece’s second international bail-out. They will be given four options – three forms of debt exchange and one rollover plan – with different durations and coupons. On average, investors would take a 21 per cent hit in the net present value of their current bondholdings.
Thursday’s New York Times article on Wall Street’s fallback plans for a technical US default and/or a downgrade of the US credit rating has generated a bit of buzz. Here’s the gist:
On Wall Street, Treasuries function like a currency, and investors often use these bonds, which are supposed to be virtually fail-proof, as security deposits in their trading in the markets. Now, banks are sifting through their holdings and their customers’ holdings to determine if these security deposits will retain their value. In addition, mutual funds — which own billions of dollars in Treasuries — are working on presentations to persuade their boards that they can hold the bonds even if the government debt is downgraded. And hedge funds are stockpiling cash so they can buy up United States debt if other investors flee. Read more
1. We’ll start with the bits on Greece’s new bailout:
3. We have decided to lengthen the maturity of the EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years. In this context, we will ensure adequate post programme monitoring. We will provide EFSF loans at lending rates equivalent to those of the Balance of Payment facility (currently approx. 3.5%) without going below the EFSF funding cost. This will be accompanied by a mechanism which ensures appropriate incentives to implement the programme, including through collateral arrangements where appropriate. Read more
Nicolas Colas, ConvergEx Group chief market strategist, likes looking at correlations.
On Thursday, he’s at it again. This time with respect to the latest seasonally adjusted annualized rate for light vehicle (cars and trucks) sales in the US. Read more
Inspired by a printer bleed of a Dodd-Frank diagram from Deloitte, via Politico, here we present a slight diversion from FT Alphaville’s bailiwick.
Every now and again we come across pictures meant to simplify the complexities of the landmark legislation. (We’d never of course suggest they’d ever be designed to obfuscate.) And it hasn’t escaped our attention that, on occasion, they carry a (very) vague likeness to certain works of art. Therefore, safe in the knowledge that this seemed like a good idea at the time, we present one of a very occasional series, Dodd-Frank as drawn by … Read more
Live markets commentary from FT.com
The HSBC/Markit flash China PMI for July fell below the 50-mark to 48.9. It was 50.1 in June, making the biggest fall since March 2009 and the first negative result since July 2010.
Whew. Read more
Wells Fargo has been hit with a record $85m civil penalty by the Federal Reserve over allegations it had steered borrowers into subprime loans and falsified information on mortgage applications, the FT reports. The fine is the largest penalty the Fed has levied in a consumer protection enforcement case and is the first time that a regulatory agency has taken action over faulty subprime practices, the Fed said in a statement on Wednesday. The bank will have to compensate customers who were eligible for lower interest rate loans but were persuaded by Wells Fargo Financial staff to take out costlier subprime loans. The fine also settles allegations that salespeople at the unit exaggerated borrowers’ incomes on loan applications to make it appear that they qualified for loans for which their true incomes would have made them ineligible.
Italy and Germany have voiced their opposition to a second release of oil by western nations’ strategic petroleum reserves, a sign that the International Energy Agency might not extend into August the 60m barrels release it ordered for July, the FT reports. The comments, with a larger-than-expected drop in commercial crude oil inventories in the US, boosted oil prices on Wednesday. Brent, the global benchmark, has already recovered all its losses following the initial release of the strategic petroleum reserve, nearing the $120 a barrel level. Senior officials in Rome and Berlin cautioned that, although their countries did not support the release, they would not formally oppose it. The IEA, the western countries’ oil watchdog, plans to review the oil market this weekend, weighting an increase in Saudi Arabian supply against production losses in Libya. The Paris-based agency needs the support of all 28 members to order a second release of oil.
Ericsson’s second-quarter profitability was hurt by contracts in Europe and India, losses at the Swedish telecoms equipment maker’s joint ventures, and higher-than-expected costs for a job reduction plan, the FT reports. Ericsson on Thursday reported revenue of SKr54.8bn ($8.54bn) for the three months to June 30, up 14 per cent compared with the same period last year. Net income rose 59 per cent to SKr3.2bn, fuelled by the sales growth. However, the closely watched gross profit margin was 37.8 per cent in the second quarter, down from 39 per cent one year ago. The deterioration was blamed on lower-margin mobile network contracts in India based on third generation wireless technology and infrastructure modernisation projects in Europe. More such European projects are expected in the second half of 2011, which could put further pressure on profitability.
The art market is riding high, thanks to a surge of new collectors across Europe and Asia who feel confident about the value of everything from Ming vases to Mark Rothko paintings, the WSJ reports. Christie’s International, the auctioneers, said it sold $3.2bn worth of fine and decorative art in the first half of the year, up by a quarter from a year earlier. The total included $2.7m in auction sales and $467.3m in privately brokered art sales, says the paper. Private art sales were up 70.5 per cent compared to the first half of 2010. Rival Sotheby’s, meanwhile, said it auctioned off $2.9bn worth of art during the same period, up a third from a year ago. It will release its consolidated sale totals in August.
Italian credit derivative contracts last week saw the highest number of contracts traded since July 2010 as fears of contagion in the eurozone debt crisis spread to Rome, the FT reports. The number of credit default swaps contracts traded last week for Italy rose to 867, nearly double that of the previous week, according to the Depository Trust & Clearing Corporation, the data warehouse. It was also the highest number of contracts traded in one week for any single name over the past year. Doubts over CDS, which insure investors against the risk of bond defaults, have grown in recent weeks amid concern that a second rescue for Greece, which is expected to involve private creditors, would not trigger a so-called credit event or CDS pay-out, undermining the intrinsic value of the instruments in the sovereign market. The sharp jump in contracts traded reassured many bankers that the CDS market was still in good health. For more see FT Alphaville.
A burst of downbeat economic surveys covering China and Europe swamped the early boost delivered by hopes of a eurozone debt deal, the FT reports. The FTSE All-World equity index was down by a fraction and US stock futures were higher by 0.1 per cent, looking to add to the rally this week which has come on the back of a generally well-received batch of corporate earnings reports. Traders had begun the session in a generally positive mood as they welcomed reports that a deal has been struck to reduce the Greek debt burden and prevent a messy default. But optimism was already being tempered somewhat by a survey of China’s purchasing managers, which showed manufacturing activity in the world’s second biggest economy contracted for the first time in a year. The preliminary report from HSBC/Markit showed a gauge of China’s factory output dipping from 50.1 in June to 48.9 in July as Beijing tries to damp demand in order to suppress inflationary pressures, a tactic that some analysts fear risks a “hard landing” for the world’s second biggest economy.
A legal battle over alleged computer hacking of a US marketing company by a News Corp subsidiary has been referred to US authorities by a senior lawmaker, exposing the company at the centre of the UK phone-hacking scandal to further questions about how it operated in the US, the FT reports. Frank Lautenberg, a Democratic senator, asked the justice department and Federal Bureau of Investigations to examine the details of a case settled between News America Marketing and Floorgraphics Inc, an in-store marketing company. Floorgraphics alleged that its rival hacked its computer system as many as 11 times in 2003 and 2004 to gain business. “I wanted to make sure that you were fully aware of the case of Floorgraphics and News America, as it may be relevant to your current investigation,” Mr Lautenberg of New Jersey wrote to Eric Holder, US attorney general, and Robert Mueller, head of the FBI, in a letter sent on Wednesday.
French president Nicolas Sarkozy has agreed to drop a plan to help fund a €115bn Greek bail-out with a €50bn bank tax, a significant victory for Angela Merkel, the German chancellor, who extracted the concession at a late night meeting in Berlin ahead of an emergency summit of eurozone leaders, the FT reports. The tax plan, which would have raised €10bn a year for five years through a 0.0025 per cent levy on all assets held by eurozone banks, was strongly resisted by Berlin, which saw the plan as taking too long to implement and raise funds, which would have been used for a massive Greek bond repurchase programme. The deal paves the way for a German-backed initiative for more direct measures to get private holders of Greek bonds to help pay for the bail-out. According to a version of the plan circulated by the European Commission on Wednesday evening, all owners of Greek bonds that come due in the next eight years will be urged to swap their holdings for new bonds that do not mature for another 30 years. Other plans, however, including a French-backed bond roll-over plan, are believed to still be on the table.
FT Alphaville reports that Citigroup’s global strategists are recommending investors play the urbanisation trend by buying into water companies, arguing that the concentration of the world’s population and increasing standards of life will drive up demand for the liquid commodity. Even Willem Buiter, Citigroup’s chief economist, a man most often seen railing at the vagaries of central banks, has got stuck in with a 4,000-word essay on the subject. “I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG,” he writes. Read more
Deferred Tax Assets (DTAs) have been mentioned (usually critically) on this blog many times before. Put very simply, they are tax carryforwards that can be included in banks’ Core Tier 1 capital ratios.
Unsurprisingly then, they make quite an appearance in the recent European stress tests. Read more
Japan’s June trade data surprised everyone on Thursday, squeezing narrowly into a Y70.7bn ($898.4m) surplus. Year-on-year exports declined only 1.6 per cent, versus a median forecast of -4.1 per cent according to Reuters.
A good showing, then, in the wake of terrible destruction and amid ongoing power restrictions. Read more