Posts from Monday Feb 6 2012

BAE considers Typhoon price cut

BAE Systems, Europe’s largest defence contractor, has signalled its willingness to reduce the price of the Eurofighter Typhoon to win back a $20bn Indian tender from France’s Dassault.Ian King, BAE’s chief executive, told the FT that BAE needed to consult with its partners in Germany, Italy and Spain, but said all options were open. “I will be discussing with our partners what we do next. In my view, all options are on the table,” he said. When pressed on whether this would include reducing the price, Mr King confirmed that it was one of the options being considered. While noting that India’s decision to grant Dassault’s Rafale preferred bidder status was based on price, he argued the Typhoon was younger, more versatile and could be modernised at a competitive cost over the coming years. Analysts and industry executives said any technical advantage the Typhoon might enjoy over the Rafale was not enough to outweigh the difference in price plus any other sweeteners, such as more generous technology transfer agreements, offered by France.

Further further reading

For the commute home,

– How the business of international banking has changed over time. Read more

The unemployment exit race and structural impairment

We found a couple of items from a Credit Suisse note commenting on Friday’s jobs report to be interesting and worth discussing in some detail.

First is a bit of commentary explaining that a higher number of unemployed have dropped out of the labour force since 2009 than have found new jobs. This has undone a long-term historical relationship. Read more

Google & Facebook pull content in India

Reuters reports that Google and Facebook have reacted to a court directive in India on Monday warning them of a potential crackdown by authorities if they do not take steps to protect religious sensibilities. The two companies are among 21 that have been asked to block potentially offensive material. The move, off the back of private petitions to the court, have stoked fears over censorship. Last year, a law was passed in India that made companies like Google responsible for user-generated content on their sites, giving them 36-hours to take down content deemed offensive once there has been a complaint. The WSJ reports that the content in question in this case involved images of religious figures. These have since been taken down by Google but only on its localised India domain, making the content still available elsewhere.

January effects in credit

It’s been a rather optimistic sort of January. S&P financials are finally trading above book value (but with wide variations between individual banks), junk bond issuance is full steam ahead with flows to high yield funds, and the headline S&P 500 is just 3 per cent off of its post Lehman high:

 Read more

Greece talks cast lengthy shadow

The FT’s Global Market Overview reports that a rally in global equities was brought to a halt on Monday as fears Greece may not agree on terms for a second bail-out offset recent optimism over supportive global data. US stocks edged lower, following declines in European equities, while the euro see-sawed. Lack of progress on debt relief negotiations in Greece has also weighed on investor sentiment on commodities markets. The country must repay €14.5bn in March, which it will be unable to do without its second bail-out from the European Union, which will be up to €130bn. The uncertainty left last week’s closing highs – triggered by stronger-than-expected US jobs creation data – and wider risk appetite looking vulnerable. At midday on Wall Street, the S&P 500 was 0.2 per cent lower, after touching its highest level since July on Friday. The tech-heavy Nasdaq Composite Index was 0.5 per cent lower, while the FTSE All-World index was nearly flat.

Pressure mounts on Greece over bail-out

The leaders of France and Germany stepped up the pressure on Greece on Monday to accept the terms of a new €130bn bail-out, saying there would be no further rescue unless all Greek political parties signed up to the deal, the FT reports. Leaders of the three political parties in Greece’s national unity government have postponed a planned meeting to agree reforms until Tuesday, the prime minister’s office said. Separately, the FT writes that European officials are insisting any new Greek bail-out programme specifically earmark funds to pay off remaining holders of Greek debt, giving lenders the freedom to withhold aid to Athens without risking a messy default that could reignite panic in financial markets. Under a new Franco-German plan that senior European officials said is likely to be included in a new Greek rescue, eurozone officials would create an escrow account to accept new bail-out funding instead of paying it all directly to Athens as in the past.

South Korean groups ramp up foreign deals

South Korean companies have embarked on a buying spree for European assets on the back of strong cash reserves and a rising global profile as the protracted debt crisis in Europe presents them with increasing opportunities to snap up distressed assets. Big Korean companies, which have favoured greenfield development after failed investments abroad in the 1980s and 1990s, are becoming more aggressive in their hunt for overseas natural resources and western luxury brands, the FT reports. South Korea’s outbound merger and acquisitions deal value surged to $11.6bn last year, about 14 times the 2005 total of $824m, according to data firm Dealogic. The 2011 figure falls far short of Japan’s $86.3bn and China’s $61.1bn but South Korea’s appetite for undervalued overseas assets is growing fast, often competing with its bigger neighbours for energy and property deals.

Money flows back into emerging markets

Money has poured into emerging markets this year, with funds dedicated to the asset class enjoying their best start to a year since 2006 amid continued investor wariness over developed markets, the FT reports. Emerging market equity funds, which fell out of favour for much of last year, attracted $3.5bn in the week ending February 1, the most in almost a year, taking the total inflows this year to $11.3bn, according to EPFR Global, a data provider. Emerging market bond funds saw inflows of $1.2bn last week, the most since March last year. Buoyed by the renewed surge in capital inflows, emerging market currencies have also enjoyed a strong start to the year. “The appetite towards emerging markets has been so far remarkable,” strategists at Société Générale said in a recent note. “To a large extent, it has reflected some [European] debt crisis fatigue, and the fact that investors have been keen to put risk back on to the table.”

Citigroup to issue China credit cards

The FT reports that Citigroup will become the first western bank to issue credit cards in mainland China under its own brand after it won approval to launch the business from the China Banking Regulatory Commission. The move is another foot in the door for Citi on the mainland after it also won preliminary approval in January to set up a joint-venture securities firm with Orient Securities, which will be based in Shanghai and licensed for investment banking business. China’s credit card market has begun to grow more rapidly in recent years after a slow start due to a lack of payments infrastructure. The number of cards in issue recorded by the Chinese central bank reached 268m by September, more than five times the level at the end of 2006, according to Citi.

Europe holds China to carbon tax payments

European officials are insisting that Chinese airlines will have to pay for their carbon emissions, rebuffing an attempt by Beijing on Monday to shield them from a controversial emissions trading scheme, reports the FT. While Chinese airlines had previously said they would not pay the EU carbon tax, the Civil Aviation Administration of China formally instructed them not to join the EU emissions trading scheme without government approval. “China hopes that Europe will address our concerns in light of the overall situation of global climate change, the sustainable development of international aviation and Chinese-European relations,” the Chinese aviation authority said, adding it “will consider additional measures to protect the interests of our citizens and companies”. The EU countered that it remains determined to include all airlines that take off or land in the 27-member bloc in the scheme, which other nations complain is a violation of their sovereignty and has stoked warnings of a trade war.

IMF warns China on eurozone fallout

Economic growth in China could drop by half this year in the event of a sharp recession in Europe, the IMF predicted on Monday in a report that underscored the importance of global trade to the world’s second largest economy. “The risks to China from Europe are both large and tangible,” and “China would be highly exposed through trade linkages,” said the report, which was published by the IMF’s resident representative office in China. The FT reports that the IMF’s forecast for China’s annual growth in 2012 has already been lowered to 8.2 per cent from a previous forecast of 9 per cent but if Europe’s performance is worse than expected then China’s export-driven economy would be badly hit.

Freight rates go negative

Negative bond yields, negative repo rates, and now… negative freight rates. At least route-specific ones.

Bloomberg has the story here (our emphasis): Read more

You either love it or you hate it, Morgan Stanley edition

This Bloomberg Markets headline (koan?) attracted puzzlement on Monday:

Gorman Embracing Vegemite in New Wall Street’s 15% Bogey at Morgan Stanley

 Read more

The currency pair league table

$/€ races ahead of $/£, $/¥ and $/SFr, but $/AUD has made a strong run from behind…

Actually, the thing that jumps out from Table 4 of the most recent FX trading survey from London’s Foreign Exchange Joint Standing Committee is that none of the columns — April 2011 thru October 2011 — are ranked consecutively. (Click to enlarge) Read more

The repo spaniel that didn’t bark?

Ratings triggers, forced sales, systemic cliff risk, et al. Still a feature in some eurozone periphery bonds, despite the rally. Portugal for instance.

Though not always… Read more

China’s hard landing odds, updated

Remember Nomura last year estimated there was a 1-in-3 chance of a hard landing in China?

Anyway, they’ve updated the index on which it was based. Nomura’s chief Asia economist, Rob Subbaraman, says the 1-in-3 odds indicated by the China Stress Index remain, but the hard landing is less likely: Read more

Markets Live transcript 6 Feb 2012

Live markets commentary from 

Pensions liability threat to profits

Higher bills for pensions are beginning to eat into US corporate profits and are expected to increase still further in 2012, the FT reports. In the current earnings season, four companies in the Dow Jones Industrial Average have said that pension contributions will be at least triple those made in 2011. Credit Suisse estimates that S&P 500 companies will have to contribute $90bn to their pension plans in 2012, a rise of 74 per cent on planned contributions for 2011. Fears over tighter margins have already given investors second thoughts over the run of corporate earnings that has propped up the stock rally, the WSJ adds.

S&P financials back trading above book value

The S&P financials sector in the US has begun trading above the book value of its assets for the first time since July, the FT says. The price to book value ratio hit 1.01 on Friday, having ended 2011 at 0.88. While the shift is a sign of changing investor sentiment, price to book value varies across individual banks. Bank of America trades at just 0.36 to Wells Fargo’s 1.21. At least some legal downside to banks’ assets may be cleared up by the long-awaited grand settlement between lenders and the government on foreclosures. After several false starts, a deal may finally have emerged, the WSJ reports.

Glencore raises premium for getting Xstrata

Glencore is likely to pay out an eight per cent premium in its planned $88bn takeover of Xstrata, up sharply from previous expectations, the FT reports. Institutional investors had called for a larger premium given the loss of control represented by the merger deal, which would create a trader-miner giant in the natural resources industry. Under the proposed takeover, Glencore’s current shareholders would own 56 per cent of the combined company. Fewer than 17 per cent of Xstrata’s shareholders need to vote against a merger to sink it. Investors have rejected miners’ “mergers of equals” before — including Xstrata’s own 2009 bid for Anglo American, the WSJ says.

Two brokers scoop up MF Global customers

R.J. O’Brien Associates and Rosenthal Collins, two of Chicago’s oldest independent brokers, ended up gaining the bulk of MF Global’s former customers following its collapse, Reuters reports. Some $1.2bn in segregated customer funds flowed to the two firms in November – $800m to RJO and $362m to Rosenthall — making it the biggest monthly increase for both in three years, CFTC data revealed. The CME transferred MF Global’s diverse collection of customer accounts en masse in the wake of its bankruptcy, but received little interest from established Wall Street broker-dealers.

GM’s $10bn earnings target

General Motors has set itself the aim of increasing its profit margin to 10 per cent, eyeing net income of $10bn a year, the WSJ reports. Three years after its federal bailout, the automaker is expected to unveil earnings of $8bn in 2011, suggesting that its ambition is within striking distance. GM’s current profit margin is six per cent. But while its restructuring has helped GM to become leaner and debt-free, analysts are sceptical it can meet the new target amid a slowdown in Europe and growing competition within the industry.

Facebook taps mobile revenues

Facebook plans to roll out ads on mobile devices – a medium where it has so far struggled to make headway – to open another source of revenue ahead of its IPO. reports the FT. The company warned in its IPO filing last week that a failure to extract “meaningful revenue” from mobile users was a risk to its business. The “sponsored stories” will begin appearing in March, in advance of the IPO in May. Facebook’s dilemma is that its mobile users are increasing much faster than its overall user growth rate, but they are eight times less likely to click on online advertisements, the NYT says.

Scotland’s unsolicited non-rating

We couldn’t help but notice that the major ratings agencies were terribly coy about Scotland.

From the FTRead more

Otto’s revenge

– Parachuted in by the great powers of the time Read more

That statement-in-full from EFG-Hermes…


The company learnt yesterday that Mr. Yasser El Mallawany, the Chief Executive Officer of the company was banned from traveling.

 Read more

Further reading

Elsewhere on Monday,

– Go to the gym and stop reading the doomersRead more

Pink picks

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

Edward Luce: The reality of American decline
Something puzzling just happened in Washington: a liberal American president who opposed the invasion of Iraq endorsed one of its chief neoconservative advocates, writes the FT’s Luce. By embracing Robert Kagan’s essay, “The Myth of America’s Decline”, Barack Obama has done the author a turn. The essay is excerpted from Mr Kagan’s book, The World that America Made, which comes out later this month. “America is back,” Mr Obama said in his State of the Union address 10 days ago. “Anyone who tells you America is in decline or that our influence has waned, doesn’t know what they’re talking about.” Mr Obama “loved” the Kagan essay, Tom Donilon, the national security adviser, later revealed on the talkshow presented by Charlie. But Mr Obama might want to scan it more closely. Read more

Snap news

Breaking pre-market news on Monday,

— Giants defeat Patriots – story Read more