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.
Thursday, May 6, 2010
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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