Asia FX By Cornelius Luca - Thu 18 Oct 2012 17:06:06 CT (Source:CME/www.lucafxta.com)
The appetite for risk soured on Thursdays, when the expected slowdown of the Chinese GDP was followed by the Google's exceptional slide. All foreign currencies fell after the European and commodity currencies surged on Wednesday. The US stock markets slipped. Gold, oil and silver ended lower. The short-term outlook for the European and commodity currencies is sideways to slightly bearish. The medium-term outlook for most of the foreign currencies is slightly bullish. The LGR short-term model is short on yen, sterling and Canadian dollar, and long euro, franc and Australian dollar. Good luck!
Overnight
US: Initial jobless claims surged to 388,000 from the previous week's revised figure of 342,000 (from the 339,000 originally reported for the previous week).
US: The leading indicator rose 0.6% in September, but the August reading was revised to -0.4% from -0.1%.
US: The Philadelphia Fed manufacturing survey surged to 25.7 in October from -1.9 in September.
Canada: Wholesale sales rose 0.5% in August after falling 0.7% in July.
Today's economic calendar
Japan: All industry activity index for August
Japan: Leading economic index / coincident index for August
Asian Stocks Fall as Earnings Drag Down Technology Shares (Bloomberg)
Asian stocks fell as worse-than- expected earnings results from Google Inc. and Microsoft Corp. weighed on technology shares. Losses were limited after consumer confidence and an index of leading indicators in the U.S. rose. Yahoo Japan Corp., a provider of online information, declined 2.9 percent in Tokyo. James Hardie Industries SE (JHX), a building-materials supplier that gets 67 percent of sales from the U.S., added 0.3 percent in Sydney. Bids to buy GrainCorp Ltd. (GNC) outnumbered offers to sell by about four-to-one as a person familiar with the matter said Wilmar International Ltd. bought a stake in eastern Australia’s largest grain handler. The MSCI Asia Pacific Index dropped less than 0.1 percent to 123.84 as of 9:48 a.m. in Tokyo before markets in Hong Kong and China opened. The measure has risen 2.5 percent this week.
“Earnings reflect the economic weakness we saw a few months ago, and therefore you could argue it’s somewhat outdated,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which has almost $100 billion under management. “You end up in a standoff in the share market between focus on economic data, which is more forward-looking, and focus on earnings, which are not as good.” The MSCI Asia Pacific Index rebounded about 14 percent through yesterday from this year’s low on June 4 as stimulus measures in Europe, the U.S., Japan and China boosted market sentiment amid a global economic slowdown and Europe’s debt crisis. The Asian benchmark traded at 13.1 times estimated earnings on average, compared with 13.9 for the Standard & Poor’s 500 Index and 12.3 for the Stoxx Europe 600 Index.
Japanese Stocks Swing From Gains, Losses as Yen Weakens (Bloomberg)
Japanese shares swung between gains and losses as exporters rose on the yen’s seven-day advance, while Japan Tobacco (2914) Inc. fell on a report the Russian government is cracking down on smoking. Canon Inc., a camera maker that gets 80 percent of its revenue overseas, rose 0.8 percent. Japan Tobacco, the leader in Russia’s cigarette market, sank 2 percent. NEC Corp. jumped 9.7 percent on a report the electronics maker’s operating profit beat its forecast. Internet portal Yahoo Japan Corp. lost 2.8 percent after Google Inc.’s third-quarter profit missed estimates. The Nikkei 225 Stock Average (NKY) rose 0.1 percent to 8,993.02 as of 10:00 a.m. in Tokyo after falling as much as 0.5 percent. The gauge is headed for a 5.4 percent weekly gain, its biggest such advance this year. Volume was almost 15 percent above the 30-day average today. The broader Topix Index added 0.1 percent to 753.19.
U.S. Stocks Fall as Google Results Pull Down Tech Shares (Bloomberg)
U.S. stocks fell, snapping a three- day advance in the Standard & Poor’s 500 Index (SPX), as Google Inc. pulled down technology shares after reporting third-quarter profit and sales that missed estimates. Google dropped 8 percent after the earnings report was filed inadvertently during regular trading hours. Technology shares had the biggest decline among 10 groups in the S&P 500. Philip Morris International Inc. (PM) dropped 4.2 percent as earnings trailed analysts’ estimates. Travelers Cos. gained 3.6 percent as earnings more than doubled on lower claims costs tied to natural disasters. The S&P 500 fell 0.2 percent to 1,457.34 at 4 p.m. in New York. The index gained as much as 0.2 percent earlier as a rise in jobless claims was offset by better-than-estimated data on leading indicators and Philadelphia manufacturing. The Dow Jones Industrial Average slid 8.06 points, or 0.1 percent, to 13,548.94 today. The Nasdaq-100 Index tumbled 1.1 percent to 2,744.17.
About 6.9 billion shares traded hands on U.S. exchan ges, 14 percent above the three-month average. “Google failed to meet expectations and then also mistakenly released in the middle of the day,” Giri Cherukuri, a portfolio manager for Oakbrook Investments LLC, which manages $3 billion, said in a telephone interview. “Google is a big company and on top of the fact that they missed estimates, they talked about advertising in the online world not doing as well as previously thought.”
Recap Stock Index Market Report (CME)
The December S&P 500 entered the US trading session on an upward track, helped by overnight economic data in China that hinted at a possible rebound. However, this morning's weaker than expected labor market data and net loss reported by Morgan Stanley seemed to trigger a measure of profit-taking after this week's impressive gains. The downside action seemed to stabilize following better than expected report on mid-Atlantic business conditions. The major indices reversed in afternoon trading and registered a new low for the session in the wake of disappointing Google earnings that came out earlier than expected. Some of the downside in the S&P 500 might have been tempered by gains in the shares of Verizon and Travelers. The market receives the latest earnings from Microsoft and Capital One after the close.
U.K. Stocks Climb to Seven-month High as EU Leaders Meet (Bloomberg)
The U.K.’s FTSE 100 Index climbed for a fourth day, reaching a seven-month high, as European Union leaders gathered in Brussels to tackle the region’s debt crisis. Mining companies pushed the benchmark gauge higher in late afternoon trading as shares of Kazakhmys Plc (KAZ) and Rio Tinto Group rallied more than 2 percent. Man Group Plc (EMG) dropped the most in almost 11 months after the hedge-fund manager reported a 57 percent increase in outflows. SABMiller Plc (SAB) declined 2.1 percent after sales fell short of estimates. The FTSE 100 Index advanced 0.1 percent to 5,917.05 at the close in London. Two shares rose for each that declined in the measure, which has gained 2.1 percent so far this week, boosted by a pick-up in U.S. housing and retail data. The index has climbed 12 percent from its 2012 low on June 1. The FTSE All- Share Index added 0.1 percent today, while Ireland’s ISEQ Index fell 0.3 percent.
“I worry if we are getting a little bit ahead of ourselves,” Karen Olney, head of thematic equity strategy at UBS AG, said on Bloomberg Television in London. “There are a lot of things that still need to be sorted out in Europe. Expectations are high so maybe as earnings come down a bit and we get a couple of bumps along the way after the summit, the markets will sell off a bit.” EU leaders gathered this afternoon in Brussels for the summit as French President Francois Hollande warned that efforts to stem the debt crisis may unravel if the EU fails to deliver on its promises. He called on the euro area to press ahead with banking union. Chinese data today showed gross domestic product expanded 7.4 percent in the third quarter from a year earlier, matching the median estimate in a Bloomberg News survey. GDP rose 2.2 percent from the prior period, a four-quarter high.
European Stocks Rise for a Fourth Day as EU Leaders Meet (Bloomberg)
European (SXXP) stocks climbed for a fourth day as a measure of U.S. manufacturing beat estimates, while investors awaited the outcome of a two-day summit of the European Union’s leaders. Wincor Nixdorf AG (WIN), Europe’s biggest maker of automated teller machines, rallied 11 percent. Nestle SA (NESN) retreated 1.7 percent as the world’s biggest food company reported nine-month sales growth that missed analysts’ estimates. Remy Cointreau SA (RCO) sank the most in 3 1/2 years after France’s second-biggest distiller posted an improvement in first-half sales that fell short of forecasts. The Stoxx Europe 600 Index added 0.2 percent to 276.18 at the close, after earlier retreating as much as 0.3 percent. The equity benchmark has rallied 18 percent from this year’s low on June 4 as European Central Bank policy makers agreed on an unlimited asset-purchase program and the Federal Reserve announced a third round of quantitative easing.
“U.S. figures supported the cause of the bulls who remain in the ascendancy,” said Angus Campbell, head of market analysis at Capital Spreads in London. “With the EU summit underway, investors are content to stick with equities as the situation in Europe is showing a few signs of improvement.” The Stoxx 600 climbed to its highest level since Sept. 25 yesterday as Moody’s Investors Service left unchanged its investment-grade debt rating on Spain and house building surged to a four-year high in the U.S.
Emerging Stocks Jump to Month High on China Prospects (Bloomberg)
Emerging-market stocks rose, driving the benchmark index to the strongest level in a month, on prospects the slowdown in the world’s second-largest economy has reached a bottom. The MSCI Emerging Markets Index added 0.2 percent to 1,013.36 at the close of trading in New York, the highest close since Sept. 14. Sany Heavy Equipment International Holdings Co. (631) jumped after data showed Chinese industrial production accelerated last month. The yuan climbed beyond 6.25 per dollar for the first time in 19 years. Brazil’s Vale SA dropped after third-quarter iron-ore output fell. Russia’s OAO Gazprom, the world’s biggest natural-gas producer, declined.
Chinese Premier Wen Jiabao said the country’s economic growth has started to stabilize, a message underlined by data today showing the nation’s industrial output rebounded from a three-year low and retail sales surged the most in six months. Emerging stocks pared gains after a report showed U.S. jobless claims exceeded analysts’ estimates. The 21 countries in the MSCI index send about 13 percent of exports to the U.S. on average, according to the World Trade Organization. “There is an improvement of the sentiment on China,” Martial Godet, head of strategy at BNP Paribas CIB in London, said by e-mail. “The long-awaited stabilization of the Chinese economy has finally arrived, with maybe even a mild pick-up.”
Treasuries Snap Four-Day Loss Before Existing Home Sales (Bloomberg)
Treasuries snapped a four-day decline before an industry report economists said will show sales of existing homes fell in September, highlighting an uneven recovery in the U.S. housing market. Government securities still headed for their steepest weekly loss in a month, after a report two days ago showed an unexpected surge in housing starts. Treasuries slid yesterday and an auction of $7 billion in 30-year inflation-indexed bonds sold at a record-low yield of 0.479 percent as investors paid a premium to guard against the threat of rising consumer prices. U.S. 10-year yields declined one basis point, or 0.01 percentage point, to 1.82 percent as of 10:04 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 98 1/4. The yield climbed 16 basis points this week, the most since the seven days ended Sept. 14. Yesterday’s high yield of 1.83 percent was the most in a month.
“The current level is a buying opportunity,” said Hiromasa Nakamura, who invests in U.S. debt from Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $41.5 billion. “It will take time for housing to significantly recover.” Existing home sales probably fell 1.7 percent in September from the month before, according to the median forecast of 78 economists before the National Association of Realtors reports the figure today. The figure rose 7.8 percent in August. Housing starts advanced 15 percent in September from August, a government report showed Oct. 17. The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.56 percentage points. The average over the past decade is 2.17 percentage points.
Aussie Set for Weekly Gain on Signs of Improving Economy (Bloomberg)
Australia’s dollar headed for its biggest weekly gain in a month as signs of improvement in the global economy supported demand for riskier assets. The so-called Aussie traded 0.3 percent from its strongest in three weeks before data today forecast to show U.S. sales of existing homes hovered near a two-year high. Figures yesterday showed gains in industrial production, retail sales and fixed- asset investment in China, Australia’s largest trading partner and New Zealand’s second-biggest export market. Buying of the “kiwi” was limited as Asian stocks pared a weekly advance. “Recent data have been easing pessimism over growth in the U.S. and China, supporting the Aussie,” said Kumiko Gervaise, an analyst at Gaitame.com Research Institute Ltd. in Tokyo. “There is a risk that the Australian dollar has gained too much in a short period of time.”
The Australian currency added 0.1 percent to $1.0377 as of 11:09 a.m. in Sydney from the close yesterday, when it reached $1.0412, the highest since Sept. 28. It has appreciated 1.4 percent this week. The Aussie rose 0.1 percent to 82.28 yen, after yesterday touching 82.52, the strongest since Sept. 19. New Zealand’s dollar, nicknamed the kiwi, fetched 81.93 U.S. cents, 0.1 percent higher than yesterday’s close. The MSCI Asia Pacific Index of regional shares dropped 0.3 percent, paring this week’s gain to 2.3 percent. U.S. purchases of previously owned houses slid 1.7 percent to a 4.74 million annual rate in September, after they increased to the most since May 2010 in the previous month, according to the median forecast of economists in a Bloomberg News survey. The National Association of Realtors will release the figures today. A separate report due Oct. 24 is expected to show a 2.7 percent gain in new home sales in September.
Korean Won Set for Weekly Gain, Bonds Fall on U.S. Data (Bloomberg)
South Korea’s won was headed for its biggest weekly gain of the month and government bonds fell as signs the U.S. economy is improving brightened the outlook for exports and spurred demand for emerging-market assets. Retail sales in the U.S., the world’s biggest economy, increased 1.1 percent in September while housing starts climbed 15 percent to a four-year high, reports showed this week. European leaders committed to their goal of creating a euro-area bank supervisor by year-end, according to officials at a European Union summit in Brussels ending today. South Korea’s economy probably expanded 1.7 percent in the third quarter from a year earlier, the slowest pace in three years, a Bloomberg News survey showed before data next week. The won appreciated 0.5 percent this week to 1,105.60 per dollar as of 9:31 a.m. in Seoul, according to data compiled by Bloomberg. The currency weakened 0.1 percent today, snapping a six-day rally. It touched 1,102.50 on Oct. 17, the strongest level since 0ct. 31, 2011.
“The won was strong this week on positive data from the U.S., but it seems some overseas investors are covering their short positions on the dollar,” said Lee Jung Hyun, a Seoul- based currency trader for Industrial Bank of Korea. (024110) A short position is a bet an asset may decline in value. One-month implied volatility for the won, a measure of exchange-rate swings used to price options, slipped 28 basis points, or 0.28 percentage point this week, to 5.80 percent. The yield on the government’s 3.25 percent bonds due June 2015 climbed six basis points this week to 2.83 percent, Korea Exchange Inc. prices show. The rate slipped one basis point today. The one-year interest-rate swap advanced four basis points this week to 2.83 percent.
Yen Falls Against Most Peers Amid BOJ Easing Speculation (Bloomberg)
The yen fell against most of its major peers amid speculation that the Bank of Japan (8301) will boost stimulus measures, reducing the demand for the nation’s assets as a haven. Japan’s currency traded 0.1 percent from the weakest level since August versus the dollar as the premium two-year U.S. Treasuries offered relative to their Japanese peers reached the highest in two months. The yen was poised for the biggest five- day decline in nine weeks against the greenback. The euro headed for a weekly gain against the U.S. currency as European leaders committed to their goal of creating a regional bank supervisor by year end at a summit in Brussels ending today. “There’s growing speculation that the Bank of Japan is going to ease monetary policy further,” said Janu Chan, economist at St. George Bank Ltd. in Sydney. “That’s likely to keep the yen under a bit of pressure.”
The yen slid 0.2 percent to 79.40 per dollar as of 10:17 a.m. in Tokyo from 79.28 yesterday, when it touched 79.47, the weakest since Aug. 21. It was set for a 1.2 percent decline this week, the biggest since the five days ended Aug. 17. The Japanese currency slid 0.2 percent to 103.76 per euro from yesterday, when it depreciated as much as 0.6 percent to 104.14, the weakest since May 8. The shared currency bought $1.3069 from $1.3067, headed for a 0.9 percent weekly advance.
Housing Revival Boosts Outlook for U.S.: Economy (Bloomberg)
Consumer confidence rose to a six- month high and an index of U.S. leading indicators climbed as a nascent housing recovery started to ripple through the world’s largest economy. The Bloomberg Consumer Comfort Index rose to minus 34.8 in the week ended Oct. 14, the highest level since April, from minus 38.5 the previous week. The Conference Board’s gauge of the outlook for the next three to six months increased 0.6 percent in September after a revised 0.4 percent drop in August. Rising property prices in some parts of the country are bolstering household finances and lifting the moods of shoppers, whose spending accounts for 70 percent of the economy. Stock- market gains are also making Americans feel wealthier and contributed to the increase in the leading index, along with a jump in permits for home construction.
“This is just an echo of yesterday’s very strong permits numbers, which were very encouraging,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, who correctly forecast the increase in the leading index. In addition, “the change in the tone of the housing sector seems to be what’s driving the improvement in consumer sentiment,” he said. Building permits, among the six of 10 indicators that boosted the leading index, jumped to highest level since July 2008, Commerce Department data showed yesterday. Housing starts climbed 15 percent in September to reach a four-year high.
Manufacturing in Philadelphia Area Grows More Than Forecast (Bloomberg)
Manufacturing in the Philadelphia region expanded in October for the first time in six months, a sign the industry may be starting to stabilize. The Federal Reserve Bank of Philadelphia’s general economic index rose to 5.7 from minus 1.9 in September, a report today showed. A reading of zero is the dividing line between expansion and contraction. The median forecast of 61 economists surveyed by Bloomberg was for an increase to 1. The report, contrasting with data showing New York-area factories shrank for the third straight month, indicates that a pillar of the recovery is starting to regain its footing. Gains in confidence and household wealth mean consumer spending may help cushion manufacturing at a time when business investment and exports are hurt by slowing global growth and uncertainty about U.S. tax changes.
“Manufacturing has troughed in terms of the declines in activity,” Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “As the recession in Europe becomes less severe, it will take the pressure off exports. There is some demand” in the U.S. The Philadelphia Fed’s report covers eastern Pennsylvania, southern New Jersey and Delaware. Estimates in the Bloomberg survey ranged from minus 2.7 to 5.8.
Jobless Claims
Other reports today showed more Americans than forecast filed applications for unemployment benefits last week, consumer confidence rose to a six-month high and the index of leading indicators climbed more than forecast in September. Jobless claims increased by 46,000 to 388,000 in the week ended Oct. 13, reflecting an unwinding of adjustments for seasonal swings at the start of a quarter, from a revised 342,000 the prior period that was the lowest since February 2008, according to Labor Department data. The Bloomberg Consumer Comfort Index rose to minus 34.8 in the week ended Oct. 14, the highest level since April, from minus 38.5 the previous week. The monthly expectations gauge improved to minus 7 in October, the best reading since May.
The Conference Board’s gauge of the outlook for the next three to six months increased 0.6 percent last month after a revised 0.4 percent drop in August that was bigger than initially reported, the New York-based group said. Economists projected the gauge would climb 0.2 percent, according to the median estimate in a Bloomberg survey.
U.S. Jobless Claims Rise 46,000 on Seasonal Shift (Bloomberg)
More Americans than forecast filed applications for unemployment benefits last week, reflecting an unwinding of adjustments for seasonal swings at the start of a quarter. Jobless claims increased by 46,000 to 388,000 in the week ended Oct. 13 from a revised 342,000 the prior period that was the lowest since February 2008, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg called for a rise in claims to 365,000. The typical pattern of large increases in unadjusted claims at the start of the quarter seems to have shifted by a week in one state, causing the adjusted data to become volatile, a Labor Department spokesman said as the figures were released to the press. Through the ups and downs, the level of firings has been little changed, indicating that a lack of hiring is the main reason payrolls have failed to strengthen.
“When you get to the turn of a quarter, the seasonals jump a lot,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who projected claims would rise to 375,000. “The labor market is getting better, but at a glacial pace. Claims are going sideways.” Stock-index futures extended earlier losses after the report. The contract on the Standard & Poor’s 500 Index maturing in December dropped 0.2 percent to 1,453.6 at 8:48 a.m. in New York.
Index of U.S. Leading Indicators Rose 0.6% in September (Bloomberg)
The index of U.S. leading economic indicators rose in September by the most in seven months, boosted in part by a jump in permits for home construction that’s helping underpin the expansion. The Conference Board’s gauge of the outlook for the next three to six months increased 0.6 percent after a revised 0.4 percent drop in August that was bigger than initially reported, the New York-based group said today. Economists projected the gauge would climb 0.2 percent, according to the median estimate in a Bloomberg survey. A recovery in the housing market and a surge in stock prices may also be fueling optimism among consumers, whose spending accounts for about 70 percent of the economy. At the same time, the so-called fiscal cliff -- $607 billion in federal spending cuts and tax increases scheduled to take effect in January unless Congress acts -- is a hurdle for business investment and hiring.
“The residential housing market is in the very early stages of a durable recovery,” Joe Lavorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a research note before today’s report. “Housing is a leading indicator of underlying domestic demand; thus, continued improvement in the former bodes well for some acceleration over time in the latter.” Estimates from 52 economists in the Bloomberg survey ranged from a decrease of 0.1 percent to an increase of 0.6 percent in the Conference Board’s leading index. The August figure was revised from a previously reported 0.1 percent drop, reflecting weaker orders from consumer goods and capital equipment during the month.
China Investment Drives Pickup in Challenge to Leaders (Bloomberg)
The accelerating investment that helped to drive a pickup in China’s economy last month shows how Communist Party officials have failed to shift the nation’s growth model, leaving a challenge for new leaders. Fixed-asset investment rose 22.6 percent in September from a year earlier, up from 19.1 percent growth in August, Bank of America Corp. estimated after yesterday’s release of data for the first three quarters of 2012. Spending on projects from the government’s budget also accelerated in September. Industrial output and retail sales picked up last month even as the economy decelerated for the seventh straight quarter. Faster investment approvals and increased railway spending show officials are using similar channels to support growth while being careful not to repeat the size of the stimulus response to the global financial crisis in 2008. Relying more on investment than consumption for expansion may exacerbate overcapacity and increase risks of a deeper slowdown later.
“Just because you have avoided a hard landing doesn’t change the fact that the growth model is unsustainable,” said Alistair Thornton, an economist in Beijing at IHS Global Insight. “We’re still relying on the old tools and that means far too much reliance on investment and not nearly enough reliance on consumption. It will take a huge amount of reform over the next few years to bring about the consumption-driven growth that China’s leaders aspire to have.”
China Won’t Provide Big Stimulus, PBOC Adviser Song Says (Bloomberg)
China’s government won’t provide big economic stimulus and a strong rebound in growth is unlikely, said Song Guoqing, an adviser to the People’s Bank of China. Local-government investment plans probably won’t materialize quickly because they’re reliant on the central government and banks for funding, Song said in a speech at Tsinghua University in Beijing yesterday. “I have the desire to drive my private jet, but that doesn’t mean I can” fly one, Song said. “The same goes for local governments’ ambitious investment plans.” Still, slowing inflation gives China’s central bank room for “tweaking” monetary policy, said Song, an academic member of the central bank’s monetary policy committee.
China’s industrial production, retail sales and fixed-asset investment accelerated in September, reducing the urgency for added stimulus to support the economy after a seven-quarter slowdown, according to data released yesterday. Gross domestic product rose 2.2 percent in the third quarter from the previous three months, a four-quarter high. Inflation last month was close to the slowest pace in two years and producer prices fell the most since 2009, government data showed on Oct. 15, giving authorities more room to ease policy. China’s nine-month fiscal revenue gained 11 percent to 9.06 trillion yuan and fiscal spending rose 21 percent to 8.4 trillion yuan, the Ministry of Finance said yesterday. “Policy makers in China still have room to act if they need to, both on the monetary and the fiscal side,” said Mark Williams, Asia economist at Capital Economics Ltd. in London. “But as things stand, it is not obvious why Chinese policy makers would want to act forcefully now.”
China’s nominal urban per capita disposable income in the first nine months of the year rose 13 percent from a year earlier to 18,427 yuan, the National Bureau of Statistics said in Beijing yesterday. In real terms, incomes rose 9.8 percent, the bureau said.
Pimco Buying Aussie, N.Z. Assets; Sees Further Rate Cuts (Bloomberg)
Pacific Investment Management Co., manager of the world’s biggest bond fund, has boosted holdings in Australia and New Zealand as it expects policy makers to cut interest rates to combat currency gains and weaker world growth. Decisions in larger developed economies to keep policy rates close to zero and engage in currency market intervention have helped push the Australian and New Zealand dollars higher, according to Scott Mather, head of global portfolio management at Pimco, which oversees $1.8 trillion in assets. The Newport Beach, California-based company’s holdings in the region are at the highest levels “in a very long time,” he said at a briefing in Auckland. “Rates will continue to fall in this region, in Australia and New Zealand,” Mather said in a conference call from Auckland. “It’s partially the reflection of weak global growth and partially in response to an abnormal amount of currency strength relative to what history would tell you we should have.”
The Reserve Bank of Australia has the highest benchmark rate among major developed economies, even after reducing it by 1.5 percentage points over the past year to 3.25 percent. The Reserve Bank of New Zealand’s key rate is a record-low 2.5 percent. Higher yields, safe-haven flows and buoyant global commodities demand have helped push the South Pacific currencies above their 20-year averages.
EU Leaders Commit to Bank Supervisor Design by Year End (Bloomberg)
European leaders committed to their goal of creating a euro-area bank supervisor by year-end, pushing divisive questions on cost-sharing into 2013. Leaders will seek to agree on a framework to establish the European Central Bank as the main supervisor by Jan. 1, according to officials at a European Union summit in Brussels. The new system, intended to break the link between banks and governments at the root of the region’s financial crisis, will phase in over a year and cover all 6,000 euro-area banks by Jan. 1, 2014, a French official said. Progress on the so-called banking union dominated talks at leaders’ 20th crisis-fighting European summit. The common supervisor would put the euro zone a step closer to being able to provide direct bank aid from its firewall fund, a tool sought by Spain and other nations that have received bailouts.
The draft summit statement showed leaders “agreeing to the legislative framework” by year-end, according to an EU official who has seen the document. The goal of political consensus contrasts with an earlier draft calling for “completing” work on the plan to give the ECB supervisory powers by year-end. The decisions don’t settle the question of when the European Stability Mechanism will be able to recapitalize banks directly. The plan calls for the supervisor to take charge of big banks and bailed-out institutions first, while also saying direct assistance requires “effective” supervision in place.
Spain Banks Face More Pain as Worst-Case Scenario Turns Real (Bloomberg)
Spain’s banks face more loan losses as the pace of an economic slump risks turning a worst-case scenario dismissed in stress tests into reality. Bad loans as a proportion of total lending jumped to a record 10.5 percent in August from a restated 10.1 percent in July as 9.3 billion euros ($12.2 billion) of loans were newly classified as being in default, according to data published by the Bank of Spain on its website today. The ratio has climbed for 17 straight months from 0.72 percent in December 2006, before Spain’s property boom turned to bust. Spanish bank stress tests by management consultants Oliver Wyman have factored in an economic contraction totaling 6.5 percent from 2012 to 2014 in an adverse scenario that the government and Bank of Spain said has a probability of about 1 percent. Analysts at Nomura and Citigroup (C) Inc. disagree, saying spending cuts and economic conditions mean the worst-case outcome already looks feasible.
“You can’t attach a 1 percent probability to a scenario that already looks realistic,” Silvio Peruzzo, a European area economist at Nomura in London, said in a telephone interview yesterday. Spain’s gross domestic product will shrink by 6.2 percent from 2012 to 2014, he estimated. Spain’s request for 100 billion euros of European Union financial aid to shore up its banks is increasing concern about the nation’s growing liabilities. Standard & Poor’s downgraded the country’s debt rating by two levels to BBB-, one step above junk, from BBB+ on Oct. 10, saying it wasn’t clear who will bear the cost of recapitalizing banks. It cut the ratings of 11 lenders including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s largest, two days ago, citing the sovereign downgrade.
