Posts from Thursday Dec 22 2011

China’s domestic workshops struggle to keep pace

The slight middle-aged man holds a bare-bottomed granddaughter in one arm and a spool of thread in the other, as he contemplates the future of his family textile workshop in Zhili, the children’s clothing capital of China, the FT reports. Mr Song – who declines to give his first name – is an inevitable casualty of China’s maturation. He has been farmer, factory worker, and sweatshop owner, but now he must find another way to make ends meet, as China moves upmarket. “I could not make a living as a farmer, so I came here – but doing this business I can only cover my living costs,” he says, gesturing at the front room of his home in a grim village on the outskirts of Zhili, where seven of his relatives hunch over sewing machines for 12 hours a day, making cheap clothes for the domestic market. The Chinese Communist party’s vision for the country’s manufacturing industry does not include workshops such as this one: China’s leaders want the country to stop making shoddy junk and start inventing things. But Mr Song, at 46, is too old, poor and uneducated to climb the value chain laid out by the economic planners.

Toyota forecasts strong comeback

Toyota is forecasting record sales for 2012 as it rebounds from two natural disasters that disrupted its supply chain and production and halved its profits this year, the FT reports. The Japanese carmaker said on Thursday that it expected its worldwide sales of Toyota and Lexus premium-brand vehicles to rise 20 per cent to 8.48m next year, from 7.05m in 2011. This would surpass its previous sales record of 8.43m vehicles set in 2007. Toyota said that the forecast did not take into account incentives for lower-emission cars recently approved by Japan’s cabinet. The tally does not include vehicles made by its Daihatsu and Hino subsidiaries. Toyota said that it expected its global sales to increase a further 6 per cent in 2013 to 8.95m. The company, which overtook General Motors as the industry’s largest carmaker in 2008, will lose the title this year after seeing its production hit first by Japan’s earthquake and tsunami in March, then flooding in Thailand in October.

European and US stocks rise after ECB loan offer

European and US equity benchmarks are higher in a generally mixed market, where investors are still absorbing the implications of the European Central Bank’s half a trillion euro cheap loan splurge, reports the FT. The Stoxx 600 is up 0.7 per cent as some dealers welcome the ECB programme as a useful tool in reducing financial system funding angst. In the US, a downward revision to US third-quarter GDP weighed on stocks. But other reports released on Thursday showed further shrinkage in weekly initial jobless claims, a higher than expected rise in December consumer sentiment and broad-based gains in a leading economic indicators index for November, supporting a 0.9 per cent gain in the S&P 500 index. Stocks briefly pared gains after Bloomberg reported that Standard & Poor’s cut Goldman Sachs’ credit rating. The stock slid 1 per cent right after the report but recovered as S&P said it had taken no action on the company. The Goldman Sachs Group is rated A- with a negative outlook by S&P. Shares were trading higher at $93.50.

Bini Smaghi sees role for European QE

A top European Central Bank policymaker has called for “quantitative easing” to be used to boost the eurozone economy if deflation risks emerge across the 17-country region, the FT reports. The comments by Lorenzo Bini Smaghi, ECB executive board member, are the strongest indication yet that the central bank would expand its policy tools to prevent a possible disastrous economic slump in continental Europe. In an interview with the Financial Times, Mr Bini Smaghi also hinted at frustration over the UK’s reluctance to join efforts to strengthen the eurozone. The euro’s success was in the City of London’s interest, he said. “The European Union, and ECB, would certainly contribute to help Britain if London was in difficulty. I would thus expect a reciprocal attitude.” Speaking in Frankfurt on Thursday, Sir Mervyn King, governor of the Bank of England, said swift implementation of measures to shore-up the eurozone was of “utmost importance”, warning that “stressed financial conditions are passing through to the real economy”.

Further further reading

For the commute home,

- Feldstein on the failure of the euroRead more

The LTRO, the switch and the basis swap market

Were you puzzled by the immediate reaction of the euro following Wednesday’s LTRO?

 Read more

2012 – the year of the double dip

Festive cheer seems to be in short supply at Capital Economics:

– We don’t have high hopes for 2012. In fact, we continue to think that the UK will re-enter recession. Output could already be contracting and is likely to continue to fall throughout most of next year. Read more

More Angry Birds, less regulatory arbitrage, please

The notice was rather vague, but we’ve done some sleuthing and have a better picture of what’s been going on now.

The timing of the letter struck us. The deadline for the great European bank recapitalisation isn’t far off (June 2012), but the conditions specified by the European Banking Authority cut off some of the most obvious routes, given the difficulty in tapping the funding markets: deleveraging and model tweakageRead more

Are western central banks having an existential crisis?

David Wessel over at the Wall Street Journal has followed up on a story FT Alphaville has been covering for a while. That the world economy is running out of super-safe financial assets, and that this is doing untold damage to central banks’ abilities to control interest rates (the last bit is our spin).

He raises a point which we think is pretty important. The fact that all this asset encumbrance really started back in the mid 2000s — and was possibly the reason for Alan Greenspan’s famous yield conundrum, when the Fed chairman declared he couldn’t rationalise why longer dated yields would not budge higher despite Fed rate hikes. Read more

Q&A: The ECB’s three-year loans

The below is from the FT’s Money Supply blog that covers on all things central banky. FT Alphaville enjoyed it so much, that we had to ask Claire if we could nick it cross-post. She kindly agreed.

_______________________________________________ Read more

Markets Live transcript 22 Dec 2011

Live markets commentary from FT.com 

FT Alphaville – Xmas opening hours

AV will be taking a little break over the festive period — from midday on December 23rd until January 3rd.

OK, it’s an extended break. But it’s been a hectic year and the team need to recharge their batteries. Of course, if something untoward should happen in the Eurozone, like a bank blowing up or worse, a small country leaving the Euro, or a big one losing its AAA rating we will power up the site and start posting. Hopefully that won’t happen and we will all be able to have a relaxing Christmas break. Read more

Europe opens higher after ECB loan offer

European bourses have opened higher in a generally mixed market where investors are still absorbing the implications of the European Central Bank’s half a trillion euro cheap loan splurge, according to the FT’s Global Markets Overview. The Stoxx 600 is up 0.8 per cent as some dealers welcome the ECB’s loan programme as a useful tool in reducing financial system funding angst. The euro is up 0.4 per cent to $1.3093 and tensions are easing in the sovereign bond sector, with Italian 10-year yields dipping 4 basis points to 6.75 per cent. But US stock futures are little changed, encapsulating the lack of a strong trend as activity thins ahead of the Christmas break. The dollar index, for example, a useful inverse gauge of risk appetite, is down just 0.2 per cent, but gold which has of late been sporting a positive correlation to trader optimism, is down 0.1 per cent to $1,612 an ounce.

Fortress CEO takes leave after being named in suit

Fortress Investment Group’s CEO Daniel Mudd has announced that he is taking a leave of absence from the hedge fund, the WSJ reports. This comes after being named as a defendant in a civil securities-fraud lawsuit brought by the SEC last Friday, with respect to his prior role as the CEO of Fannie Mae. The suit alleges that risks that the firm was taking on, with respect to mortgage holdings, were not accurately disclosed to investors. While representatives of Fortress have stated that the suit doesn’t affect their business, there was concern among executives that it could alienate investors.

US won’t ban mobile phone use when driving

Last week, the National Transportation Safety Board sought to ban the use of mobile phones when driving, even with hands free kits. The call by the NTSB has made car makers and mobile-phone companies anxious, though some cars have integrated systems that mean a mobile isn’t actually being used. On Wednesday, US transportation secretary Ray LaHood said that he isn’t backing the proposed ban, reports the WSJ. A year ago, he was on record saying that such a ban may be necessary, but has yet to follow up on it. The NTSB stands by their recommendation, but has no rule-making power. At present, many states have bans on using handheld devices to make calls (9) and to text (35) while driving.

New rules make it easier to form unions in the workplace

On Wednesday, new federal rules were announced that will make it easier for unions to recruit to members and organise themselves in the workplace, the WSJ reports. From April 30th next year, the rules will make it more difficult for employers to delay the formation of unions inside private sector companies. The usual delay tactic has been to challenge whether certain employees are eligible to vote on union formation, because they are part-time or management. Under the new rules, however, such challenges will have to wait until after the vote. About 10 per cent of elections were delayed in this way in the past, for an average of 101 days.

Further reading

Elsewhere on Thursday,

- The new Fed regs and what it means to “hold capital”. Read more

Pink picks

Comment, analysis and other offerings from Thursday’s FT,

Rodric Braithwaite: The myths of Russia
On Christmas Day 1991 we were still wearing our funny hats and eating our mince pies when Mikhail Gorbachev came on television to tell the world that he had resigned as President of the Soviet Union, writes Braithwaite, British ambassador in Moscow from 1988 to 1992. We looked out at the Kremlin on the other side of the Moscow River. The Red Flag was fluttering down for the last time. So many hopes have been dashed since then. But that is no reason to abandon hope itself. Much of what is going on in Russia today is deeply unattractive. But contrary to what you might gather from the western press, Russia is not the Soviet Union. It is comparatively open and prosperous. Russians travel abroad in their hundreds of thousands. There are more Russians than Germans on the internet. And now the Russians who voted so enthusiastically for change in 1989 have begun to reclaim their right to be heard. Mr Putin’s decision to run again for the presidency may turn out to be his biggest political mistake as he begins to slither down the other side of the bell curve. Read more

Snap news

Breaking pre-market news on Thursday,

- International Airlines Group signs binding agreement to buy BMI for £172.5m — statementRead more

Overnight markets: Down

The MSCI Asia Pacific index fell 0.4 per cent as European banks sought more cash from the European Central Bank than economists had expected, says the FT’s global markets overview. Japan’s Nikkei 225 Stock Average lost 0.3 per cent, Australia’s S&P/ASX 200 declined 0.8 per cent and South Korea’s Kospi Composite retreated 0.3 per cent.

Carmakers lost ground on concern that Europe’s debt crisis could curb Asian exports to the region. Toyota Motor was down 0.4 per cent in Tokyo while Hyundai Motor slipped 0.5 per cent in Seoul. SAIC, China’s biggest carmaker, was off 1.8 per cent in Shanghai.  Technology shares were pounded by a lacklustre earnings report fromOracle, the technology group. Samsung Electronics fell 1.23 per cent and LG Electronics slid 1.18 per cent in Seoul while Canon off 0.3 per cent in Tokyo. Read more

Fitch again warns US rating under threat

Fitch Ratings on Wednesday warned again that the US’ rising debt burden was not consistent with maintaining the country’s top AAA credit rating, but said there would likely be no decision on whether to cut the rating before 2013, reports Reuters. Last month, Fitch changed its US credit rating outlook to negative from stable, citing the failure of a special congressional committee to agree on at least $1.2tn in deficit-reduction measures. “Federal debt will rise in the absence of expenditure and tax reforms that would address the challenges of rising health and social security spending as the population ages,” Fitch said in a statement.

 

SocGen unveils surprise management shake-up

Société Générale has announced a surprise management shake-up as the French bank accelerates asset disposals and cuts costs, says the FT. Michel Péretié, who as chief executive of SocGen’s corporate and investment banking division helped to steer it through the worst of the financial crisis, will leave France’s second-largest bank in early January. He will be replaced by Didier Valet, who is currently chief financial officer and who has been at the group for more than 10 years. Mr Péretié, who joined from Bear Stearns in 2008, has “decided to pursue other opportunities outside the bank”, SocGen said after the market closed on Wednesday. The appointments highlight the pressures that the group is under to soothe rattled investors, who have seen shares in SocGen lose more than 60 per cent of their value since January.

UK companies to treble retail bond issuance

UK companies plan to treble the value of bonds they issue direct to the public next year, as they seek cheaper financing from private investors hungry for yield, the FT reports. Research from Evolution Securities estimates that primary issuance of retail corporate bonds will exceed £3bn in 2012 – building on 2011’s “watershed year”, in which just over £1bn-worth of bonds were offered via brokers using the London Stock Exchange’s Order Book for Retail Bonds. In total, there were 12 new issues specifically aimed at private investors in 2011, which raised a total of £1.22bn – a 33 per cent annual increase in the number of issues, and a 377 per cent rise in the amount of debt financing secured. By contrast, Evolution calculates that issuance in the wholesale market – where institutions and fund managers buy corporate debt – rose in the first half of the year, but has since fallen by more than 20 per cent.

 

Asian stocks, euro lower on LTRO news

Asian stocks retreated from a one-week high, while the euro traded at $1.3044, near the weakest level in 11 months on news that European banks took up a record €489bn in the ECB’s liquidity facility, says Bloomberg. The MSCI Asia Pacific Index lost 0.6 per cent at 12:07 pm in Tokyo. Standard & Poor’s 500 Index futures slid 0.2 per cent after the gauge completed its biggest two-day increase in almost three weeks. Australian dollar and South Korean won snapped two days of gains, falling 0.3 per cent and 0.7 per cent respectively. Stocks had initially surged on Wednesday after the stronger-than-expected demand, a record for the amount allocated in a single ECB liquidity operation, was revealed. The high demand came after banks were urged by policymakersto take the funds as part of a concerted effort to ease severe strains across the financial system, the FT reports. Banks used about half the €442bn allocated in one year loans in June 2009 to buy higher-yielding sovereign debt, mostly Greek and Spanish government bonds. Reuters, citing three sources with direct knowledge of the matter, says 14 Italian banks, including UniCredit and Intesa Sanpaolo, tapped €116bn of the facility, or nearly a quarter of the total — including €40.4bn of state-backed bank bonds which were used as collateral for the loans. The biggest amount, €12bn, of state-backed bonds was taken up by Intesa Sanpaolo, which confirmed it had used them as collateral for the loans, and said that these would help it complete pre-funding for its wholesale medium and long term maturities for 2012.

Vega threatens to sue over Greek bond losses

One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country’s debt restructuring if losses are too deep, the FT says. Madrid-based Vega Asset Management, an original member of a steering committee for bondholder negotiators, wrote to fellow investors this month to say that it would consider suing if Greece insisted on writedowns of more than half the net present value of the debt. “Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 per cent or less is not now a likely outcome,” Jesús Sáa Requejo, a senior Vega executive, wrote in the letter on December 7. “Vega needs to start considering all available legal options to refuse and challenge any exchange that implies a NPV loss of more than 50 per cent.” Vega, which has resigned from the steering committee, declined to comment.

BofA to pay $335m over discrimination claims

Bank of America will pay $335m to resolve US allegations that the lender discriminated against African-American and Hispanic borrowers, the latest in a series of legal and costly problems the bank has inherited from its troubled Countrywide unit, the FT reports. From 2004 to 2008, the bank allegedly overcharged more than 200,000 minority borrowers for home loans compared with similar white borrowers, according to the US Department of Justice. The lender also allegedly steered more than 10,000 creditworthy African-American and Hispanic borrowers into more expensive subprime loans. The Justice Department alleges that the bank did so solely because of the applicant’s race and national origin.

Yahoo considers Asia sell-off plan

The board of Yahoo is considering selling most of its stake in Alibaba and in Yahoo’s Japanese affiliate back to their majority owners, reports NYT DealBook, citing people briefed on the matter. The report says the board are expected to meet on Thursday to discuss a complicated transaction that values the stakes at about $17bn. The FT, citing people familiar with the talks, says the valuations were still under discussion and that the total value of the offers before the Yahoo board fell short of $17bn. Also, even if Yahoo directors pursued the idea further, any final agreement on the convoluted plan was likely to be at least three to four weeks away.

M&A activity collapses in fourth quarter

Mergers and acquisitions activity collapsed in the fourth quarter as the sovereign debt crisis and market volatility put the brakes on dealmaking and equity sales, pushing European investment banking fees to their lowest level in more than a ­decade, reports the FT. Fourth-quarter M&A volumes fell 32 per cent to $375.3bn from the previous three months, led by a 41 per cent decline in Europe. The drop, combined with a pullback in equity issuance amid turbulent markets, contributed to an 8 per cent fall in investment banking fees to $72.6bn for 2011, against 2010. In Europe, fees totalled only $2.57bn across all products, the worst quarter since records began at data-provider Thomson Reuters in 2000.