Posts from Tuesday Jul 26 2011

Chinese train lines suffer further setback

China’s high-speed rail network was hit with fresh problems on Monday when 20 bullet trains on the new line between Beijing and Shanghai were delayed for more than three hours because of a power failure, just days after power problems caused a deadly crash, writes the FT. It was at least the fifth such failure since the line opened a month ago, and a stark reminder of the quality concerns now surrounding China’s rush to build the world’s biggest high-speed rail system. The Chinese government ordered a two-month safety check of railways nationwide following the collision that killed at least 39 people, when one train smashed into the back of another that had lost power after being struck by lightning, near the eastern city of Wenzhou. Sheng Guangzu, China’s railways minister, said in a statement that the inspections would focus on bullet trains and try to solve equipment problems as quickly as possible.

India unexpectedly raises rates by 50 points

India’s central bank has raised interest rates by a higher than expected 50 basis points, signalling its determination to battle persistent high inflation, reports the FT. The increase, which brings the country’s benchmark interest rate to 8 per cent, is India’s eleventh in 18 months. It comes as the economy continues to struggle with higher global commodity prices, supply-side bottlenecks that affect the prices of food, and loose fiscal policy. The Sensex, India’s main stock index, fell 1.6 per cent following the announcement. “Inflationary pressures are very strong … inflation continues to be the dominant concern,” said Duvvuri Subbarao, governor of the Reserve Bank of India.

Dollar takes brunt of Washington debt deal battle

At first glance, it looks like the market has become bored with the US debt ceiling game of chicken, with underlying hopes for a busy and positive week of corporate earnings from global companies helping to stabilise equity benchmarks and support commodities, the FT reports. In the US government bond market, the sale of $35bn in new two-year notes attracted solid demand, with no sign of jitters about the market possibly losing its triple A status should Congress fail to increase the $14,300 debt ceiling by the August 2 deadline set by the Treasury. The FTSE All World is up 0.3 per cent following a solid session in Asia. The S&P 500 on Wall Street has closed 0.4 per cent lower after the FTSE Eurofirst 300 dropped 0.3 per cent. Results from 3M, BP and UBS challenge the otherwise upbeat narrative and counteract well-received figures from the likes of Ford and Deutsche Bank. Copper is rallying 1.6 per cent to $4.47 a pound and Brent crude is up 0.4 per cent to $118.29 a barrel as traders add to growth-focused positions. Early selling of gold has reversed with the precious metal up 0.3 per cent at $1,619 an ounce.

Soros to close Quantum fund to outsiders

George Soros, the billionaire hedge fund manager, is closing his Quantum fund to outside investors and returning their money, the FT reports. Quantum, which will continue to manage about $24.5bn of Soros family money, blamed the decision on new financial regulations requiring hedge funds to register with the Securities and Exchange Commission. “An unfortunate consequence of these new circumstances is that we will no longer be able to manage assets for anyone other than a family client as defined under the regulations”, Jonathan and Robert Soros, Mr Soros’ sons and Quantum’s co-deputy chairmen, wrote in a letter to investors on Tuesday. New regulations require hedge funds with more than $150m under management to report details about investments, employees and investors, and also makes them subject to possible inspections by the SEC. Mr Soros’ decision contrasts with his own reputation as an advocate for both government and corporate transparency.

US housing edition

This morning’s miserable new home sales report gives us an excuse to write about a theme we’ve been distantly following for some time: the possibility that the housing downturn has overshot the pre-crisis boom and will eventually provide an economic boost when it corrects.

Whether this turns out to be the case depends on whether demographics can trump the recent adjustments in household behaviour, as a recent paper from RBC explains: Read more

Further further reading

For the commute home,

– The system begins to eat itself: House GOP revolts against Speaker Boehner’s plan, which the White House suggests the President veto. Read more

US CDS curve inverts for first time ever [updated]

Presenting, courtesy of Bloomberg, le chart du jour — an eye opening inversion of the US credit default swap curve:

 Read more

What the United States could learn from Denmark

That it should raise the debt ceiling to $42,000 billion.

Wait, hear us out… Read more

Britain isn’t just in very deep trouble. It’s doomed

This… will spark some debate. Anything on the future of the British economy entitled the ‘Armageddon Project’ and applying terms like ‘psychology of denial’ and ‘debt addiction’ will do that.

But since the UK’s growth outlook and status as a safe haven will be closely watched for the rest of 2011… Read more

George Soros goes it alone, keeping it all in the family

An end of an era, of sorts.

Bloomberg reports Tuesday morning that Soros Fund Management LLC will no longer be investing non-family capital and will be returning less than $1bn to investors. Read more

The Fed’s 1.6 trillion ‘somethings’

Chris Cook, strategic market consultant, entrepreneur and commentator, likes to push boundaries when it comes to financial thinking.

He’s at it again on Tuesday in the Asia Times. This time questioning the world’s current understanding of what bank money is.  Also, how it relates to quantitative easing. Read more

Why prejudice is really, really bad for growth

Economists have long observed the inverse correlation between prejudice and economic competitiveness and economic development. Advanced economies tend to have less racism, religious intolerance, homophobia, and so forth, whereas less developed economies tend to exhibit more prejudice.

Of course, observing a correlation is not proof of causation (a fact that economists seem condemned to point out for all eternity – as modern day versions of Sisyphus). Read more

Markets Live transcript 26 Jul 2011

Live markets commentary from 

The 21st century is when everything changes

With government finances still dealing with the aftershocks that are rippling out of the epicentre of the financial credit crunch, the world economy could do with a period of calm in which to heal.

Unfortunately, it is not going to get it. Read more

Stretching the debt deadline

Last week Barclays Capital estimated that the US might actually have until August 10 before it runs out of money and faces default (assuming that matters don’t improve in Congress).

Now others are jumping on that bandwagon. Read more

BP profits drop on poor production

BP has reported net profits of $5.6bn in the second quarter, above its Gulf oil spill-derived $17bn loss a year earlier but still disappointing on analyst estimates of $5.9bn, Bloomberg reports. Production for the quarter was down, at 3.43m barrels of oil equivalen a day, 11 per cent lower than the same period last year, the FT says. The drop primarily reflected the impact to production in the Gulf of Mexico, where BP has not restarted drilling. Analysts have attacked what they see as BP’s “business as usual” approach, despite uncertainty over the final costs from the Gulf oil spill, which are unlikely to be known until later in the year, according to the WSJ.

Fed signals money market fund reform

The president of the Boston Fed has outlined potential reforms to the money market fund industry in new detail, Reuters reports. “While several proposals have been suggested, some combination of capital buffers, floating rate NAVs and enhanced disclosure seems the best way forward,” Eric Rosengren said. Floating net asset values have proven controversial, with money market fund executives arguing a fixed $1-per-share NAV provides a bedrock of stability, despite the breaking of the buck by Reserve Primary in the 2008 crisis. Capital buffers rather than an industry-desired “liquidity bank” might be a solution, if they are accepted in place of switching to floating NAVs.

Why Germany and Greece are right to blame each other

The ongoing epic of the eurozone crisis is by no means over.

Greece will probably selectively default next month (or thereabouts), and then have a pause before properly defaulting (with a debt haircut) at some later date. There are still many other options for crises out there, and politicians will no doubt have many opportunities to create even more. Read more

Netflix drops 10 per cent on price rise warning

Netflix shares have tumbled more than 10 per cent in after-market trading, following the company’s warning that a price rise will cause some customers to downgrade or cancel subscriptions, the FT says. Earnings per share of $1.26 in Netflix’s second-quarter results were above analysts’ estimates, but they took fright at the guidance for Q3 including projected subscriptions growth of 27 million, All Things D reports. The increase effectively hiked prices for some customers by sixty per cent, and will also raise the pressure on Netflix to strike new and better contracts with content providers, the NYT says.

UBS blames strong Swiss franc for weak results

UBS has scrapped earnings targets after net profits dropped 49 per cent in the second quarter, Bloomberg says. Net income fell to $1bn, down from $2bn a year earlier, with the bank announcing a round of cost cuts worth $2.5bn over the next three years, the FT reports. A strong Swiss franc was blamed for much of the poor performance in private banking, the WSJ says, but the results also show considerable volatility in UBS investment banking activity, especially fixed income, reports FT Alphaville. Deutsche Bank results released on Tuesday also reveal weak trading in investment banking, Reuters reports.

UK GDP *pass*

The preliminary estimate of second quarter UK GDP is out, and it’s bang in line with expectations.

 Read more

Back to the drawing board at UBS

New capital and regulatory requirements, combined with a weakening economic outlook, are likely to weigh on future returns, constraining growth prospects for the industry. While we believe we will deliver higher profitability, our target for pre-tax profit set in 2009 is unlikely to be achieved in the original timeframe of 3 to 5 years. Over the next 2 to 3 years, UBS will eliminate costs of CHF 1.5–2.0 billion, while remaining committed to investing in growth areas.

And so begins the second quarter results statement from UBS. Read more

Heavy platinum futures fine for ex-Moore trader

A former portfolio manager at Moore Capital has been fined $1m and barred from trading US platinum and palladium futures in a civil settlement with the CFTC, after officials claimed he tried to manipulate the two markets, the FT says. Christopher Pia, now of Pia Capital, executed large orders through a floor clerk in the last 10 seconds of trading, roiling “thinly traded” and “illiquid” markets between November 2007 and May 2008, the CFTC alleged. The regulator has sought to stamp out “banging the close” in commodity markets of late, and will gain powers to monitor Pia’s hedge fund in the settlement, the WSJ reports.

CME raises haircuts on Treasury collateral

CME Group has increased the haircuts it applies to Treasury, agency and foreign sovereign bonds, it said in a statement, reflecting growing volatility in the Treasuries market as fears over a debt ceiling default continue. T-bill collateral haircuts will rise from 0 to 0.5 per cent, and those for off-the-run Treasuries from 0.5 to 1.5 per cent. CME earlier increased margin requirements for Treasury futures, also in response to volatility, according to Reuters. The margin cost of trading 10-year Treasury futures is now $1,300, but still some way below the $2,200 charged in the depths of the financial crisis in October 2008, the FT reports.

Italian volatility, l’accounting differenza

Because some day you might want a detailed breakdown of how Europe’s banks are accounting for their Greek, Spanish — and even Italian — bonds, here’s a helpful table from Deutsche Bank.

It comes from Mohit Kumar and Abhishek Singhania, who’ve crunched the stress test dataRead more

Debt ceiling talks turn into blame game

President Obama has warned that “we would risk sparking a deep economic crisis” if Congress does not find a deal on the debt ceiling, calling for spending cuts, but casting blame on House Speaker John Boehner in a live TV address, the Washington Post says. Boehner’s attempts to sell his party on a $3,000bn set of cuts foundered on Monday, while a rival plan by Senate Majority Leader Harry Reid worth $2,700bn might not clear a Senate vote, reports the WSJ. A growing consensus on around a trillion dollars of cuts between both proposals offers hope, notes the FT, although a Republican push to legislate a short-term ceiling increase remains an obstacle.

Australian RMBS grabs Moody’s attention

Moody’s is taking another look at the way it rates Australian Residential Mortgage-Backed Securities.

We anticipate increases to Moody’s Aaa mortgage default probability and house price stress rate assumptions. Separately, Moody’s expects to modify its approach towards incorporating lenders’ mortgage insurance in Australian RMBS.

 Read more

Further reading

Elsewhere on Tuesday,

– The bonds of AugustRead more

Pink picks

Comment, analysis and other offerings from Tuesday’s FT,

Gideon Rachman: Greece needs a new political cultureFT illustration - Greek "riot dog"
To secure the fresh funds promised by the eurozone last week, the Greek government has had to commit to years of strict austerity. The country’s future seems to promise blood, sweat and tear-gas. Yet talking to the Greek elite left me feeling both sympathetic and exasperated, writes the FT’s chief foreign affairs columnist. There is still a sense of entitlement and inertia, particularly among those who are used to benefiting from the state’s largesse. Read more

Snap news

Breaking pre-market news on Tuesday,

– UBS to cut costs by Sfr1.5bn-2bn; 2012 profit target abandoned — statementRead more