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Monthly Archives: June 2013

Former Barclays Employees Face Criminal Charges for Rate Rigging

“LONDON—U.S. and British authorities are preparing to bring criminal charges against former employees of Barclays BARC.LN +0.15% PLC for their alleged roles trying to manipulate benchmark interest rates, according to people familiar with the plans, marking an escalation of a global investigation now entering its sixth year.

The charges are likely to be filed this summer, these people said, roughly a year after the big British bank became the first institution to settle over allegations that it attempted to rig the London interbank offered rate, or Libor, and other widely used financial benchmarks. The people cautioned that the plans aren’t finalized and could be delayed or modified.

The planned criminal cases indicate that government investigations into Libor manipulation, which have been under way since 2008 and until now have targeted mostly institutions rather than individuals, are moving into a new phase. So far, U.S. authorities have filed charges against two individuals. British prosecutors haven’t charged anyone. Units of two banks—UBS AG UBSN.VX +0.12% and Royal Bank of Scotland Group RBS.LN +1.29% PLC—pleaded guilty to U.S. criminal charges as part of rate-manipulation settlements….”

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$WMT Expects Scrutiny at he Upcoming Shareholder Meeting

FAYETTEVILLE, Ark. (AP) — Wal-Mart executives are expected to make the case it is improving the way it does business overseas and outline new growth opportunities at the world’s largest retailer’s annual shareholder meeting Friday.

“Wal-Mart faces increasing scrutiny from investors over how it has handled allegations of bribery in its Mexican operations that surfaced a year ago. It also faces pressure to increase its oversight of factory conditions abroad following a building collapse in April in Bangladesh that killed more than 1,100 garment workers. The discounter, based in Bentonville, Ark., is also under scrutiny for how it treats its workers.

Those problems are happening as Wal-Mart Stores Inc. is wrestling with slower sales growth.

Wal-Mart’s annual meeting, at the University of Arkansas at Fayetteville’s Bud Walton Arena, attracts thousands of investors and has historically had the air of a giant pep rally. The company brings in A-list speakers and performers like basketball legend Michael Jordan and pop singer Justin Timberlake.

Wal-Mart is considered an economic bellwether because it accounts for nearly 10 percent of nonautomotive retail spending in the U.S. The company’s first-quarter results, reported last month, showed that its low-income shoppers remain under stress. While the housing market is recovering and the stock market has rallied, low-income people haven’t benefited much. They’re also facing new pressures like higher payroll taxes that have affected spending.

During the first quarter, Wal-Mart said its profit edged up just slightly, but the company reported its first decline in a key revenue measure in its U.S. namesake business in seven quarters.

U.S. Wal-Mart stores account for 59 percent of the company’s total sales, which reached $466.1 billion for the year ended Jan. 31, excluding revenue from membership fees from its Sam’s Club division….”

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Royalty Pharma Increases Bid for $ELN to $13

“NEW YORK, June 7, 2013 /PRNewswire/ — Royalty Pharma today announced, pursuant to Rule 2.5 of the Irish Takeover Rules (the “Announcement”), a firm intention to further increase its offer for Elan Corporation, plc (ELN) to $13.00 per share in cash plus a contingent value right (“CVR”) worth up to $2.50 per share.  The CVR, based on feedback from Elan Shareholders, enables participation in the future upside of Tysabri including approval in secondary progressive multiple sclerosis and the achievement of certain sales milestones that are detailed further in section five of the Announcement which is available atwww.royaltypharma.com.

“While Elan’s Board and Management team appear to be solely focused on what we perceive to be increasingly desperate attempts to fend off Royalty Pharma’s highly compelling offer, we have been carefully listening to shareholders and are pleased to revise our offer today based on their feedback,” said Pablo Legorreta, Chief Executive Officer of Royalty Pharma. “Our increased offer gives shareholders certainty and immediate, full value for their shares. It also now allows them to realize continued upside from the Tysabri Royalty through the CVR structure. Approving Elan’s purely defensive transactions at the upcoming EGM will force Royalty Pharma to withdraw its offer and leave shareholders invested in a company with an uncertain future overseen by a Board with no track record of creating shareholder value, so we urge shareholders to oppose those proposals and tender in favor of our offer.”

With the revised offer, Royalty Pharma is now offering a compelling upfront cash value of $4.9 billion for Elan’s Tysabri Royalty (or $6.2 billion including the maximum aggregate amount payable under the CVRs), a 52% to 92% premium to the $3.25 billion at which Royalty Pharma believes Elan sold approximately half of its interest in Tysabri to Biogen.  The aggregate amount payable under the Further Increased Offer of $13.00 up to $15.50 (including the maximum aggregate amount payable under the CVRs) represents a premium of 56% to 97% to the Undisturbed Elan Enterprise Value….”

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$JPM Expects EM Sell-Off to Hurt Bank Earnings

“The emerging market selloff sparked by speculation the Federal Reserve will reduce stimulus may cut revenue for investment banks including Standard Chartered Plc and HSBC (HSBA)Holdings Plc, JPMorgan Chase & Co. (JPM)’s Cazenove said.

Emerging markets are going through the most disruptive period since the collapse of Lehman Brothers Holdings Inc. in 2008 based on the rise in equity, currency and rates volatility, according to the JPMorgan unit’s report titled “Fed Tapering: Who is Afraid of EM Selloff? We Are!”

The swings may cause a “material slowdown” in emerging market fixed-income revenues with volumes “drying up,” Cazenove analysts includingKian Abouhosseinin London wrote.

Cazenove said it’s more concerned about fixed-income revenue for Standard Chartered and HSBC than previously because of higher revenues related to emerging markets. It’s in “wait-and-see” mode for European banks with lending or earnings in Brazil, South Africa and Mexico, including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), according to the report.

Standard Chartered spokesman Jon Tracey declined to comment as did Paul Tobin, a Madrid-based spokesman for BBVA, and HSBC spokeswoman Archana Achuthan. A spokesman for Santander wasn’t immediately available to comment.

Emerging market government bonds in dollars slumped 3.5 percent in May, the most in at least three years, according to the Bloomberg USD Emerging Market Sovereign Bond Index. (BEMS) Brazilian government local-currency bonds lost the most since October 2008 last month, according to JPMorgan’s GBI-EM Broad Brazil LOC Unhedged Index. South Africa’s rand has plunged 15 percent against the dollar this year.

BlackRock Trims…”

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Consensus Among Analysts Expect Tapering to $65B a Month Starting in October

“Economists cut their estimates for how much the Federal Reserve will reduce the amount of its monthly asset purchases, a Bloomberg survey shows.

Policy makers led by Chairman Ben S. Bernanke will trim their so-called quantitative easing program to $65 billion a month at the Oct. 29-30 meeting of the Federal Open Market Committee, from the current level of $85 billion, according to the median estimate in the survey of 59 economists this week. In a similar survey before the Fed’s April 30-May 1 meeting, economists expected the Fed to cut purchases to $50 billion in the fourth quarter.

Debate among central bank policy makers over when and how to dial back their unprecedented easing campaign has shaken financial markets. The Standard & Poor’s 500 Index has dropped 2.8 percent since reaching a record closing high on May 21, and the yield on 10-year Treasuries has risen to 2.08 percent from as low as 1.63 percent last month as investors weighed the timing of a reduction in the central bank’s stimulus.

“Even those who are advocating for tapering are thinking that it could be a pretty small first step to see how it goes,” said Julia Coronado, chief economist for North America at BNP Paribas in New York and a former Fed economist. “That’s one of the few things we’ve learned” from the debate among policy makers.

When the first move comes, officials will split their $65 billion in purchases between $30 billion a month of mortgage bonds and $35 billion a month of Treasuries, a $10 billion reduction in each category, according to the survey, conducted June 4-5.

June Tapering?

Two of the 59 economists surveyed this week expect the pace of purchases to be reduced at the FOMC meetings on June 18-19 or July 30-31. Sixteen say tapering will begin at the Sept. 17-18 meeting, 14 see it happening Oct. 29-30 and 15 forecast the first tapering Dec. 17-18. Twelve see tapering next year or later.

“If jobs growth continues in the 150,000-to-200,000 per month range, that’s probably sufficient to lower the unemployment rateslightly,” said Tom Lam, chief economist at DMG & Partners Securities in Singapore. “Coupled with real GDP growth recovering to 2.5 percent, that would be sufficient for them to consider tapering modestly at the December meeting.”

Stocks, Bonds…”

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Black Gold Jumps Again, Likely Closing Out the Week in Upside for the First Time in a Month

“West Texas Intermediate headed for its first weekly gain in a month before data forecast to show more jobs were added in the U.S., the biggest crude consumer.

Futures rose as much as 0.4 percent, and have advanced 3.4 percent this week. Employers in the U.S. probably created as many jobs in May as in the month before, a Bloomberg survey showed before the Labor Department’s report today. WTI’s discount to the European benchmark, Brent, widened for the first time in three days. WTI may slide next week, according to a separate Bloomberg survey.

“We are expecting a seasonal pick-up in demand in the coming months,” said Amrita Sen, chief oil-market analyst at Energy Aspects Ltd., a consulting company in London. “The U.S. recovery has been broadly on track so far. The labor market is healing and the economy is slowly getting better.”

WTI for July delivery was at $95.06 a barrel, up 30 cents, in electronic trading on the New York Mercantile Exchange as of 10:36 a.m. London time. The volume of all futures traded was 15 percent below the 100-day average. The contract rose $1.02 to $94.76 yesterday, the highest close since May 28.

Brent for July settlement was up 39 cents at $104 a barrel on the London-based ICE Futures Europe exchange. The European benchmark grade was at a premium of $8.97 to WTI, compared with $8.85 yesterday.

Economic Recovery…”

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The S&P Cuts Brazil’s Outlook on Sluggish Growth

“Brazil’s credit rating outlook was cut to negative by Standard & Poor’s, which said sluggish economic growth and an expansionary fiscal policy could lead to an increase in the government’s debt levels.

S&P said in a statement yesterday that it lowered the outlook on Brazil’s BBB rating, which is two levels above junk and in line with Mexico and Russia, from stable. The rating company also cut the outlooks for state-controlled oil company Petroleo Brasileiro SA and government-run utility Centrais Eletricas Brasileiras SA.

The move, which threatens to end a decade-long stretch of rating upgrades for Latin America’s biggest country, was triggered by forecasts for a third year of “modest” economic growth, “weaker” fiscal policy and a deterioration in the government’s credibility, S&P said. Yields onBrazil’s dollar bonds have surged an average 0.81 percentage point in the past month to 4.49 percent. The outlook revision may prompt Brazilian debt to underperform, according to Siobhan Morden, a fixed-income strategist at Jefferies Group LLC.

“It has to do with policy inconsistency, the low-growth high-inflation trade off, and the loss of credibility of the central bank,” Morden said in a phone interview from New York.

Brazil’s economy expanded 0.9 percent last year and is forecast to grow just 2.77 percent in 2013, according to a central bank survey published June 3. Quickening inflation has prompted policy makers to boost interest rates by 0.75 percentage point this year after they lowered borrowing costs by 5.25 percentage points in cuts that began in August 2011.

‘Not Expansionary’…”

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Draghi Has Less Enthusiasm as Time Rolls On

“European Central Bank President Mario Draghi isn’t racing to the rescue of Europe’s banks or economy this time.

Almost a year since his promise to do “whatever it takes” to protect the euro soothed investors, and a month since cutting interest rates, Draghi signalled yesterday that governments, not the ECB, should do more to fight recession and boost credit to businesses in cash-strapped countries such as Spain.

As he predicted a resumption of growth by the end of the year, Draghi’s maintenance of the status quo sent bonds falling and the euro rising as investors questioned the ECB’s crisis-fighting resolve, which previously reinforced its president’s “Super Mario” nickname. Yields on Spanish and Italian 10-year bonds jumped yesterday to the most in six weeks, while German two-year borrowing costs climbed to the highest since February. Markets rebounded today with rates falling across the region.

“Investors see ECB talk for what it is, a fig leaf,” said Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris. “Draghi mentioned many possible measures, only to conclude that they are too hard to introduce.”

If the economy improves in the second half of the year, the ECB may refrain from further action as “the easy instruments have all been used,” Austrian central bank governor Ewald Nowotny said today.

Recession Risks…”

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German Industrial Production Rises the Most in Two Years

“German industrial production (GRIPIMOM) surged the most in more than a year in April as construction activity surged after an unusually long winter damped output.

Production jumped 1.8 percent percent from March, when it gained 1.2 percent, the Economy Ministry in Berlin said today. That’s the third consecutive increase and the strongest gain since March last year. Economists forecast no change, according to the median of 38 estimates in aBloomberg News survey. From a year earlier, production rose 1 percent when adjusted for working days.

The Bundesbank downgraded its outlook for the German economy today, while pointing to a gradual recovery in the course of the year. Exports in April rose more than forecast, supporting the central bank’s view that trade with faster-growing markets in Asia and the U.S. will help offset the effects of six quarters of recession in the 17-nation euro area.

“The German economy is gradually exiting the weak phase that it had around the turn of the year,” Mario Gruppe, an economist at NordLB in Hanover, said before the release. “It is however a growth path that has a few potholes in it. It will be a recovery that now and again has setbacks.”

After the European Central Bank left interest rates at a record low of 0.5 percent yesterday, President Mario Draghi reiterated his view that the region’s economy will still return to growth this year.

Stocks Fall…”

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Bundesbank Cuts Outlook for Growth Despite Ongoing Recovery

Germany’s Bundesbank cut its forecasts for growth in Europe’s largest economy for this year and next, while signaling confidence that the worst of the recession in the euro area is over.

The Frankfurt-based central bank cut its 2013 growth projection to 0.3 from the 0.4 percent predicted in December, and said the economy would grow by 1.5 percent in 2014, down from the previously-estimated 1.9 percent.

“Much will depend on whether the economic situation stabilizes in the euro-area crisis countries and whether expansionary forces will gradually gain the upper hand there,” Bundesbank President Jens Weidmann said in a statement. “A sustained upturn in the world economy is just as important as a precondition for the growth path we have assumed.”

While the German economy grew just 0.1 percent in the first three months of this year, business confidence rose in May…”

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U.K. Trade Gap Narrows More Than Expected

“Britain’s trade deficit narrowed more than economists forecast in April as imports declined faster than exports.

The goods trade gap was at 8.2 billion pounds ($12.8 billion) compared with 9.2 billion pounds in March, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 19 economists was for 8.8 billion pounds. Exports fell 1.4 percent and imports declined 3.8 percent.

While data this week show the economy is gaining momentum, today’s figures underline the risks to the recovery from a recession-stricken euro zone, Britain’s biggest trading partner. Exports to the bloc fell 2.3 percent to their lowest level since February 2011. Net trade acted as a drag on economic growth in the first quarter.

“It seems unlikely that net trade can significantly help the U.K. economy in the near term given current ongoing weak domestic demand in the euro zone and moderate and stuttering global growth,” said Howard Archer, an economist at IHS Global Insight in London. “The hope is that the overall marked weakening of the pound earlier in 2013 will increasingly feed through to boost exports and the beneficial impact of this is reinforced by global growth gradually improving.”

Exports to the European Union as a whole fell 3 percent. The decline was partially offset by a 0.2 percent rise in shipments to countries outside the bloc.

The surplus on trade in services narrowed to 5.6 billion pounds in April, leaving the overall trade deficit at 2.6 billion pounds compared with a gap of 3.2 billion pounds a month earlier, the ONS said….”

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The Aussie Finds Weakness Again

Australia’s dollar dropped versus the yen, set for its worst weekly rout since 2011, before Chinese data tomorrow forecast to show growth in imports slowed, dimming the demand outlook for commodities.

Implied volatility of the Aussie against the U.S. currency was set for a sixth weekly advance, the longest in two years, before a U.S. jobs report today that may help investors estimate when the Federal Reserve will start reducing monetary stimulus. Australia’s government bonds extended their gains to a third day amid increasing bets the Reserve Bank will cut borrowing costs to shore up economic growth.

“We’re bearish on the currency,” said Andrew Salter, a currency strategist at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney, referring to the Aussie. It’s a little bit of a surprise that “Chinese growth is so sluggish,” he said.

The Australian currency dropped 1 percent to 92.13 yen as of 5:10 p.m. in Sydney after touching 90.84, the least since Jan. 2. It’s slumped 4.2 percent in the five days through today, poised for the biggest plunge since September 2011. New Zealand’s kiwi dollar declined 0.6 percent to 77.31 yen, having fallen 3.2 percent this week.

Australia’s dollar slid 0.8 percent to 95.17 U.S. cents, extending its fifth weekly drop to 0.6 percent. New Zealand’s dollar lost 0.5 percent to 79.86 U.S. cents, trimming its weekly advance to 0.5 percent.

Australian Yields

The yield on Australia’s benchmark 10-year government note dropped 9 basis points to 3.26 percent, extending its weekly decline to 10 basis points. Similar-maturity note yields in New Zealand fell 5 basis points to 3.55 percent…”

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Credit Suisse Accuses China of Double Counting Funding Expansion Figures

China’s record funding expansion this year may be overstated in part because of double-counting, say Credit Suisse Group AG and Bank of America Corp. analysts trying to reconcile the data with weaker economic growth.

Some Chinese companies may use loans to buy wealth management products that are recorded a second time in another category, Vincent Chan, a Credit Suisse analyst in Hong Kong, wrote in a June 5 report, citing people he didn’t identify at the central bank and banking regulator. Bank of America estimates that double-counting explains 2.7 percentage points of a 12-point gap between first-quarter growth in outstanding credit and nominal gross domestic product.

The concerns echo doubts about Chinese trade figures that helped trigger an official crackdown on false reporting, resulting in May export growth forecast to be about half of April’s gains in data due tomorrow. While the estimated distortions in the credit numbers are smaller, they may provide one part of the explanation for the inconsistency between growth in financing and an economic slowdown.

“The statistics errors in total social financing this year are larger than normal, and it’s mainly caused by double counting,” Zhu Haibin, chief China economist at JPMorgan Chase & Co., said at a briefing yesterday in Beijing.

The first quarter’s $1 trillion increase in economy-wide financing contrasted with an unexpected growth slowdown, suggesting China was becoming less responsive to credit.

More Noticeable

The gap between lending and growth “has become more noticeable in recent months,” Zhu said. Another issue is that some Chinese companies have to borrow to cover working capital as accounts receivable rise, adding to the gap between credit and economic growth, Zhu said….”

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Cash Squeeze Causes China’s Overnight Lending Rate to Jump the Most in Two Years

“The rate China’s lenders charge one another on overnight loans jumped the most in almost two years as shrinking capital inflows led to a cash squeeze before a three-day holiday.

Yuan positions at local financial institutions, an indication of money pouring into Asia’s largest economy, rose 294 billion yuan ($48 billion) in April and China International Capital Corp. estimates the gain slowed to around 100 billion yuan last month. While the People’s Bank of China added a net 160 billion yuan to the financial system this week, it has refrained from conducting reverse-repurchase operations that inject funds since Feb. 7. Local markets will be shut from June 10 to June 12 for the Dragon Boat Festival.

“Foreign capital inflows are probably declining,” said Wang Huane, a senior bond trader at Qilu Bank Co. in Jinan, capital of the eastern Shandong province. “The PBOC has refrained from adding more capital into the financial system, which worsens the situation.”

The one-day repurchase rate, which measures interbank funding availability, climbed 253 basis points, or 2.53 percentage points, to 8.68 percent as of 4:30 p.m. in Shanghai, the biggest jump since July 2011, according to a weighted average rate compiled by the National Interbank Funding Center. It surged 4.15 percentage points this week.

Default Report…”

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Japan’s Finance Minister Says They Will Not Intervene in the Currency Market Just Yet

“Japanese Finance Minister Taro Aso said that the government won’t intervene in the currency market for now after the yen strengthened by the most in three years against the dollar.

“We are carefully watching, but we don’t have any immediate intention of taking any action, such as intervention,” the finance minister told reporters in Tokyo today. The yen jumped 0.7 percent to 96.28 per dollar as of 1:47 p.m. local time.

Japan’s currency surged 2.2 percent yesterday, adding to the headwinds of a slide in stocks and volatility in bonds as Prime Minister Shinzo Abe campaigns to revive the world’s third-biggest economy. As attention turns to a Bank of Japan meeting on June 10-11, Governor Haruhiko Kuroda’s actions may be limited by his pledge to avoid “incremental” steps after announcing a plan to double the monetary base over two years.

“Stocks rose and the yen weakened between November and May at a very rapid pace, driven by expectations for Abenomics and Kuroda-nomics, exceeding the pace of the economy’s fundamental improvement,” said Hiroaki Muto, a senior economist in Tokyo at Sumitomo Mitsui Asset Management. “The markets are now going through an adjustment phase from the too-rapid moves.”

Muto said that the “adjustment” is probably temporary because the Japanese economy is making gains. At the same time, he said the government may consider another jolt of fiscal stimulus.

Market Outlook…”

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Pension Funds in Japan Sell Bonds to Buy Equities

Japan’s public pension fund, the world’s biggest manager of retirement savings, said it will reduce its holdings of local bonds and buy more shares.

The proportion of assets held in Japanese bonds will be cut to 60 percent from 67 percent, the health ministry said today in Tokyo at a briefing to announce changes to the mid-term plan of the Government Pension Investment Fund. The weighting of local shares will be increased to 12 percent from 11 percent currently. The Health and Welfare Ministry, which oversees pensions, didn’t give a time frame for the changes.

“It was a negative factor as far as bond supply and demand is concerned,” said Makoto Suzuki, a bond strategist at Okasan Securities Co. in Tokyo, one of the 24 primary dealers obliged to bid at government debt sales.

GPIF’s shift toward higher-yielding assets comes as it prepares to fund retirements in the world’s most elderly population and Prime Minister Shinzo Abe tries to revive the economy through fiscal and monetary stimulus. Domestic shares have slid since Abe said yesterday that a legislative campaign to loosen rules on businesses, the “third arrow” of his economic plan, won’t begin for months.

Nikkei 225 Stock Average futures in Singapore and Osaka erased gains after the GPIF announcement. June futures on the Nikkei 225 fell 1.5 percent to 12,645 at the 2:30 p.m. close in Singapore while those in Osaka fell 1.1 percent.

Alternative Assets….”

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Where are We Going?

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