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Global Stocks and Euro Rise Sharply

November 28, 2011 by Leave a Comment

Germany and France have been discussing a deal to fast-track European budget and financial coordination, hoping that a deal that avoids the need for renegotiating European Union treaties could reassure markets and bring skeptics at the European Central Bank on board to support the beleaguered euro.

Investors were awaiting a meeting later Monday in Washington of President Obama and European Union officials, where discussions of the financial crisis were expected to figure prominently. Rumors of preparations for an International Monetary Fund bailout of Italy — even though quickly denied by the fund — also contributed to a sense that official efforts to stabilize the euro were progressing.

Alessandro Frigerio, a fund manager at R.M.J. Sgr in Milan, said he had been “almost certain” that the market would rally before Dec. 9, when European leaders hold a summit meeting to discuss the sovereign debt crisis.

“The market had been selling off for weeks on all the talk and rumors,” he said. “Now, we’re going to start getting some facts,” including more detail on the European Financial Stability Facility, the primary euro-zone bailout vehicle, and Italy’s plans to pay down its debt.

“I don’t know how the market will react after it gets the facts, though,” he said. “We’ll see when we get them.”

Investors shrugged off dire warnings from the Organization for Economic Cooperation and Development and from Moody’s Investors Service, both of which warned that the euro-zone problems were well on their way to becoming serious issues for non-euro countries.

They also ignored another dismal debt offering in Italy, where the Treasury paid 7.20 percent to sell 12-year bonds, 2.7 percentage points above what it paid at a similar auction in October.

In afternoon trading, the Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 4.2 percent, while the FTSE 100 index in London gained 2.3 percent.

Standard Poor’s 500 index futures rallied, suggesting a strong start later on Wall Street. The S.P. 500 fell 0.3 percent on Friday.

Earlier in Asia, the Hang Seng index in Hong Kong rose 2 percent, while the composite index in Shanghai added 0.1 percent. The S.P./ASX 200 in Australia closed 1.9 percent higher, while in Tokyo, the Nikkei 225 stock average rose 1.6 percent, finishing the day at 8,287.49 points, despite comments from the central bank governor, Masaaki Shirakawa, that the prospects for the Japanese economy remained poor.

Global stock markets have slumped in recent weeks, as the European debt crisis began to move from small, peripheral economies like Greece and undermined confidence in larger euro zone members, like Italy and even France.

In a dire report issued Monday, the O.E.C.D. said that “the euro-area crisis remains the key risk to the world economy.”

If concerns about the euro are not addressed, “contagion to countries thought to have relatively solid public finances could massively escalate economic disruption,” the report said. “Pressures on bank funding and balance sheets increase the risk of a credit crunch.”

That followed a similar warning from Moody’s about the increasing severity of the European debt crisis.

“While the euro area as a whole possesses tremendous economic and financial strength, institutional weaknesses continue to hinder the resolution of the crisis and weigh on ratings,” Moody’s said in a report
on Monday. “In terms of the policy framework, the euro area is approaching a junction, leading either to closer integration or greater fragmentation.”

Still, markets were helped by news of unexpectedly strong consumer spending over the Thanksgiving holiday weekend — a key shopping period for American retailers.

The National Retail Federation said Sunday that spending per shopper surged 9.1 percent over last year — the biggest increase since 2006 — to an average of almost $400 a customer. In all, 6.6 percent more shoppers visited stores on the Thanksgiving weekend than last year.

Article source: http://feeds.nytimes.com/click.phdo?i=1afb88d99f98d8acc9d785fda0194df9

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I.H.T. Special Report: Net Worth: Keeping a Wary Eye on the Euro Zone

November 23, 2011 by Leave a Comment

Q. How much worse can the European debt crisis get?

A.
The European crisis potentially still has a long way to run, with the crisis now affecting the core as well as the peripheral economies. While the euro zone leaders have said they will effectively do what it takes to defend the euro, actions speak louder than words. The politicians have been guilty of talking too much and doing too little over the last year.

Going forward, there is still a very real risk that things could get substantially worse in the euro zone, with serious ramifications for the global economy.

Q. Where is the global economy particularly vulnerable? What areas should investors watch?

A.
The euro zone is key, and Italy, in particular, is in the firing line. The Italian bond market is the third largest in the world, and there are doubts whether it would be possible to bail it out. The risks are significantly to the downside.

Outside of Europe, there has actually been better news on improving growth in the United States and falling inflation in China.

Q. Will the euro survive?

A.
We think that the euro will survive because there is no mechanism for any country to leave. In addition, the cost to both the countries that leave and those that stay would be huge, with the cost of exit far higher than the cost of staying.

Any further deterioration in Europe would probably lead to euro weakness against the U.S. dollar and other currencies. By many measures, the euro remains overvalued against the dollar and other currencies. We expect Asian currencies to perform well, although they could weaken if a major crisis developed.

Q. In the current environment, what should investors be buying, or selling?

A.
We still see great value in equities, particularly relative to cash and bonds, which both look particularly unattractive over the next couple of years. With this in mind, now is not the time to panic and sell out of equities. With any investment, the right time horizon is key, and equity investors need to exhibit greater patience than they have done in recent years.

What is important is to have a sensible, diversified portfolio across all asset classes that is designed to meet an investor’s needs in line with their risk profile.

Q. Where do you see the best investment opportunities?

A.
China is looking very attractive for the coming 12 months. With the prospect of slowing inflation, the central bank has the ability to ease monetary policy, a situation developed countries could only dream of. In addition, we see valuations are favorable, particularly after the recent sharp sell-off, and global investors are underweight China, which should create attractive upward pressure when investors return.

Q. What about commodities? Has their rally run its course?

A.
Commodities do offer compelling investment opportunities, and there is certainly no drought of likely influences that can impact prices over the next 12 months. We see challenges faced in production and geopolitical risks, not to mention the overriding macro headwinds threatening global economic growth coming from the developed world, and Europe in particular. Gold looks potentially in bubble territory and trading as a safe-haven asset, but, nevertheless, risks remain for price appreciation in the near term, given the uncertainty in the macroeconomic environment.

Q. Is Asia the answer, or will Asia stall and enter a period of prolonged slowdown?

A.
We remain very comfortable with the outlook for Asia and remain overweight. The ongoing nature of the euro crisis is causing risk aversion across the globe, and, as such, some investors are shunning Asia and focusing on developed markets such as the United States.

However, longer term it is clear that the global economy is going through a structural shift and rebalancing towards Asia and the emerging markets. This will give Asian equities a strong tailwind as investors begin to strategically increase their weights to the region.

Article source: http://feeds.nytimes.com/click.phdo?i=51741c373e157b88179a241bf431fe35

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Fate of Euro May Hinge on Italian Savers

November 23, 2011 by Leave a Comment

LONDON — Even though Europe’s debt crisis has turned Rome into financial ground zero, Italy has been able to lean on at least one solid support: the relatively large amount of government debt held by Italians themselves.

Nearly 57 percent of Italian debt is held by Italian banks, insurance companies and individuals. Those holdings have helped slow the flight of capital from Italy, even as foreign investors have been withdrawing their money from the country to park in safe havens like German, Swiss, American or Japanese government bonds.

But financial officials have become jittery about the possibility that Italians may stop buying this debt, and instead become more like Greeks and send their hard-earned savings abroad.

If that were to happen, it would greatly raise the odds that Italy, the third-largest economy that uses the euro currency, would be forced to seek a bailout — a move that could risk the future of the entire euro zone.

Hoping to stave off that calamity, the country’s banking industry and some prominent businessmen have banded together to sponsor a “buy Italian bonds day” next Monday, in which individual Italians who buy government bonds will be able to do so without paying commissions.

It is but the latest step taken by Italy’s increasingly skittish financial establishment to induce the nation’s cash-rich savers to continue financing the country’s sky-high debt, which is 130 percent of the gross domestic product. Compared with debt-saddled Greece, Spain and Ireland, Italy is much less reliant on foreign investors to finance its debt.

And more so than in any other euro zone country, Italian citizens have been active buyers of government debt, with such bond holdings representing 10 percent of household assets. So far, the evidence suggests that Italian households are not panicking.

According to Luca Mezzomo, chief economist at the banking group Intesa Sanpaolo in Rome, deposits in Italian banks remained stable through September. (The banks, in turn, use much of those savings to invest in government bonds.)

But Mr. Mezzomo concedes that the government has come under increasing pressure to do all it can to keep Italians buying bonds — especially now that foreigners are aggressively selling.

“I am confident that you will see demand from retail investors,” he said, pointing to the high yields on Italian debt. “There is a long tradition of investing in government bonds in Italy.”

The Italian treasury is doing its bit, too, with a plan to sell its debt online to individuals.

And while the high yields, or interest rates, on Italian bonds are an international distress signal, to domestic investors they may be a good way to profit.

“Bonds are a very lucrative investment now,” said Maria Letizia Ottavella, an architect in Rome. “I am deeply convinced that we should all buy Italian bonds to support our economy.”

And yet — and here’s where jitters arise — other indicators suggest that money is nonetheless fleeing Italy at worrisome levels.

John Whittaker, an economist at Lancaster University in Britain, has analyzed how much each of the 17 central banks within the euro zone’s system are borrowing from the European Central Bank. A sharp increase in this figure generally suggests money is leaving the country. When that happens, a nation’s central bank must borrow more to keep the banks afloat.

Mr. Whittaker found that between June and September of this year, the Italian central bank had borrowed 109 billion euros (roughly $145 billion) from the European bank. Before then, the Italian central bank had a 6 billion euro surplus at the European Central Bank. Mr. Whittaker says the borrowing surge was most likely a response to foreigners withdrawing their money from Italian banks, but says that it could also include Italians shifting some of their assets abroad.

“This is capital flight,” he said.

Relative to the 1.3 trillion euro pool (roughly $1.75 trillion) of Italian bank deposits, even 109 billion euros is a small figure. And it may largely reflect the move by foreigners to pull their money out of Italy. But if Italians were to follow suit, the consequences for the nation and the euro zone would be dire.

When Greece, Ireland and Portugal could no longer persuade enough domestic investors to buy bonds after foreigners decamped, the next step was a bailout.  

Gaia Pianigiani contributed reporting from Rome.

Article source: http://www.nytimes.com/2011/11/23/business/global/fate-of-euro-may-hinge-on-italian-savers.html?partner=rss&emc=rss

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European Central Bank Resists Calls to Act in Debt Crisis

November 18, 2011 by Leave a Comment

José Luis Rodríguez Zapatero, Spain’s prime minister, on Thursday became the latest leader to demand that the bank find a solution to the euro crisis, saying that “this is what we transferred power for” and that it had to be a bank “that defends the common policy and its countries.”

Mr. Zapatero made his unusually blunt statements on a day when markets sagged further and contagion continued its seemingly inexorable spread from the small economies on Europe’s periphery to Italy, Spain and even France at the core. Spain was forced Thursday to pay nearly 7 percent on an issue of 10-year debt, the highest since 1997, while investors demanded the largest premium for buying French as opposed to German debt in the decade-long history of the euro.

Only the fiercely conservative stewards of the European Central Bank have the firepower to intervene aggressively in the markets with essentially unlimited resources. But the bank itself, and its most important member state, Germany, have steadfastly resisted letting it take up the mantle of lender of last resort.

European politicians and analysts say that unbending stance now threatens the survival of the euro and the broader integration of Europe itself.

“There is no solution to the crisis without the E.C.B.,” said Charles Wyplosz, a professor at the Graduate Institute in Geneva and co-author of a standard textbook on European integration. “The amounts we are talking about are too big for anybody but the E.C.B.”

At issue is whether the bank has the will — or the legal foundation — to become a European version of the Federal Reserve in the United States, with a license to print money in whatever quantity it considers necessary to ensure the smooth functioning of markets and, if needed, to essentially bail out countries that are members of the euro zone.

Traditionally, and according to its charter, the European bank has viewed its role in much narrower terms, as a guardian of the value of the euro with a mission to prevent inflation. But as market unease has spread over the past two years, critics say the bank’s obsession with what they say is a phantom threat of inflation has stifled growth and helped bring the euro zone to the edge of a financial precipice.

With events threatening to spin out of control, the burden now rests on Mario Draghi, an inflation fighter in the job barely two weeks who surprised many economists by immediately cutting interest rates a quarter point.

“Everything until now is just a prelude. This is where it gets serious,” said Peter Zeihan, vice president of analysis at Stratfor, a geopolitical research center. “This is not purely economics. This is about Germany’s position in Europe and whether they control the institutions or not.”

Angela Merkel, Germany’s chancellor, and President Nicolas Sarkozy of France held a conference call on Thursday with Italy’s newly sworn-in prime minister, Mario Monti, to discuss how Italy could win back the confidence of markets, Mrs. Merkel’s office said in a statement. German policy makers believe the crisis is serving a purpose, keeping pressure on free-spending governments and forcing them to reform. Any rescue by the European Central Bank, they say, would only delay the inevitable reckoning.

Unlike the Federal Reserve, which has a mandate to promote employment as well as to fight inflation, the European Central Bank is charged first and foremost with maintaining price stability. In addition, the bank is specifically prohibited from financing the governments of euro area members.

So far, the bank’s bond interventions have been modest by central bank standards — $252 billion so far, compared with more than $2 trillion purchased by the Federal Reserve in recent years. The European bank does not disclose details of its purchases, but it has been active lately, and traders said it bought Spanish and Italian bonds on Thursday in small amounts, Reuters reported.

Jack Ewing reported from Frankfurt, and Nicholas Kulish from Berlin. Steven Erlanger contributed reporting from Brussels, and Raphael Minder from Madrid.

Article source: http://www.nytimes.com/2011/11/18/world/europe/european-central-bank-resists-calls-to-act-in-debt-crisis.html?partner=rss&emc=rss

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DealBook: Europe’s Debt Crisis Stymies Financial Overhaul

November 1, 2011 by Leave a Comment

Minh Uong

LONDON — As the Continent grapples with the sovereign debt crisis, financial regulatory revision in Europe has been put on the back burner, with some rules delayed until at least 2013.

The changing priorities have left investment banks, hedge funds and even nonfinancial companies in a holding pattern about compliance and costs, a situation that is weighing on earnings prospects.

“It’s the uncertainty that’s killing everybody,” said Anthony Belchambers, chief executive of the Futures and Options Association, a trade organization based in London for companies involved in the derivatives markets. “No one can measure the scale or cost of the regulation until it’s finalized.”

In the aftermath of the financial crisis in 2009, European regulators outlined the broad aims of a financial overhaul. But policy makers dragged their feet in the months that followed, unable to come to a consensus on critical areas like derivatives trading. Now, rule-making has been all but forgotten as they deal with teetering economies like Greece and Spain.

Most European rules won’t be in place before 2013, more than a year behind the original deadline, according to the Financial Stability Board, an international body tasked with strengthening the financial markets through improved regulation. Policy makers in the United States, which has faced its own delays, are on track to complete the bulk of their regulations by next year, with some already approved.

The biggest problems on the Continent center on how to wrangle the $600 trillion global derivatives markets. Negotiations have largely pitted Britain, which favors looser regulation, against France and Germany, which want stricter limits placed on markets.

France and Germany, two euro zone heavyweights, argue that only over-the-counter trades should be reported to central repositories that collect the data and be cleared through central counterparties. Britain, which handles 75 percent of such trading in Europe, says that would put London at a disadvantage to rivals in Paris and Frankfurt. Britain’s chancellor of the Exchequer, George Osborne, has fought to extend regulation to all derivatives, including those traded on electronic platforms.

The debate comes as Germany’s Deutsche Börse stands poised to become the world’s largest platform for derivatives trading if its planned merger with NYSE Euronext receives regulatory approval. Under the European Union’s current proposal, Deutsche Börse and Europe’s other electronic platforms would face less regulatory oversight than Britain’s over-the-counter financial dealers. British officials fear that would hurt London’s dominance as Europe’s financial capital if businesses leave in search of trading centers with fewer regulatory costs.

On Oct. 4, both sides reached a basic compromise. Initially, the European Union will regulate only over-the-counter derivatives starting in 2013. The rules will eventually expand to include electronic-traded derivatives, although no time frame was given.

“The whole process has been very disjointed,” said Sean Sprackling, a director at the consulting firm PricewaterhouseCoopers in London.

For European companies, the protracted legislative process has made it difficult to know what compliance and risk management structures they will need to develop — and at what cost.

Under the European proposal, Siemens, Philips, the British supermarket giant Tesco and other nonfinancial businesses will be exempt from reporting their derivatives transactions to trade repositories and clearing them through central counterparties. But the plan has added a caveat. When the rules take hold, those so-called end users whose derivatives trading operations reach a certain threshold will have to comply with regulations governing trade repositories and clearinghouses. Details on the threshold, however, have yet to be agreed on.

End users that rely on investment banks to develop and execute their derivatives — rather than in-house teams — may still have to expand their compliance teams despite working through a financial intermediary. That would be an extra cost that would hit earnings just as Europe’s nonfinancial companies are struggling to respond to a renewed slowdown in the global economy.

“A number of end users will be captured by the full regulation even if they’re dealing through a licensed firm,” Mr. Belchambers of the Futures and Options Association said.

Banks and other financial institutions have threatened to move their operations elsewhere if the changes in the United States and Europe become too onerous. But those fears are overblown, according to Barnabas W. B. Reynolds, head of the financial institutions advisory practice at the law firm Shearman Sterling in London.

For one, the derivatives rules in the United States and Europe are expected to have broadly similar objectives. So even though there will be a gap when the two regions have different regimes, it is unlikely to be long enough for companies to benefit from any regulatory arbitrage.

And analysts also say they believe it is unlikely that companies will seek out regulatory-friendly markets in Asia like Hong Kong and Singapore. Mr. Reynolds said New York and London simply provided greater stability during periods of turmoil.

“The pecking order of financial centers will remain the same,” he said. “In a time of uncertainty, there’s always a flight to quality.”

Article source: http://feeds.nytimes.com/click.phdo?i=a9c11c34e5124b216882eb09fc94611e

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Hitches Signal Difficulties Ahead for the Euro Zone

October 28, 2011 by Leave a Comment

Italy was obliged to pay the highest rate in more than a decade to sell a new bond issue, a sign that investors remained wary of the country’s political paralysis and a debt load equal to 120 percent of yearly economic output. If Italy’s borrowing costs become unsustainable, the country is potentially a much greater threat to Europe and the world economy than Greece.

“The current Italian government has lost the confidence of investors,” said Alessandro Giansanti, a rates strategist at ING in Amsterdam.

Elsewhere in the troubled euro zone, a big loss by an Austrian bank served as a reminder of the fragility of financial institutions, while a German supreme court decision scrambled efforts to speed up political decision-making.

The shift in mood was sudden and stopped a rally only a day after it began. On Thursday, major European indexes soared and bank shares rebounded following an all-nighter by European leaders that produced the boldest response yet to the debt crisis.

While major European stock indexes on Friday largely held on to their gains from the day before, investors seemed to be reflecting on the unanswered questions in the latest rescue package, which includes measures to bolster the resiliency of banks, to ease Greece’s crushing debt load and to turbocharge the euro area’s €440 billion, or $623 billion, rescue fund.

The benchmark indexes in Frankfurt, Paris and London were little changed at the end of trading Friday, while Italian shares fell 1.6 percent. The euro barely budged, trading at about $1.42.

The plan agreed to in Brussels early Thursday was short on details, which must be worked out by government technocrats in the weeks ahead. The pace is unsettling for markets, but that is the methodical way that European leaders are determined to operate. Elected officials are focused on their reluctant voters, not on investors impatient for bold initiatives.

“If you ask someone on the street, they’ll say they want the Deutsche mark back,” said Martin Lück, an economist at UBS in Frankfurt. “This is why the politicians need to move in a piecemeal fashion. They need to keep people on board.”

Germany’s Constitutional Court highlighted the complexity of European politics on Friday by issuing an injunction against a new panel in the German Parliament that is supposed to oversee the euro area rescue fund and accelerate decision making. Germany is the largest contributor to the fund.

Several dissident lawmakers complained to the court that Parliament did not have the right to delegate decision making to the panel, whose nine members were approved by a large majority on Wednesday. The court said Friday that the panel could not make decisions until judges had ruled on the merits of the complaint.

The parliamentary leader of Chancellor Angela Merkel’s conservative bloc, Peter Altmaier, said the decision meant that the entire Bundestag must decide on matters relating to the rescue fund, Reuters reported. But Mr. Altmaier insisted that the court decision would not interfere with operations of the fund, the European Financial Stability Facility.

“The German Parliament will ensure that, until the main ruling, Germany’s ability and the E.F.S.F.’s ability to act are secured,” Mr. Altmaier said, according to Reuters.

In Vienna, the Erste Group, an Austrian bank that is one of the most active institutions in Eastern Europe, reported a loss of €1.5 billion for the third quarter, caused by problems at its Hungarian and Romanian subsidiaries and a revaluation of its derivatives portfolio.

The bank, which also restated its 2010 earnings, had warned of the loss and the problems earlier in the month. Erste Group said Friday that it had sold almost all of a €5.2 billion portfolio of credit default swaps, a derivative the bank sold to customers as a form of insurance on government and corporate debt.

The disclosure about the swaps portfolio earlier this month raised questions about what other nasty surprises might be lurking in the balance sheets of European banks. Andreas Treichl, the chief executive of Erste Group, acknowledged that the bank had made mistakes. “We do have to accept the fact we caused a lot of concern,” he said during a conference call with analysts Friday.

Officials of the European Union and the International Monetary Fund hoped that the deal announced early Thursday would soothe market anxiety by easing the terms of Greece’s debt repayments enough to avoid default, as well as by building a war chest for safeguarding the larger Italian and Spanish economies against possible contagion.

Article source: http://www.nytimes.com/2011/10/29/business/global/italys-borrowing-costs-rise-amid-uncertainty-about-rescue.html?partner=rss&emc=rss

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Stocks and Bonds: Shares Fall on Wall Street

October 18, 2011 by Leave a Comment

It was a quiet start after Friday’s upswing, which pushed the Dow Jones industrial average and the Nasdaq indexes above their levels from the start of the year. The broader market, as measured by the Standard Poor’s 500-stock index, rallied nearly 6 percent last week.

By the end of Monday, though, the three indexes foundered with declines of about 2 percent. The Dow and the Nasdaq were once again down for the year, and the S. P. pressed deeper into negative territory for the year. Analysts noted that some of the drivers of market sentiment in recent weeks — including economic data and the prospect for some form of decisive action in Europe — were uninspiring. Stocks that traded in the sectors most vulnerable to economic stress took hits, with industrials, materials and financials more than 2 percent lower near the end of the trading session on Monday.

But they also attributed the declines on Monday to technical reasons, as important levels in the indexes proved resistant to breakthrough.

“The market was heavily oversold,” said Quincy Krosby, a market strategist for Prudential Financial. “Whenever that happens you are due for a bounce. It moved up too far, too fast.”

Ms. Krosby added that last week’s gains were not accompanied by strong volumes, which suggested that the rally was not solid enough to extend the gains.

“It means that new buyers are not coming in,” she said. “The conviction is not there. Volume is always the conviction of the bulls.”

The gains from last week, which were in part helped by improved retail data in the United States, happened just ahead of a meeting of finance ministers from the Group of 20. Analysts had said that they believed fear about Europe’s debt crisis had faded somewhat in the last few days.

But on Monday, Germany sought to play down expectations of a decisive breakthrough at another meeting of European leaders scheduled for this weekend.

At a news conference, Steffen Seibert, a spokesman for Chancellor Angela Merkel of Germany, said that “these are important working steps on a long path. This is a path that with certainty runs far into next year and also additional working steps will have to follow.”

Ms. Krosby said: “Part of the reason the market was able to move up was on the hopes and prayers that the Europeans would craft a credible plan in time for the meeting. They just threw cold water on that.”

The comments helped push up bond prices in the United States. The Treasury’s 10-year note rose 27/32, to 99 24/32. The yield fell to 2.16 percent, from 2.25 percent late Friday.

The Dow Jones industrial average was down 2.13 percent at 11,397.00. The S. P. 500-stock index was 1.9 percent lower, or down 23.72 points, at 1,200.86. The Nasdaq composite index was down 1.98 percent, to 2,614.92.

The benchmark Euro Stoxx 50 closed down 1.68 percent.

“Optimism is fading,” said Frank M. Pavilonis, MF Global’s senior market strategist, referring to Europe.

Economic data from the United States on regional manufacturing and another report on industrial production were weak, or “market neutral,” said Jonathan E. Lewis at Samson Capital Advisors.

“We are really operating in a twilight zone for markets,” Mr. Lewis said, referring to what he described as a lack of clarity from the economic data and the euro zone situation.

In the United States, economic data has been mixed.

On Monday, a report from the Federal Reserve Bank of New York on regional manufacturing showed no improvement in its index for overall business conditions in October. In a research note, economists from Goldman Sachs said the report suggested “generally downbeat” views of the current economic situation, but noted that some components of the index had stabilized.

Industrial production as reported by the Federal Reserve showed a month-on-month 0.2 percent rise for September, just as analysts had forecast. Manufacturing production firmed 0.4 percent in that period, which economists said reflected some recovery from the disruptions related to the Middle East turmoil and the earthquake in Japan earlier in the year.

“With a mixed performance in September, the U.S. manufacturing sector now seems to have fully recovered from the supply chain shocks caused by the Japanese tsunami,” Cliff Waldman, economist for the Manufacturers Alliance, said in a statement.

Analysts said that as financial results trickled in, stocks would continue to weather the outlook for the United States economy. Financial stocks were hardest hit, falling about 3.3 percent as a sector, on a day when more banks weighed in with quarterly results.

Wells Fargo, the largest consumer lender in the United States, was down 8.4 percent at $24.42. It reported Monday that its third-quarter earnings rose 21 percent, even as a drop in revenue indicated a disappointing sign for the bank.

Citigroup announced a profit of $3.8 billion, or $1.23 a share, beating analyst consensus estimates of 81 cents a share. It fell 1.7 percent, to $27.93.

Shares in companies in the materials sector declined 3 percent, with Alcoa down 6.6 percent, to $9.58, and U.S. Steel more than 6 percent at $22.98.

Eric Dash, Ben Protess, Stephen Castle and Liz Alderman contributed reporting.

Article source: http://www.nytimes.com/2011/10/18/business/daily-stock-market-activity.html?partner=rss&emc=rss

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DealBook: Banks Start to Make More Loans

October 18, 2011 by Leave a Comment

Despite all the bleak economic news, a funny thing has been happening in the financial industry over the last few months: the banks have quietly turned on the lending spigot.

Loan growth is still modest. And it remains heavily weighted toward the strongest corporate and consumer borrowers. But after several quarters of having their loan balances plunge or flatten out, several of the nation’s biggest banks are reporting increases.

On Monday, Citigroup officials said the bank recorded loan growth, compared with a year ago, in almost every one of its businesses during the third quarter, and in almost every corner of the globe. Wells Fargo executives said new loan commitments to small businesses were up 8 percent, while lending to bigger companies has been growing for 14 months in a row. Across the industry, analysts expect credit card loan balances will start increasing before the end of the year.

“The narrative that banks aren’t lending is incorrect,” Timothy J. Sloan, Wells Fargo’s chief financial officer, said in an interview. “Lending is strong, and based on what we’re seeing,” he added, it will “continue to grow.”

Still, the stocks of both banks, and the sector as a whole, dropped on Monday as the sluggish economy and revenue figures pointed to broad drags on the banks, including low returns on making loans and exposure to the European debt crisis.

But the new lending numbers suggest that while the economy remains extremely fragile, the confidence of consumers and businesses may be more resilient than many experts had believed. “It hasn’t really strengthened, but it looks like the recovery is still here,” Jamie Dimon, JPMorgan Chase’s chairman and chief executive, said after heralding his bank’s lending data last week.

There are myriad explanations behind the uptick in loan growth, including more customers taking advantage of ultra-low interest rates and borrowers in need of cash drawing on their credit lines. Others believe the downbeat headlines in recent weeks have been overblown. If the confidence clouds hanging over Europe and the United States were removed, the lending figures would be even stronger, analysts and bankers say.

Housing remains the banking industry’s Achilles’ heel. Mortgage and home equity loans have fallen more than 6.2 percent since their peak in late 2007 and early 2008, according to weekly data from the Federal Reserve. Most banks have ratcheted up the underwriting criteria so that fewer new borrowers qualify for a loan, especially in the housing markets along the coasts that were hit hard by the recession. As existing loans end, they are less likely to replace them with a new one.

But there has been a modest increase in lending elsewhere. Over all, corporate lending has rebounded 7.2 percent after bottoming out in October 2010. Consumer lending, with the exception of housing-related loans, turned positive during the second quarter and has been gradually increasing since then, the data show. All told, total loan balances are near where they stood in mid-2007.

“The banks want to lend,” said Gerard Cassidy, a longtime banking analyst at RBC Capital Markets. After all, he said, more than 70 percent of their income is tied to that activity. And the Federal Reserve survey of loan officers shows that banks have been gradually relaxing their underwriting requirements.

Others, however, say the banks are still clinging to their purse strings. For a broader recovery, they will need to make loans more available to more consumer borrowers with blemished credit histories and a broader array of small businesses, the critics say.

“I don’t think the lending window is open near enough to what you need to see to get the economy growing, businesses expanding, and to bring the unemployment rate down,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group, a forecasting firm.

So far, the revival in lending has not been strong enough to significantly move the revenue needle for the nation’s biggest banks, either. The poor performance of their Wall Street-related businesses and the elimination of once-lucrative overdraft and credit card penalty fees have weighed on their results. Meanwhile, the rise in new loan volume has not been enough to offset the lower profit margins on new loans as a result of the Fed’s decision to keep interest rates close to zero until at least 2013.

On Monday, Citigroup reported that its core revenue fell 8 percent, even as it squeezed out a $3.8 billion profit with some favorable accounting. It booked a $1.9 billion paper gain since the cost of retiring its debt had, theoretically, declined because of concerns over its financial condition. It also delivered about $1.4 billion to its bottom line, using money it had previously set aside to cover credit card and other loan losses. Together, those moves accounted for more than 60 percent of its pretax earnings.

Wells Fargo also reported a 6 percent drop in revenue, as several major divisions, like its vast mortgage operations and its investment banking businesses, reported a decline from last year.

But the bank still managed a record $4.1 billion profit, thanks in part to a sharp reduction in charge-offs and the release of $800 million in loan loss reserves.

But buried in the numbers of both big banks were signs that loan growth was modestly improving. Citigroup pointed to healthy demand in emerging markets, which have only recently started to feel the impact of the global slowdown.

In Asia, for example, corporate loans grew 22 percent, while card lending increased by about 4 percent, excluding the impact of the exchange rate. Citi’s Latin American operations showed similar resilience, while even the North American business showed a slight increase in lending, with the exception of mortgages.

Much of it is not “forced lending” as borrowers tap credit lines because they are in desperate need of money to pay their bills, Citi executives said. Small-business customers are “drawing them down because they have real needs and we are extending additional commitments,” said John C. Gerspach, Citigroup’s chief financial officer. “Absent the continued uncertainty, you would likely have loans growing and the economy growing at a faster rate.”

Executives at Wells Fargo, whose giant lending operations are largely focused on consumer and corporate borrowers in the United States, said that “customer sentiment is good” even though some of the economic data worsened during the third quarter. “It’s not just energy or commercial real estate; it’s really across the board,” said Mr. Sloan, the chief financial officer at Wells Fargo.

Some of the growth was due to foreign lenders ceding some ground to Wells and other large American banks, rather than an overall increase in demand. The uptick in Wells Fargo’s commercial lending business was aided, in part, by a $1.1 billion commercial real estate portfolio it bought from the Bank of Ireland. Even its mortgage business, which reported more than a 50 percent jump in home loan applications, owed some of the lending growth to consumers refinancing existing loans — not people obtaining new ones.

On Thursday, Mr. Dimon was keen to highlight JPMorgan’s lending numbers in an otherwise sobering quarter. Lending to small businesses with less than $50 million in revenue was up 70 percent through this year compared with the same period in 2010, while lending to middle-market customers was up 18 percent.

“These are pretty powerful numbers,” Mr. Dimon said on a conference call with journalists. “We look at loan growth translating to jobs.”

Article source: http://feeds.nytimes.com/click.phdo?i=e0db3596d76b5e09930def94f5301f80

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Weak Start for Wall Street

October 17, 2011 by Leave a Comment

It was a quiet start to the week after the upswing last Friday. Analysts noted that a number of the drivers of market sentiment in recent weeks — economic data and the prospect for some form of decisive action in Europe — were uninspiring.

On Monday, economic data from the United States on regional manufacturing and another report on industrial production were weak, or “market neutral,” suggesting neither a looming recession or any signs of a recession, said Jonathan Lewis of Samson Capital Advisors.

And comments from Europe after a weekend meeting of finance ministers from the Group of 20 were generally in line with expectations. The German Chancellor, Angela Merkel, was quoted by her chief spokesman, Steffen Seibert, as saying not to expect that “everything will be solved” regarding the debt crisis at the European Union summit meeting on Oct. 23, Bloomberg reported.

“We are really operating in a twilight zone for markets,” said Mr. Lewis. “We are really trading off of headlines. There is some discussion of how quickly Germany is going to support an early resolution to the sovereign debt crisis.”

As a result, he said, sentiment was weighing on stocks while giving a little lift to bonds. “We are waiting for clarity,” Mr. Samson said. “Markets like to know what to do.”

In the first hour of trading, the Dow Jones industrial average and the broader Standard Poor’s 500-stock index were each down about 1 percent, while the Nasdaq composite index was lower by slightly less than that. Both the Dow and the Nasdaq indexes had pushed higher as of the end of last week to above their levels at the end of 2010.

But the S.P. was still in negative territory, down 2.63 percent for the year.

Interest rates were slightly lower. The yield on a 10-year Treasury note was 2.1 percent compared with 2.25 percent.

“Optimism is fading,” Frank M. Pavilonis, MF Global’s senior market strategist, said, referring to Europe.

Analysts said that as financial results trickled in stocks would continue to weather the outlook for the United States economy. Financial stocks were lower in early trading on Monday, falling as a sector about 1.5 percent on the broader market. That was on a day when more banks weighed in with quarterly results.

Wells Fargo, the largest consumer lender in the United States, was down 6 percent. It reported Monday that its third-quarter earnings rose 21 percent, even as a drop in revenue indicated a disappointing sign for the San Francisco-based bank.

But Citigroup was up 2 percent after it announced a profit of $3.8 billion, or $1.23 a share, beating analyst consensus estimates of 81 cents per share.

Eric Dash and Ben Protess contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=dbafdadd73b8953a613649d384d99123

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Europe Tells Its Banks to Raise New Capital

October 13, 2011 by Leave a Comment

Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses as part of a plan to restore waning confidence.

Mr. Barroso also called on the 17 European Union members that use the euro to maximize the capacity of their 440 billion euro ($600 billion) bailout fund — a clear hint that he favors leveraging the rescue fund to increase its firepower to as much as 2 trillion euros ($2.8 trillion).

Leveraging the fund was advocated by the United States treasury secretary, Timothy F. Geithner, to ensure that troubled European countries had access to affordable financing as they tried to reduce their debt.

The Treasury Department pressed that point on Wednesday during a briefing ahead of a meeting of finance ministers of the Group of 20 on Friday and Saturday in Paris, which Mr. Geithner will attend.

Europe needs “a firewall that has the resources and capacity” to ensure that the crisis that started in Greece does not spread to bigger countries, Lael Brainard, the Treasury under secretary for international affairs, said at the briefing. The euro zone is entering a critical countdown, with investors in financial markets expecting European officials at a summit meeting on Oct. 23 and leaders of the Group of 20 at on Nov. 3 to endorse plans to resolve the region’s debt crisis.

On Wednesday, Slovakia reversed course and struck a political deal that should ensure approval of the bailout fund, the 17th and last vote required. European officials, who had been watching closely, greeted the breakthrough with a mixture of relief and frustration and were able to turn their attention to the banks.

Extra capital for European banks should be raised first from the private sector, then from national governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said.

Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal.

The plan put forward Wednesday did not put a figure on the capital reserves that would be required. That omission contrasted with the more specific plans circulating in France and among European banking regulators for a minimum capital reserve of 9 percent of assets.

Internally, the European commissioner responsible for financial services, Michel Barnier, argued that the new floor for capital should be set by the European Banking Authority, not the commission, said one European official, who spoke on the condition of anonymity because of the confidential nature of the government discussions.

On Tuesday, Alain Juppé, the French foreign minister, told the French National Assembly that several leading French banks that were deeply exposed to the sovereign debt of Greece and other Southern European countries — like BNP Paribas, Crédit Agricole and Société Générale — would move to increase their capital reserves, initially by using their own revenue or through the financial markets. Money from the government would be drawn upon only as “a last resort,” he said, according to Reuters.

Mr. Juppé said the move, which was agreed upon with Germany during talks Sunday, meant that the banks’ best buffer against losses, known as core Tier 1 capital, would increase to 9 percent or more by 2013, from 7 percent now.

The European Banking Authority has also suggested a 9 percent floor, according to European Union officials. The agency declined to comment on the figure Wednesday.

The document released Wednesday by the European Commission called for “a temporary significantly higher capital ratio of highest-quality capital after accounting for exposure” to sovereign debt in systemically important banks.

One European official said that the recapitalization proposal essentially meant that banks were likely to have to meet the requirements laid down under the so-called Basel III international standards for banks more quickly than first expected, although temporarily. Instead of reaching the specified level of capital by 2019, these goals will have to be reached “within months,” said the official, who spoke on condition of anonymity.

Ms. Brainard of the United States Treasury Department said that while Europe had finally come around to the idea that its banks need more capital in case the crisis worsened, “it’s still one piece of several actions that need to happen as part of a comprehensive plan” to prevent contagion from a Greek default or worse.

After Lehman Brothers failed in September 2008, the United States took swift action to ensure its banks had a strong cushion of capital, a move that Ms. Brainard said restored confidence and helped the banks turn around relatively quickly.

“At the time, it was seen as a risky endeavor, but it turned out to be just the medicine the market needed,” she said. “The same logic lies behind Europe’s efforts.”

On Wednesday, Mr. Barroso argued for the quick release of 8 billion euros in loans to Greece from international lenders, without which the government in Athens could default within weeks.

With the euro zone’s temporary bailout fund, the European Financial Stability Facility, set to gain new powers to help recapitalize banks, the issue of whether to use it has divided France and Germany. Mr. Barroso called for the early introduction — next year if possible — of the permanent euro zone bailout fund that is to replace the facility in 2013.

France fears that it could lose its triple-A credit rating if it has to inject billions of euros in taxpayer money into its banks. That would be a huge political setback for President Nicolas Sarkozy, who faces a re-election campaign next year.

But Berlin is reluctant to use European funds to recapitalize banks that compete with its own financial institutions.

Liz Alderman contributed reporting from Paris.

Article source: http://www.nytimes.com/2011/10/13/business/global/eu-set-to-tell-banks-to-garner-bigger-reserves.html?partner=rss&emc=rss

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