Posts from Wednesday Feb 22 2012

Further further reading

For the commute home,

– Reactions to Obama’s corporate tax proposalRead more

Tohoku returns to bond market

A nuclear operator is to tap the Japanese bond market for the first time since the Fukushima crisis, providing a litmus test of investor demand, the FT reports. Tohoku Electric Power, which was the operator most affected by the crisis after Tokyo Electric Power, is expected to issue Y25bn ($310m) of five- and 10-year bonds. Investors in the deal will likely receive a premium to Japanese government bonds times what debt issued by nuclear operators used to command before the March 2011 earthquake. While Tohoku could open the market to weaker operators, the ultimate fate of the industry remains unclear, the WSJ says.

No board plot at Olympus, says Sumitomo

Sumitomo Mitsui has denied that it is attempting to take over the board of scandal-hit Olympus, although it might seek to install a former exeuctive as chair, Reuters reports. Foreign investors have charged that the bank, which is both the biggest creditor and shareholder of Olympus, is blocking their proposals to bring outsiders on to the board. Japanese banks once commonly supported their borrowers through shareholdings in the 1990s, before bad debts forced them to slash investments. But the traditional relationship that kept banks closely involved with their borrowers remains at some companies, including Olympus, the FT says.

Yen falls to seven-month low against dollar

Bank of Japan easing policy has sent the yen to lowest level against the dollar since July, with the spread between two-year US Treasuries and Japanese debt widening the most since August, says Bloomberg. The yen has lost 3.7 per cent since the BoJ unveiled a one per cent inflation target on February 14. UBS reckons the BoJ’s shift could see the yen at ¥85 by the end of year, although the yen could return to its 2011 rally if Japan resumes posting a trade surplus in 2012, according to the WSJ.

White House plans corporate tax rate cut

US President Barack Obama has proposed cutting the corporate tax rate to 28 per cent from 35 per cent, extending an olive branch to business ahead of the autumn elections, Reuters reports. Special incentives for research and manufacturing are included in the plan, which also targets US corporate use of offshore tax havens. Mr Obama wants to eliminate “dozens” of tax breaks into the bargain, but faces resistance from Republicans promoting their own tax reform plans, the FT adds. GOP presidential nomination candidate Mitt Romney has called for a 25 per cent corporate tax rate, the WSJ reports.

Germany refuses to expand bailout fund

Germany has set itself up for a clash at this weekend’s G20 summit by ruling out an increase in the size of the European Stability Mechanism, the eurozone bailout fund, according to the FT. “The German government’s position has not changed,” a spokesman said. “That means no, it is not necessary.” The IMF and other eurozone governments have pushed for an increase in order to maintain the initiative in fighting Europe’s debt crisis, but German Chancellor Angela Merkel faces domestic opposition to enlarging Germany’s guarantees for the ESM.

Double trouble in TVIX

What on earth is going on with the TVIX ETN?

Last week we pointed out that there has been a hugely unusual rush into the double volatility ETN — which is managed by VelocityShares but backed by the banking prowess of Credit Suisse.  Daily trading volume has also been noticeably high. Read more

Twist again, again?

Given the recent improving economic data in the US, the consensus likelihood of getting QE3 later this year seems to have gone from probable to uncertain.

Obviously it all depends on what happens in the next few months, with particular emphasis on employment trends and inflation expectations. For his part, Bernanke certainly hasn’t done anything to dismiss the notion that he’d like to keep going, emphasising the influence of the depressed housing market and arguing that the unemployment rate understates the true severity of problems in the labour market. Read more

Will the Greece CDS auction be ‘fair’? — Part 2

The use of collective action clauses in Greek bonds, as part of the country’s sovereign restructuring, seems set to trigger credit default swaps. For the $3.2bn of net notional still outstanding on the contracts, it’s been a long road to a credit event.

In Part 1, FT Alphaville discussed how the next point of focus will be the performance of the auction that will determine the payout to protection buyers of the contracts. Read more

Will the Greece CDS auction be ‘fair’? — Part 1

Are you feeling relieved that the whole CDS trigger debate for Greece might be over? Well, you may have been relieved too soon. There may well be a big, nasty hitch.

A hitch involving how the credit event auction for Greece — where CDS payouts are determined — works. Read more

Urgent sovereign action required

No, not sovereign debt or something even vaguely related. We’re talking here about input from Her Majesty The Queen.

Consider Lord James of Blackheath, speaking in the House of Lords last week… Read more

“Bond market returns are about as attractive as following a plague of locusts across a field of corn”

Presenting, a public plea to portfolio managers from Kit Juckes, head of currency strategy at SocGen (our emphasis):

I’ve attached a piece on month-end flows and pension re-balancing which hit my inbox from our US equity derivs folks last night. The analysis is excellent, which I want to stress before going on to say that the outcome is deeply depressing. Read more

Why MMT is like an autostereogram

We’ve discussed MMT’s recent foray into the mainstream, and the confusion it has consequently courted.

But that’s the funny thing about the theory. It is naturally divisive because most of the time it fails to communicate its message succinctly. Which is weird, since the premise is actually fairly simple to understand. We’d say it’s akin to looking at an autostereogram. Once you get it, you never see things quite the same way again. But at the same time, try as they might, some people will never be able to see the image. Ever. Read more

Diagram du jour: How the ECB transmission mechanism is broken

Courtesy of Nomura’s euro area economics and strategy team (click to enlarge):

 Read more

Yes Virginia, there really is Modern Monetary Theory

A five-page article in the Washington Post by Dylan Matthews over the weekend, finally thrust the theory of Modern Monetary Mechanics into the mainstream.

This was exciting news for fans of the alternative economic school, more popularly known as MMT, which asks people to think of money, credit and tax in a completely different way to what is usually considered conventional in economics. Read more

Markets Live transcript 22 Feb 2012

Live markets commentary from 

A case of the mild PMIs

Some mildly positive PMI data from Markit this morning (published as the Bank of England’s minutes heaped praise on the readings’ accuracy – see page 3).

Flash Eurozone PMI Composite Output Index at 49.7 (50.4 in January). Second-highest in 6 months Read more

Vitol warns crude could pass $150

The world’s largest independent oil trader says oil prices could jump this year to a record high above $150 a barrel because of growing tensions with Iran, the FT reports. Ian Taylor, chief executive of Vitol, said on Tuesday that the commodities trading house’s main scenario was for crude oil prices to remain at around current levels of $120 a barrel for the balance of 2012. But he warned: “Geopolitical risk, especially in the Middle East, creates potential material risk to the upside.” Mr Taylor said oil prices could even surpass the record high of nearly $150 a barrel set in mid-2008. “It is unlikely, but it is possible,” he said when asked whether prices would rise to a new record. The bullish outlook comes as oil executives, traders and policymakers warn about rising prices during International Petroleum Week, the annual gathering of the industry being held this week in London. Brent, the global oil benchmark, hit an eight-month high of $121.42 a barrel on Tuesday, up $1.37 on the day, as supply outages in South Sudan, Yemen, Syria and Libya, and the fear of a significant disruption in Iran, outweighed a slowdown in demand growth.

Australian foreign minister resigns

Australia’s foreign minister Kevin Rudd resigned on Wednesday amid speculation that he was about to be removed from office by prime minister Julia Gillard for disloyalty, the FT reports. Mr Rudd made the dramatic announcement at a late night press conference in Washington, where he had earlier met Hillary Clinton, US secretary of state. He blamed attacks by “faceless men” and senior ministers in the ruling Labor party and Ms Gillard’s failure to counter them as the reason for his decision. “It’s time for some plain-speaking on this. The truth is I can only serve as foreign minister if I have the confidence of prime minister Gillard and her senior ministers,” Mr Rudd said. Mr Rudd said that in recent days Simon Crean, minister for arts and a former Labor party leader, and “a number of other faceless men have publicly attacked my integrity and therefore my fitness to serve as a minister”. “When challenged today on these attacks, prime minister Gillard chose not to repudiate them. I can only reluctantly conclude that she therefore shares these views.”

Stocks struggle amid caution over Greece deal

Global stocks struggled to make much headway as risk appetite was blunted by lacklustre manufacturing data out of China and the Greek post-deal hangover, the FT reports. While Asian shares inched forward, European stocks lacked direction as investors remained sceptical about Athens’ ability to implement tough reforms needed to cut its debt load. The FTSE All World index edged 0.1 per cent upwards to 217.55 and the euro continued to trade in a tight range around the $1.3250 level as caution pervaded the markets. Renewed strength for the haven of the dollar pushed it to a seven-month high against the yen. “The euro’s failure to hold on to gains following the finance ministers’ agreement on the second Greek bail-out package highlights the fragile nature of the recovery witnessed over the past two weeks,” said Hans Redeker, of Morgan Stanley. “There are many risks on the horizon in Europe, suggesting that the euro’s recovery is now set to come to an end.”

An (EFSF) credit derivative is born

Anyone remember the EFSF’s ersatz CDS?

They announced it back in November 2011. Another measure to eke the bailout fund’s resources out a bit more in a bad patch of the eurozone crisis. Read more

Further reading

Elsewhere on Wednesday,

USA! USA! Read more

Pink picks

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

 Read more

Snap news

Breaking pre-market news on Wednesday,

— Kevin Rudd resigns as Aussie foreign minister, expected to challenge Gillard for prime minstership – Bloomberg Read more

China flash PMIs point to February contraction

China’s manufacturing sector contracted in February for the fourth straight month as new export orders dropped sharply in the face of the euro area debt crisis, the HSBC flash purchasing managers index showed. Reuters reports the flash PMI, the earliest indicator of China’s industrial activity, rose to a four-month-high at 49.7 in February from 48.8 in January. The PMI has been below 50, which demarcates expansion from contraction, for most of the last eight months. The survey shows the sector remained sluggish in February with overall orders falling.

Overnight markets: Mixed

Asian stocks rose, erasing an earlier drop, as a rally in technology shares offset concern that a Greece bail-out may not resolve the European debt crisis, says Bloomberg. Oil fell from a nine-month high and the South Korean won weakened against all its major peers.  Technology shares contributed the most to the advance in the MSCI Asia Pacific., China’s biggest corporate e-commerce site, jumped the most in more than four years after its parent company bid as much as HK$19.6bn to buy out minority shareholders.

The FT says China’s Shanghai Composite index rose 0.1 per cent as property shares rose to their highest levels in three months after the Shanghai Securities News said non-local residents are qualified to buy second homes. China Vanke, the nation’s biggest listed property developer, rose 2.3 per cent while second-ranked Poly Real Estate gained 1.8 per cent. Read more

Rogue trade attempt at Threadneedle probed

City of London police are investigating a suspected $150m trading fraud attempted by a former trader at Threadneedle, the asset manager, reports the FT. Threadneedle confirmed on Tuesday that police and other authorities had been notified after internal company controls had been triggered and a suspicious trade was stopped from being executed last August.  A junior trader, working in the company’s investment arm, was dismissed after attempting the rogue trade, it said. The trade is alleged to have been worth about $150m and linked to Argentine warrants, according to people familiar with the case. Threadneedle, the London-based subsidiary of Ameriprise, the US financial services group, said: “In August 2011, our systems stopped a suspicious attempted trade. The matter was immediately reported to the authorities and the individual involved was subsequently dismissed.” The group, which manages about £60bn in assets, stressed that no client money had been lost as the trade did not proceed. It is not known if any arrests have been made following the incident, but a wider police investigation is under way.

US to probe Cobalt oil links in Angola

US authorities have launched an investigation into Cobalt International Energy’s operations in Angola, where the Goldman Sachs-backed group is developing one of the world’s most promising oil frontiers, reports the FT. Houston-based Cobalt said in a regulatory filing on Tuesday that US regulators had issued notice of a formal probe in November following informal discussions about allegations of ties between its local partner in Angola and senior government officials in the oil-rich southern African nation. Alerting its shareholders to the risk that the company might face liabilities under anti-corruption laws in the US, Cobalt said it was under investigation by the Securities and Exchange Commission, which handles civil cases, and the Department of Justice, which handles criminal cases. The SEC and DoJ declined to comment. Cobalt’s shares rose by 38 per cent in a day earlier this month when it reported “extraordinary success” in drilling at one of the three blocks off the Angolan coast in which it is the operator and largest shareholder. The company’s current market capitalisation is $13bn.

M&B homes in on chief executive

Mitchells & Butlers has drawn up a shortlist of three candidates to be chief executive after the job was spurned by three high-profile industry executives amid concerns at the influence wielded by the pub group’s dominant shareholder, Joe Lewis, says the FT, citing a person familiar with the situation.  Bob Ivell, M&B’s executive chairman, is speaking to three candidates after the company’s nearly year-long search has so far proved fruitless. No timeline has been given for the appointment.


Greece races to meet bail-out demands

The Greek government is racing to complete a lengthy checklist of reforms demanded by international lenders before the end of February to unlock a €130bn bail-out agreed in the early hours of Tuesday morning after months of high-stakes bargaining, says the FT. The latest demands include dozens of “prior actions” that Greece must deliver as a condition of the rescue – from sacking underperforming tax collectors to passing legislation to liberalise the country’s closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June. Greece will have just nine days to complete those and a slew of other unpopular measures to lay claim to the money and avoid a disorderly default next month that could force the country out of the single currency and trigger turmoil across the eurozone.