Archive for December, 2011

US stocks recover in thin week of trade

US stocks markets ended the pre-holiday week by booking solid gains on Friday, after five sessions that saw trade marked by a rare slowdown in bad news from Europe and further evidence of a US recovery.

The major indices began the week in the red amid lingering concerns that the European Central Bank would not step in to stop the eurozone rot.

However, they managed to eke out solid gains by Friday’s close.

US stocks recover in thin week of trade

While the Frankfurt-based central bank continued to shy away from backing indebted sovereigns, it did open lending windows for European banks, which helped ease panic.

“The signs are encouraging in Europe,” Hugh Johnson of Hugh Johnson Advisors said. “There are some signs, not overwhelming, that things are starting to stabilize in Europe.”

The Dow Jones Industrial Average finished up 3.6 percent to end the week at 12,294.00 points.

The NASDAQ was up 2.5 percent for the period and the S&P 500 added 3.7 percent for the week.

Stocks were helped by suggestions on Tuesday of a nascent turnaround in the US housing industry, with new home starts up 9.3 percent last month from a year earlier to the best level since April last year, when since-expired government tax credits were driving sales.

“The surge in sales … suggests the sector is beginning to wake from its long sleep; expect sustained gains in sales and starts ahead,” Ian Shepherdson of High Frequency Economics said.

On Thursday, US stocks scored solid gains on encouraging jobs market data.

Weekly claims for US unemployment benefits fell to the lowest level since April 2008 last week, the US Department of Labor said.

Data from Germany also set a more positive tone.

Germany’s Ifo business sentiment index defied analysts’ expectations and rose to 107.2 points this month from 106.6 last month.

“There can be no talk of a crash as in 2008,” Ifo Institute president Hans-Werner Sinn said.


2012: Make-or-break year for the eurozone

The new year promises to be make or break time for the eurozone, with dramatic integration into a new fiscal union for most and predictions that one ‘small country’ could leave the currency area.

If 2011 went down as the “annus horribilis” for the European Union’s symbol of integration, leaders of Germany, France and debt-laden monetary partners face stark choices as they enter 2012, a decade after euro notes and coins first entered into everyday circulation.

The euro debt crisis could bring all of Europe to its knees, said French President Nicolas Sarkozy in a recent speech reflecting on contagion that spread from Greece through also bailed-out Ireland and Portugal before hitting Spain and finally Italy.

“What kind of Europe will we have left if the euro disappears, if Europe’s economic heart collapses?” he asked.

A radical transformation is under way precisely to avoid that doomsday scenario, one that would eventually blur differences even in tax and welfare systems across the core eurozone economies.

But one also that may not be without an early casualty: for instance, the chairman of the Royal Bank of Scotland, Philip Hampton, expects one “small country” to leave the eurozone in 2012.

His comment, made as Greece was wrapping up painful negotiations over a massive write-down with some of the world’s biggest banks, was echoed by others in the City of London.

At the start of 2011, the troubles in Athens, Dublin and Lisbon were considered “peripheral” problems for the eurozone as a whole.

But that was before infections at the edge of the currency area ate their way into its economic heart — all the way into France and even paymaster Germany, where the threat of a credit rating downgrade or poor take-up on the sale of government bonds served as a major wake-up call.

The crisis has taken many forms since problems first emerged in the United States late in 2007.

It affected mortgage markets, consumer spending and the real economy for householders and businesses with recession, before finally triggering panic over government debt in a Europe whose banks had become overstretched.

While the crisis was at first economic, it soon became political and heads tumbled as in the spectacular case of Italy’s Silvio Berlusconi, while social discontent manifested in the Occupy Wall Street or Indignados protest movements.

Berlusconi was the highest-profile among half a dozen EU leaders who fell to the crisis from Greece to Slovakia, with unelected former EU “technocrats” brought to power in Athens and Rome to restore market confidence.

“There is a risk that public opinion will eventually backfire,” said a senior EU diplomat in Brussels.

The coming 12 months will establish whether the eurozone has the wherewithal to protect Italy or Spain from falling into a financial abyss that could suck in the second eurozone economy, France.

British Airways owner IAG agrees to buy BMI for £172.5m

The owners of British Airways today announced a deal to buy ailing airline BMI for £172.5 million amid fears that jobs will be lost following the acquisition.

There also concerns that the takeover will unfairly strengthen BA’s position at Heathrow airport, with Sir Richard Branson announcing that his rival airline, Virgin Atlantic, would “fight this monopoly every step of the way”.

Under the binding agreement announced today, BA’s owners, International Airline Group (IAG) will acquire loss-making BMI, formerly British Midland Airways, from German carrier Lufthansa.

This will give IAG, which also owns Spanish airline Iberia, up to 56 additional, and much prized, take-off and landing slots at Heathrow.

IAG chief executive Willie Walsh warned that there would be “some job losses” as a result of the deal, although he added that it was too early to say just how many posts would go.

However he said there could, eventually, be more jobs from the deal if available short-haul slots were later used for long-haul services which would mean “more pilots, more cabin crew and more engineers”.

Mr Walsh also dismissed talk of BA “over-dominance” at Heathrow, saying that the BMI acquisition would actually “enhance competition”.

He said BMI’s regional services and its low-cost airline, bmibaby were not part of the deal and that Lufthansa had the option to sell them before the IAG deal was completed.

BMI, which employs more than 3,600 staff and flies to Europe, Middle East and Africa and destinations within the UK, made a £153 million pre-tax loss in the year to 2010.

Its regional arm offers short-haul flights from Aberdeen, Edinburgh, Glasgow, Leeds Bradford, Manchester and East Midlands, while bmibaby flies primarily out of East Midlands and Birmingham.

The deal will see IAG own more than half of the slots at Heathrow – 53% – once completed, which compares with Lufthansa’s 66% hold at Frankfurt airport and Air France/KLM’s 59% grip at Paris’s Charles De Gaulle airport.

Mr Walsh said: “Buying BMI’s mainline business gives IAG a unique opportunity to grow at Heathrow, one of our key hub airports.

“Using the slot portfolio more efficiently provides the option to launch new long-haul routes to key trading nations while supporting our broad domestic and short-haul network.

“This deal is good news for the UK as we will maintain a comprehensive domestic schedule including Belfast.

“Our plans to expand our long-haul network would guarantee growth by making Britain better able to compete on a global scale.

“It will also help maximise Heathrow’s position as a world class hub airport.

“Customers will benefit from access to new destinations, more convenient schedules, enhanced frequent flyer benefits and greater investment than had been possible for loss-making BMI.

A spokesman for the Unite union said: “We will be looking to meet with IAG in the immediate future to press for guarantees on jobs and terms.”

Sir Richard, whose airline had been keen to do its own deal over BMI, said today: “Claiming that this deal is about new markets from Heathrow is a smoke-screen. This deal simply cuts consumer choice and screws the travelling public.

“BA is already dominant at Heathrow and their removal of BMI just tightens their stranglehold at the world’s busiest international airport.

“We will fight this monopoly every step of the way as we think it is bad for the consumer, bad for the industry and bad for Britain.”

Shadow transport secretary Maria Eagle said: “The competition concerns, highlighted by the sale of BMI, yet again demonstrate that the Government is completely out of touch with the calls from business for a credible aviation policy.

“By refusing to even consider the need for additional capacity in south-east England, the pressure to use scarce slots to open up new long-haul routes will grow stronger and stronger, putting at risk vital internal UK connections.

“It’s clear that this inaction by ministers is now putting jobs and growth at risk.”

She went on: “In the light of today’s news, I again urge the Transport Secretary (Justine Greening) to accept our offer to work across the political divide on a long- term strategy for both aviation and high-speed rail as part of the plan for jobs and growth that the country needs.

“Labour has accepted the Government’s decision to cancel the third runway at Heathrow, but ministers must now accept that their opposition to any other aviation growth in the South East makes no sense.”

Growth figures reveal challenges

The challenges faced by the global economy were underlined today by mixed growth figures from both sides of the Atlantic.

The UK economy grew at an upwardly revised rate of 0.6% between July and September, but the estimate for gross domestic product (GDP) growth in the second quarter was slashed to 0% from 0.1%, the Office for National Statistics reported.

Meanwhile, the US economy grew more slowly in the third quarter than previously estimated but economists said the world’s largest economy is set to record a strong finish to the year.

Back in Britain, analysts warned the UK was still teetering on the brink of recession, despite the improved third quarter figures, which were revised up from a previous estimate of 0.5%, as indicators point towards a slowdown as the new year approaches.

The overall picture at home was broadly unchanged by the revised figures as the country still faces considerable headwinds in the new year, notably from the eurozone, the UK’s biggest trade partner, which is buckling under the pressure of a crippling debt crisis.

Chris Williamson, chief economist at financial services information company Markit, said: “The underlying trend is very clearly one of an economy that is struggling in the face of what seems to be an ever-growing list of headwinds.”

Manufacturing, services and trade surveys have been mixed so far in the final quarter of the year, prompting fears that the UK is heading for a double-dip recession.

The tax and spending watchdog, the Office for Budget Responsibility, recently slashed official forecasts for growth following a similar downbeat assessment of the economy from the Bank of England.

The powerhouse services sector, which makes up some 75% of the total economy, grew at 0.7% in the third quarter, up from a previous estimate of 0.6%.

Agriculture grew at 0.5% in the third quarter while construction was ahead 0.3%.

But industrial production growth was revised down once again to 0.2% from 0.4%, which partially offset improvements in the stronger sectors.

The squeeze on household spending was underlined by figures revealing real disposable income growth slowed to 0.3% in the third quarter from 1.3% the previous three months.

Government spending was also revised down to 0.2% from 0.9% – which corresponds more closely with Chancellor George Osborne’s programme of deficit-busting spending cuts.

Looking back to the second quarter, growth in the services sector was revised down to 0.1% from 0.2%.

Labour Treasury spokeswoman Rachel Reeves said: “These revised figures show an unchanged picture over the last year. The British economy has been flatlining over the last 12 months, when we need strong growth to get unemployment and the deficit down.”

There is some hope that the improved outlook for the US will help steer the global economy to safer ground, although America is also threatened by the potential fallout from a euro meltdown.

The US government now estimates that consumer spending grew at a 1.7% annual rate last summer, instead of 2.3%. The updated estimate reflects data showing less spending on hospitals.

The US third quarter figures were lower than estimated – but were still the best quarterly figures this year, following growth of 1.3% in the second quarter.

However, economists think the economy is growing at an annualised rate of more than 3% in the final three months of this year, which would be the fastest pace since a 3.8% performance in the spring of 2010.

The upturn in the economy comes as President Barack Obama faces a re-election vote in less than a year and a presidential campaign that will focus on the economy.

The President may face voters next year with the highest unemployment of a sitting president seeking election since World War Two.

Focus Russia’s economy – PFG Special Report

December 22, 2011

Mathieu Armand
European Regional Managing Director – Asset Management

Despite not seeing double-digit economic growth for over ten years, and been hit hard by the recession in 2009, Russia has had an average annual growth rate since 2000 of over 5%. And according to the OECD, a mostly rich-country think-tank, Russia’s economy will expand by 4% this year and next.

While inflation is set to be over 8% this year, high for a middle-income country, at the beginning of the 2000s, it was over 20%. The unemployment rate has followed a similar pattern and is now below the OECD average. Labour force participation rates are also high.

But perhaps Russia’s most striking achievement is its fiscal performance. In contrast to persistent budget deficits in the 1990s, up until recently Russia enjoyed a series of surpluses, thanks to high and rising oil prices, economic growth, fiscal reform and prudent management.

Revenues from oil and gas, which by 2008 accounted for a third of all government revenues (some $200 billion), were used to repay external debt and build up assets in a stabilisation fund, which was recently used to inject a fiscal stimulus. But Russia’s budget balance is dependent on the oil price. Strip oil out and its public finances have been deteriorating since 2005.

Enhanced by Zemanta

European Bank Changes Course in Easing Credit

European Central Bank President Mario Draghi, center, said this week that helping smaller banks was crucial because they provide most of the credit to small businesses.

After long resisting the kind of financial force Washington used at the height of the financial crisis in 2008, European central bankers shifted course Wednesday. They pumped nearly $640 billion into the Continent’s banking system, raising hopes that the move could alleviate the region’s credit squeeze.

Though it is too soon to gauge any longer-term benefits, the move, by the European Central Bank, could be a turning point in the Continent’s debt crisis — a cascading problem that for nearly two years has plagued financial markets around the world and now threatens global economic growth.

American officials and global economists have long urged the Europe’s central bank to take just such an aggressive stance — even as European political leaders have repeatedly failed to devise concrete near-term plans to address Europe’s debt problems and deteriorating finances.

Carl B. Weinberg, chief economist at the consulting firm High Frequency Economics and a professed bear on the European outlook, said he was stunned by the size of the monetary operation, saying it suggested that Europe’s central bank had “shown a path toward averting catastrophic collapse in Europe.”

Indeed, some analysts suggest the central bank’s new lending program represents a kind of back door to the easy-money policy pursued by the Federal Reserve after the collapse of Lehman Brothers in 2008, which is widely credited with averting a broader economic disaster.

The three-year loans the central bank made Wednesday come with a bargain-basement interest rate of 1 percent, providing the region’s financial institutions with the kind of cheap financing they can no longer get from the market. Among other requirements, Europe’s banks need the money to refinance about a trillion dollars in loans that mature in 2012. Wednesday’s infusion could also help reduce the pressure on beleaguered government borrowers on the periphery of the Continent, most significantly Italy and Spain. Those countries have not been able to directly tap European Central Bank funds, even as investors are increasingly reluctant to finance those countries’ debt by buying their bonds.

Now, though, by lending to commercial banks at such low rates for three years, the central bank might induce them to use some of the newly available money to buy shorter-term government bonds, which have higher yields, or interest rates. Spain’s two-year government bond, for example, is currently yielding 3.64 percent.

Mario Draghi, the central bank’s new president, has resisted calls to stand directly behind debtor governments by buying their bonds as necessary, without limit. But the volume of money pumped into the system on Wednesday suggested that Mr. Draghi was prepared to indirectly support those governments through their nation’s commercial banks.

“This is exactly what happened in the United States with the Fed in 2008,” said Mr. Weinberg, the economist. By buying up bad loans and other impaired assets, and lending money to the banks, government officials in the United States were able to buy time for American banks to strengthen their depleted balance sheets.

But in the current case, European officials confront an even trickier situation. Not only must the banks borrow, but indebted European governments have huge borrowing needs of their own, totaling 1.1 trillion euros ($1.4 trillion) in 2012.

Despite those twin threats, German political leaders have opposed any outright bailout either for the banking system or for troubled government borrowers like Italy and Spain, whose free-spending ways have long irked voters in Germany, Europe’s largest economy and a principal financier of any bailouts.

If it works, the quiet virtue of the European Central Bank’s new lending program will be that it helped buttress banks while easing the pressure on governments — without the appearance of a direct rescue.

Although the program did not take effect until this week, it was announced on Dec. 8 as part of a broader series of European Central Bank efforts to stabilize anxious credit markets. The central bank said it would offer three-year loans — rather than the one-year limit it had previously imposed — and would accept a wider variety of financial assets as collateral, to make it easier for banks to qualify for the loans.

The central bank is accepting the banks’ outstanding loans as security, a measure meant to help smaller community banks that might lack conventional forms of collateral like bonds.

“In many ways, it was a success,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “But it exposes the E.C.B. to risks linked to the banks because no one knows the quality of the collateral they are providing.”

Until Wednesday’s announcement, it was not known how many banks would apply for the new loans or how much they would borrow.

In the end, 523 banks tapped the new program, borrowing 489.2 billion euros, well above the 300 billion euro estimate that market experts had been predicting. Though some of that money includes funds earmarked to replace existing loans, economists estimate that Wednesday’s action could inject 190 billion to 270 billion euros, as much as $353 billion, of new money into the European financial system.

The large number of banks that participated is also an indicator that the program has avoided the kind of welfare stigma attached to other types of rescue packages. Because the central bank does not reveal the borrowers’ identities, it is not known exactly which banks participated. But Italian banks including UniCredit and Intesa Sanpaolo borrowed a significant amount, a total of 116 billion euros among them, according to Reuters.

“This is as good as it gets for the banks,” said Gilles Moec, co-head of economic research for Deutsche Bank. “It’s a big deal.”

He said one crucial test of whether the new approach could address the bigger challenge of easing borrowing conditions for governments would come in February, when Italy has 46 billion euros worth of debt coming due. That same month, the European Central Bank plans to offer banks another round of three-year loans.

Mr. Draghi, despite his earlier opposition to channeling the central bank’s loans into government coffers, acknowledged in a speech Monday to the European Parliament that commercial banks might end up doing just that with their new, cheap money. “We don’t know how many government bonds they are going to buy,” he said.

Strong demand at recent Spanish debt auctions have driven down yields, suggesting that banks were loading up on the debt to use as collateral for the central bank loans, analysts said. But there are limits to their appetites for governments’ debt at a time when the banks are trying to reduce their vulnerability to a potential debt default by a big country like Italy, while also protecting themselves against the possibility of a breakup of the euro currency union if the 17 member nation’s cannot resolve the crisis.

Pumping new money into an economy is often seen as a textbook ingredient for inflation, if it leads to easy credit for businesses and consumers and a resultant spending spree. But that prospect is widely considered unlikely, at least initially, because Europe appears headed for an economic downturn. A weak economy will discourage much private borrowing.

Mr. Moec said the risk of higher inflation was minimal because “that would require that the banks were actually making loans to the private sector, and we think that’s going to take a while.”

Europe, housing drive markets

Dow jumps more than 300 points on positive news.

NEW YORK — Encouraging signs out of Europe and a surprisingly strong report on the U.S. housing market drove the Dow Jones industrial average up more than 300 points Tuesday. It was the best day for stocks this month.

The Spanish government pulled off a successful debt auction and gauges of business and consumer confidence in Germany rose unexpectedly. Both helped ease worries about Europe’s debt crisis. The dollar fell against the euro and U.S. government bond prices dropped as traders shifted money out of the safest assets.

Borrowing costs for the Spanish government plunged at an auction of short-term debt, a sign that investors are becoming more confident in the country’s ability to pay.

“Spain has plenty of problems, large debts and budget deficits,” said Sam Stovall, chief equity strategist at S&P Capital IQ. “So when we see debt auctions go much better than expected it’s very encouraging.”

The Dow gained 337.32 points, or 2.9 percent to close at 12,103.58.

The gains held on Tuesday afternoon even after the U.S. House of Representatives rejected a plan to extend a cut in Social Security taxes. Unemployment benefits for 2 million people are also at risk.

A Federal Reserve proposal for stricter rules on larger banks didn’t knock down JPMorgan Chase, Citigroup and other big bank stocks. JPMorgan Chase & Co. gained 4.9 percent. Citigroup added 4.6 percent.

The Standard & Poor’s 500 index gained 35.95 points, or 3 percent, to 1,241.30. Only six stocks in the index fell. The Nasdaq composite index rose 80.59, or 3.2 percent, to 2,603.73.

Analysts cautioned that recent big rallies in the stock market have been quick to fade. “If you’re selling into rallies, it means people want out,” said Quincy Krosby, Prudential Financial’s market strategist. “They don’t believe it’s sustainable.”