Dollar Hits 2009 Low Versus Euro As Stocks Look To Rally
9/8/2009 7:54 AM ET
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(RTTNews) – The dollar plunged versus most majors on increased risk appetite Tuesday morning in New York, dropping to its lowest level of the year versus the euro and nearing that mark against the surging loonie.
US stock futures soared in early dealing, helping to boost riskier and higher-yielding currencies. Friday’s relatively encouraging jobs reports convinced many bears that resistance to the summer’s bull run in equities may be futile.
Regarding Friday’s jobs report, traders focused on the shrinking job losses and ignored a rise in the jobless rate. Any positive tiding from the labor market, which typically lags a recovery, is definitely a market-positive.
Following the US Labor Day holiday, pent up selling interest drove the dollar to its lowest level since last December versus the euro. The buck dropped to 1.4497, heading back toward a record low near 1.6000, set in 2008.
Meanwhile, the dollar fell sharply versus the sterling, dropping to a 2-week low of 1.6586. On a longer term basis, the pair is little changed over the course of the summer.
The dollar remained under heavy pressure versus the loonie, and continued its trek toward parity with its petro-linked Canadian counterpart. The buck slipped to C$1.0695, within a hair of last month’s 2009 low of C$1.0630.
The buck also weakened versus the yen, dropping to 92.05 before finding support. A move below 91.73 would take the dollar to its lowest since February.
The global economy is probably out of free-fall and stabilizing faster than previously expected, European Central Bank President Jean-Claude Trichet said Monday.
“We are probably in large part of the global economy out of the period of free-fall,” he said at the end of a discussion held at the Bank for International Settlements, Basel, Switzerland.
by RTT Staff Writer
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Conference Board Forecasts A Flat Jobs Market For the Rest of The Year
NEW YORK (Reuters) – A gauge of the strength of the U.S. job market fell slightly in August and pointed to a flat employment market for the rest of the year, a research group said on Tuesday.
The Conference Board, a private research group, said its Employment Trends Index inched lower to 88.1 in August from a revised 88.2 in July, originally reported at 88.3.
The index is now down 18.5 percent from a year ago, the Conference Board added.
“The flatness of the Employment Trends Index in recent months suggests that we won’t see job growth until the end of the year,” said Gad Levanon, economist at the Conference Board.
“The fact that the index cannot get off the ground is another sign of a weak recovery, perhaps a jobless one.”
Government data on Friday showed U.S. job losses fell to their lowest level in a year last month, but the unemployment rate jumped to a 26-year high, painting a mixed picture of an economic recovery hindered by weakness in the labor market.
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Fed Kicks Off a Good Treasury Aution
By Cordell Eddings and Susanne Walker
Sept. 8 (Bloomberg) — Treasuries rose after a record $38 billion offering of three-year notes drew the strongest demand in almost a year in the first of this week’s three debt auctions totaling $70 billion.
The notes drew a yield of 1.487 percent, the lowest level since May, compared with a forecast of 1.50 percent in a Bloomberg News survey of 10 of the Federal Reserve’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.02, the most since November 2008, compared with an average of 2.58 at the last ten auctions.
“It was a very good auction,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Securities USA Inc. “It’s a defensive measure of parking money up front with the idea that the Fed is on hold for a long period of time. People think it’s an attractive place to be.”
The yield on the current three-year note fell two basis points to 1.42 percent at 1:18 p.m. in New York, according to BGCantor Market Data. The 10-year note yield fell two basis points to 3.41 percent.
The sale is the largest-ever offering of the three-year security, which the U.S. began selling in November after an 18- month hiatus.
Foreign Demand
The Treasury last auctioned three-year notes on Aug. 11, setting a record with its $37 billion sale at a yield of 1.78 percent. The three- year notes being sold today yielded 1.80 percent in pre-auction trading.
Indirect bidders, a class of investors that includes foreign central banks bought 54.2 percent of the notes at today’s auction. They bought 62.5 percent of the securities in August, the most ever.
The government plans to sell $20 billion of 10-year notes tomorrow and $12 billion of 30-year bonds on Sept 10 as the U.S. tries to fund a record budget deficit.
“This auction does not necessarily mean the next two auctions will go well,” said Bulent Baygun, head of interest- rate strategy in New York at primary dealer BNP Paribas Securities Corp., one of the 18 primary dealers that are required to bid at Treasury auctions. “For the longer-dated Treasuries to come down at these levels there will have to be strong conviction on the direction of the market.”
Broader Debate
Three-year yields have fallen about 36 basis points since the previous sale of the securities on Aug. 11….
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David Rosenburg Thinks The Consumer is Dead
David Rosenberg lays out the bear case for U.S. consumers in his latest research note:
WAGE DEFLATION
There are so many headwinds confronting the U.S. consumer it’s not even funny. For a look at the new harsh reality of soaring usage of grocery vouchers, as well as other supplements to the household budget, have a look at the grim article on page 2 of the weekend FT (Families Take Up Food Stamps as Wages Shrink). On the very same page, there is an article on the latest trend in terms of 21st-century breadlines — Middle Classes Turn to Car Park Handouts. To think we still get asked why we aren’t more bullish over the outlook for spending. Truly amazing.
TREMENDOUS UNDEREMPLOYMENT
The U.S. economy is actually 9.4 million jobs short of being anywhere remotely close to being fully employed, which is why any inflation that can somehow be created by the Fed is simply going to be unsustainable noise along a fundamental downtrend in pricing power. After last Friday’s report, we have now lost 6.9 million positions that have been cut during this recession and we have to count in the additional 2.5 million jobs that need to be created — but never were — just to absorb the new entrants into the labour market. The ‘real’ unemployment rate is now 16.8%, so to suggest that this down-cycle was anything but a depression is basically a misrepresentation of the facts.We will certainly take note that (i) the ECRI leading index is soaring to the moon and (ii) the August chain-store sales data came in better than expected. But when you look at the data and the constraints on pricing power, it does suggest that the outlook for profits is far less robust than the markets have discounted — looking at the August retail sales data, it is quite apparent that merchants were very aggressive in their price points and value-oriented chains were the big winners last month. Be that as it may, the year-over-year comps are likely looking better now that we are coming off the detonated figures of late 2008, and on top of that, the lengthening of the back-to-school season could artificially add about a quarter-point to the September chain-store sales numbers.
LEADING JOB MARKET INDICATORS … NOT LOOKING GOOD
• Jobless claims stuck at 570k — basically in line with a sustained 200k-300k payroll losses
• Temp agency job losses are continuing even if at a slower pace — this is not good news
• Downward revisions to the prior data — these tend to feed on themselves
• No change in the record-low workweek
• The Challenger and JOLTS data reveal an ongoing decline in hiring intentions
* All information on this website is provided for general purposes and should not be misconstrued as financial advice. Always consult your financial advisor before acting on any of the information herein. You should always assume that the author(s) could have a vested interest in topics described and may or may not own securities and instruments discussed.
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Ratings Agencies Facing Tough Times Ahead For Potential Fraud Claims
A recent court ruling that forced two ratings companies to defend fraud claims is a “game-changer” for the industry, David Einhorn, head of Greenlight Capital, told CNBC.
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CNBC
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Einhorn, a longtime critic of ratings agencies and an investor famed for calling the implosion of Lehman Brothers last year, said in a live interview that the ruling could cripple ratings companies that may not have the capital to defend against future claims.
In a case lodged against Moody’s cnbc_comboQuoteMove(‘popup_MCO_ID0ECEAC15839609’);[MCO 23.759 
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Standard & Poor’s Ratings Services, a federal judge last week said the ratings of securities distributed to a limited number of investors do not have the same constitutional protections as ratings distributed more widely.
The ruling is significant, Einhorn said, in that it will help shed light on what he considered the reckless way in which ratings companies were evaluating securities and the role that played in bursting the subprime mortgage bubble. The ratings companies said their opinions were protected by the First Amendment.
“Because they violated the trust by loosening standards and concentrated on their fees and their shares, there were … securities that were created and sold that shouldn’t have been and the ratings agencies knew that at the time,” he said.
“The result was that people lent money that shouldn’t have lent and other people borrowed money that they couldn’t repay, and now the whole thing has collapsed and our government has had to pledge really trillions of dollars to bail out the financial system.”
Einhorn said he is short both Moody’s and Standard & Poor’s, meaning he expects both stocks to lose share price. The companies were both lower Tuesday, though some analysts immediately after the ruling said any dips in the shares could represent buying opportunities. Warren Buffett’s Berkshire Hathaway cnbc_comboQuoteMove(‘popup_BRKA_ID0EKBAE15839609’);[BRKA 98550.00 — UNCH (0) ]
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trimmed its position in Moody’s for the second time since July.
In an earlier CNBC interview, McGraw-Hill President Harold “Terry” McGraw rebutted criticisms of the ratings agencies, pointing out that the judge actually rejected 10 of the 11 claims in the suit. He said the company will defend itself against the lone remaining claim.
“We look forward to getting that one cleared up,” McGraw said on CNBC. “Fraud does not live in our house.”
He acknowledged that his firm missed the housing collapse but said changes in the business model and regulations will help avoid such mistakes in the future.
“We had the housing recession wrong. The fact that a lot of other people had it wrong doesn’t help, but we don’t like that,” McGraw said. “That’s where our problems began.”
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Banks To Earn Less in The Near Future
By Kevin Drawbaugh – Analysis
WASHINGTON (Reuters) – Banking is supposed to be boring.
That’s the quip that lobbyists and congressional aides use, only half-jokingly, to explain what’s in store for the banking industry as governments crack down with tighter regulation.
From higher capital standards and tighter oversight, to slimmer profits and smaller bonuses, global banking promises to be a duller and less lucrative business in years ahead.
That’s not to say change is imminent. The international banking regulation process moves very slowly. But some industry analysts are convinced major changes are coming.
Nor does this mean that investors should shrug off the sector. To the contrary, analysts see opportunity in innovative, mid-sized boutique firms, developing markets, and banks that can create exciting, new savings products.
But for old-school Big Banks — the mega-institutions saved by last year’s bailouts — the future looks constrained, with officials constantly hovering, pinched margins, risks of political change, and a lingering odor of toxic assets.
Giants like Citigroup Inc (C.N) or Bank of America Corp (BAC.N), for instance, might even respond by breaking up or spinning off units under intense scrutiny, analysts say.
Some see banks at the lower margin of the government’s unspoken “too big to fail” category purposely downsizing to attract less attention and gain freedom to operate.
One financial services lobbyist expects “DNA changing at some of the firms” as they adjust to a more restrictive world after the financial crisis of 2008-2009.
PricewaterhouseCoopers, the global accounting group, said in a recent report: “The banking industry and investors must accept an uncomfortable truth — lower returns on equity will become the norm.”
Bank research group Institutional Risk Analytics said in a recent report: “Last year people seemed primarily worried about the bank in which they kept their money.
“Now they are beginning to express an interest in redeploying their capital to reward best-of-breed banks … to find out who the healthy survivors will be.”
G20 ON CAPITAL
Finance ministers of the Group of 20 large industrial nations broadly agreed over the weekend that banks ought to hold more capital as a cushion against major losses.
The G20 ministers’ final statement from a London meeting said banks will “be required to hold more and better quality capital once recovery is assured.” Continued…
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U.S. Stocks Gain As commodities React to a Weak Dollar
By Jeff Kearns and Daniel Hauck
Sept. 8 (Bloomberg) — Stocks rose worldwide, driving the Standard & Poor’s 500 Index higher for a third day, as gains in metals boosted the profit outlook for raw-material companies. Gold climbed above $1,000 an ounce as the dollar fell.
Alcoa Inc. and Chevron Corp. advanced more than 2 percent as bullion reached an 18-month high, copper added 3.4 percent and oil surged 4.7 percent. General Electric Co. gained 4.7 percent after JPMorgan Chase & Co. recommended buying the shares, saying expectations for the company are too low.
The S&P 500 rose 0.9 percent to 1,025.43 at 11 a.m. in New York. The Dow Jones Industrial Average climbed 60 points, or 0.6 percent, to 9,501.27. The MSCI World Index of equities in 23 developed nations advanced 1.3 percent after Credit Suisse Group AG said investors should favor stocks over bonds and cash.
“The economy is growing again around the world, and that’s the big thing for stocks,” said Howard Ward, who helps oversee $21.3 billion as chief investment officer for growth equities at Gamco Investors Inc. in Rye, New York. “We’re looking at a global synchronized recovery right now. Industrial activity in most of the developed and developing world has turned up.”
Stocks also rallied after the International Monetary Fund’s Dominique Strauss-Kahn said the crisis phase that toppled Lehman Brothers Holdings Inc. in September 2008 is “almost certainly behind us.”
Metals jumped after Goldman Sachs Group Inc. raised its forecasts because of “increasing evidence of a stronger-than- anticipated recovery in global industrial activity.”
Nine-Year Rally
Gold futures rose to the highest price since March 2008, climbing 0.8 percent to $1,004.80 an ounce in New York. Bullion reached an intraday record of $1,033.90 18 months ago and is rallying for a ninth straight year.
Copper advanced 3.7 percent to $2.9715 a pound in New York, gaining for a fourth straight day. Lead rallied 6.6 percent to the highest price since May 2008 in London.
Copper for delivery in three months will surge 21 percent in London through the end of 2010, Goldman Sachs analyst Jeffrey Currie wrote in a report today. Prices of the metal have more than doubled this year.
“The fact copper is up so much says recovery is ongoing and on track,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “Weakness in the dollar is helping to boost gold, copper, oil and other commodities because a weaker dollar means commodities, which are priced in dollars, become more expensive.”
Dollar Weakens
Oil futures rose 4.7 percent to $71.18 in New York as the weaker dollar increased demand for commodities as a currency hedge. The Dollar Index, which tracks the currency against those of six major U.S. trading partners, fell 1.1 percent to 77.151.
Ministers from the Organization of Petroleum Exporting Countries meet tomorrow in Vienna to set production targets. Saudi Arabian Oil Minister Ali al-Naimi said the market is in “good shape,” with price between $68 and $73 a barrel satisfactory for both consumers and producers.
Alcoa rose 2.3 percent to $12.46, while Chevron added 1.9 percent to $70.24 as raw-material and energy stocks in the S&P 500 rallied 1.2 percent and 2.1 percent, respectively. Allegheny Technologies Inc. rose 5.7 percent to $31.48 for the third- biggest gain in the S&P 500 after the specialty-metals producer signed a 10-year supply agreement with Rolls-Royce Plc that may generate as much as $1 billion of revenue.
Credit Suisse forecast gains in equity indexes worldwide ranging from 12 percent for Europe to 23 percent for Japan through mid-2010 as the economy recovers.
‘Best Phase’…….
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U.N. Panel Calling For a New Currency Reserve Again
By Steve Goldstein
A United Nations panel weighed into the dollar reserve currency debate, arguing for a new system of soft pegs to correct severe deficits in debtor nations like the U.S. and surpluses in countries like China.
The report from the United Nations conference on Trade and Development, issued on Monday, said the world economy would be better off with a system where governments intervene when necessary to either defend or depress their own currencies.
“A viable solution to the exchange-rate problem would be a system of managed flexible exchange rates targeting a rate that is consistent with a sustainable current-account position, which is preferable to any ‘corner solution.’ But since the exchange rate is a variable that involves more than one currency, there is a much better chance of achieving a stable pattern of exchange rates in a multilaterally agreed framework for exchange-rate management,” said the U.N. body.
The role of the dollar reserve’s status has been criticized of late, notably by Russia and China, which have called for the International Monetary Fund’s special drawing rights to be used instead, a proposal that many see as impractical given the lack of availability or purchase power outside of settling international obligations.
The U.N. sees the impracticalities of the SDRs but also highlighted problems with the current system.
“An economy whose currency is used as a reserve currency is not under the same obligation as others to make the necessary macroeconomic or exchange-rate adjustments for avoiding continuing current account deficits. Thus, the dominance of the dollar as the main means of international payments also played an important role in the build-up of the global imbalances in the run-up to the financial crisis,” the U.N. said.
But the report also took aim at countries like China and Germany with current account surpluses.
While debtor nations like the U.S. are compelled to reduce imports when their ability to obtain external financing reaches its limits, “surplus countries are under no systemic obligation to raise their imports in order to balance their payments.”
So the U.N. wants a system where countries would manage exchange rates within a band.
It would curb speculation, prevent currency crises, prevent long-lasting imbalances, avoid debt traps for developing countries, avoid procylical conditions and minimize the need to hold international reserves.
The U.N. acknowledged such a system won’t come overnight.
“Establishing such a system would take some time, not least because it requires international consensus and multilateral institution building,” the U.N. said.
The Group of 20 leading industrialized and developing countries meets later this month in Pittsburgh but the dollar’s reserve status isn’t expected to be on the agenda.
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By Patrick Rial and Ian C. Sayson
Sept. 8 (Bloomberg) — Asian stocks rose, lifting the MSCI Asia Pacific Index to the highest level in a year, as Australian business confidence jumped, computer-memory prices gained and gold rose above $1,000 an ounce.
National Australia Bank Ltd. climbed 3.8 percent in Sydney after the lender’s sentiment index jumped to a six-year high. Elpida Memory Inc., Japan’s largest maker of dynamic random access memory, gained 5.4 percent after the benchmark price for chips climbed to the highest level since August 2008. Newcrest Mining Ltd., Australia’s No. 1 gold producer, jumped 3.7 percent.
The MSCI Asia Pacific Index rose 1.5 percent to 115.91 as of 7:20 p.m. in Tokyo, the highest level since Sept. 24, 2008. The gauge has climbed 64 percent from a more than five-year low on March 9 on speculation stimulus measures worldwide will revive the global economy.
“The market hasn’t given up on the economic recovery story,” said Olan Caperina, who helps manage about $7.75 billion at BPI Asset Management Inc. in Manila. “There’s optimism that the market has bottomed out, but you need earnings and consistent economic data to push share prices higher.”
Japan’s Nikkei 225 Stock Average advanced 0.7 percent. JVC Kenwood Holdings Inc. surged 31 percent as the Nikkei newspaper said the company may beat profit forecasts. Limiting gains, Mitsubishi UFJ Financial Group Inc. sank 1.8 percent as central bank figures showed loan growth slowed.
Cabinet Reshuffle…..
By Daniela Silberstein
Sept. 8 (Bloomberg) — European and Asian stocks advanced for a fourth day and U.S. index futures gained as commodity producers rallied with metal prices and investors speculated that mergers will increase.
BHP Billiton Ltd., the world’s biggest mining company, and Randgold Resources Ltd. surged more than 3 percent as copper rose in London and gold rallied to an 18-month high. Cadbury Plc added 1.9 percent on speculation the maker of Dairy Milk chocolates may attract competing offers after rejecting Kraft Food Inc.’s bid yesterday. Deutsche Telekom AG and France Telecom SA climbed more than 2 percent after agreeing to merge their U.K. mobile-phone units.
Europe’s Dow Jones Stoxx 600 Index advanced 0.5 percent to 238.44 at 11:16 a.m. in London. A six-month, 51 percent rally has pushed the regional gauge’s valuation to 44.8 times profit, near the highest level since September 2003, according to weekly data compiled by Bloomberg.
“I’m feeling pretty optimistic,” Jane Coffey, who helps oversee $12 billion at Royal London Asset Management, said in a Bloomberg Television interview. “Economic data will continue to look good, corporate earnings are looking pretty good. My concern was that we’re going to have a lot equity issuance and that will weigh on the market. If we get the counter of M&A taking the stock away that will equal things out.”
The MSCI Asia Pacific Index climbed 1.5 percent as Australian business confidence jumped to the highest level in almost six years. Futures on the Standard & Poor’s 500 Index rose 1.1 percent, indicating the gauge may advance after U.S. markets were closed for the Labor Day holiday yesterday.
‘Best Phase’
By ALEX KENNEDY p {margin:12px 0px 0px 0px;}
Benchmark crude for October delivery was up $1.04 to $69.06 a barrel at late afternoon Singapore time in electronic trading on the New York Mercantile Exchange.
Trading was closed Monday in the U.S. for the Labor Day holiday, so the contract last settled on Friday at $68.02 after rising 6 cents.
Oil traders often look to stocks for signs of overall investor confidence. All major Asian stock indexes rose Tuesday while the Dow Jones industrial average climbed 1 percent on Friday.
Some analysts expect prices to eventually fall this month as demand wanes. Labor Day is traditionally seen in the United States as the end of summer, and crude demand usually falls in the autumn before rebounding in the winter as heating oil consumption picks up.
“The seasonal demand is really coming to an end right now,” said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.
Leaders of the Organization of Petroleum Exporting Countries have signaled they plan to keep output levels unchanged at the group’s meeting Wednesday in Vienna. That could send oil prices lower as traders eye OPEC members producing more and more over official quotas.
“Compliance levels have been dropping every month because many of the members have been cheating,” Kornafel said. “So if they don’t cut quotas, more oil will be entering the market.”
In other Nymex trading, gasoline for October delivery rose 0.87 cent to $1.79 a gallon, and heating oil gained 2.23 cent to $1.74 a gallon. Natural gas dropped 3.3 cents to $2.70 per 1,000 cubic feet.
In London, Brent crude was up $1.12 to $67.65.
By Lukanyo MnyandaSept. 8 (Bloomberg) — The dollar declined against the euro and the pound as stock markets rose on speculation the global recession is easing, sapping demand for the currency as a haven.
The dollar fell the most against the pound before a report economists said will show consumer credit in the U.S. declined in July by the least in six months. U.S. stock futures jumped. The yen gained against the euro as a report showed Japanese corporate bankruptcies fell for the first time in three months, and on growing speculation the government will boost measures to revive the economy. The pound rose as manufacturing increased three times as much as economists forecast.
“Normal rules apply for the dollar and it’s not surprising to see it being sold, seeing we have big gains in stock markets,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “The yen is the anomaly. It’s holding up pretty well.”
The dollar depreciated 0.6 percent to $1.4423 as of 10:02 a.m. in London. The U.S. currency fell 1 percent to $1.6512 against the pound and slipped 0.9 percent to 92.33 yen. The Swedish krona strengthened to 7.0671 against the dollar, from 7.1253 yesterday. Australia’s dollar advanced to 86.19 U.S. cents, from 85.57.
A Federal Reserve report today will probably show U.S. consumer credit fell $4 billion in July, after declining by $10.3 billion a month earlier, according to a Bloomberg survey of economists. Japanese business failures dropped 1 percent from a year earlier, Tokyo Shoko Research Ltd. said in Tokyo today.
Stocks Advance
Europe’s Dow Jones Stoxx 600 Index added 0.5 percent, headed for its fourth day of gains. Futures on the Standard & Poor’s 500 Index rose 1.1 percent, indicating the gauge may advance today following the U.S. Labor Day holiday yesterday.
The yen may extend gains amid speculation Japan’s new government will refrain from acting to weaken it, according to BNP Paribas SA, the largest French lender.
The Democratic Party of Japan, which won a landslide victory in lower house elections on Aug. 30, will officially take over the government for the first time on Sept. 16. Hirohisa Fujii, a lawmaker for the party, said Sept. 3 “intervention shouldn’t be abused.”
“They have suggested they are going to be less interventionist, and that implies there’s room for more yen appreciation,” said Ian Stannard, a senior currency strategist in London at BNP Paribas SA. “They have also reiterated that their focus will be on the domestic side of the economy.”
Pound Jumps
The pound rose against its 16 most-actively traded counterparts after the Office for National Statistics in London said factory output rose 0.9 percent from the previous month, the most in 18 months. Sterling gained 0.3 percent to 87.42 pence per euro.8
The dollar also weakened before speeches by U.S. policy makers including Chicago Fed President Charles Evans and Dallas Fed President Richard Fisher this week.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six major U.S. trading partners, fell 0.6 percent to 77.489, after reaching o 77.398, the lowest level since September 2008.
What is Next For Japan’s New Government ?
By Keiko Ujikane and Thomas R. Keene
Sept. 8 (Bloomberg) — Japan’s incoming government is likely to favor spending and tax policies that may cause a surge in government borrowing and higher long-term bond yields, said international economist Carl B. Weinberg.
The election win by the Democratic Party of Japan “will set in motion spending plans and tax cuts that will destabilize Japan’s public finances,” Weinberg, chief economist at High Frequency Economics in Valhalla, New York, said in an e-mailed response to questions.
Weinberg’s judgment reflects skepticism among private analysts that the DPJ, led by Yukio Hatoyama, will follow through on its pledge to avert an increase in government bond issuance. The incoming administration has said it will pay for its priorities — increased funds for child care, education and employment — partly through diverting as much as 5 trillion yen ($54 billion) of stimulus spending already approved.
“A catastrophic breakdown of Japan’s public-sector finances will be the biggest story ever to hit the world economy in our times, eclipsing the current financial crisis,” Weinberg said. “Coming in the midst of the yet-to-be-resolved global financial crunch, it will worsen and prolong that still- unfolding crisis.”
Japan’s bond market has shown little evidence that investors are concerned about the DPJ’s victory. The party unseated the Liberal Democratic Party that held power for most of the nation’s postwar history. Benchmark 10-year bonds yielded 1.355 percent today, compared with 1.31 percent before the Aug. 30 vote.
Election Promises…..
China’s C19 To Undercut BA & Airbus
By Bloomberg News
Sept. 8 (Bloomberg) — Commercial Aircraft Corp. of China, the government-controlled planemaker, said its first commercial jet will “surely be cheaper” than comparable Boeing Co. and Airbus SAS models, heightening competition in the world’s fastest-growing aviation market.
The 168-seater C919, due to enter service in 2016, will use as much as 15 percent less fuel than current Boeing 737s and Airbus A320s, Chen Jin, Comac’s sales head, said at the Hong Kong air show, where the company is showing a model of the plane for the first time.
Comac will initially target Chinese customers for the single-aisle C919 before seeking to challenge Boeing and Airbus overseas in the largest segment of the plane market. China’s carriers will likely need 3,710 new planes over 20 years, of which 70 percent will be single-aisle aircraft, Chicago-based Boeing said in October.
“In the medium- to long-term, Chinese aircraft manufacturers will be able to challenge the larger planemakers like Airbus and Boeing,” said Jack Xu, an analyst at Sinopec Securities Asia Ltd. in Shanghai. Price will be a “major advantage,” he added.
The plane is part of China’s push to develop its own technologies in a range of industries to move beyond being a low-cost assembler for overseas companies.
Aircraft Orders…..
Dollar Yen LIBOR Rates Drop to Their Lowest Level Since ’93
By Yumi Ikeda
Sept. 8 (Bloomberg) — Dollar-borrowing costs fell against those for Japan’s currency, widening the interest-rate gap between the currencies to the widest level since March 1993.
The London interbank offered rate, or Libor, for three- month dollar loans declined to a record low 0.30875 percent yesterday from 0.31438 percent on Sept. 4, according to the British Bankers’ Association. Libor for yen loans dropped to 0.37938 percent from 0.38125 percent, widening the difference between the rates to 7.1 basis points.
Dollar rates became cheaper than those on the yen on Aug. 24, leaving the Swiss franc as the only major currency that is cheaper to borrow than the dollar. Since then, the spread between the rates has widened for nine-straight days.
The Tokyo three-month interbank offered rate for yen deposits abroad was unchanged from yesterday at 0.53846 percent, the lowest since February 2007, according to the Japanese Bankers Association.
Tibor for euroyen has fallen almost 20 basis points this year as the Bank of Japan kept its key overnight call rate at 0.1 percent and maintained its supply of funds into the banking system under an emergency credit program.
Overnight interbank lending rates stayed around the central bank’s target in morning trade in Tokyo. Overnight unsecured call rates were at 0.09 to 0.105 percent, according to Japanese interdealer brokers. The weighted average rate for yesterday was 0.099 percent, falling below the target for the first time in a month, the Bank of Japan said.
Germany’s Output Drops Suddenly
By Gabi Thesing
Sept. 8 (Bloomberg) — German industrial output fell in July after rising in June, suggesting the recovery from recession may be gradual.
Production declined 0.9 percent from June, when it rose a revised 0.8 percent, the Economy Ministry in Berlin said today. It had initially reported a 0.1 percent decline in June output. Economists predicted an increase of 1.6 percent in July, the median of 39 forecasts in a Bloomberg survey showed. From a year earlier, production declined 17 percent when adjusted for the number of work days.
Germany unexpectedly pulled out of its worst recession since World War II in the second quarter and some data suggest the pace of expansion may accelerate. Exports and factory orders rose in July and business confidence increased for a fifth month in August. With unemployment rising and some government stimulus measures starting to expire, policy makers including European Central Bank President Jean-Claude Trichet have warned that the economic pickup may be uneven.
“The recovery is bumpy and strong order and confidence numbers don’t immediately translate into production,” said James Ashley, an economist at Barclays Capital in London. “Next month should be much better and we expect sound growth in the third and fourth quarters.”
July’s output decline was driven by a 3.2 percent drop in investment goods production and 3.9 percent slide in energy output, the ministry said. Construction fell 2.3 percent. Intermediate goods output gained 1.8 percent and production of durable goods such as household appliances rose 1.2 percent.
Exports, Orders…..
Kraft Will Still Pursue Cadbury
By Poppy Trowbridge
Sept. 8 (Bloomberg) — Kraft Foods Inc.’s 10.2 billion- pound ($16.7 billion) bid for Cadbury Plc may be a sign that Europe’s frozen takeover market is beginning to thaw after the slowest August in five years.
Kraft, the maker of Oreo cookies, said yesterday it would pursue the acquisition after the British maker of Dairy Milk chocolate rejected the offer. The 745 pence-a-share proposal may trigger a competing offer from Nestle SA and Hershey Co., forcing Kraft to increase its bid, according to Warren Ackerman, an analyst at Evolution Securities in London.
The acquisition would be the biggest cross-border deal this year and follows the $21 billion of European takeovers announced in August, according to data compiled by Bloomberg. Companies are revisiting plans for mergers that had been shelved during the credit crisis amid signs the recession may be easing. The MSCI World Index has gained 58 percent since hitting a 14-year-low in March, making it easier for firms to fund takeovers with stock.
“With equity prices higher, you have increased confidence in the corporate sector and intra-industry mergers are likely,” said Peter Hahn, a former managing director at Citigroup Inc. who now lectures on corporate finance at London’s Cass Business School.
Deutsche Telekom AG, the region’s biggest telephone company, and France Telecom SA plan to merge their U.K. mobile-phone units to create the country’s largest cellular operator, the companies said today. Investors in Zain, Kuwait’s biggest telephone company, are near to selling a 46 percent stake for almost $14 billion, according to National Investments Co., which is advising the sellers.
Marvel, Skype
By Simon Thiel, Ragnhild Kjetland and Matthew Campbell
Sept. 8 (Bloomberg) — Deutsche Telekom AG, Europe’s biggest telephone company, and France Telecom SA plan to merge their U.K. mobile-phone units to create the country’s largest cellular operator.
The two companies entered exclusive talks to combine Deutsche Telekom’s T-Mobile UK unit and France Telecom’s Orange and plan to seal the deal at the end of October, they said in an e-mailed statement today. The 50-50 venture had combined revenue of 9.4 billion euros ($13.5 billion) and will result in savings of more than 4 billion euros in network maintenance, marketing and administrative costs, the companies said.
The joint venture will have 28.4 million subscribers, or 37 percent of the U.K. market, based on figures at the end of 2008, ousting Telefonica SA’s O2 service from the top spot. The deal shrinks the number of mobile-phone operators in the U.K. to four, with the others being Vodafone Group Plc and Hutchison Whampoa Ltd.
“They can extract cost savings, which is good for them,” said Michael Kovacocy, an analyst at Daiwa Securities in London.
France Telecom rose as much as 3.6 percent in Paris trading and was up 3.2 percent to 18.71 euros as of 10:09 a.m. Deutsche Telekom rose 1.1 percent to 9.55 euros in Frankfurt.
Phone companies are looking to reduce costs as clients are spending less amid the economic slowdown. Vodafone, Deutsche Telekom, Royal KPN NV and Mobistar SA said in May that the recession was eroding profit as consumers and businesses reduced mobile-phone use.
Cost Savings….
Saudi Oil Minister Says “Oil is in Good Shape”
VIENNA (AP) – Saudi Arabia’s oil minister said Tuesday that crude markets were “in good shape,” boosting expectations OPEC will use its meeting this week to stress compliance with output quotas instead of cutting production.
The comments by Saudi Arabia’s Ali Naimi, echoed by Kuwaiti Oil Minister Sheik Ahmed Al Abdullah Al Sabah, were the latest indications that the Organization of the Petroleum Exporting Countries is comfortable with the rebound in crude prices that came about after members announced in December a record 4.2 million barrel per day output cut from September 2008 levels.
Since that meeting, prices have roughly doubled, and are holding between $68 and $71. Analysts have said they expect the group to hold fast at its current production level, which is just under 25 million barrels per day.
“Everything is in good shape,” said Naimi, whose country is OPEC’s top producer and widely seen as the group’s kingpin. Crude’s current price “is good for everybody: consumers and producers,” he told reporters in Vienna on Tuesday, as ministers of the 12-member group began to arrive ahead of the Wednesday meeting.
Saudi Arabia has said a price of about $75 per barrel was fair for the market – a level that would encourage further investment in boosting global supplies while at the same time not straining a world economy struggling to come out from the worst global recession in decades.
Kuwait’s Al Sabah echoed the same sentiment. In an interview with Kuwait’s official KUNA news agency, Al Sabah said he was “comfortable” with current prices, describing them as “acceptable” for both producers and consumers.
The producer bloc that accounts for roughly 35 percent of the world’s oil supply has left output unchanged so far this year as prices have continued to climb. October crude oil futures were up slightly over $69 per barrel in Asia on Tuesday, supported by regional stock markets.
While prices have bounced back from earlier lows in the low-$30s, global crude inventories are still far higher than the 52 to 54 days of forward cover in the OECD nations that the group would like to see.
OPEC members have, nevertheless, resisted further cuts. “In principle, they always want to have higher prices – but taking into account the weak economic situation, they’re content,” said Johannes Benigni, chief analyst at Vienna’s JBC Energy.
Working in their favor is the narrowing of the discount between the first and second month’s light sweet U.S. crude oil futures contract on the New York Mercantile Exchange. That discount is down to about $0.50 per barrel, a difference that provides buyers with insufficient incentive to buy crude for storage. That discount had been far wider in months past, meaning that refiners would prefer to buy crude and store it instead of waiting and buying oil when they need it.
Compliance has traditionally been OPEC’s greatest challenge, with cheating by some members undercutting broader efforts to boost prices.
While the group for the first part of the year was generally successful in adhering to their quotas, it has increasingly been grumbling about overproduction by members looking to cash in on crude’s rebound. Crude revenues are key for most OPEC members, accounting for as much as 90 percent of government budgets
Analysts say compliance is down to about 70 percent group-wide, as some countries like Iran and Venezuela look to tap into crude’s rebound to bring in sorely needed cash amid the global economic downturn.
Kuwait’s Al Sabah told KUNA that the consensus within the group was to stick with current production levels and enforce compliance.
Al Sabah said while a quick rebound in demand for crude was unlikely, he expected a “noticeable improvement” in the first and second quarters of 2010.
OPEC President Jose Botelho de Vasconcelos, who is also Angola’s oil minister, suggested the cartel was watching prices closely and would intervene if crude swings too sharply one way or the other.
“Given the nature and costs of the investments, the crude price can and must be stabilized at $73-$75,” he said Tuesday in Rome en route to Vienna. “If it goes up, it is only financial speculation.”
Japan’s Current Account Surplus is Down 19.4%
TOKYO (AP) – Japan’s current account surplus in July fell 19.4 percent from a year earlier as exports tumbled amid a slow recovery in the global economy, the finance ministry said Tuesday.
The current account surplus, Japan’s broadest measure of trade with the rest of the world, was 1.27 trillion yen ($13.6 billion), the first year-on-year fall in two months, the ministry said.
Exports in July dropped 37.6 percent to 4.55 trillion yen, marking the 10th consecutive year-on-year decline.
“Sluggish exports dragged down the surplus. Exports were weak in every key region, underlining that a recovery in the global economy has yet to become solid,” said Hideki Matsumura, senior economist at think tank Japan Research Institute.
Japan’s exports to the United States dropped 39.5 percent, while Asia-bound shipments fell 29.9 percent. Exports to the European Union nose-dived 45.8 percent in the month.
Matsumura said exports, a key driver for Japan’s economy, will remain stagnant throughout the year due to sustained concern over a recovery in the U.S. economy.
“Unless the U.S. economy fully recovers, we will not see a turnaround in exports,” he said.
Among key products, auto exports were down by a staggering 52.3 percent. Steel exports also plunged 42.1 percent. Exports of semiconductor products fell 28.0 percent.
Imports plunged 41.2 percent to 4.11 trillion yen in the month.
Along with falling exports, the finance ministry said a drop in the income surplus, which includes revenue of Japanese companies operating overseas, pressured the current account surplus.
The income surplus plunged 24.2 percent from a year earlier to 1.25 trillion yen.
“Revenue of Japanese subsidiaries abroad fell amid a slumping global economy,” a ministry official said.
China To Sell Its First Yuan Bonds To Japan
BEIJING (AP) – Beijing will sell some $876 million of government bonds denominated in the mainland’s yuan for the first time in Hong Kong this month, the Finance Ministry said Tuesday, in a move to expand the international use of its tightly controlled currency.
The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.
The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad. Chinese officials are concerned about the stability of the dominant U.S. dollar and have called for the creation of a new global reserve currency.
The bond sale is “certainly a push to internationalize the renminbi,” said Zhang Bin, a specialist in international finance at the Chinese Academy of Social Sciences, a government think tank. “It will increase renminbi business overseas and be conducive to the development of renminbi markets.”
Beijing signed a currency swap deal with Argentina in March and has promised to lend yuan to the central banks of South Korea, Malaysia, Indonesia and Belarus in the event of a financial emergency. That could lead to the currency’s use in private transactions.
A few mainland institutions, including state-owned China Construction Bank Ltd. and Bank of China Ltd., have issued yuan-denominated bonds in Hong Kong.
Premier Wen Jiabao, the mainland’s top economic official, has promised to strengthen trade and finance links with Hong Kong. Other officials have said it might become the center for handling finance in yuan outside the mainland.
“This measure has significant impact on promoting the depth and breadth of the Hong Kong bond market and strengthening Hong Kong’s position as an international financial center,” the territory’s government said in a statement.
The Finance Ministry gave no details of who would handle the bond issue.
Two banks – London-based HSBC Holdings and Hong Kong-based Bank of East Asia – said in May they had become the first nonmainland companies approved to sell yuan bonds.
JP Morgan’s latest Global Markets Outlook provides some quick perspective on where the global economy stands.
What’s happening? Economic growth for the second half of the year is expected to be about 3% annualized, for the US, Europe, and Japan. Emerging Asia is expected to grow 7%. Overall, the world is expected to grow at an annualized 3.4% for the rest of the year.
On the US front in particular, they highlight that positive US economic surprises appear to be at a 2-year high.
In the US, where GDP is currently projected to rise at close to a 3%ar pace during 2H09, the trajectory of final demand, including consumption, housing, and business investment, is stronger than expected this quarter.
Global inflation remains in check since the 2008-2009 downturn cooled things down substantially.
The 2008-09 recession already has delivered a very big decline in core inflation across the developed world. From a peak of 1.9%oya in August of 2008, DM core inflation—defined here as the headline CPI excluding all categories of food and energy prices—fell to an estimated 1.1%oya as of July.
Retail sales have been picking up around the world.
And on the employment front, the global picture has begun improving, helped by the manufacturing rebound we wrote about previously, despite the continued challenges faced by many unemployed around the world.
Finally, and most important, unemployment rates have begun to level off. After having risen about 0.3%-pts per month from January to May, the global unemployment rate increased just 0.1%-pt in June and July. This is happening across much of the globe, including in the US, much of Western Europe, Canada, Australia, and a good number of EM economies.
Fair enough, JP is one of the more bullish houses right now, so you can discount some of their bullish view on the stock markets right now. Yet the data they refer to still holds. Overall the world has begun to look better. Now, whether this turns into a head fake…
Analysts Say Economists Are Dead Wrong
By Eric Martin and Michael Tsang
Sept. 8 (Bloomberg) — Never before have Wall Street stock analysts diverged more with economists at their own firms over the outlook for earnings in the Standard & Poor’s 500 Index.
Profits for companies in the S&P 500 will rise 25 percent next year, according to the average estimate of more than 1,500 equity analysts tracked by Bloomberg. That’s 10.9 times faster than the expansion in gross domestic product foreseen by 53 economists surveyed last month. The ratio of income to GDP growth is the highest on record and compares with an average of 6.1, based on data compiled by Bloomberg going back 60 years.
Concern that profits won’t measure up to estimates may limit returns after the S&P 500 rose 50 percent since March, the steepest rally in seven decades. While shares trade close to the cheapest levels relative to earnings since 1989, based on next year’s projections, forecasts for the economy by Goldman Sachs Group Inc.’s Jan Hatzius, Morgan Stanley’s Richard Berner and Bank of America Corp.’s Drew Matus show equities are no bargain.
“Earnings are going to be dependent on the overall economic growth,” said Barry James of Xenia, Ohio-based James Investment Research Inc., which oversees $2 billion and whose James Balanced Golden Rainbow Fund beat 98 percent of competitors over the past five years. “While things are not as bad as they have been, we don’t see next year as being one that will go gangbusters.”
Justifying the Rally
The S&P 500 retreated 1.2 percent last week after a report on factory orders and speculation that China would curb bank lending raised doubts about the speed of the economy’s recovery from the first global recession since World War II.
Futures on the S&P 500 added 0.9 percent at 8:36 a.m. in London today after U.S. markets were closed yesterday. Investors are returning from the Labor Day holiday after the benchmark index for American equities rose as much as 52 percent from a 12-year low on March 9 and the proportion of companies that beat analysts’ profit predictions matched a record.
The gains spurred the steepest rise in the S&P 500’s price- earnings ratio since at least the 1950s, pushing the index to 19 times operating earnings from the past 12 months, the most expensive level since 2004, according to data compiled by Bloomberg. Based on analysts’ forecasts for 2010, the S&P 500 trades for 13.5 times income, the lowest since 1989 when compared with the trailing P/E ratio before Lehman Brothers Holdings Inc.’s collapse a year ago.
Too Optimistic
The U.S. economy will expand at a 2.3 percent annual rate next year as the longest recession since the 1930s ends, according to the average estimate of economists surveyed by Bloomberg. U.S. companies are expected to halt a two-year slump in profits next quarter, the longest since the Great Depression, according to analyst projections compiled by Bloomberg.
While the individual forecasts may prove accurate, as a whole they are overoptimistic, based on economists’ expectations for U.S. growth.
Sal Tharani, Goldman Sachs’s analyst who covers metal producers, told investors to buy Phoenix-based Freeport-McMoRan Copper & Gold Inc. on Aug. 18, saying in a research note that higher metals prices will help 2010 per-share profits increase 48 percent at the largest publicly traded copper producer. Among the 14 companies he covers, Tharani’s stock picks during the past year have been more profitable than any other analyst’s, according to data compiled by Bloomberg.
Tharani was unavailable to comment, said Ed Canaday, a spokesman for the bank.
‘Conviction Buy’
Goldman Sachs, Wall Street’s most profitable investment bank, added Freeport to the “Conviction Buy List” of stocks it expects to rise the most. The firm predicts copper prices will climb 34 percent next year. Futures linked to the metal have doubled in New York trading so far in 2009.
Freeport will have to reach that profit target without the help of an economy expanding faster than about 2 percent next year, according to the growth forecast from Hatzius, Goldman’s New York-based chief U.S. economist.
Consumer spending will be weaker than at the end of previous recessions, Hatzius wrote in a Sept. 1 note. He doesn’t have a prediction for earnings growth and declined to comment on analyst estimates in a Sept. 4 interview.
Ken Hoexter, an analyst at Bank of America in New York, says Union Pacific Corp. should be able to raise prices in 2010, boosting annual earnings by 21 percent at the largest U.S. railroad by market value. Hoexter, the second-best stock picker in the past 12 months among the companies he covers, has rated Omaha, Nebraska-based Union Pacific a “buy” since March 16.
Freight Hauling
Union Pacific’s sales are stabilizing after falling 28 percent in the second quarter as the recession curbed freight hauling, Hoexter said.
Demand will have to rise while the U.S. expands at a 2.5 percent annual rate, according to Drew Matus, a New York-based senior U.S. economist for Bank of America. Hoexter and Matus were unavailable to comment, according to Susan McCabe Walley, a Bank of America spokeswoman.
Stephen Richardson, an energy analyst for Morgan Stanley in New York, projects 52 percent sales growth for Apache Corp., the biggest independent U.S. oil producer by market value, more than doubling the company’s profit.
Apache, based in Houston, will earn $11.56 a share next year as it raises production and reduces costs, according to Richardson. That’s the second-highest analyst estimate among 26 in a Bloomberg survey and 32 percent more than the average.
‘Shocking Number’
“It is a shocking number,” said Richardson, whose firm expects oil prices to average $85 a barrel next year, or more than 50 percent above its average so far in 2009. “Oil’s a global market. You don’t necessarily need very strong U.S. demand for oil prices to be above where they are.”
His estimate for Apache’s profit growth is 56 times greater than the 2.6 percent U.S. economic expansion foreseen by Berner, the co-head of global economics at Morgan Stanley in New York. Consumer spending may struggle as U.S. households save more amid declining employment levels and wages, Berner said on Aug. 7.
That will limit earnings growth for U.S. companies to about 12 percent, Berner said in a telephone interview last week. A 25 percent jump in overall profits “seems improbable,” he said.
Analysts who foresee earnings outstripping the U.S. economy are counting on growth in international markets to make up the difference, said Fritz Meyer, the Denver-based senior market strategist for Invesco Aim, which oversees $149 billion.
“You want to hear managements talking about demand across the world,” Meyer said. “Earnings forecasts as they’re currently stated are achievable. I wouldn’t be surprised to see upward revisions.”
Fewer Opportunities
Companies that boost earnings through expense reductions may find fewer opportunities to cut costs next year, according to Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. Firings and shorter hours reduced labor costs by the most in nine years in the second quarter, increasing productivity at the fastest pace in six years, according to government data.
It’s unlikely the combined sales of companies in the S&P 500 will rise as much as analysts estimate when U.S. consumer demand and corporate investment are shrinking, Naroff said.
“Consumers may be on an extended spending holiday and a lot more cautious in their use of credit,” said Naroff, the top forecaster last year in a survey by Bloomberg Markets magazine. “The recovery is going to be slower, and businesses had cut expenses very, very rapidly. Making big profit gains from here, which might seem logical coming out of a recession, is going to be extremely difficult.”
Earnings, GDP
Based on the historical relationship of earnings and GDP compiled by Bloomberg since 1949, the U.S. economy would have to expand by 4.1 percent for profit among S&P 500 companies to match analysts’ prediction for a 25 percent gain in earnings.
None of the 53 economists polled by Bloomberg expect growth to be that strong. The most optimistic forecast in a survey taken from Aug. 5 to Aug. 11 was for a gain of 4 percent, by Michael Darda of MKM Partners LP in Greenwich, Connecticut. The lowest was London-based First Global economist Nikhil Gupta’s call for a 0.5 percent expansion.
Firings boosted the U.S. unemployment rate to 9.7 percent last month, the highest in 26 years. That brought the number of Americans thrown out of work since the recession began in December 2007 to 6.9 million people, the most in any post-World War II contraction, data compiled by Bloomberg show.
Increasing joblessness means investors are relying too much on government spending to drive growth in corporate earnings, said Howard Silverblatt, S&P’s senior index analyst in New York.
“We don’t see a whole lot of believers that the economy is getting better or the rally is for real,” said Fred Dickson, who manages $17 billion as chief market strategist at D.A. Davidson in Lake Oswego, Oregon. Investors “are taking a glass- half-empty rather than glass-half-full approach to the world. They’re very, very nervous.”
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