Banks, Financial

Banking app targets millennials who want help budgeting

Graduate debt, rent and high living costs have made it hard for millennials to save for a house, a pension or even a holiday. For Ollie Purdue, a 23-year-old law graduate, this was reason enough to launch Loot, a banking app targeted at tech-dependent 20-somethings who want help to manage their money and avoid falling […]

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Economy

Eurozone inflation climbs to highest since April 2014

A welcome dose of good news before next week’s big European Central Bank meeting. Year on year inflation in the eurozone has climbed to its best rate since April 2014 this month, accelerating to 0.6 per cent from 0.5 per cent on the back of the rising cost of services and the fading effect of […]

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Financial

Wealth manager Brewin Dolphin hit by restructuring costs

Profits at wealth manager Brewin Dolphin were hit by restructuring costs as the company continued to shift its focus towards portfolio management. The FTSE 250 company reported pre-tax profits of £50.1m in the year to September 30, down 17.9 per cent from £61m the previous year. Finance director Andrew Westenberger said its 2015 figure was […]

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Financial

Travis Perkins and Polymetal to lose out in FTSE 100 reshuffle

Builders’ merchant Travis Perkins and mining company Polymetal face relegation from the FTSE 100 after their recent performances were hit by political events. The share price of Travis Perkins has dropped 29 per cent since the UK voted to leave the EU in June, as economic uncertainty has sparked concerns among some investors about the […]

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Banks

RBS share drop accelerates on stress test flop

Stressed. Shares in Royal Bank of Scotland have accelerated their losses this morning, falling over 4.5 per cent after the state-backed lender came in bottom of the heap in the Bank of England’s latest stress tests. RBS failed the toughest ever stress tests carried out by the BoE, with results this morning showing the lender’s […]

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Archive | November, 2016

Manufacturing figures likely to support BoJ

Posted on 31 March 2013 by

All eyes will be on Japan this week as the new Bank of Japan governor Haruhiko Kuroda takes up an economic challenge.

The Japanese government is attempting to boost the economy with an aggressive monetary and fiscal stimulus. Last week Mr Kuroda reiterated his intention to expand purchasing to include longer-dated government bonds; as a result, the 20-year Japanese bond yield hit its lowest level in a decade. He is expected to give more detail of his asset-buying expansion plan at the bank’s monthly policy meeting this week, and could swiftly embark on dramatic action.

    Japan’s Tankan manufacturing survey, due out on Monday, is forecast to head higher, offering well-timed positive economic news for Mr Kuroda. “Large manufacturing firms will have benefited particularly from the depreciation of the yen and prospects for further currency weakening, monetary and fiscal stimulus should provide a further boost to activity and sentiment about the future,” said James Knightley of ING.

    Sentiment indicators in the US on Monday and on Wednesday will lay the groundwork for Friday’s March unemployment and non-farm payrolls data. The unemployment data in particular are vital for the timing of any future quantitative easing undertaken by the Federal Reserve. A stronger-than-expected performance in February left unemployment at 7.7 per cent; that is forecast to remain unchanged, making QE or interest rate changes unlikely in the near future. “This should keep in place a positive environment for growth and also asset price inflation, particularly property,” Mr Knightley said.

    A swath of PMI figures, particularly in manufacturing, will give a useful insight into global production levels and thus possible future GDP movements. Brazil, China, India, the eurozone and Germany are ones to watch. The bounce in the HSBC/Markit flash China manufacturing PMI has eased fears of a slowdown in economic activity from the start of this year, and analysts expect the official PMI figure due out on Monday
    to reflect this. Korean exports data will also give a flavour of global demand.

    Services PMI data for Germany, France and the eurozone are expected to remain unchanged, while German factory orders are forecast to rise month-on-month in a further sign that Europe’s leading economy is out-
    performing the rest of the continent. The ECB’s Thursday interest rate decision will be watched for signs that policy-makers are beginning to respond to the latest economic downturn. “Markit’s flash eurozone PMI fell in March, suggesting the economy was already turning down before the Cypriot crisis took hold,” said Chris Williamson of Markit.

    The Bank of England on Thursday will be watched for indications of any future quantitative easing but no change in the base rate is expected. Its monetary easing policy could be affected by UK manufacturing PMI data on Tuesda. and construction PMI on Wednesday. Services PMI is due out on Thursday.

    “Severe weather has fuelled fears that the economy may have contracted again after a 0.3 per cent decline in the final quarter of last year,” Mr Williamson said. However last week’s ONS services data offered a touch of optimism, with output up 0.3 per cent in January. Howard Archer from IHS Global Insight called this “encouraging”.

    ‘Left for dead’ currency markets pick up

    Posted on 31 March 2013 by

    foreign currencies©Dreamstime

    A rise in interest rates would be good news for currency markets

    The spectre of rising interest rates is stalking the bond markets, leading to talk of a mass move from fixed income to equities. But it is good news for currency markets, which have been left for dead under the weight of the loose monetary policies pursued by central banks since the global financial crisis.

    After years of low volatility and declining interest rates that made for thin pickings for currency managers, performance is picking up. The Parker Global Currency Managers Index, which measures returns of global currency managers, posted a gain of 1.42 per cent in January, its biggest in 21 months. February proved less rewarding, bringing the first monthly loss since October as the index fell 0.6 per cent, but FX managers are confident the trends are now in their favour.

      “We’ve seen the currency tide flow in, then out again, and now we think it is coming back,” says James Wood-Collins, chief executive of Record Currency Management.

      The hedging side of the currency business, which accounts for $32bn of the $34bn Record has under management, has been the mainstay in recent years as investors have focused on risk management strategies, he adds. “The decline in [the currency investment strategy] business was very significant across the industry.”

      It is only 10 years ago that institutional investors started to take an interest in currency investment strategies, with flows into such strategies peaking in 2007-08. Since then, poor performance has led to outflows as falling interest rates and low volatility left little room for traditional strategies to turn a profit.

      The carry trade, where investors borrow in a low-interest currency to invest in a high-yielding one, does not work when there is little movement in currencies and a low differential between rates. Momentum trading, where investors follow a trend in a currency pair up or down, similarly suffered as markets were driven by central bank intervention and political factors rather than economic fundamentals.

      Now, currency markets are more frictional, says Mr Wood-Collins, with more scope for interest rates to go up or down rather than just bounce along the bottom.

      Pressures are building up, he adds, “and while they are building you tend not to get much movement, but eventually it flips and moves quite dramatically”.

      Still, there is little evidence that institutional investors are ready to put money to work in currency strategies again. Mr Wood-Collins reports some inflows, but describes them as “episodic” and “lumpy”.

      Demand for currency investment is “confined to isolated pockets in different countries”, says Amin Rajan, chief executive at Create Research, a consultancy. “Investors are mainly chasing credit products for yield, equities for bargains and illiquid assets for inflation protection. Currencies are not high on their radar screens.”

      Malcolm Leigh, a principal at Mercer Investments, confirms that currency mandates remain depressed and he has only heard of a few, “but very few”, clients looking to invest in currencies. There is a danger, though, that investors wait until performance comes through, he adds. “They should perhaps be looking at the signposts for when performance is likely to come.”

      That will be when economic fundamentals rather than governments or central banks become the driving force in markets. “We will see dispersions start to appear among G10 economies, which will have a knock-on effect on currencies,” says Mr Leigh.

      He points to more positive news coming out of the US, where a reviving housing market and other economic indicators are encouraging a more optimistic view, helping to drive the dollar higher.

      One of the strongest factors that may drive investors into currency markets is an expectation of rising bond yields. Higher bond yields means falling bond prices, and one way of protecting against that is to move into short duration securities.

      “Clients are valuing liquidity, and there is nothing more liquid than cash in the FX market,” says Tim Carrington, head of currencies and EM at Royal Bank of Scotland. Recent moves in the Japanese yen and sterling are another factor pulling investors back into currency markets, he says, while low returns on fixed income and insufficient supply are pushing investors that way.

      There is little expectation of an imminent revival of the carry trade, though. It works well in a stable political environment when policies are diverging, but is not where the opportunities lie now, according to Mark Webster, head of FX sales, Emea and global head of financial institutions FX sales at RBS. Instead, they lie in the macro arena, which means the funds best placed to benefit are the trend-following discretionary type, where managers, not computers, make investment decisions.

      Investment consultants take a similar view. Matthew Roberts, head of multi-strategy research at Towers Watson, says: “Conversations suggest macro volatility may manifest itself in currency markets instead of fixed income markets because of low interest rates. That favours those with macro skills that are able to be nimble, notably trend followers and discretionary macro managers.”

      Standalone currency managers do not feature significantly in current portfolios, he adds. “That is not to say they couldn’t if we found an active manager we thought had differentiated views and was doing something different.”

      Mr Wood-Collins of Record agrees that trend-following strategies could do well in the current environment, as could value (based on the view that over time developed market currencies typically swing around a long-term “fair value” level). However, he reports that Record has made positive returns in the first three months of the year in the carry trade, momentum trading and emerging-market currencies. “The one underperforming is value.”

      One of the big trends he identifies is tied to the appetite investors have shown for emerging market debt, especially local currency debt. Investors concerned about the risk of rising interest rates and higher yields should recognise that “emerging market currency exposure is effectively ultra short duration”, says Mr Wood-Collins. He reports seeing early signs of a move from emerging market debt to emerging market currencies.

      Mr Roberts of Towers Watson sees ongoing interest in thematic exposure to emerging market currencies, which he expects to be maintained. But RBS’s Mr Webster says the emerging market story is less compelling than in the past, and the interest is mainly in the liquid G11 currencies.

      The emerging market story has been strong over the past 15 years, he says. “Now it has reached a level of saturation and the risk of policy errors is higher. So people are seeing value in other areas, and the rate of inflows to EM is not as high as it once was.”

      Whatever approach investors are using to seek returns from currency markets, they want products that are more transparent, lower cost and less highly geared than in the past. Currency investment strategies “will not be as highly geared or as high margin for managers” in future, says Mr Wood-Collins.

      Argentina reveals payment offer to holdouts

      Posted on 30 March 2013 by

      Cristina Fernandez©Reuters

      Argentina has told a US appeals court that it can pay holdout creditors only on the same terms as two previous debt swaps.

      In a filing with the Second Circuit Court of Appeals on Friday, after being ordered to spell out its offer to holdout creditors, Argentina argued that its offer represented “substantial” returns considering the low price paid for the bonds by the funds it described as “vultures” after the country’s default on nearly $100bn in 2001.

        Elliott, a US fund, is leading the holdout charge and has pursued Argentine assets around the globe for years, most recently getting an Argentine navy ship detained in Ghana for 78 days.

        The legal fight that has made waves through international financial circles amid fears Argentina could plunge into a messy technical default or that sovereign restructurings could become harder in future.

        In its filing, Argentina said it could offer a par bond, aimed at retail holdouts, which would pay out in full but not until 2038. For institutional investors, it offered a discount bond, payable in 2033 but with an estimated 66 per cent writedown or haircut.

        Both options came with warrants linked to GDP growth, and past-due interest would be paid in cash in the par option and via a bond due in 2017 for the discount offer.

        “There is no imaginable way the court could be expected to accept this. None. Especially given the 66 per cent discount offered,” said Joshua Rosner, managing director at research firm Graham Fisher.

        Argentina was last year ordered by New York Judge Thomas Griesa to pay $1.33bn to creditors led by Elliott because the country had violated the pari passu, or equal treatment, clause in its bonds.

        He gave the order teeth by ordering Bank of New York Mellon, the trustee of restructured bonds, not to transfer funds unless holdouts were also paid. The Second Circuit is now reviewing those issues.

        Given Argentina’s oft-stated opposition to paying holdouts whose years-long crusade to collect in full it considers immoral, many believe Argentina will try to pay exchange bondholders outside New York if the court upholds the restraints on BNYM. But that is a complex plan, and the country could tumble into technical default.

        If the court rules against it, Argentina, which has had other rehearing attempts dashed, may find its only hope lies with the US Supreme Court.

        “The best that can happen is that they can try to stave off technical default until the Supreme Court decides whether it will hear the case,” Mr Rosner said. “If, at that time, the Supreme Court doesn’t agree to hear it, it’s an almost immediate technical default.”

        Eugenio Bruno, an Argentine lawyer and debt specialist at Garrido, who is advising exchange bondholders, investment banks and holdouts that want an exchange, said the court’s demand for Argentina to spell out its offer after a lengthy hearing in February was “always a lost cause”.

        “Of course it’s totally insufficient [for holdouts]. That was never in discussion. But they couldn’t do anything else with no firm sentence against it,” he said.

        Argentina is bound by its so-called “lock law” not to make a better offer to holdouts and a clause in the bonds issued in the swaps meant any voluntary offer made before December 31 2014 would have to be made to exchange bondholders too. Argentina restructured more than 92 per cent of its defaulted debt in the swaps, in 2005 and 2010 and, with central bank reserves of $40.6bn, could not afford a series of me-too claims.

        The court now has to decide whether or not to impose the cram-down on holdouts that Argentina is seeking or stick to the letter of the bond contracts. Argentina said in its filing that Judge Griesa’s proposed solution “would cause great harm to the exchange bondholders while giving plaintiffs a return that is exorbitant on its face, and even more so when one takes into account the estimated purchase price of the majority of plaintiffs’ debt.

        It added: “For example, for [Elliott affiliate] NML, which purchased its beneficial interest in the bonds for $48.7 million, the rate of return would be 80.2% per annum, and 1,380% in total.”

        Argentina acknowledges it is the court it must convince, not the holdouts, who did not comment on the offer immediately but were expected to dismiss it. The ball is now back in the Second Circuit court.

        Pru set to defy pay cut calls for chief

        Posted on 29 March 2013 by

        Tidjane thiam©Bloomberg

        Prudential’s chief executive Tidjane Thiam

        Tidjane Thiam is set to be paid close to £7m as Prudential presses ahead with plans to grant its chief executive a full bonus in spite of calls from some top shareholders that the insurance company should consider trimming his payout.

        The Pru chief, who was censured by the Financial Services Authority this week over the mishandled $36bn bid for Asian rival AIA three years ago, is in line for an annual bonus of as much as £2m.

          This would come on top of a 10 per cent increase in his annual salary in 2012 to £1m, as well as vesting share awards under a long-term incentive plan worth a maximum of £4m.

          The decision of the remuneration committee, chaired by Lord Turnbull, to press ahead with the bonus payment is expected to be confirmed with the release of the Pru’s annual report in the coming days.

          Mr Thiam is set to enjoy near-maximum levels of payments given the annual bonus is based on measures including operating profit, cash flow and capital surplus. The long-term incentive plan is based on total shareholder return relative to peers.

          In spite of the FSA censure the chief executive has enjoyed support from Pru shareholders, even those who were against the AIA deal and were calling for his head for months after it collapsed. Shares touched 13-year highs after the Pru lifted its final dividend by more than a fifth this month on the back of a 25 per cent jump in 2012 operating profits, helped by strong growth in Asia.

          Two top-20 shareholders suggested the group should consider cutting the chief’s bonus given that the FSA this week slapped a £30m fine on Prudential over the failed AIA deal, which the regulator issued largely because the company failed to keep it fully informed about the planned bid.

          But others dismissed the calls, pointing out the fine has made only a small dent in the Pru’s financial performance.

          “There is no way Mr Thiam should lose his bonus,” said a fund manager at one of the company’s leading institutional investors. “He has done well in the US, the Asian business is humming and he has done well in the UK.”

          A third of the insurer’s shareholders failed to back the Pru’s pay plans last year. Shareholders were concerned the company had changed the performance conditions for how bonuses were awarded to Barry Stowe, who runs the Pru’s Asian business.

          At the time, Prudential said it would consult larger shareholders after the vote.

          In 2011, Mr Thiam opted to take the cash element of his bonus in shares, which was seen as a gesture of contrition over the AIA deal, which left investors with a £377m bill for fees to advisers and other costs.

          Admiralty Arch owner on hunt for assets

          Posted on 29 March 2013 by

          Admiralty Arch©Alpha Press

          Admiralty Arch

          The investor behind a multimillion revamp of Trafalgar Square’s Admiralty Arch is preparing to launch a £500m buying spree of high-profile buildings in London.

          In his first interview since buying the London landmark, Rafael Serrano, the former JPMorgan investment banker, told the Financial Times he planned to use the arch as a seed investment to create one of London’s leading luxury real estate portfolios.

            The move into the so-called trophy asset market comes at a time of growing pressure on the government to sell large parts of its sprawling property empire – much of which comprises grand but underused West End office blocks – to raise capital.

            “I don’t like the term ‘trophy property’,” says Mr Serrano. “I look at buildings through the private equity model of generating a good return over a period of time and creating a strong hedge against inflation. But if the building is so obviously prime, it is also guaranteed to preserve value through the market cycles.”

            Prime Investors Capital, Mr Serrano’s investment vehicle, is in talks to buy three more buildings in central London and is also eyeing the Knightsbridge Barracks, which is likely to come back on the market later this year. Mr Serrano will use the relationship with the government, forged during the process of buying the arch, to get access to other parts of the state property portfolio.

            The bidding war for the property ran for over six months, went to a shortlist of 28 possible buyers and was, according to Mr Serrano, “one of [his] most complicated acquisitions”.

            The process included the presentation of a bid document – a weighty, grey velvet-bound tome – and rigorous security checks due to the existence of subterranean passages linking the arch with Whitehall. “We had to prove to the entire government property unit that we were the best people to take it on and secure its future,” he says.

            The government, which is understood to be close to initiating the sale of the 270,000 sq ft Old War Office building in Whitehall, last year outlined plans to shed large parts of its property portfolio, which includes vast land holdings, central London offices and thousands of local authority buildings.

            Prime Investors Capital, which recently built the Bulgari Hotel in Knightsbridge, acquired the arch for £60m on a 99-year lease with an explicit condition that it cannot be converted into apartments or a single house. Under the company’s plans, yet to be approved, the building will be converted into a 100-room hotel. The narrow rooms that bridge the two sides of the dumb-bell-shaped property are slated to become an upmarket restaurant.

            But Mr Serrano says he does not plan to sell out of the asset within the next five years, as is typical with private equity real estate investments.

            “I don’t see an obvious exit on something like this, because it is so unusual and needs to be redeveloped with real responsibility,” he says.

            The Grade I-listed building, which has three arches and serves as a gateway between Trafalgar Square and Buckingham Palace, was commissioned by Edward VII in memory of his mother, Queen Victoria, and was completed in 1912.

            It was, until recently, used by the Cabinet Office, the policy engine room of Whitehall. Locked vaults in its basements are littered with the empty box files of sensitive government documents, carrying such labels as “Argentina 1981” and “PM’s overseas travel 1979”.

            The flight to trophy buildings, which has been led by sovereign wealth funds such as the Qatar Investment Authority, is part of a wider trend of investors turning to secure real estate assets, including student housing and municipal offices, as an alternative to bonds.

            The depth of interest in the specialist corner of property was underlined last year when Sorgente, the family-controlled Italian fund that owns New York’s Flatiron Building, asked investors for £1.6bn to finance acquisitions of trophy assets in Europe.

            The value-retaining qualities of trophy buildings have positioned them among a small number of haven investments within the real estate sector. In London, Paris, Hong Kong, New York and Rome, investors are willing to pay a premium for those rare buildings that are likely to float above the economic turmoil roiling the mainstream property market.

            However, critics of investors specialising in high-profile buildings argue that the limited supply inherent in the market means that assets are overpriced and often treated as status symbols, rather than straightforward investments.

            China questions not to pass over

            Posted on 29 March 2013 by

            This is a holy juncture. Christians are celebrating Easter, and Jews Passover. A ritual common to both is the Jewish seder – a dinner in which Jews remember the exodus from Egypt. Jesus’s Last Supper, which gave rise to the Mass, was a seder.

            At a seder the youngest person has to ask four questions about why this night is different from all others. The Long View also asks four questions each Passover about why things in the market are different from how they usually are.

            This year’s questions are all about China, giving it a flavour of the food Jews eat at Christmas, rather than Passover.

            Why are property prices increasing again, when experience of housing bubbles elsewhere suggests they should be falling?

            After the huge 2008 stimulus with which China staved off the financial crisis, property prices shot up, causing bubbles in the biggest cities. People in Beijing and Shanghai complain that they can no longer afford to live there.

            A correction was under way by the middle of last year, but then prices started rising again; official figures show Beijing rising at a 6 per cent annual rate. According to UBS, prices are rising or stable in all but two of the 70 largest cities. Why?

              The best guess: the authorities were nervous about the bubble bursting just as power changed hands last year. By injecting more credit into the system, they spurred housing activity and stopped the bubble from deflating. Which leads to another question:

              How did credit start to expand again last year, when the authorities had seemed determined to
              rein it in?

              China relies on credit. And the authorities, unlike their US counterparts, can turn on the credit tap at will – as they did last year to ease the political transition. But they do so rather too effectively. As the chart shows, bank credit tripled as a share of the economy during the 2008 stimulus, and rose sharply again last year, both times galvanising equity markets.

              In part this is because of China’s flourishing shadow banking system. Wang Tao, UBS Asia economist, puts shadow banking at 40 per cent of the Chinese economy – far smaller than the 100 per cent in some developed economies. But extreme fluctuations show that credit could easily grow out of hand. Small wonder that China tried this week to rein in shadow banks.

              Why are stocks performing so badly when China’s economy is growing faster than almost anywhere else?

              The domestic stock market’s long sideways march is what would be expected after a bubble like the one that A-shares (for domestic investors) saw in 2007. Speculators were badly burnt, so no surprise that A-shares are still shuffling along at less than half their highs.

              But H shares, available in Hong Kong, are also underperforming woefully, as are those western companies whose revenues are most exposed to China. This is because China’s growth, though still fast, is slowing. Forecasts for revenues, while still bullish, are coming down, bringing down share valuations. Further, wages grew faster than the economy last year for the first time in the modern era. This helps persuade a restive populace that they will get their fair share of the growth. But it directly attacks profit margins – providing another reason to reduce multiples on stocks. H shares trade at only about nine times earnings, while the US S&P trades at about 15.

              All of this poses a new and difficult challenge to corporate managers. They have to show they can raise productivity and manage well, not just exploit cheap labour.

              Why is the currency strengthening when high inflation implies that it should be falling, and when everyone in the west believes it is being held too cheap?

              China has an inflation problem. Raising real wages worsens it. With much of the population still living at little more than subsistence levels, inflation is a vital political issue. The Communist party cannot let it get out of control. But Fred Neumann, HSBC Asia economist, points out that “core” inflation – excluding food and fuel – is ticking up. One way to keep a check on this is to strengthen the currency. That makes foreign goods cheaper.

              It also makes it tougher to compete, particularly if wages are rising. But China needs to make the transition from a cheap exports model to a system that concentrates on building the middle class. A stronger currency pushes capital in this direction. Its real effective exchange rate (taking into account inflation) has strengthened more than any bar the currencies of Singapore and the Philippines during the past five years, according to Deutsche Bank. The central bank has been intervening more in recent months to limit this appreciation, but this only shows what a difficult balancing act it has.

              In the US stocks are at new records. Cyprus is in the headlines. Investors are not asking questions about China. They should.

              Cyprus and a dog that did not bark

              Posted on 29 March 2013 by

              In the past three weeks, Cyprus and the eurozone have been to the gates of financial hell and back again. Capital controls section off a part of Europe’s monetary union. Every action that leaders had previously warned would lead to contagion has now been taken. Yet markets have kept calm.

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              There are exceptions. Bank stocks took a beating after Jeroen Dijsselbloem, president of the colloquium of eurozone finance ministers, said banks should be bailed in, not bailed out. That is as it should be: investors take risks and should bear the downside as they do the upside.

                More interesting is the fact that much bank debt held up well. Clearly bond investors know where to be: in well-capitalised banks shareholders can cushion more of the losses.

                The euro has also been sliding throughout the Cyprus crisis. The single currency is at a four-month low. But this is a welcome correction after a period of unnatural strength. A weaker currency is what the eurozone needs, mired as its growth prospects are by uncertainty, weak banks and austerity.

                Beyond those risks, however, market observers could be forgiven for thinking that Cyprus had a functioning banking system and Italy a functioning government. The costs of borrowing for Spain and Italy have risen slightly but back to February levels only: they actually fell during the worst Cyprus indecision. Stock markets are buoyant: the S&P 500 broke a record high on Thursday. Even in Europe, broad equity indices were stable; those that suffered could attribute their losses largely to the drop in bank share prices.

                What has happened? A year or two ago, markets were alert for signs that the single currency was unravelling. A problem anywhere, it was thought, could create self-fulfilling market panics. So far, however, it seems there is nothing inevitable about contagion. For the Cyprus situation, the cordon sanitaire is working.

                One lesson is that systemic risk is, at least in part, in the eye of the beholder. If markets are quiet, like Sherlock Holmes’s dog, they must be finding some crumbs of comfort in the situation. Perhaps they remain reassured by the European Central Bank’s vow to do what it takes to keep the euro together. They may have their eyes on fundamentals, which are not good but not made worse by Cyprus either.

                Even so, the eurozone must not be lulled to sleep by investors’ gentle mood. Leaders should press ahead with a banking union without needing a crisis to whip them into action. They should accelerate Brussels’ plans for bail-in and deposit insurance schemes. That the dog did not bark is a good sign – but it does not mean it will never bark again.

                Euro remains stuck near four-month low

                Posted on 29 March 2013 by

                Euro Coin©Reuters

                The euro lost further ground this week, remaining mired at its weakest levels in more than four months as developments in Cyprus led to a sell-off.

                Concerns over the contagion effects from the bailout of the Cypriot financial system on the wider eurozone banking system has driven the single currency more than 2 per cent lower since the start of the crisis in mid-March.

                  Political turmoil in Italy, which remained without a government following inconclusive elections earlier in the month, has also weighed on the euro. Demand for Italian government debt fell at an auction on Wednesday that was seen as a test of investor sentiment for peripheral assets.

                  An unexpected rise in retail sales in February in Germany did little to help as figures showed that the rate of unemployment remained at 6.9 per cent in the eurozone’s largest economy. While the single currency climbed fractionally on Friday, it lost 1.3 per cent over the week to $1.2819 against the dollar, and was down 1.1 per cent against the pound to £0.8437.

                  The euro was also weaker against the Japanese yen, falling 1.8 per cent over the week to Y120.60 ahead of the Bank of Japan’s first monthly meeting at the start of the April with new governor Haruhiko Kuroda at the helm.

                  The weakening trend in the Japanese yen that began late last year reversed in mid-March as caution over developments in Cyprus created haven demand for the currency. Investors were also taking a wait-and-see approach ahead of the BoJ meeting, pointing to the potential for Mr Kuroda to disappoint those expecting radical measures to fight deflation and weaken the yen. The dollar fell 0.4 per cent over the week to Y94.08.

                  A client survey by Nomura, the Japanese bank, found that most expected the BoJ to increase its bond-buying scheme next week and also buy longer-dated government bonds up to 10 years in duration.

                  Jens Nordvig, strategist at Nomura, said that overseas allocations by life assurers in Japan at the start of the fiscal year in April would also be a key factor affecting the longer-term strength of the yen.

                  “We think that it will be hard for Kuroda to deliver a clear dovish surprise relative to current expectations. What may be more key to dollar-yen dynamics in April and May is whether institutional investors pursue more aggressive asset reallocation into foreign assets,” he said.

                  Bulls make seismic call on stocks record

                  Posted on 28 March 2013 by

                  For believers in a “great rotation” from bonds into equities, Thursday’s leap by the S&P 500 into record territory could well be the trigger for a seismic shift in investors’ portfolios.

                  The US benchmark, having surpassed its 2007 closing high, is up 10 per cent since January. Yet, even at these elevated levels, stock market bulls say shares look cheap: the S&P has an earnings yield of 7 per cent based on this year’s expected profits, offering vastly superior prospective returns to historically low yields on bonds.

                  S&P 500 index, MSCI Bric index

                  S&P 500 index, MSCI Bric index

                    Indeed, America appears finally to be enjoying the benefits of record-low interest rates and the Federal Reserve’s policy of emergency bond-buying, called quantitative easing.

                    Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, says: “The region leading the great rotation is the US, because there you have tangible signs that policy is working. You’ve yet to see policy working as a stimulus in Europe.”

                    “The secular outlook is still one that looks more favourable for equities than bonds,” he adds.

                    The snag with this argument is that stocks have been here before. Since 2010, global equities have followed a depressing pattern, rallying in the first quarter only to turn lower during the spring. Economic optimism has given away to doubt as the eurozone debt crisis has flared up. US politicians have flirted with fiscal calamity.

                    Almost on cue, the final weeks of March this year have seen a revival of eurozone stress, courtesy of Cyprus. Emerging markets have been notably weak. America is hardly leading a global recovery. It is the only economic bright spot.

                    “Investors came into the year without a worry list, but that may be coming back, with Cyprus at the leading edge,” says Jeffrey Knight, head of global asset allocation at Columbia Management Investment Advisors.

                    “A decent central case can be made that in the short term, equities are set to pause or pull back. Based on their performance so far, the market is on a trajectory that is way out of line with even the most bullish forecasts for 2013.”

                    The going has become considerably heavier in Europe in the past month. The FTSE Eurofirst 300 index has already dropped 1.6 per cent from its peak in mid-March for an overall rise of 4.9 per cent since January. That leaves it lagging well behind the S&P’s climb and Japan’s stunning jump of 18.7 per cent, or 9.3 per cent in US dollar terms.

                    Inconclusive elections in Italy were followed by a crisis over Cyprus, which saw policy makers taking unprecedented steps in imposing losses on bank deposit holders and introducing capital controls – and raising concern about the safety of investing elsewhere in the eurozone’s southern periphery.

                    A decent central case can be made that in the short term, equities are set to pause or pull back. Based on their performance so far, the market is on a trajectory that is way out of line with even the most bullish forecasts for 2013.

                    – Jeffrey Knight, head of global asset allocation at Columbia Management Investment Advisors

                    Rattling confidence, Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of eurozone finance ministers, warned that private investors would have to shoulder greater risks in future bank bailouts. Shares in eurozone banks tumbled from their peak on Monday.

                    Meanwhile, Italian government ten-year bond yields, which move inversely with prices, ended the week sharply higher, at about 4.75 per cent. “What has happened in Europe is providing a headwind – I’m surprised the market has held up as well as it has,” says William Davies, head of global equities at Threadneedle.

                    The risk for investors is that action taken over Cyprus undermines the effectiveness of last year’s pledge by Mario Draghi, European Central Bank president, to do “whatever it takes” to preserve the euro’s integrity. His comments provided reassurance than in the case of a crisis in Spain or Italy, the ECB would act as a backstop. But Cyprus has called into question eurozone leaders’ crisis handling skills.

                    “They are playing with fire talking about bank depositors,” says Stephane Deo, head of asset allocation at UBS. “With these kinds of decisions you are putting a lot of risk in the market.”

                    The economic uncertainty created by Cyprus and Italy could also make it harder for the eurozone to exit recession. But strategists do not yet see events in Europe reversing improvements in global investor sentiment.

                    “Europe allows the bubble in bonds to continue for longer but unless and until Europe proves to be a contagious force on the global economy, the secular outlook is still one that looks more favourable for equities than bonds,” says Mr Hartnett.

                    Anthony Conroy, head of trading at BNY ConvergEx, says stronger US growth will spur investors to switch out of bonds into equities. “Investors won’t have a choice,” he says. But he is concerned at the lack of volume for equities and says the market could well endure a correction as the second quarter gets under way.

                    However, a closer look at the S&P’s performance this year shows the leadership has come from defensive sectors such as consumer staples and healthcare, along with high dividend-paying stocks. If bulls are backing recovery, they are investing cautiously.

                    Investor flows have continued into fixed income as well, while the money that has gone into the equity market appears to have come from investors’ cash piles. The “great rotation”, in which investors will dump their low-yielding bond holdings and switch into shares, could yet be some way off.

                    Some, such as Ashish Shah, head of global credit at AllianceBernstein, sees no such rotation on the horizon. “Most investors want income, and many of them are retiring. Also, the big difference between now and 2007 is that retail investors have higher cash savings and therefore don’t need to sell their fixed income assets. They can put their cash into equities.”

                    Property boom hopes lift UK housebuilders

                    Posted on 28 March 2013 by

                    Predictions of a new property boom helped lift housebuilders to five-year highs.

                    Bellway
                    , Persimmon
                    and Barratt Developments
                    all rose to pre-credit crunch levels after JP Morgan Cazenove forecast that mortgage subsidies, the centrepiece of last week’s Budget, would trigger a jump in activity and prices, particularly for the lower end of the London market.

                      “We estimate that there are 1m first-time buyers who have failed to buy since 2008, because of constrained mortgage market conditions,” the broker told clients. “Of those if even half find funding and attempt to buy over the next three years, we would see a 27 per cent increase in housing demand.”

                      JP Morgan forecast national house price inflation of 5 per cent in 2015 and 2016, with London accelerating from the current 10 per cent level. Every percentage point of house price inflation adds about 0.8 per cent to housebuilders’ gross margins, it said.

                      The prospect of “super-margins across the sector” led JP Morgan to turn positive on Bellway, which jumped 4.6 per cent to £12.97. It also recommended buying Taylor Wimpey
                      , up 3 per cent to 90.9p, and Berkeley Group
                      , up 1.4 per cent to £20.41. Persimmon rose 2.9 per cent to £10.69 and Barratt gained 2.4 per cent to 274.1p.

                      The FTSE ended Thursday up 0.4 per cent or 24.18 points at 6,411.74. That gave the index its biggest quarterly gain since 2010, with an 8.7 per cent advance over the three months.

                      Tate & Lyle
                      led Thursday’s blue-chip risers, up 3 per cent to 850p, on a reassuring fourth-quarter trading update. The key positive was that sales of Sucralose, Tate’s sugar substitute that provides about a fifth of its earnings, had returned to normal levels after a poor third quarter.

                      Johnson Matthey
                      gained 2.2 per cent to £23.00 after announcing the purchase of Formox, a Swedish chemical catalyst business, for £107m in cash. Morgan Stanley called it a “sensible and logical deal” that would boost earnings per share by 2.5 per cent next year, but did nothing to ease concerns about auto industry demand following last week’s profit warning from Lanxess.

                      InterContinental Hotels
                      rose 2.8 per cent to £20.07 on news it had completed the sale of its Park Lane hotel much sooner than expected.

                      “The group is part way through its $500m buyback and we think this disposal gives ample scope to repeat that buyback which should more than offset any [earnings] dilution,” said Citigroup.

                      National Grid
                      took on 1.9 per cent to 765p after setting out a policy of dividend growth at least in line with inflation for the “forseeable future.” The unscheduled statement also said trading was modestly ahead of previous expectations.

                      Fears of a share overhang pushed Reckitt Benckiser
                      1.2 per cent lower to £47.18.

                      JAB, the investment firm run by former Reckitt chief Bart Becht, may have to cut its 10.5 per cent stake in the group to fund a €7.2bn bid for DE Master Blenders.

                      Antofagasta
                      was down 4 per cent to 984p after saying overnight that it would restart work at the Antucoya copper mine in Chile, which had been mothballed three months ago.

                      The group’s revised plan outlined a total budget of $1.9bn to start production in 2015, which raised concerns that the investment costs may require a dividend cut. Investors also speculated that Antofagasta’s decision may have been forced by Marubeni, the Japanese trading company that agreed to buy 30 per cent of the project in December 2011.

                      “Despite the $500m spent on the project to date, most investors breathed a sigh of relief at the news of the suspension given the marginal (at best) economics of the project,” said Macquarie. “Most investors assumed the project would be terminated. It will therefore come as an unwelcome surprise to many that not only is the project being resumed, but it will now cost $200m more to build, will cost more to mine and will be delayed by 6-12 months.”