Posts from November 2011

Further further reading

For the commute home,

– John Kay on John Maynard Keynes on the limits of knowledgeRead more

Toyota and Nissan call for more action on yen

Japan’s two biggest carmakers warned that the record strength of the yen could drive more car manufacturing overseas and called for more aggressive official intervention to push the currency lower, reports the FT. Akio Toyoda, president of Toyota, and Carlos Ghosn, Nissan’s chief executive, used media events ahead of the biennial Tokyo Motor Show to warn that one of Japan’s most important industries faced a “hollowing out” should the yen’s trading values against the dollar and the euro persist.

Appetite for dim sum bonds wanes

For most of the year, Hong Kong’s “dim sum” bond market appeared invulnerable. Even as other asset classes suffered, renminbi-denominated bonds remained in strong demand from international investors, reports the FT. In recent months, however, enthusiasm has waned. Dim sum bond prices have declined substantially since September, when investors started to question the widely-held belief that the renminbi will only appreciate against the US dollar. “The game has changed,” says one fund manager. “There’s less excitement around appreciation and there are fears of a Chinese hard landing.”

Clinton warning over aid from China

Hillary Clinton has urged developing nations to be “smart shoppers” when accepting foreign aid from China and other new donors, as she became the first US secretary of state in more than 50 years to visit Burma on Wednesday, reports the FT. In Rangoon, Mrs Clinton warned that powerful emerging economies may be more interested in exploiting natural resources than promoting real development. “Be wary of donors who are more interested in extracting your resources than in building your capacity,” she said. “Some funding might help fill short-term budget gaps, but we’ve seen time and again that these quick fixes won’t produce self-sustaining results.”

Stance shift sees China ease monetary policy

Beijing has kicked off a new round of monetary loosening after more than two years of progressively tighter policies by cutting the proportion of deposits that banks must hold in reserve with the central bank, reports the FT. The 0.5 percentage point cut in the reserve ratio for all banks announced on Wednesday “is a signal not only that policymakers are loosening but that they want to be seen to be doing so,” said Mark Williams, chief Asia economist at Capital Economics. “We see this as a decisive shift in policy stance from China.”

Congress push to relax US securities laws

Proposals for the biggest relaxation of US securities laws in decades are being pushed forward in the US Senate, reports the FT. A hearing of the Senate banking committee will examine on Thursday a package of measures to encourage “capital formation” that has drawn White House support but which critics warn could hurt investors and make markets more opaque. The proposals, pushed by both Republicans and Democrats, include allowing companies to engage in “crowd funding” to solicit investments online and helping fast-growing companies such as Facebook keep their accounts private.

Markets cheer bank liquidity move

A wave of central bank action around the world to avert a liquidity crisis cheered financial markets on Wednesday but highlighted the depth of international concern about possible economic turmoil in Europe, the FT reports. In a co-ordinated move with other central banks the US Federal Reserve slashed the penalty rate that it charges them on dollar liquidity from 100 to 50 basis points. Earlier, China made a decisive shift towards easier monetary policy with Brazil expected to follow. US and European equities rose sharply, with the FTSE 100 closing up 3.1 per cent and the S&P 500 up 4.3 per cent in New York. But analysts warned that the move had not addressed the fundamental issues behind the eurozone’s sovereign debt crisis.

Rally monkey makes a splash in global liquidity

The almost-useless DJ Industrial Average on Wednesday climbed nearly 500 points – its largest one day gain since March 2009 – returning it to positive territory for 2011.

The volatility macaque was last seen crying into his undulating bananas.

The ‘dollars for euro collateral’ crunch

Back in September 2010, the European Repo Council’s survey of the European repo market noted a striking anomaly.

The European repo market — worth approximately €6,979bn — had seen a near doubling in the amount of repo being used for dollar funding. Read more

Financial comet crashes into planet hyperbole

Well, we asked for an update. Now let’s play spot the difference.

Before (about 10am New York time): Read more

Warning: Financial comet spotted

There’s talking one’s book and then there’s setting it alight and throwing it in a vat of petrol.

And Forbes contributor Nigam Arora appears to have taken the latter approach with this postRead more

The collateral limits of coordinated action

Wednesday’s central bank intervention is impressive in its symbolism but unlikely to do much more than buy eurozone leaders a few days.

RBS’ US rates team has provided a useful analysis of the move. The immediate background to the intervention, according to the strategists, is that European institutions have been having trouble funding in the US repo market so have turned to the currency markets instead — buying USD then reversing the transaction three or so months later. Hence the recent stress in the currency basis swap markets. Read more

So much for that impact on currency basis swaps

Was Wednsday’s cordinated central bank intervention in currency swap markets all for nothing?

Currency basis swap markets certainly seem to think so. Read more

NYSE invokes rule 48 for Wednesday’s open

Tin trampolines at the ready, it’s set to be a fast open:


 Read more

Guest post: El-Erian on central bank action

Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO, submits this guest post to FT Alphaville in reaction to this morning’s coordinated announcement.

Risk markets love liquidity injections, real and perceived. As such, they will welcome today’s announcement by six major central banks to reduce the price of emergency financing and broadening its scope. They will also like the possibility that this dramatic coordinated move provides a stronger context for further actions at the level of individual institutions. Read more

More on the dollar crunch and the liquidity drop

Right, here’s some early reaction to the latest central bank liquidity drop.

It comes from RBC’s Michael Cloherty, who makes the astute observation that it is now cheaper for foreign banks to borrow dollars from their central bank than it is for a US bank to borrow from the Federal Reserve: Read more

Central banks move to ease European dollar crunch

Readers take note. This is a chart of the one-year German note, currently yielding less than zero. An unprecedented event according to Reuters:

 Read more

Debt and CDS: It’s complicated

In which we attempt to explain the complexities at the heart of the CDS trigger debate…

Debt is nothing more than a financial relationship between two parties, whether individuals or institutions. Just as it is with relationships, debt can often be complicated. This fact makes it rather unfortunate that derivatives have been written on some $27,700bn of worth of complicated debt relationships. Read more

Markets Live transcript 30 Nov 2011

Live markets commentary from 

Equities, Japan and next decade

Morgan Stanley’s Graham Secker makes some interesting observations in his 2012 outlook report.

Chief among them is that the investment framework of the last 25 years is increasingly irrelevant and that Japan offers the best guide to what might happen in the equity market over the next decade. Read more

BHP puts diamonds division up for sale

BHP Billiton has put its diamonds business up for sale at a time when expectations of rising long-term demand for the precious stones are unleashing tectonic changes in the world’s diamond industry, the FT reports. The world’s biggest mining company by market value said on Tuesday it would review options for the Ekati mine in northern Canada, the only diamond mine in its portfolio. This could to lead to a sale of its diamonds business over the next two months. “Potential transactions arising from the review will be subject to detailed analysis before a final decision is made,” BHP said. It expects to complete the process by the end of January 2012. Potential buyers include Rio Tinto and Anglo American. Anglo is positioned to become the world’s biggest diamond miner by production, after it bought a controlling stake in De Beers for $5.1bn this month. Diavik, Rio’s diamond mine in Canada, is close to the Ekati mine in the semi-arctic diamond fields north of Yellowknife, Northwest Territory. Former and present employees of both Rio and BHP have said privately that the companies have for years studied proposals to combine the assets.

S&P’s bank downgrade snaps equity rally

Markets were bouncing off their lows after German unemployment data showed surprising reslience in the eurozone’s largest economy, but a move by Standard & Poor’s to cut the credit ratings of some of the world’s largest banks continued to weigh on sentiment, the FT reports. The FTSE Eurofirst was 0.8 per cent lower, snapping a three-day rally. The euro was down 0.2 per cent at $1.3290 and Italian bond yields were higher, with 10-year debt up 4 basis points at 7.28 per cent. The stronger than anticipated jobless data, which showed the number of unemployed in Germany falling to the lowest level since November 1991 at 2.71m on a seasonally-adjusted basis, have aided the mood. Nonetheless, markets remained vulnerable to sharp swings in sentiment on the back of tidbits of news. A case in point: Chinese equities and commodity markets took a tumble this morning on the back of rumours that China’s purchasing managers’ index, due to be released tomorrow, would undershoot expectations. Consensus expectations were for a reading of 49.8 for the country’s crucial manufacturing sector, but talk in Asian markets suggested the survey could point significantly lower.

AMR files for bankruptcy protection

AMR Corporation, the parent company of American Airlines, filed for bankruptcy protection on Tuesday in an effort to shed its crippling debt burden and reduce its costs after losing ground to competitors over the past decade, the FT reports. Gerard Arpey, AMR’s long-serving chief executive, is also to retire, the company said. The filing ends of months of speculation about the future of the third-largest US carrier. Its shares have slumped after a run of quarterly losses even as its peers returned to profitability. American chose to forgo bankruptcy protection in the early 2000s while its rivals used the process to shed their pension plans and reduce structural costs, leaving it at a substantial disadvantage. Since then, companies such as United Airlines and Delta Air Lines, have only increased their lead. The two American rivals have trimmed their fleets, redesigned their networks and leapfrogged American through big mergers and acquisitions.

Businesses plan for possible end of euro

International companies are preparing contingency plans for a possible break-up of the eurozone, according to interviews with dozens of multinational executives, the FT reports. Concerned that Europe’s political leaders are failing to control the spreading sovereign debt crisis, business executives say they feel compelled to protect their companies against a crash that can no longer be wished away. When German chancellor Angela Merkel and French president Nicolas Sarkozy raised the prospect of a Greek exit from the eurozone earlier this month, it marked the first time that senior European officials had dared to question the permanence of their 13-year-old experiment with monetary union. “We’ve started thinking what [a break-up] might look like,” Andrew Morgan, president of Diageo Europe, said on Tuesday. “If you get some much bigger kind of … change around the euro, then we are into a different situation altogether. With countries coming out of the euro, you’ve got massive devaluation that makes imported brands very, very expensive.”

Italy’s very own special liquidity programme? [Updated]

Fresh off the wire on Wednesday:


Hedge fund survey says

That hedge fund clients get itchy feet far easier these days, and that some of them look at the credit default swap spreads of their counterparties when deciding whether to stick with them or get out of dodge.

That’s according to a survey published on Tuesday by research firm Aksia of 125 hedge funds with $800bn of assets under management collectively, representing about a third of the industry by assets. Read more

Banks downgraded; fun’s over

Rally over?

 Read more

EFSF expansion agreed (to be inadequate)

The European Financial Stability Facility announced that eurozone finance ministers have agreed measures already discussed to boost the fund’s firepower – the 20 to 30 per cent guarantee on sovereign bonds, and allowing the fund to create “co-investment funds” to buy bonds either directly or in the secondary market.  From the media statement:

EFSF will be able to use both leverage options simultaneously. The final amount of “firepower” achieved through the use of the options will depend upon the concrete use and mix of the instruments and particularly the exact degree of protection between 20% and 30%. EFSF has currently a lending capacity of €440 billion and firm commitments regarding Ireland and Portugal totalling €43.7 billion. Read more

Further reading

Elsewhere on Wednesday,

– Prop trading under the guise of hedging. Read more

Pink picks

Comment, analysis and more from Wednesday’s FT,

IMF/black hole illustration - FT Read more