Poor US jobs data knocks Wall Street, reignites global stock market sell-off

Poor US jobs data knocks Wall Street, reignites global stock market sell-off


The world stock market sell-off got a second wind on Thursday afternoon after disappointing US jobs data compounded investors' already bleak view of the world economy

Published: 3:26PM BST 20 May 2010

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European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000. Photo: Getty

European markets gave up early rises after the Dow Jones opened down 2.1pc following a jump in US jobless claims to 471,000. Economists were expecting them to fall to 440,000.

The poor news on the US economy added to jitters about a tightening of financial regulation, pushing London's FTSE 100 down 2pc. Germany's DAX skidded 2.3pc, France's CAC 2.8pc and Spain's Ibex 1.7pc. Earlier, Asian markets fell for a second day with the Nikkei sliding 1.5pc and Australia's ASX 1.6pc.

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Gilt yields on 10-year bonds fell further in the US, Germany and UK in a flight to safety.

European tensions over a unilateral German ban on the shorting of government bonds and some financials stocks on Tuesday evening continued to reverberate across financial markets.

The euro, which came off fresh four-year lows around $1.21 on Wednesday after a massive €9.5bn intervention by the Swiss central bank, remained volatile.

The currency spiked above $1.24 in early trade on speculation of a possible co-ordinated intervention from central banks, and talk that Greece may be about to leave the eurozone. This rally was short lived and it was trading around $1.2340 just before 3pm.

Angela Merkel, the German Chancellor who yesterday caused a stir by warning that the euro was in danger, today said she would campaign for a tax on financial markets at the G20 summit in Canada.

In a wide-ranging speech on financial regulation, she stressed the importance of tightening the fiscal rules governing the euro area, the breech of which has contributed to the current crisis.

"If you have a currency like the euro ... then you need stricter rules than other governments that just decide for their own currency," she said.

"We need to tighten up the Stability and Growth Pact," she insisted, ahead of a meeting of EU finance ministers and the EU president Herman van Rompuy to discuss the pact Friday in Brussels.

She also called for a European version of the rating agencies which have been accused of exacerbating the crisis.

"I would be in favour of introducing a European rating agency which would act as a competitor to other rating agencies on a level playing field," she said.

Earlier in the day investors were tempted back into the market following yesterday's steep falls. Bank shares were in demand and by 11.30am Britain's FTSE 100 was up 0.3pc, Germany's DAX had dipped 0.3pc and France's CAC-40 has gained 0.04pc.

But market watchers were wary. "The day will be a roller coaster, no doubt," said David Keeble, an analyst at Credit Agricole. "The German short ban has emphasised that Europe is not unified and this is at a juncture when it really, really needs to be."

Christine Lagarde, French Economy Minister, told RTL radio that the German decision "should have been taken in concert" with other European nations and was in itself "open to debate".

The crisis in Europe is being driven by debt and public deficit levels which have soared way above EU rules as governments increased spending to get their economies through the worst recession in decades.

French President Nicolas Sarkozy added to worries wheh he said France's constitution should be altered to compel new governments to sign up to a timetable to balance their budgets. He also said he wanted to freeze public spending for three years.

Greek authorities deployed hundreds of extra police in Athens for the fourth general strike in four months which caused widespread disruption. During Greece's last general strike on May 5, three workers — including a pregnant woman — died while trapped in a bank that rioters set ablaze.

Public anger has grown in Greece against deep pension and salary cuts, as well as steep tax hikes, imposed in an attempt to pull Greece out of an unprecedented debt crisis.

The measures were needed for Greece to receive a €110bn (£95bn) three-year rescue loan package from other EU countries and the International Monetary Fund that staved off bankruptcy.

Spain also braced for street protests by public service workers against a tough government austerity plan aimed at reining in the public deficit amid fears of a Greek-style debt crisis.

The country's main unions has called for demonstrations in front of government buildings throughout the country at the same time as the government is set to approve the belt-tightening plan later Thursday.

http://www.telegraph.co.uk/finance/markets/7745696/Poor-US-jobs-data-knocks-Wall-Street-reignites-global-stock-market-sell-off.html

Asian stocks fall on Japan deflation warnings

Asian stocks fall on Japan deflation warnings

May 20, 2010 - 2:54PM
Asian stocks fell, dragging the MSCI Asia Pacific Index to its lowest in more than six months, after Japan's finance minister warned about continuing deflation and concern grew about Europe's debt crisis.

Canon Inc., a camera maker that counts Europe as its biggest market by revenue, lost 2.9 per cent in Tokyo. Surfwear maker Billabong International, which gets 23 per cent of its sales in Europe, slumped 5.1 per cent in Sydney. Toyota sank 2 per cent as the carmaker offered repairs for an engine fault in its Passo subcompact models.

The MSCI Asia Pacific Index fell 1 per cent in Tokyo, set to close at its lowest level since Sept. 4. The gauge has tumbled 12 per cent from its high this year on April 15 amid concern debt problems in countries from Greece to Spain will spill over into other European nations. Germany this week introduced a temporary ban on naked short selling to calm the region's financial markets.

''With the volatility at present it's difficult for investors to swim against the tide,'' said Tim Schroeders, who helps manage about $US1.1 billion at Pengana Capital in Melbourne. ''Doubts over Europe's ability to keep its own house in order remain, along with concerns about the robustness of global growth. Many investors are sitting on the sidelines until the way forward becomes clearer.''

Japan's Nikkei 225 Stock Average sank 1.2 per cent, as Finance Minister Naoto Kan warned that the economy continues to be in a deflationary state minutes after a government economic growth report missed estimates. Australia's S&P/ASX 200 Index lost 0.5 per cent. South Korea's Kospi Index fell 0.5 per cent.

China, Hong Kong

China's Shanghai Composite Index sank 0.4 per cent, after earlier rising 0.8 per cent. Hong Kong's Hang Seng Index was little changed. Singapore's Straits Times Index dropped 0.4 per cent even after a government report showed the city-state's economy grew at a faster pace than initially estimated.

Futures on the Standard & Poor's 500 Index gained 0.3 per cent. The index slid 0.5 per cent yesterday as Germany's trading restrictions and a jump in mortgage foreclosures to a record triggered a flight from equities.

German regulators banned investors from naked short sales of 10 banks and insurers, as well as naked credit-default swaps on euro-area government bonds, starting yesterday.

Short sellers borrow assets and sell them, betting the price will fall and they'll be able to buy them later, return them to the lender and pocket the difference. In naked short- selling, traders never borrow the assets so betting is unlimited.

Free repairs

Canon declined 2.9 per cent to 3815 yen in Tokyo, while Nintendo, a Japanese maker of game consoles that gets 34 per cent of its revenue in Europe, dropped 3.3 per cent to 25,970 yen in Osaka. Billabong slumped 5.1 per cent to $10.25.

Toyota, the world's largest automaker, fell 2.1 per cent to 3435 yen, the biggest drag on the MSCI Asia Pacific Index. The company will offer free repairs from tomorrow for an engine fault affecting 22,300 Passo subcompact models in Japan, according to Toyota spokeswoman Mieko Iwasaki.

Japan's Nikkei 225 Stock Average had the steepest decline among key stock gauges in the Asia Pacific region. A government report showed the country's economy expanded slower than economists expected in the first quarter, with more than half of growth coming from trade, and consumer spending contributing less than one-fifth.

Chinese interest rates

Finance Minister Kan said that he expects the Bank of Japan to support the economy with flexible policy and that officials must be cautious about calling the recovery self-sustaining. The BOJ starts a two-day policy meeting today.

Property stocks in Hong Kong rose after the state-run China Securities Journal said in a front-page editorial today that the nation can wait until the second half of 2010 or next year to raise benchmark rates as economic growth slows.

Chinese measures to rein in the country's real-estate prices contributed to the MSCI Asia Pacific Index's slump since April. Companies in the measure trade at an average 14.4 times estimated earnings, near the lowest level since December 2008.

'Face reality'

Hang Lung Properties, which received 40 per cent of its fiscal 2009 revenue from China, gained 1.3 per cent to $HK27.90 in Hong Kong. China Overseas Land & Investment, controlled by the nation's construction ministry, rose 0.7 per cent to $HK14.52. Bank of China, the nation's third- largest lender, climbed 0.5 per cent to $HK3.96.

''Most economists will have to face reality and postpone their expected timing of the first rate hike, especially after the breakout of the European debt crisis,'' Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch, said in an e-mailed report.

Energy companies in Asia advanced as oil futures in New York climbed 1 per cent to $US70.60 a barrel, extending yesterday's 0.7 per cent increase. Cnooc, China's largest offshore oil producer, gained 1.8 per cent to $HK12.36. Cosmo Oil jumped 4.2 per cent to 251 yen in Tokyo.

Oil & Natural Gas, India's largest state-owned oil explorer, surged 9 per cent to 1116.9 rupees after the country's government agreed to more than double the price of gas produced from fields awarded to state companies.

Bloomberg

Source: theage.com.au

http://www.smh.com.au/business/markets/asian-stocks-fall-on-japan-deflation-warnings-20100520-vhio.html

Global stockmarkets slumped overnight

Global stockmarkets slumped overnight, as the surprise German strike against speculative trading panicked nervous investors instead of reassuring them.

Top economist Nouriel Roubini, who was one of the few experts to predict the global financial crisis, warned that the debt drama set off by Greece was likely only the tip of the iceberg.

A fresh crisis could occur "not just in the eurozone but in the UK, US, or Japan," Roubini said in a speech at the London School of Economics.

"The next stage of the crisis could be a sovereign debt crisis that could lead to a double-dip recession."

In Asian trade on Wednesday, Tokyo lost 0.5 per cent with Hong Kong down 1.8 per cent while Sydney fell to its lowest level in nine months, giving up 1.9 per cent.

AFP

http://www.smh.com.au/business/markets/angelas-ashes-desperate-merkel-fuels-slump-in-global-markets-20100520-vfl2.html

Dollar in free-fall as foreign investors ditch Australian assets

Dollar in free-fall as foreign investors ditch Australian assets
CLANCY YEATES
May 20, 2010

The biggest market correction since late 2008 has deepened, as skittish investors ditch Australian assets amid fears Europe's debt crisis will derail the global recovery.

Worries of another leg in the financial crisis worsened yesterday, prompting a 1.9 per cent sell-off on the local sharemarket and a free-fall in the Australian dollar.

Overseas hedge funds frantically entered deals to ''sell Australia'', broking houses said, sending the dollar tumbling more than US2c to a fresh eight-month low of US85.88c.

The carnage continued into early European trade, with the region's markets down about 3 per cent.

The market turmoil followed a surprise move by Germany to institute a ban on short-selling of its banks, echoing the attempts of regulators to shore up confidence at the height of the financial crisis.

In response to the escalating problems in Europe, markets are turning their back on assets seen as carrying high exposure to the world economy.

The Australian dollar and local shares are high on the list, as markets view both as proxies for the global growth outlook.

The currency strategist at RBS, Greg Gibbs, said Germany's need to shore up the system was ''shocking'' to investors because it suggested European governments held doubts over whether last week's $1.1 trillion bailout was enough.

''It is either a massive over-reaction or the risks of a collapse in the euro system are larger than we thought,'' Mr Gibbs said.

Since breaching 5000 points last month, the ASX 200 has tumbled more than 12 per cent to 4387.1 points.

The rate paid by global banks on three-month loans - the London interbank offered rate, or Libor - has also surged to a nine-month high.

''The only reason it's gone up is because banks are a bit worried about lending to each other for terms of longer than a day,'' Mr Gibbs said.

According to research from the Melbourne Institute, shareholder sentiment has taken its biggest slide since the heat of the financial crisis, after a 10.5 per cent year-on-year slide in confidence in May. The reading was the first decline after five rises in a row.

Despite the worsening outlook, analysts remain upbeat on Australia's economic outlook.

A strategist at Credit Suisse, Atul Lele, said the prospects of the global economy had actually improved in recent weeks, shown by stronger growth in the United States.

Because of this, Mr Lele said he thought sharemarket valuations now looked attractive, especially in sectors exposed to global growth such as resources.

He added that regulation should not spook investors because increased government involvement - including short-selling bans - had been more help than hindrance in the recent market recovery. ''We've seen a significant amount of intervention globally in the past 18 months and that has been been largely positive, and it explains how we got out of the financial crisis with such rapidity,'' Mr Lele said.

The chief executive of David Jones, Mark McInnes, said the economy was ''very hard to predict'' on a weekly or monthly basis, but emphasised the string of upbeat forecasts from the Reserve Bank and the recent federal budget.

''If you compare [now] to March last year [when the] the world was ending, BHP had just sacked 3000 people, unemployment was rising, house prices were falling, and the sharemarket was at 2800 points - a year and a few months on, the fundamental economy is much, much better.''

http://www.smh.com.au/business/dollar-in-freefall-as-foreign-investors-ditch-australian-assets-20100519-vfcq.html

Aussie dollar in freefall

Aussie dollar in freefall
GABRIELLE COSTA
May 20, 2010 - 5:20PM
Vote

Economic volatility hits globally
The Australian dollar suffered a free fall as offshore investors ditched what they class as high-risk investments.

The Australian dollar was in freefall this afternoon, plunging to as low as 82.56 US cents against the greenback and falling sharply against other major currencies, on renewed worries about the health of the global economy.

Traders said the losses were caused by global hedge funds selling the dollar to reduce their exposure to currencies considered as risky.

By the time of the local close, the dollar had recovered slightly to 83.15 US cents, still down more than 2.5 US cents from yesterday's close of 85.88 US cents.

TD Securities FX strategist Roland Randall said the unit had been caught in the grip of investor insecurity about the on-going European debt crisis.

''The big picture is the world is selling risk assets in concerns out of Europe,’’ he said. ''We’ve seen the Aussie plummet.''

It's been a shocking month for the currency, sinking more than 10 per cent from 92.7 US cents - a shift that may add to local inflationary pressures as the higher cost of imports flows through the economy.

Shares also extended their recent run of falls to end down 1.6 per cent for the day. Share values are now down more than 10 per cent this month, wiping more than $130 billion from the value of the market.

Currency movements table

Since the start of May, the Aussie dollar has been the worst performer among frequently traded currencies in the world, and is now at its lowest against the greenback since the start of September.

International turbulence stemming from the sovereign debt crisis in Europe - and heightened by Germany's shock move to ban a form of short-selling - has prompted investors to turn their backs on what are often referred to as risky assets, which include the Australian dollar.

The Australian dollar is a high-yield currency - interest rates are higher in Australia than in many other trading economies - so any decision considered to hamper growth in the global economy is deemed a negative for the local currency.

Investors are pricing in a less-than-zero chance of an interest rate rise when the Reserve Bank meets next month and the chance of only one quarter-percentage point rise in the next year.

Until recently the market had suggested as many five rate rises between now and next May.

The local dollar also fell sharply against the currencies of other major trading partners and tourist destinations overnight.

It was buying 75.93 yen at the close, a 10-month low. It is down from 77.81 yen this morning and 87.79 yen at the start of May. The dollar was also worth 57.8 British pence, down on the 60.8 pence it bought at the start of the month.

The dollar is also down against the much-troubled euro. At the close it was buying 66.96 euro cents. Just last week, the dollar hit a record high against the euro, when it was buying 71.78 euro cents. That movement marks a fall of more than 5 per cent in the space of just five trading days, versus a currency itself targeted by sellers.

Westpac senior currency strategist Richard Franulovich said growth assets such as equities and the Australian currency had been under "a lot of pressure" following the moves by the German regulator.

"There is a lot of angst in financial markets, bewilderment and frustration with the decision by Germany to impose a ban on naked selling of all sorts of instruments," Mr Franulovich said from New York.

Short selling occurs when traders bet on a stock or investment that they do not own.

Naked short selling - when a trader has yet to find another party - was cited as a factor in the turbulence on world markets during the 2008 financial crisis.

"That consternation, that fear of what next and the uncertainty it has created has caused a significant bout of risk aversion," Mr Franulovich said.

"Equities were under pressure heavily early in the (New York) session... That coincided with an Aussie currency trading badly and briefly dipping below 84 (US cents)."

BusinessDay, with agencies

http://www.smh.com.au/business/markets/aussie-dollar-in-freefall-20100520-vg2a.html

World Competitiveness Yearbook 2010: Asia Gains, U.S. Drops in Competitiveness

Asia Gains, U.S. Drops in Competitiveness

The World Competitiveness Yearbook 2010 from Swiss business school IMD finds the U.S. and Europe losing their edge to fast-growing Asian economies

By Mark Scott

• View Slide Show

A lot can change in 12 months. At this time last year, Western nations dominated the annual ranking of the world's most competitive countries prepared by the IMD business school in Lausanne, Switzerland. Now, in the most recent ranking released May 19, five of the top 10 are from the Asia-Pacific region. Emerging-power China, ranked No. 18, has gained ground, even as No. 3-ranked U.S. and No. 22-ranked Britain slipped in the global pecking order.

"For the first time, we're seeing the creation of a self-sufficient economic block of developing countries," says Stéphane Garelli, director at IMD's World Competitiveness Center and co-author of the World Competitiveness Yearbook 2010. "They have money, markets, technology, and global brands that didn't exist 10 years ago."

The eastward shift isn't likely to end soon. While Europe struggles to rein in gaping budget deficits and the U.S. continues to suffer from high unemployment, most emerging economies have weathered the economic downturn better—and are now back to work. Commodity-rich nations such as Brazil and Russia are benefiting from rising prices for everything from iron ore to oil to soya beans. Such manufacturing giants as China and India are tapping into growing domestic markets, fueled by emerging middle classes eager to spend their renminbi and rupees.

"Local investors who previously would have taken their cash overseas are looking at investment opportunities at home," says IMD's Garelli. "The U.S. and Europe have to realize the investment money just isn't coming back."

WORLD'S BIGGEST LOSER: EUROPE

The Swiss school's 2010 competitiveness yearbook will make for tough reading in the West. Based on a detailed analysis of economic output, government and business efficiency, skills, and infrastructure, the researchers ranked 58 of the world's economies to determine which are best-placed to succeed in the 21st century economic race. For the first time in 17 years, the U.S. lost the top spot, falling behind Singapore and Hong Kong, respectively. Australia, Taiwan, and Malaysia are additional Asia-Pacific countries that scored in the top 10.

The biggest loser in this year's rankings is Europe. Despite a combined gross domestic product of almost $15 trillion and a total population of nearly 500 million, only three Old World countries—Switzerland, Sweden, and Norway—broke into IMD's top 10 this year. Perennial stars Denmark, Finland, and the Netherlands dropped out of the top 10, replaced by Taiwan and Malaysia (as well as by Norway, which is outside the EU and euro zone). The continent's largest economies, Germany (No. 16), United Kingdom (No. 22), and France (No. 24), remained well outside the top 10; France alone among the three gained ground, rising four rungs. IMD attributes the Old World's relatively poor showing to high levels of government debt, a weakening infrastructure, and continued inefficiencies in European labor markets.

The U.S. may be better positioned to come back. While IMD finds grounds to criticize U.S. business regulation and government policy, the country retains two major global advantages, Garelli says. First is the sheer size of the domestic economy—far and away the world's largest; when GDP growth returns in earnest, the U.S. will be able to leverage its bulk into competitiveness gains. The U.S. also benefits from having the world's most advanced research and development capability and highest-ranked infrastructure. "We can't sell the U.S. short," Garelli says. "Once the [economic] turnaround takes hold, the country should bounce back relatively quickly."

For an introduction to the top 10 countries and others of interest in the IMD 2010 World Competitiveness Yearbook, check out our slide show.

Click here for a look at the results of IMD's 2009 competitiveness ranking.

Click here for an alternative competitiveness ranking from 2009, prepared by the World Economic Forum.

Click here for a look at the results of IMD's 2008 competitiveness study.

Scott is a correspondent in BusinessWeek's London bureau.

http://www.businessweek.com/globalbiz/content/may2010/gb20100519_766709.htm?chan=rss_topStories_ssi_5

Utusan must change ways, says Najib

Utusan must change ways, says Najib

UPDATED @ 12:56:52 20-05-2010
By Syed Jaymal Zahiid May 20, 2010

Najib urged Utusan to be more than just Umno’s mouthpiece. — file pic

KUALA LUMPUR, May 20 — Controversial Umno mouthpiece, Utusan Malaysia, must transform itself if it wishes to stay relevant, Prime Minister Datuk Seri Najib Razak said today.

The Malay-language daily pushes Umno’s agenda — often through racially-tinged articles against the party’s rivals — but Najib urged the 72-year-old newspaper to be more than just the party’s mouthpiece.

“I understand that sensational news sells... especially with that ‘one person,’” he said in a veiled reference to Utusan Malaysia’s constant attacks on Opposition Leader Datuk Seri Anwar Ibrahim.

“But you must also be a medium to build an intellectual culture, a critical society,” the Umno president added.

Najib’s call for change was made at the company’s ground-breaking ceremony for a new headquarters in its Jalan Chan Sow Lin plant here.

The prime minister said that the ceremony must coincide in a shift of paradigm for the newspaper.

While it may continue to fight for its so-called agenda to protect the nation’s majority “race, Islam and country”, Utusan must play a pivotal role in helping the government achieve its transformation plan.

“In the development of the new building, Utusan must also work towards handling changes,” he said.

Najib has embarked to re-brand the Barisan Nasional-led federal government’s image as an administration that stands on the all inclusive 1 Malaysia platform.

The New Economic Model has become the nation’s sixth prime minister’s map to drive the ruling coalition away from its Malay-centric path which has polarised the nation and crippled the economy.

But Utusan has not been doing Najib the much needed favours. It continues to draw blood through opinion pieces that have drawn the ire of the non-Malay population.

Though the prime minister did not touch on this in his speech before Utusan’s big guns, he made subtle hints that the newspaper must be quick to adapt to the current political and economic climate.

“Yes we can lean on history but what is the use of history if our survival is threatened,” stressed Najib.

And while urging Utusan to step up to the plate given the fierce competition in the news industry, Najib warned on the need for the Malay daily to safeguard its integrity.

“The integrity of our news reports is important. There is if we keep having to apologise. It must be fast, accurate and verified,” said Najib who is the son of the nation’s second premier, Tun Abdul Razak.

Echoing his past call to all media, Najib also urged Utusan to be partners to the government.

“Utusan must play its role as a partner to the government because we are heading towards change”.

http://www.themalaysianinsider.com/malaysia/article/utusan-must-change-ways-says-najib

Analysts differ on Wilmar’s prospects post scam claims

Analysts differ on Wilmar’s prospects post scam claims
By Lee Wei Lian May 20, 2010

KUALA LUMPUR, May 20 — Analysts differed on the outlook for plantation giant Wilmar International Ltd following allegations of tax fraud.

Wilmar was alleged to have colluded with Indonesian tax officials to claim tax rebates worth 3.6 trillion rupiahs or RM1.24 billion, but Wilmar has said that its internal records will stand up to scrutiny.

Research house OSK Research said in a report today that shares of Wilmar could be a bargain after the counter fell by nearly 7 per cent yesterday on the Singapore stock exchange and that it was encouraged by Wilmar’s strong stand on the allegations.

“Should the company be able to sort out the issue, the stock will be a bargain even at these levels,” said OSK Research. “While the stock may still weaken somewhat from here, we believe it is now cheap enough for investors to start nibbling on.”

The report also noted that Wilmar has clarified that its COO Martua Sitorus is not personally under investigation for tax fraud allegations.

“We believe the market will be relieved as Martua was the person who spearheaded Wilmar’s expansion in Indonesia,” said OSK Research which maintained its “Buy” call on Wilmar.

A separate report by a local research house said that Wilmar shares will be affected by uncertainties arising from the allegations and said that if the RM1.24 billion in tax rebates were to be charged to Wilmar’s profit and loss account, it would reduce the group’s 2010 profits by 23 per cent.

“What is more detrimental is the reputational damage to the group,” said the research house. “We wonder if the Chinese government would start scrutinising Wilmar’s tax payments and accounts due to the allegations in Indonesia.”

The research house maintained a “hold” call on Wilmar due to potential earnings disappointment from lower operating margins, the impact of a potential slowdown in the China market which accounts for 70 per cent of Wilmar’s earnings and uncertainties arising from the tax claim allegations.

PBB Group Berhad holds a 18.4 per cent stake in Wilmar and its shares dropped nearly six per cent yesterday on news on the allegations. Wilmar accounts for about 75 per cent of the PBB Group’s profits.

PBB Group said yesterday that the claims were still uncertain as investigations by Wilmar had yet to be concluded.

http://www.themalaysianinsider.com/business/article/analysts-differ-on-wilmars-prospects-post-scam-claims/#When:04:23:23Z

EU backs tougher rules for hedge funds, private equity

EU backs tougher rules for hedge funds, private equity


European Union finance ministers backed stricter rules for hedge funds and private equity groups on Tuesday.

Reuters
Published: 4:36PM BST 18 May 2010

Comments 2 | Comment on this article

European Union finance ministers backed stricter rules for hedge funds and private equity groups on Tuesday. German Finance Minister Wolfgang Schaeuble answers questions. Photo: AFP

The draft rules will control pay and borrowing at hedge funds as well forcing them to disclose extensive information about how they are investing or short-selling.

The strict regime is part of a wider set of pledges by world leaders to create a more stable financial system.

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"We are determined to accelerate the pace of regulation," Wolfgang Schaeuble, Germany's finance minister, said after the meeting.

"Up until now this was not regulated," he said of the hedge fund and private equity industry. "This hole will now be closed."

Britain had fought to water down the law and was hoping to overturn a provision that refuses to grant a single licence for foreign funds to do business across Europe. US Treasury Secretary Timothy Geithner has also objected to this.

London's objections were overruled in rare break with Brussels diplomacy which says no country should accept a law that it does not want to.

British diplomats said they had achieved the "best possible" outcome from the meeting, but concerns remain about the impact tighter regulations will have on London's hedge fund industry.

Britain is home to 80pc of the bloc's hedge funds and believes the new rules - likely to take effect around 2012 - will curb choice for investors by making it harder for managers to find investors across the EU's 27 countries.

Only the Czech Republic backed Britain in opposing the approval of the new rules by the finance ministers, insufficent support in the face of heavyweights France and Germany, who pushed for rigid restrictions.

The vote left Britain's new finance minister, George Osborne, outvoted at his first meeting with his peers. Officials said he did not speak during the deliberations on the issue.

The European Parliament's economic affairs committee approved its version of the draft measure on Monday evening, opening the door to formal negotiations on a final deal with EU states, perhaps by July.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/ditch-the-directive/7737229/EU-backs-tougher-rules-for-hedge-funds-private-equity.html

Hedge fund selling hits 18-month high

Hedge fund selling hits 18-month high


Hedge funds have embarked on their largest selling spree in a year and a half as market uncertainty drives many investors to sell shares as fears over the stability of many Western economies grow.

By Harry Wilson, Financial Services Correspondent
Published: 5:47PM BST 19 May 2010

In a sign of the speed with which market sentiment has deteriorated over the last month, hedge funds have made a dramatic switch from their biggest buying spree in more than two years to become big sellers once again, according to UBS.

The latest data from UBS's prime brokerage business, which handles the Swiss bank's dealings with hedge funds, shows that as of the end of last week selling by funds was at its highest monthly level since January 2009.

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Hedge funds have been blamed for much of the recent volatility in world markets, with the German government prompting chaos on Wednesday with its ban on short-selling in the shares of 10 major Germany financial institutions, including Allianz, Commerzbank and Deutsche Bank.

Based on the UBS data, hedge fund selling of bank shares has been relatively muted, with most of the net selling focused around the IT, consumer services and transport, telecoms, and metals and mining sectors.

From heavy selling earlier in the year, hedge fund and long-only investors' buying of bank shares has picked up in the last two months, leading some to question why the German government decided to institute its ban now.

Pedro de Noronha, managing partner of hedge fund firm Noster Capital, said the ban was "ridiculous".

"All it proves is how scary it is to have people who are unsophisticated in financial markets imposing regulations on products they don't understand," said Mr de Noronha.

To compound the sense of victimisation felt by hedge funds, the announcement of the ban came on the same day that European Union finance ministers voted through tough new industry regulations in a move widely seen as more political grand standing than considered law making.

The Alternative Investment Fund Managers directives will put hedge funds under a new super-regulator for the first time, despite repeated criticism from industry trade bodies.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7741612/Hedge-fund-selling-hits-18-month-high.html

Fear is gripping markets: economists

Fear is gripping markets: economists

EOIN BLACKWELL
May 19, 2010 - 7:44PM
AAP

Fear and uncertainty, not market fundamentals, drove the Australian dollar to an eight-month low on Wednesday and pushed the domestic share market into the red, economists say.

Fears over US and German regulatory reform, the European debt crisis and the Australian government's resource rent tax saw the local dollar hit an eight-month low of 85.17 US cents on Wednesday,

Local shares fell, too, sliding 1.87 per cent to close at a nine-month low at 4,387.1 points for the All Ordinaries index.

Investor sentiment darkened further after the Westpac-Melbourne initiate consumer sentiment index showed a seven per cent slide for May, its biggest percentage drop since the height of the credit crunch in October 2008.

"It's just been one hit after the other," ICAP economist Adam Carr said of the global and domestic concerns.

He said the worries were unfounded with the economic fundamentals of nations in general, and Australia in particular, strengthening.

"The US is seeing what looks like a V-shaped recovery," he said.

"Everyone is waiting for the fall to come in China and it's not going to happen.

"When you look past all the hysteria, the Australian economy, employment, both are going at a very strong rate and interest rates are only about average."

Yet the headlines have been dominated over the past week by the uncertainty surrounding Europe.

A 750 billion euros ($A1.06 trillion) bailout package for debt-laden EU nations like Greece initially calmed markets last week.

But the mood didn't last long amid renewed speculation the crisis could spread and slow EU growth.

4Cast Financial Markets economist Michael Turner said it was hard to see how Europe could escape its debt woes without serious structural damage.

"The way people are expressing that at the moment is through the euro and the stock market," he said.

The Euro was trading at 1.2215 US cents at Wednesday's close, compared with 1.3240 US cents on May 1.

The euro is still above its long-term average of 118 US cents, Mr Turner said.

"It certainly goes a long way to show how fearful markets are with the way all this plays out."

Investor uncertainty reignited on Tuesday when Germany's securities market regulator, Bafin, banned naked short selling of certain securities - often cited as key factor leading to the 2008 financial crisis.

In the US, meanwhile, proposed reforms to the financial regulations that govern Wall Street are before the US Senate and are being fought over Democrats and Republicans.

But it's all just noise, ICAP's Adam Carr said.

"If you're pessimistic over Europe then you might as well quit your job, buy a gun, get some land and learn how to farm," he said.

"Because if you're going to be pessimistic on Europe, then you have to write off the US and write off Japan."

ANZ senior rates strategist Tony Morriss said the safe-haven bond market should to do well amidst the uncertainty and fear.

"I think on the sentiment at the moment you'd sell on any sort of rally in currency, which means that bonds should be supported."

© 2010 AAP

Mining tax 'contagion' set to spread globally

Mining tax 'contagion' set to spread globally
May 20, 2010 - 10:39AM

Australia’s planned 40 per cent tax on mining "super profits" has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton and Rio Tinto and the attraction of mining stocks.

“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS in Sydney. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”

BHP, the world’s largest mining company, Xstrata and Rio said they are reviewing projects in Australia, the No. 1 exporter of coal and iron ore, after the federal government unveiled the tax earlier this month, saying a country’s resources belong to the people. Citigroup analyst Craig Sainsbury said Canada, Peru and Chile may be next.

“Resource nationalism” is a major risk facing miners in the next few years, Evy Hambro, manager of BlackRock Investment Management’s flagship World Mining Fund said last month.

Chile, the biggest copper exporter, is proposing a temporary rise in mining taxes to help pay for earthquake reconstruction that may cost BHP, Xstrata and Anglo American $US1.2 billion ($1.4 billion) in the next two years. Brazil, the second-biggest iron ore exporter, may tax shipments of the commodity or raise royalties, Energy and Mining Minister Edison Lobao has said.

‘Markets suicide’

The Australian tax plan is “global financial markets suicide,” according to Charlie Aitken, the executive director of Southern Cross Equities, the equal top ranked predictor of BHP’s share price performance of 17 analysts, according to data compiled by Bloomberg.

Mining companies’ earnings may be cut by almost a third when the tax starts in 2012, Moody’s Investor Services said this week. The tax would be broadly credit negative for the sector and raise uncertainty for some companies over the short-to-medium term, Moody’s said.

The tax may also prompt European and Scandinavian nations to seek a greater share of revenue from production, Magnus Ericsson, a senior partner at Raw Materials Group, a mining data and analysis company, said. The proposal will make Australian mines the highest taxed in the world, according to Minerals Council of Australia.

“Economies, particularly European economies, are going to have to deal with deficits,” said Jamie Nicol, chief investment officer at Dalton Nicol Reid in Brisbane. “They are going to look at some sort of innovative tax solutions to try and claw back some of that.”

Levy wars

Nations that resist may attract investment. South Africa taxes mining companies at 33 per cent, Canada 23 per cent and China 30 per cent compared with a forecast 58 per cent in Australia after the tax, according to Citigroup data.

Treasurer Wayne Swan has said he “strongly disagrees” with claims the tax will damage miners. China’s demand for Australian metals will outweigh higher taxes, according to AMP Capital Investors, a unit of the country’s largest pension plan provider, which hasn’t changed its industry assessment.

Rio, the world’s third-largest mining company, this month said it will spend $US401 million to boost iron ore output in Canada, citing the “attractiveness of investing” in the North American nation. BHP has said the tax would stymie investment.

Fortescue, Australia’s third-largest iron ore exporter, this week placed $US15 billion of projects on hold, citing the tax.

“It doesn’t matter if it’s the Congo or Sudan, or it’s Australia or Canada, these projects require commitments by governments that are 30 years and when they move the goal posts they will have a serious rippling effect,” said Frank Holmes, chief investment officer of US Global Investors. “They could stifle the world.”

Bloomberg

Behind the drama in Europe lies a global crisis

Behind the drama in Europe lies a global crisis


The euro is under threat – along with our entire free-market system, warns Edmund Conway.

By Edmund Conway
Published: 7:49PM BST 19 May 2010

Comments 23 | Comment on this article

Angela Merkel, the German Chancellor, followed the unilateral German shorting ban with a warning that the euro was in danger, urging the EU speed up supervision of financial markets.Photo: Getty

It is now accepted, even by Angela Merkel, that as Europe battles its financial crisis, the very fate of the euro is at stake. Her belated discovery of this home truth is welcome, but she does not go far enough. The real concern is that the crisis bubbling on the other side of the Channel represents a make-or-break moment for globalisation.

If that sounds rather exotic, consider two apparently separate events from the past couple of days. The first features George Osborne. While things have gone pretty well back home for the new Chancellor, he is already having trouble in Europe, where the Commission has been fighting not only to de-claw the hedge fund industry – against British wishes – but also to impose new rules on its member states.

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The Commission's latest idea is that every European finance minister (including Osborne) should be compelled to send his Budget plans to Brussels for approval before announcing them to his own MPs and citizens. The rationale is that if there is to be a central bail-out fund for stricken European nations, there should be someone in the middle making sure no one misbehaves. Osborne, understandably, was having none of it, using his inaugural European summit to insist that when it came to a country's budget, "the national parliament must be absolutely paramount".

The second event took place a few thousand miles away in Washington, where the US Senate voted 94:0 to prevent the International Monetary Fund from using its cash to help countries that are inextricably trapped in a debt spiral. Though barely reported on this side of the Atlantic, this vote could have enormous consequences – such as preventing the fund from providing its share of the grand European bail-out package announced with such fanfare last week, which amounts to a third of the trillion-dollar total.

Though superficially unconnected, the two events share a similar theme: for the first time in many years, the technocrats who run our economies are realising that the main barrier to resolving a crisis and reinstating business-as-usual is not so much our ability to afford it, but our populations' willingness to pay.

As long as things were going well, economies were growing rapidly, and affluence was increasing, it was easy for politicians to pretend that when it came to economics, national borders didn't much matter any more. But now the chips are down, nationalism is back.

The rule of thumb here is as follows: of the three aims we have been striving towards in recent history – democracy, national sovereignty and global free trade – you cannot have any more than two at any one time. 

• Want to run your country as an independent state, open to the whims and volatility of the free markets? The voters will punish you at the ballot box. 
• Insist that your nation has full control of its own affairs? Then you have to jettison any plans to play a full part in the global economy. 
• Want democracy and globalisation? Then you have to suborn your sovereignty.

This is what Professor Dani Rodrik of Harvard University calls the "policy trilemma", and it is what lay behind the breakdown of the last era of globalisation, which coincided with the Industrial Revolution. Under the British Empire, free trade flourished, reinforced by the gold standard (in some senses a precursor to the euro) and the Royal Navy.

However, this only came about because most politicians were able to ignore their citizens' protectionist impulses. The first decades of the 20th century brought not only the First World War but also a mass electorate; when Churchill tried to revive the gold standard in the 1920s, at the cost of deflation and depression in the UK, the public revolted. Churchill called the blunder his "worst ever mistake".

Scarred by the beggar-thy-neighbour policies of the 1930s, John Maynard Keynes could only contemplate a "globalisation-lite" as he rebuilt the world's economic structure after the Second World War. But the Bretton Woods system, which intentionally suppressed the free market through capital controls, lasted only so long. Liberalisation went into overdrive with the fall of the Berlin Wall and the opening-up of China. Yet the resulting system is actually something of a patchwork. Europe exemplifies the problem: the continent is a hodge-podge of nations trying to disguise itself as a completely liberalised market. Unfortunately, its people have different ideas: the Germans are furious about the Greek bail-out; the British insist on remaining on the sidelines.

Perhaps recognising the danger of alienating her voters, Mrs Merkel has now taken what might be a first step towards curtailing economic globalisation, by banning the short-selling of German banks. Some worry that a return to capital controls is the next step in the European effort to prevent meltdown. Others suspect that the European Central Bank has already intervened in the markets to prop up the euro.

Quite what the real plan is remains to be seen. Most likely, there isn't one – yet. But unless they intend to embrace totalitarianism, Europe's members will eventually have to abandon either their national sovereignty or globalisation itself. Given the continent's size, and our reliance on it as our largest trading partner, this is not a drama we can afford to ignore.

http://www.telegraph.co.uk/finance/comment/edmundconway/7742164/Behind-the-drama-in-Europe-lies-a-global-crisis.html