Posts from Thursday Feb 2 2012

Record-breaking start to 2012 for Asian bonds

Asian debt markets got off to a flying start in 2012, recording all time record issuance for January as global investors look for new safe homes for their cash and issuers look to guard against the disappearance of other financing options, reports the FT. Investment-grade Asian companies outside Japan issued $5.76bn of bonds in international markets in January, which is by far the biggest total recorded for the first month of the year and is the third-biggest total for any month in the past three years, according to Dealogic. Adding in financial and sovereign issuance from the region takes the total to more than $10bn. The only area to remain truly moribund was the much less developed high-yield market.

Earnings doubts hang over Hong Kong rally

The Hang Seng has had its best start to the year since the mid-1990s, rising 12.5 per cent over the past month, the FT reports. Even so, by standard valuation metrics, Hong Kong’s benchmark stock index still looks cheap. It is trading on a price-to-earnings ratio of about 9.4, a discount to the Asia-wide average of 12 and much lower than its own long-term average of about 14. The question for investors is whether the Hang Seng represents a bargain, or whether the seductive p/e ratio is a value trap. “I’m quite optimistic at least for the next couple of months that the rally can continue,” says Arnout van Rijn, who manages about $2bn of Asian equities for Robeco.

Aussie dollar hits five-month high

The Australian dollar rose to its highest level against the US dollar in five months on Thursday, as figures showed that the country’s trade surplus rose to a record high last year, buoyed by strong commodity exports. The FT reports that Australia’s currency advanced to a fresh five-month high of $1.0756 against the US dollar in early Asian trading. It later pared some of its gains and was flat against the dollar by the close of trading in London. The Japanese yen continued to strengthen against the US dollar after a week of gaining ground. The dollar declined 0.2 per cent to hit a low of Y76.02.

Further further reading

For the commute home,

- Do groundhogs make better forecasters than economists? Read more

Japanese yen strengthens further

Japan’s finance minister hasn’t ruled out intervention should the yen continue to rise against the dollar, particularly if “speculative moves” continue to the push the currency higher, the WSJ reports. The strength of the yen has been hurting Japanese companies. The loose monetary policy of the US Fed has been exacerbating the rate. Recently release indicators have revealed Japan’s first trade deficit since 1980, a change which could slow the yen’s ascent. The currency has been considered a safe haven which investors have piled into over the course of the most recent financial crisis.

Sony warns of ballooning full-year loss

Sony warned its net loss would balloon to Y220bn ($2.9bn) this year, two and a half times its previous forecast, owing to a surging yen, supply-disrupting floods in Thailand and the cost of restructuring its unprofitable television business, the FT reports. Kazuo Hirai, who on Wednesday was named Sony’s next chief executive, on Thursday promised to make “unavoidable, painful choices” to fix or dispose of loss-making operations and turn the Japanese company round after what will be its fourth straight year in the red.

China considering deeper involvement in EFSF

China is considering how to get “more deeply involved” in resolving Europe’s debt crisis by co-operating more closely with European rescue funds, Wen Jiabao, Chinese premier, said on Thursday. China “is investigating and evaluating concrete ways in which it can, via the IMF, get more deeply involved in solving the European debt problem through [European Stability Mechanism/European Financial Stability Facility] channels,” Mr Wen said in a joint press conference with German Chancellor Angela Merkel in Beijing. The FT reports that the comments have revived hopes that China, which holds by far the world’s largest foreign exchange reserves, could add some of this $3.2tn cash pile to existing and future European bail-out funds.

Bernanke adopts caution on US recovery

US Federal Reserve chairman Ben Bernanke struck a cautious tone on the health of the economy in testimony to Congress but gave no hint that more stimulus from the central bank is near, the FT reports. The pace of the economic recovery remains “frustratingly slow” and “the sluggish expansion has left the economy vulnerable to shocks”, Mr Bernanke told the House of Representatives budget committee. But he added: “Fortunately, over the past few months, indicators of spending, production and job market activity have shown some signs of improvement”. Mr Bernanke’s neutral tone suggests that the Fed may wait for more information on the economy’s progress before deciding whether to loosen monetary policy further, perhaps with a third round of quantitative easing, nicknamed QE3.

Glencore and Xstrata close to $88bn deal

Glencore and Xstrata have launched merger talks to create a $88bn commodities trading and mining giant with the financial muscle to sweep up some of its biggest rivals, reports the FT. The all-share merger, which could be formally announced as soon as Tuesday, would turn the natural resources industry worldwide on its head by combining the world’s largest trading house with one of the biggest mining groups. Separately, the FT reports that after a less than stellar year for the mergers and acquisitions market in 2011, and the worst start to the year it has had for a decade, the potential merger is also likely to give a more than $100m boost to the advisers involved. Deutsche Bank, Goldman Sachs, JPMorgan and Nomura are advising Xstrata on the deal, while Citigroup and Morgan Stanley are advising Glencore.

Seasonality bias in the ISM… fixed?

Wednesday’s ISM reading in the US was solid, but maybe the best reason to look favourably on it is that you can now trust the report more than you could in recent months.

We’ve previously written about how the severity of the downturn at the end of 2008 might have borked the statistical techniques used to seasonally adjust economic data, basing this mostly on some recent analysis done by the US economics teams at Nomura and Goldman Sachs. Read more

Breaking the Bank (in gilts)

This’ll be a controversial argument about the Bank of England’s buying of UK government debt, we know… but it comes from Philip Rush of Nomura:

Aggressive quantitative easing brings [gilt] market capacity constraints into play. A renewed intensification of the sovereign debt crisis could cause this should one of QE’s reverse auctions fail. Tweaking maturity buckets or adding linkers could cure the constraints… Read more

Bernanke: recovery now, thrift later, generic speeches in the meantime

Not much interesting in Bernanke’s testimony to the House of Representatives this morning, but given his many previous warnings that premature fiscal tightening could stifle the weak recovery, he probably hopes listeners will tune out this par…

Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events. Read more

CME’s farmer fund

This looks like a sign of the post-MF Global shift in the futures market…

 Read more

Markets Live transcript 2 Feb 2012

Live markets commentary from FT.com 

China to rescue the Eurozone? Maybe

That’s the euro mid-morning on Thursday, reversing earlier weakness in an instant.  Here are the snaps from Reuters: Read more

Who tapped the LTRO, cont’d [updated]

Just one name today, but hopefully it rams home why banks are using the ECB’s three-year liquidity. From BBVA’s latest results:

Making use of the new lending facility provided by the European Central Bank (ECB), BBVA took up €11,000m at the extraordinary 36-month auction on December 21. This figure is equivalent to the sum of its wholesale debt redemptions for 2012. It means that the Group has “liquidity coverage” and demonstrates its prudence in liquidity risk management in line with the profile of maturities in upcoming years. However, it does not imply that the Group will not issue debt in 2012 if conditions improve. Read more

AstraZeneca to cut 7,300 jobs amid pressure on revenues

AstraZeneca pledged to buy back $4.5bn of its shares this year as the Anglo-Swedish pharmaceutical group warned of growing pressure on its revenues and unveiled plans to cut 7,300 jobs, the FT reports. The company posted full-year revenues down 2 per cent at constant exchange rates to $33.3bn on the back of nearly $2bn in sales lost to generic competition and $1bn because of government prices. The Wall Street Journal says the company faces a number of crucial patent expiries between 2012 and 2015, including patents for drugs such as Seroquel and Nexium, as well as a loss of patent protection from 2016 onwards for its best-selling drug, Crestor. “While the further expected losses of market exclusivity make for a challenging 2012 outlook, we remain committed to a long-term, focused, R&D-based strategy, and today we have announced further steps to drive productivity in all areas to improve returns on our investment in innovation,” Chief Executive David Brennan said.

Sony warns of ballooning full-year loss

Sony warned it would suffer a Y220bn ($2.9bn) net loss for the full year, a much larger deficit than it had previously forecast, as it embarks on an expensive restructuring of its unprofitable television business, the FT reports. The Japanese group’s new guidance for the financial year ending in March compares with an earlier loss estimate of Y90bn and is more pessimistic than experts had expected. Industry analysts tracked by Bloomberg had been projecting a loss of Y147bn. Thursday’s downgrade reflects the cost of dissolving a TV panel-making joint venture between Sony and Samsung of South Korea, a move that Sony says will force it to book a non-cash impairment charge of Y66bn. Sony is also writing off TV production facilities in Japan and scaling back its sales targets. The electronics and entertainment group announced on Wednesday that Kazuo Hirai, its 51-year-old deputy president, will take over as president and chief executive in April, confirming a widely anticipated change of leadership. Mr Hirai will take on most of the responsibilities currently held by Sir Howard Stringer, the Wales-born American who has been Sony’s chief executive since 2005 and will stay on as chairman.

Decline in trading hits Deutsche Bank

Deutsche Bank dropped to a fourth-quarter pre-tax loss after the crisis in the eurozone dragged down its trading and investment banking earnings, the FT reports. Germany’s largest bank by assets said revenues for the quarter were down 7 per cent to €6.9bn from the record fourth quarter of 2010. Net income of €186m, down from €605m a year ago, was helped by a €537m tax gain. Quarterly revenues from Deutsche’s private client and asset management division outstripped those from the corporate and investment bank, highlighting the turbulent trading conditions and the bank’s attempt to rebalance towards more stable earnings from retail banking. Revenues from debt sales and trading, normally the engine room of the bank, sank by 35 per cent while equity sales and trading revenues dropped 38 per cent year-on-year in the quarter. The bank’s corporate banking and securities division, which houses sales and trading as well as its advisory businesses, posted a €422m quarterly pre-tax loss, including €380m of charges related to lawsuits.

Shipping costs fall to 25-year low

A glut of ships has driven prices to ship dry commodities to their lowest level in 25 years, raising fears of fresh crisis for an industry vital to global trade, the FT reports. The key indicator of earnings for vessels carrying iron ore, coal and other bulk commodities – the Baltic Dry index – fell on Wednesday to its lowest level since August 1986, extending a streak of consecutive daily falls from December 12 that seen the barometer fall 65 per cent. The index is widely followed outside the industry as a gauge of global trade. However, analysts said the latest slide in prices reflected mainly the impact of a surge in deliveries of ships ordered in the shipping boom before the 2008 financial crisis, which has outpaced still-growing demand to move goods. The declines – which have seen average charter rates for Capesize ships, the largest kind, fall from $32,889 a day on December 12 to $5,327 on Wednesday – also reflect the impact of temporary factors, including the early Chinese New Year holiday and poor weather in Australia and Brazil. Earnings for most vessels on the short-term spot market are now well below operating cost levels, raising concerns about the finances of many ship operators, particularly those with high numbers of vessels leased from other owners at relatively high prices.

Stocks at 6 month high as growth fears ease

Many risk asset benchmarks were trying to consolidate near recent highs as the optimism released by improving manufacturing data continues to reverberate across global markets, the FT reports. S&P 500 futures suggested Wall Street would open little changed, and the FTSE Eurofirst 300 was up just 0.1 per cent, a fractional gain that nevertheless took the index to fresh six-month highs. Risk appetite was not entirely dominant, however. Copper was seeing profit-taking after its good run, losing 0.7 per cent to $3.82 a pound, while the euro was down 0.1 per cent to $1.3142 and the dollar index was up 0.1 per cent. The single currency was off its lows after a €4.6bn auction of Spanish bonds and a €8bn sale of French paper both saw good demand. Still, gold is up 0.3 per cent to $1,748 an ounce and haven Treasuries were softer, pushing 10-year yields up 1 basis point to 1.84 per cent. The FTSE All-World equity index was advancing 0.2 per cent to its best level since the start of August. The barometer has gained 21 per cent since its October intraday low and was up 7.4 per cent so far this year.

Facebook serves notice on $5bn IPO

Facebook launched the process for its highly anticipated stock market debut, filing papers for a $5bn initial public offering that will turn key shareholders into billionaires, most notably Mark Zuckerberg, the 27-year-old chief executive and co-founder, the FT reports. Mr Zuckerberg’s 28.4 per cent stake would give him a paper worth of $22.7bn, based on secondary market trading, valuing Facebook at $80bn. More striking is the absolute control Mr Zuckerberg will retain over the company. He and his close allies own 57 per cent of the company, guaranteeing that he will be able to run Facebook more like the mission-driven public trust he envisioned in his Harvard dorm room eight years ago than a public company beholden to investors. “Facebook exists to make the world more open and connected, and not just to build a company,” he wrote in a letter to investors in the filing. “Simply put: we don’t build services to make money; we make money to build better services.”

That Eurozone repo contraction, charted

We’ve had the results of ICMA’s European repo survey, but the following chart — by way of the ECB’s statistical data warehouse — offers a much more contemporaneous view thanks to data collected by the ECB via its MFI balance sheet reporting regulation . (H/T to Lorcan Roche Kelly of Trend Macro, by way of Alea.)

Shown in the following chart are the outstanding amounts of repurchase agreements in the Eurozone as of the end of December between MFIs, excluding ESCB, and other financial institutions (excluding insurance corporations and pension funds): Read more

Glencore and Xstrata close to $80bn deal

Glencore and Xstrata are in advanced talks over a nearly $80bn merger that could reshape the mining industry, combining the world’s largest commodities trading house with one of the largest miners of thermal coal and copper, the FT reports. The deal could be announced as soon as early next week, ahead of Xstrata’s annual results on Tuesday, according to a person familiar with the discussions. In a brief statement on Thursday, Xstrata confirmed that it had received an approach from Glencore and was in discussions, but cautioned there was no certainty that any offer would be made. Under UK takeover rules, Glencore has until March 1 to make an offer. News of the talks was first reported by Bloomberg. “The companies are closer to a merger than [at] anytime in the last five years,” the person with knowledge of the conversations said. “Nothing is firm, however.” A deal would shake up the mining sector in a similar fashion to the multi-billion dollar combination of BHP and Billiton in 2001 that created the world’s largest mining company by market capitalization. Glencore has since issued a statement saying “there can be no certainty that any offer will be made”.

The word from Zug – Xstrata confirms Glencore approach (Updated)

Xstrata statement:

Response to speculation Read more

Further reading

Elsewhere on Thursday,

- You know what’s cool, $1bn in profits. Read more

Pink picks

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

Charles Goodhart: Longer-term forecasts are a step backwards
Neither central bankers, nor anyone else, have a good way of predicting future fluctuations in either output, inflation or interest rates more than a few quarters ahead, writes Goodhart, a former member of the Bank of England’s Monetary Policy Committee. In order to express a view about the likely level of official interest rates two years hence, the respondent would have to try to work out what might be the expected growth rate of output three years hence and the probable inflation rate four years from now. Read more

One brave Unilever executive… (updated)

Undeterred by his experience last year, Unilever chief financial officer Jean-Marc Huet has agreed to come back on Markets Live on Thursday to discuss the company’s year-end numbers.

He’ll be joining Bryce Elder and Paul Murphy here at 11am on Thursday, offering readers the chance to pepper him with questions on anything and everything consumer. Read more

Snap news

Breaking pre-market news on Thursday,

– Glencore and Xstrata close to $80bn merger – FT reportRead more

Overnight markets: Up

Asian stocks rose for a third day after data showed a global expansion in manufacturing and Nomura’s unexpected profit increase boosted financial shares, says Bloomberg. Asian currencies strengthened to a three-month high and gold advanced.

Asian markets
Nikkei 225 up +64.81 (+0.74%) at 8,875
Topix up +5.48 (+0.72%) at 763.44
Hang Seng up +296.31 (+1.46%) at 20,630 Read more