Posts from Monday Jul 25 2011

Wall Street struggles amid debt ceiling worries

Gold hit a record, while stocks and commodities were struggling for traction, with US bond yields higher as Washington’s fiscal brinkmanship debilitated risk appetite, reports the FT’s global market overview. The FTSE All-World was down 0.3 per cent, but pared much of its earlier slide of 0.8 per cent. The FTSE Eurofirst 300 started the week with a fall of 0.3 per cent, with banks leading the declines as eurozone contagion fears were not dispelled. S&P 500 futures provided a violent indication of how uncertainty was affecting growth-focused assets: the front contract opened late on Sunday with an immediate 1.5 per cent drop. It recovered somewhat and Wall Street’s benchmark index was down 0.3 per cent. It is the traditionally perceived “riskier” assets that were taking all this on the chin – Brent crude was off 0.5 per cent to $118.05 a barrel, for example. US benchmark bonds were seeing some selling, with the 10-year note up 4 basis point to 3 per cent, and the 30-year bond, considered more sensitive to credit rating issues, yielding 4.32 per cent, up 6bp. US sovereign credit default swaps hit 57bp, the highest since February 2010. Still, benchmark US yields were only about 20 basis points off recent lows. Gold — of course — was the main beneficiary of the stress. The precious metal was up 0.9 per cent to $1,614 an ounce, having spiked to a record $1,622.5 as Asian markets kicked into gear.

Deutsche Bank announces co-CEOs

Anshu Jain and Jürgen Fitschen are set to take over the reins of Deutsche Bank as co-chief executives next May, succeeding Josef Ackermann after his decade in charge of Germany’s biggest bank, reports the FT. Deutsche confirmed the moves on Monday as revealed it also wanted Mr Ackermann to stay on as supervisory board chairman. This is the bank’s fourth shot at a duel CEO structure. It could be a rocky marriage due to culture clashes, inter-generational strife and power struggles, says the WSJ.

Chinese railway shares fall after deadly crash

Chinese railway shares tumbled on Monday after a deadly high-speed train crash over the weekend raised concerns about the future of the country’s fast-growing rail network, reports the FT. At least 38 people died and more than 200 were injured when two trains collided on Saturday in the deadliest high-speed train accident since the Eschede disaster in Germany in 1998. Efforts to muzzle news of the incident has sparked outcry, according to Reuters. And David Pilling writes that the crash throws doubt upon China’s high octane growth.

LA researcher is scourge of Chinese companies

Without ever leaving the comfort of his Beverly Hills home in Los Angeles, Andrew Left has become the scourge of companies based halfway around the world in China. Mr Left, 40, does not understand Chinese and has not been in China for more than a decade. Over the past five years, however, he has prepared research reports on at least 18 Chinese companies that trade publicly in the US, alleging fraud, accounting irregularities and disclosure violations. Since each report was posted, the stock prices of 14 of those 18 companies have fallen 50 to 100 per cent, says the FT. Mr Left’s strategy is similar to that of Carson Block, the short seller who devastated Sino-Forest’s value with a damning report extensively covered by FT Alphaville.

US debt impasse spooks markets

Investor fears about gridlock in Washington over raising the US debt ceiling mounted further as political leaders jousted over competing solutions to avert a possible debt default in August, writes the FT. The lack of public signs of progress in resolving the debt ceiling impasse between the Republican and Democratic parties cast a shadow over global markets with frustrated investors withdrawing further into haven assets. In Washington, the two political parties issued dueling plans, reports Reuters. Bloomberg looks at the details. President Obama was due to address the nation at 9pm New York time, 9am Hong Kong time.

Chinese fighters ‘repel’ US aircraft

Two Chinese fighter jets crossed an unofficial dividing line in the Taiwan Strait late last month in pursuit of a US spy aircraft, according to defence sources in Taipei and Beijing, reports the FT. The incident marked the first time in more than a decade that Chinese military aircraft have entered Taiwan’s side of the 180km-wide strait. According to Taiwan’s defence ministry, two Chinese Su-27 fighter jets briefly crossed the so-called “middle line” on June 29. News of the incident broke when Secretary of State Hilary Clinton was in China, trying to reassure her hosts that the US would put its fiscal house in order, according to Foreign Policy.

Further further reading

For the commute home,

– New York Magazine profiles Lloyd BlankfeinRead more

American football, basketball and inside baseball

Three big negotiations at three different stages. One deal.

On Monday National Football League (NFL) players voted to accept a deal to end the league’s 135-day lockout. Meanwhile, in Washington, debt ceiling negotiations drag on, with brief moments of optimism followed by accusations and name-calling. So why has the the US government failed and the NFL succeeded? Read more

What the United States could learn from Chile

The many worlds interpretation of quantum physics posits that all alternative histories and futures are real. If true, somewhere out there is this version of the United States federal budget:

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Rating (ir)relevance and downgrade speculation


“We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

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How not to draft a sovereign debt restructuring

This is the authentic, accept-no-elisions list of financial institutions in support of the IIF’s Greece financing offer:

It’s been the source of much confusion on Monday, as Greek banks mysteriously disappeared from an original list – only to appear later once again. (And throughout it’s been clear that they would have the strongest incentives/disincentives of all to swap their bonds, making the situation all the more outlandish). BBVA and BayernLB were also shunted off and then back on the list. Read more

What’s as good as gold, but potentially much more volatile?

The Swiss franc.

It has indeed often been cited as being as good as gold. Read more

Oh, it’s just another eurocrash [updated]

Lighting up the list of Europe’s biggest fallers at pixel time — banks:

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Greek debt swap — spot the missing banks [updated]

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Settlement failure financing, ETF edition

FT Alphaville has referred in previous posts to the emerging global settlement failure issue. We’d now like to address the curious case of settlement fail patterns across the repo universe.

As we have already noted, what started off as a Treasury market issue moved quickly into the Mortgage Backed Security (MBS) market, as and when authorities introduced failure penalties in the former. Read more

(Settlement) failure is an option

What if the persistent number of settlement fails was deliberately done?

A sort of unconventional financing for the market participants doing the failing, if you will. Read more

ETF arbitrage, Chinese trust edition

For those who still question the notion that ETFs “manufacture arbitrage” for anyone smart enough or well positioned enough to exploit the opportunity, we bring you the latest example of ETF arbitrage in action, this time from China — courtesy of KPMG’s 2011  Mainland China Trust Survey.

And a simply extraordinary insight into the world of ETF arbitrage trading it is too: Read more

A Bank of Ireland mystery

Behold, a modern-day banking miracle.

From a Bank of Ireland press release on Monday: Read more

Markets Live transcript 25 Jul 2011

Live markets commentary from 

Dodd-Frank collateral rules attacked

Banks have mounted a fresh assault on Dodd-Frank Act requirements to increase the collateralisation of derivatives trades, arguing that they will leave the financial system more reliant on the use of Treasuries for collateral than ever, the WSJ reports. The Act’s provisions state that derivatives collateral must be in cash or high-grade securities, though concerns have risen that Treasuries or agency debt will no longer be safe assets for margin requirements in the future. There is in fact an underrated risk that a rapid US ratings downgrade or even default could lead to a fire-sale unwinding of Treasuries collateral in markets, FT Alphaville has previously reported.

Grantham on looming peak dirt

Jeremy Grantham has returned to the subject of finite resources. In his latest quarterly letter, he says he didn’t intend to get quite so doomy on us back in April:

With hindsight, there are a few additions and qualifications I would like to make regarding my letter on resources of last quarter. I will start with an overview of the prospects for our collective well-being: there is nothing about the resource limitation problem that we cannot resolve.  We have the brain power and, especially, the inventiveness.  We have some nearly infinite resources: the sun’s energy and the water in the oceans.  We have some critically fi nite resources, but they can be rationed and stretched by sensible, far-sighted behavior to fi ll the gap between today, when we live far beyond a sustainable level, and, say, 200 years from now, when we may have achieved true long-term sustainability.  Such sustainability would require improved energy and agricultural technologies and, probably, a substantially reduced population.  With intelligent planning, all of this could be reasonably expected.  A population reduction could be arrived at by a slow and voluntary decline (perhaps with some encouragement of smaller family size achieved, for example, through greater education).

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State debt talks look back to New York 1970s crisis

State leaders are learning from New York’s rancorous brush with bankruptcy in the 1970s as they seek consensus on reducing debt burdens, the FT reports. Felix Rohatyn, the veteran banker from Lazard Freres who was one of the architects of the city’s eventual financial rescue, has been advising Andrew Cuomo, governor of New York. The 1970s rescue plan has attracted renewed interest for its creation of consensus between labor unions and lawmakers against default, contrasting with recent gridlock in Wisconsin and Minnesota. Rhodes Island, owner of the biggest pension holes in the country, is pioneering the ‘persuasive’ approach, says the WSJ.

What’s wrong with Greece bailout II…

… in three easy-to-read paragraphs.

From Jacques Cailloux and his team at RBS. Read more

Corporate profits borne aloft on foreign revenue

Three-quarters of the companies that have so far reported second-quarter earnings have beaten estimates, but largely on account of international revenues rather than domestic profit, says the WSJ. General Electric, which saw overall revenues rise 21 per cent in the second quarter, experienced a 3.4 per cent drop in US earnings but benefited from double-digit growth in emerging markets. Corporate profits of this kind are unlikely to help the US jobs outlook any time soon. On the other hand, Apple and Coca-Cola have shown that it is possible to wring profit out of the US consumer, while Caterpillar, an emerging-markets stalwart, is now falling behind, Bloomberg notes.

Calls for BP to follow Conoco with break-up

More and more analysts are arguing that BP should break itself up in order to abandon its moribund post-Gulf oil spill performance, reports Bloomberg. JPMorgan analysts said last week that BP could realise up to $100bn from a ConocoPhillips-style split into refining and marketing operations. The bank calculated that the company’s assets were worth $248bn in market value, versus the current market capitalisation of $147bn. The break-up argument has been circulating for some time, especially because BP has already moved to offload refining assets such as Texas City. But a decision is unlikely until BP knows its final bill for the Gulf oil spill, the WSJ says.

For Greece alone

While some European bankers are feeling confused over the matter of private sector participation in the new Greek bail-out, what might it mean for Ireland and Portugal?

The insistence from EU leaders that the Greek programme was “for Greece, and Greece alone” was of course aimed at telling bondholders in other peripheral countries that haircuts, voluntary or not, would not be in their future. Though, apparently, it hasn’t convinced all. Read more

Money market funds pull European bank exposure

European banks have found far less credit available from US money market funds in the last few weeks, withdrawing a prime supply of short-term financing, the FT reports. Even French banks have seen funding opportunities decline. One banker said that one week or one month was the limit for term funding, down from six to nine months before the middle of June. Lending to Italian or Spanish banks has vanished altogether, one money market fund head said. Funds have been cutting exposure to the region for some time, but French banks were traditionally among the greatest sources of European paper for investment.

Funding round values Airbnb at $1.3bn

Airbnb, a three-year-old start-up that allows travellers to rent rooms in private homes all over the world, has raised $112m in new funding, valuing the company’s equity at $1.3bn, according to the FT. Venture capital of $60bm from Andreessen Horowitz. $40m from Digital Sky Technologies and $5m from General Catalyst comprised financing, in addition to private investors, TechCrunch says. Jeff Jordan, general partner at Andreessen Horowitz has said that Airbnb ‘reminds me more of eBay in its early days than any other business I have ever encountered.’ It’s a also a big bet that there isn’t another internet bubble brewing, notes the WSJ.

Markets arrested by prospect of US default

With a fortnight to go until the Treasury will begin facing serious difficulties, rolling over US debt without a ceiling increase, world markets on Monday have begun to fear the implications, the WSJ reports. The euro and yen both failed to steal gains from the dollar, although US stocks futures have been volatile, pointing to an open down 1 per cent as European trading began. However the dollar did drop 1.4 per cent against the Swiss franc, to a record low, Reuters says. Gold is also benefiting from the stress, the FT notes, rising 1 per cent to $1,614 an ounce in Europe, having spiked to a record $1,622 as early Asian markets kicked into gear.

The eurosion of sovereign CDS

Here’s the smart thing in the eurozone plan unveiled last week.

Whatever it does for Greece’s debt sustainability (little) and to ensure private sector involvement (nothing) it really sticks a knife, so to speak, into holders of CDS on Greek debt. That, we’d argue, is something that European politicians have been gunning for for some time. Read more