May 8 (Bloomberg) -- European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro.
Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before the markets open on May 10.
“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels.
Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid to prevent a global sovereign-debt crisis from pitching the world back into a recession.
European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details.
“When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.”
Independent ECB
Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure.
With the euro facing its stiffest test since its debut in 1999, the summit -- called to discuss longer-term efforts to coordinate economic policies -- turned into a crisis-management session that dragged past midnight.
The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18.
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain.
Spreading Contagion
Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs yesterday. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty, who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.”
The spreading contagion also drew the attention of President Barack Obama, who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back.
In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s.
Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said.
Credit-Rating Authority
With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets.
Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments.
Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.”
The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens.
Biggest Contributor
Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line yesterday with endorsements in the lower and upper houses of parliament. A group of German academics filed a lawsuit to try to halt the payout.
A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.”
Europe’s unprecedented lending pledge has “proven insufficient to stop market contagion to the rest of the euro- zone periphery,” Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit. “Different kinds of solutions are necessary to fix the underlying problems of the rest of the euro periphery other than Greek-style packages, and these are unlikely to come in the very short term.”
Friday, May 7, 2010
Asia Currencies Post Weekly Drops as Europe Debt Crisis Spreads
May 8 (Bloomberg) -- Asian currencies tumbled this week, with South Korea’s won and the Philippine peso posting their biggest losses in more than a year, as Europe’s debt crisis drove investors from riskier assets.
The MSCI Asia-Pacific Index of regional shares had its worst week since February 2009 and the cost of protecting the region’s corporate bonds from default rose the most in 14 months. Greece’s Finance Minister George Papaconstantinou said May 6 the nation has insufficient funds to pay 8.5 billion euros ($10.8 billion) of debt due this month and Moody’s Investors Service said Europe’s fiscal crisis may threaten banks in Portugal, Spain, Italy, the U.K. and Ireland.
“Asian stocks and currencies are typical riskier assets and so they got sold aggressively,” said Minori Uchida, senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest bank. “Asian currencies are also hit harder than other emerging markets because the region largely depends on external demand and anything threatening the global economy means a sell for Asian currencies.”
The won declined 4.1 percent this week to 1,155.45 per dollar and the peso slid 2.4 percent to 45.535. Malaysia’s ringgit dropped 2.7 percent, the most since a dollar peg ended in 2005. Indonesia’s rupiah gained 0.1 percent to 9,225 yesterday, trimming its weekly loss to 2.4 percent, on suspected intervention by the central bank.
Intervention
Bank Indonesia will ensure a “stable” rupiah and doesn’t plan to impose capital controls, central bank Deputy Governor Budi Mulya said yesterday. The monetary authority “is always in the market to smooth currency volatility,” said Lindawati Susanto, head of foreign-exchange trading at PT Bank Resona Perdania in Jakarta.
India’s rupee also pared losses yesterday on suspected intervention, after touching a two-month low of 45.725 per dollar. The currency declined 2.5 percent to 45.4800 this week.
“The Reserve Bank of India has supported the rupee intermittently since yesterday as things move from bad to worse in global financial markets,” said J. Moses Harding, a Mumbai- based executive vice president at IndusInd Bank Ltd. “I think the RBI is only trying to cushion currency weakness and check volatility rather than influence its direction.”
In Taiwan, traders said the central bank sold the local currency in the final minutes of trading yesterday to help weaken it. The island’s dollar declined 1.4 percent this week to NT$31.85 versus the greenback. It slid 0.3 percent yesterday, having been little changed at NT$31.73 two minutes before the end of the trading session.
Stock Outflows
Investors pulled “modest” amounts of money from equity funds investing in Asia’s emerging markets in the week ended May 5, while funds focused on Taiwan recorded the biggest outflows since the third quarter of 2009, according to EPFR Global. Foreign investors sold $885 million more Korean equities than they bought in the first four days of this week and pulled $1.4 billion from Taiwan’s stocks, exchange data show.
“While Asia is much stronger than Europe in terms of the fiscal position, markets will nevertheless be affected by deleveraging flows away from emerging markets as an asset class,” Frances Cheung, a Hong Kong-based senior rates strategist at Credit Agricole CIB, wrote in a research note yesterday.
Elsewhere in Asia, Singapore’s dollar dropped 1.9 percent this week to S$1.3933 and the Thai baht was little changed at 32.35.
The MSCI Asia-Pacific Index of regional shares had its worst week since February 2009 and the cost of protecting the region’s corporate bonds from default rose the most in 14 months. Greece’s Finance Minister George Papaconstantinou said May 6 the nation has insufficient funds to pay 8.5 billion euros ($10.8 billion) of debt due this month and Moody’s Investors Service said Europe’s fiscal crisis may threaten banks in Portugal, Spain, Italy, the U.K. and Ireland.
“Asian stocks and currencies are typical riskier assets and so they got sold aggressively,” said Minori Uchida, senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest bank. “Asian currencies are also hit harder than other emerging markets because the region largely depends on external demand and anything threatening the global economy means a sell for Asian currencies.”
The won declined 4.1 percent this week to 1,155.45 per dollar and the peso slid 2.4 percent to 45.535. Malaysia’s ringgit dropped 2.7 percent, the most since a dollar peg ended in 2005. Indonesia’s rupiah gained 0.1 percent to 9,225 yesterday, trimming its weekly loss to 2.4 percent, on suspected intervention by the central bank.
Intervention
Bank Indonesia will ensure a “stable” rupiah and doesn’t plan to impose capital controls, central bank Deputy Governor Budi Mulya said yesterday. The monetary authority “is always in the market to smooth currency volatility,” said Lindawati Susanto, head of foreign-exchange trading at PT Bank Resona Perdania in Jakarta.
India’s rupee also pared losses yesterday on suspected intervention, after touching a two-month low of 45.725 per dollar. The currency declined 2.5 percent to 45.4800 this week.
“The Reserve Bank of India has supported the rupee intermittently since yesterday as things move from bad to worse in global financial markets,” said J. Moses Harding, a Mumbai- based executive vice president at IndusInd Bank Ltd. “I think the RBI is only trying to cushion currency weakness and check volatility rather than influence its direction.”
In Taiwan, traders said the central bank sold the local currency in the final minutes of trading yesterday to help weaken it. The island’s dollar declined 1.4 percent this week to NT$31.85 versus the greenback. It slid 0.3 percent yesterday, having been little changed at NT$31.73 two minutes before the end of the trading session.
Stock Outflows
Investors pulled “modest” amounts of money from equity funds investing in Asia’s emerging markets in the week ended May 5, while funds focused on Taiwan recorded the biggest outflows since the third quarter of 2009, according to EPFR Global. Foreign investors sold $885 million more Korean equities than they bought in the first four days of this week and pulled $1.4 billion from Taiwan’s stocks, exchange data show.
“While Asia is much stronger than Europe in terms of the fiscal position, markets will nevertheless be affected by deleveraging flows away from emerging markets as an asset class,” Frances Cheung, a Hong Kong-based senior rates strategist at Credit Agricole CIB, wrote in a research note yesterday.
Elsewhere in Asia, Singapore’s dollar dropped 1.9 percent this week to S$1.3933 and the Thai baht was little changed at 32.35.
Thursday, May 6, 2010
India Should Tax ‘Volatile’ Stock Inflows, Ex-Governor Says
May 7 (Bloomberg) -- India should tax foreign capital inflows into the equity market that stay invested for less than two years to protect its financial system and sustain economic growth, said former central bank governor Bimal Jalan.
“If you have unstable, unpredictable, volatile capital flows which are affecting financial stability as well as the real economy’s stability, then you have to find a way of handling them so that they are not free for all,” Jalan, who headed the Reserve Bank of India between 1997 and 2003, said in a telephone interview. “I’m in favor of tax on profits earned from capital flows which are going to the stock market.”
Emerging markets in Asia are grappling with a surge in capital inflows as governments and central banks around the world pumped in cash to counter the global recession. Taiwan central bank Governor Perng Fai-nan said this week emerging markets should consider limits, Indonesia has studied the issue and Brazil imposed a levy last year.
Reserve Bank of India Governor Duvvuri Subbarao said on April 26 India “may well employ” some form of capital controls. Record foreign buying of stocks and bonds lifted India’s rupee in each of the first four months of 2010, the longest winning streak in three years.
Asian nations should increasingly consider ways to manage inflows that are fueling inflation and creating asset bubbles, Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific, wrote in the report yesterday.
‘Legitimate’ Tool
The International Monetary Fund, which previously criticized capital controls, in February released a study saying limits on capital are a “legitimate” tool in some cases for governments.
Equity and property prices in some markets have surged as the region’s growth outpaces the rest of the world. The central bank estimates the $1.2 trillion economy may expand 8 percent “with an upward bias” in the year ending March 31. Last year, it grew 7.2 percent.
The World Bank predicts as much as $800 billion in global capital flows this year, compared with about $450 billion to developing economies in the second half of 2009 at an annualized pace.
Foreign investors have bought a net 290.2 billion rupees ($6.4 billion) of stocks this year compared with a record 834.2 billion rupees in 2009, according to the nation’s market regulator. The rupee has appreciated 2.7 percent against the dollar this year. Last year, it gained 4.8 percent.
‘Red Light’
At present, India permits the rupee to be freely convertible on the trade and current account and places curbs for the capital account. An advisory panel formed by the central bank in 2006 suggested fuller convertibility in five years.
A cap on the amount of funds Indian companies are allowed to raise abroad as well a ceiling on foreign investments in debt instruments are among the controls imposed by India. The limit on foreign investment in government debt is $5 billion while on corporate debt it is $10 billion.
Kaushik Basu, chief economic adviser in India’s finance ministry, said there is no surge in capital inflows this year and that the country had witnessed bigger influx of funds earlier. “I don’t think it’s really a situation where you need to bring in capital controls,” said Basu.
Jalan said policy makers should improve regulation of capital into the country when the situation is normal instead of waiting until the emergence of a crisis.
“There should be no reluctance to take measures which will provide you financial stability,” said Jalan. “You have free roads but you obey the red lights.”
“If you have unstable, unpredictable, volatile capital flows which are affecting financial stability as well as the real economy’s stability, then you have to find a way of handling them so that they are not free for all,” Jalan, who headed the Reserve Bank of India between 1997 and 2003, said in a telephone interview. “I’m in favor of tax on profits earned from capital flows which are going to the stock market.”
Emerging markets in Asia are grappling with a surge in capital inflows as governments and central banks around the world pumped in cash to counter the global recession. Taiwan central bank Governor Perng Fai-nan said this week emerging markets should consider limits, Indonesia has studied the issue and Brazil imposed a levy last year.
Reserve Bank of India Governor Duvvuri Subbarao said on April 26 India “may well employ” some form of capital controls. Record foreign buying of stocks and bonds lifted India’s rupee in each of the first four months of 2010, the longest winning streak in three years.
Asian nations should increasingly consider ways to manage inflows that are fueling inflation and creating asset bubbles, Noeleen Heyzer, executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific, wrote in the report yesterday.
‘Legitimate’ Tool
The International Monetary Fund, which previously criticized capital controls, in February released a study saying limits on capital are a “legitimate” tool in some cases for governments.
Equity and property prices in some markets have surged as the region’s growth outpaces the rest of the world. The central bank estimates the $1.2 trillion economy may expand 8 percent “with an upward bias” in the year ending March 31. Last year, it grew 7.2 percent.
The World Bank predicts as much as $800 billion in global capital flows this year, compared with about $450 billion to developing economies in the second half of 2009 at an annualized pace.
Foreign investors have bought a net 290.2 billion rupees ($6.4 billion) of stocks this year compared with a record 834.2 billion rupees in 2009, according to the nation’s market regulator. The rupee has appreciated 2.7 percent against the dollar this year. Last year, it gained 4.8 percent.
‘Red Light’
At present, India permits the rupee to be freely convertible on the trade and current account and places curbs for the capital account. An advisory panel formed by the central bank in 2006 suggested fuller convertibility in five years.
A cap on the amount of funds Indian companies are allowed to raise abroad as well a ceiling on foreign investments in debt instruments are among the controls imposed by India. The limit on foreign investment in government debt is $5 billion while on corporate debt it is $10 billion.
Kaushik Basu, chief economic adviser in India’s finance ministry, said there is no surge in capital inflows this year and that the country had witnessed bigger influx of funds earlier. “I don’t think it’s really a situation where you need to bring in capital controls,” said Basu.
Jalan said policy makers should improve regulation of capital into the country when the situation is normal instead of waiting until the emergence of a crisis.
“There should be no reluctance to take measures which will provide you financial stability,” said Jalan. “You have free roads but you obey the red lights.”
Ambani Case Ruling May Decide Fate of Indian Energy Investments
May 7 (Bloomberg) -- India’s Supreme Court will rule today on a gas dispute between billionaire Mukesh Ambani and his estranged brother, a decision that may determine whether the energy-starved nation will be able to attract explorers.
The court’s verdict will come on appeals filed after a lower court ordered Mukesh’s Reliance Industries Ltd., India’s most valuable company, to honor a 2005 accord to sell gas from the nation’s largest field at a discount to Reliance Natural Resources Ltd., controlled by younger brother Anil Ambani, 50.
The judgment may resolve the feud between the world’s richest brothers over a field with $38 billion worth of reserves. India’s oil regulator said last year’s auction of oil and gas fields received few offers because of disputes over production sharing contracts awarded in previous rounds and the global recession.
“Its main significance is the extent to which it can provide comfort to an industry that has international players,” said Prashanth Sabeshan, an independent Singapore-based lawyer who has advised energy companies in India. “Can you sell gas at an agreed price in India?”
Reliance Natural had its biggest monthly gain in almost a year in April as the court neared its verdict. The stock swung between gains and losses yesterday and closed 0.2 percent lower at 68.35 rupees. Reliance Industries fell 1.3 percent, the fifth day of declines, in line with a global selloff in equities.
Energy companies bid for half the oil and gas blocks on offer during an international auction, which closed in October as the Ambani gas dispute made its way to the Supreme Court. Reliance Industries, which won the KG-D6 field in an auction a decade ago, shunned the sale. India received bids for 36 of the 70 areas offered last year.
Investors Seek Clarity
The row contributed to the unease of international energy companies over the lack of clarity in India’s production sharing contracts between the government and explorers that govern pricing and revenue sharing from oil and gas blocks.
BG Group Plc, the U.K.’s third-largest natural-gas producer, withdrew from a block in April with state-run Oil & Natural Gas Corp., citing the absence of clear documentation on the validity of its contract.
“Investors have been waiting so long for a verdict,” said Taina Erajuuri, who helps manage more than 1 billion euros ($1.3 billion) of emerging market stocks at Helsinki-based Fim Asset Management, including Reliance Industries. “There is this need for clarity, one way or the other.”
India, which imports more than 75 percent of its crude oil needs, is keen to attract investment to reduce dependence on overseas purchases and develop domestic supplies critical to sustaining its expansion. The world’s second-fastest growing major economy is forecast to account for 15 percent of the global increase in energy demand to 2030, according to the International Energy Agency.
Family Dispute
The dispute stems from a 2005 agreement dividing the Reliance business, brokered by Mukesh, 53, and Anil’s mother after the family patriarch, Dhirubhai Ambani, died without leaving a will. The accord required Reliance Industries to supply 28 million cubic meters of gas a day for 17 years at $2.34 per million British thermal units.
The government subsequently set a price of $4.20 per million British thermal units in September 2007 for gas contracts in the Krishna Godavari basin.
Anil’s Reliance Natural told the Supreme Court that the government’s decision on gas prices could not be implemented retroactively. Reliance Industries countered that it cannot comply with the contract because gas can neither be sold nor bought by either party without the government’s approval.
Proposed Plant
The government maintains the state alone has the power to fix gas prices, assign customers and approve gas sales. In an affidavit filed on Sept. 1, the government said it wasn’t interested in the brothers’ agreement and only wants to protect its rights as the owner of the gas.
The Bombay High Court ordered Reliance Industries on June 15 to honor the agreement and supply the fuel, which was meant for a power plant near New Delhi that has yet to be constructed. The Supreme Court ruling is scheduled for 10:30 a.m. local time today, according to the court’s website.
Losing the case could shave as much as $600 million off Reliance Industries’ annual earnings, Moody’s Investors Service said Oct. 19.
Reliance Industries started production from the KG-D6 field in April last year and produces about 64 million cubic meters of gas a day, Executive Director P.M.S. Prasad said in March. All of the fuel is sold to customers including fertilizer plants, power stations and chemical plants selected by the government. Peak production of 80 million cubic meters a day may be reached this year, doubling the availability of gas in the country.
The case is SLP(C) No. 14997/2009 between Reliance Natural Resources and Reliance Industries in India’s Supreme Court.
The court’s verdict will come on appeals filed after a lower court ordered Mukesh’s Reliance Industries Ltd., India’s most valuable company, to honor a 2005 accord to sell gas from the nation’s largest field at a discount to Reliance Natural Resources Ltd., controlled by younger brother Anil Ambani, 50.
The judgment may resolve the feud between the world’s richest brothers over a field with $38 billion worth of reserves. India’s oil regulator said last year’s auction of oil and gas fields received few offers because of disputes over production sharing contracts awarded in previous rounds and the global recession.
“Its main significance is the extent to which it can provide comfort to an industry that has international players,” said Prashanth Sabeshan, an independent Singapore-based lawyer who has advised energy companies in India. “Can you sell gas at an agreed price in India?”
Reliance Natural had its biggest monthly gain in almost a year in April as the court neared its verdict. The stock swung between gains and losses yesterday and closed 0.2 percent lower at 68.35 rupees. Reliance Industries fell 1.3 percent, the fifth day of declines, in line with a global selloff in equities.
Energy companies bid for half the oil and gas blocks on offer during an international auction, which closed in October as the Ambani gas dispute made its way to the Supreme Court. Reliance Industries, which won the KG-D6 field in an auction a decade ago, shunned the sale. India received bids for 36 of the 70 areas offered last year.
Investors Seek Clarity
The row contributed to the unease of international energy companies over the lack of clarity in India’s production sharing contracts between the government and explorers that govern pricing and revenue sharing from oil and gas blocks.
BG Group Plc, the U.K.’s third-largest natural-gas producer, withdrew from a block in April with state-run Oil & Natural Gas Corp., citing the absence of clear documentation on the validity of its contract.
“Investors have been waiting so long for a verdict,” said Taina Erajuuri, who helps manage more than 1 billion euros ($1.3 billion) of emerging market stocks at Helsinki-based Fim Asset Management, including Reliance Industries. “There is this need for clarity, one way or the other.”
India, which imports more than 75 percent of its crude oil needs, is keen to attract investment to reduce dependence on overseas purchases and develop domestic supplies critical to sustaining its expansion. The world’s second-fastest growing major economy is forecast to account for 15 percent of the global increase in energy demand to 2030, according to the International Energy Agency.
Family Dispute
The dispute stems from a 2005 agreement dividing the Reliance business, brokered by Mukesh, 53, and Anil’s mother after the family patriarch, Dhirubhai Ambani, died without leaving a will. The accord required Reliance Industries to supply 28 million cubic meters of gas a day for 17 years at $2.34 per million British thermal units.
The government subsequently set a price of $4.20 per million British thermal units in September 2007 for gas contracts in the Krishna Godavari basin.
Anil’s Reliance Natural told the Supreme Court that the government’s decision on gas prices could not be implemented retroactively. Reliance Industries countered that it cannot comply with the contract because gas can neither be sold nor bought by either party without the government’s approval.
Proposed Plant
The government maintains the state alone has the power to fix gas prices, assign customers and approve gas sales. In an affidavit filed on Sept. 1, the government said it wasn’t interested in the brothers’ agreement and only wants to protect its rights as the owner of the gas.
The Bombay High Court ordered Reliance Industries on June 15 to honor the agreement and supply the fuel, which was meant for a power plant near New Delhi that has yet to be constructed. The Supreme Court ruling is scheduled for 10:30 a.m. local time today, according to the court’s website.
Losing the case could shave as much as $600 million off Reliance Industries’ annual earnings, Moody’s Investors Service said Oct. 19.
Reliance Industries started production from the KG-D6 field in April last year and produces about 64 million cubic meters of gas a day, Executive Director P.M.S. Prasad said in March. All of the fuel is sold to customers including fertilizer plants, power stations and chemical plants selected by the government. Peak production of 80 million cubic meters a day may be reached this year, doubling the availability of gas in the country.
The case is SLP(C) No. 14997/2009 between Reliance Natural Resources and Reliance Industries in India’s Supreme Court.
U.K. Inflation Threat Underestimated, JPMorgan Says
May 6 (Bloomberg) -- Investors underestimate the threat inflation poses to U.K. gilt returns, and should seek protection from higher consumer prices no matter who wins today’s election, according to JPMorgan Chase & Co.
Britain’s record budget deficit means the next government will be left with few options besides raising levies including the sales tax, which will push consumer prices higher, Jasper Falk, the bank’s global head of inflation trading, said in an interview. Investors should still “keep buying protection” such as index-linked bonds or swaps because the Bank of England will likely be forced to keep its benchmark interest rate at a record low to foster the economic recovery, Falk said.
“There is potentially going to be a knee-jerk reaction in the bond market after the election, but beyond that I see a major move in inflation,” Falk said. “All three parties are being criticised for not addressing the deficit more explicitly. But one thing they are likely to do if they become the next government is to raise taxes. You are likely to see a spike in short-term inflation.”
JPMorgan’s latest survey in March showed more respondents expect British inflation to be above the central bank’s target of 2 percent in two to five years. In the euro region, an increased number of investors expected below-average inflation.
Prime Minister Gordon Brown and his rivals, Conservative leader David Cameron and Liberal Democrat chief Nick Clegg, have been trying to persuade voters their policies are best to tackle a budget gap that widened to 11.5 percent of gross domestic product last year, the biggest among the Group of Seven nations.
Consumer Price Growth
U.K. annual consumer-price growth accelerated to 3.4 percent in March, data released on April 20 showed, near the 14- month high of 3.5 percent reached in January. Inflation expectations, as measured by the 10-year yield difference between regular and index-linked bonds, were little changed from the level at the start of the year, standing at 295 basis points as of 2:15 p.m. in London.
In the euro region, the crisis engulfing Greece and the risk that it might spread to other indebted nations, such as Portugal and Spain, may lead to a decline in inflation, Falk said.
The JPMorgan survey, which the bank said is monitored by central banks including the Federal Reserve, the European Central Bank and the Bank of England, showed 66 percent of respondents expect U.K. inflation to be above target, compared with 57 percent in the previous report in November. Of the total, 17 percent expect consumer price growth to be “significantly” above 2 percent.
‘Tale of Two Cities’
By contrast, 17 percent of respondents said inflation in the 16-nation euro region will fall “below average” in the medium term, compared with 12 percent in the previous survey. Some 52 percent of investors in the survey expect inflation in the region to be close to target.
“The inflation story in the U.K. and the euro zone is a tale of two cities,” said Falk. “The shift we’ve seen in our latest survey is the softening of expectations in the euro area and the hardening of expectations in the U.K. What might have prevented a sell-off in the euro-zone inflation market is probably concern over potential tax increases in the near term.”
British index-linked bonds underperformed both U.S. Treasury Inflation-Protected Securities (TIPS) and German inflation debt, returning 2.5 percent compared with 3.1 percent from TIPS and 3.3 percent from German securities, according to Bank of America Merrill Lynch’s indexes.
Britain’s record budget deficit means the next government will be left with few options besides raising levies including the sales tax, which will push consumer prices higher, Jasper Falk, the bank’s global head of inflation trading, said in an interview. Investors should still “keep buying protection” such as index-linked bonds or swaps because the Bank of England will likely be forced to keep its benchmark interest rate at a record low to foster the economic recovery, Falk said.
“There is potentially going to be a knee-jerk reaction in the bond market after the election, but beyond that I see a major move in inflation,” Falk said. “All three parties are being criticised for not addressing the deficit more explicitly. But one thing they are likely to do if they become the next government is to raise taxes. You are likely to see a spike in short-term inflation.”
JPMorgan’s latest survey in March showed more respondents expect British inflation to be above the central bank’s target of 2 percent in two to five years. In the euro region, an increased number of investors expected below-average inflation.
Prime Minister Gordon Brown and his rivals, Conservative leader David Cameron and Liberal Democrat chief Nick Clegg, have been trying to persuade voters their policies are best to tackle a budget gap that widened to 11.5 percent of gross domestic product last year, the biggest among the Group of Seven nations.
Consumer Price Growth
U.K. annual consumer-price growth accelerated to 3.4 percent in March, data released on April 20 showed, near the 14- month high of 3.5 percent reached in January. Inflation expectations, as measured by the 10-year yield difference between regular and index-linked bonds, were little changed from the level at the start of the year, standing at 295 basis points as of 2:15 p.m. in London.
In the euro region, the crisis engulfing Greece and the risk that it might spread to other indebted nations, such as Portugal and Spain, may lead to a decline in inflation, Falk said.
The JPMorgan survey, which the bank said is monitored by central banks including the Federal Reserve, the European Central Bank and the Bank of England, showed 66 percent of respondents expect U.K. inflation to be above target, compared with 57 percent in the previous report in November. Of the total, 17 percent expect consumer price growth to be “significantly” above 2 percent.
‘Tale of Two Cities’
By contrast, 17 percent of respondents said inflation in the 16-nation euro region will fall “below average” in the medium term, compared with 12 percent in the previous survey. Some 52 percent of investors in the survey expect inflation in the region to be close to target.
“The inflation story in the U.K. and the euro zone is a tale of two cities,” said Falk. “The shift we’ve seen in our latest survey is the softening of expectations in the euro area and the hardening of expectations in the U.K. What might have prevented a sell-off in the euro-zone inflation market is probably concern over potential tax increases in the near term.”
British index-linked bonds underperformed both U.S. Treasury Inflation-Protected Securities (TIPS) and German inflation debt, returning 2.5 percent compared with 3.1 percent from TIPS and 3.3 percent from German securities, according to Bank of America Merrill Lynch’s indexes.
Phillies’ Security to Subdue On-Field Fans After Taser Incident
May 6 (Bloomberg) -- The Philadelphia Phillies said fans entering the field of play at Citizens Bank Ballpark during games will be apprehended by team security and not police, a decision that came after a 17-year-old was subdued with a Taser.
The Phillies said in a statement that the policy applies to “ordinary circumstances” of field intrusion and that violators would be turned over to the Philadelphia police on the field for handcuffing and subsequent charging.
“If greater force is necessary, requiring the assistance of Philadelphia police in making the apprehension, such assistance will be employed,” the Phillies said.
The Phillies said they will continue to prosecute all fans who run onto the field during a game to the maximum extent of the law, which could include jail time of up to one year and a $2,500 fine.
During a May 3 game against the St. Louis Cardinals, a towel-waving fan eluded security while running in circles in the outfield at Citizens Bank Park for about 30 seconds. He was then subdued by a Philadelphia police officer who used his Taser stun gun.
Philadelphia Police Commissioner Charles Ramsey said video of the incident was reviewed and it was determined that the officer acted within department guidelines.
The fan, Steve Consalvi of Gilbertsville, Pennsylvania, has apologized for his “foolish act” and was charged with defiant trespass, disorderly conduct and resisting arrest.
The following night, a 34-year-old man also ran onto the field of play during a game against the Cardinals as the crowd booed and some fans chanted “Tase him!” He was arrested and faces charges including marijuana possession, criminal mischief and disorderly conduct.
While Pennsylvania Governor Ed Rendell was among those to question the use of stun guns by police to subdue fans who run onto the field, many Major League Baseball players have said it’s an appropriate action, fearing for their safety.
“If you don’t want to get Tased, don’t go on the field,” Cardinals pitcher Adam Wainwright told reporters. “There’s absolutely nothing wrong with getting Tased if you’re on the field.”
The Phillies said in a statement that the policy applies to “ordinary circumstances” of field intrusion and that violators would be turned over to the Philadelphia police on the field for handcuffing and subsequent charging.
“If greater force is necessary, requiring the assistance of Philadelphia police in making the apprehension, such assistance will be employed,” the Phillies said.
The Phillies said they will continue to prosecute all fans who run onto the field during a game to the maximum extent of the law, which could include jail time of up to one year and a $2,500 fine.
During a May 3 game against the St. Louis Cardinals, a towel-waving fan eluded security while running in circles in the outfield at Citizens Bank Park for about 30 seconds. He was then subdued by a Philadelphia police officer who used his Taser stun gun.
Philadelphia Police Commissioner Charles Ramsey said video of the incident was reviewed and it was determined that the officer acted within department guidelines.
The fan, Steve Consalvi of Gilbertsville, Pennsylvania, has apologized for his “foolish act” and was charged with defiant trespass, disorderly conduct and resisting arrest.
The following night, a 34-year-old man also ran onto the field of play during a game against the Cardinals as the crowd booed and some fans chanted “Tase him!” He was arrested and faces charges including marijuana possession, criminal mischief and disorderly conduct.
While Pennsylvania Governor Ed Rendell was among those to question the use of stun guns by police to subdue fans who run onto the field, many Major League Baseball players have said it’s an appropriate action, fearing for their safety.
“If you don’t want to get Tased, don’t go on the field,” Cardinals pitcher Adam Wainwright told reporters. “There’s absolutely nothing wrong with getting Tased if you’re on the field.”
Canadian Stocks Fall on Concerns European Debt Crisis to Spread
May 5 (Bloomberg) -- Canadian stocks fell for a third day, led by oil companies, as protests over Greek austerity measures turned violent and concern mounted that the country’s debt crisis will spread to other European nations.
Suncor Energy Inc., Canada’s largest oil and gas company, declined 5.4 percent as oil futures dropped below $80 a barrel for the first time in five weeks. Kinross Gold Corp., Canada’s third-biggest gold producer, sank 4.4 percent after saying it’s buying a stake in Red Back Mining Inc. Public Storage Canadian Properties, which rents storage space in Canada, jumped 29 percent on a bid to take the company private.
The Standard & Poor’s/TSX Composite Index decreased 155.73 points, or 1.3 percent, to a two-month low of 11,875.13.
“People are worried about Europe,” said David Baskin, president of Baskin Financial Services Inc. in Toronto, which manages C$350 million ($340 million). “Greece is a mess; they’re killing people on the streets. They don’t know what to make of it, and when people are uncertain, they sell.”
The S&P/TSX has slumped 2.7 percent this week for the biggest three-day loss since January as the euro has fallen to a 13-month low against the U.S. dollar. The Reuters/Jefferies CRB Commodity Index fell to its lowest level in five weeks.
Energy and raw materials companies make up 45 percent of Canadian stocks by market value.
‘Grave Contagion‘
Axel Weber, a council member of the European Central Bank, said today Greece’s fiscal crisis threatens “grave contagion effects.”
Greece, Spain, Ireland and the UK had budget deficits of at least 10 percent of gross domestic product last year and Italy’s national debt rose to 116 percent of GDP, according to the European Union’s statistical agency.
Three people were killed today after Greeks protesting proposed spending cuts and tax increases burned down a building containing a bank branch. The country’s biggest airport canceled all flights as air-traffic controllers joined a general strike.
Crude oil futures dropped 3.3 percent, adding to a 4 percent decline yesterday. The S&P/TSX Energy Index sank 2.7 percent, the most since Oct. 28.
Suncor tumbled 5.4 percent to C$32.51. Canadian Natural Resources Ltd., Canada’s second-largest energy company by market value, decreased 4.1 percent to C$73.83. Cenovus Energy Inc., the oil company spun off from EnCana Corp. in December, slumped 3 percent to C$27.76.
Pharmacy-benefits manager SXC Health Solutions Corp. led the S&P/TSX with a 7 percent retreat to C$63.01 before the release of its first-quarter earnings. SXC shares have still nearly doubled over the past nine months.
Banks Fall
The S&P/TSX Financials Index declined to its lowest level since Mar. 11 as banks slipped. Royal Bank of Canada, the country’s biggest bank, lost 0.8 percent to C$61.21. Toronto- Dominion Bank, its largest domestic rival, decreased 1.6 percent to C$73.60. Bank of Montreal, the No. 4 bank by assets, slumped 2.2 percent to C$60.93.
Brokerage GMP Capital Inc. climbed 3.3 percent to C$12.03, snapping a 14-day streak of declines.
Kinross fell 4.4 percent to C$18.21 after announcing it is buying a 9.4 percent stake in Red Back for C$600 million ($582 million). TD analyst Greg Barnes cut his rating on Kinross to “hold” from “buy,” telling clients, “the rationale behind the investment is unclear to us.”
Thomson Reuters Rises
Financial news and information provider Thomson Reuters Inc. climbed 3 percent to a two-year high of C$38.02 after being added to TD analyst Vince Valentini’s “action list” of top stocks.
Producers of coal used in steel mills rallied as China’s benchmark coal price rose the most in four months. Western Coal Corp. surged 6.9 percent to C$5.59 to lead the S&P/TSX. Grande Cache Coal Corp. gained for the first time in 11 days, advancing 9.5 percent to C$6.46. Teck Resources Ltd. increased 0.5 percent to C$37.44.
Public Storage Canadian Properties soared 29 percent, the most in at least 18 years, to C$18.10. An entity controlled by B. Wayne Hughes, the company’s chairman and majority owner, and his daughter, Tamara Gustavson, offered to buy the rest of the company private for C$17 a unit. Public Storage Canadian Properties’ independent directors said an independent valuation found the company’s fair value is C$20 to C$24 a unit.
Suncor Energy Inc., Canada’s largest oil and gas company, declined 5.4 percent as oil futures dropped below $80 a barrel for the first time in five weeks. Kinross Gold Corp., Canada’s third-biggest gold producer, sank 4.4 percent after saying it’s buying a stake in Red Back Mining Inc. Public Storage Canadian Properties, which rents storage space in Canada, jumped 29 percent on a bid to take the company private.
The Standard & Poor’s/TSX Composite Index decreased 155.73 points, or 1.3 percent, to a two-month low of 11,875.13.
“People are worried about Europe,” said David Baskin, president of Baskin Financial Services Inc. in Toronto, which manages C$350 million ($340 million). “Greece is a mess; they’re killing people on the streets. They don’t know what to make of it, and when people are uncertain, they sell.”
The S&P/TSX has slumped 2.7 percent this week for the biggest three-day loss since January as the euro has fallen to a 13-month low against the U.S. dollar. The Reuters/Jefferies CRB Commodity Index fell to its lowest level in five weeks.
Energy and raw materials companies make up 45 percent of Canadian stocks by market value.
‘Grave Contagion‘
Axel Weber, a council member of the European Central Bank, said today Greece’s fiscal crisis threatens “grave contagion effects.”
Greece, Spain, Ireland and the UK had budget deficits of at least 10 percent of gross domestic product last year and Italy’s national debt rose to 116 percent of GDP, according to the European Union’s statistical agency.
Three people were killed today after Greeks protesting proposed spending cuts and tax increases burned down a building containing a bank branch. The country’s biggest airport canceled all flights as air-traffic controllers joined a general strike.
Crude oil futures dropped 3.3 percent, adding to a 4 percent decline yesterday. The S&P/TSX Energy Index sank 2.7 percent, the most since Oct. 28.
Suncor tumbled 5.4 percent to C$32.51. Canadian Natural Resources Ltd., Canada’s second-largest energy company by market value, decreased 4.1 percent to C$73.83. Cenovus Energy Inc., the oil company spun off from EnCana Corp. in December, slumped 3 percent to C$27.76.
Pharmacy-benefits manager SXC Health Solutions Corp. led the S&P/TSX with a 7 percent retreat to C$63.01 before the release of its first-quarter earnings. SXC shares have still nearly doubled over the past nine months.
Banks Fall
The S&P/TSX Financials Index declined to its lowest level since Mar. 11 as banks slipped. Royal Bank of Canada, the country’s biggest bank, lost 0.8 percent to C$61.21. Toronto- Dominion Bank, its largest domestic rival, decreased 1.6 percent to C$73.60. Bank of Montreal, the No. 4 bank by assets, slumped 2.2 percent to C$60.93.
Brokerage GMP Capital Inc. climbed 3.3 percent to C$12.03, snapping a 14-day streak of declines.
Kinross fell 4.4 percent to C$18.21 after announcing it is buying a 9.4 percent stake in Red Back for C$600 million ($582 million). TD analyst Greg Barnes cut his rating on Kinross to “hold” from “buy,” telling clients, “the rationale behind the investment is unclear to us.”
Thomson Reuters Rises
Financial news and information provider Thomson Reuters Inc. climbed 3 percent to a two-year high of C$38.02 after being added to TD analyst Vince Valentini’s “action list” of top stocks.
Producers of coal used in steel mills rallied as China’s benchmark coal price rose the most in four months. Western Coal Corp. surged 6.9 percent to C$5.59 to lead the S&P/TSX. Grande Cache Coal Corp. gained for the first time in 11 days, advancing 9.5 percent to C$6.46. Teck Resources Ltd. increased 0.5 percent to C$37.44.
Public Storage Canadian Properties soared 29 percent, the most in at least 18 years, to C$18.10. An entity controlled by B. Wayne Hughes, the company’s chairman and majority owner, and his daughter, Tamara Gustavson, offered to buy the rest of the company private for C$17 a unit. Public Storage Canadian Properties’ independent directors said an independent valuation found the company’s fair value is C$20 to C$24 a unit.
U.S. Senate Approves Anti-Bailout Amendment to Financial Bill
May 5 (Bloomberg) -- The U.S. Senate today approved a change to financial-overhaul legislation banning taxpayer-funded bailouts of Wall Street firms as Democrats aim to attract Republican support for the broader bill.
Lawmakers voted 96-1 for an amendment offered by Senator Barbara Boxer, a California Democrat, to bar use of government funds to rescue failing financial companies. The move revises a provision that Republicans said would perpetuate bailouts.
Senate Banking Committee Chairman Christopher Dodd, the Connecticut Democrat who drafted the overhaul legislation, said today he wants to satisfy those who doubt “the too-big-to-fail proposition is no longer a question.”
The Senate is debating Dodd’s proposal for a sweeping rewrite of rules governing Wall Street, intended to prevent a repeat of the 2008 financial crisis that led the U.S. to extend $700 billion in taxpayer aid to companies including Citigroup Inc. and Bank of America Corp.
Republicans have argued that the bill contains loopholes that would permit future bailouts, focusing their opposition on a provision giving the government authority to liquidate failing financial firms whose collapse would roil the economy.
Dodd today announced he and Alabama Senator Richard Shelby, the Banking Committee’s top Republican, had struck a deal on an amendment to allay those concerns.
The two had agreed on a deal that would eliminate a proposed industry-paid $50 billion fund to cover the cost of liquidations and ensure shareholders and unsecured creditors bear losses when the government unwinds a company, Dodd said today on the Senate floor. The Senate is also voting on this amendment today.
The deal allowed the Senate to proceed to votes on amendments after a week’s delay as the two lawmakers worked toward compromise.
Shelby
Shelby said his agreement with Dodd didn’t mean he supported the broader bill.
“This over 1,500 page bill contains a broad reach into the global financial system and the American economy,” Shelby said on the Senate floor. “Now that we are over this particular hurdle, we will be addressing many additional concerns that we have in the coming days.”
Dodd’s bill, which was approved by the Senate Banking Committee in March over Republican opposition, is based on a proposal President Barack Obama released last June. The measure is similar to legislation approved by the House of Representatives in December.
Lawmakers voted 96-1 for an amendment offered by Senator Barbara Boxer, a California Democrat, to bar use of government funds to rescue failing financial companies. The move revises a provision that Republicans said would perpetuate bailouts.
Senate Banking Committee Chairman Christopher Dodd, the Connecticut Democrat who drafted the overhaul legislation, said today he wants to satisfy those who doubt “the too-big-to-fail proposition is no longer a question.”
The Senate is debating Dodd’s proposal for a sweeping rewrite of rules governing Wall Street, intended to prevent a repeat of the 2008 financial crisis that led the U.S. to extend $700 billion in taxpayer aid to companies including Citigroup Inc. and Bank of America Corp.
Republicans have argued that the bill contains loopholes that would permit future bailouts, focusing their opposition on a provision giving the government authority to liquidate failing financial firms whose collapse would roil the economy.
Dodd today announced he and Alabama Senator Richard Shelby, the Banking Committee’s top Republican, had struck a deal on an amendment to allay those concerns.
The two had agreed on a deal that would eliminate a proposed industry-paid $50 billion fund to cover the cost of liquidations and ensure shareholders and unsecured creditors bear losses when the government unwinds a company, Dodd said today on the Senate floor. The Senate is also voting on this amendment today.
The deal allowed the Senate to proceed to votes on amendments after a week’s delay as the two lawmakers worked toward compromise.
Shelby
Shelby said his agreement with Dodd didn’t mean he supported the broader bill.
“This over 1,500 page bill contains a broad reach into the global financial system and the American economy,” Shelby said on the Senate floor. “Now that we are over this particular hurdle, we will be addressing many additional concerns that we have in the coming days.”
Dodd’s bill, which was approved by the Senate Banking Committee in March over Republican opposition, is based on a proposal President Barack Obama released last June. The measure is similar to legislation approved by the House of Representatives in December.
Monday, May 3, 2010
Airline Bonds Rally as Continental, UAL Merge: Credit Markets
May 4 (Bloomberg) -- Airline bond yields are the lowest relative to the rest of the junk-bond market in more than two years as investors step up bets a rebound in air traffic will make it easier for carriers to repay debt.
The extra yield investors demand to own airline bonds instead of Treasuries fell to 6.04 percentage points as of April 30, according to Bank of America Merrill Lynch index data. That’s 0.43 percentage point wider than junk bonds on average, the tightest the spread has been since March 2008.
Carriers are being helped as the return of business travelers and a rise in average ticket prices offsets a 64 percent jump in the average spot-market price for jet fuel from a year earlier. United Airlines parent UAL Corp., which agreed on May 2 to merge with Continental Airlines Inc., was put on review for a possible upgrade from Caa1 by Moody’s Investors Service and its B- rating was placed on CreditWatch with “positive” implications by Standard & Poor’s.
“People view airline debt as less risky as the economy improves,” said Jeff Straebler, a fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut. “With the economy slowly improving, and most people feel that it’s going to stay that way, really the big concern is simply oil.”
Airline bonds have returned 9.35 percent this year through April 30, 2.19 percentage points more than high-yield bonds overall, Bank of America Merrill Lynch index data show. Spreads have narrowed 229 basis points, or 2.29 percentage points, compared with a tightening of 78 basis points to 561 for all speculative-grade credit.
Fed Survey
Elsewhere in credit markets, the extra yield investors demand to own company debt instead of Treasuries was unchanged at 149 basis points, down from 176 at the end of 2009, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Average yields rose 3.3 basis points to 3.958 percent.
The smallest proportion of banks in two years restricted standards on business lending in the first quarter, signaling a possible thaw in credit, according to a Federal Reserve survey of senior loan officers released yesterday. More banks expressed a greater willingness to make installment loans to consumers than in the previous quarterly survey.
“This is just one more feather in the cap of the recovery in the financial markets,” said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut. “We’re going in the right direction.”
Loan Standards
The shortage of credit, as banks tightened loan standards and many consumers and businesses paid off debt, has impeded the recovery. The central bank cited “tight credit” among the reasons for its April 28 decision to keep interest rates at zero to 0.25 percent for an “extended period.”
Manufacturing in the U.S. expanded in April at the fastest pace since June 2004, indicating the world’s largest economy accelerated as it entered the second quarter. The Institute for Supply Management’s factory index rose to 60.4, exceeding the median forecast in a Bloomberg News survey of 76 economists, from a March reading of 59.6.
Dave & Buster’s, the closely held operator of restaurant entertainment complexes, is seeking $200 million in loans to finance its leveraged buyout. Oak Hill Capital Partners is buying the Dallas-based company from Wellspring Capital Management LLC for about $570 million, Dave & Buster’s said yesterday in a statement. JPMorgan Chase & Co. and Jefferies Group Inc. committed to provide debt financing for the acquisition, according to the statement.
Hyundai Debt
Hyundai Motor Co. plans to issue $960.8 million of bonds backed by auto loans as soon as May 5, according to a person familiar with the offering, who declined to be identified because terms aren’t public. Hyundai last issued similar debt in September, according to data compiled by Bloomberg.
Top-rated bonds backed by auto loans yield about 0.56 percentage point more than Treasuries, compared with 0.81 percentage point on Jan. 5, according to a Bank of America Merrill Lynch index. The debt was trading at a spread of about 3.16 percentage points a year ago, the data show.
About $21 billion in securities backed by auto loans have been sold in 2010, compared with $13.7 billion during the same period last year, Bloomberg data show.
Americans’ spending rose 0.6 percent in March, the most in five months, the Commerce Department said. Incomes increased 0.3 percent, the first gain this year.
Credit Risk Falls
The cost of protecting against defaults on U.S. corporate bonds fell, with the Markit CDX North America Investment Grade Index declining 1.6 basis point to 90.5 basis points as of 5:46 p.m. in New York, according to Markit Group Ltd. The credit- default swaps index typically falls as investor confidence improves and rises as it deteriorates.
The Markit iTraxx Australia index dropped 3 basis points to 84.5 basis points, according to Westpac Banking Corp. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 100.5, Royal Bank of Scotland Group Plc prices show.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Emerging Markets
In emerging markets, spreads widened 3 basis points to 261 basis points, according to JPMorgan’s EMBI+ index, even as the European Central Bank joined international efforts to help Greece avoid a default. The ECB said it would indefinitely accept Greece’s debt as collateral regardless of the credit rating.
Yields on Brazil’s interest-rate futures contracts jumped to the highest level in 14 months as faster-than-forecast inflation boosted speculation benchmark rates will rise. The yield on the contract due January 2011, the most active in Sao Paulo trading, climbed 8 basis points to 11.2 percent at 4:03 p.m. New York time, its highest level since Feb. 25, 2009.
UAL, based in Chicago, and Continental, which has its headquarters in Houston, agreed to merge in a stock swap valued at more than $3 billion to create the world’s largest airline, reviving a deal that fell apart two years ago.
“Consolidation is a positive,” Straebler said in a telephone interview. “If you have fewer large players, they are less likely to try and expand market share at the cost of profitability.”
United’s yield, or average fare per mile, climbed 12 percent in the first quarter in the company’s main jet business. Revenue for each seat flown per mile, a measure of demand and ticket prices, jumped 19 percent while costs on the same basis rose 8.3 percent.
Airline Junk Bonds
Airlines issued $2.66 billion of high-yield notes last year, compared with no sales in 2008 and more than four times the amount of offerings in 2007, Bloomberg data show. United, the only airline to offer dollar-denominated junk bonds in 2010, sold $700 million of notes on Jan. 11, the data show.
The carrier’s $500 million of 9.875 percent senior secured debt due in August 2013 has risen about 6.7 cents from issue to 106 cents on the dollar, according to RW Pressprich & Co. United’s 12 percent secured notes have jumped 12.7 cents to 108.
“Airlines look to be in good financial shape for 2010,” analysts at independent debt research firm CreditSights Inc. wrote in an April 20 report. Carriers’ “access to capital markets should allow financing of 2010 aircraft,” capital expenditures and for refinancing of secured debt maturities, they wrote.
Air carrier “credit quality has improved, but not to the same degree as spreads have tightened,” said Jonathan Root, an analyst at Moody’s in New York. “The investors have comfort with the higher risk because they have the airplanes as security.”
Of the $3.36 billion of airline debt issued since the start of 2009, 91.1 percent has been secured by collateral, Bloomberg data show.
The extra yield investors demand to own airline bonds instead of Treasuries fell to 6.04 percentage points as of April 30, according to Bank of America Merrill Lynch index data. That’s 0.43 percentage point wider than junk bonds on average, the tightest the spread has been since March 2008.
Carriers are being helped as the return of business travelers and a rise in average ticket prices offsets a 64 percent jump in the average spot-market price for jet fuel from a year earlier. United Airlines parent UAL Corp., which agreed on May 2 to merge with Continental Airlines Inc., was put on review for a possible upgrade from Caa1 by Moody’s Investors Service and its B- rating was placed on CreditWatch with “positive” implications by Standard & Poor’s.
“People view airline debt as less risky as the economy improves,” said Jeff Straebler, a fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut. “With the economy slowly improving, and most people feel that it’s going to stay that way, really the big concern is simply oil.”
Airline bonds have returned 9.35 percent this year through April 30, 2.19 percentage points more than high-yield bonds overall, Bank of America Merrill Lynch index data show. Spreads have narrowed 229 basis points, or 2.29 percentage points, compared with a tightening of 78 basis points to 561 for all speculative-grade credit.
Fed Survey
Elsewhere in credit markets, the extra yield investors demand to own company debt instead of Treasuries was unchanged at 149 basis points, down from 176 at the end of 2009, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Average yields rose 3.3 basis points to 3.958 percent.
The smallest proportion of banks in two years restricted standards on business lending in the first quarter, signaling a possible thaw in credit, according to a Federal Reserve survey of senior loan officers released yesterday. More banks expressed a greater willingness to make installment loans to consumers than in the previous quarterly survey.
“This is just one more feather in the cap of the recovery in the financial markets,” said Michael Darda, chief economist at MKM Partners LLC in Greenwich, Connecticut. “We’re going in the right direction.”
Loan Standards
The shortage of credit, as banks tightened loan standards and many consumers and businesses paid off debt, has impeded the recovery. The central bank cited “tight credit” among the reasons for its April 28 decision to keep interest rates at zero to 0.25 percent for an “extended period.”
Manufacturing in the U.S. expanded in April at the fastest pace since June 2004, indicating the world’s largest economy accelerated as it entered the second quarter. The Institute for Supply Management’s factory index rose to 60.4, exceeding the median forecast in a Bloomberg News survey of 76 economists, from a March reading of 59.6.
Dave & Buster’s, the closely held operator of restaurant entertainment complexes, is seeking $200 million in loans to finance its leveraged buyout. Oak Hill Capital Partners is buying the Dallas-based company from Wellspring Capital Management LLC for about $570 million, Dave & Buster’s said yesterday in a statement. JPMorgan Chase & Co. and Jefferies Group Inc. committed to provide debt financing for the acquisition, according to the statement.
Hyundai Debt
Hyundai Motor Co. plans to issue $960.8 million of bonds backed by auto loans as soon as May 5, according to a person familiar with the offering, who declined to be identified because terms aren’t public. Hyundai last issued similar debt in September, according to data compiled by Bloomberg.
Top-rated bonds backed by auto loans yield about 0.56 percentage point more than Treasuries, compared with 0.81 percentage point on Jan. 5, according to a Bank of America Merrill Lynch index. The debt was trading at a spread of about 3.16 percentage points a year ago, the data show.
About $21 billion in securities backed by auto loans have been sold in 2010, compared with $13.7 billion during the same period last year, Bloomberg data show.
Americans’ spending rose 0.6 percent in March, the most in five months, the Commerce Department said. Incomes increased 0.3 percent, the first gain this year.
Credit Risk Falls
The cost of protecting against defaults on U.S. corporate bonds fell, with the Markit CDX North America Investment Grade Index declining 1.6 basis point to 90.5 basis points as of 5:46 p.m. in New York, according to Markit Group Ltd. The credit- default swaps index typically falls as investor confidence improves and rises as it deteriorates.
The Markit iTraxx Australia index dropped 3 basis points to 84.5 basis points, according to Westpac Banking Corp. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 100.5, Royal Bank of Scotland Group Plc prices show.
Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Emerging Markets
In emerging markets, spreads widened 3 basis points to 261 basis points, according to JPMorgan’s EMBI+ index, even as the European Central Bank joined international efforts to help Greece avoid a default. The ECB said it would indefinitely accept Greece’s debt as collateral regardless of the credit rating.
Yields on Brazil’s interest-rate futures contracts jumped to the highest level in 14 months as faster-than-forecast inflation boosted speculation benchmark rates will rise. The yield on the contract due January 2011, the most active in Sao Paulo trading, climbed 8 basis points to 11.2 percent at 4:03 p.m. New York time, its highest level since Feb. 25, 2009.
UAL, based in Chicago, and Continental, which has its headquarters in Houston, agreed to merge in a stock swap valued at more than $3 billion to create the world’s largest airline, reviving a deal that fell apart two years ago.
“Consolidation is a positive,” Straebler said in a telephone interview. “If you have fewer large players, they are less likely to try and expand market share at the cost of profitability.”
United’s yield, or average fare per mile, climbed 12 percent in the first quarter in the company’s main jet business. Revenue for each seat flown per mile, a measure of demand and ticket prices, jumped 19 percent while costs on the same basis rose 8.3 percent.
Airline Junk Bonds
Airlines issued $2.66 billion of high-yield notes last year, compared with no sales in 2008 and more than four times the amount of offerings in 2007, Bloomberg data show. United, the only airline to offer dollar-denominated junk bonds in 2010, sold $700 million of notes on Jan. 11, the data show.
The carrier’s $500 million of 9.875 percent senior secured debt due in August 2013 has risen about 6.7 cents from issue to 106 cents on the dollar, according to RW Pressprich & Co. United’s 12 percent secured notes have jumped 12.7 cents to 108.
“Airlines look to be in good financial shape for 2010,” analysts at independent debt research firm CreditSights Inc. wrote in an April 20 report. Carriers’ “access to capital markets should allow financing of 2010 aircraft,” capital expenditures and for refinancing of secured debt maturities, they wrote.
Air carrier “credit quality has improved, but not to the same degree as spreads have tightened,” said Jonathan Root, an analyst at Moody’s in New York. “The investors have comfort with the higher risk because they have the airplanes as security.”
Of the $3.36 billion of airline debt issued since the start of 2009, 91.1 percent has been secured by collateral, Bloomberg data show.
Australian, South Korean Stocks Rise on U.S. Manufacturing Data
May 4 (Bloomberg) -- Australian and South Korean stocks gained after U.S. manufacturing grew at the fastest pace since 2004 and personal spending increased, buoying confidence in the global economic recovery.
Hyundai Motor Co., South Korea’s biggest automaker, climbed 3.7 percent in Seoul on higher U.S. sales. Westfield Group, the world’s biggest shopping center by market value, gained 2.4 percent in Sydney after reporting better-than-expected growth in its Australian malls. Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, rose 0.6 percent in Sydney after crude oil climbed to a 3-week high in New York yesterday.
“The mentality of the market is still buy the dips, especially when the economic data from the U.S. is all very positive,” said Chris Weston, an institutional dealer at IG Markets in Melbourne.
The MSCI Asia Pacific excluding Japan Index increased 0.3 percent to 423.49 as of 8:30 a.m. in Hong Kong. The gauge has increased 13 percent from its low this year on Feb. 8 as better- than-estimated economic and earnings reports worldwide offset concerns a debt crisis in Europe will damp growth.
Australia’s S&P/ASX 200 Index added 0.1 percent to 4,789.40. New Zealand’s NZX 50 Index rose 0.4 percent. South Korea’s Kospi Index climbed 0.6 percent. Japan is closed for a public holiday.
Futures on the Standard & Poor’s 500 Index were little changed. The gauge advanced 1.3 percent yesterday, the most since March 5, after the Institute for Supply Management’s index of manufacturing advanced to 60.4 in April from 59.6 a month earlier. Commerce Department figures showed consumer spending in the U.S. rose in March by the most in five months and incomes climbed for the first time this year.
Australian manufacturing growth accelerated in April to the fastest pace in almost eight years, the Australian Industry Group and PricewaterhouseCoopers said in a separate survey released yesterday in Canberra.
Hyundai Motor Co., South Korea’s biggest automaker, climbed 3.7 percent in Seoul on higher U.S. sales. Westfield Group, the world’s biggest shopping center by market value, gained 2.4 percent in Sydney after reporting better-than-expected growth in its Australian malls. Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, rose 0.6 percent in Sydney after crude oil climbed to a 3-week high in New York yesterday.
“The mentality of the market is still buy the dips, especially when the economic data from the U.S. is all very positive,” said Chris Weston, an institutional dealer at IG Markets in Melbourne.
The MSCI Asia Pacific excluding Japan Index increased 0.3 percent to 423.49 as of 8:30 a.m. in Hong Kong. The gauge has increased 13 percent from its low this year on Feb. 8 as better- than-estimated economic and earnings reports worldwide offset concerns a debt crisis in Europe will damp growth.
Australia’s S&P/ASX 200 Index added 0.1 percent to 4,789.40. New Zealand’s NZX 50 Index rose 0.4 percent. South Korea’s Kospi Index climbed 0.6 percent. Japan is closed for a public holiday.
Futures on the Standard & Poor’s 500 Index were little changed. The gauge advanced 1.3 percent yesterday, the most since March 5, after the Institute for Supply Management’s index of manufacturing advanced to 60.4 in April from 59.6 a month earlier. Commerce Department figures showed consumer spending in the U.S. rose in March by the most in five months and incomes climbed for the first time this year.
Australian manufacturing growth accelerated in April to the fastest pace in almost eight years, the Australian Industry Group and PricewaterhouseCoopers said in a separate survey released yesterday in Canberra.
Sunday, May 2, 2010
Asia Sovereign Risk Index Starts as Government Debt Focus Grows
May 3 (Bloomberg) -- Asia’s newest bond risk benchmark and only purely sovereign index begins trading tomorrow as European credit downgrades sharpen investor focus on government debt.
The Markit iTraxx SovX Asia Pacific index will track credit-default swaps on debt of China, Malaysia, Thailand, South Korea, Vietnam, the Philippines, Indonesia, Japan, Australia and New Zealand. Each nation will be equally weighted and the index will be traded in U.S. dollars with a five-year maturity.
“This is a welcome addition,” Joseph Yiu, a credit trader at Westpac Banking Corp., said in a phone interview from Sydney. “It will allow investors to play the sovereign index off against single names, which should increase liquidity.”
Standard & Poor’s last week downgraded Greece, Portugal and Spain, prompting Angel Gurria, head of the Organization for Economic Cooperation and Development, to warn of the risks caused by the build-up in sovereign debt.
The sovereign credit swap index attracting most interest from traders is the Markit iTraxx SovX Western Europe, Yiu said. It rose 36.5 basis points last month as European Union and International Monetary Fund officials put final touches on a package that will let Greece tap emergency loans.
Markit Group Ltd. London-based spokeswoman Caroline Lumley confirmed the May 4 start date and declined to comment further.
Starting Level
Credit-default swaps are used to speculate on the creditworthiness of a company or government, or to hedge against losses on bonds and loans, and let buyers demand payment from sellers if the underlying borrower fails to make scheduled interest or principal payments. Prices rise as perceptions of creditworthiness deteriorate.
Based on an average of the 10 countries to be included, the SovX Asia Pacific index should start trading around the 105 basis-point mark, and track the SovX Western Europe index, Barclays Capital credit analysts led by Soren Willemann said.
“We’ve been trading SovX Western Europe since September and it’s been a good product launch with a variety of accounts involved,” Willemann said by phone from London. On a theoretical historic basis, the two indexes would have “exhibited a very strong relationship,” he said.
The wide range of nations in the SovX Asia Pacific index may make it difficult to reflect sovereign risk, according to Brayan Lai, a credit analyst at Credit Agricole CIB.
“If you’re looking at a systemic hedge against Asia it might be reasonably useful, but the countries included differ so much in so many respects,” Lai said. Weighting countries according to the size of their GDP would be “more reflective of risk” as would splitting the index into developed and developing economies, he said.
‘Manipulate Markets’
China, the world’s fastest-growing major economy, has a gross domestic product almost 17 times the size of Thailand’s which in turn has an economy three times the size of Vietnam’s, according to data compiled by Bloomberg.
A sovereign swaps index in Asia may also give investors “more incentive to manipulate markets,” said James Dondero, Highland Capital Management LP president and co-founder. Greek Prime Minister George Papandreou blamed credit swap traders for worsening his nation’s debt crisis and driving up borrowing costs. “This index will make it easier for investors to bet on Asian sovereigns and distort things,” Dondero said in an interview in Singapore April 29.
Claims that default swaps are responsible for a surge in government borrowing costs are “flawed and inconsistent,” trade group the International Swaps and Derivatives Association said on March 15.
The Markit iTraxx SovX Asia Pacific index will track credit-default swaps on debt of China, Malaysia, Thailand, South Korea, Vietnam, the Philippines, Indonesia, Japan, Australia and New Zealand. Each nation will be equally weighted and the index will be traded in U.S. dollars with a five-year maturity.
“This is a welcome addition,” Joseph Yiu, a credit trader at Westpac Banking Corp., said in a phone interview from Sydney. “It will allow investors to play the sovereign index off against single names, which should increase liquidity.”
Standard & Poor’s last week downgraded Greece, Portugal and Spain, prompting Angel Gurria, head of the Organization for Economic Cooperation and Development, to warn of the risks caused by the build-up in sovereign debt.
The sovereign credit swap index attracting most interest from traders is the Markit iTraxx SovX Western Europe, Yiu said. It rose 36.5 basis points last month as European Union and International Monetary Fund officials put final touches on a package that will let Greece tap emergency loans.
Markit Group Ltd. London-based spokeswoman Caroline Lumley confirmed the May 4 start date and declined to comment further.
Starting Level
Credit-default swaps are used to speculate on the creditworthiness of a company or government, or to hedge against losses on bonds and loans, and let buyers demand payment from sellers if the underlying borrower fails to make scheduled interest or principal payments. Prices rise as perceptions of creditworthiness deteriorate.
Based on an average of the 10 countries to be included, the SovX Asia Pacific index should start trading around the 105 basis-point mark, and track the SovX Western Europe index, Barclays Capital credit analysts led by Soren Willemann said.
“We’ve been trading SovX Western Europe since September and it’s been a good product launch with a variety of accounts involved,” Willemann said by phone from London. On a theoretical historic basis, the two indexes would have “exhibited a very strong relationship,” he said.
The wide range of nations in the SovX Asia Pacific index may make it difficult to reflect sovereign risk, according to Brayan Lai, a credit analyst at Credit Agricole CIB.
“If you’re looking at a systemic hedge against Asia it might be reasonably useful, but the countries included differ so much in so many respects,” Lai said. Weighting countries according to the size of their GDP would be “more reflective of risk” as would splitting the index into developed and developing economies, he said.
‘Manipulate Markets’
China, the world’s fastest-growing major economy, has a gross domestic product almost 17 times the size of Thailand’s which in turn has an economy three times the size of Vietnam’s, according to data compiled by Bloomberg.
A sovereign swaps index in Asia may also give investors “more incentive to manipulate markets,” said James Dondero, Highland Capital Management LP president and co-founder. Greek Prime Minister George Papandreou blamed credit swap traders for worsening his nation’s debt crisis and driving up borrowing costs. “This index will make it easier for investors to bet on Asian sovereigns and distort things,” Dondero said in an interview in Singapore April 29.
Claims that default swaps are responsible for a surge in government borrowing costs are “flawed and inconsistent,” trade group the International Swaps and Derivatives Association said on March 15.
China’s Reserve-Ratio Rise May Not Be Enough to Whip Inflation
May 3 (Bloomberg) -- China’s third increase of bank reserve ratios this year left benchmark interest rates and the yuan’s peg to the dollar unchanged, risking the need for more concerted effort to contain property prices and inflation in coming months.
The requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its Web site yesterday. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.
The latest move adds to a government crackdown on property speculation after record price increases in March and came on a holiday weekend, with Chinese markets shut today. Within an hour of the central bank announcement, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.
“Beijing still prefers to fine-tune credit conditions and the property market rather than using blunter instruments that impact the entire economy like higher lending rates and a stronger currency,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. The danger is that the approach “will not be enough to keep these price pressures under control, which would then force policy-makers to tighten more aggressively later on.”
Yesterday’s move removes 300 billion yuan ($44 billion) from the financial system and may push back an interest-rate increase until “early June,” according to Deutsche Bank AG.
The Shanghai Composite Index has tumbled 12 percent this year on concern that government measures to cool the property market and the economy will hurt profits.
Speculative Capital
Inflows of speculative capital from investors betting on yuan gains may have driven yesterday’s move, said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co.
Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, said “China has been inundated with hot money on the back of yuan revaluation speculation.”
Non-deliverable yuan forwards indicate the government will end the peg to the dollar, letting the currency gain 3.2 percent within 12 months.
In March, a $22.5 billion jump in foreign-exchange reserves, the biggest gain in four months, suggested investors could be showing a renewed appetite for bets on the currency. Exports and company profits are rebounding and the economy expanded 11.9 percent in the first quarter from a year earlier.
Surging Profits
Baoshan Iron & Steel Co., the nation’s largest publicly traded steelmaker, estimates first-half profit may increase as much as 10-fold, while Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. posted the largest first- quarter profits among the world’s banks.
Still, Chinese policy makers have expressed caution about the outlook for the domestic and global economies as Europe, the nation’s biggest export market, grapples with a debt crisis. The emergency in Greece makes an interest-rate increase “less and less likely” this quarter and could delay gains in the yuan, Bank of America-Merrill Lynch said last week.
“The foundation of the recovery in the Chinese economy is not very solid, so we will continue to adopt a moderately loose monetary policy and an expansionary fiscal policy,” Xie, the finance minister, said in Tashkent, Uzbekistan, yesterday.
Speculation that China was poised to let the yuan gain intensified last month after U.S. Treasury Secretary Timothy F. Geithner delayed a report that could name the nation a currency manipulator and had an unscheduled meeting in Beijing with Chinese Vice Premier Wang Qishan. The currency trades at about 6.83 per dollar.
Central Bank’s Trigger
Manufacturing accelerated in April and material costs jumped, a May 1 report showed, underscoring the risk of overheating in the fastest-growing major economy. Those data, and possibly strong loan growth in April, may have triggered yesterday’s move, said Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd.
Reserve-ratio increases and the targeting of a 22 percent reduction in new loans this year are among efforts to wind back stimulus that has driven the nation’s recovery from the financial crisis. Measures to cool the real-estate market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second-home purchases.
In March, property prices rose 11.7 percent across 70 cities from a year earlier, the most since data began in 2005. The inflation rate was 2.4 percent, compared with a government target for the year of about 3 percent.
Inflation Eroding Savings
In February, consumer prices rose 2.7 percent, the most in 16 months, topping the one-year deposit rate of 2.25 percent. The benchmark one-year lending rate is 5.31 percent.
PBOC Deputy Governor Zhu Min said March 25 that rate rises were a “heavy-duty weapon” and alternative measures were working well.
China faces a complex economic environment this year amid a weak global recovery and domestic challenges including managing inflation expectations and risks from local-government borrowing and property loans, banking regulator Liu Mingkang said April 30.
Investor Marc Faber said April 21 that China’s “excessive” credit expansion and surging real-estate prices are “danger signals” and “there are some symptoms of a bubble building.”
China appears heading for an “asset boom, bubble and bust” that probably won’t be thwarted by tighter economic policy, Citigroup Inc. economists said in a March report. It may take as long as two years for the bubble to form and at least three years for it to burst, London-based Willem Buiter, a former Bank of England policy maker, and Shen Minggao in Hong Kong estimated.
Premier Wen Jiabao’s government is aiming to slow credit growth to 7.5 trillion yuan ($1.4 trillion) this year from a record 9.59 trillion yuan in 2009. In the first three months of 2010, banks lent 35 percent of the full-year target.
--Kevin Hamlin, Li Yanping, Sophie Leung, Feiwen Rong, Shamim Adam. Editors: Chris Anstey, Paul Panckhurst.
The requirement will increase 50 basis points effective May 10, the People’s Bank of China said on its Web site yesterday. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.
The latest move adds to a government crackdown on property speculation after record price increases in March and came on a holiday weekend, with Chinese markets shut today. Within an hour of the central bank announcement, Finance Minister Xie Xuren said that officials remained committed to expansionary policies to cement the nation’s recovery.
“Beijing still prefers to fine-tune credit conditions and the property market rather than using blunter instruments that impact the entire economy like higher lending rates and a stronger currency,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. The danger is that the approach “will not be enough to keep these price pressures under control, which would then force policy-makers to tighten more aggressively later on.”
Yesterday’s move removes 300 billion yuan ($44 billion) from the financial system and may push back an interest-rate increase until “early June,” according to Deutsche Bank AG.
The Shanghai Composite Index has tumbled 12 percent this year on concern that government measures to cool the property market and the economy will hurt profits.
Speculative Capital
Inflows of speculative capital from investors betting on yuan gains may have driven yesterday’s move, said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co.
Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong, said “China has been inundated with hot money on the back of yuan revaluation speculation.”
Non-deliverable yuan forwards indicate the government will end the peg to the dollar, letting the currency gain 3.2 percent within 12 months.
In March, a $22.5 billion jump in foreign-exchange reserves, the biggest gain in four months, suggested investors could be showing a renewed appetite for bets on the currency. Exports and company profits are rebounding and the economy expanded 11.9 percent in the first quarter from a year earlier.
Surging Profits
Baoshan Iron & Steel Co., the nation’s largest publicly traded steelmaker, estimates first-half profit may increase as much as 10-fold, while Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. posted the largest first- quarter profits among the world’s banks.
Still, Chinese policy makers have expressed caution about the outlook for the domestic and global economies as Europe, the nation’s biggest export market, grapples with a debt crisis. The emergency in Greece makes an interest-rate increase “less and less likely” this quarter and could delay gains in the yuan, Bank of America-Merrill Lynch said last week.
“The foundation of the recovery in the Chinese economy is not very solid, so we will continue to adopt a moderately loose monetary policy and an expansionary fiscal policy,” Xie, the finance minister, said in Tashkent, Uzbekistan, yesterday.
Speculation that China was poised to let the yuan gain intensified last month after U.S. Treasury Secretary Timothy F. Geithner delayed a report that could name the nation a currency manipulator and had an unscheduled meeting in Beijing with Chinese Vice Premier Wang Qishan. The currency trades at about 6.83 per dollar.
Central Bank’s Trigger
Manufacturing accelerated in April and material costs jumped, a May 1 report showed, underscoring the risk of overheating in the fastest-growing major economy. Those data, and possibly strong loan growth in April, may have triggered yesterday’s move, said Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd.
Reserve-ratio increases and the targeting of a 22 percent reduction in new loans this year are among efforts to wind back stimulus that has driven the nation’s recovery from the financial crisis. Measures to cool the real-estate market have included a ban on loans for third-home purchases and raising mortgage rates and down-payment requirements for second-home purchases.
In March, property prices rose 11.7 percent across 70 cities from a year earlier, the most since data began in 2005. The inflation rate was 2.4 percent, compared with a government target for the year of about 3 percent.
Inflation Eroding Savings
In February, consumer prices rose 2.7 percent, the most in 16 months, topping the one-year deposit rate of 2.25 percent. The benchmark one-year lending rate is 5.31 percent.
PBOC Deputy Governor Zhu Min said March 25 that rate rises were a “heavy-duty weapon” and alternative measures were working well.
China faces a complex economic environment this year amid a weak global recovery and domestic challenges including managing inflation expectations and risks from local-government borrowing and property loans, banking regulator Liu Mingkang said April 30.
Investor Marc Faber said April 21 that China’s “excessive” credit expansion and surging real-estate prices are “danger signals” and “there are some symptoms of a bubble building.”
China appears heading for an “asset boom, bubble and bust” that probably won’t be thwarted by tighter economic policy, Citigroup Inc. economists said in a March report. It may take as long as two years for the bubble to form and at least three years for it to burst, London-based Willem Buiter, a former Bank of England policy maker, and Shen Minggao in Hong Kong estimated.
Premier Wen Jiabao’s government is aiming to slow credit growth to 7.5 trillion yuan ($1.4 trillion) this year from a record 9.59 trillion yuan in 2009. In the first three months of 2010, banks lent 35 percent of the full-year target.
--Kevin Hamlin, Li Yanping, Sophie Leung, Feiwen Rong, Shamim Adam. Editors: Chris Anstey, Paul Panckhurst.
Alaska Air, BP, Nomura, Pozen, Sabesp: U.S. Equity Preview
May 2 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading tomorrow. Stock symbols are in parentheses, and prices are as of 5:20 p.m. in New York unless otherwise noted.
Alaska Air Group Inc. (ALK:US): The airline may rise as much as 40 percent as the traffic around Seattle and Hawaii improves, and industry consolidation leaves fewer competitors, Barron’s reported.
BP Plc (BPAQF:US): Europe’s largest oil and gas company and Transocean Ltd. (RIG:US) are among companies that may rebound after the shares were sold amid concern over the remediation costs of an oil spill in the Gulf of Mexico, Barron’s reported. Oil companies affected by the spill, which began April 20, including Anadarko Petroleum Corp. (APC:US) and Halliburton Co. (HAL:US), have lost a combined $40 billion in market value, the weekly newspaper said in its May 3 edition.
Cia. De Saneamento Basico do Estado de Sao Paulo (SBS:US): Brazil’s biggest water utility, also known as Sabesp, may rise as the nation’s economy rebounds and global demand for clean water expands, Barron’s reported.
General Growth Properties Inc. (GGP:US): The mall owner’s bankruptcy court hearing on its auction process was pushed back one day to give the company more time to evaluate competing investment plans. The hearing will be on May 5, General Growth said.
Integral Systems Inc. (ISYS:US): The maker of Epoch Client satellite systems and software said Bill Bambarger resigned as chief financial officer because of personal and health reasons.
Nomura Holdings Inc. (NMR:US): Japan’s biggest brokerage may rise as it adds staff and expands in global markets, including the U.S., Barron’s reported.
Popular Inc. (BPOP:US): Puerto Rico’s largest bank said it acquired assets and assumed all retail deposit liabilities of Westernbank Puerto Rico, which was closed by regulators.
Pozen Inc. (POZN:US) surged 28 percent to $13.91 in extended trading. The drugmaker and partner AstraZeneca Plc (AZN:LN) won U.S. clearance to sell an arthritis drug that combines a painkiller with an ulcer medication.
Alaska Air Group Inc. (ALK:US): The airline may rise as much as 40 percent as the traffic around Seattle and Hawaii improves, and industry consolidation leaves fewer competitors, Barron’s reported.
BP Plc (BPAQF:US): Europe’s largest oil and gas company and Transocean Ltd. (RIG:US) are among companies that may rebound after the shares were sold amid concern over the remediation costs of an oil spill in the Gulf of Mexico, Barron’s reported. Oil companies affected by the spill, which began April 20, including Anadarko Petroleum Corp. (APC:US) and Halliburton Co. (HAL:US), have lost a combined $40 billion in market value, the weekly newspaper said in its May 3 edition.
Cia. De Saneamento Basico do Estado de Sao Paulo (SBS:US): Brazil’s biggest water utility, also known as Sabesp, may rise as the nation’s economy rebounds and global demand for clean water expands, Barron’s reported.
General Growth Properties Inc. (GGP:US): The mall owner’s bankruptcy court hearing on its auction process was pushed back one day to give the company more time to evaluate competing investment plans. The hearing will be on May 5, General Growth said.
Integral Systems Inc. (ISYS:US): The maker of Epoch Client satellite systems and software said Bill Bambarger resigned as chief financial officer because of personal and health reasons.
Nomura Holdings Inc. (NMR:US): Japan’s biggest brokerage may rise as it adds staff and expands in global markets, including the U.S., Barron’s reported.
Popular Inc. (BPOP:US): Puerto Rico’s largest bank said it acquired assets and assumed all retail deposit liabilities of Westernbank Puerto Rico, which was closed by regulators.
Pozen Inc. (POZN:US) surged 28 percent to $13.91 in extended trading. The drugmaker and partner AstraZeneca Plc (AZN:LN) won U.S. clearance to sell an arthritis drug that combines a painkiller with an ulcer medication.
Payrolls Probably Grew as Recovery Spread: U.S. Economy Preview
May 2 (Bloomberg) -- Employers in the U.S. probably added jobs in April for the third time in four months, pointing to a recovery that is both broadening and gaining momentum, economists said before a government report this week.
Payrolls rose by 200,000, the most in three years, after increasing by 162,000 in March, according to the median forecast of 60 economists surveyed by Bloomberg News before the Labor Department’s May 7 report. Other figures may show consumer spending, home sales and manufacturing grew.
Companies from Caterpillar Inc. to General Electric Co. are hiring as Americans spend more and businesses update equipment. Sustained job growth is required to propel consumer spending, which accounts for about 70 percent of the economy.
“It’s really all about jobs,” said Omair Sharif, an economist at RBS Securities in Stamford, Connecticut. “Consumption has come back more robustly than most people had anticipated, including employers.”
The April payroll figures may receive a boost from the hiring of temporary government workers to conduct the 2010 census, economists such as Sharif said. Even so, gains are projected in others areas like manufacturing.
The Labor Department report will probably show the unemployment rate was 9.7 percent for a fourth straight month, according to the survey median. The jobless rate has not increased since October, when it reached a 26-year high of 10.1 percent. The economy lost 8.4 million jobs since the recession began in December 2007, the most of any downturn in the postwar era.
Fed’s View
Federal Reserve officials last week restated their intention to keep the benchmark interest rate near zero for an “extended period” and said the job market is strengthening.
“The labor market is beginning to improve,” policy makers said in an April 28 statement. “Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”
The Labor Department’s employment report may also show a 15,000 gain in factory payrolls, according to the median estimate. Hiring is picking up as companies ramp up orders.
Manufacturing probably expanded in April at the fastest pace in more than five years, economists said before a May 3 report from the Institute for Supply Management. The Tempe, Arizona-based group’s factory index increased to 60, the highest level since June 2004, from 59.6, the survey showed. Index readings greater than 50 signal expansion.
Broadening Expansion
Service industries probably expanded in April at the fastest pace in four years, economists said before a separate report from the Institute for Supply Management on May 5. The index of non-manufacturing businesses, which account for almost 90 percent of the economy, rose to 56 from 55.4 the prior month, the survey showed.
The U.S. economy grew in the first quarter at a 3.2 percent annual rate, led by consumer spending and business investment, figures from the Commerce Department last week showed. Household spending climbed at a 3.6 percent pace, the most in three years, compared with a 1.6 percent increase the previous three months.
Optimism that the economy will keep growing has helped lift stocks. The Standard & Poor’s 500 Index has climbed 6.4 percent this year.
Americans probably increased spending in March for a sixth straight month, a report tomorrow from the Commerce Department may show tomorrow. Purchases climbed 0.6 percent after a 0.3 percent gain the previous month, and incomes likely rose 0.3 percent after no change in February, the survey showed.
Caterpillar Hiring
Caterpillar, the world’s largest maker of construction equipment, had its first earnings increase in seven quarters as demand rose, and said it will bring back at least 9,000 jobs this year of the 19,000 it cut globally in 2009. The Peoria, Illinois-based company has added about 1,500 workers since year- end because of higher production, including 600 in the U.S.
The housing market, a weak spot for the economy in recent years, is showing signs of life, helped in part by government incentives. The number of Americans in March signing contracts to purchase previously owned homes probably rose 4 percent, economists said ahead of a May 4 report from the National Association of Realtors.
Buyers may be aiming to take advantage of a tax credit that requires a contract be signed by the end of April, when the program expired. The index of purchase agreements, or pending home sales, rose 8.2 percent in February, the second-biggest gain on record and the largest since October 2001, according to the Washington-based Realtors group.
Payrolls rose by 200,000, the most in three years, after increasing by 162,000 in March, according to the median forecast of 60 economists surveyed by Bloomberg News before the Labor Department’s May 7 report. Other figures may show consumer spending, home sales and manufacturing grew.
Companies from Caterpillar Inc. to General Electric Co. are hiring as Americans spend more and businesses update equipment. Sustained job growth is required to propel consumer spending, which accounts for about 70 percent of the economy.
“It’s really all about jobs,” said Omair Sharif, an economist at RBS Securities in Stamford, Connecticut. “Consumption has come back more robustly than most people had anticipated, including employers.”
The April payroll figures may receive a boost from the hiring of temporary government workers to conduct the 2010 census, economists such as Sharif said. Even so, gains are projected in others areas like manufacturing.
The Labor Department report will probably show the unemployment rate was 9.7 percent for a fourth straight month, according to the survey median. The jobless rate has not increased since October, when it reached a 26-year high of 10.1 percent. The economy lost 8.4 million jobs since the recession began in December 2007, the most of any downturn in the postwar era.
Fed’s View
Federal Reserve officials last week restated their intention to keep the benchmark interest rate near zero for an “extended period” and said the job market is strengthening.
“The labor market is beginning to improve,” policy makers said in an April 28 statement. “Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”
The Labor Department’s employment report may also show a 15,000 gain in factory payrolls, according to the median estimate. Hiring is picking up as companies ramp up orders.
Manufacturing probably expanded in April at the fastest pace in more than five years, economists said before a May 3 report from the Institute for Supply Management. The Tempe, Arizona-based group’s factory index increased to 60, the highest level since June 2004, from 59.6, the survey showed. Index readings greater than 50 signal expansion.
Broadening Expansion
Service industries probably expanded in April at the fastest pace in four years, economists said before a separate report from the Institute for Supply Management on May 5. The index of non-manufacturing businesses, which account for almost 90 percent of the economy, rose to 56 from 55.4 the prior month, the survey showed.
The U.S. economy grew in the first quarter at a 3.2 percent annual rate, led by consumer spending and business investment, figures from the Commerce Department last week showed. Household spending climbed at a 3.6 percent pace, the most in three years, compared with a 1.6 percent increase the previous three months.
Optimism that the economy will keep growing has helped lift stocks. The Standard & Poor’s 500 Index has climbed 6.4 percent this year.
Americans probably increased spending in March for a sixth straight month, a report tomorrow from the Commerce Department may show tomorrow. Purchases climbed 0.6 percent after a 0.3 percent gain the previous month, and incomes likely rose 0.3 percent after no change in February, the survey showed.
Caterpillar Hiring
Caterpillar, the world’s largest maker of construction equipment, had its first earnings increase in seven quarters as demand rose, and said it will bring back at least 9,000 jobs this year of the 19,000 it cut globally in 2009. The Peoria, Illinois-based company has added about 1,500 workers since year- end because of higher production, including 600 in the U.S.
The housing market, a weak spot for the economy in recent years, is showing signs of life, helped in part by government incentives. The number of Americans in March signing contracts to purchase previously owned homes probably rose 4 percent, economists said ahead of a May 4 report from the National Association of Realtors.
Buyers may be aiming to take advantage of a tax credit that requires a contract be signed by the end of April, when the program expired. The index of purchase agreements, or pending home sales, rose 8.2 percent in February, the second-biggest gain on record and the largest since October 2001, according to the Washington-based Realtors group.
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