Thursday, May 7, 2009

European Stock Futures, Asian Shares Rise; UBS, Banks May Gain

By Sarah Jones

May 7 (Bloomberg) -- European stock-index futures and Asian shares climbed on speculation that American banks don’t need as much capital as earlier projected and growing signs the worst of the global recession may be over.

UBS AG and Deutsche Bank AG may climb after U.S. Treasury Secretary Timothy Geithner said today’s bank stress tests results will be “reassuring.” Anheuser-Busch InBev NV might advance as the world’s biggest brewer said first-quarter profit almost doubled, beating analysts’ estimates. Barclays Plc may move after the U.K.’s third-largest bank reported higher profit.

Futures on the Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, added 1.2 percent to 2,428 at 7:52 a.m. in London. The U.K.’s FTSE 100 Index is set to open 29 points higher, according to CMC Markets.

“The fact that more details are emerging with regard to the U.S. bank stress tests is improving sentiment,” said Matt Buckland, a London-based dealer at CMC. “The fact the capital shortfalls will be quantified is certainly welcomed news.”

Federal Reserve stress tests on the 19 biggest lenders show Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, according to people familiar with the conclusions. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp. have enough capital to help prop up flows of credit to businesses and consumers.

Geithner, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan are scheduled to brief reporters in Washington before the 5 p.m. release of the results.

‘Significant Cushions’

“There is very significant cushions in these institutions today, and all Americans should be confident that these institutions are going to be viable institutions going forward,” Geithner said yesterday in an interview with PBS television’s Charlie Rose program.

U.S. stocks rallied to a four-month high yesterday, led by banks, as details of the Fed’s stress tests trickled out. Citigroup surged 17 percent as people familiar with the matter said the lender needs only about $5 billion. Futures on the Standard & Poor’s 500 Index slipped less than 0.1 percent today, while the MSCI Asia Pacific Index jumped 3 percent.

Europe’s Stoxx 600 has advanced 32 percent since March 9 as earnings at companies from Credit Suisse Group AG to Siemens AG beat analysts’ estimates and investors speculated that the U.S. government’s plan to finance the purchase of illiquid assets from banks will help to pull the global economy out of its first recession since World War II.

UBS, Barclays

American depositary receipts of UBS, the largest Swiss bank by assets, rose 4.1 percent from yesterday’s close in Zurich. U.S.-traded securities of Deutsche Bank, Germany’s largest bank, increased 4.5 percent.

Barclays may move after the lender said first-quarter net income rose 12 percent to 826 million pounds ($1.25 billion).

Societe Generale SA may be active after France’s third- largest bank reported a first-quarter loss of 278 million euros ($370 million) on writedowns linked to U.S. bond insurers and higher provisions for risky loans. Analysts surveyed by Bloomberg had estimated Societe Generale would post a profit of 332 million euros.

AB InBev may climb. The brewer posted a first-quarter profit of $716 million as sales increased and costs declined after the $52 billion merger that formed the company. That beat the $484 million median estimate of eight analysts surveyed by Bloomberg.

KKR & Co. has also agreed to pay $1.8 billion for the South Korean beer unit of AB InBev, which will use the money to pay down debt.

Deutsche Telekom

Deutsche Telekom AG might be active after Europe’s biggest telephone company reported a first-quarter loss because the U.K., Polish and U.S. wireless units were hurt by currency fluctuations and the economic slowdown.

Zurich Financial Services AG may fall after Switzerland’s biggest insurer said first-quarter profit dropped 75 percent to $362 million, hurt by losses on investments. Earnings compare with the $334 million median estimate of four analysts surveyed by Bloomberg.

Axa SA may be active after Europe’s second-biggest insurer said first-quarter revenue dropped 1.7 percent to 27.6 billion euros on lower fees from asset management and after the financial crisis curbed demand for life-insurance policies. That’s in line with analysts’ estimates of 27.3 billion-euro, according to a Bloomberg survey. Revenue from asset management declined 29 percent.


Unilever might move after the world’s second-largest maker of consumer goods said first-quarter profit fell 45 percent to 731 million euros after shoppers in western Europe sought cheaper alternatives to the company’s Knorr soups and Dove soaps. That trailed the median 789 million-euro estimate of eight analysts surveyed by Bloomberg.

The European Central Bank, which meets in Frankfurt today, will probably cut its key interest rate by a quarter point to 1 percent and offer banks longer-term loans to stem the region’s recession, according to all 53 economists in a Bloomberg News survey. The ECB announces its decision at 1:45 p.m. in Frankfurt and Trichet holds a press conference 45 minutes later.

Separately, the Bank of England will probably hold its key rate at 0.5 percent. That decision is due at noon London time.

Bickering ECB May Cut Benchmark Rate to 1%, Lengthen Bank Loans

By Gabi Thesing

May 7 (Bloomberg) -- The European Central Bank will probably cut its key interest rate to a new record low today and offer banks longer-term loans to stem the region’s worst recession since World War II.

ECB officials meeting in Frankfurt will lower the benchmark rate by a quarter point to 1 percent, according to all 53 economists in a Bloomberg News survey. The central bank, led by President Jean-Claude Trichet, may keep the rate there until the third quarter of 2010, a separate survey shows.

“They are pretty much done with rates,” said Ken Wattret, chief euro-area economist at BNP Paribas in London. “The question is now what happens beyond that. With the economy still in the doldrums and deflation a real risk, Trichet will have to keep the door open to do whatever is necessary to fight those risks.”

The difficulty for Trichet is that his 22-member Governing Council is split over how best to proceed. Germany’s Axel Weber wants the ECB to signal that 1 percent is the floor for the key rate and has argued against buying government or corporate debt to boost the economy. Others such as Athanasios Orphanides of Cyprus say asset purchases and deeper rate cuts may be needed.

“The continuing divisions and bickering risk delaying the appropriate policy response,” said James Nixon, an economist at Societe Generale SA in London. “What they announce today will be woefully inadequate given the challenges facing the economy.”

Weber’s Prescription

The ECB announces its decision at 1:45 p.m. in Frankfurt and Trichet holds a press conference 45 minutes later. Separately, the Bank of England will probably hold its key rate at 0.5 percent. That decision is due at noon London time.

The Bank of England, U.S. Federal Reserve and Bank of Japan are already buying bonds, effectively printing money to reflate their economies in a policy known as quantitative easing.

With recent economic reports in Europe suggesting the worst of the recession is over, Trichet may find common ground around the less aggressive approach put forward by Weber.

Arguing that asset purchases are not required, he is instead pushing for the ECB to extend the maturities on its loans to banks to ease tensions in money markets.

The measure may force colleagues to sign up to his second request -- a signal from the ECB that interest rates won’t drop any further. That’s because banks would be reluctant to take up long-term loans if they thought credit could get cheaper.

Winning the War?

Council member Yves Mersch and Executive Board members Juergen Stark and Lorenzo Bini Smaghi have signalled support for Weber’s view. They’re squaring off against council members who want to preserve the option of further action such as Orphanides, Nout Wellink and George Provopoulos, opening perhaps the biggest split among ECB policy makers in the bank’s 10-year history.

“Weber is a heavyweight and his views always carry a lot of sway,” said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan. “It looks like he will win this battle but maybe not the war. There are a number of other influential voices on the council and the ECB could still launch an asset-purchase program down the line if things get worse.”

The 16-nation economy will shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

While the pace of decline in Europe’s service and manufacturing industries is easing, lending to companies and consumers dropped for a second straight month in March and a European Commission survey shows households expect prices to fall over the next 12 months.

Deflation Threat

Inflation was 0.6 percent in April. The ECB, which aims to keep the rate just below 2 percent, says it may dip below zero this summer.

“If inflation threatens to remain significantly below 2 percent for a considerable period of time, then additional policy easing could be warranted” after May, Orphanides, a former Fed adviser, said in an April 14 interview.

Even though almost three quarters of company financing in the euro area comes from banks, buying corporate debt may be helpful because “all asset markets are interconnected,” Orphanides said.

“The euro area is clearly experiencing a deep recession,” said David Mackie, an economist at JPMorgan in London. “It is hard to see how the region can avoid something that looks a lot like deflation. The ECB should be putting in place the most accommodative policy stance possible, and leaving it in place for an extended period of time.”