March 21 (Bloomberg) -- German Chancellor Angela Merkel signaled a demand for greater budget discipline was the price for her supporting European Union aid to Greece, denouncing what she called “superficial” solidarity and seeking to quell speculation of a split with her finance minister on the issue.
Merkel said she’s made no decision on whether to back EU aid or to seek International Monetary Fund assistance to help Greece contain Europe’s biggest budget deficit. A government spokesman confirmed her statement, which was reported by Deutsche Presse Agentur, citing an interview to be broadcast today by Deutschlandfunk.
Her comments underscored the struggle within Merkel’s government -- and among European leaders -- on how to react to the Greek budget crisis. Public opposition to a bailout for Greece has escalated in Germany, the main contributor to the EU budget, before an EU summit in Brussels March 25-26.
The German government sought to play down divisions between Merkel and Finance Minister Wolfgang Schaeuble, denying a report in Der Spiegel magazine that the finance chief told his staff not to communicate with chancellery aides without his consent.
“An intensive exchange occurs daily between the chancellor and the finance minister along with their ministries on Greece,” said a statement from the government press office yesterday.
Merkel’s government said March 19 it wouldn’t rule out a loan to Greece from the IMF. Schaeuble’s spokesman expressed “great reservation” about aid from the Washington-based lender.
CDU Rally
In an appearance before members of her Christian Democratic Union, Merkel lauded Greek Prime Minister George Papandreou’s efforts to cut his budget deficit to 8.7 percent of gross domestic product from 12.7 percent, calling his austerity measures “a real achievement.”
“There has to be solidarity that tackles the problem at its roots, not solidarity that’s superficial and in the end weakens everybody,” Merkel said at a political rally in the city of Muenster in the western state of North Rhine-Westphalia.
Merkel is open to different options on Greece, according to the Deutschlandfunk interview reported by DPA. The Greek government isn’t yet in need of financial assistance, German government spokesman Ulrich Wilhelm told reporters in Berlin.
“We assume that Greece is in a position to solve its problems itself with its consolidation program,” Wilhelm said.
Saturday, March 20, 2010
Bharti Board Said to Approve $9 Billion Zain Africa Unit Offer
March 21 (Bloomberg) -- Bharti Airtel Ltd., the Indian phone company planning a $9 billion purchase of Zain’s African wireless assets, intends to make a formal offer this week, after Bharti’s board yesterday approved the bid, according to two people with knowledge of the negotiations.
Zain, Kuwait’s biggest phone company, may be asked to provide legal protection from a dispute in Nigeria, one of the people said, declining to be identified because the discussions aren’t public. The board didn’t specifically ask for this protection, and was satisfied with the proposals that Bharti management made with regards to Nigeria, the second person said.
Bharti and Zain are in exclusive talks until March 25 to complete a transaction that would give India’s largest wireless carrier 42 million new subscribers in 15 African countries. Bharti has sought overseas businesses as competition at home has reduced call rates for many of its 122 million Indian subscribers to as little as half a U.S. cent a minute. This is Bharti’s third attempt to enter Africa, after being thwarted twice in efforts to merge with South Africa’s MTN Group Ltd.
“I don’t expect Bharti to materially lose value on this deal,” G.V. Giri, an analyst at IIFL Capital Ltd. in Mumbai, said by phone. “They may have at most overpaid by $1 billion to $1.5 billion, but through cost cutting they should be able to recover that sort of value.” Giri maintained his “buy” rating on the stock.
“This was an offer made as per guidelines set by the board, so the approval doesn’t surprise us,” Giri said.
Nigeria Dispute
Senjam Raj Sekhar, a spokesman for New Delhi-based Bharti declined to comment.
Bharti added 3.9 percent on March 19 to close at 311.90 rupees in Mumbai trading, posting its biggest gain since Nov. 30. The stock was the best performer on the benchmark Sensitive Index, which advanced 0.3 percent.
Econet Wireless Holdings Ltd., based in a suburb of Johannesburg, is disputing control of Zain’s unit in Nigeria.
The Nigerian operations are the single-largest revenue producer for Mobile Telecommunications Co., known as Zain, and have been described by Bharti chairman Sunil Mittal as the most important piece of its planned purchase. Econet Chief Executive Officer Strive Masiyiwa said March 18 that there has been no agreement or settlement in the dispute over the Nigerian unit.
India’s largest wireless company’s plan can’t include the purchase of Zain’s Celtel Nigeria BV unit, Econet has said.
Econet
Econet is seeking to overturn a 2006 deal in which Celtel bought a 65 percent stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria. Econet, with 5 percent of Zain Nigeria, says it should have had the right of first refusal on those shares.
Econet’s Masiyiwa has said that the case is still in arbitration and that until that process has been completed the unit in Nigeria cannot be sold.
Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria.
The Nigerian unit is a key asset for Zain. In 2008 Zain generated about 21 percent of its total earnings before interest, tax, depreciation and amortization in Nigeria and about 22 percent of its total sales.
It was now up to Zain to agree to Bharti’s terms in the offer to conclude a deal, one of the people said.
Zain, Kuwait’s biggest phone company, may be asked to provide legal protection from a dispute in Nigeria, one of the people said, declining to be identified because the discussions aren’t public. The board didn’t specifically ask for this protection, and was satisfied with the proposals that Bharti management made with regards to Nigeria, the second person said.
Bharti and Zain are in exclusive talks until March 25 to complete a transaction that would give India’s largest wireless carrier 42 million new subscribers in 15 African countries. Bharti has sought overseas businesses as competition at home has reduced call rates for many of its 122 million Indian subscribers to as little as half a U.S. cent a minute. This is Bharti’s third attempt to enter Africa, after being thwarted twice in efforts to merge with South Africa’s MTN Group Ltd.
“I don’t expect Bharti to materially lose value on this deal,” G.V. Giri, an analyst at IIFL Capital Ltd. in Mumbai, said by phone. “They may have at most overpaid by $1 billion to $1.5 billion, but through cost cutting they should be able to recover that sort of value.” Giri maintained his “buy” rating on the stock.
“This was an offer made as per guidelines set by the board, so the approval doesn’t surprise us,” Giri said.
Nigeria Dispute
Senjam Raj Sekhar, a spokesman for New Delhi-based Bharti declined to comment.
Bharti added 3.9 percent on March 19 to close at 311.90 rupees in Mumbai trading, posting its biggest gain since Nov. 30. The stock was the best performer on the benchmark Sensitive Index, which advanced 0.3 percent.
Econet Wireless Holdings Ltd., based in a suburb of Johannesburg, is disputing control of Zain’s unit in Nigeria.
The Nigerian operations are the single-largest revenue producer for Mobile Telecommunications Co., known as Zain, and have been described by Bharti chairman Sunil Mittal as the most important piece of its planned purchase. Econet Chief Executive Officer Strive Masiyiwa said March 18 that there has been no agreement or settlement in the dispute over the Nigerian unit.
India’s largest wireless company’s plan can’t include the purchase of Zain’s Celtel Nigeria BV unit, Econet has said.
Econet
Econet is seeking to overturn a 2006 deal in which Celtel bought a 65 percent stake in Nigerian mobile operator Vmobile, since renamed Zain Nigeria. Econet, with 5 percent of Zain Nigeria, says it should have had the right of first refusal on those shares.
Econet’s Masiyiwa has said that the case is still in arbitration and that until that process has been completed the unit in Nigeria cannot be sold.
Zain bought Celtel International for $3.4 billion in 2005 to expand into 13 African countries, including Kenya and Nigeria.
The Nigerian unit is a key asset for Zain. In 2008 Zain generated about 21 percent of its total earnings before interest, tax, depreciation and amortization in Nigeria and about 22 percent of its total sales.
It was now up to Zain to agree to Bharti’s terms in the offer to conclude a deal, one of the people said.
Friday, March 19, 2010
Japan’s Bonds Complete Third Weekly Loss as Recovery Signs Grow
March 20 (Bloomberg) -- Japan’s bonds fell for a third week as signs the world’s second-largest economy is recovering damped demand for the safety of government debt.
Benchmarkyields climbed to the highest level since the start of February before a government report next week that economists said will show exports surged more than 40 percent last month from a year earlier. Bonds also dropped this week as sentiment among Japanese manufacturers climbed and demand for services increased, signs the rebound is gathering momentum.
“Economic prospects are turning out be much brighter than expected,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., part of Japan’s third-largest banking group. “Upward pressure on bond yields will increase.”
The yield on the 10-year bond rose two basis points this week to 1.36 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.4 percent security due March 2020 fell 0.177 yen to 100.351 yen. The yield climbed as high as 1.37 percent yesterday, matching the most since Feb. 5.
Ten-year bond futures for June delivery slid 0.22 this week to 138.63 on the Tokyo Stock Exchange.
Japan’s exports jumped 45.7 percent in February, after rising 40.8 percent the previous month, according to a Bloomberg News survey before the March 24 report. Sentiment among large manufacturers was positive for a third quarter, a government survey showed March 18. Demand for services rose 2.9 percent in January, the Trade Ministry said March 17.
The Nikkei 225 Stock Average advanced 0.8 percent yesterday to 10,824.72, completing a sixth week of gains.
‘Encourage Investors’
“A recovery in risk appetite will encourage investors to buy more higher-yielding assets such as commodity currencies and stocks,” said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., which advises on foreign currency, overseas investments and hedge funds.
Ten-year yields may advance to 1.75 percent and the Nikkei 225 may rise above 12,000, said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group.
“A robust recovery in overseas demand will shore up corporate profits and help improve corporate confidence notably at the Bank of Japan’s next Tankan survey,” Shikano said. “As the continued economic recovery forms the basis for sustained rise in stocks.”
The Tankan index of sentiment among large manufacturers, due to be released April 1, climbed to minus 10 in the first quarter, from minus 24 in December, Shikano predicted.
Yields Attract
This week’s drop in bonds was tempered on speculation yields at a six-week high will lure institutional investors amid signs some parts of the economy are still struggling to recover.
“Ten-year yields above 1.40 percent look attractive given stubborn deflationary pressure,” said Shinji Hiramatsu, who helps oversee the equivalent of $15.7 billion in assets at Sompo Japan Asset Management Ltd. in Tokyo.
Japanese commercial land prices fell to the lowest in at least 36 years, the Ministry of Land, Infrastructure, Transport and Tourism said on March 18. Prices declined 6.1 percent in 2009, more than the 4.7 percent drop a year earlier.
Japanese bonds handed investors a loss of 0.1 percent so far this month in local-currency terms, according to indexes from Bank of America Corp.’s Merrill Lynch unit.
Benchmarkyields climbed to the highest level since the start of February before a government report next week that economists said will show exports surged more than 40 percent last month from a year earlier. Bonds also dropped this week as sentiment among Japanese manufacturers climbed and demand for services increased, signs the rebound is gathering momentum.
“Economic prospects are turning out be much brighter than expected,” said Shinji Nomura, chief debt strategist in Tokyo at Nikko Cordial Securities Inc., part of Japan’s third-largest banking group. “Upward pressure on bond yields will increase.”
The yield on the 10-year bond rose two basis points this week to 1.36 percent at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1.4 percent security due March 2020 fell 0.177 yen to 100.351 yen. The yield climbed as high as 1.37 percent yesterday, matching the most since Feb. 5.
Ten-year bond futures for June delivery slid 0.22 this week to 138.63 on the Tokyo Stock Exchange.
Japan’s exports jumped 45.7 percent in February, after rising 40.8 percent the previous month, according to a Bloomberg News survey before the March 24 report. Sentiment among large manufacturers was positive for a third quarter, a government survey showed March 18. Demand for services rose 2.9 percent in January, the Trade Ministry said March 17.
The Nikkei 225 Stock Average advanced 0.8 percent yesterday to 10,824.72, completing a sixth week of gains.
‘Encourage Investors’
“A recovery in risk appetite will encourage investors to buy more higher-yielding assets such as commodity currencies and stocks,” said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., which advises on foreign currency, overseas investments and hedge funds.
Ten-year yields may advance to 1.75 percent and the Nikkei 225 may rise above 12,000, said Tatsushi Shikano, senior economist in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan’s largest banking group.
“A robust recovery in overseas demand will shore up corporate profits and help improve corporate confidence notably at the Bank of Japan’s next Tankan survey,” Shikano said. “As the continued economic recovery forms the basis for sustained rise in stocks.”
The Tankan index of sentiment among large manufacturers, due to be released April 1, climbed to minus 10 in the first quarter, from minus 24 in December, Shikano predicted.
Yields Attract
This week’s drop in bonds was tempered on speculation yields at a six-week high will lure institutional investors amid signs some parts of the economy are still struggling to recover.
“Ten-year yields above 1.40 percent look attractive given stubborn deflationary pressure,” said Shinji Hiramatsu, who helps oversee the equivalent of $15.7 billion in assets at Sompo Japan Asset Management Ltd. in Tokyo.
Japanese commercial land prices fell to the lowest in at least 36 years, the Ministry of Land, Infrastructure, Transport and Tourism said on March 18. Prices declined 6.1 percent in 2009, more than the 4.7 percent drop a year earlier.
Japanese bonds handed investors a loss of 0.1 percent so far this month in local-currency terms, according to indexes from Bank of America Corp.’s Merrill Lynch unit.
India’s Unexpected Interest Rate Rise ‘Sign of Things to Come’
March 20 (Bloomberg) -- India’s central bank will probably raise interest rates again next month as the first increase in two years is only the initial step in the battle against inflation, BNP Paribas SA and Standard Chartered Plc said.
The Reserve Bank of India yesterday increased the benchmark reverse repurchase rate to 3.5 percent from a record-low 3.25 percent and the repurchase rate to 5 percent from 4.75 percent, saying containing inflation has become “imperative.”
Governor Duvvuri Subbarao’s move comes after Australia and Malaysia increased rates this month, while Norway and Israel did so at the end of last year as the global economy’s recovery from the worst recession since World War II gathers pace. The World Bank indicated this week that China should also act to help contain the risk of a property bubble.
“This is just a sign of things to come,” said Manoj Rane, treasurer at BNP Paribas in Mumbai. “A 25 basis-point increase doesn’t get you there but it sets the course” to contain inflation.
Lagging behind India are central banks in the Group of Seven economies with the Federal Reserve and European Central Bank among those waiting for evidence of a more concrete recovery before they unwind record low borrowing costs. Canada may be the first G-7 central bank to shift after data showed its core inflation rate unexpectedly accelerated last month.
Stocks Declined
Stocks in the U.S. declined after the decision, a month before the bank’s scheduled monetary policy meeting. Subbarao moved after India’s industrial production gained 16.7 percent in January following a 17.6 percent increase in December from a year earlier, the fastest pace since at least 1994, according to Bloomberg data. The wholesale-price inflation rate touched 9.89 percent in February, according to the commerce ministry.
“We see this as the first of several policy rate increases as the Reserve Bank of India realigns policy rates to high inflation,” said Sanjeev Prasad, executive director at Kotak Securities Ltd. Prasad, India’s top-ranked analyst in the past four years according to Asia Money polls, expects the central bank to raise interest rates by 2 percentage points in the fiscal year starting April 1.
As inflation accelerated, the difference between the overnight money-market rate and the one-year swap rate, a measure of expectations for changes in borrowing costs, surged almost six-fold this fiscal year. The spread averaged 1.59 percentage points this month, compared with 27 basis points in April 2009, when the fiscal year began. A basis point is 0.01 of a percentage point.
Doubled Holdings
Foreigners more than doubled holdings of Indian debt this fiscal year, raising total ownership to an all-time high $11.2 billion on March 18, to benefit from the rising yields on the nation’s assets. Outstanding overseas investment in stocks also climbed to a record $76 billion on the same day.
“It’s a positive step for all financial markets because it shows policy makers’ resolve to tackle the inflation problem in a timely manner,” said Arvind Sampath, the Mumbai-based head of interest-rate trading at Standard Chartered. “The measures will help subdue inflationary expectations, which is good for the economy as a whole.”
Benchmark 10-year bond yields have added 24 basis points this year, after rising by a record 2.3 percentage points in 2009 as investors braced for faster inflation and higher policy rates. India’s benchmark share index has rallied 95 percent and the rupee has gained 10 percent in the past year.
Currency option prices signal investors are the most optimistic in 21 months that rising asset yields and quickening economic growth will bolster the rupee. One-month implied volatility, a measure of expectations for rupee price movements, touched 7.4 percent, the lowest level since June 2008, on March 18, data compiled by Bloomberg show. The gauge of expected currency swings is quoted by traders as part of options prices.
Inflationary Pressures
The central bank yesterday said inflationary pressures have “accentuated” and have been “spilling over to the wider inflationary process” and pointed to the latest industrial production data to show “revival of private demand.”
India’s passenger car sales gained in February to a record amid rising incomes in the world’s second-most populous nation. The demand is encouraging Ford Motor Co. and Volkswagen AG to build plants and unveil new models in the South Asian nation.
India’s $1.2 trillion economy, Asia’s biggest after Japan and China, may expand 8.2 percent in the next fiscal year, compared with 7.2 percent in the year to March 31, the Finance Ministry said in February.
Inflation has returned to Asia as growth accelerates amid the global economic recovery. Consumer prices in China rose to a 16-month high of 2.7 percent in February from a year earlier as industrial production grew 20.7 percent in the first two months of 2010, the most in more than five years. Factory output in Malaysia rose 12.7 percent in January.
Inflation is politically sensitive in a country such as India, where the World Bank estimates three-quarters of the nation’s 1.2 billion people live on less than $2 a day. Opposition parties led by the Bharatiya Janata Party repeatedly stalled proceedings in parliament this month, accusing Prime Minister Manmohan Singh’s government of being anti-poor and failing to curb prices.
The Reserve Bank of India yesterday increased the benchmark reverse repurchase rate to 3.5 percent from a record-low 3.25 percent and the repurchase rate to 5 percent from 4.75 percent, saying containing inflation has become “imperative.”
Governor Duvvuri Subbarao’s move comes after Australia and Malaysia increased rates this month, while Norway and Israel did so at the end of last year as the global economy’s recovery from the worst recession since World War II gathers pace. The World Bank indicated this week that China should also act to help contain the risk of a property bubble.
“This is just a sign of things to come,” said Manoj Rane, treasurer at BNP Paribas in Mumbai. “A 25 basis-point increase doesn’t get you there but it sets the course” to contain inflation.
Lagging behind India are central banks in the Group of Seven economies with the Federal Reserve and European Central Bank among those waiting for evidence of a more concrete recovery before they unwind record low borrowing costs. Canada may be the first G-7 central bank to shift after data showed its core inflation rate unexpectedly accelerated last month.
Stocks Declined
Stocks in the U.S. declined after the decision, a month before the bank’s scheduled monetary policy meeting. Subbarao moved after India’s industrial production gained 16.7 percent in January following a 17.6 percent increase in December from a year earlier, the fastest pace since at least 1994, according to Bloomberg data. The wholesale-price inflation rate touched 9.89 percent in February, according to the commerce ministry.
“We see this as the first of several policy rate increases as the Reserve Bank of India realigns policy rates to high inflation,” said Sanjeev Prasad, executive director at Kotak Securities Ltd. Prasad, India’s top-ranked analyst in the past four years according to Asia Money polls, expects the central bank to raise interest rates by 2 percentage points in the fiscal year starting April 1.
As inflation accelerated, the difference between the overnight money-market rate and the one-year swap rate, a measure of expectations for changes in borrowing costs, surged almost six-fold this fiscal year. The spread averaged 1.59 percentage points this month, compared with 27 basis points in April 2009, when the fiscal year began. A basis point is 0.01 of a percentage point.
Doubled Holdings
Foreigners more than doubled holdings of Indian debt this fiscal year, raising total ownership to an all-time high $11.2 billion on March 18, to benefit from the rising yields on the nation’s assets. Outstanding overseas investment in stocks also climbed to a record $76 billion on the same day.
“It’s a positive step for all financial markets because it shows policy makers’ resolve to tackle the inflation problem in a timely manner,” said Arvind Sampath, the Mumbai-based head of interest-rate trading at Standard Chartered. “The measures will help subdue inflationary expectations, which is good for the economy as a whole.”
Benchmark 10-year bond yields have added 24 basis points this year, after rising by a record 2.3 percentage points in 2009 as investors braced for faster inflation and higher policy rates. India’s benchmark share index has rallied 95 percent and the rupee has gained 10 percent in the past year.
Currency option prices signal investors are the most optimistic in 21 months that rising asset yields and quickening economic growth will bolster the rupee. One-month implied volatility, a measure of expectations for rupee price movements, touched 7.4 percent, the lowest level since June 2008, on March 18, data compiled by Bloomberg show. The gauge of expected currency swings is quoted by traders as part of options prices.
Inflationary Pressures
The central bank yesterday said inflationary pressures have “accentuated” and have been “spilling over to the wider inflationary process” and pointed to the latest industrial production data to show “revival of private demand.”
India’s passenger car sales gained in February to a record amid rising incomes in the world’s second-most populous nation. The demand is encouraging Ford Motor Co. and Volkswagen AG to build plants and unveil new models in the South Asian nation.
India’s $1.2 trillion economy, Asia’s biggest after Japan and China, may expand 8.2 percent in the next fiscal year, compared with 7.2 percent in the year to March 31, the Finance Ministry said in February.
Inflation has returned to Asia as growth accelerates amid the global economic recovery. Consumer prices in China rose to a 16-month high of 2.7 percent in February from a year earlier as industrial production grew 20.7 percent in the first two months of 2010, the most in more than five years. Factory output in Malaysia rose 12.7 percent in January.
Inflation is politically sensitive in a country such as India, where the World Bank estimates three-quarters of the nation’s 1.2 billion people live on less than $2 a day. Opposition parties led by the Bharatiya Janata Party repeatedly stalled proceedings in parliament this month, accusing Prime Minister Manmohan Singh’s government of being anti-poor and failing to curb prices.
Thursday, March 18, 2010
Google May Shut Down China Unit in April, CBN Says
March 19 (Bloomberg) -- Google Inc. may pull out of China on April 10, China Business News reported today, citing an unidentified Chinese sales agent for the company.
The search engine may announce its exit on March 22, the Shanghai-based newspaper reported, citing an unidentified Google China employee. It may also reveal plans for its China staff on the same day, according to the report.
Google hasn’t confirmed the April 10 date for its pullout, the newspaper cited the sales agent as saying. Tokyo-based spokeswoman for the company, Jessica Powell, declined to comment on the report.
Google challenged the government of the world’s most- populous country in January by threatening to allow all search results to be shown on its Chinese-language Web, including references to Tibet and the 1989 Tiananmen Square crackdown. The two sides have since been in talks to resolve the issue.
The Mountain View, California-based company said it decided to stop censoring content after discovering its computers had been hacked from within China. Google said its systems had been targeted by highly sophisticated attacks aimed at obtaining proprietary information, as well as personal data belonging to Chinese human rights activists who use the company’s Gmail e- mail service.
The attacks Google reported employed skills that were “much greater than most enterprises are equipped to deal with,” according to security research firm ISEC Partners Inc. At least 20 other international companies in technology, finance and chemicals were similarly targeted, Google said at the time.
Speculation
Speculation that negotiations had faltered intensified after the government said last week the plan to stop filtering at its Google.cn site was irresponsible. Some of Google’s advertisers in China have been advised to switch to rivals including Baidu Inc.
China censors online content it deems critical of the government by shutting down Web sites based in the nation and blocking access to overseas sites including those of Facebook Inc., Twitter Inc. and Google’s YouTube. Authorities also censor media through state ownership of all newspapers, television and radio stations.
The Chinese service started by Google in 2006 limits search results to comply with government restrictions, such as blocking access to sites that discuss Taiwan or Tibetan independence, the outlawed Falun Gong and the Tiananmen Square military crackdown on pro-democracy protesters.
The prospect of a Google pullout sent ripples through the market, with Baidu’s shares climbing 46 percent since the Jan. 12 announcement. Google has lost 4.1 percent in the same period.
China Sales
Google earned sales of 2.27 billion yuan ($333 million), from China in 2009, according to Analysys International
China has 384 million Internet users, according to government data. That’s more than the total U.S. population, and EMarketer Inc. in New York said the number may grow to 840 million, or 61 percent of the population, by 2013.
Baidu, China’s biggest Internet search engine, will pick up “the lion’s share” of Google’s search business should the U.S. company leave, Nomura Holdings Inc. analyst Jin Yoon wrote in a Jan. 13 report. Tencent Holdings Ltd., operator of China’s biggest online chat service, and Sohu.com Inc. also will gain, Yoon said.
U.S. Secretary of State Hillary Clinton said Jan. 21 that U.S. technology companies should resist censorship of the Internet, and the perpetrators of cyber attacks such as those against Google must face the consequences.
China said it opposed Clinton’s comments, which caused damage to Sino-U.S. relations, Foreign Ministry Spokesman Ma Zhaoxu said on Jan. 22. The Chinese government has said it doesn’t engage in cyber attacks and is itself a victim of breaches of Internet security.
The search engine may announce its exit on March 22, the Shanghai-based newspaper reported, citing an unidentified Google China employee. It may also reveal plans for its China staff on the same day, according to the report.
Google hasn’t confirmed the April 10 date for its pullout, the newspaper cited the sales agent as saying. Tokyo-based spokeswoman for the company, Jessica Powell, declined to comment on the report.
Google challenged the government of the world’s most- populous country in January by threatening to allow all search results to be shown on its Chinese-language Web, including references to Tibet and the 1989 Tiananmen Square crackdown. The two sides have since been in talks to resolve the issue.
The Mountain View, California-based company said it decided to stop censoring content after discovering its computers had been hacked from within China. Google said its systems had been targeted by highly sophisticated attacks aimed at obtaining proprietary information, as well as personal data belonging to Chinese human rights activists who use the company’s Gmail e- mail service.
The attacks Google reported employed skills that were “much greater than most enterprises are equipped to deal with,” according to security research firm ISEC Partners Inc. At least 20 other international companies in technology, finance and chemicals were similarly targeted, Google said at the time.
Speculation
Speculation that negotiations had faltered intensified after the government said last week the plan to stop filtering at its Google.cn site was irresponsible. Some of Google’s advertisers in China have been advised to switch to rivals including Baidu Inc.
China censors online content it deems critical of the government by shutting down Web sites based in the nation and blocking access to overseas sites including those of Facebook Inc., Twitter Inc. and Google’s YouTube. Authorities also censor media through state ownership of all newspapers, television and radio stations.
The Chinese service started by Google in 2006 limits search results to comply with government restrictions, such as blocking access to sites that discuss Taiwan or Tibetan independence, the outlawed Falun Gong and the Tiananmen Square military crackdown on pro-democracy protesters.
The prospect of a Google pullout sent ripples through the market, with Baidu’s shares climbing 46 percent since the Jan. 12 announcement. Google has lost 4.1 percent in the same period.
China Sales
Google earned sales of 2.27 billion yuan ($333 million), from China in 2009, according to Analysys International
China has 384 million Internet users, according to government data. That’s more than the total U.S. population, and EMarketer Inc. in New York said the number may grow to 840 million, or 61 percent of the population, by 2013.
Baidu, China’s biggest Internet search engine, will pick up “the lion’s share” of Google’s search business should the U.S. company leave, Nomura Holdings Inc. analyst Jin Yoon wrote in a Jan. 13 report. Tencent Holdings Ltd., operator of China’s biggest online chat service, and Sohu.com Inc. also will gain, Yoon said.
U.S. Secretary of State Hillary Clinton said Jan. 21 that U.S. technology companies should resist censorship of the Internet, and the perpetrators of cyber attacks such as those against Google must face the consequences.
China said it opposed Clinton’s comments, which caused damage to Sino-U.S. relations, Foreign Ministry Spokesman Ma Zhaoxu said on Jan. 22. The Chinese government has said it doesn’t engage in cyber attacks and is itself a victim of breaches of Internet security.
Asian Stocks Rise After U.S. Jobless Report Bolsters Confidence
March 19 (Bloomberg) -- Asian stocks rose, driving the MSCI Asia Pacific Index toward a fourth weekly advance, after U.S. jobs and manufacturing reports boosted confidence in a global economic recovery.
Sony Corp., which makes Bravia televisions and the PlayStation 3 video-game system, climbed 2.2 percent in Tokyo. Honda Motor Co., a Japanese carmaker that gets 44 percent of its sales in North America, rose 1.4 percent. Advantech Co., an industrial-computer maker that gets a third of its sales in North America, jumped 7 percent in Taipei. Kia Motors Corp., South Korea’s second-largest automaker, gained 3.7 percent in Seoul after saying it will boost production capacity in Europe.
The MSCI Asia Pacific Index gained 0.2 percent to 124.58 as of 10:21 a.m. in Tokyo, with about twice as many stocks advancing as declining. Equities have rallied in the past six weeks as concerns over monetary tightening and Greece’s debt receded, and as companies from Woolworths Ltd. to Nissan Motor Co. reported better-than-expected earnings.
“The U.S. economy is improving day by day, and so is the global economy,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo. “People are beginning to expect better corporate earnings.”
Japan’s Nikkei 225 Stock Average rose 0.4 percent, the biggest increase among Asia-Pacific equity benchmarks. Australia’s S&P/ASX 200 Index gained 0.1 percent. South Korea’s Kospi index was little changed.
U.S. Reports
Futures on the Standard & Poor’s 500 Index slipped 0.1 percent after the gauge closed little changed yesterday. A Labor Department report showed first-time jobless applications dropped in the week ended March 13, while the Federal Reserve Bank of Philadelphia’s general economic index rose in March to the highest level this year.
Sony, which gets about a quarter of its revenue from the U.S., climbed 2.2 percent to 3,505 yen. Honda, Japan’s second- largest carmaker, rose 1.4 percent to 3,245 yen. Advantech surged 7 percent to NT$70.5 in Taipei.
Kia Motors gained 3.7 percent to 23,650 won in Seoul. The company will add a 100 million-euro ($137 million) engine unit to its factory in Slovakia to boost production capacity in Europe, Kia’s Slovak affiliate said yesterday.
The MSCI Asia Pacific Index has gained 9.1 percent from its lowest level in more than two months on Feb. 8, as better-than- estimated U.S. employment data and a pledge of support from French President Nicolas Sarkozy for debt-stricken Greece bolstered confidence in the global recovery.
The average price of stocks in the index has risen to 18.9 times estimated earnings on average from 18 at February’s low.
Sony Corp., which makes Bravia televisions and the PlayStation 3 video-game system, climbed 2.2 percent in Tokyo. Honda Motor Co., a Japanese carmaker that gets 44 percent of its sales in North America, rose 1.4 percent. Advantech Co., an industrial-computer maker that gets a third of its sales in North America, jumped 7 percent in Taipei. Kia Motors Corp., South Korea’s second-largest automaker, gained 3.7 percent in Seoul after saying it will boost production capacity in Europe.
The MSCI Asia Pacific Index gained 0.2 percent to 124.58 as of 10:21 a.m. in Tokyo, with about twice as many stocks advancing as declining. Equities have rallied in the past six weeks as concerns over monetary tightening and Greece’s debt receded, and as companies from Woolworths Ltd. to Nissan Motor Co. reported better-than-expected earnings.
“The U.S. economy is improving day by day, and so is the global economy,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo. “People are beginning to expect better corporate earnings.”
Japan’s Nikkei 225 Stock Average rose 0.4 percent, the biggest increase among Asia-Pacific equity benchmarks. Australia’s S&P/ASX 200 Index gained 0.1 percent. South Korea’s Kospi index was little changed.
U.S. Reports
Futures on the Standard & Poor’s 500 Index slipped 0.1 percent after the gauge closed little changed yesterday. A Labor Department report showed first-time jobless applications dropped in the week ended March 13, while the Federal Reserve Bank of Philadelphia’s general economic index rose in March to the highest level this year.
Sony, which gets about a quarter of its revenue from the U.S., climbed 2.2 percent to 3,505 yen. Honda, Japan’s second- largest carmaker, rose 1.4 percent to 3,245 yen. Advantech surged 7 percent to NT$70.5 in Taipei.
Kia Motors gained 3.7 percent to 23,650 won in Seoul. The company will add a 100 million-euro ($137 million) engine unit to its factory in Slovakia to boost production capacity in Europe, Kia’s Slovak affiliate said yesterday.
The MSCI Asia Pacific Index has gained 9.1 percent from its lowest level in more than two months on Feb. 8, as better-than- estimated U.S. employment data and a pledge of support from French President Nicolas Sarkozy for debt-stricken Greece bolstered confidence in the global recovery.
The average price of stocks in the index has risen to 18.9 times estimated earnings on average from 18 at February’s low.
Wednesday, March 17, 2010
BOJ’s Loan Program Stymied as Credit Demand Wanes
March 18 (Bloomberg) -- The Bank of Japan’s decision to double the size of a liquidity program for banks may prove more effective in placating the government than stemming deflation.
The bank yesterday increased its three-month lending facility for banks to 20 trillion yen ($221 billion), a “monetary easing” that may help reduce borrowing costs and bolster corporate sentiment, Governor Masaaki Shirakawa said at a Tokyo press briefing.
There’s little sign that the initial effort helped the economy: bank lending has fallen for three straight months, prices tumbled by a record and wages dropped. Where the initiative did win plaudits is among politicians -- Prime Minister Yukio Hatoyama, facing a July parliamentary upper house election as his poll numbers subside, welcomed the move.
“You can provide liquidity to banks but they don’t have to lend,” Joseph Stiglitz, the Columbia University economist and Nobel laureate, said in an interview when asked whether the BOJ is doing enough to defeat deflation. Central banks in Japan and the U.S. “have to rethink the fundamentals” and work with governments to force banks to extend more credit, he said.
Japan is in a type of “liquidity trap” where extra cash injections may not have much impact, according to Stiglitz, 67, a former White House Council of Economic Advisers chairman.
Companies from Toshiba Corp. to Sony Corp. are refraining from boosting their capital spending even after Japan’s economy pulled out of its worst recession in the postwar era.
Avoided ‘War’
The BOJ’s move is “a signal of cooperation, but it’s not effective expansionary monetary policy” because demand remains too low for companies to increase investment, said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. Hatoyama “is under extreme pressure going into the election, and it would be a declaration of war toward the government” had the central bank done nothing, he said.
Japan’s benchmark overnight lending rate was kept at 0.1 percent by the board yesterday.
Stocks climbed and the yen weakened after the decision. Japan’s currency traded at 90.60 late yesterday in Tokyo from 90.37 before the announcement. It was at 90.39 as of 9:05 a.m. in Tokyo today. The Nikkei 225 Stock Average rose 1.2 percent, before retreating 0.2 percent in early trading today.
More to Come
The government may keep pressing the BOJ to do more, and next month offers a fresh opportunity to take additional steps. The bank will have updated economic projections and quarterly surveys of business and household confidence. Yesterday’s decision left monthly government bond purchases at 1.8 trillion yen, and the term of the loan program for banks at three months.
Hatoyama told reporters yesterday that he hopes the central bank will take action to defeat deflation, and that the BOJ’s step was in line with what the Cabinet anticipated. Finance Minister Naoto Kan said the decision shows the bank is “stepping up efforts to fight deflation.”
Kan has been leading calls for monetary action as his ability to inject fiscal stimulus is constrained by record public debt. Shirakawa, for his part, said yesterday that “monetary policy alone can’t beat deflation.”
“I wish there was a miracle, but all we can do is persist with our efforts” to reverse the drop in prices, which will “take time,” the governor said.
Next Move
Shirakawa’s next move may be to extend the period of the loans to six months or a year, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.
Other options include increasing the sovereign bond purchases, specifying conditions needed for ending the current monetary policy, and adopting an inflation target, a measure that Kan has been pushing for.
A price target would “put out a trigger point for inflation, and until we get there” the central bank should keep adding cash to the banking system, said Robert Feldman, head of economic research at Morgan Stanley in Tokyo.
Board members Miyako Suda and Tadao Noda opposed yesterday’s credit expansion. Both said in the past month that they expect the economy to keep improving, and Noda said further monetary easing would have limited impact because short-term interest rates are already very low.
Yields on three-month discount bills issued by the government were unchanged at 0.12 percent yesterday, according to Bloomberg data.
Manufacturers’ Confidence
Deflation persists even as the export-led recovery gains momentum. A Finance Ministry and Cabinet Office survey today showed that large firms were optimistic about the outlook for a third straight quarter. Sentiment among manufacturers with more than 1 billion yen ($11 million) in capital was 4.3 points this quarter, compared with 13.2 points in the previous three months. A number greater than zero means optimists outnumber pessimists.
The gross domestic product deflator, a broad measure of prices, tumbled a record 2.8 percent in the fourth quarter. Consumer prices slid for 11 straight months to January, while factory output climbed in the same period -- increases that haven’t been enough to prompt companies to expand.
Toshiba plans to slash capital spending by 41 percent this fiscal year, the company said in January. Sony said last month that capital investment for this fiscal year will probably be 34 percent less than a year earlier.
Not all analysts say the bank’s action will be fruitless.
“The headlines about further monetary easing might help to keep inflation expectations positive,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. The move “should also maintain the weaker bias in the yen, especially when other major central banks are perceived to be heading for the exit.”
The bank yesterday increased its three-month lending facility for banks to 20 trillion yen ($221 billion), a “monetary easing” that may help reduce borrowing costs and bolster corporate sentiment, Governor Masaaki Shirakawa said at a Tokyo press briefing.
There’s little sign that the initial effort helped the economy: bank lending has fallen for three straight months, prices tumbled by a record and wages dropped. Where the initiative did win plaudits is among politicians -- Prime Minister Yukio Hatoyama, facing a July parliamentary upper house election as his poll numbers subside, welcomed the move.
“You can provide liquidity to banks but they don’t have to lend,” Joseph Stiglitz, the Columbia University economist and Nobel laureate, said in an interview when asked whether the BOJ is doing enough to defeat deflation. Central banks in Japan and the U.S. “have to rethink the fundamentals” and work with governments to force banks to extend more credit, he said.
Japan is in a type of “liquidity trap” where extra cash injections may not have much impact, according to Stiglitz, 67, a former White House Council of Economic Advisers chairman.
Companies from Toshiba Corp. to Sony Corp. are refraining from boosting their capital spending even after Japan’s economy pulled out of its worst recession in the postwar era.
Avoided ‘War’
The BOJ’s move is “a signal of cooperation, but it’s not effective expansionary monetary policy” because demand remains too low for companies to increase investment, said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. Hatoyama “is under extreme pressure going into the election, and it would be a declaration of war toward the government” had the central bank done nothing, he said.
Japan’s benchmark overnight lending rate was kept at 0.1 percent by the board yesterday.
Stocks climbed and the yen weakened after the decision. Japan’s currency traded at 90.60 late yesterday in Tokyo from 90.37 before the announcement. It was at 90.39 as of 9:05 a.m. in Tokyo today. The Nikkei 225 Stock Average rose 1.2 percent, before retreating 0.2 percent in early trading today.
More to Come
The government may keep pressing the BOJ to do more, and next month offers a fresh opportunity to take additional steps. The bank will have updated economic projections and quarterly surveys of business and household confidence. Yesterday’s decision left monthly government bond purchases at 1.8 trillion yen, and the term of the loan program for banks at three months.
Hatoyama told reporters yesterday that he hopes the central bank will take action to defeat deflation, and that the BOJ’s step was in line with what the Cabinet anticipated. Finance Minister Naoto Kan said the decision shows the bank is “stepping up efforts to fight deflation.”
Kan has been leading calls for monetary action as his ability to inject fiscal stimulus is constrained by record public debt. Shirakawa, for his part, said yesterday that “monetary policy alone can’t beat deflation.”
“I wish there was a miracle, but all we can do is persist with our efforts” to reverse the drop in prices, which will “take time,” the governor said.
Next Move
Shirakawa’s next move may be to extend the period of the loans to six months or a year, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.
Other options include increasing the sovereign bond purchases, specifying conditions needed for ending the current monetary policy, and adopting an inflation target, a measure that Kan has been pushing for.
A price target would “put out a trigger point for inflation, and until we get there” the central bank should keep adding cash to the banking system, said Robert Feldman, head of economic research at Morgan Stanley in Tokyo.
Board members Miyako Suda and Tadao Noda opposed yesterday’s credit expansion. Both said in the past month that they expect the economy to keep improving, and Noda said further monetary easing would have limited impact because short-term interest rates are already very low.
Yields on three-month discount bills issued by the government were unchanged at 0.12 percent yesterday, according to Bloomberg data.
Manufacturers’ Confidence
Deflation persists even as the export-led recovery gains momentum. A Finance Ministry and Cabinet Office survey today showed that large firms were optimistic about the outlook for a third straight quarter. Sentiment among manufacturers with more than 1 billion yen ($11 million) in capital was 4.3 points this quarter, compared with 13.2 points in the previous three months. A number greater than zero means optimists outnumber pessimists.
The gross domestic product deflator, a broad measure of prices, tumbled a record 2.8 percent in the fourth quarter. Consumer prices slid for 11 straight months to January, while factory output climbed in the same period -- increases that haven’t been enough to prompt companies to expand.
Toshiba plans to slash capital spending by 41 percent this fiscal year, the company said in January. Sony said last month that capital investment for this fiscal year will probably be 34 percent less than a year earlier.
Not all analysts say the bank’s action will be fruitless.
“The headlines about further monetary easing might help to keep inflation expectations positive,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. The move “should also maintain the weaker bias in the yen, especially when other major central banks are perceived to be heading for the exit.”
U.K. Government Reorganizations Cost $1.2 Billion, Auditor Says
March 18 (Bloomberg) -- Prime Minister Gordon Brown’s government spent more than 780 million pounds ($1.2 billion) on reorganizing its departments with no way of tracking any tangible benefits of the changes, the U.K.’s auditor said.
In a report published today, the National Audit Office said it was impossible to show that the changes made since the 2005 general election offered value for money. It said there was a risk that public bodies were carrying out reorganizations “unnecessarily.”
“With 90 reorganizations in four years, U.K central government machinery is in a constant state of change,” the head of the NAO, Amyas Morse, said in an e-mailed statement. “At approximately 200 million pounds per annum, the costs are far from negligible and the reorganizations inevitably involve disruption and loss of service.”
Since 1980, 25 new central-government departments have been created, including 13 that no longer exist. By comparison, only two new departments have been created in the U.S. over the same period, the auditor said. Morse called for a “more deliberate and carefully planned process” in the U.K. and a “slowdown in the rate of change.”
“Gordon Brown has had a reckless attitude to spending to our money,” the opposition Conservatives’ Cabinet Office spokesman, Francis Maude, said in an e-mail. “This Labour government’s obsession with pointless reorganizations and branding projects has come at the expense of actually dealing with the pressing social and economic problems blighting the country.”
In a report published today, the National Audit Office said it was impossible to show that the changes made since the 2005 general election offered value for money. It said there was a risk that public bodies were carrying out reorganizations “unnecessarily.”
“With 90 reorganizations in four years, U.K central government machinery is in a constant state of change,” the head of the NAO, Amyas Morse, said in an e-mailed statement. “At approximately 200 million pounds per annum, the costs are far from negligible and the reorganizations inevitably involve disruption and loss of service.”
Since 1980, 25 new central-government departments have been created, including 13 that no longer exist. By comparison, only two new departments have been created in the U.S. over the same period, the auditor said. Morse called for a “more deliberate and carefully planned process” in the U.K. and a “slowdown in the rate of change.”
“Gordon Brown has had a reckless attitude to spending to our money,” the opposition Conservatives’ Cabinet Office spokesman, Francis Maude, said in an e-mail. “This Labour government’s obsession with pointless reorganizations and branding projects has come at the expense of actually dealing with the pressing social and economic problems blighting the country.”
Tuesday, March 16, 2010
India Said to Propose Sovereign Fund to Acquire Energy Assets
March 17 (Bloomberg) -- India may create a sovereign fund to help state companies compete for overseas energy assets with rivals from China, a government official said.
The oil ministry has formally asked the finance ministry to use a part of the nation’s $254 billion foreign-exchange reserves for the proposed fund, the official said, declining to be identified because a decision hasn’t been reached.
“Such a fund would be very, very welcome if we are to compete with the Chinese,” R.S. Sharma, chairman and managing director of state-run Oil & Natural Gas Corp., India’s biggest energy explorer, said by telephone from New Delhi.
India has trailed China in the quest for oil as ONGC and rivals PetroChina Co. and Cnooc Ltd. scour the globe for resources to meet demand in the most populous and fastest- growing major economies. Chinese companies spent a record $32 billion last year to buy oil, coal and metal assets in Africa, Asia and Australia compared with $2.1 billion invested by ONGC in the only Indian energy acquisition.
“India needs to speed up overseas acquisitions to cater to economic growth,” Dharmakirti Joshi, principal economist at Crisil Ltd., the Indian unit of Standard & Poor’s, said from Mumbai. “India’s forex reserves have been strong enough of late and companies here need a boost.”
The South Asian nation had foreign reserves of $254 billion on March 5 compared with China’s $2.4 trillion in December 2009.
Oil Minister Murli Deora declined to comment. B.S. Chauhan, finance ministry spokesman, said he can’t comment on discussions between ministries.
Plans Blocked
Cnooc, China’s biggest offshore oil explorer, this week agreed to buy half of Argentina’s Bridas Corp. for $3.1 billion, its biggest purchase, capping $6.6 billion of acquisitions on three continents in the past four years. Cnooc bought a stake in a Nigerian oil field in 2006 after India’s government blocked ONGC’s plan to buy the share.
China Investment Corp., the country’s $300 billion sovereign wealth fund, last year invested in energy and mineral producers in nations including Canada, Indonesia and the U.S. while China Development Bank Corp. gave China National Petroleum Corp., PetroChina’s parent, a $30 billion loan at a discounted interest rate to fund overseas expansion.
Demand for fuel in India, the world’s second-most populous nation, may rise as growth in the $1.2 trillion economy accelerates and output from aging domestic fields declines. India’s finance ministry expects gross domestic product to expand 8 percent in the year starting April 1.
India’s total energy consumption may more than double by 2030 to 833 million tons of oil equivalent, based on current trends, driven by population growth and an industrial build-up, according to the Paris-based International Energy Agency.
ONGC last year bought Imperial Energy Plc for 1.4 billion pounds ($2.1 billion) in India’s biggest energy acquisition.
India imports more than 75 percent of its crude oil needs.
The oil ministry has formally asked the finance ministry to use a part of the nation’s $254 billion foreign-exchange reserves for the proposed fund, the official said, declining to be identified because a decision hasn’t been reached.
“Such a fund would be very, very welcome if we are to compete with the Chinese,” R.S. Sharma, chairman and managing director of state-run Oil & Natural Gas Corp., India’s biggest energy explorer, said by telephone from New Delhi.
India has trailed China in the quest for oil as ONGC and rivals PetroChina Co. and Cnooc Ltd. scour the globe for resources to meet demand in the most populous and fastest- growing major economies. Chinese companies spent a record $32 billion last year to buy oil, coal and metal assets in Africa, Asia and Australia compared with $2.1 billion invested by ONGC in the only Indian energy acquisition.
“India needs to speed up overseas acquisitions to cater to economic growth,” Dharmakirti Joshi, principal economist at Crisil Ltd., the Indian unit of Standard & Poor’s, said from Mumbai. “India’s forex reserves have been strong enough of late and companies here need a boost.”
The South Asian nation had foreign reserves of $254 billion on March 5 compared with China’s $2.4 trillion in December 2009.
Oil Minister Murli Deora declined to comment. B.S. Chauhan, finance ministry spokesman, said he can’t comment on discussions between ministries.
Plans Blocked
Cnooc, China’s biggest offshore oil explorer, this week agreed to buy half of Argentina’s Bridas Corp. for $3.1 billion, its biggest purchase, capping $6.6 billion of acquisitions on three continents in the past four years. Cnooc bought a stake in a Nigerian oil field in 2006 after India’s government blocked ONGC’s plan to buy the share.
China Investment Corp., the country’s $300 billion sovereign wealth fund, last year invested in energy and mineral producers in nations including Canada, Indonesia and the U.S. while China Development Bank Corp. gave China National Petroleum Corp., PetroChina’s parent, a $30 billion loan at a discounted interest rate to fund overseas expansion.
Demand for fuel in India, the world’s second-most populous nation, may rise as growth in the $1.2 trillion economy accelerates and output from aging domestic fields declines. India’s finance ministry expects gross domestic product to expand 8 percent in the year starting April 1.
India’s total energy consumption may more than double by 2030 to 833 million tons of oil equivalent, based on current trends, driven by population growth and an industrial build-up, according to the Paris-based International Energy Agency.
ONGC last year bought Imperial Energy Plc for 1.4 billion pounds ($2.1 billion) in India’s biggest energy acquisition.
India imports more than 75 percent of its crude oil needs.
Asian Stocks Rise on Fed’s Rate Pledge, Weaker Yen; Mazda Rises
March 17 (Bloomberg) -- Asian stocks rose, driving the MSCI Asia Pacific Index to an eight-week high, as the U.S. Federal Reserve pledged to keep borrowing costs near zero for an “extended period” and the yen weakened.
James Hardie Industries SE, the biggest seller of home siding in the U.S., gained 1.1 percent in Sydney. Mazda Motor Corp., which gets 21 percent of its sales in Europe, rose 2.5 percent as the euro strengthened after Standard & Poor’s affirmed Greece’s credit ratings. Mitsui Mining & Smelting Co. surged 5.8 percent after boosting its profit forecast and after commodity prices rose.
“Expectations that interest rates will remain low in the U.S. are boosting demand for commodities,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.
The MSCI Asia Pacific Index rose 0.7 percent to 123.82 as of 10:16 a.m. in Tokyo, set to close at the highest level since Jan. 21. The Nikkei 225 Stock Average advanced 0.7 percent in Japan, where the central bank is scheduled to announce its latest policy decisions this afternoon.
South Korea’s Kospi Index jumped 0.9 percent and Taiwan’s Taiex advanced 1 percent. The S&P/ASX 200 Index rose 0.6 percent in Sydney.
Futures on the Standard & Poor’s 500 Index were little changed. The gauge rose 0.8 percent yesterday to the highest close since October 2008 after the Fed’s rate comments. The Fed has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then.
The MSCI Asia Pacific Index has gained 8.4 percent from a more than two-month low on Feb. 8 as better-than-estimated U.S. jobs data and a pledge of support from French President Nicolas Sarkozy for debt-stricken Greece boosted confidence in the global recovery.
S&P affirmed Greece’s investment-grade BBB+ rating and dropped the country from “creditwatch negative,” saying the 4.8 billion euros ($6.6 billion) of budget cuts passed this month “were appropriate to achieve” the goal of cutting the European Union’s biggest deficit.
The stock rally has lifted the average price of shares in the MSCI Asia Pacific Index to 18.7 times estimated earnings, compared with 15 times for the MSCI World Index of 23 developed nations.
James Hardie Industries SE, the biggest seller of home siding in the U.S., gained 1.1 percent in Sydney. Mazda Motor Corp., which gets 21 percent of its sales in Europe, rose 2.5 percent as the euro strengthened after Standard & Poor’s affirmed Greece’s credit ratings. Mitsui Mining & Smelting Co. surged 5.8 percent after boosting its profit forecast and after commodity prices rose.
“Expectations that interest rates will remain low in the U.S. are boosting demand for commodities,” said Hiroichi Nishi, an equities manager at Nikko Cordial Securities Inc. in Tokyo.
The MSCI Asia Pacific Index rose 0.7 percent to 123.82 as of 10:16 a.m. in Tokyo, set to close at the highest level since Jan. 21. The Nikkei 225 Stock Average advanced 0.7 percent in Japan, where the central bank is scheduled to announce its latest policy decisions this afternoon.
South Korea’s Kospi Index jumped 0.9 percent and Taiwan’s Taiex advanced 1 percent. The S&P/ASX 200 Index rose 0.6 percent in Sydney.
Futures on the Standard & Poor’s 500 Index were little changed. The gauge rose 0.8 percent yesterday to the highest close since October 2008 after the Fed’s rate comments. The Fed has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then.
The MSCI Asia Pacific Index has gained 8.4 percent from a more than two-month low on Feb. 8 as better-than-estimated U.S. jobs data and a pledge of support from French President Nicolas Sarkozy for debt-stricken Greece boosted confidence in the global recovery.
S&P affirmed Greece’s investment-grade BBB+ rating and dropped the country from “creditwatch negative,” saying the 4.8 billion euros ($6.6 billion) of budget cuts passed this month “were appropriate to achieve” the goal of cutting the European Union’s biggest deficit.
The stock rally has lifted the average price of shares in the MSCI Asia Pacific Index to 18.7 times estimated earnings, compared with 15 times for the MSCI World Index of 23 developed nations.
Sunday, March 14, 2010
China’s Wen Rebuffs U.S. Calls for Stronger Currency
March 15 (Bloomberg) -- Chinese Premier Wen Jiabao rebuffed calls for the yuan to appreciate, risking a further downturn in relations with the U.S. where lawmakers and economists say his stance is hampering a global recovery.
“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”
U.S. lawmakers, including Senator Charles Schumer, are proposing that China should be hit with stiffer tariffs to compensate for the unfair export advantage they say comes from an undervalued currency. Economist Paul Krugman says that global growth would be about 1.5 percentage points higher if China stopped restraining the value of the yuan.
“Currency is the issue in Washington that is really welling up and getting more and more pressure,” said James McGregor, a senior counselor in Beijing at APCO Worldwide, a public-affairs group advising clients including China Cosco Holdings Co., operator of the world’s largest dry-bulk fleet. President Barack Obama “has tried to be low key and work with China behind closed doors -- the problem is they have given him no face in return and he is under real pressure in Washington because he’s looking weak against China.”
Yuan Forwards Fall
Non-deliverable yuan forwards fell 0.2 percent to 6.6427 per dollar as of 9:43 a.m. in Hong Kong today, the biggest decline in more than a month. The contracts indicate that traders are betting the currency will gain about 2.8 percent in the next 12 months.
Wen also urged America to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.
The U.S. currency has climbed about 7 percent from last year’s Nov. 25 low, according to the Dollar Index, a six- currency gauge of the greenback’s value.
Treasury Department figures show China’s holdings of Treasury securities dropped for a second month in December to $894.8 billion. Only Japan holds more U.S. Treasury assets.
Wen, 67, echoed central bank Governor Zhou Xiaochuan’s comments that China needs to be cautious in ending crisis policies, which have included pegging the yuan at about 6.83 per dollar since July 2008 as the global financial crisis took hold.
One-Off Revaluation
The premier reiterated that the nation will keep the yuan “basically stable” and maintain a moderately loose monetary policy and a proactive fiscal stance. He said it’s “essential” for the timing of any policy changes to be appropriate.
“This is a sign that there will be no one-off revaluation in coming months,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “China’s top policy makers do have their own currency reform plans but coercion from other countries will do disservice to this cause.”
A bipartisan group of U.S. senators including Schumer, a New York Democrat, wrote Commerce Secretary Gary Locke last month, saying imports from China are being subsidized by that nation’s intervention in the currency market.
The Chinese premier said that pressure for currency gains can amount to trade “protectionism,” adding that “I’m a strong supporter of free trade.” Protectionism affecting China will backfire because much of the nation’s trade involves foreign-invested exporters, Wen said.
‘Depressing Effect’
The yuan rose 21 percent against the dollar between July 2005 and July 2008, before the government halted its advance to protect exporters. The dollar and the yuan have strengthened against the euro this year, pushing up the cost of Chinese exports in the European Union, the Asian nation’s biggest market.
Krugman, a Nobel Prize-winning economist, said China’s currency policy has a “depressing effect” on economic growth in the U.S., Europe and Japan. If the yuan were not undervalued, it would have a “significant” impact on the global recovery, he said in a March 12 speech in Washington.
Ballooning sovereign debt and high unemployment around the world could send the global economy into a second, or “double dip” downturn, Wen said. In China, inflation, combined with wide income gaps and official corruption, could lead to social instability “and even affect the government’s hold on power,” he said.
Unbalanced, Unsustainable
Policy makers have made managing “inflation expectations” a key task for this year. February’s gain in consumer prices was 2.7 percent, compared with Wen’s target of about 3 percent for the year. Zhou said yesterday that while the increase was a little higher than forecast, it hadn’t altered the central bank’s plans.
China’s difficult task is to grow without stoking inflation and while adjusting an economic model that has led to an “‘unbalanced, uncoordinated and unsustainable” expansion, Wen said. Officials will maintain “appropriate and sufficient” liquidity and keep interest rates at “reasonable” levels, he added.
Wen blamed strains in China’s relationship with the U.S. on Obama’s meeting with the Dalai Lama and American arms sales to Taiwan. He expressed hope for an improvement in “our most important diplomatic relationship.”
Asked about increasing dissatisfaction among foreign businesses in China over the investment climate, the premier sought to reassure international investors.
In January, Mountain View, California-based Google Inc. said it may close down its Chinese Web site because of alleged cyber attacks and China’s ongoing online censorship.
“China will unswervingly pursue the policy of opening up to the outside world,” Wen said. “Foreign businesses are welcome to come to China to set up businesses according to the law.”
--Michael Forsythe, Eugene Tang, Li Yanping, Kevin Hamlin. Editors: Paul Panckhurst, John Liu
“I don’t think the renminbi is undervalued,” Wen said yesterday at a press conference in Beijing marking the end of China’s annual parliamentary meetings, using another term for the yuan. “We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency.”
U.S. lawmakers, including Senator Charles Schumer, are proposing that China should be hit with stiffer tariffs to compensate for the unfair export advantage they say comes from an undervalued currency. Economist Paul Krugman says that global growth would be about 1.5 percentage points higher if China stopped restraining the value of the yuan.
“Currency is the issue in Washington that is really welling up and getting more and more pressure,” said James McGregor, a senior counselor in Beijing at APCO Worldwide, a public-affairs group advising clients including China Cosco Holdings Co., operator of the world’s largest dry-bulk fleet. President Barack Obama “has tried to be low key and work with China behind closed doors -- the problem is they have given him no face in return and he is under real pressure in Washington because he’s looking weak against China.”
Yuan Forwards Fall
Non-deliverable yuan forwards fell 0.2 percent to 6.6427 per dollar as of 9:43 a.m. in Hong Kong today, the biggest decline in more than a month. The contracts indicate that traders are betting the currency will gain about 2.8 percent in the next 12 months.
Wen also urged America to “take concrete steps to reassure investors” about the safety of dollar assets, repeating concerns that he expressed a year ago, sparked by a growing U.S. fiscal deficit.
The U.S. currency has climbed about 7 percent from last year’s Nov. 25 low, according to the Dollar Index, a six- currency gauge of the greenback’s value.
Treasury Department figures show China’s holdings of Treasury securities dropped for a second month in December to $894.8 billion. Only Japan holds more U.S. Treasury assets.
Wen, 67, echoed central bank Governor Zhou Xiaochuan’s comments that China needs to be cautious in ending crisis policies, which have included pegging the yuan at about 6.83 per dollar since July 2008 as the global financial crisis took hold.
One-Off Revaluation
The premier reiterated that the nation will keep the yuan “basically stable” and maintain a moderately loose monetary policy and a proactive fiscal stance. He said it’s “essential” for the timing of any policy changes to be appropriate.
“This is a sign that there will be no one-off revaluation in coming months,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. “China’s top policy makers do have their own currency reform plans but coercion from other countries will do disservice to this cause.”
A bipartisan group of U.S. senators including Schumer, a New York Democrat, wrote Commerce Secretary Gary Locke last month, saying imports from China are being subsidized by that nation’s intervention in the currency market.
The Chinese premier said that pressure for currency gains can amount to trade “protectionism,” adding that “I’m a strong supporter of free trade.” Protectionism affecting China will backfire because much of the nation’s trade involves foreign-invested exporters, Wen said.
‘Depressing Effect’
The yuan rose 21 percent against the dollar between July 2005 and July 2008, before the government halted its advance to protect exporters. The dollar and the yuan have strengthened against the euro this year, pushing up the cost of Chinese exports in the European Union, the Asian nation’s biggest market.
Krugman, a Nobel Prize-winning economist, said China’s currency policy has a “depressing effect” on economic growth in the U.S., Europe and Japan. If the yuan were not undervalued, it would have a “significant” impact on the global recovery, he said in a March 12 speech in Washington.
Ballooning sovereign debt and high unemployment around the world could send the global economy into a second, or “double dip” downturn, Wen said. In China, inflation, combined with wide income gaps and official corruption, could lead to social instability “and even affect the government’s hold on power,” he said.
Unbalanced, Unsustainable
Policy makers have made managing “inflation expectations” a key task for this year. February’s gain in consumer prices was 2.7 percent, compared with Wen’s target of about 3 percent for the year. Zhou said yesterday that while the increase was a little higher than forecast, it hadn’t altered the central bank’s plans.
China’s difficult task is to grow without stoking inflation and while adjusting an economic model that has led to an “‘unbalanced, uncoordinated and unsustainable” expansion, Wen said. Officials will maintain “appropriate and sufficient” liquidity and keep interest rates at “reasonable” levels, he added.
Wen blamed strains in China’s relationship with the U.S. on Obama’s meeting with the Dalai Lama and American arms sales to Taiwan. He expressed hope for an improvement in “our most important diplomatic relationship.”
Asked about increasing dissatisfaction among foreign businesses in China over the investment climate, the premier sought to reassure international investors.
In January, Mountain View, California-based Google Inc. said it may close down its Chinese Web site because of alleged cyber attacks and China’s ongoing online censorship.
“China will unswervingly pursue the policy of opening up to the outside world,” Wen said. “Foreign businesses are welcome to come to China to set up businesses according to the law.”
--Michael Forsythe, Eugene Tang, Li Yanping, Kevin Hamlin. Editors: Paul Panckhurst, John Liu
Money Rates Rising Signals Treasury Losses as Fed Prepares Exit
March 15 (Bloomberg) -- Money market interest rates at five-month highs show the Federal Reserve is laying the groundwork to siphon a record $1 trillion in excess cash from the banking system and sending a bearish signal on Treasuries.
Overnight federal funds rates rose to the highest since September and the cost to dealers to borrow and lend U.S. securities for one day more than doubled in the past month. Three-month Treasury bill rates rose last week to the highest since August.
The rise is a sign traders are preparing for tighter monetary policy as stimulus measures end. In the three months before the Fed started raising borrowing costs in June 2004, 10- year Treasury yields rose about 0.75 percentage point as bond prices fell. While higher rates mean increased borrowing costs for President Barack Obama, they also show growing confidence that the economic recovery is gaining traction.
“The Fed is definitely getting its ducks in a row,” said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. “There is no doubt that in the early phases of the Fed’s plan, the Treasury market could suffer.”
A surprise first-quarter rally in Treasuries is already losing momentum. Bonds have lost 0.52 percent in March after gaining 0.4 percent last month and 1.58 percent in January, according to Bank of America Merrill Lynch index data. Bond dealers said at the end of 2009 that government bonds would fall again this year.
Sales Surge
Fresh evidence of the recovery came March 12, when the Commerce Department said retail sales climbed 0.3 percent in February, the fourth gain in five months. Purchases were projected to fall 0.2 percent, according to the median estimate of 77 economists in a Bloomberg survey. Sales excluding autos rose 0.8 percent, exceeding the estimates of all 68 economists surveyed.
Morgan Stanley economists said in a report last week they expect the U.S. economy to expand 3.2 percent this year, up from their forecast in December of 2.8 percent.
Fed Chairman Ben S. Bernanke and his fellow policy makers will likely keep their target rate for overnight loans between banks in a range of zero to 0.25 percent at a meeting tomorrow, according to Bloomberg News surveys. Even so, some central bankers say the Fed should end its pledge to keep rates close to zero for an “extended period” as the economy recovers.
Fed Dissension
Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.
Policy makers have kept the target rate for overnight loans unchanged since December 2008, and pumped more than $1 trillion in excess cash into the banking system to unlock credit markets after banks and financial companies reported about $1.8 trillion in writedowns and losses.
The effective fed funds rate, or volume-weighted average of rates dealers charge each other that’s published daily by the New York Fed, has moved closer to the top of the central bank’s band. Funds reached 0.17 percent on March 5, the highest since Sept. 16.
‘Clearly Afoot’
“Something is clearly afoot, and while the move may not be imminent, the direction is clearly not in doubt,” said Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut at UBS AG. The firm is one of the 18 primary dealers that act as counterparties on the Fed’s open market operations.
An influx of government securities after the Treasury expanded its Supplementary Financing Program, where it sells bills on the central bank’s behalf, to $200 billion from $5 billion in February has lifted repurchase agreement, or repo, rates. The program is part of the central bank’s strategy for rolling back its assistance to financial markets.
The average level of overnight general collateral repo rates traded on March 5 through London-based ICAP Plc, the world’s largest inter-dealer broker, touched 0.19 percent, the highest since December. It was 0.07 percent last month.
Securities dealers use repos to finance holdings and increase leverage. Government securities that can be borrowed at rates close to the Fed’s target for overnight loans between banks are called general collateral.
Moving Closer
The Fed moved closer to withdrawing stimulus when it said last week it plans to use money market funds in addition to primary dealers to drain excess reserves before the record amount of cash in the financial system leads to inflation.
“We’re now getting closer to the point here where we see further removal of monetary stimulus,” said Derrick Wulf, a money manager at Burlington, Vermont-based Dwight Asset Management Co., which oversees $69 billion. “Some very subtle steps have already been taken.”
Yields on 2-year notes rose 6 basis points, or 0.06 percentage point, to 0.96 percent last week, up from the low this year of 0.72 percent on Feb. 5. Rates on three-month bills rose as high as 0.155 percent, from this year’s low of 0.2 percent on Jan. 11.
Treasuries rallied in January as Greece’s budget crisis fueled demand for the safety of U.S. government debt and helped the securities beat predictions for losses.
Financing Costs
Higher yields means increased government financing costs as the Obama administration borrows record amounts to sustain the recovery. U.S. marketable debt has risen to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to $1.6 trillion in the fiscal year ending Sept. 30.
The Treasury will sell a record $2.55 trillion of notes and bonds this year, an increase of about $440 billion, or 21 percent, from last year, Morgan Stanley estimated at the end of 2009. The New York-based firm is also a primary dealer.
Treasury 2-year note yields will climb to 1.91 percent and 10-year note will yield 4.19 percent at the end of the year, according to Bloomberg surveys. David Greenlaw, the chief fixed- income economist at Morgan Stanley, has the most bearish forecast, predicting 10-year yields will touch 5.5 percent amid increased supply and as the Fed ends its housing debt purchase program.
Tighter credit spreads, a 29 percent gain in company debt since the end of 2008 and a 27 percent rally in the Standard & Poor’s 500 stock index in the same period suggest Treasuries face more competition for funds and less investor demand for a refuge from risk.
Fed Futures
“We expect the supply/demand imbalance to intensify,” Anshul Pradhan, a fixed-income research analyst at Barclays Plc in New York, wrote in a report dated March 12. The firm, also a primary dealer, predicts 10-year yields will rise to 4.3 percent by year-end.
Futures contracts on the Chicago Mercantile Exchange show a 45.6 percent probability the Fed will raise rates by September. The median estimate of 51 economist surveyed by Bloomberg News is for an increase to 0.75 percent by year-end.
Volatility in Treasuries may rise from the lowest level since before the credit markets seized up as the Fed moves closer to shifting monetary policy, according to Ira Jersey, the head of interest rate strategy in New York at primary dealer Royal Bank of Scotland Group Plc. Bigger price swings may cause traders to demand higher yields to compensate for the fluctuations.
Merrill Lynch’s MOVE Index, an options-based gauge of expectations for price swings in Treasuries, fell this month to the lowest since July 2007. A Barclays index of volatility in options on interest-rate swaps, used to hedge the affects of rate swings, fell last week to a 10-month low of 97.28 basis points.
“Interest rate volatility, which has gotten crushed this year, is likely to head higher,” said Jersey. “This will be in part from investors misinterpreting the Fed’s actions in the months ahead. As the Fed begins to drain reserves, there will be false starts that trigger increases in yields.”
Overnight federal funds rates rose to the highest since September and the cost to dealers to borrow and lend U.S. securities for one day more than doubled in the past month. Three-month Treasury bill rates rose last week to the highest since August.
The rise is a sign traders are preparing for tighter monetary policy as stimulus measures end. In the three months before the Fed started raising borrowing costs in June 2004, 10- year Treasury yields rose about 0.75 percentage point as bond prices fell. While higher rates mean increased borrowing costs for President Barack Obama, they also show growing confidence that the economic recovery is gaining traction.
“The Fed is definitely getting its ducks in a row,” said Mark MacQueen, a partner at Austin, Texas-based Sage Advisory Services Ltd., which oversees $7.5 billion. “There is no doubt that in the early phases of the Fed’s plan, the Treasury market could suffer.”
A surprise first-quarter rally in Treasuries is already losing momentum. Bonds have lost 0.52 percent in March after gaining 0.4 percent last month and 1.58 percent in January, according to Bank of America Merrill Lynch index data. Bond dealers said at the end of 2009 that government bonds would fall again this year.
Sales Surge
Fresh evidence of the recovery came March 12, when the Commerce Department said retail sales climbed 0.3 percent in February, the fourth gain in five months. Purchases were projected to fall 0.2 percent, according to the median estimate of 77 economists in a Bloomberg survey. Sales excluding autos rose 0.8 percent, exceeding the estimates of all 68 economists surveyed.
Morgan Stanley economists said in a report last week they expect the U.S. economy to expand 3.2 percent this year, up from their forecast in December of 2.8 percent.
Fed Chairman Ben S. Bernanke and his fellow policy makers will likely keep their target rate for overnight loans between banks in a range of zero to 0.25 percent at a meeting tomorrow, according to Bloomberg News surveys. Even so, some central bankers say the Fed should end its pledge to keep rates close to zero for an “extended period” as the economy recovers.
Fed Dissension
Kansas City Fed President Thomas Hoenig voted against repeating the statement on Jan. 27 because he wanted to keep “the broadest options possible.” Since then, Dallas Fed President Richard Fisher, James Bullard of St. Louis and the Philadelphia Fed’s Charles Plosser have also expressed reservations.
Policy makers have kept the target rate for overnight loans unchanged since December 2008, and pumped more than $1 trillion in excess cash into the banking system to unlock credit markets after banks and financial companies reported about $1.8 trillion in writedowns and losses.
The effective fed funds rate, or volume-weighted average of rates dealers charge each other that’s published daily by the New York Fed, has moved closer to the top of the central bank’s band. Funds reached 0.17 percent on March 5, the highest since Sept. 16.
‘Clearly Afoot’
“Something is clearly afoot, and while the move may not be imminent, the direction is clearly not in doubt,” said Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut at UBS AG. The firm is one of the 18 primary dealers that act as counterparties on the Fed’s open market operations.
An influx of government securities after the Treasury expanded its Supplementary Financing Program, where it sells bills on the central bank’s behalf, to $200 billion from $5 billion in February has lifted repurchase agreement, or repo, rates. The program is part of the central bank’s strategy for rolling back its assistance to financial markets.
The average level of overnight general collateral repo rates traded on March 5 through London-based ICAP Plc, the world’s largest inter-dealer broker, touched 0.19 percent, the highest since December. It was 0.07 percent last month.
Securities dealers use repos to finance holdings and increase leverage. Government securities that can be borrowed at rates close to the Fed’s target for overnight loans between banks are called general collateral.
Moving Closer
The Fed moved closer to withdrawing stimulus when it said last week it plans to use money market funds in addition to primary dealers to drain excess reserves before the record amount of cash in the financial system leads to inflation.
“We’re now getting closer to the point here where we see further removal of monetary stimulus,” said Derrick Wulf, a money manager at Burlington, Vermont-based Dwight Asset Management Co., which oversees $69 billion. “Some very subtle steps have already been taken.”
Yields on 2-year notes rose 6 basis points, or 0.06 percentage point, to 0.96 percent last week, up from the low this year of 0.72 percent on Feb. 5. Rates on three-month bills rose as high as 0.155 percent, from this year’s low of 0.2 percent on Jan. 11.
Treasuries rallied in January as Greece’s budget crisis fueled demand for the safety of U.S. government debt and helped the securities beat predictions for losses.
Financing Costs
Higher yields means increased government financing costs as the Obama administration borrows record amounts to sustain the recovery. U.S. marketable debt has risen to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to $1.6 trillion in the fiscal year ending Sept. 30.
The Treasury will sell a record $2.55 trillion of notes and bonds this year, an increase of about $440 billion, or 21 percent, from last year, Morgan Stanley estimated at the end of 2009. The New York-based firm is also a primary dealer.
Treasury 2-year note yields will climb to 1.91 percent and 10-year note will yield 4.19 percent at the end of the year, according to Bloomberg surveys. David Greenlaw, the chief fixed- income economist at Morgan Stanley, has the most bearish forecast, predicting 10-year yields will touch 5.5 percent amid increased supply and as the Fed ends its housing debt purchase program.
Tighter credit spreads, a 29 percent gain in company debt since the end of 2008 and a 27 percent rally in the Standard & Poor’s 500 stock index in the same period suggest Treasuries face more competition for funds and less investor demand for a refuge from risk.
Fed Futures
“We expect the supply/demand imbalance to intensify,” Anshul Pradhan, a fixed-income research analyst at Barclays Plc in New York, wrote in a report dated March 12. The firm, also a primary dealer, predicts 10-year yields will rise to 4.3 percent by year-end.
Futures contracts on the Chicago Mercantile Exchange show a 45.6 percent probability the Fed will raise rates by September. The median estimate of 51 economist surveyed by Bloomberg News is for an increase to 0.75 percent by year-end.
Volatility in Treasuries may rise from the lowest level since before the credit markets seized up as the Fed moves closer to shifting monetary policy, according to Ira Jersey, the head of interest rate strategy in New York at primary dealer Royal Bank of Scotland Group Plc. Bigger price swings may cause traders to demand higher yields to compensate for the fluctuations.
Merrill Lynch’s MOVE Index, an options-based gauge of expectations for price swings in Treasuries, fell this month to the lowest since July 2007. A Barclays index of volatility in options on interest-rate swaps, used to hedge the affects of rate swings, fell last week to a 10-month low of 97.28 basis points.
“Interest rate volatility, which has gotten crushed this year, is likely to head higher,” said Jersey. “This will be in part from investors misinterpreting the Fed’s actions in the months ahead. As the Fed begins to drain reserves, there will be false starts that trigger increases in yields.”
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