The US debt ceiling stand off has shown the first signs of rattling equity investors, who have sent Washington a message as Wall Street has dropped sharply, reports the FT’s global market overview. After investors sought the comforting glow of gold and dumped the dollar, the risk reduction trade sharply reversed those moves in New York as the S&P 500 dropped 2 per cent, extending its decline this week to a drop of 3 per cent. Earlier, the selloff in US stocks dragged European equity markets deep into the red. The dollar rebounded as the euro has dropped 1 per cent, while gold eased to $1,614 an ounce after setting a record at $1,627 an ounce. The FTSE All-World equity index sunk 1.6 per cent, while Brazil’s Bovespa slumped by 1.8 per cent. The S&P 500’s slide was led by the technology sector, off 3 per cent, while industrials dropped 2.7 per cent. Good earnings from Boeing, ConocoPhillips, Dow Chemical and Amazon, along with a barn storming debut for Dunkin’ Donuts, whose price closed its first day at $29.62 after listing at $19 a share, failed to arrest the slumping market. Read more
Chinese censors are struggling to contain public and media reaction to the high-speed train crash that claimed at least 39 lives in Wenzhou last weekend and wrecked the image of China’s high-speed rail network, reports the FT. On Wednesday the Beijing News posed three direct questions across an entire page challenging the government’s handling of the tragedy, disregarding a blunt official directive that their reporting of the tragedy should not “question”, “elaborate” or “associate”. The WSJ says Premier Wen Jiabao has ordered a ”swift, open and transparent investigation” (his words) into the crash. Meanwhile, the FT reports that hundreds of rioters in a southern Chinese city battled with police into the early hours of Wednesday morning after a disabled fruit vendor died while being beaten by Chinese officials on the street in broad daylight. Read more
The Brazilian real tumbled on Wednesday after the country introduced measures to curb foreign exchange speculation in a bid to bring down the currency from a 12-year high against the dollar and protect its manufacturers, reports the FT. The government imposed a 1 per cent transactions tax on currency derivatives, laid down new legislation whereby the tax could be increased to up to 25 per cent, demanded the registration of “over-the-counter” currency trades and threatened further measures such as raising minimum trading margins. Read more
As much as half US companies’ record $1,240bn in cash balances is being held overseas, according to Moody’s research, with groups wary of incurring a 35 per cent repatriation tax, writes the FT. While debates rages in Washington about the state of public finances, the rating agency said on Wednesday that cash held by non-financial companies had risen 11.2 per cent during 2010, even as capital expenditure, deal-making and distributions to shareholders increased.
US diplomats will sit in New York with Kim Kye-gwan, North Korea’s top nuclear negotiator, for the first talks in two years, a move that could herald the start of further engagement with Pyongyang. Mr Kim is likely to meet Stephen Bosworth, his US counterpart, and perhaps Robert Ford, US special envoy for North Korea, today and Friday, reports the FT. Meanwhile, China is getting on with augmenting its military power — Reuters reports its building a couple of mega aircraft carriers which are “causing concern” in the region. Read more
If Asia’s equity and bond markets are any guide, then investors seem pretty sanguine about the risks of the US Treasury running out of cash or the eurozone debt crisis spinning out of control, says the FT. There’s scant evidence of worry so far: Asian stocks have risen in recent weeks, with the All-World Asia Pacific excluding Japan index 3 per cent higher than at the start of the year. The
iTraxx Asia ex-Japan index – a measure of credit risk – remains well below its average levels of 2010. The relatively illiquid US CDS market is less sanguine, with insurance costs against a US default hitting a record on Wednesday, according to the FT. FT Alphaville had more on US CDS, including its inversion, a couple of days ago.
Republican leaders in the House of Representatives are scrambling to quash a rebellion among some of their rank-and-file members over opposition to the party’s plan to raise the debt ceiling as the US continues to veer towards a possible default, reports the FT. This is despite a call for unity by House speaker John Boehner, whom the WSJ reports requesting “an army” of support. However, both Democrats and Republicans recognise similarities in their plans, according the Reuters. sides Wall Street bankers are complaining about being kept out of the loop by the Federal Reserve on contingency planning, adds the FT. FT Alphaville isn’t moaning, however, keeping up on what may happen to bonds, equities and currencies if the US is downgraded. Read more
For the commute home,
- A debate on the (ir)relevance of economics. Read more
A miserable day.
At one point the headline on the Reuters home page read: “Wall Street slides on earnings, economy, politics.” Short of blaming the collective wisdom of the two cultures, there was nothing left. Read more
Over the last few years we’ve all got used to the familiar risk-on and risk-off patterns.
But as you’ve probably heard, the US’s AAA credit rating is facing a possible downgrade, which could decouple the correlation between the US dollar and risk assets, according to Nomura. Read more
It’s been a day of important Lehman Brothers legal verdicts.
On Wednesday morning in New York, the US District Court in Manhattan rejected a move by former Lehman Brothers executives and auditors to dismiss litigation brought by investors who allege they were misled by the bank’s Repo 105 practices. Read more
The decision of our European partners to lend us at 3.5 percent, an interest rate just above the one at which Germany itself is borrowing, is in essence tantamount to introducing a European bond, regardless of the fact that this system has not been completed yet
Is that really the essence of eurobonds? Read more
The search for the elusive US-AAA alternative continues.
As Nomura’s Charles St-Arnaud and Lefteris Farmakis already pointed out on Wednesday, there’s not really all that many options left. Read more
That’s a big deal for the structured finance world, though you might not know it. Read more
Live markets commentary from FT.com
We know that private placements have become a popular method of European bank funding recently.
Though smaller, the deals do allow issuers access to cheaper, more flexible funding — or even money that might not otherwise have been available to them given recent eurozone sentiment. Plus the banks don’t have to worry about providing, for example, billions worth of collateral upfront in a benchmark covered bond issue that would have been closely scrutinised by the market. Read more
Amazon has reported a 51 per cent leap in quarterly sales, hailing its fastest growth in more than a decade but seeing net income slip by 8 per cent to $191m as it defends market share, the FT reports. Most analysts remain confident that the company is right to sacrifice profits in the near term to build up better distribution and data centres for its cloud computing services, Reuters says. Operating profit margin has halved from a year earlier. Rivals say that Amazon is benefiting from an unfair sales tax exemption for most of its customers, although the company is facing challenges in some states. California has just begun collecting a new ‘Amazon tax’, the Orange Country Register reports. Read more
The Swiss franc is on the rise against the euro and the dollar again on Wednesday thanks, as multiple market reports state, to its safe-haven status.
In fact, the currency was last quoted at about 1.158 versus the euro and 0.7996 against the dollar. Read more
A long-awaited grand settlement on US home foreclosures has been further delayed, as banks fight over their shares of the multi-billion dollar bill, the WSJ reports. Wells Fargo told regulators that it should pay less than JPMorgan or Bank of America, while Citigroup has also argued that it should be rewarded for holding fewer riskier mortgages on its books. Banks have also clashed with state attorneys general and federal departments over the extent to which other mortgage-related loans can also be included in the settlement. The US housing market continues to show poor signs of recovery in the meantime, with home prices dropping 4.5 per cent in the year to May, says the FT. Read more
Fresh foreign investment in Brazilian stocks plunged 70 per cent in the first half of 2011, reversing fortunes for the country’s markets, the FT reports. While foreign direct investment has flooded into Brazil, cross-border portfolio investment in the country’s stock market during the first six months of this year dropped to $2.89bn from $9.74bn in the same period of 2010, according to central bank data. The Bovespa has fallen 13.5 per cent in the year to date, on a combination of fears over high inflation and political interference in bulwark companies such as Petrobras or Vale. Read more
House Speaker John Boehner has delayed a vote on a plan raising the debt ceiling, having faced conservative opposition and scepticism over the viability of its spending cuts, the WSJ reports. The Congressional Budget Office estimated that the bill would reduce deficits by between $850bn and $1,100bn over ten years, depending on the budgetary baseline used, less than had been anticipated, the FT says. Republican lawmakers are unlikely to support the plan in sufficient numbers for it to pass, although its failure would not preclude elements from it being incorporated into a rival Democrat proposal, according to Reuters. Read more
Money market funds invested in government bonds have increased cash available to meet short-term withdrawals to over two-thirds of their assets, building up liquidity in case of a United States sovereign default, the FT reports. Holdings had been just under half of assets at the end of March. Funds are also avoiding one-month Treasury notes which mature on August 4 and August 11, during the deadline period for raising the US debt ceiling. Corporate treasurers have also moved towards bolstering their cash reserves and hedging interest-rate risk ahead of expected volatility in the Treasury market, reports the WSJ. Read more
Regulators investigating alleged manipulation of the London interbank offered rate have turned their focus to yen rates set in London and the Tokyo interbank offered rate, the FT reports. UBS has confirmed the investigation’s widened scope by disclosing in its results that it had received “conditional leniency and conditional immunity” from the Department of Justice for turning over information on the setting of the two rates. Regulators are probing whether traders used derivatives to place bets on future yen and dollar rates and then colluded with bank treasury departments to move the rates in their direction, people familiar with the matter said. Read more
It’s a question FT Alphaville has been pondering for some time.
Why do markets suddenly seem to ‘wake up’ to the problems of one particular country or market, while ignoring similar and even worse issues in other areas? It is, perhaps, a pattern that was first seen in the Asian crisis and the emerging market drama of the 1990s. The question then was “what’s the difference between Russia and Brazil?” To which the only half-joking answer was “about nine months.” Read more
Elsewhere on Wednesday,
- James Montier’s ode to the joy of cash. Read more
Comment, analysis and other offerings from Wednesday’s FT,
Alan Beattie: A double act of self-inflicted crises
Fearing the audience was bored after more than two years without a financial crisis, Europe and America, that veteran double act, have decided to put on a variety show, says FT columnist Alan Beattie. In Europe, the eurozone announced a second Greek bail-out after belatedly realising it was heading for default; meanwhile in the US, the Congress is trying hard to make a solvent government look like Greece. All functional politics may be alike, but each dysfunctional government is dysfunctional in its own way. The twin crises show how the two political systems have evolved in an unhelpful fashion. Read more
Breaking pre-market news on Wednesday,
- Santander first-half profit down 21 per cent to €3.5bn – statement. Read more