Malaysia is one of the only markets bucking the trend
By Gavin Serkin and Michael Patterson
July 13 (Bloomberg) — Stocks dropped from Dubai to Taipei, Treasuries rose and the yen and the dollar advanced against higher-yielding currencies on concern the global economic recovery will be delayed.
The MSCI Emerging-Markets Index fell 2.22 percent, the steepest intraday decline since July 6. The yen strengthened against all of the 16 most-traded currencies tracked by Bloomberg, rising 1.8 percent versus the South African rand and 1.4 percent compared with the pound. The yield on the 10-year Treasury note dropped 4 basis points to 3.27 percent.
Emerging-market stocks have priced in a recovery from the first global recession since World War II, with the benchmark index trading at its most expensive level since October 2007. The revival may be “relatively subdued for some time,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a commentary in the Atlanta Journal-Constitution. China’s central bank said “new challenges” to its policies make it necessary to “strengthen monetary and credit management.”
“The global economic slump will not be followed by a strong and sustained upswing,” wrote UniCredit SpA’s strategy team, led by Thorsten Weinelt in Munich, in a research report today. “The initial ‘V’ will likely be replaced only too quickly by a bumpy ‘W’ in 2010.”
Biggest Premium
The MSCI Emerging-Markets Index retreated to 720.07 as of 11:04 a.m. in London, bringing its slide from a 2009 high on June 1 to 10.2 percent. The gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index, according to weekly data compiled by Bloomberg. When developing nations last commanded a premium in October 2007, the 22-country benchmark sank 54 percent in the next year.
Asian stocks headed for their biggest decline since May 14, sending the MSCI Asia Pacific Index down 2.38 percent to an eight-week low.
Taiwan’s Taiex Index dropped 3.5 percent, tied with South Korea’s Kospi Index for the steepest slide among benchmark equity gauges worldwide. The won declined the most of the 16 most-traded currencies, weakening 3.1 percent versus the yen and 2.6 percent against the dollar. Financial companies led the retreat in Taiwan after Mainland Affairs Council Chairwoman Lai Shin-yuan said an economic agreement with China may be signed in 2010, disappointing investors who expected a deal this year.
Samsung Electronics Co., Asia’s biggest maker of computer- memory chips and flat screens, dropped 3.9 percent in Seoul after a U.S. consumer sentiment index fell more than economists estimated and Treasury Secretary Timothy Geithner said the world’s largest economy still faces “enormous challenges.”
Dubai, Russia
The world economy will contract 1.4 percent this year, the International Monetary Fund said in a revised forecast July 8, compared with an April estimate of a 1.3 percent drop. The Washington-based institution raised its forecast for 2010 expansion to 2.5 percent from 1.9 percent.
“We see a recovery on a very low level,” Roger Groebli, head of financial market analysis at LGT Capital Management, said in an interview on Bloomberg Television from Hong Kong today. “You still need a lot of fertilizer to make these green shoots flower.”
The Dubai Financial Market General Index sank 3 percent as oil prices slid for a second day. Russia’s ruble weakened 0.8 percent to 33.02 per dollar, heading for its lowest close since May 1. The ruble’s weakness after the central bank cut interest rates for the fourth time in less than three months on July 10 shows the currency’s recovery was a “very fragile trend” and “downside potential is high,” Alfa Bank’s Chief Economist Natalia Orlova said. Russia is the world’s largest energy exporter.
Yield Curve
Crude oil for August delivery traded below $60 a barrel for a second day, falling 0.1 percent to $59.83 a barrel in electronic trading on the New York Mercantile Exchange.
The difference in yield, or spread, between 10-year Treasury notes and two-year securities narrowed to 2.40 percentage points, from a record 2.81 percentage points on June 5. The so-called yield curve typically widens when investors anticipate a recovery because they demand more compensation for holding longer-dated securities on the risk that growth will spark inflation.
Ten-year Treasury yields may decline to 3 percent by the end of this month, according to Akira Takei, a manager in the international bond investment department at Mizuho Asset Management Co. in Tokyo, a unit of Japan’s second-largest bank.
Lloyds Losses
The pound fell to the weakest level in a month against the euro and dropped for a second day versus the dollar after the Sunday Times reported that Lloyds Banking Group Plc may announce further losses when the bank reports in three weeks. The British currency slid 0.9 percent versus the euro and 0.7 percent compared with the dollar. Lloyds slipped 1.9 percent.
Xstrata Plc lost 5 percent after the Observer reported yesterday in London that the mining company may offer a cash payment of as much as 5 billion pounds ($8.1 billion) to convince Anglo American Plc investors to consider its merger proposal.
Europe’s Dow Jones Stoxx 600 Index slipped 0.3 percent and futures on the Standard & Poor’s 500 Index dropped 0.4 percent on concern second-quarter earnings reports will show the recession is far from over.
Goldman Sachs Group Inc. added 0.9 percent to $143.09 in German trading after Meredith Whitney Advisory Group LLC upgraded the shares to “buy” from “neutral.” The U.S. bank is due to report earnings this week, along with JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp.
Default Swaps
CIT Group Inc., the century-old U.S. lender that hasn’t been able to persuade the government to back its debt sales, said in documents obtained by Bloomberg News that its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers. The company is in talks with regulators, it said in a statement today.
Credit-default swaps rose, signaling a deterioration in perceptions of credit quality, with the high-yield Markit iTraxx Crossover Index climbing as much as 15 basis points to 790, the highest level in two months. The index, which is a benchmark for the cost of protecting bonds against default, pared its gain to 7 basis points, according to JPMorgan Chase & Co. prices.
Posco South Korea’s Larget Steel Maker Raised Its Target Production
By Shinhye Kang and Saeromi Shin
July 13 (Bloomberg) — Posco, South Korea’s largest steelmaker, raised its 2009 production target, signaling the worst of the global slump in demand may be over after second- quarter profit plunged 71 percent.
Output may be 6.4 percent higher than forecast, Posco said today, after reporting net income of 431 billion won ($328 million). The profit, boosted by a stronger won that cut borrowing costs, beat the median analysts’ estimate of 279.5 billion won.
Posco Chief Financial Officer Lee Dong Hee last month forecast earnings will rebound in the second half on lower material costs, rising production and exports. The company cut output for the first time in its 41-year history in December after the global recession cut sales to builders and automakers.
“The second-quarter is the bottom, and earnings are headed upwards,” said Park Hyoung Ryol, a Seoul-based fund manager at Consus Asset Management Co., which oversees the equivalent of $3 billion in assets. “The thing is how much it will improve.”
Shares of Posco, 5.2 percent owned by Warren Buffett’s Berkshire Hathaway Inc., fell 1.3 percent to close at 430,000 won in Seoul trading. The results came after the market closed.
Posco raised its annual crude steel output target to 29.8 million metric tons from a previous estimate of 28 million tons. Chief Financial Officer Lee had said on June 30 that output will be increased as customers begin to restock.
Sales Dropped….
China’s Central Bank Vows To Do More
By Bloomberg News
July 13 (Bloomberg) — China’s central bank pledged to do more to guide loan growth as a record expansion in credit adds to the risks of asset bubbles and bad debts.
The People’s Bank of China will “strengthen monetary and credit management,” Li Dongrong, an assistant governor, said in a statement on the agency’s Web site. It will “guide the direction of money and loans” to ensure stability in the financial sector, Li said.
New loans rose almost fivefold in June as the credit boom revived growth in the world’s third-biggest economy, helping the Shanghai Composite Index to climb 80 percent from last year’s low. The central bank urged June 25 more lending to rural areas and small and medium-sized businesses and less to polluting industries and those with overcapacity.
“The central bank may work on more policies to better guide loans to boosting the real economy,” said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. “The bank might have found that despite rapid loan growth, exporters still face difficulty in getting funds.”
Exports fell for an eighth month in June, the government said last week. Yuan forwards dropped by the most in more than a month today on speculation the central bank will keep the currency stable to help exports recover. The yuan was little changed, closing at 6.8327 against the dollar.
‘Gloomy’ Export Outlook….
Fitch Places Japan’s CBMS Loans on Negative Watch
By Finbarr Flynn
July 13 (Bloomberg) — Default rates on loans underlying Japanese commercial mortgage-backed securities rose to an “unprecedented high” of 53 percent in the first half, Fitch Ratings said.
Fitch has placed on negative ratings all Japanese CMBS backed by so-called bullet maturity loans as real-estate financing dries up amid a depressed outlook for the economy, the credit assessor said in a report today. Most or all the principal must be repaid when bullet maturity loans fall due.
“The agency expects the extremely challenging refinancing environment to continue,” Fitch said in today’s statement. “The lack of finance and the resultant forced disposition of assets are weighing heavily on the real estate market.”
A total of 58.6 billion yen ($635 million) of 92.3 billion in CMBS-related loans maturing in the six months to June 30 didn’t repay when due, Fitch said in the statement. For its analysis, Fitch is assuming all CMBS-related loans maturing in the next 12 months will default, it said.
How Expensive Are Emerging Markets
By Adria Cimino and Michael Patterson
July 13 (Bloomberg) — The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value.
The MSCI gauge trades at 15.4 times reported earnings, compared with 14 for the Standard & Poor’s 500 Index, according to weekly data compiled by Bloomberg. When developing nations last commanded a premium, the 22-country benchmark sank 54 percent in the next year.
Groupama Asset Management, Palatine Asset Management and Standard Life Investments say the disparity means investors are paying too much for shares from China to India to Brazil at a time when the global economy is contracting. MSCI’s emerging- market gauge is valued at 1.7 times its companies’ net assets after a 34 percent surge last quarter, the highest on record compared with the MSCI World Index of 23 advanced economies, which trades for 1.5 times, data compiled by Bloomberg show.
“Emerging-market stocks are at risk,” said Matthieu Giuliani, a Paris-based fund manager at Palatine, which oversees $5.56 billion. “You should only pay so much for growth.”
Investors are already starting to show a lack of confidence in a continued rally. The MSCI developing-nation index dropped 8.3 percent from its 2009 high on June 1 through last week, while the MSCI World fell 7.4 percent and the S&P 500 retreated 6.8 percent. Emerging-market funds had $540 million of net outflows in the week to July 8, the second time in three weeks investors withdrew money, according to Cambridge, Massachusetts-based EPFR Global, which tracks funds with $10 trillion worldwide.
Volatile Returns…..
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