Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

Volcker downplays risks to bond markets

Posted on 31 January 2012 by

Paul Volcker has defended proposed trading rules for US banks that are being criticised by foreign governments as likely to disrupt the operation of their national bond markets.

Japanese, UK and Canadian regulators, together with European bankers, have recently warned that the Volcker rule, which is designed to prohibit “proprietary trading” by US banks, could reduce flows in global markets and damage liquidity. The topic was raised at the recently held World Economic Forum in Davos and the European Commission plans to raise objections with the US.

“There will be plenty of proprietary trading in securities without the half dozen or so American banks participating in it,” said Mr Volcker, speaking with John Bogle, the father of index investing, at the John Bogle Forum held in New York on Tuesday.

The former Federal Reserve chairman said: “Trading is permitted. Underwriting is permitted, if a foreign government wants to engage in underwriting with the assistance of an American bank,” said Mr Volcker, an economic adviser to President Barack Obama. “What is not permitted is a proprietary position.”

The Volcker rule is designed to prohibit most “prop trading” by banks, where institutions take positions for their own accounts but Wall Street has argued that the restrictions will also hamper “market making”, where a bank stands between a buyer and seller of securities. That has sent alarm bells ringing in other countries that have bond markets that rely on US banks setting prices.

European bankers and officials are worried that the Volcker rule could compound strains in the $13tn eurozone government debt market and argue that prop trading provides much needed liquidity at a time of stress.

Mr Volcker expressed surprise at this stance, given the recent history of enmity towards speculative trading in the eurozone.

“What I’ve heard repeatedly out of European governments in the past is their concern about all this speculative activity in financial markets by hedge funds taking proprietary positions and destroying our currency,” he said. “Now I understand they want more speculative activity in their currencies and it’s suddenly become healthy and wonderful for their currencies, this activity they used to frown upon.”

House price fall triggers Wall St reversal

Posted on 31 January 2012 by

US stocks defied European trends for a second consecutive day, falling on poor US economic data after global indices had rallied on enthusiasm for a eurozone fiscal discipline pact brokered by Germany.

Shares had opened higher on the eurozone deal, climbing as much as 0.6 per cent to 1,320.55, putting the index back into bull market territory. Technicians enthused about a so-called “golden cross”, as the S&P 500’s 50-day moving average broke above its 200-day moving average.

According to Schaeffers Investment Research, the S&P 500 has delivered positive returns in the calendar year following all but one of the 17 golden crosses since 1975, with a median gain of 13 per cent.

“Although it is usually well-hyped when it happens, you do have to respect the fact that a golden cross really is a strong intermediate-term signal,” said Ryan Detrick, chief technical strategist at Schaeffers.

At 10am stocks reversed course as data showing an unexpected decline in consumer confidence added to earlier gloom around a further fall in US house prices.

Homebuilders suffered with PulteGroup
off 2.4 per cent at $7.45, Lennar
down 2.9 per cent to $21.49 and DR Horton
falling 1.1 per cent to $13.92. All three stocks remain up at least 9 per cent for the year and have rallied more than 50 per cent from October lows.

Some analysts pointed out that weak housing data may encourage continued Federal Reserve stimulus. “Recent housing data has once again disappointed to the downside,” said Gina Martin Adams, a senior analyst at Wells Fargo Securities.

Stocks pared losses through the rest of the session, but the S&P 500 ended off 0.1 per cent at 1,312.4, up 4.4 per cent for the month for its best January since 1997.

Earnings were responsible for most of the big movers. Shares in RadioShack
plunged 29.8 per cent to $7.18 after the company suspended share repurchases and warned that fourth-quarter earnings would come in below expectations. Heavy discounting over the holiday sales period took its toll on margins at the electronics retailer, and the company’s market capitalisation has now fallen by more than 60 per cent since the start of 2011.

RadioShack rival Best Buy
fell 5.6 per cent to $23.95 for the worst performance in the S&P 500.

The Dow Jones Industrial Average was off 0.2 per cent at 12,632.91, as ExxonMobil
, one of the most influential stocks in the price-weighted index, fell 2.1 per cent to $83.74.

Exxon’s fourth-quarter earnings rose 2 per cent, but margins at its US refining business slumped. Profit at its US “downstream” business, which includes marketing as well as refining, slid from $226m to just $30m.

Exxon’s fall left Apple
once again as the largest US company by market capitalisation, after its shares hit a new high of $458.24, before finishing the day at $456.48, a gain of 0.8 per cent.

That helped the Nasdaq to a gain of 0.1 per cent for the day, the only one of the three big US indices to record gains on Tuesday, as it closed at 2,813.84.

However shares in Amazon
, one of the other heavily weighted stocks in the Nasdaq, fell almost 10 per cent in after-hours trading as fourth-quarter earnings data missed expectations.

Eli Lilly
climbed 1.3 per cent to $39.74 despite seeing fourth-quarter profit fall by about 25 per cent, as sales of its Zyprexa antipsychotic drug were hit by new generic competition. The company also said clinical trials of its experimental Alzheimer’s treatment were not yet complete.

US Steel
climbed 5.1 per cent to $30.19, more than rebounding from Monday’s sell-off, which had followed the announcement of a lossmaking sale of its Serbian unit.

Although US Steel declared a fourth-quarter loss, it was smaller than in 2010, and it forecast “significantly improved” results for the current quarter on firmer steel prices.

Netflix
fell 4.2 per cent to $120.20, as the rally, which has seen shares in the video streaming website climb 80 per cent this year, paused for breath.

Sears Holdings
was once again hit by reports that CIT, a key provider of finance in the retail sector, would stop extending credit to Sears suppliers to fund deliveries to the department store chain. Its shares fell 4.3 per cent to $42.15.

Banks bucked the falling market, helped by improving eurozone sentiment. Bank of America
climbed 0.9 per cent to $7.13 and Morgan Stanley
was up 2.5 per cent to $18.65.

India boost for Dassault as jet is frontrunner

Posted on 31 January 2012 by

France’s Dassault has been awarded frontrunner status in the hotly contested $20bn race to supply 126 fighter jets to India, providing a much-needed boost for French economic and industrial prestige.

The Indian government said the French Rafale fighter jet had beaten the four-nation Eurofighter Typhoon to become preferred bidder to equip India with the multi-role fighter jets in one of the world’s largest military contracts. Dassault now enters exclusive talks with the Indian government.

The contract, estimated to be worth $15bn-$20bn, will help shape India’s air power for the next three decades and serve as the bedrock of a strategic partnership. It also has the potential to reinvigorate the French defence industry when military budgets are being slashed across Europe.

The decision is a blow for Eurofighter, whose Typhoon aircraft was seen as the clear frontrunner. But it is a huge boost for Nicolas Sarkozy, France’s president, and Dassault, which has yet to secure an export order for the Rafale. Shares in Dassault rose 18 per cent in Paris.

Mr Sarkozy faces an election in May and the declining strength of French industry is expected to be a crucial campaign battleground, with the incumbent trailing his socialist rival in opinion polls.

He seized on the announcement as “a signal of confidence in the French economy”. The deal “proves that if we have a good product France can win in extraordinarily competitive markets”.

David Reeths, a consultant at IHS Jane’s, said: “It’s of particular importance to Dassault as [this competition] is really their last, best chance to continue high-end fast jet production.”

India’s decision came after evaluating the life-cycle cost of the aircraft, the acquisition cost and so-called military offset considerations. The offsets include the level of technology that European companies will disclose to India and the share of investment they will bring to India’s defence industries.

The four companies in the Eurofighter consortium, led by the Franco-German EADS and including Britain’s BAE Systems and Italy’s Finmeccanica, have vowed to fight on given India’s recent history of stripping companies of their preferred bidder status after long, drawn-out negotiations.

“We are disappointed, but it’s not all over until the contract is signed. We don’t yet know the final decision,” one UK diplomat said.

India’s defence ministry said a final contract would be awarded in the financial year beginning April 2012. It said the Rafale was the cheaper of the rival bids.

“Rafale is the most competent contender,” said a person close to the negotiations at India’s defence ministry.

After trials last year, India selected the Rafale and the multinational Eurofighter Typhoon to compete in the final stages of the competition. It had discarded bids from Boeing’s F/A-18 Super Hornet, Lockheed’s F-16 Super Viper, Sweden’s Saab Gripen and Russia’s MiG-35.

The decision will be a setback to Eurofighter, which had strongly lobbied India to buy its aircraft and considered its bid stronger in terms of performance, security of supply and strategic alignment. It is also a blow for David Cameron, the UK prime minister, and Angela Merkel, the German chancellor, who both lobbied on behalf of Eurofighter.

Additional reporting by Girija Shivakumar in New Delhi and Hugh Carnegy in Paris

EU to rule on D Börse and NYSE merger

Posted on 31 January 2012 by

NYSE PICN

The NYSE Euronext and Deutsche Börse tie-up on Wednesday faces its day of reckoning in Brussels, as European Union commissioners are expected to sign-off a recommendation to block a merger that allegedly stifles competition.

Senior officials are confident that a clear majority of the 27 European commissioners will back Joaquín Almunia, the competition commissioner, and prohibit the bid. But it is likely to come after an extremely contentious and rare debate at the full college of commissioners, a discussion of the like not seen in Brussels since merger control rules were pioneered in the early 1990s against stiff resistance from supporters of dirigiste industrial policy.

The potential dissenters are being led by Michel Barnier, the EU’s top financial regulator, who is determined to air his views on the merger
particularly given the sweeping market reforms he is overseeing.

“It is normal and legitimate that the college of commissioners have a discussion on these kinds of issues,” Mr Barnier told the Financial Times.

“The decision will have to be taken on the balance of two things: the rigorous application of competition law in current circumstances and the evolution we will see in the European financial landscape.”

Some senior EU officials expect Mr Barnier will achieve no more than a dissenting note in the meeting minutes – a declaration that will not save the merger but will infuriate Mr Almunia by raising questions over his judgment.

A more serious rebellion in the typically consensual college would be a watershed moment in Brussels, reviving debates over whether competition policy is a quasi-legal verdict or a more political process that supports the rise of “European champions”.

Typically competition commissioner’s recommendations are treated with some deference and waved through. While politics plays a role in the most controversial cases, the negotiation is usually settled behind the scenes.

An ideal outcome for the merger parties would be a week’s delay to the decision, in which Mr Almunia will be asked to check whether any more concessions are possible to allay competition concerns. If Mr Almunia wins as expected, the meeting will sign-off the European Commission’s 22nd merger prohibition.

Mr Barnier is sympathetic to the case that the merger will boost Europe’s ability to compete globally in listed derivatives at a time when the US and Asia show no signs of opening up their market structures.

“It is pretty much unprecedented in recent years to have this sort of discussion,” said Stephen Kinsella, a partner at the law firm Sidley Austin. “Although it is ultimately a college vote, it’s generally accepted that the competition commissioner makes his recommendation and the others defer to that.”

Junk bond rally stirs memory of credit boom

Posted on 31 January 2012 by

Junk bonds, until last year one of the favoured post-crisis asset classes for many investors, are enjoying a vigorous rally that has drawn comparisons with the credit boom.

US corporate debt rated below investment grade, or junk, has notched up a 3 per cent return this year, according to Barclays Capital, a strong rebound from last year’s sell-off as the eurozone crisis intensified. Issuance has reached $19.5bn, Dealogic says. Ford led the way with a $1bn deal at the start of January.

Click to enlarge

The bombed-out European market has performed even better as a result of the European Central Bank’s emergency loans to banks, which has revived risk appetite. European junk bonds have returned 5.3 per cent to investors and issuance has rebounded to almost $6bn.

“We’ve seen nothing like it [in Europe] since the halcyon days before the subprime crisis,” Suki Mann, a strategist at Société Générale said in a note last week. “This is effectively a massive rally in credit. The message isn’t hidden or subtle: buy corporate bonds, simple. Rather add risk, any risk and there’s no point in being measured about it.”

Nonetheless, caution remains on both sides of the Atlantic. Bankers, investors and analysts warn that the high-yield debt markets are susceptible to the same risks that undermined the markets late last year.

“There has been more money thrown at the problem but the risks that we saw in the latter half of 2011 have not been resolved,” says Bonnie Baha, head of global developed credit at DoubleLine Capital. “Absent better economic growth in the US and a resolution in Europe, this is another head fake.”

Another stumble on the road to fiscal health in Europe or signs that US economic growth is slowing could reignite a “risk-off” slide that sends junk bonds lower, Ms Baha adds. Europe’s high-yield debt market looks particularly vulnerable. While investors have poured almost $7bn into US high-yield funds in the four weeks to January 25, only $12m has dripped back into European funds, according to EPFR Global.

High cash balances at funds that sold many of their holdings of lower-rated debt, an illiquid secondary market and the recovery of risk appetite triggered by the ECB’s almost €500bn of three-year loans to banks have eased the way for new bonds. Yet bankers are doubtful that the flow of deals will continue at the same clip.

“For all intents and purposes, the European high-yield market was closed in the second half of last year, so there was a backlog of deals to take to the market and investors had cash they wanted to place,” says Kristian Orssten, European head of high-yield syndicate at JPMorgan. “But it’s still fragile.”

A replay of Europe’s second-half junk bond freeze could cause difficulties at some lower-rated companies, which face problems borrowing from banks.

The US, too, looks susceptible to a fresh bout of risk aversion. Some macroeconomic data have improved but seasonal factors make it hard to read, says a US chief investment officer: “It would be wrong to assume that the US is anything as robust as the recent figures would suggest.”

What is more, this year’s fund inflows have been mostly through exchange-traded funds, a type of fund that trades, like stocks, on an exchange. Such funds have grown in popularity across asset classes in recent years partly because they allow investors to react quickly to changing market conditions.

“One of the reasons you are buying an ETF is the ability to press a button and get rid of it,” says Ashish Shah, head of global credit at AllianceBernstein.

If demand dissipates and borrowing costs jump sharply as they did last year, it could be particularly troublesome for European companies.

Many US companies refinanced their pending debt maturities during the previous rally. That has left a group of “walking dead” companies who may be unable to refinance debts. However, overall maturities are relatively low over the next few years, Mr Shah says.

On the other hand, a large number of European companies could well depend on the US markets remaining open to augment the European investor base. Of the $19.5bn of junk bonds sold in the US this year, more than $5bn have been issued by companies domiciled in Europe. “A less robust US market could be felt more by the European companies,” says Martin Fridson, global credit strategist for BNP Paribas Investment Partners.

Mogul keeping out the squatters

Posted on 31 January 2012 by

joost van gestel

Joost Van Gestel at the former statistics bureau building

Even in a neat black suit Joost Van Gestel appears slightly rumpled, as though distracted by the demands of managing thousands of far-flung properties that do not actually belong to him. The preoccupied air is understandable for someone running such a peculiar real-estate empire.

Camelot, the company Mr Van Gestel founded in 1993, is the world’s largest manager of vacant properties, placing temporary tenants at low rents in buildings that would otherwise stand unoccupied. He started the company as an “anti-squatting” broker, helping find discount tenants for property owners to keep out squatters in the heyday of the Netherlands’ anarchist counterculture. Today, with 10,000 tenants in vacant properties from Ireland to southern France, he sees Camelot’s role more broadly: filling the gap in the market between owners who cannot find market-rate renters and tenants who can’t afford market-rate rents. And, in the process, preventing the urban decay caused by vacancy. “Nowadays we talk about ‘live-in guardianship’,” Mr Van Gestel says. “‘Anti-squat’ sounds a bit negative.”

Camelot was not the first such company in the Netherlands. “It actually wasn’t such an original idea,” says Mr Van Gestel with characteristic modesty. However, other anti-squatting brokers were small-scale and informal, lacking clear business plans. Camelot has sought to bring professionalism the market.

The management challenges involved have been formidable. “With the old [anti-squat] organisations, it was sort of anarchy,” he explains. Early anti-squatting brokers had no formal legal structure. Mr Van Gestel was the first to negotiate explicit agreements with municipal governments allowing the temporary tenants he placed to fall outside of tenant-rights laws, so that landlords had confidence they would not try to contest eviction.

He says that little attention was paid to the condition of buildings, contrasting this with the meticulous care Camelot has taken of the building we are meeting in – a 13-storey brutalist concrete monstrosity in The Hague that previously housed the country’s Central Bureau of Statistics. Underneath the building lie the reinforced bunkers that once served as the Dutch government’s fallout shelter in case of nuclear attack. It now serves as home to 84 start-up companies and non-profit organisations. Two Camelot employees man the building’s reception desk. “It’s very clear who has which space. The key responsibility is clear. The fire exits are clearly marked,” Mr Van Gestel says. “You can use certain parts of the building, others are shut off. That prevents anyone from going up to the 10th floor and attempting suicide, or locking themselves in and starting a fire at night.”

Unlocking the grip
of local authorities

The key to making Camelot’s business model scalable has been establishing the legal structures in each country to carve out exemptions to tenancy laws for temporary tenants. Joost Van Gestel says convincing governments of the benefits of keeping buildings occupied has been key.

However, unexpected complications can arise. In Britain, Belgium and elsewhere, governments have tried to incentivise owners to find renters
by charging tariffs when their buildings stand empty for more than a year. In some municipalities the tariffs have become a significant source of revenue. “We went to Belgium for a conference recently and some government officials
were saying, ‘but if we bring you in then the building is being used and I don’t get my tariff fees’,” says
Mr van Gestel. “And I said: ‘Yeah, that was the whole point! The point was to get the building in use, so that the neighbour’s kid doesn’t go play there and break her leg.’ Then they say, ‘Oh yeah, oh yeah’ . . . ”

Because of the company’s security and maintenance standards, and because buildings with tenants are less likely to burn down or deteriorate, several big insurers now offer discount premiums to owners of vacant buildings managed by Camelot.

When Mr Van Gestel entered the market, he was at a point where he was ready to make a life change. The son of a middle manager at a supermarket chain and an elementary-school teacher, Mr Van Gestel got a masters degree from the Netherlands’ Nyenrode Business School (among his classmates was Jan Kees de Jager, now the country’s finance minister) and then worked in the corporate food and nutrition sector.

He never expected to become an entrepreneur. “I was forced into it,” he says. “I’d planned to work as an executive for Unilever or Procter & Gamble, spend three years in Germany, then Italy, then maybe South America, see the world.”

By 1992 he was working his way up at Kraft Foods in Germany, marketing a new line of flavoured instant coffee. He had an idea for a promotion tied to that year’s football World Cup: a pink football-shaped package filled with sampler sachets. But it proved impossible to get the company on board. “In a big organisation like that, to get people to come along with you . . . you have to make the packages, get marketing in, set prices – pushing the organisation to get that going took so much energy, even though it was a good idea. I got frustrated.”

By chance the girlfriend of his business-school friend Bob de Vilder was at that time renting through an anti-squatting broker. She was the one who came up with the idea of starting their own company. Mr Van Gestel leapt at the chance and 20 years ago he left Kraft to found Camelot.

Today, Mr de Vilder is Camelot’s marketing and sales director. He says Mr Van Gestel tends to play down his own originality, but that without his corporate experience and coherent business vision it would have been impossible to build a solid company in such an oddball sector. “Joost is a bit of a ‘sober Brabanter’,” he says, referring to Mr Van Gestel’s home region of Brabant and its reputation for down-to-earth businessmen.

The public benefits to municipalities have helped Camelot to expand beyond the Dutch market, where the anti-squatting model is less familiar. When Mr Van Gestel set up a branch in London in 2002, while securing fire permits he learnt that local firefighters were having trouble finding affordable housing in the city. That led to a joint programme, which has placed 150 London firefighters in Camelot properties. The London programme helped Mr Van Gestel convince French authorities, who also have trouble finding city-centre housing for public employees, to change rent laws so that Camelot could begin operating in France.

Camelot now operates in six countries. The financial crisis has been good for the company – properties are staying empty longer, meaning tenants are less worried about having to leave. Revenues are rising consistently by 30 per cent a year; they hit €20m in 2011, up from €15m in 2010.

The company’s empire now comprises the strangest collection of buildings one could imagine. They include bankrupt bread factories, former convents, an ornate 17th-century cottage built as the official residence of Holland’s dyke maintenance officer (in the very town where the legendary Dutch boy supposedly stuck his finger in a leak), and an abandoned theme park complete with a fairytale pink castle that is now home to a dozen residents and available for business conferences.

Standing in one of Camelot’s properties can feel a bit surreal. At the Central Bureau of Statistics building, we walk past high-modernist sculptures in the central reflecting pool to peek in on his tenants. A sculptress is giving classes. A husband-and-wife start-up is restoring high-end children’s furniture. Two separate, rival groups of model train enthusiasts have constructed vast networks of toy rails.

But Mr Van Gestel says the most exciting part of the business is the nuts and bolts of helping it to expand. “You’re constantly looking for a new structure to introduce,” he says. “We have a telesales department now. We have a new department for database entry . . . We have our own IT department, with software developers in India. Thinking over how I can manage that growth, motivating my employees – that, for me, is the kick. That’s what I like.”

He pauses for a moment. “Which is funny, because it’s just the sort of thing that I didn’t like 20 years ago.”

US Reits are drawn to subprime securities

Posted on 31 January 2012 by

Real estate investment groups in the US are set to raise more funds to buy subprime and other private mortgage-backed securities, aided by attractive returns and rising share prices.

Real estate investment trusts, or Reits, have already been big buyers in the market for packages of mortgages backed by Fannie Mae, Freddie Mac and other government agencies, creating what some have termed a “shadow” financing system for US mortgages.

They are increasingly turning their attention to the market for subprime and other riskier “non-agency” mortgage securities, drawn by high yields relative to the low cost of borrowing, which is a result of the Federal Reserve’s move to keep rates at close to zero until 2014.

“The non-agency trade is very attractive right now,” said Ted Conway, managing director in investment banking at Barclays Capital.

In a sign of the growing demand, in January the Fed was able to sell about $7bn of non-agency mortgage-backed securities that it owns as part of its 2008 bail-out of AIG. Efforts to sell the portfolio last year were lacklustre.

Several Reit groups focused on non-agency securities are waiting to go public, and others are eyeing their rebounding share prices as an opportunity to sell additional shares to purchase more mortgages.

“If the stocks continue to hold ground, we will see increased follow-on activity, which is typically a leading indicator of the strength of the market and support from the buyside,” said JT Deignan, managing director of equity capital markets at UBS.

Apollo Residential Mortgage and Invesco Mortgage Capital have risen 12 per cent this year and Chimera Investment Corporation is up 20 per cent.

Several Reits that had hesitated to raise more cash – with their share prices valuing them well below book value – may now be reconsidering.

In January, Two Harbors and AG Mortgage Investment Trust raised $400m via secondary offerings. Provident Mortgage Capital Associates updated its initial public offering filings last week, a signal it is soon aiming to list.

“Our long-term view [is] that the market for [non-agency] loans . . . will grow [and] we expect our portfolio to become increasingly focused on this asset class over time,” PMCA said in its prospectus.

Western Asset Management Company and Pimco, two of the world’s largest fixed-income fund managers, have also filed to raise equity capital for such Reits.

“The long-term expectation and hope is for Reits to be a major non-bank source of funding in the private mortgage market,” said Mahesh Swaminathan, a mortgage strategist at Credit Suisse.

US regulatory reform aims to require originators of mortgage bonds to retain the riskiest portions, but Basel III requirements on banks are likely to force them to hold large amounts of capital against these holdings.

“Clearly, with [new banking rules] there is no appetite on the part of banks to hold lower-rated securities,” Mr Swaminathan said.

Deutsche Bank faces post-Ackermann future

Posted on 31 January 2012 by

Josef Ackermann’s assessment of the year was bleak. It “confronted Deutsche Bank – and the entire financial industry – with enormous challenges . . . the extremely difficult world economic environment burdened the capital markets”, the chief executive said, insisting Deutsche was on the right track. “We have improved the quality of our balance sheet and strengthened our core capital,” he said.

A preview of Thursday’s annual results statement? Not quite. The words are from Deutsche’s 2002 annual report, the first Mr Ackermann signed as chief executive.

On Thursday the 63-year-old Swiss will present the bank’s annual results for the last time, after almost a decade bookended by the dotcom bust and a German recession, on the one hand, and the eurozone’s debt crisis on the other. Few of Mr Ackermann’s peers have lasted in the top job so long – and he also emerged unscathed from a criminal prosecution for his role in awarding bonuses while a Mannesmann board member – but when he steps down in May, to be succeeded by Anshu Jain and Jürgen Fitschen as co-chief executives, he will leave questions over how the bank can thrive in a post-crisis world.

The peak years of Deutsche’s financial performance on Mr Ackermann’s watch were 2006 and 2007, when net income topped €6bn, return on equity hovered at about 30 per cent and Deutsche’s balance sheet exceeded €2,000bn. The post-Lehman crisis of 2008 sent the bank plunging to a first annual loss, while hopes of a record €10bn of operating pre-tax profits last year fizzled as the market turmoil continued.

Investors who stuck with the bank through his tenure have seen little benefit. Deutsche’s market capitalisation was €27.3bn at the end of his first part-year in charge. It was €27.4bn at the end of last year.

If Deutsche is not much bigger, it is more global, particularly in its key investment banking activities. Mr Ackermann “transformed Deutsche from a regional bank to a global flow monster rivalling the major US banks in fixed income trading”, says Huw van Steenis, of Morgan Stanley. Matthew Clark, an analyst at Keefe, Bruyette & Woods, says: “Ackermann identified the themes of globalisation and bank disintermediation early on and . . . steered the bank to exploit them.”

Partly because so much competition has fallen by the wayside, Mr Ackermann remains bullish on investment banking earnings, even after adapting to regulation and structural changes after the crisis.

However, some of Deutsche’s activities during banking’s boom years have left it facing a string of lawsuits including a $1bn claim by the US Department of Justice over its role in the US mortgage market.

The last two years of Mr Ackermann’s watch was marked by an attempt to shift the bank towards more basic banking business, particularly in its home market, where Deutsche acquired Postbank, a retail rival. Shuffling the bank’s assets remains a work in progress, and Deutsche is expected to sell a clutch of asset management businesses.

Mr Ackermann also identified a need for banks to become more engaged with politicians and regulators. He carved out a role as an industry statesmen, grappling over regulation and fronting the Institute of International Finance, the bankers’ club involved in talks with Greece over a voluntary bond haircut.

But his view of the right leadership sparked an unedifying wrangle over his own succession. First he identified potential in Axel Weber before the former Bundesbank president was snapped up by UBS. Then Mr Ackermann tried and failed to prolong his own stay by joining Deutsche’s supervisory board.

That leaves doubts over how firmly Mr Ackermann stands behind Mr Jain and Mr Fitschen in spite of their long association: all three were part of the bank’s first “group executive committee” set up on the eve of Mr Ackermann’s accession to the top job.

For the German public, Mr Ackermann came to embody suspicions about “Anglo-Saxon” finance. But a former Deutsche executive says that, however polarising Mr Ackermann was to outsiders, internally he helped the bank gel, healing some “Frankfurt versus London” rivalries. It is something for Mr Jain and Mr Fitschen to ponder as they try to show the bank can cope with having two leaders in the post-Ackermann years.

Merkel to court Chinese investors

Posted on 31 January 2012 by

Angela Merkel, the German chancellor, flies to China on Wednesday to explain Europe’s crisis management in the eurozone, and woo Beijing and Chinese financial institutions to invest in Germany and the wider common currency area.

“The chancellor will be seeking to gain the confidence of financial investors,” a senior German official said on the eve of her departure for an official visit to Beijing and Guangzhou. “China also has an interest in seeing confidence growing in the European economy.”

High on the agenda of the chancellor will be to spell out the decisions taken by European Union leaders at a summit on Monday to lay down strict budget rules for the 17 eurozone partners in a formal treaty, and commit themselves to structural reforms to boost growth and competitiveness in Europe’s sluggish economies.

At talks with both Hu Jintao, the Chinese president and Communist party leader, and Wen Jiabao, the prime minister, Ms Merkel will seek Beijing’s support for boosting the resources of the International Monetary Fund to cope with the global financial crisis and invest in eurozone government bonds and bloc rescue funds, Berlin officials said.

“It is not the job of the chancellor to be an investment banker,” the official said. Her role was to restore confidence in Europe’s crisis management.

The German chancellor is also looking for the “constructive co-operation” of the Chinese government to curb any nuclear weapon ambitions that Iran may have and end violence in Syria.

She wants a reassurance that China will not increase its own oil imports from Iran to replace sales lost after the EU imposed sanctions on buying oil from Tehran.

“It is in Germany’s interest that China, an important importer of Iranian oil, should under no circumstances increase its imports,” another senior official said. “It would naturally be nice if China would even join the oil embargo or, alternatively, reduce its purchases.”

Although Ms Merkel will raise some longstanding complaints of German investors and exporters to China about forced technology transfers, lack of equal participation in public tenders and other market access issues, she is not expected to make a big issue of such questions. The chancellor will also raise concerns about the treatment of minorities in China.

“We don’t want to have a wailing wall this time but more of a dialogue on questions of substance,” one diplomat said.

The two-day trip, including meetings with Chinese bankers and businessmen as well as the Communist party leaders, is the fifth such visit by Ms Merkel to China in the past five years, underlining the increasingly close trade ties between the world’s two most successful exporting nations.

Her party will include some 20 business leaders as well as members of the German Bundestag and civil society.

The total volume of trade between the two countries reached €145bn in 2011, according to preliminary estimates, and China is now Germany’s second largest source of imports with sales of some €80bn. German exports to China increased 22 per cent last year, to €65bn, with booming sales of cars, chemicals, machine tools and electronic goods.

Ms Merkel will meet financial investors in Beijing, and deliver a speech on the eurozone crisis, before flying south to Guangzhou to meet investors, accompanied by Mr Wen. She is expected to meet some political critics, including artists and writers at a reception at the German embassy in Beijing.

US stealth rally built on hopes for QE3

Posted on 31 January 2012 by

Stealthily does it. A new year rally on Wall Street has propelled US stocks to their best January performance in 13 years. But can it last?

The strong run for financials, semiconductor stocks and small companies, all of which were battered in the turmoil of 2011, point to a bull run powered by hopes for economic recovery in America.

S&P sectors graphicClick to enlarge

New York’s benchmark S&P 500 index, with a gain of 4.1 per cent for the year to date, was on course on Tuesday for its strongest January since 1999 and is at its highest level since July. Equity volatility as measured by the CBOE’s Vix, the so-called fear gauge, has dropped to its lowest level since last summer.

Semiconductor stocks were up 12 per cent and small-caps 7 per cent. The Nasdaq Composite was up 8 per cent, with Apple the star of the star of the earnings season.

By contrast, the three sectors in negative territory for the year are telecoms, utilities and consumer staples, defensive areas of the market peppered with high dividend-yielding companies that did well in 2011.

Notably, the Dow Jones Industrial Average trails other benchmarks, with many of its high dividend-paying blue-chips, including the likes of Verizon, Procter & Gamble, Coca-Cola and Chevron, experiencing a poor start to the year. Leading the Dow this year is Bank of America with a gain of 27 per cent.

Anthony Conroy, head of trading at BNY ConvergEx, says: “The big defensive stocks have made way for growth names and those that were hardest hit last year.”

One high-profile advocate of owning equities is Barton Biggs, founder of the Traxis Partners hedge fund. For the past six weeks he has maintained a net long position in equities at 65 per cent, but admits he faces a dilemma.

He says: “I’m terrified of missing a big rally, but I’m equally terrified of a possible apocalypse coming if the situation in Europe deteriorates and the euro [collapses].”

Bob Doll, BlackRock chief equity strategist, says: “At some point, it is inevitable that markets will take a break from the pace they have been on since the year began, but our outlook for stocks remains a positive one.”

It is not just the recent run of positive data on the US economy. Efforts by the European Central Bank to pump hundreds of billions of euros of emergency funding into the eurozone banking system have helped avert the threat of a credit crunch in Europe. The willingness of central banks to provide more support for the US, Chinese and European economies has, for now, reassured investors.

Liz Ann Sonders, chief investment strategist at Charles Schwab, says: “Markets are beginning to behave more normally. Last year, one needed to manage risk on and risk off almost every day. But this year may be better for stock pickers. That’s healthier.”

Yet, for bears and more cautious investors, the January lift is little more than an example of new year portfolio rotation, a bounce that will not last. The bulls, these investors argue, are misreading the data.

Last week’s move by the Federal Reserve to maintain near-zero interest rates until the end of 2014 and its hint at further “quantitative easing”, or QE3, to come, is as much a reminder of the dangers facing the economy as it is calculated to reassure. Moreover, the eurozone debt crisis is far from resolved.

In addition, the latest US growth data were boosted by strong inventory growth. That points to weaker activity in the coming months. At the same time, US fourth-quarter earnings have grown at their slowest pace since the upturn in profits began in late 2009.

More troubling have been low trading volumes and the relative absence among share buyers of institutional investors, pension and global fund managers – seen as a red flag for any rally. That absence has characterised the S&P’s rebound of 20 per cent from its cyclical low in early October.

Kenneth Polcari, managing director at Icap on the New York Stock Exchange trading floor, says: “Without volumes, rallies have no conviction. We are not seeing asset managers jumping on board this rally.”

Indeed, US equity mutual funds lost about $500m in January after $135bn in outflows during 2011, according to investment research company TrimTabs.

Mr Biggs at Traxis says: “People are still licking their wounds. There’s a tremendous buying power and liquidity on the sidelines, but people are waiting for less volatile markets.”

Mitch Petrick, a managing director and head for global market strategies at The Carlyle Group, says: “For a lot of people, the objective these days is capital preservation and not capital appreciation. Sitting on cash has become the most crowded trade.”

Even so, cash offers little or no real return. And the possibility that equities could continue to creep higher, buoyed by the likely injection of more cheap money from the Fed, will weigh on asset managers who have yet to return to risky assets.

James Dailey, chief investment officer at Team Financial Managers, says: “QE3 would accelerate the rotation we’re already witnessing from defensive stocks into materials and financials.”

Not for the first time since the financial crisis, then, investors are likely to take their cue from policymakers rather than earnings reports.

Additional reporting by Ajay Makan