Financial job losses
Stocks and corporate bonds haven’t been doing so well lately, while the market-implied probability of four Fed rate hikes by the end of this year — the median expectation of policymakers as of December — has plunged below 1 per cent (according to Bloomberg’s WIRP function, anyway). Reasonable people are now starting to wonder whether another downturn is imminent. Changes in prices could be signalling weakness yet to be captured by the official statistics on employment, output, and incomes. Even if you don’t believe asset prices contain useful information, it’s possible the hit to net wealth could encourage households and businesses to cut spending, thereby leading to recession and job losses.
Pearson is restructuring again as its education business continues to struggle, Royal Mail says it had a great Christmas delivering presents. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Amec Foster Wheeler’s chief executive is stepping down amid the oil rout, Wolseley’s CEO is retiring, Home Retail Group has knocked up a deal to sell DIY business Homebase for £340m. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
Banks have been pulling out of direct dealings in physical commodity markets ever since the Senate Report on Wall Street Bank involvement in the market outed a spree of systemic risks, competitive advantages and general concerns last November. The question is, has this had any impact on commodity prices or even the ability of major commodity traders to get financing?
Securitisation has gotten a bad rap thanks to its association with dodgy underwriting during the bubble. Yet bundling loans originated by banks and selling them to investors in the capital markets could be just what is needed to boost the flagging euro area economy. This helps explains the European Central Bank’s recent announcement that it will be shopping for asset-backed securities (including mortgage bonds) and covered bonds starting in October.
Polled in March 2012, top academic economists overwhelmingly agreed that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.” This academic consensus has penetrated popular opinion to the extent that some people believe increasing cross-border trade flows is unambiguously good for everyone. Likewise, there is a relatively common — and wrong — belief that the Hawley-Smoot tariffs were a significant factor in the severity of the Great Depression. We don’t want to suggest that trade is bad, but it is worth highlighting that the actual views of the experts who study these issues are much more nuanced than what the “pop internationalists” often spew out. For example, a new paper by Daron Acemoglu, David Autor, David Dorn, Gordon H Hanson, and Brendan Price estimates that the sharp increase in bilateral trade between China and the US cost somewhere between 2 and 2.4 million jobs between 1999 and 2011 — about 1 percent of the entire civilian population in 2011. Less than half of those jobs were in manufacturing sectors that directly competed with Chinese businesses.
“Money,” we were once told, “is whatever you can use to pay your debts.” That definition is both precise and slippery, since much of what can be used as “money” during good times is prone to losing its money-ness precisely when the need to repay debt is greatest. Think of someone in the days before deposit insurance trying to pull cash from a failed bank to cover expenses after losing a job — or, for a more recent example, a hedge fund attempting to cover redemptions from panicked investors only to find that the prime broker responsible for holding its cash had blown up and the collateral it had provided was worthless. The only kinds of money that reliably hold their value are the ones explicitly backed by a strong government*. Unfortunately, there isn’t nearly enough available to satiate the total demand for cash. Financial firms fill the gap by creating products that often offer many of the conveniences of money but that lack government guarantees, thereby rendering them inherently unstable and prone to crises. These products are “mostly money” in the way that Westley was only “mostly dead.” They were also the topic of the “Workshop on the Risks of Wholesale Funding,” which we attended last week at the Federal Reserve Bank of New York.
Banco Espirito Santo has recently, and spectacularly, shown how many sins of the past lie beneath Portuguese corporate life. Also recently, readers of the Independent (and Matt Levine) would have come across what must be one of the most pointlessly complicated derivatives transactions ever — and also involving a Portuguese company.
Markets || Argentina defaults as last-minute talks fail || Sierra Leone declares Ebola virus public health emergency || SFO pays £1.5m to Robert Tchenguiz || Lloyds takes fresh £600m PPI hit || House price growth slows in July || Former Banco Espírito Santo board face legal action after losses || Balfour Beatty ends merger talks with Carillion:
RBS shares jump on better-than-expected trading update || BSkyB to pay up to £7.4bn to acquire European sister companies || Pearson sticks to profit targets || Lloyds to pay up to £300m Libor fines || Air Algerie airliner wreckage found in Mali || Heathrow records growth and looks for more via a third runway || Goldman bankers to Babble on their own chatroom || Amazon dives after losses blow out || Markets
Markets: Asian equity markets were in day two of a rebound as investors took an optimistic view that problems in Portugal’s banking sector won’t cause anything like the contagion seen in 2011. Mainland China markets pared losses after central bank data showed that all sorts of money was being thrown around to prop up growth. The M2 measure of money supply rose at an annual pace of 14.7 per cent – its quickest since August – versus forecasts at just 13.6 per cent. (FT’s Global Markets Overview)
Camp Alphaville reminder: You turn your back for five minutes and there’s a mystery anthropologist added to the lineup. (Details here) Markets: Asia-Pacific bourses were on the ascent after a dovish outlook from the Federal Reserve propelled the S&P 500 to a fresh record high, jumping 0.8 per cent to 1,956.98. The CBOE Vix volatility index fell 12 per cent, closing at its lowest level since February 2007. Perceptions that the Fed will hold interest rates low helped drive investors into Treasuries, sending the yield on the 10-year note down 6 basis points to 2.59 per cent. (FT’s Global Markets Overview) A paragraph so good it goes straight to the top:
Camp Alphaville reminder courtesy of Paul Murphy: “Think of a festival, but for finance rather than music. Oh, and without the drugs.” (Details here) Markets: Asia-Pacific equities were treading water head of a keenly anticipated European Central Bank policy meeting. Focus was also shifting to Friday’s May US jobs report. after private payrolls processor ADP reported that 179,000 jobs were created in the US last month, fewer than expected and down from a revised 215,000 increase in April. (FT’s Global Markets Overview)
Markets: Australian equities lost momentum after the government revealed its 2014 budget — various welfare benefits would be cut, 16,500 public jobs would be axed, and a 2 per cent levy would be temporarily imposed on incomes above A$180,000 — while Asia-Pacific bourses elsewhere sought direction as traders waited for corporate earnings. The subdued tone in Asia followed a US session in which the S&P 500 hit 1,900 for the first time ever, but then pared back to close flat at 1,897. Tech stocks resumed their slide, with the Nasdaq losing 0.3 per cent. India’s stock markets keep moving upwards, anticipating a Modi victory. The nifty has climbed nearly 7 per cent in the past week. (FT’s Global Markets Overview)
Institutional Investor’s Alpha published its rich list for 2013 this week which, as Matt Levine has described with flair and some made-up maths, is only tangentially related to how well the hedge fund managers in question performed last year: If you start with a ton of money, and/or your hedge fund has really good returns, you will make a lot of money. Notions of fair compensation for your labor, or appropriate pay for performance, just don’t enter into it. Money begets money, lots of money begets lots of money, and skill in the begetting is a nice bonus. That post is also his contribution to the burgeoning mountain of Piketty-related comment, and without tossing another pebble onto the pile, it is worth digging a little more into the reasons for those vast fortunes to exist, and why that matters.
Markets: Appetite for stocks has returned to Asia-Pacific following a more encouraging development in Ukraine, and after the US central bank chief pledged to continue supporting markets with easy money policies. Markets were rallying after Putin indicated that he was ready to discuss a way out of the Ukraine crisis. He called on pro-Moscow groups in eastern Ukraine to postpone a referendum on independence that was planned for Sunday. (FT’s Global Markets Overview)
Holcim and Lafarge outline cement merger deal || BlackRock positions potential successors to Fink || Dropbox and Square raise new credit facilities || Nigeria almost doubles GDP in recalculation || Former adviser attacks European Commission over austerity || Markets
Markets: Asian markets were in a near-frozen state ahead of the US jobs report due to be released later on Friday, which influences the Federal Reserve’s thinking on monetary policy. A retreat from risk was apparent among some Asia tech stocks, however, which followed their US counterparts lower. Wall Street paused for breath after two successive record closing highs for the S&P 500. (FT’s Global Markets Overview)
Optimism over the US economy, the prospect of further easing by the European Central Bank and waning market tensions regarding the Crimea crisis are helping push European stocks to two-week highs following a sturdy Asian session. The positive mood sees most industrial commodities gain ground and reduced demand for supposed havens such as Treasuries. Gold, which dropped to a one-month low on Tuesday, is up $3 to $1,313 an ounce even as the dollar index rises 0.1 per cent to 80.04. The FTSE Eurofirst 300 is up 0.6 per cent after its Asia-Pacific peer rallied 1 per cent and as US index futures show the S&P 500 adding 4 points to 1,870. That would leave the New York benchmark just 8 points below its record high.
Inflation falls to lowest level in four years || EasyJet shares climb as mild weather helps cut airline’s losses || Bord Gáis Funds cut Russian holdings after sanctions || Energy sold to Centrica-led consortium for €1.1bn || Royal Mail union warns of industrial action after 1,300 job cuts || Co-op Bank review finds yet more skeletons || The US is losing its edge as an employment powerhouse || Walt Disney Co to buy Maker Studios || Markets
Markets: Disappointing economic data from Japan and a further decline in China’s currency had Asian equities falling out of favour on Friday. The renminbi, which is tightly guided by the Chinese central bank, has fallen as much as 0.83 per cent against the US dollar. This is the currency’s ninth day of declines. (FT’s Global Markets Overview and FastFT)
From the introduction to a new IIF paper: The already acute financial pressures appear to have intensified further in recent weeks, with bank deposits falling sharply, the government out of funding and foreign exchange reserves likely to have tanked to as low as $12 billion by late February. The political change in Kiev has increased odds that Ukraine would receive the urgent financial assistance needed soon enough to avert default. With the Russian bailout likely to be put on hold, this assistance should amount to at least $20 billion this year alone. However, this would require the prompt formation of a new government able to undertake the reforms needed to alleviate the acute macroeconomic imbalances and put the economy on sound footing.