Posts from Wednesday Dec 14 2011

Doubts over eurozone deal weigh on euro

The euro on Wednesday hit its lowest level against the dollar since January as European countries showed the strain of efforts to force through austerity policies and impose tough new spending rules, the FT reports. The 17-country single currency has fallen 2.5 per cent since the end of last week when European Union leaders’ agreed a package of measures to solve the eurozone debt crisis. Cracks have begun to emerge among the 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.

Gold tarnished in dash for dollar

Gold tumbled below $1,600 an ounce for the first time in more than 10 weeks and silver fell almost 7 per cent as the precious metals bore the brunt of a dash for dollars among investors and traders, the FT reports. The sell-off in the bullion markets intensified on Wednesday afternoon, recalling the darkest days of the 2008 financial crisis when prices fell as traders were forced to liquidate their positions. “This is very reminiscent of the second half of 2008,” said Tom Kendall, precious metals analyst at Credit Suisse. “There were similar funding stresses, a squeeze on liquidity, and heightened counterparty risk – and gold behaved in a similar manner.”

Opec agrees to maintain output levels

Opec has pulled off a show of unity after its last meeting ended in disarray, agreeing to keep its members’ oil output at current levels of about 30m barrels a day for the first half of next year, the FT reports. The deal on Wednesday will go some way to allaying the concerns of oil consuming countries, who have urged the producers’ cartel to maintain supplies rather than cut them in the face of slower economic activity. Even so, analysts said oil prices were unlikely to fall significantly from the current level of about $110 a barrel. The balance of supply and demand remains tight. Brent crude, the benchmark, tumbled $4.88 a barrel to $104.62 amid a wider sell-off in commodities ater Opec announced the deal. Brent prices hit a two-year high of $127.02 in February.

India and China voice growth fears

India has warned that emerging market economies are beginning to “falter”, as China’s top economic policymakers described the global outlook as “extremely grim and complicated”, the FT reports. Pranab Mukherjee, India’s finance minister, said that India had to turn its attention urgently to “reviving growth as quickly as possible” after alarming signs that financial markets were under renewed stresses. Similarly, China’s Communist party wrapped up its most important economic meeting of the year with an agreement to focus on maintaining fast economic growth amid the worsening outlook.

Olympus meets deadline to revise results

Olympus, the scandal-hit Japanese optical equipment maker, has cleared a crucial hurdle in its campaign to retain its listing on the Tokyo Stock Exchange after it managed to meet the Wednesday deadline to file postponed quarterly results, reports the FT. The filing means the company will avoid automatic delisting under TSE rules, and the damage to its reputation and financing ability that would have entailed. In the end, Olympus completed its filing with about two hours to spare. It won unqualified approval from its external auditors for its financial statements for the quarter to September 30, which showed a Y32.3bn ($414m) net loss as well as significant but not catastrophic deterioration in the value of its assets.

China money growth slows to decade low

Chinese money growth slowed to its lowest in more than a decade last month, keeping the pressure on the government to loosen monetary policy and prevent the economy from slowing too sharply, the FT reportsBeijing has already switched to easing mode, as marked by its cut of banks’ reserve requirements two weeks ago, but the latest data showed that downside risks were still proliferating. The broad M2 measure of money supply rose 12.7 per cent from a year earlier, the slowest since May 2001 and well below the 16 per cent rate that the central bank believes is necessary to support economic growth.

China set to tax US-made car imports

China will impose retaliatory duties on US car imports in the latest sign of trade friction between the world’s two largest economies, the FT reports. In a statement, China’s commerce ministry said on Wednesday that it was taking action in response to damage to its car industry from US “dumping and subsidies”. The move will affect several larger vehicles popular in China, including sport utility vehicles made by Germany’s BMW and Mercedes-Benz brands at their US plants. Shares of BMW and Daimler, which owns Mercedes, fell 5 per cent and 3 per cent respectively on Wednesday.

Further further reading

For the commute home,

- John Paulson proposes a sovereign-guarantee scheme for Europe. Read more

Electoral maths: Presidential elections and the S&P 500

In December of last year, we read a few posts suggesting 2011 would see above average returns for the S&P 500 since it was the third year of a presidential term, which has historically proved lucrative for equity investors (chart from Credit Suisse):

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More on the conflicted Isda committee

The International Swaps and Derivatives Association has a list of journalists who’ve been naughty or nice. They write about them on their Media Comment blog here.

Given FT Alphaville’s previous post about the Isda-organised Determinations Committee, which rules on behalf of the entire industry on whether credit derivatives will pay out, we’d like to make a few more points to address at least some of the possible counter-arguments. (To be clear: the quote boxes below display our versions of putative counter-arguments.) Read more

The conflicted Isda committee

Imagine playing a game where you bet on the outcome of a certain event. Most of the time the final outcome is unambiguous: you play, and afterwards, it’s clear whether you won or you lost. But every now and then, the result is hazy. Did the ball go into the goal? Was there a handball? Did he reach base?

This is usually where a referee steps in to decide. Read more

Tricky cartisti

There’s a certain Italian elegance to this intraday chart of Iti 10 year sovereign debt, no?

Technical analysts might spot an upside down head with a shoulder-shrug. Maybe. Read more

CME Group plays old-school Chicago politics

In case you missed it, last night Jon Corzine was artfully thrown under what looked like a bomb-strapped bus being driven by the Chicago Mercantile Exchange, with no Keanu Reeves in sight.

Terry Duffy, chief executive of CME group, told the Senate hearing on MF Global that the former New Jersey governor “was aware” that money had gone missing from customer accounts. Read more

The IMF on a coercive Greek debt restructuring

We think the IMF just might be trying to say something to those who are still looking for a “voluntary” Greek bond write-down.

Interesting set of quotes dotted around the Fifth ReviewRead more

Not a lot of cash in the Attic

There’s so much to read in the IMF’s latest report into Greece’s bailout, released on Tuesday…

Although firstly we just want to point out what the Fund says about an increasing lack of cash inside the Greek state. It’s in this excerpt of the report (page 8): Read more

The Saudi production puzzle

Last week it transpired that Saudi Arabian oil production had hit its highest level in three years.

As Bloomberg reported at the time: Read more

Blame the European banks

For their economic woes, US citizens can blame a dysfunctional Congress, greedy bankers, over-entitled workers or just plain old global imbalances. Or, of course, the eurozone debt crisis.

Goldman argues that one little-scrutinised way that the eurozone crisis could affect the US economy is through European banks pulling back on lending there. Read more

Markets Live transcript 14 Dec 2011

Live markets commentary from FT.com 

As Chinese apartments go, so goes China

It seems that investors in Chinese shares are not feeling too optimistic of late:

Shanghai Composite 1 year -  Read more

Europe’s CLO market in danger of extinction

Bundles of European buy-out loans, used to underpin many private equity deals prior to the financial crisis, are in danger of dying out, removing a vital cog in the region’s credit machinery, the FT reports. Bankers warn that a winding down of European collateralised loan obligations (CLOs) is expected to stymie fresh deals and to hamstring the market’s ability to refinance an estimated €250bn of European leveraged loans due to mature by 2017. “The European leveraged loan market was made up of the banks and CLOs. Both of those pillars are melting away,” says a senior leveraged finance banker. “There’s going to be a big fat tail of problems for a lot of people.” At the leveraged loan market’s peak in 2007, CLOs bought two-thirds of the €166bn of leveraged loans issued that year, according to a report by Standard & Poor’s published this year. But by the end of 2014, the agency estimates that more than 98 per cent of European CLOs monitored by the agency will have gone “static”, meaning their managers are unable to refinance existing loans or buy new ones.

You have 24 months to comply

Shock, horror.

Just days after the London Stock Exchange paid a jaw dropping price for FTSE, the index provider has decided not take the nuclear option and force a 50 per cent minimum free float requirement on foreign companies listing on London. It’s settled for 25 per cent instead. Read more

Stocks drift on lingering eurozone fears

Traders were so far delivering a mixed and indecisive global session after the Federal Reserve left policy unchanged amid lingering eurozone worries, the FT reports. The FTSE All-World equity index was down 0.4 per cent and industrial commodity prices were mostly softer, with copper off 1.1 per cent to $3.40 a pound and Brent crude dipping 0.6 per cent to $108.80 a barrel. Wholesale risk aversion was certainly not the predominant theme, however. Gold was rebounding 0.3 per cent to $1,636, after tumbling nearly $80 in the previous two days. The dollar index, which tends to display an inverse correlation to investor optimism, was fractionally lower – though still near 11-month highs – while US Treasuries were also seeing some profit taking after their good run, nudging up yields. Meanwhile, the FTSE Eurofirst 300 was down 0.4 per cent, but S&P 500 futures pointed to Wall Street adding 0.3 per cent at the open.

Collateral crunch, commodity financing edition

Look at any financial market long enough and it starts to resemble the repo market.

Conventional sales and buybacks. Islamic finance. Covered bonds. Commodity contango or backwardation trades. Most of them have some form of sale and later buyback of assets, inbuilt into the trade. The level of the buyback implies a yield-type return, exploiting the market’s current preferences. Read more

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. “The Fed is maintaining the status quo, noting some improvement in the jobs market, but the big risk remains Europe,” said Greg McBride, senior financial analyst at Bankrate.com. “We’ve actually seen better data on the US economy but nobody’s noticed because of the financial tension emanating from 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.

IT consultant discovers eurozone, with disastrous consequences

For a company that does half its business in the euro area, one could reasonably expect Logica to be fully conversant with the ongoing sovereign debt crisis.

 Read more

Further reading

Elsewhere on Wednesday,

- Ad-libbing at the MF Global hearingRead more

Pink picks

Comment, analysis and more from Wednesday’s FT,

  Read more

Snap news

Breaking pre-market news on Wednesday,

- Thomas Cook says first quarter bookings off to slow start; to close 200 shops; net debt £891m — statementRead more

Doubts raised over IMF firepower and UK contributions

Prospects for a rapid increase in IMF firepower to cope with the eurozone crisis have receded after the Japanese government and the Bundesbank set tough conditions before making contributions, reports the FT. On Tuesday Jun Azumi, Japanese finance minister, said that the EU needed to present a more convincing plan before Japan put more money into the IMF. Separately, hopes that eurozone leaders might increase the size of their own rescue fund in March were knocked when Angela Merkel, Germany chancellor, reportedly told lawmakers in a closed session she was sticking to her demand for a €500bn ceiling.  The Telegraph says there is concern the UK may have to contribute a further £30bn to eurozone rescue loans through the International Monetary Fund, matching the sorts of burdens shouldered by Germany, France and other EMU states, after an IMF publication said “European leaders agreed to make bilateral loans to the IMF of as much as €200bn — with €150bn contributed by eurozone members and €50bn from other members of the EU”.

Morgan Stanley to book $1.8bn loss after MBIA settlement

Morgan Stanley has resolved its legal conflicts with bond insurer MBIA, ending a long-running dispute tied to guarantees of mortgage securities that will result in the bank recording a $1.8bn pre-tax loss, the FT reports. MBIA will pay Morgan Stanley $1.1bn as part of the settlement, which will end lawsuits the companies launched against one another and extinguish $4bn in insurance contracts tied to mortgage securities that Morgan Stanley purchased from the bond insurer, the FT says, citing a person with direct knowledge of the matter. The settlement ends Morgan Stanley’s role in a 2009 lawsuit launched by 18 banks against the insurer and New York state’s financial regulator for restructuring the company during the height of the financial crisis in a way that allegedly harmed Wall Street counterparties. Morgan Stanley had about $2.7bn in exposure to MBIA in the form of derivatives and another $144m in exposure to bond insurers overall related to guarantees on mortgages and other asset-backed securities, according to its third-quarter filing with the US Securities and Exchange Commission.