Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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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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Archive | November, 2016

Jupiter posts rise in profits and inflows

Posted on 28 February 2013 by

Jupiter Fund Management has underlined its success on Thursday as one of the UK’s top-performing asset managers in announcing higher profits and net inflows.

Despite tough market conditions, the FTSE 250 group posted profits before tax of £73.6m at the end of December, an increase of 4.7 per cent compared with the previous year. This was above expectations of £69.4m.

    It also reported net inflows of £1bn that helped contribute to a 15.3 per cent rise in assets under management to £26.3bn.

    Edward Bonham Carter, chief executive, said: “Our success is about steady investment in the business. This is an organic story. We generally don’t indulge in acquisitions.”

    He pointed to a 79 per cent outperformance of his funds against benchmarks over the past three years and the big jump in the dividend as signs of the company’s strength.

    Shares rose 2 per cent to 336.10p as investors praised the company, which has defied a difficult environment despite its focus on European equities. The European Central Bank’s promise last July to defend the euro added some stability to the situation.

    The bulk of its clients are retail investors, who have remained loyal to Jupiter despite the temptation to switch money out of equities and into cash at the height of the eurozone worries in 2012.

    These investors are often some of the most cautious when it comes to allocations, say analysts.

    Investors were particularly impressed by the 13 per cent increase in the dividend for last year. Mr Bonham Carter said Jupiter would pay a total dividend of 8.8p per share, up from 7.8p a year earlier and ahead of analysts’ expectations of 8.1p.

    At the same time, the company is continuing to pay down debt.

    “If you look at our finances, you can see we are in a healthy, robust position,” said Mr Bonham Carter. He is also hopeful that Jupiter can benefit from growing confidence among some investors that equity markets will continue to move higher.

    Despite turmoil this week sparked by the impasse in the Italian elections, there are signs that initial public offering and merger and acquisition markets are reviving, which should help asset management groups.

    Jupiter had benefited since the ECB’s pledge to do everything in its power to prevent the collapse of the euro, Mr Bonham Carter said. He added: “Good things will happen and bad things will happen in the markets. We have to make sure we keep doing what we are doing, which our clients like.”

    Finance: An inequitable divide

    Posted on 28 February 2013 by

    Blackstone CEO Stephen Schwarzman, and Kurt Bjorklund of Permira©Bloomberg

    Divergent paths: Stephen Schwarzman of Blackstone, left, and Kurt Björklund, co-head of London-based Permira

    In October 2006 Guy Hands, his advisers at Citigroup and two other banks met in London to discuss a life-transforming plan for the British financier.

    The idea was to list Terra Firma, his private equity firm, to help diversify into new businesses: property, infrastructure and debt. Terra Firma would triple assets under management within three years to about €30bn, and Mr Hands would cash in a tidy $500m, according to people with knowledge of the matter.

    In New York, Stephen Schwarzman, founder of private equity firm Blackstone, and Wesley Edens, co-founder of Fortress, were making similar plans. But in the end, Mr Hands decided against an initial public offering, while Mr Schwarzman and Mr Edens pushed ahead. Fortress listed in February 2007, and two months later Terra Firma killed the idea. Blackstone went public that June.

      Many observers saw the IPOs by Fortress, Blackstone and eventually KKR as a sign that the credit-fuelled private equity boom had topped out. But in hindsight, it also marked the moment when the fortunes of US and European private equity groups parted ways.

      The newly listed US groups branched out from their private equity roots, becoming asset managers. This enabled them to collect steady fees that sustained them in tough times. But the European firms, including Apax Partners, Permira and BC Partners, stuck with what they knew best: leveraged buyouts.

      Five years after the start of the financial crisis, most of the US groups seem to have weathered the storm and are growing, albeit at a slower pace than before. In Europe, the private equity groups are shrinking.

      “During the boom years, the European firms chose to grow their buyout fund rather than using the fundraising cycle to go into other products,” says Dominique Senequier, head of Axa Private Equity, the private equity fund management unit of French insurer Axa. “Going multi-products is a natural evolution for a maturing industry, which has to cope with increasing fixed costs, notably due to tighter regulation.”

      Although Blackstone’s share price has plunged more than 40 per cent since the IPO, the firm’s assets have more than doubled to $210bn – and Mr Schwarzman has partially cashed out. Fortress’s assets have swollen 60 per cent to $51bn. Meanwhile, Terra Firma’s assets have little-changed at €11bn, and Mr Hands has not been able to raise a new fund for traditional buyouts after losing £1.75bn – and £200m personally – in one bad investment, EMI.

      David Rubenstein, co-founder of Carlyle Group, says that any large company looks to diversify.

      Kings of the private equity jungle

      In the Darwinian world of European private equity, a handful of top performing fund managers are money magnets, in sharp contrast with the struggling majority, writes Anne-Sylvaine Chassany.

      Advent International, which invests in Europe and North America, amassed €8.5bn in nine months last year, beating its initial $7bn target. This year’s bright spot is expected to be CVC Capital Partners.

      To continue reading, click here

      “I decided that we would move to the mutual fund model to give our clients – if they like us – the opportunity to invest in different funds,” Mr Rubenstein said at a conference in Berlin this week. “It’s a way to get investors to stay in a family of funds.’’

      Terra Firma is not the only private equity firm in Europe to face hardships. Candover, one of the oldest names in European private equity, was forced to stop investing. Groups such as Permira and Apax, which once dominated the industry with large funds, are struggling to raise money as investors commit less fresh cash to buyout funds.

      By contrast, the top private equity firms in the US have evolved from narrowly based buyout firms to public alternative asset managers. At Blackstone, the property and credit arms, with $57bn and $56bn under management respectively, are now bigger than their historical corporate takeover business. It has also built a fund of funds business of almost $50bn.

      Such diversification is a strength in the present environment, some industry experts say. When companies are reluctant to offer themselves for sale, making it difficult for the buyout groups to put money to work, it is helpful for private equity to have other ways to earn.

      Henry Kravis, co-founder of KKR, says that diversification has allowed him to offer more products to companies, including helping them raise capital. “If you met a CEO and if he said I am not interested in selling my company, what else are you going to talk about?” he said on Thursday at a conference. “You have to change, evolve and at KKR we want to keep it that way.”

      Eventual moves into new businesses had been the aim at Blackstone when it was founded in the mid-1980s, Mr Schwarzman says. “When we introduced the firm we sent out letters saying that we would start an advisory business and then a private equity business and then move into allied businesses, always assuming we could find the right talent.”

      Mr Schwarzman learnt in his investment banking days – at Lehman Brothers from 1972 to 1985 – that financial groups have to constantly innovate and change to sustain their margins. At the time, as much as 80 per cent of Lehman’s revenues came from products that had not existed five years earlier, he says.

      The divergent paths of the Americans and the Europeans may lie in a fundamentally different attitude towards business. The US private equity executives like to see themselves as entrepreneurs building big businesses that will outlast them. They describe themselves as self-made men, outsiders who shook up the established financial world. Carlyle Group’s Mr Rubenstein, the son of a postman who never made more than $7,000 a year, went to college and law school on full scholarships. He, like David Bonderman at TPG and the cousins Henry Kravis and George Roberts at KKR, saw himself as a challenger to the status quo.

      Many of their European counterparts were not interested in building large companies. A public listing would put them in the spotlight, which they were not eager for. And their ownership structures tend to be less concentrated in the hands of a few founders, making dramatic change more difficult. Furthermore, many European firms simply liked being small and focused.

      Dick Hanson, co-founder of London firm Doughty Hanson, which in the 1990s raised Europe’s largest private equity fund, has a rule that his team should not exceed 30 people, because he wants to know everyone.

      “The history is different,” Kurt Björklund, co-head of London-based Permira, says. “Most of the European firms emerged from large institutions and there has been less desire and less pressure to create liquidity for the founders.”

      Permira was born in 1996 when four teams operating across Europe under the Schroders Venture name joined forces to raise a regional fund. Mr Björklund says it has no intention to replicate the Blackstone model. “I have no doubt that focused operators with strong returns will always be able to attract capital,” he says.

      Lately it has been difficult. Permira has been marketing a €6.5bn fund for nearly 18 months and has yet to secure €2bn – after raising €11.1bn in 2006, the largest buyout fund in Europe at the time. Mr Björklund declines to comment on fundraising.

      The structure of the US market also makes it easier for buyout firms, while Europeans, in the epicentre of the eurozone crisis, have suffered from a bigger dependence on banks to fund deals. The American groups have also been able to rely on a large base of domestic pension plans to invest in their funds.

      Over the past two years, faced with a dearth of deals in Europe, the European groups that have a New York base – such as BC, Apax, Permira and CVC – have been more active there than on their own turf. But some were too late. Cinven, which has raised €4.3bn for a new buyout fund after raising €6.5bn in 2006, had to shelve plans to open offices in New York after the crash.

      “There isn’t much you can do when large ticket investors come back with half of their previous commitments at best or don’t come back at all because they don’t like what’s going on in the eurozone,” says Mounir Guen, head of MVision, which helps firms raise funds.

      European groups raised $31bn for buyouts last year, down from $86bn in 2008, according to data from research firm Preqin. Apax Partners, which raised €11.2bn in 2007, has decided to call time on its current marketing push after 18 months on the road. It is ready to settle for about €6bn, say investors.

      “Whenever a European firm sits down with an investor that’s not European, they spend 45 minutes defending the euro, the next 10 minutes explaining why Europe might make sense for buyouts, which leaves them with five minutes to make the case they are the right fund manager,” Oliver Gottschalg, a professor at the HEC business school in Paris, says. “European firms face a tougher uphill battle.”

      There have been embryonic attempts to diversify in Europe. CVC is expanding into debt management. EQT, a Stockholm-based company, has diversified into infrastructure. Axa Private Equity, which is spinning out of Axa, has diversified into secondaries and debt, in addition to its mid-market European buyouts. It has $30bn in assets under management. Partners Group, the Swiss manager launched in 1996 by three former Goldman Sachs bankers, is listed in Zug and has €28bn in assets, ranging from buyouts and debt to infrastructure.

      But by and large, European firms have viewed diversification as an unattractive proposition. BC debated the issue internally, after Andrew Newington, a London partner, advocated branching out into debt to take advantage of discounts during the financial crisis. Mr Newington left late last year.

      Limited partners in funds view strategy drifts as dangerous moves, more of a distraction. Fund managers run the risk of diluting their brand with lousy returns in other areas, says Helen Steers, head of primary investments at Pantheon, an investor in private equity funds. “What’s ultimately important is whether the fund managers deliver outsized returns,” Ms Steers said. “As investors, we believe they should stick to their knitting. We want them to live and die doing what they do best.”

      But the jury is still out on performance. Since 2007, US buyouts exceeding $1bn are posting higher returns on average than European funds, according to Preqin.

      There is room in Europe for a bigger and diversified player, says Jon Moulton, founder of London-based turnround investor Better Capital. But it is unclear who will emerge.

      “You need a golden brand name and we don’t have one in Europe. They are all coming out of the crisis tarnished,” he says. “From the point of view of the firms’ owners, being diversified is a much more resilient model. The fact is, the Europeans didn’t do it. Nobody has had the drive, or the greed, to do it.”

      IAG rises following profit projection

      Posted on 28 February 2013 by

      British Airways owner International Airlines Group posted a €997m loss for last year after taking a €343m impairment charge for its beleaguered Spanish subsidiary Iberia.

      The group, which was formed through a merger between Iberia and British Airways, said it expected to see stronger operating profits next year than in 2011 when it reported a €485m profit.

        Investors sent its shares climbing 8 per cent to €2.78.

        Meanwhile, Aéroports de Paris said net profit fell by 1.9 per cent to €341m in 2012, just short of consensus expectations of €346m.

        However, investors focused on the group’s positive outlook and pledged to increase dividends to €2.07 per share this year compared with €1.76 in 2012. Its shares climbed 4.3 per cent to €64.70.

        Strong demand from India, China and Mexico helped to drive Essilor’s net profit up 15.5 per cent to €584m in 2013.

        The optical lenses manufacturer also said revenues would grow by more than 7 per cent and profit margins would remain stable in 2013. Its shares climbed 5.9 per cent to €79.05, their highest level.

        “We remain positive on Essilor’s defensive growth profile and strong cash generation,” said analysts at S&P Capital IQ.

        Strong full-year earnings from EADS on Wednesday prompted analysts to upgrade their ratings on the French aerospace and defence group.

        Deutsche Bank raised its target price on the shares from €38 to €42, while Kepler increased its target price from €42 to €48. Both banks have a “buy” rating on the shares, which gained 5.5 per cent to €39.18.

        The wider FTSE Eurofirst 300 rallied for a second session, gaining 0.9 per cent to 1,171.47.

        Investors continued to sell out of KPN, sending its shares sliding 2 per cent to €2.61. The Dutch telecommunications group has lost nearly 30 per cent of its market capitalisation since the start of the year.

        Last week, Mexican billionaire and major shareholder Carlos Slim backed the group’s plan to raise €4bn through capital markets.

        Sacked Singapore-based trader sues UBS

        Posted on 28 February 2013 by

        A Singaporean claim for wrongful dismissal against UBS in the wake of the Libor-rigging scandal threatens to prolong the affair for the Swiss bank and has hinted at potential vulnerabilities for HSBC.

        Prashant Mirpuri, a British derivatives trader employed in UBS’s Singapore office from September until earlier this month, is one of two former employees to file employment claims over how the bank handled its internal investigations into benchmark-rigging.

          In December, the bank paid a record $1.5bn to settle allegations by US and UK authorities that it rigged Libor, and two of its former employees face criminal charges filed by the US Department of Justice over the manipulation of yen Libor.

          Mr Mirpuri, who previously worked for HSBC in Hong Kong, is suing UBS for wrongful dismissal, together with Mukesh Chhaganlal, the bank’s former co-head of macro trading for emerging markets in Asia. Mr Chhaganlal was also dismissed this month from UBS over alleged gross misconduct.

          Both men say they were not given opportunities to properly defend themselves and that they were fired “in order to mitigate [UBS’s] role in the growing scandal related to alleged fixing of reference rates in the Singapore market.”

          UBS said it was unable to comment but that it was “fully co-operating with the authorities”.

          Mr Mirpuri’s allegations against UBS could also draw HSBC further into a scandal of which it has so far been on the periphery. UBS and its lawyers “oppressively” grilled him over his activities at HSBC, according to Mr Mirpuri’s arguments contained in court documents seen by the Financial Times.

          He alleges that the bank showed him his internet chats with UBS employees, both when he was with UBS and from his time at HSBC, between 2010 and 2012. They asked about “trades and chats [he] had entered into during his time as an employee at HSBC” when they had no right to, Mr Mirpuri alleges.

          Singapore has emerged as a key centre in the sprawling worldwide probe into the rigging of benchmark rates. The Singaporean authorities are one of about 10 prosecutors and regulators around the world examining whether Libor and other benchmark rates were rigged in a probe embroiling 20 of the world’s biggest financial institutions.

          Mr Chhaganlal maintains in his court documents that he expressed concerns over rate-setting to the Monetary Authority of Singapore. He also “avers that he was not a party to the alleged fixing of any reference rates”.

          Tan Chi Min, a former senior derivatives trader at the Royal Bank of Scotland, also sued in Singapore for wrongful dismissal against his former employer. E-mails included in his court documents proved embarrassing for the bank ahead of its own $612m settlement this month, where some of the same messages were anonymously cited by regulators as part of their findings.

          Another key figure in the scandal, Philippe Moryoussef, a former euro swaps trader at both RBS and Barclays in London, is also now understood to be in Singapore.

          HSBC’s public exposure to the benchmark-rigging scandal has so far been limited to conversations between Mr Moryoussef and a former HSBC employee surrounding Euribor, the Brussels rate, the FT reported last year.

          HSBC declined to comment.

          Bankers look for ways round bonus caps

          Posted on 28 February 2013 by

          Bankers and pay experts were quick to react angrily to the EU’s plan to single out banks for bonus caps. But they did not let their anger distract them from immediately looking for ways to get around the rules.

          Top bankers said their human resources departments and lawyers had straightaway started to comb the – so far scant – details of the agreement in the pursuit of ideas on how to circumvent them.

            “In the coming weeks, banks will look at the final text and at possibilities to recraft their overall compensation schemes,” said Jon Terry, a remuneration partner at PwC.

            The most obvious move for banks will be to increase base salaries, in a similar fashion as they did in 2009 and 2010 when new rules forced them to defer more of their payouts and when a one-off bonus tax was introduced in the UK.

            “Since bonuses became part of the legal and regulatory agenda in 2009-10, many of the highly paid at global banks have seen their salaries triple, and this in a global downturn,” said Peter Hahn, a banking expert at Cass Business School.

            He added that yet again “salaries are almost certain to rise substantially, leaving banks with less flexibility to reduce or claw-back bonuses when needed”.

            Bankers’ lobbyists argue that such a move will go against a push by the sector and its regulators in recent years for a lower and more flexible cost base, mostly by increasing the variable portion of pay and by introducing the possibility to recoup promised but yet unpaid bonuses if an employee misbehaves.

            “Unfortunately [the EU’s fourth capital requirements directive, in which the cap is included] also includes measures on compensation that will increase fixed costs at a crucial time of bank restructuring. The outcome will be an inflexible cost base, contributing to greater risk in banks,” said Simon Lewis, chief executive at the Association for Financial Markets in Europe, a lobby group for wholesale banks.

            But senior bankers said the cost factor was not crucial as it would only hit a very small number of the highest paid staff.

            “As a percentage of staff, this is tiny, not even in the hundreds,” said a top executive at a European investment bank. “But what we are talking about here are the key strategic people, the ones that really make the competitive difference.”

            Mr Terry estimated that the rules could hit more than 5,000 staff in the City of London, should the rules only apply to what the European Banking Authority defines as “key risk takers”.

            UK banks typically have several hundred key risk takers. Barclays, for example, had 238 of these so-called code staff in 2011. German rival Deutsche Bank had 1,363 code staff in 2011, thanks to a wider definition of the local regulator.

            However, it is unclear if it will only apply to code staff or to all employees and in any case, the European Banking Authority is currently looking to broaden the definition of key risk takers. In the future, it could well include thousands of staff.

            Banks are also eyeing significantly increasing the proportion of variable pay that vests after five years or more, something Deutsche Bank had already introduced for its 150 top managers last year.

            Under the planned rules, this would allow banks to apply a discount to a quarter of the bonus when calculating the cap. Pay experts and bankers estimate that could lift the cap to somewhere between 2.5 and 3 times base salary. “That would be fine for our senior management,” said one top banker.

            Another idea under discussion is to turn base salaries into a more flexible instrument by introducing “rolling contracts” that vary each year depending on performance.

            A New York-based executive of a European bank said he and others would try to find ways to move salaries up and down each year, in essence reclassifying “bonus” as “fixed remuneration”.

            Mr Terry said non-European banks might also transfer staff away from London, where the US banks in particular have huge international hubs. “The proposals mean banks are more likely to build new capabilities in New York, Hong Kong or Singapore instead of Europe.”

            But no European bank executive is seriously debating the most radical of all options – to move headquarters. Banks including Barclays, HSBC and Standard Chartered have years ago regularly threatened such steps in response to harsher regulation. But they have since realised that in the current anti-banker climate, the reputational and political damage would be too big.

            Spain suffers worst corporate slide of crisis

            Posted on 28 February 2013 by

            Spain’s largest companies suffered the worst drop in quarterly earnings since the country’s crisis began as new data showed the Spanish economy was shrinking at a faster rate than expected.

            On a day when more than a third of Spain’s Ibex 35 index reported full-year results Bankia, the nationalised lender, reported a net loss of €19.2bn, the largest in Spanish corporate history. Meanwhile, ongoing restructuring woes at Spanish carrier Iberia saw International Airlines Group swing to a near €1bn full-year pre-tax loss from a profit the year before.

              “It has been the worst year for corporate earnings in Spain since the crisis began,” said Emmanuel Cau, European equity strategist at JPMorgan. “Earnings have collapsed in Spain for domestically focused businesses, which reflects a sharp fall in domestic GDP.”

              With eight companies still to report, the Ibex 35 index as a whole reported a net loss of €2.7bn in the fourth quarter, according to analysis by Mirabaud, the worst since the crisis began, with banks contributing to the bulk of the losses.

              But while the earnings reports highlighted the depth of the economic downturn last year, several corporate leaders voiced confidence that their companies would enjoy a better performance in 2013. The turnround is set to be especially pronounced at Bankia, which predicted it would post a full-year profit this year, while Telefonica pleased investors by showing signs that the deterioration in its Spanish business was stabilising.

              Other large Spanish companies continued to be sheltered by profits from their international businesses while earnings at home were hurt by domestic woes, with one in four people jobless. Telefonica, Spain’s former state telecoms monopoly, said sales at home slumped 13 per cent over last year, while Repsol, the oil group, saw fuel sales at domestic petrol forecourts fall 9 per cent.

              The flurry of earnings reports came as new data revealed that the Spanish economy contracted at a faster pace than previously thought late last year.

              In a sign of the continuing weakness in the country’s credit-starved economy, output fell 0.8 per cent in the last three months of 2012 – the sharpest quarterly drop in more than three years – Spain’s national statistics office said.

              Analysts said the fall highlighted the challenge faced by the Spanish economy this year. “Official forecasts for the economy look far too optimistic,” said Jonathan Loynes of Capital Economics, pointing out that the government was predicting a fall in GDP of only 0.5 per cent in 2013, about one point less than consensus forecasts.

              Analyst expectations for corporate earnings in Spain has collapsed since the crisis began, with 12 month forecasts for earnings per share growth down by 42 per cent from their peak five years ago, according to analysis by JPMorgan.

              “Everyone is saying we have seen the worst, and the second half is going to be better, but there are few signs of this. We have heard this before,” said Ignacio Méndez Terroso, head of strategy at Mirabaud in Spain.

              Euro nears $1.30 against the dollar

              Posted on 28 February 2013 by

              The euro fell close to $1.30 against the dollar as falling inflation in the single currency bloc weighed on growth concerns.

              The single currency lost 0.4 per cent to $1.3058 after the European Commission said that inflation in January fell on an annual basis to 2 per cent, down from 2.2 per cent in December, increasing bets that the European Central Bank had room to cut interest rates again when it meets next week.

                The US dollar was stronger after figures showed the US economy had risen 0.1 per cent in the fourth quarter of last year, contradicting earlier estimates that it had contracted. The dollar index, which weighs the US currency against a basket of other currencies, gained 0.3 per cent.

                The Australian dollar gained ground after a quarterly report showed that Australian companies were planning to invest more over the next financial year, even as capital spending in the fourth quarter of last year fell. The Aussie rose to a high of $1.0290, although was later just 0.1 per cent higher against the US dollar at $1.0245. 

                Analysts said the relatively upbeat forecasts lessened the chances that the Reserve Bank of Australia could cut interest rates again when it meets next week. “This suggests no imminent need for the RBA to provide additional stimulus, and our Australian economics team stick to their view that the cash rate has now bottomed at 3 per cent,” said Gareth Berry at UBS.

                The Japanese yen weakened after the Japanese government confirmed it was nominating Haruhiko Kuroda as the new governor of the Bank of Japan, encouraging expectations that the BoJ would take a firm stance on combating deflation.

                The dollar hit a session high of Y92.67 and was later 0.1 per cent higher at Y92.37.

                The UK pound rose as investors rebalanced their portfolios on the final day of a month that saw sterling slide against other major currencies amid rising expectations the Bank of England could seek to ease monetary policy once more. The pound gained 0.2 per cent against the dollar to $1.5189 and was 0.5 per cent higher against the euro at €1.16.

                Osborne fights to limit bonus cap fallout

                Posted on 28 February 2013 by

                Britain will mount an 11th hour fightback next week to chip away at the EU’s bonus cap, as finance ministers brace for a face-to-face clash over the small print of the world’s tightest pay regime for bankers.

                While London has all but given up attempting to overturn the principle of a strict bonus ratio, George Osborne, the UK chancellor, is personally preparing to battle next week to secure revisions that mitigate the fallout for the City of London.

                  The political deal with the European Parliament is provisional and still requires formal approval from a majority of EU states. But the jubilant victory declaration issued by MEPs means that a full rewrite is out of the question. Othmar Karas, the EU parliament’s lead negotiator, said he did not “see any risk” of backsliding.

                  Practical politics is also on the side of the deal being passed. Even in private, few countries – namely the UK, Sweden and the Czech Republic – have exposed themselves politically by challenging the wisdom of the parliament’s crackdown.

                  Most EU states, including Britain, have also won prized concessions in the broader legislation setting capital rules for banks, and are unwilling to put that at risk.

                  “We are very happy with what we got, thank you very much,” said one EU diplomat. “We’re not going to let the parliament unravel it for the sake of bonuses”.

                  Another official from a country that might have supported the UK said: “This is the best we can get.”

                  A diplomat involved in Thursday’s negotiation said it was a “horrible situation” for the British but nobody was going to rescue them. “They know,” the diplomat said. “They sounded like they were crawling down the tree as discreetly as possible.”

                  But there remains hope in Whitehall that Britain could win some minor concessions, at least in important technical details of the pay crackdown. Indeed, the UK’s very public isolation on an issue of such national importance may win it support.

                  Some issues remain open, or at least confused. A final text is unlikely to emerge for another few weeks and the fight over the fine print is far from over. There may even be the need for a further negotiating session with parliament.

                  For instance, while most parties involved in Wednesday night’s negotiation expect the bonus rules to apply only to top-ranking staff at banks ,some in parliament are unsure. Ensuring the narrow interpretation makes a big difference for banks.

                  Banx cartoon

                  The role of the European Banking Authority in setting the rules for how to count long-term pay within the cap is also unclear. Its guidance may not be mandatory – giving member states some leeway in implementation.

                  David Cameron, the UK prime minister, also highlighted the importance of how the rules were applied to bank operations outside the EU – an issue on which the UK won no concessions at all, apart from a European Commission review of the consequences. In an indication of Britain’s priorities, he said international banks needed to “continue competing and succeeding while being located in the UK”.

                  Other countries – led by Luxembourg and Belgium – are also wary of the tough transparency requirements for banks included in the deal. One senior MEP speculated that this could generate an “unholy alliance” to dissect parts of the political compromise.

                  But the prospects of a full revolt look slim, according to several diplomats. “All it is now is a matter of trying to help Britain save face,” said one. This leaves Mr Osborne with some unpalatable options.

                  One is to force a vote although, at present, Britain lacks the allies it needs to block the motion.

                  Mr Osborne may decide to abstain or vote against the deal regardless. But this would break the unspoken convention in Brussels that avoids member states being outvoted on core national industries. For all the tension with Brussels over financial services regulation, the UK has yet to be outvoted.

                  The last resort is to invoke the “Luxembourg compromise” – a long-standing gentlemen’s agreement within the EU not to overrule member states on areas of a “vital national interest”.

                  Most diplomats think the weapon – which has no formal legal backing – is better hinted at than used. So far, British officials say there is no talk of deploying the “L-bomb”.

                  Dollar turns to follow US equities

                  Posted on 28 February 2013 by

                  The dollar is changing its spots. Hopes for a US recovery have led to a major shift in the way the US currency moves that could reshape foreign exchange trading.

                  Since the start of this year, the dollar has risen in line with US equities, in sharp contrast to much of the period since the global financial crisis.

                    In the wake of Lehman’s collapse, the dollar became negatively correlated with US equities. When investors fretted about the eurozone, Chinese growth, or even the US itself, they fled to the safety of US Treasuries and pulled out of equities, including the S&P 500. The dollar benefited, moving in the opposite direction to stocks.

                    Then, when risk appetite rose at the start of 2012, the S&P gained 8.6 per cent in the first two months of the year but the dollar fell as investors used it to fund risky trades elsewhere.

                    This year, though, both have risen. The dollar index has gained more than 2 per cent, while the S&P 500 is up 6.7 per cent. Figures from HSBC show that the negative correlation between the two has hit its weakest level since May 2011.

                    Analysts and investors believe this is because of a combination of interest rate differentials, the rise of the Japanese yen instead of the US dollar as a funding currency, and that US investors have a preference for their home market.

                    Ian Stannard, currency strategist at Morgan Stanley, says that data from the US Treasury indicate that US investors are buying overseas assets at a lower rate than might be expected in a time of risk-taking.

                    Net overseas sales in December were just $12.3bn, showing that US residents bought half the level of foreign securities they did in October, and a 10th of their December 2011 purchases.

                    “As Federal Reserve policy provides support to US asset markets, rather than this translating into broader risk appetite, fuelling a portfolio outflow from the US, domestic investors are favouring their home markets,” says Mr Stannard.

                    “We expect the dollar to move higher as US equities move higher – the US could even become an outright investment destination, suggesting dollar outperformance within a risk-on environment.” 

                    Deutsche Bank believes the dollar has just emerged from its longer-term downward trend from 2002 to 2011 and is now set to strengthen over the coming years as US investors buy fewer foreign equities and US monetary easing comes to an end. The bank forecasts that the euro will fall to $1.20 in the next year and the pound will fall to $1.41. 

                    Investors are also responding to signs that the US economy is improving at a faster rate than other developed nations. Bob Savage, chief strategist at New York currency hedge fund FX Concepts, says: “Much of the rise in the S&P 500 and the US dollar seems to be about worries abroad and the usual ‘least dirty shirt’ argument.”

                    Indeed, the International Monetary Fund forecast last month that US growth would outstrip that of the eurozone, the UK and Japan this year. Concerns over Italy are helping to drag down sentiment on the euro and the pound slid after the Bank of England downgraded its growth forecasts this year. By contrast, in the US this week, figures showed monthly new home sales in January hit their highest since 2007.

                    “Relative economic performance is becoming more of a driver of relative rates and therefore of currencies,” says Kit Juckes, foreign currency strategist at Société Générale. “Since the US is streaking away in economic terms from Europe and Japan, the dollar is slowly catching a bid.” 

                    Analysts and investors say the correlation shift also illustrates the return of an important driver for currency markets: interest rate differentials.

                    Before the financial crisis, it was normal to buy a currency with a higher interest rate and sell those with lower rates.

                    That strategy has been hard to pull off as developed countries have cut interest rates and currencies have been in the grip of so-called “risk-on, risk-off” trading that has seen investors prioritise perceived safety above yield at times of risk aversion. The dollar, with its deep, liquid bond market, has been the main beneficiary of that trade even as interest rates have been held at zero.

                    But the growing consensus that the US is set to end its bond-buying programme as Japan eases further and the European Central Bank wavers has helped support the dollar, whose popularity as a funding currency is waning.

                    Consensus among investors that the yen is set to weaken further has led to the Japanese currency rising to prominence as a funding currency, with the UK pound a popular alternative.

                    While the euro makes up over half of the dollar index, the yen and the UK pound are the next largest components, meaning that weakness in both currencies this year has helped the dollar index to rise.

                    Marc Chandler, head of currency strategy at Brown Brothers Harriman, questions whether the US stock market is rallying because of a relatively strong earnings season or because the Fed continues to pump liquidity into the system. That could mean that when the Fed ends its bond-buying, the dollar will get a boost but US equities would suffer.

                    The next big test, say analysts, will be if the dollar and stocks can retain their gains beyond the automatic US public spending cuts due to kick in on Friday.

                    Vanguard partially closes two large funds

                    Posted on 28 February 2013 by

                    Vanguard, the $2tn US mutual fund group, is taking steps to reduce cash flows into its oldest mutual fund and its largest municipal bond fund to ensure that managers can continue to run these portfolios effectively.

                    The $68bn Vanguard Wellington fund and the $39bn Vanguard Intermediate Term Tax-Exempt Fund will no longer accept new accounts from institutional clients and financial advisers although both funds will remain open to retail investors.

                      Institutional clients and financial advisers that are already investors in both these funds will be allowed to make additional purchases.

                      “Our commitment is to protect the interests of the funds’ current shareholders, and as we’ve done in the past, we are demonstrating the conviction to do this by partially closing two of our largest funds,” said Bill McNabb, chief executive of Vanguard.

                      The Wellington fund delivered a total return (including dividends) of 12.8 per cent over the 12 months to the end of January and has posted an annual average total return of 8.2 per cent since its launch in 1929.

                      As an alternative to its Wellington fund, Vanguard suggested that investors consider either its passively managed Balanced Index Fund or the Vanguard STAR Fund which is a fund of funds made up of 11 actively managed Vanguard funds.

                      The Vanguard Intermediate Term Tax-Exempt Fund delivered a total return (including dividends) of 3.8 per cent over the 12 months to the end of January and has achieved an annual average total return of 5.8 per cent since its launch in 1977.

                      Vanguard said that no single fund offers the same risk/reward profile as the Intermediate-Term Tax-Exempt Fund but it pointed to two alternatives that are managed in a similar fashion.

                      The Vanguard Limited-Term Tax-Exempt Fund is a shorter duration fund which the company suggested could be considered by investors willing to forego some income for greater interest rate risk protection.

                      Seven Vanguard funds are currently closed to most new accounts. These are the Admiral Treasury Money Market Fund, Federal Money Market Fund, High Yield Corporate Fund, Convertible Securities Fund, Capital Opportunity Fund, Primecap Core Fund, and Primecap Fund.