Wall Street was once more feeling the heat as the political standoff in Washington over the country’s debt ceiling shows no sign of resolution, while disappointing earnings in Europe have added to the gloom, reports the FT’s global market overview. The morning was calm but as the afternoon unfolded, the S&P 500 turned negative, erasing an early gain of 0.9 per cent after it became clear that the US Senate will vote down a debt ceiling deal passed by the House after markets are closed. The yield on 10-year Treasury notes was 2.96 per cent, down 2 basis points, but the benchmark lost ground versus its triple A rated rivals. The yield on 10-year gilts has been trading below the US this week, a situation not seen since a brief period in 2009 and April 2010 and, before that, throughout most of 2006. Gold climbed again, after taking a breather on Thursday, and was up 0.1 per cent at $1,615.30. Silver was down 1.2 per cent at $39.77.
Alibaba Group, the Chinese e-commerce company, is mounting a challenge to several leading technology companies with the launch of its own mobile operating system, reports the FT. Beijing Tianyu Communications Equipment, a Chinese handset maker, will launch the first smartphone running on Aliyun, the new operating system, by the end of July, and release a tablet computer featuring Alibaba’s operating system by the end of the year, Wang Jiang, president of Alibaba Cloud Computing, told reporters.
Hackers attacked the computer databases of SK Communications Co and may have accessed the personal details of 35m members of Cyworld, a popular South Korean social network, reports the Wall Street Journal . On Thursday the company admitted the hackers had breached cyber-defences and could have obtained the names, email addresses, phone numbers and resident registration numbers of Cyworld users.
The United States and North Korea on Thursday began discussions on whether to reopen talks on the latter’s nuclear weapon programme. Two years after the countries’ last diplomatic exchange, the US special envoy for North Korea, Stephen Bosworth, met North Korean negotiator vice foreign minister Kim Kye-gwan in New York. “We’re quite clear, broadly, on what we’re looking for, which is for North Korea to live up to its commitments … it needs to take concrete steps toward denuclearization,” Mark Toner, State department spokesperson, told Reuters.
James Murdoch has won unanimous support from the British Sky Broadcasting board to remain as chairman, but at least two non-executive directors are expected to step down, a person familiar with the situation told the FT on Thursday. The phone-hacking scandal threatened to flare up again on Thursday with claims by the Guardian that the News of the World hacked the phone of Sara Payne, who became the focus of a campaign for tougher laws on sex offenders after her eight-year-old daughter Sarah was abducted and murdered.
Nintendo is slashing the price of its 3DS handheld game console by up to 40 per cent just four months after its launch, with poor sales leading to a Y25bn ($321m) quarterly loss, reports the FT. The Japanese group has dominated the game hardware market in recent years with its small DS machines and larger Wii home systems. But it is facing difficult challenges as consumers increasingly choose to play games on general-purpose devices such as smartphones and tablet computers.
Chinese Premier Wen Jiabao has tried to quell rising public anger by visiting the scene of last weekend’s high-speed rail crash and vowing to “severely punish” those responsible for the accident that killed 39 people and has fuelled concerns about the safety of the country’s bullet train system, reports the FT. The Wall Street Journal writes that the crash — and Wen’s government’s response — has drawn new criticism of China’s approach to growth. “China wants development, but it doesn’t want blood-smeared GDP,” read the headline in the People’s Daily, the official paper of the Chinese Communist Party.
The debt ceiling impasse continued on Thursday. Concern that the US Treasury may delay debt payments next week pushed yields on short-term bills to new peaks, as traders and investors sold down their holdings in the face of continued political brinkmanship, reports the FT. The yield on the bill that matures on August 4, which returned no interest when sold earlier this month, rose to 20 basis points on Thursday. In Washington, it was unclear at pixel time whether House speaker John Boehner had enough votes to pass his deficit reduction bill, says Reuters. Not that it matters much — Senate majority leader Harry Reid has vowed to kill the bill if it’s passed, according to the New York Times. This is probably (hopefully) all a cacophony of bluster but just in case, the Wall Street Journal reports that the US treasury has a back-up plan. Involving prioritisation for bondholders, according to Bloomberg.
For the commute home,
– The House is set to vote on the thing we all wish would go away. Read more
We know, we know: there should be a weekly quota for US debt posts. But Wednesday’s note from Citigroup’s Willem Buiter and Ebrahim Rahbari is not your average debt ceiling report.
They suggest the debt ceiling impasse is a vaudeville compared to the tragedy that could await. The US faces five scenarios and a downgrade is all but guaranteed, say the authors: Read more
It may have escaped your attention but on Tuesday afternoon the Financial Stability Oversight Council (FSOC) published its first annual report into the state of the US financial system. Click below for 160 pages of pdf fun:
The debt ceiling cacophony largely silenced coverage of the report, which was mandated by the Dodd-Frank Act to highlight any emerging threats to
the American way of life the US economy. Read more
There were a few rumours swirling through the interwebs earlier on Thursday that the Italian credit default swap curve had inverted.
We are sorry to disappoint, but according to Lisa Pollack at Markit, their data suggest that’s not strictly the case. Read more
Warning! — long post. But with investors still grappling with the terms of the Greek debt restructuring, it’s worth reading on…
Avid readers will remember Option 4 of the proposed Greece financing offer. Read more
Live markets commentary from FT.com
The euro? Too euro-trash. Read more
MERS, the mortgage registry previously at the centre of the scandal over foreclosures, has confirmed rule changes to prevent members from filing foreclosure actions in its name, Reuters reports. The agency has also required loan servicers to obtain mortgage assignment documents before beginning actions, following controversy over foreclosures proceeding without assignments being available. The change had been telegraphed in February, FT Alphaville reported, but it is not clear how the move affects its legal position. Delaware officials are the latest to investigate MERS business practices, the Washington Post says.
Premiums for one-year US sovereign CDS reached a record high of 90 basis points in London on Wednesday, overtaking the previous high set in March 2009, and trading higher than five-year protection, the FT says. While trading in the one-year tenor is illiquid and net notional exposure to the US is small at $4.9bn, investors could win a pay-out should the Treasury miss a payment in the next month because of the debt ceiling effect. At the same time, ISDA confirmed on Wednesday that US CDS is subject to a three-day grace period between a missed payment and the declaration of a credit event, possibly giving the Treasury time to catch up.
Credit Suisse will cut 2,000 jobs after becoming the latest bank to announce weak trading in the second quarter, Reuters reports. Net profit fell to SFr 768m ($959m), below the SFr 1bn estimates of analysts and down 52 per cent on the year. Net fixed income sales and trading revenues plunged by 59 per cent, even weaker than the 53 per cent tumble in FICC trading posted by Goldman Sachs earlier this month, reports the FT. Credit Suisse says it will save $562.5m from cutting 4 per cent of its workforce, although it warned that the strong Swiss franc and low client activity were expected to continue, the WSJ says.
Brazil has announced a harsh tax on currency derivatives, sending the Real tumbling against the dollar from its 12-year high, the FT reports. The government’s 1 per cent transactions tax could be increased to up to 25 per cent and carry requirements for both registration of over the counter trades and minimum trading margins, according to a new law being put forward. While the measures affect all market participants, the government may still make concessions on exemption for currency hedging, Reuters says.
The SEC has asked Groupon to answer questions about its use of an unusual accounting metric in financial information provided under its IPO filing, the WSJ reports. Investors have argued that the ‘adjusted consolidated segment operating income’ framework under-rates the company’s marketing costs. Groupon earned $60.6m in operating income for 2010 on the adjusted CSOI basis, and lost $413.4m on a GAAP basis according to its S-1 filing, FT Alphaville reported at the time. The SEC is also looking at Groupon’s accounting of gross profits, with the probe prolonging the company’s pre-IPO review, says CNBC.
So much focus on government debt lately — won’t somebody please think of the household leverage?
Morgan Stanley’s Global Monetary Analyst team has: Read more
House Republicans have continued to pile pressure on their freshmen members to support Thursday’s vote on Speaker John Boehner’s debt ceiling plan, the Washington Post says. The vote could still be delayed if insufficient support materialises. Between 15 and 20 Republicans in the House are estimated to be firmly against the plan, which would not be enough to defeat the legislation but would make any further defections fatal, reports the FT. The Boehner plan allows a $900bn debt ceiling increase in return for caps on spending over ten years, Politico says. Senate Majority Leader Harry Reid’s parallel proposal would not cut spending as much as thought, but would be the next set of legislation to be tweaked if the House plan passes in time, according to the WSJ.
The Federal Reserve has not engaged enough with contingency plans for money markets in the event of a US default or ratings downgrade, according to senior Wall Street executives and traders, says the FT. “The responsible government people aren’t engaging and I bet a piece of it is they are really not sure what to do,” one said. The Fed’s role is complicated, given its position as both financial regulator and agent of the Treasury for making payments on government bonds. Investors have rushed to hedge exposures from a ratings downgrade, reviewing longer duration positions but at the same time building up holdings in T-bills at the other end of the curve, IFR (via Reuters) reports.
Hey European banks! Have you seen this?
[International Accounting Standards IAS39 – Paragraph 59] A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. It may not be possible to identify a single, discrete event that caused the impairment. Rather the combined effect of several events may have caused the impairment … [these events can include] a) significant financial difficulty of the issuer or obligor; …
Elsewhere on Thursday,
– On voodoo economics, the debt ceiling debate, and hyperinflation. Read more
Comment, analysis and other offerings from Wednesday’s FT,
Breaking pre-market news on Thursday,
– Credit Suisse Q2 net income falls 52 per cent, plans to cut jobs – statement, report.
Republican leaders in the House of Representatives piled pressure on sceptical rank-and-file lawmakers to back their party’s plan to raise the US debt limit, after the threat of a conservative rebellion increased fears that America could default early next week. The FT says at a tense closed-door meeting, John Boehner, House speaker, made a seemingly desperate appeal for his members to support the Republican proposal to increase the country’s borrowing authority, which is expected to come up for a vote on Thursday. The Nikkei stock average fell for a second straight day on Thursday to break below its 200-day moving average, hurt by weak US economic data and a deadlock in talks to raise the US debt ceiling, Reuters reports.
The MSCI Asia Pacific index slid 0.8 per cent amid increasing fears that a failure to raise the US debt ceiling could wreak havoc on global markets. Mitsubishi UFJ Financial Group fell 1.5 per cent in Tokyo while Westpac Banking Corp, Australia’s second-largest lender by market value, slid 1.2 per cent and third-ranked Australia & New Zealand Banking Group lost 1.3 per cent. Chinese banks lost ground after regulators reaffirmed controls on loans to local financing vehicles. Industrial & Commercial Bank of China, the world’s largest bank by market value, dropped 0.7 per cent while China Construction Bank fell 1.1 per cent. Gold lost some ground late on Wednesday after hitting a record of $1,628 earlier in the day, but rose slightly on Thursday.
Wall Street bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario planning for a US downgrade or default, the FT says. With days until the Treasury’s August 2 deadline to raise the debt ceiling, bankers say they are not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating. They want to address contingency planning for a run on money market funds that hold Treasury bonds, the impact on capital and liquidity ratios if there are large inflows or outflows of deposits and the potential effect on short-term financing from any problems in the repurchase, or “repo”, market.