Posts from Tuesday Dec 20 2011

Further further reading

For the commute home,

- Hedge fund refuge sought by tradersRead more

Yanzhou Coal in talks to buy Australian miner

Yanzhou Coal is in talks to take over Gloucester Coal, which would create one of the largest coal groups in Australia and provide the Chinese group with a backdoor listing of its local subsidiary, the FT reports. The deal, which is the latest example of a Chinese company looking to secure Australian commodities, is important for Yanzhou as it would allow the group to list its subsidiary Yancoal on the local exchange without needing to undertake an initial public offering in nervous markets.

Tokyo eyes Chinese state bonds investment

Japan is in talks with Beijing to invest in Chinese government bonds as part of a broader effort to strengthen financial and economic ties with its largest trading partner, the FT reports. “As we have to deepen economic ties, we are having many discussions. We believe the mutual benefits of investing in each other’s bonds would be substantial,” said Jun Azumi, Japan’s finance minister. The talks come ahead of a meeting this Sunday between Yoshihiko Noda, Japan’s prime minister, and Hu Jintao, his Chinese counterpart. Mr Azumi stressed that no decision had been made and the finance ministry declined to confirm the possible size of any Japanese investment in Chinese bonds.

Seoul adopts Christmas tree diplomacy

South Korea, walking a delicate diplomatic line in the wake of Kim Jong-il’s death, offered sympathy to the North Korean people without making any direct reference to the longtime ruler, while also going to pains to avoid provoking Pyongyang’s inexperienced new leader, the FT reports. The depth of South Korea’s concern was demonstrated by its decision not to illuminate Christmas tree-shaped towers along the North Korean border to prevent a potential confrontation with Kim Jong-eun, the dictator’s youngest son.

Stocks rally as eurozone tensions ease

Better news out of Europe sparked a rally in growth-focused assets as trading started to thin ahead of the holiday season, reports the FT. The FTSE All-World equity index was up about 2 per cent, with risk appetite building as shown by a 0.9 per cent fall for the dollar index and sturdy buying in the commodity space, where copper was up 2 per cent to $3.37 a pound. Gold, which has been trading of late with a close correlation to stocks, rose over 1 per cent to $1,613 an ounce. Much was made of the bullion’s drop below the 200-day moving average last week, so traders are eyeing that technical indicator again as it now becomes potential resistance at $1,621. Wall Street’s S&P 500 rebounded and jumped over 3 per cent, more than overcoming Monday’s losses, which came after Bank of America’s share price slipped below $5 for the first time this year, triggering heavy selling of financials. A report on Tuesday that showed US home building starts at a one-and-a-half year high in November added to evidence the struggling housing market may be gaining traction, further buoying investors. The mood was calmer early on in the session, with Asian markets recouping some of Monday’s losses as tensions surrounding the transition of power in North Korea eased a touch. Sentiment also improved in Europe after the Ifo survey of German business confidence defied the gloom-mongers by rising sharply in December. This was followed by a well-received €5.6bn auction of Spanish short-term debt, which reduced fears about sovereign funding difficulties across the eurozone.

Strong take-up of ECB loans expected

The European Central Bank is expected to report strong demand for an offer of unlimited three-year loans after banks were urged to take the funds as part of concerted efforts to ease severe strains across the eurozone’s financial system, reports the FT. Lenders across the region have been locked out of public funding markets in recent months due to fears of a worsening of Europe’s sovereign debt crisis. However some banks have historically been keen to avoid turning to the ECB for fear of signalling weakness to their peers. ECB president Mario Draghi said last week: “We see no stigma attached to the use of central banking credit provisions: our facilities are there to be used.” The ECB announced the emergency three-year loans, known as longer-term refinancing operations, or LTROs, earlier this month, in an attempt to help banks overcome €720bn worth of funding due to mature next year. The previous largest amount allocated in a single ECB operation was the €442bn in one-year loans offered back in June 2009. Some analysts think demand for three-year liquidity could exceed that figure given current severe financing strains for banks – although the median forecast is lower.

Covert transfers and the SMP

We are indebted to Marc Ostwald of Monument Securities for this:

AMSTERDAM, Dec 20 (Reuters) – The Dutch central bank cancelled its interim dividend, thereby increasing the government’s budget deficit, saying it may make a loss in 2011 due to the European Central Bank’s bond buying programme, the Dutch Finance Minister said on Tuesday. Read more

‘Tis the seasonality, hold the jolly

Endless worries about a eurozone disintegration and potential growth slowdowns across the developing world, but at least there’s been a streak of surprisingly not-terrible economic indicators in the US heading into the new year.

Or: feels a lot like December 2010, doesn’t it? Read more

A €360bn LTRO?

The ECB has announced the result of Tuesday’s fine tuning operation.

(Click to enlarge) Read more

On the limits of usable collateral for the LTRO

Wednesday’s three-year LTRO funding allotment is unsurprisingly the big focus in the market this week.

And while many suspect that some banks are gratuitously loading up on cheap-to-deliver bonds just to exploit the operation for carry trades, those with actual funding needs are potentially facing a very different situation. Read more

Calling all petro-states

Gas-states, too! The eurozone needs you — and you need the eurozone! So, start backing up the trucks for eurozone sovereign debt.

Philip Verleger, an energy economist and visiting fellow at the Peterson Institute, has written a brief paper outlining this argument that the big energy exporting states should, along with China, help fund an emergency IMF fund that would aim to bring peripheral bond yields down to 3 per cent. Read more

Australian banks’ll be right, mate

There was a bit of a furore in Australia this month when the big banks looked like — shock, horror — they would not immediately pass on an official interest rate cut in full to their mortgage clients.

In the end, the big four banks eventually did pass on the 25bps cut to borrowers, but dropped big hints that they may not bow to public pressure in future. Read more

Markets Live transcript 20 Dec 2011

Live markets commentary from FT.com 

Bank of America stock closes below $5

Investors have dumped Bank of America, driving its share price to a near three-year low of $4.99 and raising fresh worries over the state of the second-largest US bank by assets, reports the FT. The bank’s shares are trading at about 38 per cent of tangible book value, meaning investors either do not believe the value of BofA’s assets or fear the company is understating its liabilities, analysts said. The stock has plummeted 63 per cent this year, more than rivals JPMorgan Chase, Citigroup and Wells Fargo, as concerns over falling US home prices and unknown mortgage liabilities from the bank’s purchase of Countrywide Financial continue to haunt BofA more than two years after the recession officially ended. The Sage of Omaha’s $5bn investment in the bank, made over summer, is now $1.5bn underwater, reports the WSJ’s Deal Journal. However, Berkshire Hathaway’s holding comes with other benefits such as warrants that don’t expire for 10 years and around $300m in dividend payments a year.

Viva Espana [updated]

The Spanish auction results are out…

RTRS -SPAIN SELLS EU5.64 BLN OF BILLS VS MAXIMUM TARGET OF EU4.5 BLN Read more

Europe marginally softer in mixed trading

It’s another mixed day in global markets as traders scratch around for any sign of a festive rally as eurozone debt worries continue to weigh on sentiment, according to the FT’s Global Markets Overview. But at least the mood is calmer than that seen in the previous session, with Asian markets recouping some of Monday’s losses as tensions surrounding the transition of power in North Korea ease a touch. The FTSE All-World equity index is flat, with risk appetite muted as shown by a 0.2 per cent fall for the dollar index and some tentative buying in the commodity space, though copper is down 0.2 per cent at $3.29 a pound. The continent’s benchmark was slated to shed more after Wall Street suffered a late slide on Monday, when Bank of America’s share price slipped below $5 for the first time this year,triggering heavy selling of financials. However, S&P 500 futures are up 0.5 per cent in electronic trading on Tuesday, helping to pare European losses.

 

US prosecutors challenge Stanford on memory

Allen Stanford, the Texas financier accused of running a $7bn Ponzi scheme, says he is not fit to stand trial next month because he has no memory before a 2009 jailhouse assault. US prosecutors counter that claim, made in court filings, and say Mr Stanford is faking memory loss, the FT reports. A prison doctor said Mr Stanford was faking because his test results indicate he was “blatantly simulating cognitive defects,” according to the government’s court filing. The question of Mr Stanford’s competency and whether his trial will ultimately go forward on January 23 will be debated at a hearing beginning on Tuesday in federal court in Houston. Mr Stanford was arrested in June 2009 on charges he ran a Ponzi scheme through Stanford Financial Group, a Houston-based brokerage firm, and Stanford International Bank, an offshore Antigua-based bank he controlled. Two years since the bank was shuttered, brokerage customers are still trying to recover assets. Last week, the US Securities and Exchange Commission sued the Securities Investor Protection Corp to compel it to allow Stanford brokerage customers access to its customer protection fund, which could refund customers up to $500,000 each in cash and securities.

 

AT&T drops bid for T-Mobile USA

AT&T has abandoned its $39bn bid for Deutsche Telekom’s T-Mobile USA arm, conceding defeat in the face of overwhelming opposition from US regulators and the Obama administration, reports the FT. The move – a rare upset for a deal of its size – represents a significant setback for AT&T under the management of Randall Stephenson, chief executive, who saw the purchase as a way to overcome a shortage of wireless spectrum facing AT&T because of the rapid growth in data-hungry smartphones such as Apple’s iPhone. If the deal had been completed, the second and fourth-largest US mobile network operators would have been combined and put 75 per cent of the industry in the hands of Verizon Wireless and AT&T. The collapse of the deal releases a $3bn break-up fee to Deutsche Telekom, which will cover T-Mobile’s expenses for the next 12-24 months, Bloomberg reports. Beyond this time horizon, the mobile operator may struggle to generate enough operating cash flows to cover capital spending should a new partner not be found. DealBook says the collapse of the deal will also be felt by two boutique investment banks, Greenhill & Company and Evercore Partners, who used their advisory role to AT&T to highlight they could compete with bulge-bracket banks, while it will allow Goldman Sachs to leapfrog Morgan Stanley and JPMorgan to the top of the US M&A league table.

Efforts to boost IMF funds falls short

The European Union has fallen short in its campaign to supply the International Monetary Fund with an additional €200bn to battle the debt crisis after the UK rebuffed pleas to join the effort. The 17 eurozone governments were hoping that the UK would contribute as much as €30bn, supplementing their own expected €150bn pledge and helping to persuade other governments to reach into their pockets, the FT reports. George Osborne, the British finance minister, reiterated the UK government’s stance that the IMF’s mission was to protect “countries – not currencies” and that Britain believed the 17 eurozone members should take more decisive action to tackle the crisis themselves. Efforts to shore up support from outsiders has thus far met with limited support. Russia last week said it would be prepared to offer at least $10bn – but only after it saw further details of the EU’s plans to confront the crisis. The US, which would have to win approval from Congress, has declined. However, Denmark has said it could give €5.4bn. Sweden, Poland and the Czech Republic are also expected to contribute.

 

HTC calls ruling a ‘victory’ over Apple

HTC has claimed victory over Apple in a closely watched intellectual property case for the smartphone industry, despite a US court ruling that imposes a ban on the import of some of HTC’s handsets into the US. The Taiwanese company said the final ruling by the US International Trade Commission “declared an actual victory for HTC” because it found that HTC had only infringed on one patent out of 10 complaints made by Apple, and rejected two of the four claims on the patent that had been upheld in an earlier decision. The court also gave HTC until April 19 next year to comply with the ruling, reports the FT. The Apple patent that was infringed about related to data-detection technology and HTC will completely remove it from their handsets, Reuters reports.

 

Inside the mind of a gold bug

Warning: this is a very scary place to be. Rampant inflation, conspiracy, socialism, totalitarianism and Ayn Rand can be found at every turn.

Presenting the latest Thunder Road report from former resource analyst Paul MylchreestRead more

Mario explains himself

We all wondered what was really behind those new non-standard ECB measures announced by Mario Draghi two weeks ago.

Thankfully, Draghi has finally explained himself in more detail (via a speech in Brussels this week). Read more

Further reading

Elsewhere on Tuesday,

- To be a Roman patrician. Read more

Pink picks

Comment, analysis and more from Tuesday’s FT,

Editorial comment: Whole world needs Europe to grow
Today the whole world badly needs Europe to grow, says the FT. Long-term growth and rebalancing are sine qua non for overcoming the debt crisis, but short-term recovery is a greater priority. Austerity by those who must should now be compensated by stimulus from those who can. Political foundations for such a bargain exist: in Cannes, the Group of 20 came close to agreeing it; in Germany, the opposition calls for a recovery plan for Europe. It is right: nothing less will do. Read more

Snap news

Breaking pre-market news on Tuesday,

- AstraZeneca warns full year earnings will be at the lower end of expectation after two late stage drug failures — statementRead more

Osborne calls time on RBS’ global ambitions

George Osborne has called time on Royal Bank of Scotland’s ambitions to be a force in global investment banking, as the chancellor backed sweeping reforms to ensure taxpayers never again have to rescue the banks, reports the FT. In an attempt to fend off criticism that the government had watered down measures proposed by Sir John Vickers, he told the state-backed bank to return to its roots as a UK-focused lender. The comments came as Mr Osborne pledged to implement the proposals put forward in September by Sir John’s Independent Commission on Banking, with few compromises. But in a sign that the government had succumbed to threats from HSBC that it could leave the UK if regulatory costs rose too high, Mr Osborne said banks could avoid tough capital rules on their international operations as long as they did not pose a risk to British taxpayers. Mr Osborne said the reforms would cost the UK between £800m and £1.8bn in lost economic output each year, but that this would be more than offset by an annual gain of £9.5bn from the “reduction in the likelihood or impact of future financial crises”, reports the Telegraph.

ECB warns of global risks

The ECB has warned that the eurozone debt crisis could spread to engulf further member states, creating risks to financial stability that could reverberate around the world, the FT reports. “Contagion of euro area sovereign debt strains remains the most pressing risk for financial stability in the euro area, the European Union and even across the globe,” said the ECB’s latest eurozone financial stability review, released on Monday. The comments hinted at ECB concern over politicians’ failure to bring the crisis under control, and at the danger of countries’ fiscal austerity plans being derailed by domestic politics. Presenting the report in Frankfurt, Vitor Constâncio, vice-president, said the ECB had not considered the possibility of a eurozone break-up because such a scenario was “unthinkable”. But even the exit of a single member would have unforeseeable consequences, Mr Constâncio warned. Other risks to eurozone financial stability, according to the ECB, include funding strains in the banking system, which the ECB will seek to address this week with its first offer of unlimited three-year loans to banks. Mr Constâncio also highlighted the risk of credit tightening hitting the real economy. Separately, Mario Draghi, ECB president, told the European parliament in Brussels that draft changes to European treaties strengthening fiscal rules were a “first step” but could be “made much better”.

Japan in talks on buying Chinese government bonds

Japan is discussing with China possible purchases of Chinese government bonds, Bloomberg reports. Japanese finance minister Jun Azumi said “I think it’s mutually beneficial” for the two countries to be investing in one another’s debt, at a press conference in Tokyo today. “We’re not abandoning the dollar or euro, but we’re adding the yuan to deepen our relationship.” Prime minister Yoshihiko Noda signaled in September 2010 as the nation’s finance chief that Japan should have the ability to invest in China’s market given that the Chinese are buying Japanese debt. Japan holds $1.22tn of foreign-currency reserves, the world’s largest after China.

Overnight markets: Slightly higher

Asian shares rebounded from Monday’s steep losses as investors were relieved by no sign of turmoil in North Korea following the death of the country’s leader Kim Jong-il, says the FT. The MSCI Asia Pacific index gained 0.5 per cent with South Korea’s Kospi Composite index up 1 per cent, Japan’s Nikkei 225 Stock Average 0.6 per cent higher and Australia’s S&P/ASX 200 index flat. China’s Shanghai Composite Index advanced 0.4 per cent while Hong Kong’s Hang Seng index added 0.2 per cent.

Bargain hunting by pension funds helped lift South Korean shares with defence equipment makers rallying after North Korea conducted a short-range missile test on Monday. Speco jumped by the daily limit of 15 per cent while Victec, which makes electronic warfare equipment, and Huneed Technologies, a military communication equipment maker, each also surged 15 per cent. In Tokyo, Mitsui O.S.K Lines surged 4.4 per cent on media reports that the shipping company agreed to a joint venture with Indonesia firm Trada Maritime to transport liquefied natural gas to the south-east Asian nation. Rival Nippon Yusen was 3.7 per cent higher. Olympus climbed 14 per cent on a report in the Nikkei business daily that the company is considering a $1.28bn capital increase to boost its financial health. Read more

LME to raise trading fees

The London Metal Exchange will raise trading fees for non-members by as much as seven times as it seeks to maximise profitability ahead of a potential takeover, says the FT. The exchange, the global centre for metals trading, expects that its members – mostly banks and brokerages – will pass on the increased cost to their customers. This would raise the cost of trading for the hedge funds, trading houses and metals consumers that are the heaviest users of the contracts. The LME said in a notice to members that it would raise trading fees for non-members to a flat rate of 50p ($0.78) per contract traded from the start of March; up from current fees of 16p for trades in segregated accounts and 7p for trades in non-segregated accounts. Fees for trades between the LME’s 93 members will be unaffected. The 134-year-old exchange announced in September that it had received expressions of interest from more than 10 potential suitors.