May 20, 2010
Naked Truth on Default Swaps
By FLOYD NORRIS
Should people be able to bet on your death? How about your financial failure?
In the United States Senate, Wall Street won one this week when the Senate voted down a proposal to bar the so-called naked buying of credit-default swaps. If that were the law, you could not use swaps to bet a company would fail. The exception would be if you already had a stake in the company succeeding, such as owning a bond issued by the company.
On the other side of the Atlantic, Germany announced new rules to bar just such betting — but only if the creditors were euro area governments.
None of this argument would be taking place if regulators had done their jobs years ago and classified credit-default swaps as insurance.
As it happened, however, clever people on Wall Street followed the prescription laid down by Humpty Dumpty in Lewis Carroll’s “Through the Looking Glass:”
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
When Alice protested, Humpty Dumpty replied that the issue was “which is to be master — that’s all.”
The word here is “swap.” It used to mean, well, a swap. In a currency swap, one party will win if one currency rises against another and lose if the opposite happens.
Credit-default swaps are, in reality, insurance. The buyer of the insurance gets paid if the subject of the swap cannot meet its obligations. The seller of the swap gets a continuing payment from the buyer until the insurance expires. Sort of like an insurance premium, you might say.
But the people who dreamed up credit-default swaps did not like the word insurance. It smacked of regulation and of reserves that insurance companies must set aside in case there were claims. So they called the new thing a swap.
In the antiregulatory atmosphere of the times, they got away with it. As Humpty would have understood, Wall Street was master. Because swaps were unregulated, calling insurance a swap meant those who traded in them could make whatever decisions they wished.
That decision, perhaps more than anything else, enabled the American International Group to go broke — or, more precisely, to fail into the hands of the American government. Had it been forced to set aside reserves, A.I.G. would have stopped selling swaps a lot sooner than it did.
The decision that swaps were not insurance meant that anyone could buy or sell them — or at least anyone who could find a counterparty.
Had credit-default swaps been classified as insurance, the concept of “insurable interest” might have been applied. That concept says that you cannot buy insurance on my life, or on my house, unless you have an insurable interest.
Gary Gensler, the chairman of the Commodities Future Trading Commission, recently laid out the history of that concept. It did not exist until the 18th century, when many people — not just owners of ships or cargos — began buying insurance against ships sinking.
More ships began sinking, and insurers cried foul.
The British Parliament outlawed such sales of ship insurance in 1746. Ever since, to buy that insurance you had to have an interest in the ship or its cargo. But it was another 28 years before Parliament extended the idea to life insurance.
So should it be illegal for me to buy credit-default swaps on companies even if I have no other interest in the company? And if I have an interest, should I be limited to buying only enough insurance to cover my exposure? That is, if I own $100 million in XYZ Corporation bonds, should I be able to buy $1 billion in insurance against an XYZ default?
To most on Wall Street, the answer is obvious: let markets function. My buying that insurance will probably drive up the price, and serve as a market indication that people are worried about the credit, which is good because it gives a warning to others.
In any case, it is legal to sell stocks short. That, too, is a way to bet that a company will fail. So what’s the difference?
One difference is that many people short stocks because they deem them overvalued, not because they think the company will go broke. They can profit even if the company does well, so long as the stock does turn out to have been overvalued.
Many who despise credit-default swaps argue that they can be used to force companies to fail. The swap market is thin, and even a relatively small purchase can drive up prices. That very movement may make lenders nervous, cause liquidity to dry up and bring on unnecessary bankruptcies.
There is another, little noticed, possible impact of credit-default swaps. They can undermine bankruptcy laws.
Normally, a creditor wants to keep a company out of bankruptcy if there is a decent chance it can survive. If it does go broke, the creditor wants to maximize the value of the company anyway, so that more will be available to pay creditors.
But what happens if a major creditor, who might even control one class of bonds, has a much larger position in credit-default swaps?
Will he not have interests directly at odds with those of other creditors, since he will do better if the company ends up with less to pay its creditors? Might that creditor seek to, and perhaps be able to, sabotage the company’s best hopes for revival?
At a minimum, such things should be disclosed, but that gets tricky when one part of a megabank (the one with the bonds) claims it is run independently from the other (the one with the swaps).
I don’t know whether it is necessary to treat credit-default swaps like insurance and require someone to have an insurable interest before swaps can be purchased.
The financial reform bill now being debated in the Senate has provisions intended to assure that many of the previous swap abuses are not repeated.
But I do think Germany’s decision was ill considered. First, it may have little effect if other countries do not join in. Buying a swap in New York or London, rather than Frankfurt, will not be difficult.
But the more important issue is one of limiting the targets of credit-default swap purchases. If Germany had simply required buyers of credit-default swaps to have an insurable interest, it would have been standing up for a principle.
By limiting the scope to swaps on debt of euro area governments, the German government sends two signals: it is acting in self-interest, and it is still worried that it may have to finance more bailouts.
http://www.nytimes.com/2010/05/21/business/economy/21norris.html?ref=business
Saturday, 22 May 2010
It's a risky business, don't you forget it
It's a risky business, don't you forget it
May 22, 2010
There was a time not so long ago when the markets were convinced that the risks the global financial crisis had exposed were contained. But that was then. Yesterday's market fightback aside, risk has been rediscovered and risk aversion is back in vogue.
It has been evident in the attack on the euro, the proxy for Europe's sovereign debt problem, and the message it sends that government debt taken on to save the financial system and prop up the global economy in 2008 and 2009 will be a long-term weight on growth everywhere.
It is also behind the Australian dollar's dive. The Rudd government's clumsily handled resource rent tax, signs of a pause on Reserve Bank rate rises and our commodity-heavy currency's vulnerability to concerns about global growth were other factors, as was a currency market version of programme trading. Selling by Japanese retail ''carry trade'' investors was triggered as the US dollar-yen rate moved below 90 yen and the Aussie-yen rate went below 75 yen. But however you cut it, what we are talking about is risk rediscovered and reinsured.
After misjudging how America's sub-prime property crisis would infect world markets, hedge funds and other big investors are determined not to be caught again, either by underestimating the possibility that Europe's sovereign debt crisis will fan out into a new systemic global crisis, or by mis-pricing the long-term impact of the debt-funded bailout.
The most fundamental risk insurance that investors take out is a fatter percentage return on the investments they make.
I can't tell you if hedge funds believe they have taken out enough insurance by beating down the quoted prices of shares and other vulnerable markers, including the euro and the Aussie. But I can tell you that insurance levels have been significantly increased worldwide.
In September the companies in the S&P/ASX 200 share index were promising to deliver earnings that equal a 5.9 per cent return on the cost of buying them. Totally safe 10-year Commonwealth bonds were yielding 5.5 per cent, so share investors were receiving a premium of less than half a percentage point for their higher risk, potentially higher return sharemarket exposure.
After this month's slide, the same share index is yielding 8.5 per cent, and the bond rate is down to 5.3 per cent, pushing the risk premium on the sharemarket up significantly, to 3.2 percentage points.
On the same measure Wall Street's share investing risk premium has moved from 3.4 percentage points to 5 percentage points, and even higher insurance has been taken out in Europe. The risk premium there was already big at 4.3 percentage points in September. Today it is 6.3 percentage points, as lower share prices push the euro market's share earnings yield up to 9 per cent, and as a flight to the safety of German government debt pushes its long-term government bond yield to 2.67 per cent - a level that is not only below anything seen during the global financial crisis, but the lowest seen since World War II.
That's a fat cushion by historical standards. It's worth noting that even as the markets have melted, some indicators have been pointing in the other direction.
While there's been a spike in a prominent sharemarket fear indicator, the Chicago Board Options Exchange's Vix index, interbank lending spreads are much narrower than they were during the financial crisis.
Yesterday's Australian market bounce showed that some investors see signs such as these as evidence that this is a crisis in name only, and see the elevated risk premiums as a buying signal.
Others will note that the markets remain hostage to political events - none more so than Australia's.
Last night, for example, Angela Merkel's coalition government was preparing to push Germany's share of the €750 billion rescue package for Greece and other debt-burdened European Union nations through its lower house. The vote was going to be close and the markets needed Merkel to win to hold their nerve.
Australia is running into an election that is shaping up as the most crucial for the markets here in decades. Tony Abbott's declarations that a Coalition government would call off the national broadband project that threatens Telstra's hegemony, scrap a tax that penalises highly profitable miners and rewards marginal ones, and find money elsewhere in part by cancelling the Rudd government's planned cut in company tax from 30 per cent to 28 per cent mean that Australian businesses and the markets face vastly different outcomes from a poll that is only months away.
mmaiden@theage.com.au
Source: The Age
http://www.brisbanetimes.com.au/business/its-a-risky-business-dont-you-forget-it-20100521-w1tw.html
May 22, 2010
There was a time not so long ago when the markets were convinced that the risks the global financial crisis had exposed were contained. But that was then. Yesterday's market fightback aside, risk has been rediscovered and risk aversion is back in vogue.
It has been evident in the attack on the euro, the proxy for Europe's sovereign debt problem, and the message it sends that government debt taken on to save the financial system and prop up the global economy in 2008 and 2009 will be a long-term weight on growth everywhere.
It is also behind the Australian dollar's dive. The Rudd government's clumsily handled resource rent tax, signs of a pause on Reserve Bank rate rises and our commodity-heavy currency's vulnerability to concerns about global growth were other factors, as was a currency market version of programme trading. Selling by Japanese retail ''carry trade'' investors was triggered as the US dollar-yen rate moved below 90 yen and the Aussie-yen rate went below 75 yen. But however you cut it, what we are talking about is risk rediscovered and reinsured.
After misjudging how America's sub-prime property crisis would infect world markets, hedge funds and other big investors are determined not to be caught again, either by underestimating the possibility that Europe's sovereign debt crisis will fan out into a new systemic global crisis, or by mis-pricing the long-term impact of the debt-funded bailout.
The most fundamental risk insurance that investors take out is a fatter percentage return on the investments they make.
I can't tell you if hedge funds believe they have taken out enough insurance by beating down the quoted prices of shares and other vulnerable markers, including the euro and the Aussie. But I can tell you that insurance levels have been significantly increased worldwide.
In September the companies in the S&P/ASX 200 share index were promising to deliver earnings that equal a 5.9 per cent return on the cost of buying them. Totally safe 10-year Commonwealth bonds were yielding 5.5 per cent, so share investors were receiving a premium of less than half a percentage point for their higher risk, potentially higher return sharemarket exposure.
After this month's slide, the same share index is yielding 8.5 per cent, and the bond rate is down to 5.3 per cent, pushing the risk premium on the sharemarket up significantly, to 3.2 percentage points.
On the same measure Wall Street's share investing risk premium has moved from 3.4 percentage points to 5 percentage points, and even higher insurance has been taken out in Europe. The risk premium there was already big at 4.3 percentage points in September. Today it is 6.3 percentage points, as lower share prices push the euro market's share earnings yield up to 9 per cent, and as a flight to the safety of German government debt pushes its long-term government bond yield to 2.67 per cent - a level that is not only below anything seen during the global financial crisis, but the lowest seen since World War II.
That's a fat cushion by historical standards. It's worth noting that even as the markets have melted, some indicators have been pointing in the other direction.
- There are concerns that Europe's growth will be strangled by debt,
- concern too about China's decision to restrict bank lending and slow the pace of its recovery, but global indicators in recent months have in the main been positive.
- Thursday night's slight rise in US jobless claims was an exception, albeit a badly timed one for the markets.
While there's been a spike in a prominent sharemarket fear indicator, the Chicago Board Options Exchange's Vix index, interbank lending spreads are much narrower than they were during the financial crisis.
Yesterday's Australian market bounce showed that some investors see signs such as these as evidence that this is a crisis in name only, and see the elevated risk premiums as a buying signal.
Others will note that the markets remain hostage to political events - none more so than Australia's.
Last night, for example, Angela Merkel's coalition government was preparing to push Germany's share of the €750 billion rescue package for Greece and other debt-burdened European Union nations through its lower house. The vote was going to be close and the markets needed Merkel to win to hold their nerve.
Australia is running into an election that is shaping up as the most crucial for the markets here in decades. Tony Abbott's declarations that a Coalition government would call off the national broadband project that threatens Telstra's hegemony, scrap a tax that penalises highly profitable miners and rewards marginal ones, and find money elsewhere in part by cancelling the Rudd government's planned cut in company tax from 30 per cent to 28 per cent mean that Australian businesses and the markets face vastly different outcomes from a poll that is only months away.
mmaiden@theage.com.au
Source: The Age
http://www.brisbanetimes.com.au/business/its-a-risky-business-dont-you-forget-it-20100521-w1tw.html
Friday, 21 May 2010
A quick look at UMW (21.5.2010)
A quick look at UMW (21.5.2010)
http://spreadsheets.google.com/pub?key=tQhf3FL0inyTABbF4g8_jdw&output=html
GFC II looms if debt woes grow, UBS warns
GFC II looms if debt woes grow, UBS warns
STUART WASHINGTON
May 21, 2010 - 12:05PM
A European inability to contain its debt crisis would lead to ‘‘Global Financial Crisis No. 2’’, a senior economist has warned.
Scott Haslem, an economist with investment bank UBS, said today current instability suggested there were two potential paths for the global economy related to the debt crisis emanating from Europe.
One path was that fears surrounding European debt would continue to escalate, creating a lack of trust in global financial institutions resulting in what Mr Haslem termed ‘‘Global Financial Crisis No. 2’’.
But Mr Haslem said a more likely path would be that European leaders would meet the challenges posed by Greece’s current instability, partly because the consequences of failure would be so dire.
‘‘The most negative path is simply that the rise in risk and the dysfunction that is in Europe at the moment, if we can’t contain that in the European environment and it becomes a global financial crisis, then I think it’s going to be difficult days ahead,’’ he said.
‘‘I think the more likely scenario is that policy makers have walked this path before over the last couple of years ... and probably know a little bit more how to deal with these issues.
‘‘I think the more likely path is that we become more comfortable over the next couple of months that this is indeed likely to be contained to Europe and we re-join what we define as a fairly moderate, patchy economic recovery.’’
He made the remarks this morning ahead of the Australian S&P 200 as low as 3.2 per cent below its close yesterday.
swashington@smh.com.au
http://www.smh.com.au/business/gfc-ii-looms-if-debt-woes-grow-ubs-warns-20100521-vzub.html
STUART WASHINGTON
May 21, 2010 - 12:05PM
A European inability to contain its debt crisis would lead to ‘‘Global Financial Crisis No. 2’’, a senior economist has warned.
Scott Haslem, an economist with investment bank UBS, said today current instability suggested there were two potential paths for the global economy related to the debt crisis emanating from Europe.
One path was that fears surrounding European debt would continue to escalate, creating a lack of trust in global financial institutions resulting in what Mr Haslem termed ‘‘Global Financial Crisis No. 2’’.
But Mr Haslem said a more likely path would be that European leaders would meet the challenges posed by Greece’s current instability, partly because the consequences of failure would be so dire.
‘‘The most negative path is simply that the rise in risk and the dysfunction that is in Europe at the moment, if we can’t contain that in the European environment and it becomes a global financial crisis, then I think it’s going to be difficult days ahead,’’ he said.
‘‘I think the more likely scenario is that policy makers have walked this path before over the last couple of years ... and probably know a little bit more how to deal with these issues.
‘‘I think the more likely path is that we become more comfortable over the next couple of months that this is indeed likely to be contained to Europe and we re-join what we define as a fairly moderate, patchy economic recovery.’’
He made the remarks this morning ahead of the Australian S&P 200 as low as 3.2 per cent below its close yesterday.
swashington@smh.com.au
http://www.smh.com.au/business/gfc-ii-looms-if-debt-woes-grow-ubs-warns-20100521-vzub.html
Whatever Germany does, the euro as we know it is dead
"Money can't buy you friends, but it does get you a better class of enemy" – Spike Milligan
For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.
In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.
By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.
This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.
What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new "hard currency" zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.
When asked on Sky if, in five years' time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: "I think it's pretty unlikely." The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.
Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone's sickliest constituents reads as if it was penned to sum up today's turmoil.
"A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly," Sir Martin predicted. "Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear."
Welcome to the headaches of George Papandreou. The bond markets called his country's bluff. Greece is skint, but its unions don't want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.
Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.
By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin's support for Greece, which talks of developing processes for "an orderly state insolvency". This sounds ominously like a softening-up process for a form of default.
Greece's severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.
In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe's planned monetary union was "a German racket designed to take over the whole of Europe". One knew what he was getting at, but it has not turned out that way.
Protecting the euro has become a project via which profligate states dip their fingers in Berlin's till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany's version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.
As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair's blandishments in favour of the euro was a life-saver.
Sterling's devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation's finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK's interest to do so.
US stocks plunge as economy worries bite. There's a whiff of fear back in the air.
US stocks plunge as economy worries bite
May 21, 2010 - 6:43AM
Dow Jones slides on world's woes
US stocks plunged again Thursday on fears Europe's debt crisis might spread around the world.
US stocks sank nearly 4 per cent overnight on growing fears the euro zone's efforts to tackle its sovereign debt crisis will fall short, jeopardising the global economic recovery.
Selling picked up speed late in the day and indexes closed around their session lows after the US Senate voted to end debate on the sweeping overhaul of financial regulation, allowing a final vote on the bill later on Thursday or Friday.
What you need to know
The SPI was down 89 points at 4228
The Australian dollar was buying 82 US cents
The Reuters Jefferies CRB index fell 1.02%
The S&P 500 finished down 12 per cent from its April 23, 2010, closing high, signaling a correction and marking the worst day since late April 2009. The index also ended below its 200-day moving average, a sign the momentum downward could build.
The correction comes on the back of a stream of negative news out of Europe, from worries over Greece's debt crisis to Germany's unilateral decision this week to ban naked short-selling.
Banks and commodity-related stocks, which are more sensitive to economic cycles, were among the hardest hit, with the KBW Bank index sliding 5.1 per cent. The S&P Energy index fell 4.4 per cent, while US June oil futures fell 2.7 per cent, or $US1.86, to settle at $US68.01 a barrel in volatile trade on the day of its expiry.
"The primary mover is coming from Europe. There are still fears of a debt crisis over there and the fact that it could spread to the banking system," said Bernie McSherry, NYSE trader at Cuttone & Co in New York. (Liquidity issue is temporarily solved, but not the solvency issue.)
The Dow Jones industrial average dropped 376.36 points, or 3.6 per cent, to 10,068.01. The Standard & Poor's 500 Index slid 43.46 points, or 3.9 per cent, to 1071.59. The Nasdaq Composite Index lost 94.36 points, or 4.11 per cent, to 2204.01.
May individual equity options and some options on stock indexes will stop trading at Friday's close and expire on Saturday, which may increase volatility.
The Chicago Board Options Exchange Volatility index, Wall Street's so-called fear gauge, surged 31.3 percent earlier to 46.37, its highest intraday level in more than a year. But the VIX pared back slightly to end up 29.6 per cent at 45.79.
In a sign of heightened fear, 2.5 million puts have traded across all the exchange traded funds, which is three times the normal and about 51 per cent of the total put volume.
Disappointing economic data on the domestic front also contributed to the downdraft. The number of US workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April.
The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the US mid-Atlantic region accelerated less than expected in May.
Large manufacturers' shares ranked among the heaviest weights on the Dow, with Caterpillar down 4.5 per cent at $US58.67 and 3M falling 3.5 per cent to $US79.62.
Uncertainty surrounding the final outcome of the financial reform bill weighed on financial shares and hindered the market overall, McSherry said.
"Put it all together and there's a whiff of fear back in the air. Hopefully, it doesn't metastasize and get worse."
Analysts said the correction could be healthy for a market that surged as much as 80 percent from the March 9, 2009, closing low. But if worries over the recovery's sustainability persist, it will be difficult for stocks to bounce back.
Reuters
May 21, 2010 - 6:43AM
Dow Jones slides on world's woes
US stocks plunged again Thursday on fears Europe's debt crisis might spread around the world.
US stocks sank nearly 4 per cent overnight on growing fears the euro zone's efforts to tackle its sovereign debt crisis will fall short, jeopardising the global economic recovery.
Selling picked up speed late in the day and indexes closed around their session lows after the US Senate voted to end debate on the sweeping overhaul of financial regulation, allowing a final vote on the bill later on Thursday or Friday.
What you need to know
The SPI was down 89 points at 4228
The Australian dollar was buying 82 US cents
The Reuters Jefferies CRB index fell 1.02%
The S&P 500 finished down 12 per cent from its April 23, 2010, closing high, signaling a correction and marking the worst day since late April 2009. The index also ended below its 200-day moving average, a sign the momentum downward could build.
The correction comes on the back of a stream of negative news out of Europe, from worries over Greece's debt crisis to Germany's unilateral decision this week to ban naked short-selling.
Banks and commodity-related stocks, which are more sensitive to economic cycles, were among the hardest hit, with the KBW Bank index sliding 5.1 per cent. The S&P Energy index fell 4.4 per cent, while US June oil futures fell 2.7 per cent, or $US1.86, to settle at $US68.01 a barrel in volatile trade on the day of its expiry.
"The primary mover is coming from Europe. There are still fears of a debt crisis over there and the fact that it could spread to the banking system," said Bernie McSherry, NYSE trader at Cuttone & Co in New York. (Liquidity issue is temporarily solved, but not the solvency issue.)
The Dow Jones industrial average dropped 376.36 points, or 3.6 per cent, to 10,068.01. The Standard & Poor's 500 Index slid 43.46 points, or 3.9 per cent, to 1071.59. The Nasdaq Composite Index lost 94.36 points, or 4.11 per cent, to 2204.01.
May individual equity options and some options on stock indexes will stop trading at Friday's close and expire on Saturday, which may increase volatility.
The Chicago Board Options Exchange Volatility index, Wall Street's so-called fear gauge, surged 31.3 percent earlier to 46.37, its highest intraday level in more than a year. But the VIX pared back slightly to end up 29.6 per cent at 45.79.
In a sign of heightened fear, 2.5 million puts have traded across all the exchange traded funds, which is three times the normal and about 51 per cent of the total put volume.
Disappointing economic data on the domestic front also contributed to the downdraft. The number of US workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April.
The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the US mid-Atlantic region accelerated less than expected in May.
Large manufacturers' shares ranked among the heaviest weights on the Dow, with Caterpillar down 4.5 per cent at $US58.67 and 3M falling 3.5 per cent to $US79.62.
Uncertainty surrounding the final outcome of the financial reform bill weighed on financial shares and hindered the market overall, McSherry said.
"Put it all together and there's a whiff of fear back in the air. Hopefully, it doesn't metastasize and get worse."
Analysts said the correction could be healthy for a market that surged as much as 80 percent from the March 9, 2009, closing low. But if worries over the recovery's sustainability persist, it will be difficult for stocks to bounce back.
Reuters
Thursday, 20 May 2010
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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