Economic growth must slow, warns BIS

By Norma Cohen and Chris Giles in London

Global economic growth must slow to curb inflationary pressure around the world, the influential central bankers’ bank has warned, saying that there was little or no slack left for rapid non-inflationary expansion.

In its annual report, the Bank for International Settlements said that with the scope for rapid growth closing, monetary policy should be quickly brought back to normal and countries should act urgently to close budget deficits.

More

ON THIS STORY

• Interactive Inflation across the G20
• High-tech companies wary on expansion
• Fed holds rates on inflation concerns
• In depth Central banks
• Eurozone core inflation rises sharply

The tough recommendations were urged on advanced and emerging economies alike from the BIS – the international organisation which came closest to predicting the 2008-09 financial and economic crisis – despite signs of weakening economic momentum this year.

The spike in energy prices has cooled the global economy since January and led to fears for the recovery, culminating in the International Energy Agency’s release of 60m barrels of oil in the coming month.

The BIS report, however, warned policymakers not to expect a normal recovery because much of the pre-crisis growth had been unsustainable and capacity will have been destroyed for ever, particularly in finance and construction.

Jaime Caruana, general manager of the BIS, said on Sunday that the imbalances caused by unsustainable growth before the crisis “now need to be rectified, and as they are, growth is bound to be slow. Policymakers should not hinder this inevitable adjustment.”

Rising food, energy and other commodity prices underscored the need for central banks around the world to begin raising interest rates, perhaps even more rapidly than they brought them down, said the BIS in its report. “Highly accommodative monetary policies are fast becoming a threat to price stability,” it concluded.

The fact that interest rates have been so low for so long also introduces new risks into the world’s financial system even though these policies were put in train initially by a desire to reduce risk, the report added.

“The persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions,” the BIS said.

The BIS view runs counter to that of the Federal Reserve, its largest member central bank, which made it clear last week that its interest rates would remain extremely low for an “extended period”.

Its recommendations are closest to the policy of European Central Bank, which is expected to raise interest rates for a second time in early July. In a barb at the Bank of England, the BIS said inflation had persistently exceeded its 2 per cent target since the end of 2009, but that rates have not yet been raised in response. “One wonders how long its current policy can be sustained,” the BIS said.

財富管理東移惠及獅城

羡煞帕拉多廣場（Paradeplatz）上的銀行了！

監管少利潤可觀

帕拉多廣場是瑞士蘇黎世的銀行中心，曾幾何時，富裕人士很倚賴在這裏落戶的財富管理銀行，然而，兩者今天的關係卻疏遠了。這並不令人意外：瑞士銀行（UBS）在金融危機時陷入困境，不僅導致客戶流失，甚至威脅瑞士私人銀行業的信譽。事實上，除了瑞銀的問題，當地私人銀行業甚為健康。

不過，正如瑞士銀行家及他們在英美的同儕漸漸發現，新興市場的富裕客戶希望在老家附近獲取財富管理意見及服務。事實上，考慮到亞洲財富管理收入今年預料增長多達20%，比發達市場的增長步伐快一倍，羅兵咸永道（PwC）就估計，新加坡或會在2013年前，晉身為全球首屈一指的環球財富管理中心。

歐洲傳統財富管理公司正嘗試打好亞洲的根基，在當地開立「在岸」（onshore）前哨基地，以爭取中國及印度企業家的生意。

除了亞洲財富的誘因外，還有其他具說服力的理由，支持銀行向東方拓展業務。在亞洲，監管機構對銀行業的干預較少。再者，不同於在發達市場每每要倚賴錯綜複雜的轉介網絡，亞洲的生意不僅較易做，利潤也較可觀。

全球總體而言，財富管理銀行平均賺取的毛利，相當於管理資產總值的72個基點；未來兩年，有關比例預料會增加6個基點。對於綜合銀行而言，巴塞爾III（Basel III）新資本標準落實後，拓展財富管理業務的誘因就更大，皆因財富管理業務消耗的智力資本比金融資本多。

不過，銀行要管理好自己的成本倒有困難。接受羅兵咸永道訪問的二百七十五家金融機構中，近四分三的成本對收入比率（cost-to-income ratios）超過60%；整體行業平均比率達71%。

缺人才成本比率高

而且，財富管理業務的最主要開支，在亞洲愈來愈難控制：在瑞士或英美，銀行可以利用大批擁有豐富經驗的人才。但若要拓展東方業務，銀行要麼重金禮聘，向對手「挖角」；要麼大灑金錢自行培訓人才。進軍東方的市場回報也許難以抗拒，但卻要付出代價。

譯自THE LEX COLUMN

版權所有：FINANCIAL TIMES

America flirts with a fate like Japan’s

The stalling of the US recovery raises big, scary questions. After a recession, this economy usually gets people back to work quickly. Not this time. Progress is so slow, the issue is not so much when America will return to full employment but what “full employment” will mean by the time it does.

The A-List

An exciting new comment section featuring agenda-setting commentary on global finance, economics and politics

Contributors will include financier and philanthropist George Soros, chief executive of Pimco Mohamed El-Erian, chairman of Goldman Sachs Asset Management Jim O’Neill, political scientist Francis Fukuyama, professor of politics Anne-Marie Slaughter and former EU trade commissioner Peter Mandelson

The administration thinks the pace of recovery will pick up soon. Last week President Barack Obama called the pause a “bump in the road”. Others think the slowdown will persist and might get worse, fears that cannot be dismissed. One alarming possibility is that the traits the US has relied on to drive growth in the past – labour market flexibility, rapid productivity growth – might have become toxic. If the US is unlucky, traits seen as distinctive strengths are now weaknesses, and a “lost decade” of stagnation, like Japan’s in the 1990s, might lie ahead.

The mainstream view is more optimistic and goes as follows. The recovery in the first half of the year was weak but special or temporary factors were to blame: bad weather, the timing of defence expenditures, the phasing out of fiscal support, the Japanese earthquake, the oil-price surge, worries over Europe’s debt, and so on. Together these could have cut 1.5 percentage points from growth in the first half of this year, yielding a feeble 2 per cent – too slow to put a dent in unemployment.

Some of those factors should fade in the second half, letting the growth rate recover to between 3 and 4 per cent. That would be disappointing with so much ground to make up – though unemployment would be falling, albeit slowly. Even optimists acknowledge it will take a while for consumers to cut debt to comfortable levels, for the housing market to stabilise, and for other aftershocks of the Great Recession to be worked out. But, in the end, the economy will bounce back and close the gap between actual and potential output.

Strong productivity growth, reflecting the US economy’s famous ability to cut jobs promptly, is central in all this. Potential output is growing even as actual output and employment stutter. This hurts now, the optimists acknowledge, but when conditions improve workers will be rehired. A low-friction labour market is fast to hire as well as to fire, and American companies will take up the slack quickly once conditions allow. In the end, US labour-market exceptionalism will deliver new jobs and strong growth as in the past.

But will it? Two things might work differently this time. First, since the recession was unusually deep and the recovery unusually slow, the US is experiencing unheard-of long-term unemployment rates. The housing slump and its associated plague of negative equity aggravate this by making it harder for the unemployed to move to find work. Long-term joblessness erodes skills and employability. Structural unemployment is surely inching closer to European levels. America has not been here before.

As Financial Times columnist Martin Wolf recently pointed out, after a recession such as this you can make a case for welcoming low productivity growth if it keeps more people in work. Better to spread the pain around through short-time working, he argued, than cut jobs. In a new paper, Robert Gordon of Northwestern University makes essentially the same point. He shows that in the past quarter-century the US labour market has become markedly more exceptional – more organised around the “disposable worker”. Management thinking and declining unions have driven friction ever lower, while employment subsidies and regulation have made Europe’s labour markets stickier. The Great Recession and its surge of long-term unemployment are a severe test of what was once seen as a distinctive US economic strength.

The second danger also works through productivity, but arises from the role played by debt in this cycle. Under circumstances such as today’s, with households striving to cut debt and interest rates at zero, economies can behave in strange ways. In a paper last year, Paul Krugman of Princeton and The New York Times, and Gauti Eggertsson of the Federal Reserve Bank of New York drew attention to the possibility of a “paradox of toil”, akin to the paradox of thrift (whereby if everyone tries to save more, the economy shrinks and so does aggregate saving). The logic of the paradox of toil is simple. Suppose the supply of labour increases, or productivity rises. Initially, prices would tend to fall. If nominal interest rates are stuck at zero, the real interest rate and burden of debt both rise. This leads overleveraged consumers to cut spending still more. Demand is not just slow to respond: the economy shrinks.

It is a peculiar world where higher productivity reduces output; and willingness to accept wage cuts worsens unemployment (which Mr Krugman and Mr Eggertsson call the “paradox of flexibility”). The idea that easy hiring and firing might permanently raise long-term unemployment is less bizarre, but still not something the US has needed to worry about in the past.

A gradually improving recovery would put things right side up. US strengths would be strengths again. But a prolonged slowdown, with consumers still not on top of their debts, might be self-reinforcing. Some would say this has already begun, hence the pause. The optimists say no, not yet – and they had better be right.

Eurozone fund to limit preferred status

Bonds issued by the eurozone’s new €500bn rescue fund on behalf of Ireland, Greece and Portugal will not enjoy preferred creditor status – an alteration to the fund intended to help those countries’ return more quickly to private capital markets.

The adjustment to the European Stability Mechanism was agreed by eurozone finance ministers at a meeting in Luxembourg on Monday that was dominated by concerns about Greece.

It marks a subtle but important change to the terms of the ESM unveiled in March by European leaders: specifically, that the new rescue fund’s bonds would enjoy preferred status to those of all other creditors, save the International Monetary Fund.

That seniority would put ESM bonds at the front of the queue for repayment and was intended to make the rescue fund more palatable to taxpayers.

The ESM is set to become operational in mid-2013, when it will take over from the temporary €440bn bail-out fund, the European Financial Stabilisation Facility, that eurozone governments cobbled together in the midst of last year’s Greek bail-out. The EFSF’s bonds do not enjoy preferred status.

The mismatch between the two funds has added to concerns about the ability of Greece, Ireland and Portugal – all of whom have tapped the EFSF for cash – to return to private capital markets for funding. The chief worry among investors is that any new bonds they purchased would become junior if one of those governments was later forced to seek fresh assistance from the ESM.

For Ireland, the worry is particularly acute since under the terms of its €85bn rescue package it is supposed to return to private markets in late 2012 – just months before the ESM begins operations. The mismatch has also created issues for Portugal because some of the money it is due to receive from its €110bn package may not be paid until after the ESM has replaced the EFSF.

Jean-Claude Juncker, the president of the Eurogroup, said the change was “good news” for each of the three countries. “This should make it easier for these countries to come back to the market,” Mr Juncker told journalists in Luxembourg.

Mr Juncker also announced changes to the EFSF’s capital structure intended to make the fund more effective. Its working capital will be increased to €726bn – amounting to an over-guarantee of 165 per cent – so that it is able to lend its full €440bn capacity, if needed.

Standard Bank says Chinese copper market cause for concern

Posted by Izabella Kaminska on Mar 28 17:49.

We’re calling it the “The Great Chinese Commodity-as-Collateral Financing” fiddle.

That is, the purchase of commodities like copper on deferred payment terms for the sole purpose of raising cheap financing for reinvestment in higher yielding assets.

We’ve raised the alert before, but now thankfully more and more analyst research seems to be catching on.

The latest comes in the shape of a Standard Bank note by a team freshly back from a Chinese field trip (H/T the FT’s Jack Farchy).

Not only do they provide excellent new estimates of just how pervasive the practice in China really is, they’re sounding the loudest alert to the copper market yet.

For one, the note is entitled “China trip report — copper market a real cause for concern”.

Here are some particularly useful anecdotes we found from the note (our emphasis):

We visited China last week, with the aim of gauging Chinese sentiment, the impact of monetary tightening measures on consumers and also investigating the scale and implications of copper’s use as a financing tool. We were already fairly bearish towards copper’s near term prospects before the trip. That negative feeling has intensified, with significant downside risks to copper prices emerging.

• Anecdotally, something in the region of 600,000 mt of refined copper is currently sat in bonded warehouses in Shanghai, with perhaps another 100,000 mt in the southern ports. This is equivalent to around 11% of China’s total refined consumption and around 40% of China’s net refined copper demand.

• Bonded stocks have climbed by around 300,000 mt since the beginning of this year, pointing to the absence of end use demand at the moment.The amount of metal is so high, that spare capacity at some bonded warehouses is running out, with some metal being stored outside.

• The scale of the refined inventory casts into doubt the size of the expected refined deficit in the copper market this year, and raises the prospect of a balanced market, or even a small surplus.

• More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.

Initially via a letter of credit and then by using deferred payment LC, they create a borrowing vehicle. Estimates for the amount of metal tied up in such a way range from 40-80% of total bonded stocks. Our estimates are towards the upper end of this range.

• Property developers (or the property developing arms of conglomerates), appear to be behind the lions share of this type of activity, driven by an unwillingness by domestic banks to extend finance, or the imposition of interest rates of anything from 10-20% when they do. On that basis, interest rates on metal of LIBOR + cost of funding look very attractive indeed.

The big news of course is that Standard Bank attributes the lion’s share of the commodity “fiddle” to property developers.

That means, in their opinion, not only is the arrangement exposed to falling copper prices, it’s equally vulnerable to falling Chinese real-estate prices. Potentially, more so.

As they note:

A scenario of falling Chinese property prices, perhaps combined with a government clampdown on alternative sources of funding, would therefore be a devastating outcome for the copper market, simultaneously robbing the metal of an end-user and leading to a mini credit crunch. The obvious home for the bonded material would then be the LME warehouses in the Asian region, with very negative implications for sentiment towards copper prices.

As for the Shanghai-London arbitrage — which traditionally sends copper China bound when prices are higher in Asia than in London — the volumes have, as we havenoted, for a while been flowing towards Shanghai regardless of lower prices.

Now Standard Bank says that scenario only emphasizes the use of copper imports as a financing tool, as the arbitrage loss is clearly seen as a natural hike in the cost of financing.

Or as they put it:

In terms of the SHFE-LME arbitrage, the level remains depressed. With copper also now regarded as a financing tool, the arbitrage is likely to be artificially depressed for some time to come. Arguably, any arbitrage losses on metal that is brought into China, if financing deals are wound up, is perhaps more akin to an interest rate than a trading loss, i.e. an additional cost for the facility to that already paid to the financial institution.

• With the SHFE-LME arbitrage remaining in negative territory, even more of the spare metal in bond, (not held on finance), may be re-exported and delivered into LME warehouses over the coming weeks and months. This alone should keep a lid on prices and prevent the market getting too carried away, even without any potential implosion in China.

Now account for that when you’re the People’s Bank of China…

Tricky.

Related links:
China’s bonded-warehouse copper mystery – FT Alphaville
China’s copper as collateral addiction - FT Alphaville
Copper’s rise slowed by Chinese oversupply - FT
Simply amazing commodity collateral shenanigans in China - FT Alphaville

iPhone自貶身價有理

既然沒穿沒爛，為何自貶身價？售價昂貴且邊際利潤豐厚的蘋果智能手機iPhone銷情愈來愈佳，然而，關於蘋果正研製一款廉價版iPhone的揣測卻揮之不去。

這個主意聽起來莫名其妙，但深思之下其實大有道理。售價較昂貴的高端智能手機市場仍然處於高速增長階段，但數年後，增長動力很大程度要倚賴較低廉的市場。

瑞信認為，售價500美元以上的手機市場2012年後將停滯不前，反觀售價300美元以下的手機市場則會突飛猛進。智能手機業務佔蘋果總銷售四成，貢獻一半毛利；若蘋果想讓這個重要部門繼續保持增長，就必須推出一款更多人能負擔的手機。

此舉同時可以間接地協助蘋果，捍衞在平板電腦這個增長迅速市場上的主導地位。運行Google作業系統Android的智能手機，銷量之所以比iPhone高出一倍，因為前者獨霸售價較廉宜的市場。這些Android新用戶將購買相關程式軟件（apps），熟習Android的操作，日後就有更大機會選購運行Android的平板電腦而非iPad。

當然，縱使自貶身價頭頭是道，但並不表示謠言屬實。過往，蘋果即使遇上增長迅速的市場商機（例如小型筆記簿型電腦Netbook風潮），若自認不能生產出價格既具競爭力、質素又不負自家品牌形象的產品，就寧願置身事外。另一方面，蘋果願意犧牲多少毛利來換取增長，也是個謎。

「簡約版iPhone」（iPhone nano）即將會矚目登場嗎？天曉得。不過，若蘋果沒認真考慮過拓展有關商機就太笨了。

iPhone自貶身價有理

既然沒穿沒爛，為何自貶身價？售價昂貴且邊際利潤豐厚的蘋果智能手機iPhone銷情愈來愈佳，然而，關於蘋果正研製一款廉價版iPhone的揣測卻揮之不去。

這個主意聽起來莫名其妙，但深思之下其實大有道理。售價較昂貴的高端智能手機市場仍然處於高速增長階段，但數年後，增長動力很大程度要倚賴較低廉的市場。

瑞信認為，售價500美元以上的手機市場2012年後將停滯不前，反觀售價300美元以下的手機市場則會突飛猛進。智能手機業務佔蘋果總銷售四成，貢獻一半毛利；若蘋果想讓這個重要部門繼續保持增長，就必須推出一款更多人能負擔的手機。

此舉同時可以間接地協助蘋果，捍衞在平板電腦這個增長迅速市場上的主導地位。運行Google作業系統Android的智能手機，銷量之所以比iPhone高出一倍，因為前者獨霸售價較廉宜的市場。這些Android新用戶將購買相關程式軟件（apps），熟習Android的操作，日後就有更大機會選購運行Android的平板電腦而非iPad。

當然，縱使自貶身價頭頭是道，但並不表示謠言屬實。過往，蘋果即使遇上增長迅速的市場商機（例如小型筆記簿型電腦Netbook風潮），若自認不能生產出價格既具競爭力、質素又不負自家品牌形象的產品，就寧願置身事外。另一方面，蘋果願意犧牲多少毛利來換取增長，也是個謎。

「簡約版iPhone」（iPhone nano）即將會矚目登場嗎？天曉得。不過，若蘋果沒認真考慮過拓展有關商機就太笨了。

Blow to bank crisis plans

Regulators are struggling to create a global mechanism that could wind down a big financial institution without the disruption caused by Lehman Brothers’ collapse in 2008.

The US is due on Tuesday to propose its own so-called “resolution” regime that would allow officials to stabilise a big, distressed bank, sell off assets over time and force creditors to take a discount on the value of their debt, without taxpayer money or market disruption.

Paul Tucker, deputy governor of the Bank of England, said it was a “mistake” by the US to equate keeping a seized bank open with a bail-out. He questioned whether the system could work if no buyers were on hand to pick up some assets.But policymakers attending meetings around the International Monetary Fund and Institute of International Finance criticised the US regime and cast doubt on whether anything but a modest set of principles could be agreed at the Group of 20 meeting in Seoul next month.

Mr Tucker said he thought employees would stop coming to work at an institution slated for closure. “And I suspect that even if it’s risk-free, some counterparties will move away because what’s the point of dealing and placing money with an institution that has no future?” he said.

European policymakers want to allow “open bank resolutions” that keep an institution running, but the US is opting for a system of mandatory liquidation, partly because the multibillion dollar bail-outs of AIG and Citigroup created immense political pressure for creditors, shareholders and executives to bear financial responsibility. The US is also far less enthusiastic than some Europeans on the introduction of instruments such as “contingent capital” and “bail-ins”, designed to convert debtholders’ stakes in a bank into more loss-absorbent equity when it gets into trouble.

Lael Brainard, the senior Treasury official responsible for international affairs, said that “more analysis” was needed of bail-in instruments and they should serve only as “complements to effective resolution frameworks”.

But more important than US scepticism might be a lack of investor appetite, according to some bankers and investors meeting in Washington.

“I’m severely concerned,” said Raj Singh, chief risk officer at Swiss Re. “That’s not the kind of bet I’m buying into when I’m buying into bank debt: who’s really going to fund all these things that people are talking about in these resolution mechanisms? It certainly won’t be people like us.”

Phillipp Hildebrand, chairman of the Swiss central bank, said international regulators and policymakers meeting at the Basel committee and Financial Stability Board would define “core ingredients” that should be included in national resolution regimes and over time work to harmonise them.

“Cross-border resolution is very hard,” he said. “If you try to build a beautiful, global resolution regime I think we‘ll be at it for a very, very long time.”

打賭墨西哥100年

墨西哥剛以超低的6.1厘孳息出售年期100年的債券，有關這宗一個世紀以來最大型發債行動 的新聞反映不僅一個而是兩個泡沫：投資者對回報及長期投資項目飢不擇食；他們再次鍾情新興市場，即使蛇蠍美人也甘願投懷送抱。

新興市場風險 價差由8年前的高位下跌至近日的新低。整體而言，這可能是合理的；但墨西哥過去100年的歷史卻道盡幾許變遷。1929年後，現代墨西哥的局勢才真正穩定 下來，但所謂的穩定也只是以新興市場的標準而言。縱使革命制度黨（PRI）往後71年逐漸鞏固權力，但墨國貨幣仍多次貶值，包括1976年、1982年及 1994年。1994年的貨幣危機要勞煩美國動用500億美元拯救。

墨西哥近期則面對毒梟橫行的問題，自總統卡爾德龍（Felipe Calderon）上任至今，販毒黑幫仇殺不僅奪去3萬人的性命，更把遊客嚇走，有時甚至連軍隊也招架不住。來自石油的收入也非長賺長有；舊油田產量節節 下跌，開採新油田則須投放大量資金及專業技術。當地油產與2004年高峰期比較下跌四分一；5年後，墨西哥可能成為淨進口國。引入更多外來資本發展油業似 乎是明智之舉，但卻受制於政治阻力及憲法賦予國營石油公司Pemex的公營機構地位。再者，逃稅猖獗加上墨西哥惡名昭彰的貪污問題（根據透明國際的評分， 墨西哥廉潔程度世界排名89位），令當局拓展收入面對困難。

政局不穩甚至通脹，是否已成為歷史陳迹？投資者寧願借錢給墨西哥100年，接受 比「沒有風險」的美國10年前發行、年期遠為短的債券更低的利率，顯示希望戰勝了教訓。

China tightens grip on output of rare earths

By Leslie Hook in Hong Kong

Published: October 6 2010 17:23 | Last updated: October 6 2010 17:23

When the Olympic torch toured the world on its way to Beijing in August 2008, one of the Chinese cities it passed through was Baotou, an unassuming town of 2m in the middle of Inner Mongolia.

Today Baotou is back in the limelight thanks to its outsized role in the production of rare earths, a group of 17 minerals used in the manufacturing of products from car batteries, video cameras to military equipment.

China produced 97 per cent of the world’s rare earths last year, and global concerns about that monopoly have peaked in recent weeks, after Japanese traders reported their rare earth shipments were halted during a diplomatic dispute between their country and China.

At the centre of this debate sits the Inner Mongolia Baotou Steel Rare Earth Hi-Tech Company, which has quietly grown into the world’s largest producer of the minerals, contributing nearly half of China’s production.

During the 1980s, global rare earths production shifted from the US to China because of lower labour costs and also lower environmental standards – the mining and processing of these elements can be highly polluting.

Today, the Baotou company is listed in Shanghai with a market capitalisation of Rmb62bn ($9.3bn) and it produces 55,000 tonnes of processed rare earths a year, about 44 per cent of global production.

Net profit fell because of the global decline in demand last year to Rmb56m but its interim net profit this year bounced back to more than double that amount, which has been reflected by its share price which is up 172 per cent since January.

“They’ve always been the single most powerful force in the rare earth industry,” says Ian Higgins, general manager of Less Common Metals. “Over time Baotou has been getting stronger and stronger.”

Baotou’s position could grow further thanks to China’s plans to consolidate the rare earths mining sector.

In September, the powerful National Development and Reform Commission announced that Baotou Iron and Steel Group, the parent of the listed rare earths company, would have a monopoly on rare earths production in Baotou by the end of the year, taking over smaller mines in the area. China has 129 legally registered rare earths mines – and many more that operate illegally, usually at great environmental cost.

Baotou Iron and Steel Group also began to extend its reach into southern China, investing Rmb232m in August to buy minority stakes in three rare earth miners in the south eastern Jiangxi province.

The company has received approval to develop China’s first rare earths reserves, which will eventually grow to 200,000 tonnes of processed rare earths, equivalent to roughly 19 months of global production based on 2009 levels.

For the industry as a whole, however, there are signs that the Beijing government does not wish it to get too big. The consolidation of China’s rare earths sector is part of a broader national effort to shift away from this type of low value-added, high environmental impact products.

As a result, China has cut export quotas for rare earths and raised export taxes for the minerals.

Export taxes for rare earths are currently around 15 to 25 per cent, and quotas for the mineral are so tight that they are traded around between the companies that receive quota allocations.

The going rate is about $30 per kilogram, according to Mr Higgins.

These efforts to increase prices may eventually spur more countries to start rare earths production, and cut the number of Chinese rare earths miners, although China’s industrial consolidation efforts often exhibit a large gap between policy and practice.

Wall Street downbeat on bank earnings

By Francesco Guerrera and Andrew Edgecliffe-Johnson in New York

Published: October 5 2010 23:03 | Last updated: October 5 2010 23:03

Wall Street’s sentiment towards Goldman Sachs and Morgan Stanley has turned sharply bearish over the past month with analysts’ estimates for the banks’ third-quarter earnings plunging amid a slump in trading activities.

The poor performance of the trading operations – a key driver of the two banks’ recovery after the financial crisis – will intensify questions over their business models and deepen fears of job

Analysts have slashed their forecasts for Morgan Stanley’s third-quarter results by more than 73 per cent in the past 30 days, according to Thomson Reuters’ StarMine.

Goldman’s consensus estimate has fallen by more than a ­quarter since early September and is now forecasting the lowest quarterly earnings per share, excluding exceptional items, since November 2008.

Sri Raman, StarMine’s quantitative analyst, said Goldman’s results, due on October 19, could still come in below the consensus numbers because five of the 22 analysts covering the bank were yet to lower their predictions.

“If they don’t all revise their estimates, we would expect Goldman to miss [the consensus forecast],” he said. “That is a bold prediction because Goldman has a history of always beating expectations.”

StarMine estimates that Goldman’s earnings could come in more than 16 per cent below the current EPS consensus of $2.52. In the same period last year, Goldman earned $5.25 per share.

The consensus estimate for Morgan Stanley is $0.15 per share, compared with the $0.38 EPS recorded in the third quarter of 2009.

Goldman and Morgan Stanley declined to comment, but executives said they expected most analysts to fall into line before the results. Financial sector analysts tend to move later than colleagues covering other sectors because bank earnings are more volatile.

Macroeconomic woes and political uncertainty have kept investors on the sidelines, prompting analysts to become more and more pessimistic during the quarter about the profitability of trading operations.

“Anxiety stemming from a waning economic recovery and uncertainty over the mid-term elections left clients paralysed and trading desks fell silent during the quarter,” wrote Brad Hintz of Bernstein’s Research in a recent note that lowered estimates for Morgan Stanley and Goldman Sachs.

StarMine weights analysts’ forecasts according to their past accuracy and gives more emphasis to those who make early calls or “bold” estimates, which differ strongly from the mean.

It estimates that its methodology has had an 80 per cent success rate over the past 10 years in predicting the direction in which estimates will move for highlighted stocks.

Mr Raman said this quarter’s reporting season should see earnings of North American companies rise on average by 23.8 per cent year on year, building on the 38 per cent growth seen in the second quarter.

Hong Kong presses for RMB-denominated IPOs

By Robert Cookson in Hong Kong

Published: October 5 2010 19:35 Last updated: October 5 2010 19:36

The Hong Kong stock exchange is pushing to allow companies to launch initial public offerings denominated in the Chinese currency by next year, opening a fresh channel for international investors to buy renminbi assets.

The move, if approved, could also eventually become an important fundraising route for companies with operations on the Chinese mainland.

HKEx is one of dozens of financial groups that has been rushing to create renminbi-denominated products in Hong Kong since July, when China eased restrictions on the use of the currency in the territory.

Banks and other financial institutions in Hong Kong have rolled out insurance policies, certificates of deposit and hedging tools denominated in renminbi – the first such products available to foreign investors.

Mr Li said the introduction of renminbi-denominated products on the Hong Kong stock exchange would help China boost international use of its currency and cut reliance on the dollar, adding that it was “a very small step in a very long march”.

Since becoming the first mainland-born head of the Hong Kong bourse in January, Mr Li, a former investment banker, has been lobbying Beijing to relax China’s strict controls on cross-border flows of the renminbi.

Further liberalisation was needed before companies would have enough reason to issue renminbi-denominated shares in Hong Kong, he said.

“The key to making this work is to allow the money to flow back,” Mr Li said.

Although China has this year removed almost all restrictions on the use of its currency for cross-border trade, the repatriation 遣送回國; 調回本國 of renminbi for investment purposes almost always requires the approval of mainland regulators.

HKEx would like Beijing to introduce a fast-track route back to the mainland for companies that have raised renminbi from IPOs in Hong Kong.

McDonald’s, the US burger chain, in August became the first foreign multinational to issue renminbi-denominated bonds in Hong Kong. But the company had to wait about a month before it could move the proceeds on to the Chinese mainland.

The biggest hedge funds in the US…

Posted by Sam Jones on Sep 30 17:05. Comment | Share

Out from AR magazine just moments ago is their annual ranking of the biggest hedge fund managers in the US. Unsurprisingly, Bridgewater is still number one. Surprisingly, it has increased its lead by a significant margin.

The firm now manages a titanic $50.9bn according to AR. Its nearest rival is JP Morgan – the bank – which manages around $41.1bn in hedge funds connected to its Highbridge business.

The nearest independent contender is Paulson & Co, with an estimated $31bn AUM. This year has hardly been kind on the firm, though after its spectacular 2008 and 2009, few would doubt its deserved place at the top table. Though September is supposed to have been good for Paulson, as of August 31 the Paulson Advantage and Advantage Plus funds were down 7.54% and 11.16% respectively.

Bridgewater has meanwhile seen its flagship Pure Alpha II fund return 16.74 per cent since January. In market conditions such as these, Bridgewater is deserving of praise. (The sylvan Connecticut-based firm is as cultish publicity-shy as it is successful, but according to investors, Bridgewater was a major beneficiary from the eurozone crisis).

The only other surprise is the – relative – fall from grace of DE Shaw, which according to AR manages just $17.8bn as of July 1 (we understand the number has since increased). Little wonder the firm is slashing jobs.

Related links:
www.ft.com/hedgefunds
www.twitter.com/samgadjones

What price Tokyo’s (first round) of intervention?

Posted by Gwen Robinson on Oct 01 10:16. Comment | Share

The details of Tokyo’s first yen intervention in six years have emerged from the Japanese finance ministry.

As Bloomberg reports on Friday, Japan sold Y2,120bn in the month through to September 28 in a bid to weaken the yen after it rose to a 15-year high on September 15. This was in many circumstances more than expected:

“The number exceeded expectations somewhat and may add to speculation they intervened more than once,” said Takashi Kudo, general manager of market information service at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. in Tokyo. “If the market gets the impression that they will continue to step in, that’s a positive for easing the yen’s gains. And exporters may not need to buy the yen in a hurry.”

To put it in context, that Y2,120bn ($25bn) worth of intervention far exceeded the previous single-day high of Y1,660bn that the BoJ put into yen-containment efforts on January 9 2004. In the eight months from January 2003, the government injected about Y13,300bn into the market in efforts to stop the yen breaking through Y115 to the dollar, according to finance ministry data.

Nomura’s Tokyo-based team led by currency strategist Yunosuke Ikeda estimates that this time, the finance ministry expects to spend a total of between Y10,000bn to Y20,000bn to try to curb yen strength. Tokyo’s current budgetary arrangement allows a maximum of Y34,700bn for FX intervention, according to end-June estimates, Ikeda adds.

At the same time, as the Bank of Japan heads into its regular policy meeting on Monday, and the yen stays stubbornly high, speculation is growing — as we noted on Thursday — that the central bank will take extra measures towards easing.

The BoJ’s problems are being compounded by extra pressure on the dollar-yen exchange rate, amid growing expectations in the US that the Fed will shortly take more steps to boost the economy. That follows the Fed’s September 21 announcementthat it is “prepared to provide additional accommodation if needed to support the economic recovery” – which has fuelled speculation of a fresh round of quantitative easing, as the Fed increases Treasury purchases.

So back in Tokyo, just to keep people on their toes, as Bloomberg adds:

Finance Minister Yoshihiko Noda [on Friday] reiterated the government’s resolve to take bold action on the yen if necessary. Vice Finance Minister Mitsuru Sakurai yesterday said he expects the Bank of Japan to make appropriate policy decisions at a monetary policy meeting next week, an indication the government wants the central bank to do its part in supporting growth.

Meanwhile, Julian Jessop of Capital Economics has some thoughts on the recent Japanese intervention, as he writes in a client note:

This month’s intervention by Japan to weaken the yen has contributed to fears of a “global currency war” or, viewed more positively, to hopes that large-scale unsterilised intervention by the major central banks will be another important way in which unconventional monetary policy will be used to boost nominal demand and asset prices. We are far from convinced.

For a start, if the aim of Japanese authorities was to cause a fundamental shift in sentiment towards the yen, they have clearly failed. The yen initially fell sharply after the official intervention on 15th September, but it has now retraced almost all of that decline. The upshot is that, rather than making intervention by others more likely, this failure has surely reduced the chances that central banks elsewhere will follow Japan’s example.

What’s more, there is very little evidence that Japan regards currency intervention as a tool of monetary policy… two key points: first, it is worth clarifying just whose intervention it was. The Bank sold yen for dollars… However, the Bank was simply acting as the agent for the Japanese government and specifically for the Ministry of Finance, which determines currency policy.

Second, too much has been made of the fact that the intervention was apparently unsterilised. The yen sold do seem to have been allowed to accumulate in commercial banks’ current accounts at the Bank of Japan (thus loosening monetary conditions), rather than been mopped up through operations such as bill sales. But this may not be as significant as it first appeared.

Anonymous “official sources” have suggested that the intervention has not been fully sterilised (yet?), but there has been no formal statement on this issue from the Bank. Current account balances held at the Bank have risen by ¥2-3 trillion since 15th September, the bulk of which may well represent unsterilised intervention. However, these balances usually rise anyway in late September as the end of the fiscal half year approaches. The Bank may simply have decided to leave the intervention funds in the market ahead of the fiscal half year-end as a convenient way of providing extra liquidity, but will then allow them to drain again in October as seasonal pressures unwind.

Even if left fully unsterilised, notes Jessop, the Y2,000bn or so spent would represent just 2 per cent or so of Japan’s monetary base, and less than 0.3 per cent of the broad monetary aggregate, M2. This figure, he notes, is:

…also dwarfed by other possible monetary policy changes – for example, if the Bank does ease policy further next week, the leading option would probably be an increase in the total amount of cheap loans under the special funds-supply operation from Y30,000 to Y50,000 – an increase potentially 10 times bigger than any boost from the intervention.

Overall, says Jessop, the markets “may have read far too much into the actions of the Japanese authorities”. He concludes:

“We certainly stick to our first thought that the intervention will not fundamentally alter the outlook for the yen. Moreover, the move is still best seen as a gesture to appease domestic criticism of PM Kan, rather than the first in a series of unsterilised interventions designed to complement other monetary tools. And if Japan’s actions were the opening salvos in a global currency war, they have proved to be a damp squib.”

Related links:
Japan intervention watch - FT Alphaville
Yen intervention: Did they or didn’t they? – FTAlphaville (Sept 24)
In-depth: Yen intervention – FT.com
What next for the yen: ‘A lot of fake movements’ – FT Alphaville

A psy-QE-logical problem

Posted by Tracy Alloway on Oct 01 15:14. 2 comments | Share

David Rosenberg thoughts on QE v2.0 are complex indeed.

Though he’s detailed at length why quantitative easing will flatten the yield curve —this time — he’s rather dubious of its actual effects on the US economy, at least in terms of mortgages.

In his Friday ‘Breakfast’ missive, the Gluskin Sheff analyst says:

New home sales are at their second lowest level on record despite record low 4% long-term mortgage rates. So if QE2 brings rates down to 3%, who cares? And with 11 million U.S. households upside down on their mortgages, refinancings have failed to boom and add cash flow to pocketbooks as was the case in 2003-04.

At the 2006 bubble peaks, households were engaging in mortgage equity cashouts to the tune of over $80 billion per quarter. That provided the thrust for the spending binge even as the jobs cycle lagged behind, similar to what we had seen in the past as the economy continued to adjust the vagaries of the post-dotcom bubble bust. Today, cash-out refinancing activity is running at one-tenth that good ol’ pace of five years ago. Indeed, attitudes towards “being in debt” have shifted so radically that nearly 1 in 4 households are now “cashing in” and paying down their mortgage debt. Nearly 1 in 3 upon refinancing are doing the most un-American thing of all; choosing to accelerate their paydown by reducing their amortization terms! This means maintaining or increasing the same monthly payments in a lower rate environment, which in turn helps explain why spending intentions on other things are going down. What can Dr. Bernanke do when the shift in attitudes is so profoundly psychological?

Right now debt is, quite simply, distasteful?

It’s certainly one way — together with tighter bank lending — to explain the breakdown in some of the historical associations between rates, refinancing and home sales in the below charts.

They — along with the extra commentary — come from RBC Capital Markets’ US economics team, led by Tom Porcelli.

Exhibit 1: We have been saying QE2 will have little impact on the economy aside from perhaps more refi activity. But an increase in refis and the commensurate savings would be a drop in the bucket. If the level of refi originations matched the all-time highs seen back in 2003 and mortgage rates fell another 50bps we would see an injection of $5bn to consumer pocketbooks in one year – or 0.05% of nominal PCE. Miniscule.

Exhibit 2: Furthermore, getting back to the record level of refi’s seems highly unlikely. Keep in mind that we’ve already seen rates fall 200bp from nearby highs (which is 2/3 the decline seen during the boom). The response to this decline in rates this time around has been muted thanks to, among other things, incredibly tight lending standards.

Exhibit 3: Low rates have done nothing to stimulate home sales and the relationship between mortgage rates and sales, since the bubble peaked in mid-2006 has decidedly broken down…

Exhibit 4: …those that say lower mortgage rates will motivate buyers clearly have not done their homework.

Over to you, Bernanke.

Related links:
Historic lows in mortgage rates fail to motivate buyers, owners – USA Today
Get ready, get set, deleverage! With one notable (US) exception - FT Alphaville
Quixotic QEasing - FT Alphaville