Wednesday, December 29, 2010

FOREX-Dollar steadies vs euro; falls vs Aussie, yen

Wed Dec 29, 2010 6:39am EST

* Dollar steady vs euro, comes off lows as U.S. yields spike

* Swiss franc near record high; commodity currencies gain

* Dollar falls vs yen; trade thin, volatile

(Updates prices, changes byline, dateline; previous TOKYO)

By Jessica Mortimer

LONDON, Dec 29 (Reuters) - The dollar steadied against the euro on Wednesday as a spike in U.S. Treasury yields helped it recover from losses the previous day, while gains in commodity prices buoyed the likes of the Australian and Canadian dollars.

The market remained very thin, however, and susceptible to exaggerated moves after a yo-yo session the previous day which was marked by year-end flows and saw the dollar fall sharply against a range of currencies.

The turnaround came as U.S. Treasury yields rose across the board, with the benchmark 10-year issue gaining 16 basis points to just shy of 3.50 percent after a poor auction of five-year bonds. [US/]

The auction also served as a reminder of fiscal problems facing the United States. Coupled with concerns about a debt crisis in the euro zone, this buoyed the yen and kept the Swiss franc near record highs versus the dollar and euro as investors sought safety.

The dollar index, which tracks the greenback's performance against a basket of currencies, was slightly easier on the day at 80.276 .DXY, though it held above Tuesday's low of 79.596.

Weak U.S. consumer confidence and home price data on Tuesday, pointing to a fragile economy, [ID:nN28251373] weighed on the dollar and tempered its recovery.

"Cheaper U.S. Treasury prices make them more attractive but only to a point, and there could come a point when investors don't want to buy them any more," said Neil Mellor, currency strategist at Bank of New York Mellon.

He added that the greenback was soft against the yen as Japanese exporters have been selling on concerns about a weakening dollar, as well as against commodity-linked currencies, though he cautioned against reading too much into moves in such an illiquid market.

Investors will watch for a sale of seven-year U.S. debt on Wednesday.

The euro was steady on the day at $1.3123 EUR= after a whipsaw move on Tuesday that took it to $1.3275, its strongest since Dec. 17. It held above support at its 200-day moving average, now at $1.3084, and last week's low just above $1.3050.

Monday, December 27, 2010

Trichet Exit Looms as Sovereign Debt Woes Keep ECB Rate at 1%: Euro Credit

By Jana Randow and Simon Kennedy - Dec 24, 2010 8:00 AM GMT+0800

Jean-Claude Trichet will retire as European Central Bank president next October with the euro area still needing record-low interest rates, according to economists who accurately predicted the region’s monetary policy this year.

The Frankfurt-based central bank will keep its key interest rate unchanged throughout 2011 amid low inflation, moderate growth and persisting fallout from the sovereign-debt crisis, said 12 of 17 economists in a Bloomberg News survey. The sample was taken among forecasters who correctly anticipated in January that the ECB’s benchmark would stay this year at 1 percent.

The new year approaches with Trichet celebrating his 68th birthday this week after leading Europe’s response to the turmoil, which at one point threatened to destroy the single currency and has already engulfed Greece and Ireland. Even after those nations received international bailouts, the cost of insuring Greek debt rose yesterday to the highest in a month and investors speculate that Portugal may be next to require aid. The euro has fallen 8.7 percent against the dollar in 2010.

“Problems in the banking sector won’t be resolved quickly, and banks in peripheral countries will continue to need support,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “There won’t be any major inflation pressures that would warrant a rate increase before 2012.”

The 17 economists questioned this month participated in a similar survey of 61 forecasters in January on the outlook for ECB policy in 2010. The median forecast then was the benchmark would be at 1.5 percent now with Deutsche Bank AG and Bank of America Merrill Lynch analysts among those predicting 2 percent.

Buying Bonds

The ECB cut its rate to 1 percent in May 2009 to fight the worst recession in its history. A year later the central bank began buying government bonds for the first time to ease credit- market tensions as investors focused on outsized budget deficits. As recently as this month, the ECB was forced to delay a further withdrawal of unlimited liquidity support to euro-area banks.

Lingering questions on whether Portugal and Spain require external help will keep the ECB “patient, cautious and prudent” as it leaves its rate on hold through next year, said Cedric Thellier, an economist at Natixis in Paris. He says the region faces a sluggish recovery even as Germany’s strength offsets weakness in the so-called peripheral economies.

Portugal’s credit rating was downgraded yesterday by Fitch Ratings to A+ from AA-. The company predicted the nation will suffer a recession next year.

The ECB this month forecast growth will slow in 2011 to about 1.4 percent from this year’s 1.7 percent, while inflation will advance to 1.8 percent from 1.6 percent. That’s still under the bank’s target of just below 2 percent. The region will expand in size in January as Estonia becomes its 17th member.

Recession Prospects

David Owen, chief economist at Jefferies International Ltd. in London, said the ECB’s numbers imply the “weakest growth on record.” Carl Weinberg, chief economist at High Frequency Economics Ltd. in Valhalla, New York, predicts the economy will “lapse into a deep recession, squeezed by a credit crunch and plagued by multiple bank failures.” Both forecasters expect no change in the main interest rate next year.

Adding to pressure on growth is the push to curb budget deficits to pacify investors. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks. Those on similar Greek securities have returned to the 12 percent level they reached in May. The cost of insuring Greek debt jumped 38 basis points yesterday to 1,019, according to CMA prices for credit-default swaps.

Deficit Measures

Measures to restore order to budget deficits will amount to 1.3 percent of the euro zone’s gross domestic product in 2011, with Ireland and Portugal cutting back about 4 percent and Greece as much as 6 percent, according to Julian Callow, chief European economist at Barclays Capital. He also forecasts no rate change in 2011.

Analysts at UniCredit SpA, Royal Bank of Scotland Group Plc and Standard Chartered Plc are among five forecasters expecting the ECB to begin rate increases in the second half of 2011.

“The ECB will want to start re-establishing its anti- inflation credentials,” said Sarah Hewin, senior economist at Standard Chartered in London, whose forecast for a 1.75 percent rate was the highest of those surveyed. Jacques Cailloux, chief euro-area economist at RBS, expects an increase to 1.5 percent as strength in core economies such as Germany keep them “ring- fenced” from debt strains.

Surging bond yields prompted the ECB to step up bond purchases following Ireland’s aid package. The region’s central banks have bought 72.5 billion euros ($95 billion) of government debt since the bond program was announced in May. The ECB has also committed to aid banks with as much liquidity as needed through the first quarter for periods of up to three months.

Crisis Response

“The ECB made very clear that in their view the crisis needs to be resolved by governments,” said Ken Wattret, an economist at BNP Paribas SA in London and another forecaster who was right in 2010. “But governments aren’t very quick, so the ECB is going to feel continuously obliged to step in.”

Economists are divided over how long the ECB will take to return to its pre-crisis refinancing system of cash auctions. While Greet Vander Roost at KBC Asset Management in Brussels expects the exit to be finished by the end of the second quarter, Citigroup’s Michels says the ECB will keep supplying unlimited liquidity in weekly operations into 2012.

Michels’s scenario would turn responsibility for normalizing ECB monetary policy to the next president as Trichet’s central banking career comes to an end after almost two decades and eight years at the ECB. Who will replace him will be a subject of heated debate for leaders next year with Bundesbank President Axel Weber and Bank of Italy Governor Mario Draghi most often linked to the job.

“By next November it ought to be a lot clearer how the crisis is playing out,” said Callow of Barclays Capital. “The challenge for Trichet’s successor is to mold the euro area into a more cohesive economic and financial entity.”

ECB Rate at end of 2011

Analistas Financieras International 1 percent
Barclays Capital 1 percent
BHF-Bank AG 1.5 percent
BNP Paribas SA 1 percent
Capital Economics Ltd. 1 percent
Citigroup Inc. 1 percent
High Frequency Economics Ltd. 1 percent
Jefferies International Ltd. 1 percent
JPMorgan Chase & Co. 1 percent
KBC Asset Management 1 percent
Lloyds TSB Corporate Markets 1.25 percent
Natixis 1 percent
Royal Bank of Scotland Group Plc 1.5 percent
Standard Chartered Bank 1.75 percent
Societe Generale SA 1 percent
UniCredit Group 1.25 percent
Wermuth Asset Management GmbH 1 percent

Tuesday, December 21, 2010

Greece Faces `Heightened' Probability of Debt Rating Downgrade, Fitch Says

By Greg Chang and Anchalee Worrachate - Dec 21, 2010 10:51 AM PT

Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”

The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.

Fitch said it expects the review to be completed in January and there is a “heightened probability” of a downgrade.

Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s. The Greek bailout in May and subsequent aid for Ireland last month have so far failed to quell investors’ concerns that Europe’s debt crisis may spread to other nations.

“On the margin, this will further put pressure on peripheral spreads at the time when sovereign credit quality is a major concern,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank. “But this is barely a surprise move. Fitch is the final guy to catch up. The market has moved way ahead.”

Moody’s has Greece on a Ba1 rating, while S&P has it on BB+. The extra yield investors charge to hold Greek 10-year debt over German bunds was at 898 basis points today, compared with a record of more than 965 basis points in May.

The so-called yield premium on Ireland’s debt, which rose to a euro-era high of 680 basis points on Nov. 30, was at 590 basis points today. Portugal was at 354 basis points.

Greece is cutting spending and raising taxes as a condition of its aid from the European Union and International Monetary Fund. The IMF said on Dec. 17 that the country’s rescue program has “continued to perform well” and it approved payment of another 2.5 billion euros ($3.3 billion) under the deal.

“The overall fiscal adjustment to date has been impressive,” the IMF said last week. “It is important that fiscal structural reforms be forcefully advanced to ensure a lasting consolidation.”

Friday, December 17, 2010

EU Leaders Create Debt-Management Mechanism From 2013

European Union leaders agreed to amend the bloc’s treaties to create a permanent debt-crisis mechanism in 2013 as they struggled to bridge divisions over immediate steps to stabilize bond markets.

A day after the European Central Bank armed itself with more capital to resist the crisis, the EU started to discuss measures such as offering shorter-term credits or using the bloc’s main rescue fund to buy bonds of distressed countries.

“My vision is of a Europe that grows ever closer together - - at different speeds in some cases, to be sure,” German Chancellor Angela Merkel told reporters after an EU summit in Brussels today.

For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets about Europe’s search for the right formula to quell the fiscal contagion that threatens the euro.

The future setup “is to some extent window-dressing as it does not solve the current crisis,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013.”

The euro gained 0.1 percent to $1.3254 at 2:45 p.m. in Brussels, while bonds of Portugal, Spain, Greece and Ireland slipped. Moody’s Investors Service followed up warnings that it may cut the credit ratings of Spain and Greece by announcing today that it downgraded Ireland by five notches to Baa1 from Aa2, with a negative outlook.

Talks Under Way

Luxembourg Prime Minister Jean-Claude Juncker said deliberations are under way over more flexible use of the main 440 billion-euro component of the fund instead of waiting until the last minute to arrange all-or-nothing lifelines like the 85 billion-euro package granted to Ireland on Nov. 28.

Asked whether shorter-term credits or bond purchasing are up for debate, Juncker said measures being considered are “exactly those that you mentioned.”

Such steps would ease strains on the ECB, which has bought 72 billion euros of weaker countries’ debt since May to stabilize markets. Yesterday, the ECB shored up its capital base to guard against losses from the purchases, voting to almost double its capital to 10.76 billion euros.

“Let’s be candid,” International Monetary Fund Managing Director Dominique Strauss-Kahn said in an interview on “Charlie Rose” on PBS. “The European Union needs a little more time, until maybe the beginning of next year, to be able to produce a comprehensive package.”

No ‘Speculation’

Driven by a German public outcry against propping up fiscally reckless countries, Merkel opposed putting more money on the table or further entwining Europe’s economies through joint bond sales. Merkel didn’t rule out more flexible use of the current fund, declining to enter into “speculation.”

In a departure from German insistence that each country determine its own fate, Merkel said today that maintaining national fiscal discipline won’t alone put the 16-nation euro region on a sounder footing.

Merkel and French President Nicolas Sarkozy indicated that closer coordination of business tax rates might come back onto the agenda as Europe tries to forge a more unified economy and fix flaws in the euro’s makeup.

In a jab at Ireland’s 12.5 percent corporate tax rate, Sarkozy said “I don’t think you can have the lowest corporate taxes in the euro zone and then transfer your debt.” Spanish Prime Minister Jose Luis Rodriguez Zapatero said the tax discussion is an “important novelty” that will play out over years.

‘Needs to Mature’

Italian Prime Minister Silvio Berlusconi put calls for joint euro-area borrowing in the same category, noting the German opposition “but that the proposal needs to mature. It will be studied more deeply.”

On the summit’s main business, Germany won an EU commitment for a treaty amendment to set up a crisis-resolution system in 2013 that would allow financial aid “if indispensable” to underpin the euro and might force bondholders to bear some of the costs of future rescues.

German insistence on cutting bond values when countries get into trouble in the future triggered the latest phase in the debt crisis, culminating in Ireland’s support package and triggering concern that Portugal and Spain will be next.

While costs for bondholders aren’t mentioned in the two- sentence amendment agreed on last night, the leaders endorsed a Nov. 28 decision by finance ministers that writedowns may take place on a “case by case” basis in accord with IMF practices.

‘Useful Clarification’

ECB President Jean-Claude Trichet called the pledge not to mandate bond writeoffs a “useful clarification.”

Merkel needed the amendment to prevent German high-court challenges to the future aid mechanism, which the EU wants to get up and running when the current rescue package lapses in mid-2013.

The compromise text reads: “The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality.”

Merkel didn’t get everything she wanted. Germany originally pushed to allow financial aid only as a “last resort,” language that might have ruled out contingency credit lines or given the IMF the lead in sorting out Europe’s economic woes.

Last overhauled a year ago, the treaty is the EU’s equivalent of a constitution, binding on EU institutions in Brussels and on national governments’ handling of European affairs. All 27 countries, including the 11 outside the euro region, must ratify the amendment.

European finance ministers plan to work out details of the future system by March so it can take effect in the middle of 2013.

Tuesday, November 30, 2010

EU Faces More Bailouts as Euro Contagion Spreads to Portugal: Euro Credit

By John Fraher and James Hertling - Nov 30, 2010 5:20 PM GMT+0800

The failure of the Irish rescue to stem a selloff across euro-region bond markets may spell more bailouts to come, starting with Portugal.

The costs to insure Portuguese debt against default rose to a record today and Spanish bonds slid the most since the euro’s debut for a second day, highlighting investor concerns that officials lack the tools to contain a debt crisis threatening the currency’s survival. The extra yield that investors demand to hold Italian debt over German 10-year bonds rose to the highest in more than 13 years.

“We are barely halfway through the current crisis in the euro zone,” Paul Donovan, deputy head of global economics at UBS AG in London, said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” program. “Unless we can see a further significant decline in bond yields in Portugal, the market is going to expect another bailout. And then market attention will turn to Spain.”

Market declines began yesterday less than 24 hours after European Union finance ministers confirmed their second bailout of a euro nation after Greece’s in May, handing Ireland an 85 billion-euro package ($111 billion) to rescue its banks and bolster government finances. While EU officials also agreed on a mechanism to smooth bond restructurings after 2013, investors are speculating that debt-strapped nations won’t be able to cut deficits fast enough before then.

Euro Drops

The single currency dropped for a third day to a 10-week low of $1.3034. The premium on Spanish 10-year bonds over German bunds rose 28 basis points to a euro-era high of 295. The yield on Italy’s 10-year government bond rose 18 basis points to 4.83 percent, about 80 basis points more than Brazil. Portuguese credit-default swaps jumped 11.5 basis points to a record 551, after surging 40 basis points yesterday, according to CMA, a data provider.

The challenge for EU leaders is to stop the crisis without a fiscal union or a clear mechanism to kick profligate members out of the single currency.

Finance ministers found themselves meeting on Sunday, Nov. 28, to calm markets just six months after agreeing to a 750 billion-euro bailout package for the euro region.

While the fund’s size was supposed to head off future speculative attacks, Spanish Finance Minister Elena Salgado arrived at the meeting rejecting talk that she would soon join Ireland in seeking a bailout.

“Speculation exists because it’s part of the fabric of the markets,” she said. “We have certainty that we can control it.”

Focus Turns to ECB

Investors’ attention will soon turn to the European Central Bank, whose 22-member Governing Council will decide on Dec. 2 whether it can afford to stick to a plan to withdraw emergency stimulus at the start of next year.

While the ECB has so far signaled no willingness to deploy new measures, London-based HSBC Holdings Plc says it may provide more help to banks in Spain and Portugal and may even have to conduct broader asset purchases.

“The ECB will once again have a role to play to ensure that financial stability is maintained, albeit reluctantly,” said Janet Henry, chief European economist at HSBC in London. The ECB last week bought the most government bonds in two months.

Investors have also expressed concerns that the European Union’s bailout pot may be smaller than advertised and insufficient to save Spain, whose economy is twice the size of Ireland, Greece and Portugal combined. HSBC’s sums show the country needs 351 billion euros over the next three years.

Enough Cash?

In practice, the EU may only be able to deploy 255 billion euros of the 440 billion-euro European Financial Stability Facility, according to analysts at Nomura International Plc.

That’s because the rescue fund is financed by issuing bonds and in order to secure a AAA rating, governments agreed to set aside a pool of cash, depleting the total amount available to pump into economies. The rest of the bailout pool consists of 60 billion euros from the European Commission and 250 billion euros pledged by the International Monetary Fund.

“There isn’t enough official money to bail out Spain if trouble occurs,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said yesterday in Prague. While it’s “quite likely that Portugal” will be next in line for financial assistance, “the big elephant in the room” is Spain, he said.

At 9.3 percent of gross domestic product, Spain will have the largest budget deficit in the euro area this year after Ireland and Greece, the European Commission forecast yesterday. Portugal’s shortfall will be 7.3 percent of GDP.

‘Fiscal Union’

Some economists point out that the euro region may ultimately be strengthened by the current crisis if it forces EU governments to work more on coordinating fiscal policy. The Greek crisis led earlier this year to the creation of the euro region’s first bailout fund and Ireland’s rescue accelerated talks over a permanent crisis resolution mechanism.

“In the next 5 to 10 years there has got to be more of a fiscal union within the euro region than we have today,” said UBS’s Donovan. “One of the things that Europe does well is integrate in a crisis.”

Harvinder Sian, a senior fixed-income strategist in London at Royal Bank of Scotland Group Plc says the crisis needs to threaten Germany and its banks before a long-term solution for the euro region can be found.

Until now, German Chancellor Angela Merkel has been reluctant to spend her taxpayers’ money on bailouts. She sparked the latest stage of the crisis by demanding that bondholders help foot the bill of any future rescues.

“The problems need to hit Germany before more viable solutions such as more fiscal and political integration look likely,” Sian said. “That is, it may take a near death experience for the periphery and core EMU banking systems before this realization dawns.”

Sunday, November 28, 2010

Ireland Wins $113 Billion Bailout as EU Ministers Seek to Halt Debt Crisis

European governments threw debt- strapped Ireland an 85 billion-euro ($113 billion) lifeline and scaled back proposals to saddle bondholders with losses in future budget crises, seeking to reverse the market selloff menacing the euro.

European finance ministers backed a Franco-German compromise on post-2013 bailouts that watered down calls by German Chancellor Angela Merkel for investors to be forced to take losses to share the cost with taxpayers. The ministers agreed that a future crisis-management system won’t automatically cut the value of bond holdings, easing away from a proposal that led investors to dump assets of Portugal, Spain and Italy.

The twin decisions on Ireland and the post-2013 crisis facility “should address the current nervousness in the financial markets,” European Union Economic and Monetary Commissioner Olli Rehn told reporters after an emergency EU meeting in Brussels today.

Ireland, swamped by the bursting of a decade-long real- estate bubble, became the second country after Greece to tap European aid as investors questioned whether Europe has the resolve and financial firepower to stem the panic. Ten-year bond yields soared in Portugal, Spain and Italy last week, in a vote of no-confidence in Europe’s handling of the debt shock that exposed flaws in the euro’s makeup and fueled doubts whether 16 countries belong in the same currency.

“The euro is under threat,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said before the Brussels meeting. “The market has got it into its head that it is going to pick off one country at a time.”

Fiscal Emergencies

Europe’s bailout of Greece in May and setup of a 750 billion-euro fund for fiscal emergencies drove the euro as high as $1.4282 against the dollar on Nov. 4. It has since fallen to $1.3241.

Germany, which built the euro on the principle of budgetary rigor, unleashed the latest phase of the crisis by demanding a “permanent” system as of 2013 that would enable fiscally troubled countries to restructure their debts cut the value of bond holdings.

The German push ran into criticism from central bankers such as European Central Bank President Jean-Claude Trichet, who warned that it would unsettle current bondholders. Romano Prodi, who as Italian prime minister shepherded Italy into the euro, said in a Nov. 26 Bloomberg Television interview that it was hazy on detail and led to “unthinkable problems” in the markets.

Germany backed away from the call for an automatic penalty on future bondholders, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis. The new proposal would introduce “collective action clauses” for debt sold as of 2013, enabling fiscally hard-hit governments to renegotiate bond contracts. EU governments aim to enshrine it in the bloc’s treaties by mid-2013 and pair it with a new emergency liquidity fund to replace the one expiring then.

‘Useful Clarification’

“I had asked for a clarification,” Trichet said. He saluted the new proposal as a “useful clarification” that paves the way to an EU setup “fully consistent with the global doctrine, fully consistent with IMF policies.” Rehn said: “There’s plenty of herd behavior in the market. We want to clarify any possible confusion.”

Germany last week also muffled talk by the head of its central bank, Axel Weber, that the EU could put more money into the bailout fund if necessary.

Germany’s export-led economy has powered through the euro crisis, with business confidence at a record high in November and the government projecting growth of 3.7 percent this year, the fastest pace in over a decade.

German resilience contrasts with recession in Greece and Ireland, splitting the euro region between better-off countries in Germany’s economic slipstream and poorer ones on the continent’s fringes.

Cash Reserves

Ireland said it will pay average interest of 5.8 percent on the package, which breaks down into 45 billion euros from European governments, 22.5 billion euros from the IMF and 17.5 billion euros from Ireland’s cash reserves and national pension fund.

“I don’t believe there were any other real options,” Irish Prime Minister Brian Cowen told reporters in Dublin.

A day after more than 50,000 protesters marched through Dublin to denounce Cowen’s budget cuts to stave off financial ruin, the EU gave Ireland an extra year, until 2015, to get its budget deficit to the euro limit of 3 percent of gross domestic product.

Including the bill for propping up Irish banks, the deficit is set to reach 32 percent this year, the highest in the euro’s 12-year history.

Banking System

Cowen has overseen the collapse of Ireland’s banking system and public finances, leading to recession and unemployment of close to 14 percent. Cowen’s government is also unraveling. The Green Party, a junior coalition partner, wants January elections and some lawmakers from his own party are slamming his leadership.

Close banking links led Britain, a non-euro user that didn’t contribute to Greece’s 110 billion-euro rescue in May, to contribute 3.8 billion euros to Ireland’s package.

““That is money we fully expect to get back,” Chancellor of the Exchequer George Osborne told reporters in Brussels. “It’s in everyone’s national interest and it’s in Britain’s national interest that we get some economic stability in Ireland and indeed across the euro zone,”

The deal for Ireland shifted attention to Portugal, which last week passed the deepest spending cuts in more than three decades with the goal of getting back under the EU’s deficit limits by 2012.

Housing Boom

While Greece let the budget get out of hand and Ireland fell prey to a housing boom that turned to bust, Portugal suffers from a lack of competitiveness that kept average economic growth below 1 percent in the past decade.

Like Ireland, Portugal doesn’t immediately need money to run the government. It has completed this year’s bond sales and doesn’t face a redemption until April. The government debt agency plans to hold an auction of 12-month bills on Dec. 1.

“Portugal doesn’t see a need to ask for help,” German Finance Minister Wolfgang Schaeuble said.

Spain, the fourth-largest economy in the euro region, doesn’t need a bailout, Spanish Economy Minister Elena Salgado said.

Tuesday, November 23, 2010

Ireland Long-Term Sovereign Rating Lowered by Standard & Poor's

By Christopher Anstey - Nov 24, 2010 9:34 AM GMT+0800

Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record. Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.

S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.

‘Lots of Risks’

“There are lots of risks in the European markets,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The flight to quality is supporting Treasuries.”

U.S. Treasuries have advanced the past three days, with 10- year notes slipping today in Asian trading. Yields on 10-year notes were at 2.787 percent as of 9:34 a.m. in Tokyo. The euro was up 0.3 percent at $1.34 after two days of losses.

Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.

EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.

Financing Breakdown

The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.

“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s gross domestic product has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”

Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program, a proposal endangered by the ruling party’s coalition partner announcing it will exit the government next month. Opposition parties are calling for Prime Minister Brian Cowen to agree to an immediate election.

Risk Premium

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.

Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.

Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.

Irish lenders core tier 1 capital level may be raised to 12 percent from 8 percent, according to the broadcaster.

The government may seek to share losses with Allied Irish’s subordinated bondholders, though senior debt would be honored, RTE also said.

Monday, November 8, 2010

G-20 Spat Risk Eases as U.S. Eschews Pushing Targets

By Shamim Adam and Aki Ito - Nov 8, 2010 4:19 PM GMT+0800

U.S. Treasury Secretary Timothy F. Geithner refrained from pushing for current-account targets and China hailed the potential effect of Federal Reserve easing at a finance ministers’ meeting days before the Group of 20 summit.

The Fed’s move to buy $600 billion of Treasuries could contribute “tremendously” to global growth, Vice Finance Minister Wang Jun said after Asia-Pacific Economic Cooperation forum finance chiefs met in Kyoto, Japan, Nov. 6. At the same gathering, Geithner said current-account deficits or surpluses aren’t “something that is amenable to limits or targets.”

Policy makers from Asia to South America have warned that the Fed’s decision to pump liquidity into the U.S. will depress the dollar and spark flows of capital to emerging markets that threaten asset-price bubbles. China’s Vice Foreign Minister Cui Tiankai said Nov. 5 the U.S. step may hurt global confidence, while rejecting state-planning style targets for trade deficits.

“It looked like there was going to be quite a lot of conflict or lack of agreement going into the G-20 but this suggests there may be a bit more accord,” said Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB in Hong Kong. “There is some toning down of the rhetoric on the Fed’s policy but in return, the U.S. will be looked upon to tone down” its push to shrink trade and investment imbalances.

Summit Agenda

Geithner said G-20 leaders, who meet in Seoul Nov. 11-12, are poised to approve last month’s agreement among finance ministers to avoid long-term current account surpluses or deficits, “assessed against indicative guidelines to be agreed.” The G-20 includes the largest developed and emerging nations, from the U.S. and Germany to Japan, China, India and Brazil.

While the Treasury chief said last month that 4 percent of gross domestic product was “likely to emerge as the basic benchmark countries look to,” he refrained from repeating that guideline in Kyoto. He instead noted policy makers have tried to address persistent trade and investment imbalances since the 1940s, and “it’s a process that’s going to take some time.”

China’s response to the Fed’s quantitative easing continued today, with Vice Finance Minister Zhu Guangyao saying it will provide a “shock” to the global economy and increase “hot money” flows to emerging economies. Zhu told reporters in Beijing the U.S. hasn’t “fully realized” the possible impact of the policy, which China hopes will help the global economy.

U.S. Responsibility

In Kyoto, Wang highlighted language in the APEC finance chiefs’ statement that nations with reserve currencies must be “vigilant against excess volatility disorderly movements.” The dollar has a majority of global foreign-exchange reserves, according to the International Monetary Fund.

“We pay close attention to the U.S. quantitative easing policy,” Wang said two days ago. “Quantitative easing policy that’s aimed at boosting the U.S. economy will help the revival of the global economy tremendously.”

Wang’s comments contrasted with those of Vice Foreign Minister Cui, who demanded an explanation from the Fed in a Nov. 5 press briefing in Beijing because “many countries are worried about the impact of the policy on their economies.”

Officials from China, Germany and Japan opposed a set target for current accounts in the past month even as Canada and Australia indicated openness to the idea. Among the G-20 nations, Saudi Arabia, Germany, Russia and China all run surpluses larger than 4 percent, and Turkey and South Africa have deficits bigger than that, according to the International Monetary Fund.

Geithner Objective

“We’re trying to make sure as the world economy recovers, that future growth is sustainable and we don’t see re-emerge the kind of excess imbalances on the trade side, either surpluses or deficits, that could threaten future growth and the future financial stability,” Geithner said at a joint press conference after the Kyoto meeting.

Thai Finance Minister Korn Chatikavanij said in a Nov. 5 interview with Bloomberg Television that while Geithner’s push to discuss global imbalances in trade and investment flows is a “constructive approach,” Southeast Asian nations oppose setting specific targets.

“We didn’t discuss a specific number,” Japan’s Finance Minister Yoshihiko Noda said after the APEC meeting. “However, both surplus and deficit countries must address these imbalances. We hold the same understanding that there is a need for multi- faceted cooperation to ensure that current accounts are sustainable.”

Capital Flows

Underlying the U.S. push to address the imbalances is the assessment by the Fed that a surfeit of Asian savings helped spark the credit boom earlier this decade, which ended in the biggest financial crisis since the 1930s. Now, officials from Asia to Latin America counter it’s the American central bank’s liquidity injections that are warping global capital flows and driving down the dollar.

Brazilian Finance Minister Guido Mantega escalated the international rhetoric in September, saying a “currency war” had begun, with nations seeking to cheapen their exchange rates to bolster exports. G-20 finance ministers and central bank governors then aimed to defuse the tensions with their Oct. 23 communique pledging to avoid “competitive devaluation.”

China has kept its currency’s advance against the dollar to less than 3 percent since mid-June, a strategy that’s contributed to other currencies rising and nations taking steps to prevent an “unfair disadvantage,” Geithner said last month.

Todd Elmer, a Singapore-based currency strategist, wrote today in a note to investors that Geithner’s “shift in rhetoric represents a modest dollar negative since it suggests the status quo which has resulted in trend dollar weakening is likely to remain in place.”

‘Strong Dollar’

Geithner told reporters in Kyoto two days ago that the U.S. views a “strong dollar” as in its interest and “we will never use our currency as a tool to gain competitive advantage.” The Dollar Index, which IntercontinentalExchange Inc. uses to track the dollar against the currencies of six major U.S. trading partners including the euro and yen, slid last week to the lowest level since December 2009.

Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters.

“The fact that the Fed is undertaking quantitative easing has made it very difficult for U.S. officials to accuse other countries” of manipulating their currencies “when they are indirectly debasing the dollar,” Kotecha said.

CEOs Most Optimistic on U.S. Profits in Bull Signal for S&P 500

By Lynn Thomasson and Whitney Kisling - Nov 8, 2010 6:39 PM GMT+0800

More U.S. executives than ever are increasing earnings forecasts compared with those lowering them, helped by almost $2 trillion of Federal Reserve spending and a recovery in the global economy.

EBay Inc., United Parcel Service Inc. and 196 other companies raised profit estimates above analysts’ projections last month as 130 firms cut them, the biggest gap since Bloomberg began tracking the data in 1999. Shipping companies and computer makers boosted forecasts the most, pushing the Morgan Stanley Cyclical Index of businesses most tied to the economy up 27 percent since July 2. That beat the 20 percent rally in the Standard & Poor’s 500 Index.

Companies are raising the outlook for U.S. profits at the same time the Fed is trying to prevent deflation and reduce unemployment by purchasing an additional $600 billion in Treasuries. The last time executives were this optimistic, stocks climbed 39 percent over the next 3 1/2 years, data compiled by Bloomberg show.

“It’s important for the rally and for the general health of the market that investors continue to anticipate higher earnings,” said Dean Gulis, who manages $3 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. “That companies themselves are expecting better profits is very positive. As we see rising earnings, we’ll see improving stock prices.”

GDP Growth

About 1.5 U.S. companies boosted earnings estimates above analysts’ forecasts for each that cut projections in October. That’s about three times the average of 0.59 in the past 10 years, data tracked by Bloomberg show. The ratio fell to a record low of 0.1 in December 2008, three months after New York- based Lehman Brothers Holdings Inc. filed for bankruptcy. When it reached 1.1 in March 2004, the S&P 500 rose from 1,126.21 to a record 1,565.15 in October 2007, Bloomberg data show.

The S&P 500 has gained 203 points since falling to a 10- month low on July 2 after companies from Baltimore-based T. Rowe Price Group Inc. to Google Inc. in Mountain View, California, topped analysts’ estimates and investors speculated the Fed would act to boost growth. The benchmark measure of U.S. stocks rose 3.6 percent to 1,225.85 last week, the fifth-straight gain. S&P 500 futures expiring in December slipped 0.4 percent to 1,218.3 at 10:37 a.m. in London.

Earnings at EBay, the owner of the second most-visited e- commerce site, are getting a boost as consumers make more purchases online and use its PayPal service to handle money transfers. The San Jose, California-based company forecast more fourth-quarter sales and earnings than analysts estimated on Oct. 20, spurring the biggest gain in the shares in nine months.

Credit Expansion

Consumer borrowing in the U.S. unexpectedly increased in September by the most in two years, led by a surge in non- revolving credit such as college loans and auto financing, the Federal Reserve said on Nov. 5. The report was released the same day the Labor Department said employers added 151,000 jobs in October, more than twice the median economist prediction.

“We have outperformed our expectations through the first three quarters of the year, and enter the holiday season with confidence in our payments business,” said Bob Swan, EBay’s chief financial officer, on a conference call following the earnings release. “From a business standpoint, our global footprint is expanding.”

Rising international demand for everything from transportation services to tobacco and power tools is helping drive profits at companies such as UPS, Philip Morris International Inc. and Danaher Corp. While forecasts for U.S. gross domestic product in 2011 have fallen to 2.4 percent from 2.9 percent in July, the biggest emerging markets are expected to expand at least twice as fast, based on economist estimates and International Monetary Fund forecasts compiled by Bloomberg.

Freight Traffic

UPS, the world’s largest package-delivery company, raised its estimate for 2010 income on Oct. 21 and projected growth of 51 percent to 53 percent for the year. That would be the biggest annual earnings increase for the Atlanta-based firm since before 2000, data compiled by Bloomberg show.

Freight-train traffic has risen 16 percent since July 9, according to the Association of American Railroads. The index of carloads at the largest U.S. lines plunged 31 percent from its highest level in 2008 to May 2009, Bloomberg data show.

“Looking towards peak season, customer sentiment is mixed, but leaning towards cautious optimism,” UPS CFO Kurt Kuehn told investors and analysts on Oct. 21. “We’re expecting a good, strong fourth quarter, and I’m extremely confident we’re on our way back to the high levels of profitability that we’ve demonstrated in the past.”

Overseas Edge

Investors are betting profits at S&P 500 companies with the most sales outside the U.S. will beat the market. Corporations getting at least 50 percent of their revenue from foreign sources rose 10 percentage points more than American-focused stocks since July 2.

Earnings for the 30 companies in the Morgan Stanley index of economically sensitive shares will grow 25 percent next year, almost twice the rate of the S&P 500, according to analyst estimates compiled by Bloomberg. The cyclicals gauge trades for 12.2 times estimated 2011 earnings, or 0.5 point lower than the S&P 500, Bloomberg data show.

Philip Morris said on Oct. 21 that currency fluctuations, lower taxes and rising sales in countries from Algeria to Indonesia led the New York-based company to increase its 2010 income projection. The biggest publicly traded tobacco maker has advanced 30 percent since July 2.

“We have strong business momentum going into the fourth quarter and will benefit from higher margins in Japan as well as price increases in Argentina, France, Indonesia, Italy, Poland, Portugal, Russia and the U.K.,” said Hermann Waldemer, the CFO, in a conference call. “We have market leadership and are growing volume and overall share in emerging markets.”

Craftsman Tools

Danaher cited faster growth in emerging markets as one of the reasons for increasing its 2010 profit forecast on Oct. 21 to between $2.25 and $2.30 a share, the highest since at least 1999, up from a range of $2.16 to $2.23. The Washington-based maker of Craftsman tools said on Nov. 4 that it gets about 20 percent of revenue from developing nations.

Increased regulation of the financial and health-care industries is leading businesses to outsource computer services, Cognizant Technology Solutions Corp. said on Nov. 1. The Teaneck, New Jersey-based provider of data systems support raised its 2010 earnings forecast and beat analysts’ third- quarter estimates. The shares are up 28 percent since July 2.

“Clients continue to search for cost savings in order to fund growth and innovation in other areas,” Chief Executive Officer Francisco D’Souza said on the call after the quarterly profit report.

Already Rallied

Stock prices have already risen to account for higher corporate earnings and shares will require a strengthening economy to climb more, said Trym Riksen, chief investment officer for the private-banking division of DnB NOR ASA. The valuation for the companies in the S&P 500 has climbed to 15.4 times reported profit from the past year, from a 14-month low of 13.7 in July, according to data compiled by Bloomberg.

“This huge wave of positive guidance has already been priced into the market,” said Riksen, whose Oslo-based firm oversees the equivalent of about $391 billion. “It would be very surprising if that huge wave were to be prolonged.”

Rising raw-material prices are reducing profitability for Clorox Co., a maker of household-cleaning products, and apparel company Jones Group Inc. Earnings are being squeezed as companies struggle to pass costs onto shoppers at a time when year-over-year gains in the consumer price index have averaged 1.8 percent in 2010, compared with a 10-year average of 2.5 percent, data compiled by Bloomberg show.

Record Cotton

Clorox lowered its annual profit forecast on Nov. 2, citing weakening U.S. growth and higher commodity costs. Shares of the Oakland, California-based company fell the most in almost two years. Jones Group cut its 2010 sales projection on Oct. 27 amid soaring cotton prices, which reached a record $1.446 a pound on Nov. 5. Shares of the New York-based clothing maker are down 6.9 percent this year.

Gains in U.S. GDP are trailing the average pace following a contraction, according to data compiled by the National Bureau of Economic Research and Bloomberg. NBER said the worst recession since the 1930s ended in June 2009, and Bloomberg data show GDP growth will average 2.5 percent a quarter through June 2011, or half the average rate in the two years following contractions since 1949.

Most companies are earning more than analysts expected. More than 70 percent in the S&P 500 beat profit forecasts in the July-to-September period for the sixth straight quarter, the longest streak in Bloomberg data going back to 1993. S&P 500 earnings since Oct. 7 were 7 percent higher than analysts predicted, the data show.

Biggest Nations

Brazil, Russia, India and China, the biggest developing nations, are forecast to expand more than the U.S. next year. Their growth will average 6.6 percent, according to the median economist forecasts in a Bloomberg survey and IMF projections.

“Earnings have been phenomenal out of corporate America,” Robert Doll, who oversees $3.45 trillion as chief equity strategist at New York-based BlackRock Inc., said in a Nov. 3 interview on Bloomberg Television’s “First Up” with Susan Li. “They’ve delivered versus expectations, yet again outshining the tepid economic recovery. I think that’s the real story.”

Tuesday, October 19, 2010

Gold Closes Lower after China Rate Hike

James Hyerczyk, Futures Hound
Published 10/19/2010 - 8:58 p.m. EST

December Gold sold off on Tuesday after China’s central bank raised interest rates. The move by China surprised traders who began selling riskier currencies and commodities.

The People’s Bank of China raised its benchmark one-year lending and deposit rate by 25 basis points effective from October 20, the first increase in nearly three years. The move was most likely tied to pressure from the U.S. to increase the value of the Yuan. Others believe it was an effort to prevent the economy from overheating. The action by China triggered a rally in the U.S. Dollar, thereby weakening demand for gold and silver.

The current break in the gold market is the largest in terms of price and time on the daily chart in a few months. This could be an indication that further downside movement is coming.

The current main bottom on the daily swing chart is $1325.60. A trade through this price will turn the main trend down.

Based on the current closing price reversal formation, the first down side target is the 50% level at $1313.00, followed by the Fibonacci level at $1295.30. On Wednesday, an uptrending Gann angle comes in at $1293.00. This makes $1295.30 to $1293.00 an important support cluster.

Wanna know when the BOJ will intervene?

By Sean Lee || October 18, 2010 at 22:48 GMT

If so, keep a sharp eye on this page from the BOJ,, and add it to you favourites. The number to watch is the trade weighted index down the bottom of each pdf. The BOJ intervened when the index got close to 120 and as its now back above 124, the pressure is probably off.

Tuesday, October 12, 2010

Dollar Trades Near a 15-Year Low Versus Yen After Federal Reserve Minutes

By Candice Zachariahs and Catarina Saraiva - Oct 13, 2010 7:15 AM GMT+0800

The dollar traded near the weakest in 15 years against the yen and a record low versus the Swiss franc on speculation Federal Reserve officials will reiterate they are poised to resume bond purchase to support growth.

The Dollar Index, which tracks the greenback against major trading partners, was near its lowest since January after the Fed said yesterday in minutes of its September meeting that it was set to take more credit-easing steps “before long.” The bank will announce increases in Treasury purchases, or so-called quantitative easing, in November, Goldman Sachs Group Inc. has said. The euro was near a nine-month high before a report likely to show European industrial production rose in August.

“The Dollar Index will remain under pressure,” said Kurt Magnus, executive director of foreign exchange sales at Nomura Australia. A second round of quantitative easing “is imminent and the minutes suggest that it will be large and aggressive.”

The dollar traded at 81.81 yen as of 8:02 a.m. in Tokyo, from 81.72 yesterday in New York. It reached 81.39 on Oct. 11, the lowest level since April 1995. The euro fetched $1.3915 from $1.3924 yesterday and touched $1.4029 on Oct. 7, the most since Jan. 28. The yen traded at 113.84 against the euro from 113.79.

The Dollar Index, used by IntercontinentalExchange Inc. to track the greenback against currencies including the euro, yen and Swiss franc, slid 0.1 percent to 77.363 yesterday. It touched 76.906 on Oct. 7, the lowest level since Jan. 15.

The index will decline to 76.70 this week, corresponding to the euro advancing through $1.41, Magnus said.

The gauge of the U.S. currency has fallen 3.8 percent since Sept. 21, when the central bank said in a statement following its policy meeting that it’s prepared “to provide additional accommodation if needed” to support the recovery.

‘Before Long’

That phrase was meant to be in accord “with the members’ sense that such accommodation may be appropriate before long,” according to the central bank’s minutes yesterday.

The Fed will announce increases in its Treasury purchases at its policy meeting Nov. 2-3, helping the U.S. avoid the “very bad” economic outcome of a renewed recession, New York- based Jan Hatzius, chief U.S. economist at Goldman Sachs, said yesterday via e-mail.

Fed Chairman Ben S. Bernanke will discuss business innovation in Pittsburgh today and speak on monetary policy objectives and tools in Boston on Oct. 15.

The Swiss franc traded at 95.71 centimes after yesterday gaining as much as 1 percent to 95.56 centimes against the dollar. It touched 95.55 centimes on Oct. 7, the strongest ever.

Weber Comments

Industrial production in the euro region probably rose 0.8 percent in August, economists forecast before the European Union’s statistics office report today.

The report supports European Central Bank Governing Council member Axel Weber’s comments yesterday that the risk of Europe sliding back into recession is “negligible.” The central bank should stop its bond-buying program, he said.

“These securities purchases should now be phased out permanently,” said Weber, who also heads Germany’s Bundesbank, in a speech delivered in New York yesterday. With policy makers debating when to withdraw other emergency measures, Weber said the risk of “exiting too late” is greater than the danger of “exiting too early.”

Sunday, September 19, 2010

Britain shows no sign of double-dip recession-Cable

LIVERPOOL, England, Sept 19 (Reuters) - Britain shows no signs of a double-dip recession and manufacturing is growing strongly, Business Secretary Vince Cable said on Sunday.

"On the double dip recession, there is no sign of it," Cable told an event at his Liberal Democrat party's conference in Liverpool.

"In fact, the private sector is growing quite strongly in certain areas, particularly manufacturing," Cable added.

"Certainly we are not heading for a double-dip recession. It's an outside risk. I can't promise that it won't happen, but it certainly looks improbable," he said.

Slowing growth in Britain's services sector have prompted concerns the economy may go into reverse only months after emerging from the worst recession in generations following the global financial crisis.

British service sector activity grew last month at its slowest pace since April 2009, with a marked fall in hiring as employers worried about an economic slowdown and public spending cuts, according to the latest Markit/CIPS services purchasing managers' index. (Reporting by Tim Castle, editing by Maureen Bavdek)

Tuesday, September 14, 2010

Australian Dollar Trades Near Two-Year High on Growth View, Fed Purchases

By Candice Zachariahs - Sep 14, 2010 4:22 PM PT

The Australian dollar traded near its strongest level in two years as a strengthening domestic economy and concern the Federal Reserve will expand efforts to keep down borrowing costs spurred demand for the currency.

New Zealand’s currency was near a seven-week high as speculation increased that U.S. policy makers will buy additional Treasury securities this year to help sustain growth as the recovery falters. Gains in the so-called kiwi were tempered on speculation the Reserve Bank of New Zealand will leave interest rates unchanged at a meeting tomorrow.

“Aussie can probably track a bit higher,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. “The Australian economy is outperforming the rest and the market’s pricing in the prospect of quantitative easing in the U.S.”

The Australian dollar traded at 93.96 U.S. cents as of 9:22 a.m. in Sydney from 93.97 cents in New York yesterday, when it climbed to 94.58 cents, the highest level since July 2008. The currency was at 78.01 yen from 78.03 yesterday.

New Zealand’s dollar bought 73.28 cents from 73.43 cents yesterday when it advanced to 73.95, the strongest since July 27. It traded at 60.84 yen from 60.97.

Economists at Goldman Sachs & Co. expect the Fed to announce as early as November a program of asset purchases to support a weak economy. Treasury purchases may total about $1 trillion in another round of quantitative easing, said Jan Hatzius, chief U.S. economist at Goldman Sachs.

Benchmark interest rates are 4.5 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Sunday, September 5, 2010

ECB Trichet: Strong 2Q Confirms No Double Dip

First Published Sunday, 5 September 2010 05:37 pm - © 2010 Need to Know News

--But Too Early To Declare "Victory"

PARIS (MNI) - The Eurozone's strong second quarter growth performance confirms that there won't be a double-dip recession, but there are plenty of challenges in the coming years, ECB President Jean-Claude Trichet said in a newspaper interview published Saturday.

"I've already said on many occasions that I didn't foresee a double dip in Europe, and the latest results confirm it," Trichet told the French daily Le Figaro.

He warned against reading too much into quarterly figures, however, saying that the economy must be judged in a longer-term perspective. "That said, I am delighted with the growth in the second quarter and with the upward revision to the European Central Bank staff forecasts that I announced last Thursday," he added.

However, "with regard to growth in the coming years, we remain cautious and are not declaring victory," Trichet said.

Trichet and his ECB colleagues have said many times recently that they do not expect growth in the second half of this year to match the second quarter's torrid pace. They expect momentum to slow in the third quarter and even more so in the fourth, though they believe a modest recovery will continue.

The Eurozone economy surpassed expectations in the second quarter with a robust 1.0% q/q growth rate, driven largely by Germany's dizzying 2.2% quarterly pace. Largely on the basis of the strong second quarter, the ECB staff revised upward its midpoint growth forecast for 2010 to 1.6% from the previous projection of 1%.

Trichet suggested that the strong 2Q performance cannot be attributed to the euro's weaker tone in foreign exchange markets, which many say has been a big boon for exports - especially Germany's.

"I note with great interest that the Eurozone's second quarter growth rests above all on its domestic demand [consumption and investments]: a total contribution of 0.7% to growth of 1%, with a contribution of 0.1% from foreign trade and 0.2% from inventories," the ECB president said.

He downplayed the idea that Germany's disproportionate share of 2Q EMU growth meant that a "two-speed" Europe was emerging.

"Germany is the biggest economy in the [currency] union and the top market for the exports of the near-totality of the other countries. When it improves, it is clearly good for the Eurozone as a whole," Trichet said.

He lauded Germany, saying its success was the fruit of the measures it has undertaken in recent years to reduce production costs and increase productivity, as well as the adaptability of German companies to the realities of globalization.

In a comment that could be aimed at France, which is facing a week of strikes, protests and general tension over the government's pension reform plan, Trichet noted that Germany's success was built on "a high degree of confidence among social partners [unions and employers], which we be desirable to regain in all countries of the Eurozone."

Given its attention to production costs and the reforms it has undertaken to make the economy "more flexible," Germany "can serve as an example to all its neighbors," Trichet said.

Asked to explain why the U.S. Federal Reserve was worried about deflation while the ECB was not, Trichet said there were "important structural differences on the two sides of the Atlantic, and that the fear of deflation "manifested itself from time to time in the United States, even if, very fortunately, the risk has not materialized."

In Europe, he added, "we are lucky to have a remarkable anchoring of inflation expectations in line with our definition of price stability of less than but close to 2%." He repeated, as he has for many months, that "the ECB considers the current interest rates appropriate to give us medium-term price stability, without inflation or deflation."

Trichet also repeated his criticism of the big three ratings agencies, saying "it is not necessarily healthy" that the important task of evaluating securities be share among only three institutions at the global level. "I don't think the solution is necessarily the creation of a public institution. We must continue to reflect," he said, adding that, "the right answers in this domain as in others can only be worldwide ones."

Trichet also renewed his call for China to exercise "greater flexibility" with regard to the exchange rate of its currency, the yuan. "From this point of view, I appreciated, along with all the [finance] ministers and [central bank] governors of countries with floating currencies, the move in the direction of more flexibility that was made public by China last June 19," he said.

Wednesday, August 25, 2010

Canadian Dollar Falls for Fifth Day Marking Longest Streak in 19 Months

By Chris Fournier - Aug 25, 2010 8:10 PM GMT+0800

Canada’s dollar depreciated for a fifth day versus its U.S. counterpart, the longest string of losses since January 2009, as risk aversion drove global stocks lower, weakening the outlook for currencies tied to growth.

The loonie, as the currency is sometimes known, is down 1.1 percent this year. A faltering economic recovery means the chances for further Bank of Canada interest-rate increases in 2010 are diminishing, dimming the currency’s appeal.

“It’s a simple reflection of risk aversion,” Shaun Osborne, chief currency strategist in Toronto at Toronto- Dominion Bank’s TD Securities unit, wrote in an instant message. “It feels a little as if the impetus for higher rates in Canada beyond September is perhaps fading a little more.”

The Canadian currency retreated 0.4 percent to C$1.0652 per U.S. dollar at 8:09 a.m. in Toronto, compared with C$1.0615 yesterday, when it touched C$1.0665, the lowest point since July 6. One Canadian dollar buys 93.88 U.S. cents.

Osborne predicted the loonie will head toward C$1.0775 if it breaks through C$1.0675.

The MSCI World Index, a gauge of equities in 24 developed nations, also fell a fifth day.

Bank of Canada policy makers next meet on Sept. 8, after raising interest rates by a quarter percentage point to 0.75 percent on July 20, the second increase in two months.

Monday, August 23, 2010

Cameron Economy Set to Take a Pounding as Traders Turn Bearish

By Lukanyo Mnyanda and Paul Dobson - Aug 23, 2010 12:25 PM GMT+0800

U.K. Prime Minister David Cameron attends a summit in New Delhi. Investors drove the pound as much as 11.8% higher against the euro from its low this year on March 1 on speculation Cameron's austerity measures would shrink the nation's 11 percent deficit and preserve its top debt rating. Photographer: Pankaj Nangia/Bloomberg
Audio Download: Debate on Pound

The British pound’s biggest rally in 14 months is in jeopardy as Prime Minister David Cameron’s budget cuts begin to curb economic growth.

Foreign-exchange forecasters are the most pessimistic on the pound since May 2009, when Standard & Poor’s said the U.K. was at risk of losing its AAA credit rating, according to data compiled by Bloomberg. Bears in a Bloomberg survey of strategists outnumber bulls 29 to 12, while TD Securities in Toronto, the most-accurate forecaster in the six quarters ended June 30, has the lowest estimate, predicting sterling will depreciate 15 percent versus the dollar by year-end.

“The story has changed,” said Richard Benson, an executive director at Millennium Asset Management in London who oversees $14 billion and correctly predicted in the first half of 2009 the pound would gain versus the euro. “The prospects for growth look quite soft and fiscal retrenchment is about to be undertaken,” said Benson, who is betting against sterling as the U.K. expansion lags behind Germany.

Investors drove the pound as much as 11.8 percent higher against the euro from its low this year on March 1 on speculation Cameron’s austerity measures would shrink the nation’s 11 percent deficit and preserve its top debt rating. It’s starting to retreat as the planned cuts risk undermining the recovery.

Trimming Forecasts

The Bank of England lowered its 2012 growth forecast on Aug. 11, to 3 percent from 3.6 percent, citing “tight credit conditions” and the budget program. The U.K. will probably expand 1.2 percent this year, the median estimate of 24 economists surveyed by Bloomberg showed. German gross domestic product may increase 2 percent this year, with the U.S. rising 3 percent, separate surveys show.

Gains in London house prices in the first-half of 2010 were wiped out this month as the market weakened, Rightmove Plc, operator of the U.K.’s biggest property website, said on Aug. 16. Consumer confidence dropped in July for a third month, data from Nationwide Building Society showed on Aug. 11.

Benson said sterling will weaken more than 8 percent against the euro by year-end, from 81.83 pence last week. It rose 0.2 percent 81.69 pence and to $1.5564 from $1.5534 as of 12:42 p.m. in Tokyo.

“It’s a turning point for the pound,” said Ian Stannard, a London-based senior currency strategist at BNP Paribas SA, the third-most-bearish of 34 forecasts for the pound against the dollar compiled by Bloomberg as of Aug. 20. “The data has peaked and it’s set to deteriorate.”

The pound fell 12 percent from the start of the year to a low of $1.4231 on May 20 on concern former Prime Minister Gordon Brown’s Labour Party would fail to tackle a budget deficit that had reached 12.6 percent of the economy.

Cameron Takes Over

Cameron’s Conservative Party ended 13 years of Labour rule in the May 6 election and formed a coalition government with Nick Clegg’s Liberal Democrats, promising cuts to tackle the shortfall. Sterling jumped 7.9 percent against the dollar in the two months through July.

Governments across Europe are attacking deficits after the region’s debt crisis sent bond yields in Greece, Portugal and Spain to the highest relative to German bunds since the euro was introduced in 1999 and prompted credit downgrades by S&P, Fitch Ratings and Moody’s Investors Service. S&P reiterated the “negative” outlook for the U.K. on July 12, saying its projections for the economy were less optimistic than those Chancellor of the Exchequer George Osborne presented in his emergency budget on June 22.

Osborne, 39, the youngest chancellor since 1886, pledged to almost erase the deficit by 2015 via spending cuts worth 30 billion pounds ($47 billion) annually and measures including a public-sector wage freeze, firings and tax increases.

Gilts Rise

Gilts climbed that day as the Debt Management Office reduced the amounts of bonds to be sold in the fiscal year through March to 165 billion pounds from 185.2 billion pounds. U.K. bonds have returned 5.74 percent since May 6, compared with 3.95 percent on average for government bonds globally, according to Bank of America Merrill Lynch index data.

“The actions we took in the budget have removed the biggest downside risk to the recovery, a loss of confidence and a sharp rise in market interest rates,” Osborne said in a speech at Bloomberg’s London offices on Aug. 17. “Britain now has a credible plan to deal with our record deficit. We must stick by it.”

Strategists who boosted fourth-quarter predictions for the pound to as high as $1.67 in January now see the currency declining to $1.51 by year-end, according to the Bloomberg survey’s median forecast.

Pound Forecasts

TD Securities predicts sterling will end the year at $1.32. BNP Paribas, based in Paris, estimates the pound may slide to $1.40, while Zurich-based UBS AG, ranked by Euromoney Institutional Investor Plc as the world’s second-biggest foreign-exchange trader, forecasts a drop to $1.35.

Against the euro, the pound will likely end the year at 81 pence, based on the median estimate of 27 economists and strategists. As recently as April they forecast 87 pence.

“The appreciation we expected several months ago has now occurred and most likely overshot,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, who sees the pound at $1.53 by Dec. 31. “The pound faces several ongoing hurdles, including the outlook for inflation and the Bank of England.”

The pound is weakening even as inflation shows few signs of slowing. The currency fell 0.5 percent on Aug. 17 even though the Office for National Statistics said U.K. consumer-prices increased 3.1 percent in July from a year earlier, above the government’s 3 percent limit.

Futures Traders

Futures traders have reversed bets that the pound will gain against the U.S. dollar, data from the Washington-based Commodity Futures Trading Commission showed on Aug. 20.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with bets on an advance, so-called net shorts, was 4,431 on Aug. 17, compared with net longs of 5,021 a week earlier. Net shorts were as much as 76,745 in May.

“We still find sterling attractive,” said Thanos Papasavvas, who helps invest about $5 billion as head of currencies at Investec Asset Management Ltd. in London. “It’s more to do with the U.S., which is behind the curve on the fiscal adjustments. Economic reports coming out of the U.S. have been disappointing, whereas data from the U.K. has been better than expected.”

The pound will trade between $1.65 and $1.70 by year-end, Papasavvas said.

‘Cautiously Optimistic’

Osborne said in his speech on Aug. 17 that economic data pointed to a “gradual recovery.”

“We can start to be cautiously optimistic about the economic situation,” he said.

Bank of England Governor Mervyn King may resist further gains in the pound to promote exports and industries including tourism that have benefited from a 24 percent drop in sterling on a correlation-weighted basis since the start of 2007.

Retail sales in central London grew at the fastest rate since 2006 in the five weeks to July 3 as visitors to the U.K. took advantage of the weaker currency, the British Retail Consortium and accounting firm KPMG LLP said on July 19.

“The governor has been arguing the case for an export-led recovery,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which oversees $20 billion. “A much stronger exchange rate would not be very welcome. He would attempt to talk it back down if we did get back toward the $1.70 level.”

A weaker pound may not be enough to give an additional kick to the economy as Cameron’s austerity program slows the recovery, said Brian Kim, a currency strategist at UBS in Stamford, Connecticut.

“The fiscal side in the U.K. is going to hamper growth,” Kim said in an interview. “We could see more sterling weakness in the second half of the year.”

Wednesday, July 21, 2010

European Bank Stress Tests Said to Describe Three Scenarios

By Meera Louis and Jann Bettinga - Jul 20, 2010

European regulators plan to detail three scenarios when they publish the results of their stress tests on the region’s banks this week, according to a document by the Committee of European Banking Supervisors.

Banks will publish their estimated Tier 1 capital ratios under a benchmark for 2011, an adverse scenario and a third test that includes “sovereign shock,” according to a template prepared by CEBS for the banks and obtained by Bloomberg News.

In the last scenario, banks will publish their estimated losses on sovereign debt they hold in their trading book as well as “additional impairment losses on the banking book” that they may suffer after a sovereign debt crisis, according to the document that was dated July 15.

Under accounting rules, banks have to adjust the value of sovereign bonds held in the trading book according to changes in market prices, said Konrad Becker, a financial analyst at Merck Finck & Co. in Munich. For government debt held in the banking book, lenders must write down their value only if there is serious doubt about a state’s ability to repay its debt in full or make interest payments, he said.

The sovereign-shock scenario doesn’t assume a European nation will default, said a person with knowledge of the matter, who spoke on the condition of anonymity because the information is private. Instead, it will assume that rising government-bond yields will push up borrowing costs, spurring defaults in the private sector that would lead to losses in lenders’ banking books, said the person.

EU Stress Tests

CEBS coordinates national banking authorities and makes policy recommendations to the European Union on regulation. Spokeswoman Efstathia Bouli declined to comment.

EU regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a recession and a decline in the value of their government bond holdings. They are using the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal.

The banks may publish how much they will need to raise in capital if their Tier 1 ratio, a key measure of financial strength, falls below 6 percent under the sovereign scenario, the draft shows. Lenders will also provide estimated loss rates for their corporate and retail holdings for the adverse cases, according to the template.

Tuesday, July 13, 2010

Greece provides an opportunity to sell the EUR

Posted by Dean Popplewell at 6:16 am EDT, 07/13/2010

Moody’s paranoia of being forgotten decided to downgrade Portugal two notches to A1 this morning. This has given the Euro-zone sovereign debt crisis top-billing again, surpassing the disappointing ZEW Business survey from Germany, which did not fall, but plummeted from 28.7 to 21.2. All this negative news has hit a market that was already looking for safer heaven trading ideas after China made it clear that it will halt any property speculation and on fear that their GDP report on Thursday will show that their economy is slowing down. Global sentiment again has taken a hit. Will earnings season save the day? Solid demand for the Greek bill auction has given the EUR some support, but sellers are lurking.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Forex heatmap

The market yesterday felt motionless ahead of this week’s earnings report and tomorrows US sales data. Investors are looking for some ‘concrete’ guidance before they go out on a limb again. The US trade deficit has been virtually unchanged for the last three months and analysts do not expect much movement in the May report either. Consensus is pegging this morning’s headline print just above the -$40b mark again, as a price related decline in petroleum imports will be negated by an increase in the non-oil deficit. The market is anticipating solid gains in both the import and export non-petroleum gains, but with a greater weighting on the imports category. Digging deeper, the ‘nominal deficit is expected to be restrained by lower oil prices, while the ‘real’ should rise.

The USD$ is higher against the EUR -0.44%, GBP -0.24%, CHF -0.15% and lower against JPY +0.21%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.52%. All good things temporarily come to an end and that includes the loonies advance after stellar fundamental reports of late. Last weeks unemployment report blew all analysts estimates out of the water (+93k), but with equities floundering temporarily reduced the appeal of growth based currencies. Any dollar rallies will only give speculators a better ‘average’ opportunity to own the CAD. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates (+0.50%) somewhat or as a safer-haven proxy. Couple this with commodities has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. If the BOC remains in a ‘normalizing’ rate mood then the currency will be more sought after. The futures market has priced in a 0.25% hike by the BOC next week. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking.

The AUD has continued its slide for a second consecutive day, retreating from its highest level in three weeks amid speculation that the recent rally was overdone and before Chinese GDP reports that analysts expect will show that their growth is slowing, thus damping demand for higher-yielding assets. Currently the AUD is running out of momentum, and the market expects to see more of the same this week. Last week we saw that there was nothing better to drag a currency higher that strong employment numbers. This week, economic sentiment seems to rule the coop. Fundamentally, with a strong domestic growth base it is buffering the economy from any outside negative influence at the moment. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. However, that been said, the currency pressure is coming mostly from investors who want to own safer heaven position. On the crosses especially, like AUD/JPY one can expect further pressure being exerted. For now, speculators will be better sellers on upticks (0.8753).

Crude is little changed in the O/N session ($74.94 -1c). Crude prices felt the heat yesterday, declining from a one week high as investors locked in profits. Earlier, the commodity rose on the back of China’s import fuel data (net imports +2m-metric tones to +22.14m), setting up the market nicely to offload winning positions ahead of an anticipated softer US sales data tomorrow. Last week, the black-stuff had a + 5.5% gain, the biggest rally in six weeks, as a drop in jobless claims ‘bolstered speculation the country would sustain its economic recovery’. The earning’s season and an equity market finding it difficult to maintain traction will pressurize commodities, as will cooler weather being predicted coupled with no threats of hurricanes in the Gulf of Mexico. Last week’s EIA report revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. Data showed an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude is bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. Currently there are too many negative variables that support the bear’s short positions with speculators preferring to sell on rallies.

The ‘yellow metal’ had the largest rally on Friday in three week’s as investors demanded the commodity that had been trading close to its technical lows for a few day’s. Investors continue to weigh ‘the signs of hope in the US labor market against concerns of impending European bank stress-tests (July 23). Yesterday, with consolidation the name of the game, the metal pared some of its advances on speculation that a strengthening dollar will erode demand for the precious metal as an alternative asset. Technically, the bullish sentiment has been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. India, the world’s biggest consumer, expects imports to plunge as much as -36% this year. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal, at least until the technical support of $1,175-80 is broken. Year-to-date, the commodity has gained +11.5% as investors have been content in using the commodity as a hedge against any European holdings, believing that the EUR has not bottomed out just yet ($1,204 +$5)!

The Nikkei closed at 9,537 down -11. The DAX index in Europe was at 6,149 up +72; the FTSE (UK) currently is 5,230 up +63. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.05%) and are little changed in the O/N session. Debt prices remain soft on the back of investors diminishing concerns that the US will slip back into a double dip recession and also on investors radar, is the US governments auction of $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b). Throw in a revised IMF forecast for global growth, +4.6% vs. an April estimate of +4.2, warrants dealers to cheapen up the curve and keep 10-year yields above the +3% level to take down product. With the current market sentiment dealers will want to sell product on up-ticks.

Wednesday, July 7, 2010

EU Stress Tests Will Cover 91 Banks, Assume Bond Value Drop

By Ben Moshinsky - Jul 7, 2010

European Union regulators are carrying out stress tests on 91 banks, accounting for 65 percent of the area’s banking industry, to examine whether they can withstand a shrinking economy and a drop in government bond values.

The lenders being tested include 14 from Germany, six from Greece and four from the U.K., the Committee of European Banking Supervisors said in an e-mailed statement. EU banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks.

“This sounds like the softest option possible,” said Stephen Pope, London-based chief global equity strategist at Cantor Fitzgerald. “If that is the indicator how stringent the stress tests will be, then they aren’t worth too much.”

Regulators are counting on the tests to reassure investors that banks have enough capital to withstand a debt default by a European country. U.S. bank stocks rebounded last year after government analysis of their balance sheets found that 10 lenders needed to raise $74.6 billion of capital.

EU leaders have pledged to disclose the results of the tests, showing how individual banks would hold up to economic and market shocks, by the end of July. CEBS is working with the European Central Bank on the tests.

CEBS’s role is to coordinate national banking authorities and make policy recommendations to the EU on regulation. The London-based regulator is working with the European Central Bank on the tests. An ECB spokeswoman declined to comment.

Sovereign ‘Deterioration’

The adverse scenario being tested “assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon and a “deterioration of sovereign risk” from early-May government bond values, according to the CEBS statement.

The commission has said it expects the EU’s economy to grow by 1 percent this year and 1.7 percent next year.

The results will be disclosed “both on an aggregated and on a bank-by-bank basis, on July 23,” CEBS said. The agency didn’t specify scenarios for so-called haircuts on European sovereign bonds.

Greek Bonds

Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring.

The tests originally covered only big cross-border lenders, later broadening out to include smaller EU banks such as Spain’s savings banks, known as cajas.

German Landesbanken such as Bayerische Landesbank, Landesbank Baden-Wuerttemberg and WestLB AG, and Spanish cajas are undergoing the tests. Landesbanken are owned by regional governments and groups of savings banks.

Billionaire investor George Soros said it would be impossible to judge the state of the European banking industry without including “the smaller banks, notably the cajas in Spain and the Landesbanken in Germany,” in the stress-testing exercise, during a speech in Berlin on June 23.

Banks including Spain’s Banco Santander SA and Bankinter SA, as well as Deutsche Bank AG, Commerzbank AG and HSH Nordbank AG, are also involved in the stress testing.

The U.K. banks being tested are HSBC Holdings Plc, Lloyds Banking Group Plc, Barclays Plc and Royal Bank of Scotland Group Plc. BNP Paribas SA and Societe Generale SA are among the French banks under examination.

Friday, July 2, 2010

Orders to U.S. Factories Declined in May More Than Forecast

By Timothy R. Homan

July 2 (Bloomberg) -- Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC, discusses the June U.S. employment report released today and outlook for the economy. Payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures showed. Employment at companies rose 83,000. The jobless rate fell to 9.5 percent from 9.7 percent. Lebas talks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Orders placed with U.S. factories declined in May more than forecast, a sign that manufacturing may be starting to cool.

The 1.4 percent decrease in bookings was the biggest since March 2009 and followed a revised 1 percent gain in April, the Commerce Department said today in Washington. Economists forecast orders would drop 0.5 percent, according to the median projection in a Bloomberg News survey.

Manufacturers are seeing a pause in demand after the industry helped the world’s largest economy emerge from the worst recession since the 1930s. Today’s figures underscore the Federal Reserve’s concerns that the European debt crisis poses a risk to a self-sustaining U.S. recovery.

“Manufacturing has been the star of the economy this year so any signs that conditions are turning would cause some concern,” Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report. “The demand for products is slowing.”

Estimates of total orders in the Bloomberg survey of 70 economists ranged from a decline of 2 percent to a gain of 1.5 percent. The decrease in May was the first in nine months.

Manufacturing in June expanded at the slowest pace this year as factories received fewer orders and demand from abroad slowed, a report showed yesterday. The Institute for Supply Management’s manufacturing gauge fell to 56.2 from 59.7 a month earlier. Readings greater than 50 indicate expansion. The Tempe, Arizona- based group’s new orders measure fell to the lowest level since October.

June Employment

Earlier today, the Labor Department said the U.S. lost 125,000 jobs in June, reflecting a drop in the number of federal census workers and a smaller-than-forecast gain in private hiring. Factory employment rose by 9,000 in June, the smallest gain this year.

Demand for durable goods, which make up just over half of total factory demand, decreased 0.6 percent in May. Shipments of durable goods fell 0.3 percent.

Bookings of non-durable goods, including food, petroleum and chemicals, decreased 2.1 percent. The decline reflected a drop in the value of orders for petroleum products, clothing, fertilizers and beverages.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, increased 3.9 percent after a 2.8 percent drop in April. Shipments of these goods, used in calculating gross domestic product, rose 1.4 percent after rising 0.4 percent.

Factory Inventories

Factory inventories declined 0.4 percent in May, and manufacturers had enough goods on hand to last 1.25 months at the current sales pace.

Sales and inventories “are very much in sync,” Samuel Allen, chief executive officer of Deere & Co., said in a June 23 interview in reference to the manufacturer’s agricultural business. “We do believe the recovery is underway,” he said. “We do believe it is moving slowly.”

Manufacturing, which accounts for about 11 percent of the economy, faces the risk of a slowdown in exports as the debt crisis threatens Europe’s economy and factory activity in China cools.

Tuesday, June 15, 2010

European recession next year "almost inevitable"-Soros

By Adrian Croft

LONDON, June 15 (Reuters) - Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire U.S. investor George Soros said on Tuesday.

Flaws built into the euro from the start had become acute, Soros told a seminar, warning that the euro crisis could have the potential to destroy the 27-nation European Union.

The euro's lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness, he said.

Germany had imposed its criteria on how a 750 billion euro ($1 trillion) euro zone rescue mechanism should be used and was imposing its own standards -- a trade surplus and a high savings rate -- on the rest of Europe, Soros said.

"But you can't be a creditor country, a surplus country, without somebody being in deficit," he said.

"That's the real danger of the present situation -- that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually ... setting in motion a downward spiral," he said.

Germany would do relatively well because the decline in the euro had boosted its economy, he told the seminar on the euro zone crisis organised by two thinktanks, the European Council on Foreign Relations and the Centre for European Reform.

"Germany is going to smell like roses but (the rest of) Europe is going to be pushed into a downward spiral, stagnation lasting many years and possibly worse than that," he said.

"In other words, I think a recession next year is almost inevitable given the current policies," Soros said, later clarifying that he meant a recession in Europe as a whole.


"If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period," he said.

Political will to forge a common fiscal policy in Europe was absent and since Europe was liable to move backwards if it did not advance, "the crisis of the euro could actually have the potential of destroying the European Union," he said.

European banks had bought large amounts of the sovereign bonds of weaker euro zone countries for a tiny interest rate differential, Soros said.

"That's one of the reasons why the banks are so over-leveraged and why the German and the French banks own Spanish bonds," he said.

"Now ... they have a loss on their balance sheets which is not recognised and it reduces the credibility of those banks so the banking system is in serious trouble," he said.

"The commercial paper market, for instance, in America is now refusing to lend to European banks so there is even a funding crisis and the ECB (European Central Bank) has to step in and the banks are unwilling to lend to each other," he said. (Editing by Chizu Nomiyama)

Friday, June 11, 2010

Retail Sales in U.S. Probably Rose, Sparked by Auto Bargains

By Bob Willis

June 11 (Bloomberg) -- Sales at U.S. retailers probably rose in May for the first time in three months as shoppers returned to automobile showrooms seeking bargains, economists said before a government report today.

Purchases climbed 0.5 percent, according to the median estimate of 76 economists surveyed by Bloomberg News. Sales probably increased 0.2 percent excluding autos, led by gains at service stations as gasoline prices rose, economists said.

The pending demise of some Chrysler LLC and General Motors Corp. dealers gave sales a boost as consumers, grappling with rising unemployment, sought discounts. Tax breaks and income supplements from the Obama administration’s stimulus plan are also propping up demand, even as the need to boost savings signals sustained gains in spending will be slow to develop.

“Spending improved as the fiscal stimulus put cash in consumers’ pockets,” said Ryan Sweet, a senior economist at Moody’s in West Chester, Pennsylvania. “There are still a number of headwinds which threaten the economy’s recovery.”

The Commerce Department’s report is due at 8:30 a.m. in Washington. Economists’ forecasts for total sales ranged from a decline of 0.3 percent to a gain of 1.4 percent. Estimates for non-auto purchases ranged from a 0.5 percent drop to an increase of 1.2 percent.

At the same time, the Labor Department may report that 615,000 workers filed claims for jobless benefits last week, compared with 621,000 a week earlier, according to the survey median.

Job Cuts

Employers eliminated 345,000 workers from payrolls in May, the fewest since September and a sign the recession is abating, Labor figures last week showed. Retailers cut 17,500 positions, the smallest reduction since June 2008, the month before spending started to sink.

Sales of cars and light trucks rose to a 9.9 million annual unit pace in May from a 9.3 million rate the prior month, according to industry figures released June 2. Purchases reached a 9.1 million pace in February, the lowest level since 1981.

General Motors, Chrysler and Ford Motor Co., the only major U.S. automaker not in bankruptcy, all had smaller declines than forecast in comparison with May 2008.

“It’s just a slight uptick,” Ken Czubay, Ford vice president of sales and marketing, said on a conference call June 2. “This is still a very fragile industry.”

Only Essentials

The International Council of Shopping Centers last week said May same-store sales dropped 4.6 percent from the same month last year, more than double its forecast of a 2 percent decline. Macy’s Inc., Dillard’s Inc. and Saks Inc. were among merchants that reported steeper declines than analysts estimated as Americans focused on buying essentials rather than discretionary items.

With home values falling, credit tight and unemployment forecast to keep rising after reaching a 25-year high of 9.4 percent reached in May, consumers are reluctant to spend on anything beyond necessities such as gasoline and food.

Wal-Mart Stores Inc., the biggest retailer, projected last month that its U.S. comparable-store sales may rise as much as 3 percent in the 13 weeks through July 31.

With demand still weak, companies probably cut inventories by 1 percent in April, an eighth consecutive decrease, economists said another Commerce report at 10 a.m. will show.

Federal Reserve Chairman Ben S. Bernanke last week told Congress that the pace of decline in the economy was slowing and consumer spending had stabilized.

Spending “has been roughly flat since the turn of the year,” he said. While the fiscal stimulus will boost spending power, weak labor conditions, tight credit and falling wealth may limit sales, he said.

Bloomberg Survey

Initial Retail Retail Business
Claims Sales ex-autos Inv.
,000’s MOM% MOM% MOM%

Date of Release 06/11 06/11 06/11 06/11
Observation Period 6-Jun May May April
Median 615 0.5% 0.2% -1.0%
Average 613 0.5% 0.3% -0.9%
High Forecast 640 1.4% 1.2% 1.4%
Low Forecast 580 -0.3% -0.5% -1.3%
Number of Participants 45 76 71 52
Previous 621 -0.4% -0.5% -1.0%
4CAST Ltd. 610 0.6% 0.5% ---
Action Economics 610 0.5% 0.2% -1.2%
AIG Investments --- 1.1% 0.9% -1.3%
Aletti Gestielle SGR 620 0.4% 0.0% -1.2%
Ameriprise Financial Inc 612 0.4% 0.2% -1.0%
Argus Research Corp. --- 0.0% 0.2% -0.8%
Bank of Tokyo- Mitsubishi 625 1.2% 1.0% -1.0%
Bantleon Bank AG --- 0.4% 0.3% ---
Barclays Capital 615 0.4% 0.3% -1.1%
BBVA 615 0.5% 0.3% -1.1%
BMO Capital Markets 600 0.5% 0.2% -1.2%
BNP Paribas 606 0.6% 0.1% -0.7% 610 0.3% 0.0% -0.8%
Calyon --- 0.5% 0.3% ---
CIBC World Markets --- 0.3% 0.1% -1.0%
Citi 590 0.5% 0.2% -0.8%
ClearView Economics --- 0.6% 0.2% -0.8%
Commerzbank AG 620 0.5% 0.1% -1.0%
Credit Suisse 610 0.4% 0.3% -1.0%
Daiwa Securities America --- 0.3% 0.1% -1.2%
DekaBank --- 0.6% 0.3% -1.0%
Desjardins Group 625 0.3% 0.1% -1.1%
Deutsche Bank Securities --- 0.5% 0.1% -0.9%
Deutsche Postbank AG --- 0.3% 0.1% ---
DZ Bank --- 0.5% 0.3% ---
First Trust Advisors 621 1.3% 1.2% -1.1%
Fortis --- 0.5% --- -0.8%
FTN Financial --- -0.3% -0.5% ---
Goldman, Sachs & Co. --- 0.7% 0.4% ---
Helaba 620 1.0% 0.6% -1.0%
Herrmann Forecasting 609 0.6% 0.3% -1.0%
High Frequency Economics 621 1.0% 0.7% -1.1%
Horizon Investments --- 0.3% 0.3% -1.2%
HSBC Markets 620 0.9% 0.7% -0.9%
IDEAglobal 625 0.5% 0.2% -0.8%
IHS Global Insight --- 0.9% 0.6% ---
Informa Global Markets 625 0.7% 0.2% -0.8%
ING Financial Markets 615 0.5% 0.1% -1.1%
Intesa-SanPaulo --- 0.3% 0.2% ---
J.P. Morgan Chase 625 1.4% 0.6% -1.0%
Janney Montgomery Scott L --- 0.7% 0.3% -1.3%
Johnson Illington Advisor --- 0.4% 0.1% -1.0%
JPMorgan’s Private Wealth --- 0.3% 0.2% 0.4%
Landesbank Berlin 600 0.3% -0.3% -1.2%
Landesbank BW --- 0.8% --- ---
Maria Fiorini Ramirez Inc 605 0.7% 0.5% ---
Merrill Lynch 580 0.4% 0.1% -1.0%
MFC Global Investment Man 599 0.1% -0.1% -0.5%
Mizuho Securities 625 0.1% 0.0% -1.2%
Moody’s 615 0.5% 0.3% -0.9%
Morgan Stanley & Co. --- 0.1% 0.2% ---
National Bank Financial 600 0.6% 0.3% ---
Natixis --- 0.5% 0.4% ---
Newedge --- 0.4% 0.2% ---
Nomura Securities Intl. --- -0.1% 0.3% ---
PNC Bank --- 1.1% 1.0% -0.7%
Raymond James 595 0.3% 0.0% ---
RBC Capital Markets --- 0.4% 0.1% ---
RBS Securities Inc. 630 0.6% 0.4% -0.9%
Ried, Thunberg & Co. 620 0.9% 0.6% -0.9%
Schneider Foreign Exchang 610 -0.2% -0.2% -0.4%
Scotia Capital 630 -0.1% -0.2% ---
Societe Generale --- 0.7% 0.5% ---
Stone & McCarthy Research 640 0.8% 0.6% -1.1%
TD Securities 610 0.9% 0.3% ---
Thomson Reuters/IFR 610 0.8% 0.5% 1.4%
Tullett Prebon 615 0.4% --- -0.5%
UBS Securities LLC 625 1.1% 0.4% -1.0%
Unicredit MIB 600 0.2% 0.2% ---
University of Maryland 600 0.3% 0.0% -1.0%
Wachovia Corp. --- 0.2% 0.7% -1.0%
Wells Fargo & Co. 610 0.5% --- -1.2%
WestLB AG --- 0.1% 0.0% ---
Westpac Banking Co. 605 0.5% 0.1% -0.8%
Wrightson Associates 620 0.9% 0.6% -0.9%