World Markets Fall On Potential Sustainability
HONG KONG (AP) – Global stock markets dropped Friday as leaders of the world’s 20 largest economies assembled in the U.S. to find ways to foster a healthy economic recovery.
European shares were modestly lower after Asian markets closed down, while the dollar fell against major currencies and oil prices gained slightly after a two-day plunge.
Asia’s move lower followed a fall on Wall Street, where investors pulled out of stocks amid worries about the sustainability of this year’s rally and news of an unexpected drop in sales of existing homes in August.
Investors are also increasingly nervous that governments will prematurely unwind emergency measures that have gotten money flowing through financial markets since the crisis erupted last year. This week, the U.S. Federal Reserve announced it would slow its purchases of mortgage-backed securities, while European Central Bank said it would curtail certain types of dollar-denominated loans.
Amid the concern, G-20 leaders were gathered for a two-day meeting in the U.S. dedicated to bringing about a strong and sustainable turnaround after the world’s worst downturn in decades. Both President Obama and British Prime Minister Gordon Brown said nations should not move too quickly to end low-interest rates, stimulus spending and other props.
“Much of the gains across asset classes so far this year – to levels not justified by fundamentals – have been a direct result of cheap and easily available funding,” Dariusz Kowalczyk, chief Investment strategist for SJS Markets in Hong Kong, wrote in a note. “News that the amount and availability of liquidity will be imminently limited caused fears that asset bubbles will be diffused sooner.”
As trade got under way in Europe, Britain’s FTSE was up 0.1 percent, Germany’s DAX fell 0.4 percent and France’s CAC-40 was down 0.2 percent.
In Japan, the Nikkei 225 stock index shed 278.24 points, or 2.6 percent, to 10,265.98 after Nomura, the country’s leading brokerage, announced its biggest shares sale ever, weighing on the broader market.
Hong Kong’s Hang Seng lost 0.1 percent to 21,024.40, and China’s Shanghai index dropped 0.5 percent.
Elsewhere, South Korea’s Kospi shed 0.1 percent, India’s Sensex edged lower by 0.1 percent and Indonesia’s index lost 1.0 percent. Taiwan and Australia’s markets were up 0.3 percent.
Overnight on Wall Street, the Dow fell 41.11, or 0.4 percent, to 9,707.44.
The S&P 500 index fell 10.09, or 1.0 percent, to 1,050.78, and the Nasdaq composite index fell 23.81, or 1.1 percent, to 2,107.61.
U.S. futures pointed to a higher open on Wall Street Friday. Dow futures were up 18 points, or 0.2 percent, at 9,653.
Oil prices clawed back some losses in Asia, with benchmark crude for November delivery up 33 cents at $66.22.
The dollar weakened to 90.53 yen from 91.26 yen. The euro gained to $1.4688 from $1.4661.
Oil Rises Slightly To Hover Around $66pb
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Benchmark crude for November delivery was up 52 cents at $66.41 a barrel by late afternoon Singapore time in electronic trading on the New York Mercantile Exchange. On Thursday, the contract fell $3.08 to settle at $65.89, the lowest since July 29.
Oil fell $6.86 during Wednesday and Thursday after an unexpected increase in U.S. crude and gasoline supplies triggered doubts about consumer spending and the strength of the economic recovery.
“People have been too optimistic about the economy,” said Clarence Chu, a trader at market maker Hudson Capital Energy in Singapore. “The U.S. and Europe are still losing jobs every month.”
Crude has traded between $65 and $75 for months, a period of stability after prices soared to $147 in July 2008 before crashing to $32 in December.
“If next week’s inventory number shows another build, we could break below $65,” Chu said. “Until that happens, I still think we’re range bound.”
In other Nymex trading, gasoline for October delivery was steady at $1.64 a gallon, and heating oil held at $1.69 a gallon. Natural gas was up 2.5 cents to $3.98 per 1,000 cubic feet.
In London, Brent crude rose 56 cents to $65.41 on the ICE Futures exchange.
Sigapore’s Industrial Output Rises For A Second Consecutive Month
Industrial production in Singapore climbed for the second straight month on a yearly basis in August mainly due to a continued surge in biomedical output, an official report showed Friday.The Economic Development Board of Singapore said industrial output grew 12.3% year-on-year in August, following the 17% rise in the preceding month. Economists had expected a 5% increase in output.
The yearly growth was largely attributed to an increase in biomedical manufacturing output. With the second largest share in overall industrial output, the biomedical manufacturing output surged 97.8%, mainly due to the strong performance in the pharmaceutical segment. Pharmaceutical output soared 108.1%, while output in the medical technology segment fell 7.5%.
At the same time, electronics output, having the largest share in the total, decreased 6.4% in August following the 5.9% fall in July. Declines in output continued in the precision engineering, transport engineering and general manufacturing industries, although at a slower pace. Transport engineering output dropped 2.5% compared to the 11.8% fall in the previous month. Precision engineering output decreased 12.7%, slower than the 16.2% slide in July, while output from general manufacturing industries was down 4.2%.
On a monthly basis, industrial output was down a seasonally adjusted 5.6% in August, in contrast to the upwardly revised 25.7% rise in the previous month, with the decline smaller than the 6.4% decline expected by economists. Cumulative industrial output in the first eight months of 2009 contracted by 6.7% compared to the corresponding period of the preceding year.
Yen Bonds Rise As Japan Begins To Relieve Stimulus
By Justin Carrigan
Sept. 25 (Bloomberg) — The yen and government bonds gained as central banks weighed withdrawing economic-stimulus measures that have helped buoy demand for riskier assets.
The Japanese currency rose against all 16 of its most- traded peers tracked by Bloomberg, strengthening to less than 90 per dollar, as of 11:26 a.m. in London. European bonds advanced, driving the yield on the German 10-year bund to the lowest level in almost two weeks. The Dow Jones Stoxx 600 Index of European shares added 0.2 percent after falling as much as 0.5 percent earlier. U.S. index futures climbed 0.4 percent.
Group of 20 leaders are meeting in Pittsburgh to discuss policy coordination and tighter banking regulation. Federal Reserve Governor Kevin Warsh said the U.S. may need to be as aggressive in reversing its actions to revive the economy as it was in starting. European Central Bank policy maker Yves Mersch said “timely preparation” is needed about when to raise rates and withdraw liquidity once money markets recover.
“If the world starts to believe that we are moving on from crisis management mode, the market could get sensitive about the timing of the retreat from the abnormal level of intervention,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a report.
The yen climbed 1.2 percent to trade as high as 89.97 per dollar, the first time it has breached 90 against the U.S. currency since Feb. 12. It advanced 1.5 percent against the pound and 1 percent compared with the euro. The pound fell against all 16 most-traded currencies.
Gilts Lead Gains
U.K. gilts led gains in government bonds, with the yield on the 10-year note dropping 3 basis points to 3.67 percent. The yield on the German 10-year bund declined 2 basis points to 3.28 percent, while the U.S. 10-year note yield fell 1 basis point to 3.37 percent.
The U.S. government and the Fed have spent, lent or committed more than $12 trillion in an effort to revive the economy and credit markets. Germany yesterday reduced its fourth-quarter debt-sale program, citing “improved funding conditions.”
The gains in U.S. futures indicated the Standard & Poor’s 500 Index will trim its weekly decline of 1.6 percent. A report today from the Commerce Department may show orders for U.S. durable goods rose in August for the fourth time in the past five months, economists said. New-home sales probably rose 1.6 percent to a 440,000 rate, a separate report may show……
G-20 Emerges As The New Go To Forum
By Hans Nichols and Simon Kennedy
Sept. 25 (Bloomberg) — World leaders will today announce the Group of 20 nations is replacing the G-8 as the main forum for global economic coordination, reflecting a shift in power from rich countries to emerging markets.
The decision, unveiled in a White House statement late yesterday, comes as President Barack Obama, Chinese President Hu Jintao and other leaders gather in Pittsburgh for their third summit in a year to reshape the governance of the world economy following the worst financial crisis since the Great Depression. The G-8 will still exist and may meet on separate matters such as security, a U.S. official said earlier.
The transfer of influence to the broader group, whose membership ranges from the U.S. to China to Saudi Arabia, symbolizes the fact that the richest industrial nations now lack the sway to govern the world economy alone after their excesses sparked the turmoil that tipped the globe into recession.
“The G-20 needs to prove it can make the tough calls and implement agreed outcomes in a timely fashion,” said Tim Adams, who served as the U.S. Treasury’s top international official under former Secretaries John Snow and Henry M. Paulson and is now managing director of the Lindsey Group. “I think it will succeed, but the G-20 must prove skeptics wrong and that will take time and effort.”
The G-20 accounts for about 85 percent of global gross domestic product and was created after a spate of currency devaluations plagued emerging markets from Russia to Thailand in the 1990s. The G-8 oversees about two thirds of global GDP.
‘One Chance’
“What we are trying to do is create a system for economic cooperation across the world,” U.K. Prime Minister Gordon Brown said yesterday. “We have this one chance to make a huge success of international cooperation.”…..
By Duane D. Stanford and Jeroen Molenaar
Sept. 25 (Bloomberg) — Unilever, the maker of Dove soap, agreed to buy Sara Lee Corp.’s personal-care and European detergent unit for 1.28 billion euros ($1.88 billion), gaining Sanex shower gel in its biggest purchase in nine years.
Unilever, based in London and Rotterdam, will pay cash for the business, which makes Duschdas and Radox soap and had sales of more than 750 million euros for the year ending June 2009, according to a statement today. Sara Lee, which has been shedding units to focus on coffee and food, said the proceeds would help it buy back up to $1 billion in stock.
The purchase is the largest by Chief Executive Officer Paul Polman since he took the reins at Unilever at the start of the year. He focused the company on winning back cash-strapped shoppers and boosting sales volumes by cutting prices, and was rewarded as the company unexpectedly posted volume growth in western Europe in the second quarter.
“We’re not convinced that this is the greatest collection of assets, but another acquisition shows Unilever is still moving from the back foot — cost cutting, disposals — to the front foot — volume growth, acquisitions,” Credit Suisse analysts said in an e-mailed note.
The deal is Unilever’s biggest acquisition since buying SlimFast Foods Co. and Ben & Jerry’s Homemade Inc. for a combined $2.6 billion in April 2000. Unilever’s brands besides food include Vaseline and Axe deodorants……
ANZ To Complete Full Purchase of ING
By Angus Whitley and Shani Raja
Sept. 25 (Bloomberg) — Australia & New Zealand Banking Group Ltd. agreed to buy ING Groep NV’s stake in their life insurance and wealth-management venture for A$1.76 billion ($1.5 billion) in the bank’s biggest acquisition since 2003.
Australia’s fourth-biggest lender will pay cash for ING’s 51 percent stake in ING Australia and ING New Zealand, the Melbourne-based bank said in a statement today. Amsterdam-based ING, which received a 10 billion euro ($14.6 billion) lifeline in October from the Netherlands, will book a profit of 300 million euros from the sale, it said in a statement.
Australian banks, which remained profitable throughout the financial crisis, have raised capital via share sales to help fund asset purchases from distressed sellers. ANZ Chief Executive Officer Mike Smith, who previously headed HSBC Holdings Plc’s Asian division, in August agreed to buy Royal Bank of Scotland Group Plc’s units in six Asian countries.
“ANZ is taking advantage of the retreat by international banks,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. The deal is “symptomatic of a very healthy domestic banking sector.”
ING, which is seeking to raise funds to repay the Dutch state, and ANZ merged their insurance and wealth management divisions in Australia and New Zealand in 2002. Under the terms of the joint venture, ANZ and ING were unable to independently undertake wealth management takeovers without opening the deal to the other partner.
‘More Attractive’
ING’s other businesses in Australia — ING Direct, ING Investment Management, ING Wholesale Banking and ING Real Estate — are not affected by the transaction, the Dutch company said……
Ford To Build A Plant in China
SHANGHAI (AP) – Ford Motor Co. said Friday it plans to spend $490 million on building a third assembly plant in China, ramping up production to meet surging demand in this fast-growing market as the U.S. automaker expands in Asia.
The factory, to be built in the central Chinese city of Chongqing, will make the next-generation Focus compact car, which Ford plans to sell globally.
The announcement from Chongqing came the day after the Dearborn, Michigan-based automaker unveiled a made-in-India compact car – part of a plan to boost sales in Asia, a region the U.S. automaker has hardly dented but is counting on to drive growth.
“Today’s announcement reinforces our commitment to the further expansion of our China operations to meet the continued rise in demand from Chinese consumers for world-class Ford products and services,” Ford chief executive Alan Mulally said in a statement.
In India earlier this week, Mulally said he expects a third of global car sales to come from Asia in 20 years, a third from the Americas and a third from Europe and Russia…..
Barclays To Buy Citi Assets in Portugal
By SARA SCHAEFER MUñOZ
Barclays PLC is in talks to buy some of Citigroup Inc.’s retail-banking assets in Portugal, including the American bank’s credit-card portfolio there, according to people familiar with the matter.
The deal, which could be announced as early as next week, would increase Barclays’s retail presence in southern Europe. Barclaycard, the bank’s credit-card business, has suffered fewer impairment charges than many of its peers since the onset of the financial crisis, and has eyed expansion in Western Europe and the U.S.
Spokespeople for Citi and Barclays declined to comment. It was unclear how much the assets would sell for, but people close to the matter suggested it is less than $100 million.
The move comes at a time when Barclays Capital, Barclays’s investment bank, has been expanding in the U.S., Europe and Asia, and analysts have said that Barclays may look for opportunities to expand its retail and commercial division to balance the company’s revenue stream.
(Reuters) – U.S. regulators say that the level of losses from syndicated loans facing banks and other financial institutions tripled to $53 billion in 2009, due to poor underwriting standards and the continuing weakness in economic conditions.
According to the Shared National Credit Program (SNC) 2009 Review, an annual inter-agency report released on Thursday, credit quality deteriorated to record levels with respect to large loans and loan commitments.
The Shared National Credit Program which was set up in 1977 to review large syndicated loans now reviews and classifies all institutional loans of at least $20 million that are shared by three or more supervised institutions.
According to the report, criticized assets rated ‘special mention’, ‘substandard’, ‘doubtful’ and ‘loss’, touched $642 billion, representing 22.3 percent of the SNC portfolio, compared with 13.4 percent a year ago.
Classified assets rated ‘substandard’, ‘doubtful’, and ‘loss,’ rose to $447 billion from $163 billion in 2008.
The volume of SNCs rated ‘doubtful’ and ‘loss’ in 2009 rose almost 14-fold to $110 billion, while non-accrual loans touched $172 billion, up from $22 billion in 2008.
The report also said foreign banks held about 38 percent of the $2.9 trillion in loans, while hedge funds, pension funds, insurance companies and other entities held about 21 percent.
The report also said that non-banks continued to hold a “disproportionate share” of classified assets compared with their total share of the SNC portfolio. They hold 47 percent of loans seen as ‘substandard’, ‘doubtful’ and ‘loss’.
The SNC review is prepared by the Federal Reserve Board of Governors, Federal Deposit Insurance Corp (FDIC), Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS)
The Fed May Have To Raise Rates Sooner Than Expected
PITTSBURGH (Reuters) – The U.S. Federal Reserve may have to raise interest rates from their currently ultra-low setting near zero before the need to take action becomes obvious, Fed Board Governor Kevin Warsh said on Thursday.
Warsh, in an op-ed published in the Wall Street Journal a day after the Fed left rates unchanged and declared the U.S. economic recovery under way, said the central bank was at “a critical transition period, of still unknown duration.”
“I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary,” Warsh said.
The Fed on Wednesday said that growth had resumed after a severe economic downturn, and Warsh echoed this line while emphasizing that inflation remained in check, allowing policy-makers to leave rates low while the recovery builds.
“Longer-term inflation expectations are stable, and economic conditions are likely to warrant exceptionally low levels of the federal-funds rate for an extended period,” Warsh said, repeating the Fed’s Wednesday policy statement.
He said financial markets could provide better forward-looking guides to the development of growth and price pressures than traditional economic data, and picked out asset prices and credit spreads as two important gauges. U.S. stock markets are up 50 percent since March and credit spreads have narrowed.
In addition to cutting interest rates to the bone, the Fed pumped hundreds of billions of dollars into financial markets to prevent them from seizing up during last year’s crisis, doubling the size of its balance sheet to over $2 trillion.
“Policy makers should acknowledge the heightened costs of policy error. The stakes are high, in part, because the policy accommodation that requires timely removal as the economy rebounds is substantial,” Warsh said.
Critics fear that massive increases in liquidity represented in the boost in the size of the Fed’s balance sheet could spark inflation as growth picks up steam.
The Fed has said it will exit from its massive monetary expansion to prevent inflation taking hold.
“Policy makers should continue to communicate as clearly as possible the guideposts, conditions and means by which extraordinary monetary accommodation will be unwound, including the removal of excess bank reserves,” Warsh said.
The Vampire Squid to Benefit From Derivatives Regulation
“Standardized central clearing of OTC derivatives are likely to force a major electronification of derivatives trading, which may play to Goldman’s advantage given their existing technology platform and expertise in high volume electronic trading,” Citigroup analyst Keith Horowitz said.
Taming the over-the-counter (OTC) derivatives market — a “shadow banking system” of enormous size now largely beyond government reach — is a key part of a push for tighter government oversight of banks and capital markets under way now for six months.
“Standardized” OTC derivatives would go through clearinghouses at regulated exchanges to reduce the risk of default. OTC derivatives are complex instruments whose value is based on an underlying asset.
Horowitz, who recently met with Goldman’s Chief Financial Officer David Viniar, said the new rules, which could set mandatory minimum collateral and margin requirements, if enacted are expected to benefit the bank relative to its peers.
Goldman has historically had among the most stringent collateral and margin terms versus more generous peers, who too often cut deals with easy credit terms to win business, said Horowitz, who also met Goldman’s Chief Operating Officer Gary Cohn and investment banking head David Solomon.
“We are more optimistic on Goldman’s long-term prospects and gained comfort that worst-case outcomes from regulatory reform are unlikely to materialize and structurally impair returns,” Horowitz wrote in a note to clients.
Global policymakers agree that the OTC derivatives market should be regulated after a type of derivative, credit default swaps, led to insurer American International Group’s (NYSE:AIG – News) near collapse and $180 billion government bailout.
The analyst raised his earnings estimate for Goldman by 20 cents to $4.20 a share for the third quarter, and by 25 cents to $5 a share for the fourth.
He kept his “buy” rating and target of $215 on the stock. Goldman shares closed at $183.06 Thursday on the New York Stock Exchange.
More Trouble Ahead For Housing
Guest post from The Decline And Fall of Western Civilization:
This factoid from Mark Hanson:
Let me frame this… in the bubble years existing sales $500k and over were common. In CA alone, from early 2005 to late 2007, the average house price was over $450k. Total sales were huge then too…over 700k nationally in many summer months.
In July 2009 there were only 460k single family (ex-condo) sales – by the way that was down from June’s 465k, but that got lost in the housing bottom headlines. Of the 460k houses sold, only 12k or roughly 2.5% had a purchase price over $500k. I don’t have inventory numbers on houses for sale over $500k but even at 5% of the total inventory that is 1.75 years of supply. Oh, and by the way in CA alone last month there was close to 12k NODs on props over $500k.
This 2.5% sales rate goes to underscore how insignificant (and ruined in many cases) the organic move-up/across buyer has become due to epidemic negative equity and absolute lack of affordability through exotic finance. Unless he can sell and re-buy he will remain gone.
But what really is negative equity? Unlike the bubble years when zero down or a 100% HELOC after the purchase in order to replenish savings was the norm, today’s buyer has to sell for enough to cover the Realtor cost and the 20% down needed to buy most mid-to-high end houses using new vintage loans. Most analysts look at the reported negative-equity figures as the tipping point — it’s not.
If homeowners can’t sell for enough to pay a Realtor 6%, extract the down on the new property, and pay for moving costs they are effectively in a negative equity position. Homeowners know this — a homeowner that has only 15% equity knows they are trapped in their house. We are still learning what this realization does to spending habits, as the focus for many becomes ‘how do I earn or save my way out of this’.
When looking at neg-equity if you move the bar down to 90%, 80%, or even 74% (6% Realtor fee + 20% down) then it changes everything. The vast majority of homeowners in the nation become stuck (see chart below). Without these existing homeowners active in the real estate market, we will never find a true bottom.
Hanson is painting a picture of a residential real estate market in a death spiral. With some states seeing a sizable majority of potential homebuyers frozen out of the housing market by negative equity, there will be effectively no (ie, net negative) move-up or organic homebuying. Folks with less than 25% equity in a house that can be sold today cannot even move laterally, much less trade up, without adding capital that (for the most part) they don’t have to spare. So mid- to high-end homes become completely illiquid assets at anything like current prices — and illiquidity will drive prices further south as supply overwhelms demand. With prices declining further, banks will tighten lending standards further — the era of the 30% down payment is already here in the blighted coastal states, and it figures to spread, moving the bar yet further away for the trapped. There is furthermore a demographic trend at work, as savings-light empty-nest baby boomers divest themselves of the grand houses that characterized their materialistic phase and move to downsize in an effort to raise capital and lower expenses in advance of old age. And so the vicious cycle perpetuates itself.
The end result will i think be a massive compression in price differentials between small and large homes. Square footage, greatrooms, stainless-and-granite professional kitchens and fourth bedrooms were at a huge premium in the boom; in the bust the functional essence of a home, the roof it provides, will likely become the focal point to the relative devaluation of all extraneous components. It would not surprise me if, in the most afflicted markets, large houses actually exchange more cheaply than mid-size units, reflecting the significant differential in operating costs and taxes.
That may seem like great news if you’re waiting out the housing bust from the sidelines and renting your way to, if not prosperity, at least smaller losses. but the effect of further significant declines in house prices on the properties to which the banks are perhaps most exposed has utterly no positive effect for credit quality and therefore the economy.
Source: Decline And Fall Of Western Civilization
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