Posts from Tuesday Dec 13 2011

Beijing urged to bolster house sales

Friction is rising over Beijing’s real estate policies, with some top Chinese policy advisers arguing that restrictions should be loosened to avoid an abrupt economic slowdown, reports the FT. In a commentary published on Tuesday, an adviser to China’s central bank recommended an adjustment of existing policies to boost the number of housing transactions and provide a “soft landing” for the property sector. “If tightening is too fast and too abrupt it will have an overwhelming impact on overall economic growth,” Li Daokui wrote in New Fortune magazine. “If housing prices drop drastically it would place an enormous burden on the sentiment of many middle-income households.”

Fed keeps policy on hold amid uncertainty

The US Federal Reserve said the economy is doing a little better but noted significant downside risks from the eurozone crisis and kept monetary policy firmly on hold, the FT reports. Its statement on Tuesday, little changed since November’s, means that the rate-setting Federal Open Market Committee will hold fire on any further easing and await developments in the new year. The FOMC is caught between stronger economic data in the US and uncertainty about what will happen in Europe. Recent data on consumption and business confidence has raised hopes of stronger growth next year but much depends on whether Congress extends a 2 percentage point reduction in payroll taxes into 2012. The Fed is taking advantage of a quieter period to work on changes to its communication policy including the possible adoption of an explicit numerical objective for inflation.

Japan to buy Lockheed’s F-35 fighter jet

Japan’s government is set to choose the F-35 Lightning II stealth fighter made by US contractor Lockheed Martin as its new air-defence fighter, Japanese media reported on Tuesday, reports the FT. The decision, expected to be finalised by cabinet members on Friday, would provide a big boost for the troubled F-35 programme and mark a continuation of a longstanding Japanese practice of relying on the US for almost all its imports of advanced weapons platforms. The highly advanced but largely unproven F-35 is competing against the Eurofighter Typhoon and US aerospace manufacturer Boeing’s F/A-18 Super Hornet for the Japanese order for about 42 aircraft, which could be worth an initial US$6bn or more.

EU treaty hopes come under strain

Franco-German hopes for a sweeping new treaty to bind the region’s economies more closely came under strain on Tuesday as several European Union leaders warned of difficulties pushing a far-reaching pact through their national parliaments, reports the FT. The pressure was particularly acute in non-eurozone countries, where at least four governments warned that the precise legal text would determine whether they could sign up to the treaty or otherwise join the UK on the sidelines. Officials in several of those countries said their most pressing concern was whether the new rules giving Brussels powers to police national budgets would be binding only to eurozone governments or to all signatories. Officials in several of those countries said their most pressing concern was whether the new rules giving Brussels powers to police national budgets would be binding only to eurozone governments or to all signatories.


China promises crackdown on fake goods

China has promised another wave of tough measures against counterfeiters as it defends itself against constant criticism of its record in the protection of intellectual property rights, reports the FT. The country will launch a crackdown early next year on goods including fake medicines and cigarettes, pirated software and CDs, said Jiang Zengwei, deputy minister of commerce. The initiative was announced just hours after the office of the US Trade Representative blasted China again over a string of market access hurdles including intellectual property rights protection. It is the first policy announcement since Beijing set up a permanent mechanism to deal with IPR issues last month, including a “leadership group”, which is effectively a collection of politicians operating outside the cabinet with responsibility for dealing with infringements.

Stocks give up gains as eurozone fears persist

Stocks trimmed earlier gains and the euro traded at its lowest level since the start of the year as investors continued to express concern about the eurozone fiscal crisis, the FT reports. As expected, the US Federal Reserve kept its benchmark lending rate on hold at its policy meeting earlier today but some investors were disappointed with the fact the bank refrained from alluding to further quantitative easing. The FTSE All-World index was down 0.2 per cent and Wall Street’s S&P 500 reversed earlier gains to trade 0.3 per cent lower. Stocks in the US advanced earlier despite a weaker than forecast reading for US November retail sales. “There were some rumours circulating that maybe the Fed would come with QE3. But, frankly, there was no real indication of such move,” said Tommy Molloy, chief dealer at FX Solutions. “Markets remain captive of headlines in Europe.” Pervading anxiety over the eurozone debt crisis pushed the euro 1.3 per cent lower to $1.3023 in afternoon traiding in New York, its lowest level since January. Mr Molloy said selling pressure on the euro was likely to continue “deep into the first quarter of 2012” and, in contrast, investors would keep favouring the US dollar.

Further further reading

For the commute home,

Breaking: CME head says he was told by an MFG employee that Corzine did know about the missing money. Read more

Policymaker potency in the next US crisis: part II

In part one, the appetizer, we quickly looked at whether the US banking sector is stronger than it was in 2008, as Lewis Alexander, the new Nomura chief US economist, argues. On the face of it, he’s right — balance sheets appear stronger, but we can’t be sure.

In part two, the main course, we look at what would happen if a crisis was to hit again. Read more

Policymaker potency in the next US crisis: part I

US policymakers probably have no idea what would happen to domestic banks if Europe implodes, but how useful would it be if they did?

There’s another Nomura note on US banks making the rounds, but this one is made more interesting by who wrote it: Lewis Alexander, a counselor to Tim Geithner from 2009 until February 2011 helping to build the Treasury department’s new Office of Financial Research. He is now Nomura’s chief US economist. Read more

FOMC statement, 13 December 2011

Go back to watching Mario. See you in 2012.

Not quite, of course, but as expected, there’s nothing to see in the December FOMC statement. Rates remain the same and Twist continues. The doveish Charles Evans again dissented. Read more

At home with Ben

We’ve marvelled many times at Jon Hilsenrath’s extraordinary ability to mind meld with the most powerful man in global finance —  Ben Bernanke (in case you were wondering).

How else to explain the string of scoops explaining the Fed’s thinking in the lead up to crucial FOMC meetings or get-togethers at Jackson Hole. Read more

Procrastination kills, Greek debt edition

FT Alphaville is still confused by eurozone bigwigs’ promise that they’ll follow “IMF principles” to be friendly to bondholders in sovereign debt bailouts. Versus, say, being nasty about making them write down debt.

The promise got the IMF wrong. It also ignored what’s still going on in Greece’s “involvement” of the private sector. Which isn’t very friendly at the moment. More like “catastrophic”. Read more

European banks ‘need tons of money’, says GMO

In a note released on Tuesday, GMO, the global asset management firm headed by Jeremy Grantham, writes that “European banks need tons of money” to correct capital shortfalls. This much, we know.

But the five scenarios used by Richard P. Mattione, the firm’s head of macroeconomic research, for why banks will need to raise much more capital should prove familiar to FT Alphaville readers. Mattione uses data from the July EBA tests and July BIS data, so be warned. In fact, there are a few points here that seem to be behind the results of the latest EBA efforts. Read more

Euro rout


 Read more

Credit derivatives are getting younger these days

A year ago, Nicholas Vause of the Bank of International Settlements wrote about “Counterparty risk and contract volumes in the credit default swap market” and pointed out the relative increase in shorter maturity contracts.

Using a couple more surveys than he had then, we get (click to expand): Read more

Meet the credit derivative “end-users”

It’s a well understood fact that credit derivatives markets are primarily dealer-to-dealer. We do, however, hear that there are clients, or “end-users”, hiding somewhere. The Bank of International Settlements’ Quarterly Review, out on Monday, invites us to take a closer look.

Introducing Nicholas Vause, who put the section of the Review together, and his informative graphs (click to enlarge): Read more

The IMF as the ECB’s unsecured borrower of last resort

News that the Bundesbank is fast approaching a zero domestic asset balance-sheet situation from a eurozone Target2 payment perspective has caused a bit of a stir in the financial commentariat space.

Critics suggest it’s largely unimportant, since there is no limit on Bundesbank transfers even if it runs out of assets. Read more

“Why the teacher is in such difficulties?”

Just in case anyone was thinking of dusting off the idea that China might bailout Europe, here’s a repeat of its demands: conferral of “market economy” status (for WTO purposes) and an “ironclad” guarantee that they’ll be paid back.

This is Yao Yang, director of the China Center for Economic Research at Peking University, who we can assume is toeing the party line when writing first at Project Syndicate and then, on Tuesday, for China DailyRead more

Super senior moments at RBS

It’s the middle of 2007. Executives at RBS are joining the dots about how even super senior tranches of CDOs offer scant protection in the face of a tsunami of subprime defaults.

A structure which would become commonly understood by many, had some that should have been in the know scratching their heads. Given that CDO structures seem to be the answer to everything these days, it beggars belief that the captains of the industry had trouble grasping the problem. Read more

Markets Live transcript 13 Dec 2011

Live markets commentary from 

Presenting a record UK pension shortfall

The Bank of England’s financial repression and the eurozone debt crisis continue to take their toll on the UK’s private pension funds.

Lowlights from the latest Pension Protection Fund report: Read more

Cameron lays bare coalition strains

David Cameron on Monday defended his use of the British veto at last week’s European Union summit as in the “national interest”, but the strains placed on his coalition government were laid bare when his deputy, Nick Clegg, refused to sit alongside him in the House of Commons, the FT reports. Mr Clegg, leader of the pro-European Liberal Democrats, claims the veto was bad for British business and would leave the UK isolated. But the prime minister was cheered by Tory MPs who claimed he had shown “bulldog spirit”. Mr Cameron’s refusal to agree an EU treaty change to reinforce eurozone fiscal discipline in the absence of safeguards for the City of London continues to cause anger across Europe. That could be further inflamed by Britain’s refusal to take part in an urgent €200bn funding boost for the International Monetary Fund to tackle the crisis. The Wall Street Journal reports that the financial services industry is all concerned that the EU will pursue new regulations requiring certain types of business to be transacted within the euro zone, cutting London out of the equation.

Fat-tail fears catch oil traders between $50 and $150 bets

Investors and traders are buying large numbers of oil contracts that would profit from a price super-spike – and a collapse, the FT reports. In a rare and deep split of views, investors and traders are pricing in unusually large “fat tail” risks – low-probability events that have an outsize impact on prices – for next year that could boost oil prices to $150 a barrel or push them to $50 a barrel. “We face a bifurcated market: a crisis in the Middle East could send prices through the roof; the eurozone debt problems could trigger a collapse,” Seth Kleinman, head of energy strategy at Citigroup, said echoing a widely held view in the market. The fear of abnormally large “fat tail” risks has driven investors to buy insurance through options – contracts that give holders the right to buy or sell crude oil at a predetermined price and date. “Everyone I speak to on crude oil, if they have a directional bet they do it through out-of-the-money options,” said Fabio Cortes, a commodities fund-of-funds manager at Oakley Capital. “It’s like a lottery ticket.”

Russian oligarch to challenge Putin

One of Russia’s richest tycoons said on Monday he would run for president against Vladimir Putin in next year’s election, prompting speculation that the Kremlin may be trying to contain growing public dissent in its “managed” democracy, the FT reports. Mikhail Prokhorov, 46, the third-richest man in Russia and owner of the New Jersey Nets basketball team, returned to the political fray after thousands of middle-class voters demonstrated at the weekend over alleged vote-rigging in parliamentary elections. Mr Putin’s announcement in September that, after four years as prime minister, he would return to the presidency next year, has fanned middle-class anger. According to the Wall Street Journal, State television, which typically gives little coverage to opposition figures, led its 6 p.m. newscast with Mr. Prokhorov’s announcement, highlighting his assertion that he was doing it without high-level blessing.

Sino-Forest to default on debt payment

Sino-Forest, the Chinese forestry company fighting allegations of fraud, said on Monday that it would miss an interest payment on its debt and is unable to say when it will be able to publish its earnings statement, which would put it in default on $1.8bn worth of bonds, the FT reports. The company said its board had decided not to make a $10m interest payment due on Thursday on a 2016 convertible bond. The company said that it will miss a deadline to publish third-quarter results within 30 days of its last announcement, when the Hong Kong and Ontario-based company issued an interim report into allegations made by short seller Muddy Waters. The 180-page November report, which the company said proved it was not a “near total fraud”, nor a “Ponzi scheme”, also showed available cash had dropped more than $600m since the start of the year, to stand at $571m in November. For more on the story see FT Alphaville.

Former WaMu executives near deal with FDIC

Three former Washington Mutual executives are close to a settlement with the Federal Deposit Insurance Corporation over claims they were grossly negligent and breached their fiduciary duty in the run-up to the biggest bank collapse in US history, according to people familiar with the situation. According to the Financial Times, Kerry Killinger, ex-chief executive of WaMu, Stephen Rotella, former chief operating officer, and David Schneider, the ex-home loans president, were close to agreeing a settlement of less than $100m to settle the case. The FDIC had demanded $900m. If agreed, the settlement would be one of the most high-profile in the aftermath of the financial crisis. The FDIC and lawyers for the executives declined to comment. The WSJ reported that in its lawsuit the FDIC alleged the three executives “focused on short term gains to increase their own compensation, with reckless disregard for WaMu’s longer-term safety and soundness.”

US lawmakers reach government funding deal

US lawmakers moved closer to a deal on Monday to fund the government through next year, potentially avoiding a shutdown that would have further damaged Congress’ tattered reputation ahead of the 2012 election, Reuters reports. The group of Republican and Democratic lawmakers tentatively agreed on how to fund a wide range of government functions from homeland security to protecting the environment, congressional aides said. The details were not immediately available and lawmakers were expected to publish the massive spending bill on Tuesday, said Reuters. “There are still a couple of open items that need to be ironed out. These aren’t deal breakers or game changers but are still important issues,” said a Democratic spokesman for the appropriations committee in the House of Representatives.

The UK’s inflation myth

Told ya.

From Reuters… Read more

ECB Overnight Deposits Hit Fresh High

Overnight deposits held by eurozone banks at the European Central Bank hit another fresh high for 2011 Monday, reflecting continuing market tension and the end of the central bank’s monthly reserve period, the Wall Street Journal reported. Banks deposited €346.36bn overnight, up from the previous 2011 peak of €334.91bn deposited overnight Friday. According to the paper the high deposit rate reflects the continuing distrust in interbank lending markets, as banks prefer to park cash overnight with the ECB rather than lend it out to other banks. Deposits also tend to rise with the approach of the ECB’s reserve period for commercial banks, says the WSJ. According to  the ECB banks borrowed €8.95bn from the ECB’s overnight lending facility — an emergency facility — up from the €7.41bn borrowed on Friday. For more on the ECB’s reserve statistics as related to margin calls, see FT Alphaville.

AT&T and D Telekom to rethink merger

AT&T and Deutsche Telekom abandoned their attempt to win quick court approval for AT&T’s proposed $39bn acquisition of the German company’s T-Mobile USA unit and said they will decide over the next five weeks whether to formally kill or revise the deal, the FT reports. The decision represents a reversal for AT&T and Randall Stephenson, chief executive, who said when he announced the ambitious deal in February that he was confident of winning regulatory approval and expected the deal to close within a year. The two companies told US District Court Judge Ellen Huvelle on Monday that they “wished to stay any further court proceedings” until January 18 to allow the two companies “time to evaluate all options”. The Department of Justice, which had sued on antitrust grounds in August to block a deal that would have combined the second and third-largest US wireless operators and created a new mobile industry leader, joined in the filing, which was immediately approved by the judge.