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Finance and Economics News
China and rare earths: Of metals and market forces
Thu, 02 February 2012 16:03:13 GMT
ALL that glisters is not gadolinium. Even so, that mineral and its 16 ?rare earth? cousins?found in everything from batteries to catalytic converters?do help make the modern world go round. And, as the world?s manufacturers of such products have been reminded recently, China has a chokehold on their production.China?s grip on rare earths first made headlines in 2010, when it suddenly cut exports to Japan. But it had been squeezing the market for years. In 2000 it exported some 47,000 tonnes of the stuff; by 2010 it exported only about 30,000 tonnes. This decline appeared to be the result of unfair export taxes and quotas.
Mine, all mine
Western powers have threatened to take the case to the World Trade Organisation (WTO). This week they seemed to get a boost when that body ruled against China on a related case. On January 30th an appellate body of the WTO ruled that China?s policies to restrict exports of several metals, like bauxite and magnesium, violated its WTO obligations. American and European officials cheered, arguing that China?s rare-earth policy must now also be...
Weather derivatives: Come rain or shine
Thu, 02 February 2012 16:03:13 GMT
Perfect weather for wind-up merchants
WEARING lots of layers and a decent waterproof coat is one way to guard against changeable weather. Firms facing losses because of a big freeze or baking sun do not have that option. Insurance companies have long offered cover against flooding, hurricanes and other catastrophes. For less calamitous changes in the weather, derivatives are a better option.This is still a ?niche market?, says Tim Andriesen of CME Group, the exchange where most weather contracts are traded. According to the Weather Risk Management Association, an industry body, the value of trades in the year to March 2011 totalled $11.8 billion, nearly 20% up on the previous year, though far below the peak reached before the financial crisis took the steam out of the business. In 2005-06 the value of contracts had hit $45 billion.Weather derivatives had an inauspicious start: the first trade was done by Enron in 1997. The instruments were initially used by American energy companies to hedge against the effect that unseasonal temperatures could have on gas sales. But abundant shale gas...
Japanese banks: Quietly does it
Thu, 02 February 2012 16:03:13 GMT
THE first round of Japanese investment into America, during the 1980s and 1990s, was notable for being so emotive. Extraordinary prices were paid to buy up supposedly gilt-edged assets including golf courses, investment firms and a large part of New York?s Rockefeller Centre. Sellers were delighted; the public horrified. The real victims were the Japanese buyers themselves, who suffered huge losses.Not every deal flopped. In particular, a minority investment in Goldman Sachs by Sumitomo Bank that was initially seen as an embarrassment in Japan (Sumitomo thought the stake was to be a partnership rather than a spigot for cash) turned out to deliver good returns. The lessons of that approach?a discreet profile, a minority stake, a focus on finance?may characterise the next wave of Japanese investment.Western banks need to raise equity capital to meet new regulatory hurdles. Other financial assets are being sold off as part of post-crisis restructurings. Japanese banks are relatively healthy, have high capital ratios and are deeply sceptical about their own ability to grow in Japan. That has led them once again to look outward, and not just to the Asian backyard.On January 18th Sumitomo Mitsui Financial Group, Japan?s second-largest financial institution and the current incarnation of the old Sumitomo Bank, paid $93m for a 5% stake in Moelis & Company, a niche investment...
Investment banking: Bonfire of the bankers
Thu, 02 February 2012 16:03:13 GMT
?IT SUCKED,? says the head of investment banking at one of Europe?s biggest banks, reviewing the fourth quarter of 2011. That succinct assessment will take few by surprise. The sale and trading of bonds and shares slowed to a trickle last year. Analysts at Credit Suisse reckon that investment-banking revenues among the big American banks slumped by a quarter in 2011. Trading bonds, currencies and commodities (activities known as FICC) is the industry?s bread and butter: FICC revenues fell by about 15% in America. Things are even worse in Europe. Credit Suisse reckons that European investment banks will post a 43% drop in revenue for 2011. On February 2nd Deutsche Bank announced a fourth-quarter loss for its investment bank.The first few weeks of this year also look dire. Markets have recovered relative to December, but there has not been the usual January leap. Analysts at Citigroup gloomily predict a further 10% fall in FICC revenues in Europe this year.The question dogging the industry is whether these falls are temporary or permanent. ?Trading goes up, trading goes down,? Jamie Dimon, the boss of JPMorgan Chase, told journalists in January. ?When things come back these numbers will boom again and we?ll be geniuses, and it won?t be because we did anything, it will be because we stayed in the game.? ...
Correction: BBVA
Thu, 02 February 2012 16:03:13 GMT
In "By hook or by crook" (January 14th 2012) we mistakenly said that write-downs had boosted BBVA's capital by ?400 billion. We were a little out: the bank's capital rose by ?400m. Sorry.
Free exchange: The silent bazooka
Thu, 02 February 2012 16:03:12 GMT
THE European Central Bank (ECB) tends to take the long way around. When in 2009 the Federal Reserve and the Bank of England slashed interest rates towards zero and started quantitative easing (buying government bonds with central-bank money), the ECB was more circumspect. It was reluctant to cut its main rate below 1% and loth to buy government bonds directly.Instead it adopted its own non-standard measures. It offered unlimited loans to commercial banks for up to a year against a broad range of collateral. The ECB?s oblique approach had much the same effect as the route taken by the Fed and others. A flood of liquidity from a ?442 billion ($611 billion) auction of one-year ECB loans in June 2009 pushed short-term interest rates close to levels in America and Britain. Banks used much of the cash to buy government bonds, driving down long-term interest rates. More than two years on, and in far more trying circumstances, the ECB seems to have repeated the trick. Faced with renewed recession, a bank-funding crisis and investor revulsion against all but the safest euro-zone government bonds, the ECB said on December 8th that it would...
Buttonwood: The war on finance
Thu, 02 February 2012 16:03:12 GMT
THE man who the polls suggest will be the next French president, François Hollande, claims that finance is his ?real adversary? in the coming election. Britain has just stripped the former chief executive of the Royal Bank of Scotland of his knighthood. Even Newt Gingrich is attacking the ?vulture capitalists? in the private-equity industry. Perhaps the West is set for a ?war on finance? along the lines of the ?war on terror?, with similar uncertainty about how to define victory.Politicians seem to have three main beefs with the financial sector. The first is that bankers earn too much. The second is that banks take reckless risks and then need rescuing by governments. And the third complaint is that investors in financial markets have undue influence over an economy through their ability to affect bond yields and equity prices.The first two problems are really related. People do not worry too much about footballers? high pay. The problem with bankers is the extent to which they are subsidised by explicit and implicit taxpayer support. (Of course, you might worry about income inequality in general but...
The Reserve Bank of India: Pulling every lever
Thu, 02 February 2012 16:03:12 GMT
ONE of the perks of being governor of the Reserve Bank of India (RBI) is the use of a colonial bungalow on Carmichael Road, a posh street that weaves along a ridge in south Mumbai. On one side live some of India?s richest industrialists, modern-day pharaohs with flashy architectural tastes. On the other, a stone?s throw down a cliff, is a small slum?a monument to desperation and government failure. Both sets of neighbours are part of the 1.2 billion population that India?s central bank must look out for. In normal times this is a task that would furrow the brow; now that the country?s boom is faltering, it risks causing a blinding headache. Judging by the numbers, the RBI is among the world?s best central banks. Its record on balancing growth and inflation is decent enough (see chart 1). Since 1995 wholesale prices have risen by an average of 6% a...
Malaysia?s central bank: Serene but surprising
Thu, 02 February 2012 16:03:12 GMT
Steady Zeti
MALAYSIA?S central bank, Bank Negara Malaysia (BNM), is the least predictable in the region, according to Robert Prior-Wandesforde of Credit Suisse. Its rate-setting decisions surprise analysts 26% of the time. That is not because it is erratic or antsy. Far from it. In the past seven years it has changed its policy rate only ten times, never cutting it below 2% or raising it above 3.5%. On January 31st it sat on its hands again.This serenity is overseen by Zeti Akhtar Aziz, the bank?s governor since 2000. She is not bothered by Mr Prior-Wandesforde?s finding. Predictability is prized by the advocates of inflation-targeting, who believe central banks can mould people?s expectations of prices. But the BNM never embraced inflation-targeting, even when it was fashionable.The bank surprised analysts by not raising rates in mid-2008, when the removal of fuel subsidies contributed to inflation of over 8%. ?We were condemned by everyone, everyone,? Ms Zeti says. The bank then caught analysts out again by raising rates in March 2010, when the global financial crisis was...
Greece and the euro: An economy crumbles
Thu, 26 January 2012 16:02:59 GMT
THE banners at the entrance to the Bank of Greece museum in Athens promise a ?fascinating journey through Greece?s modern economic and monetary history?. How could any passer-by resist? Inside the museum ranks of glass cases enclose an array of coins and old bank notes, as well as the paraphernalia used to make them. The bills range from 5 drachma up to 100m drachma, a reminder that Greece has had problems with inflation in the past. The end of history, at least for this exhibition, is 2001 when Greece adopted the euro. But the country?s present troubles suggest an important chapter to the story of Greek money is still to be written. Some reckon the drachma may roll off the presses again.This is no longer just a fantasy of diehard sceptics about the euro in Britain and Germany. Even Greeks concede that the big problem afflicting the economy, now in its fifth year of recession, is the uncertainty about whether Greece can stay in the euro and get its act together. Savers are anxious that their cash might be forcibly converted to a new Greek currency. By November the Greek banking system had lost a quarter of the...
Buttonwood: In praise of pessimists
Thu, 26 January 2012 16:02:59 GMT
BARELY a week goes by without a report on the level of confidence among consumers, businesspeople and investors. Optimism is what?s wanted?Keynes talked of the ?animal spirits? that influence economic activity. Pessimists are routinely denounced as Jeremiahs. Those who try to bet on falling prices find their activities are restricted.A cheery disposition may be necessary for societies to function. Daniel Kahneman, a psychologist and Nobel economics laureate, has a chapter in his book ?Thinking Fast and Slow? which describes overconfidence as ?the engine of capitalism?. No entrepreneur can be sure that his planned investment will succeed but if no one took a risk, new products and jobs would never be created. A certain blindness to the odds may be necessary. According to Mr Kahneman, the chances of an American small business surviving for five years are just 35%. But ask individual entrepreneurs about their prospects and 81% think they have a better than seven-in-ten chance of success.This self-confidence may be innate, just as most people think they are better-than-average drivers. And it would seem...
Private equity under scrutiny: Bain or blessing?
Thu, 26 January 2012 16:02:59 GMT
IF STEVE SCHWARZMAN thought it was valid in 2010 to compare Barack Obama?s ?war? against business to Hitler?s invasion of Poland, what can he be thinking now? Private-equity executives must be hoping the boss of Blackstone will keep his opinions to himself. More bad publicity is the last thing the industry needs. Other Republican presidential candidates are competing to see who can say the most damning thing about Mitt Romney?s career at Bain Capital. Newt Gingrich?s supporters have even made a sort of horror movie about what happens when private-equity firms like Bain Capital get their hands on otherwise healthy companies.The buy-out bit of the industry, which buys mature companies, fixes them up and sells them on, is the one on trial (few have a bad word for venture capital, which invests in start-ups). It is charged with destroying the jobs of ordinary people while enriching the likes of Mr Romney.Examples of dud deals are not hard to come by. The tax code?s treatment of debt (with interest on debt payments being tax-deductible) and private equity?s thirst for profits have at times driven the industry to...
Free exchange: Shake it all about
Thu, 26 January 2012 16:02:58 GMT
THE downturn in the euro area and the wobbly recovery in America have already taken their toll on the emerging world. Setting China?s still-bouncy economy to one side, the average growth rate in other developing countries is estimated to have slumped to an annual rate of less than 3% in the fourth quarter of 2011, from 6.5% in the first quarter. Some of that slowdown was the result of policy tightening to cool overheating economies and curb inflation, but it also reflects weaker exports and reduced capital inflows. If the euro-area debt crisis worsens, things will get nastier for emerging economies.The good news is that whereas most rich countries have little or no room to cut interest rates or to increase public borrowing, emerging markets as a group still have lots of monetary and fiscal firepower at their disposal. That room for manoeuvre served developing countries well during the downturn of 2008-09: monetary and fiscal easing was more effective in boosting demand than it was in the rich world, thanks to healthier private-sector balance-sheets. Although the emerging markets have less room for easing...
The Federal Reserve: Can you hear me now?
Thu, 26 January 2012 16:02:58 GMT
JAPAN holds the modern record for years spent with interest rates at zero; they were on the floor from 2001 to 2006. America is on track to break that record. Having cut its short-term rate to near zero in late 2008, the Federal Reserve said on January 25th it will probably stay there ?at least through late 2014?, more than a year longer than its previous guidance.On the same day the Fed for the first time published projections of the year individual members of the Federal Open Market Committee, its main policymaking body, expect the federal-funds rate to start rising and the path it would follow over the next three years. The median forecast for a rise in interest rates is 2014 (see chart) but the accompanying statement implies it will probably be later.The Fed also took the long-awaited step of announcing an explicit inflation target?something that many other central banks adopted years ago and that the Fed chairman, Ben Bernanke, has long advocated. The central bank said it prefers inflation of 2%, also the target (or the midpoint in a target range) of the British, Canadian, Swedish and Israeli central...
Deutsche Börse and NYSE Euronext: Competing arguments
Thu, 26 January 2012 16:02:58 GMT
FOR the chief executives of Deutsche Börse (DB) and NYSE Euronext, this week?s hobnobbing in Davos was strictly business. A $9.5 billion plan to unite the two exchanges was derailed in early December when European Commission staff revealed they were likely to advise blocking it on competition grounds. The exchanges are lobbying hard to persuade the 27 EU commissioners to ignore their staff and approve the deal. A decision is due to be made on February 1st.On the face of it, investors should support the commission?s recommendation to stymie the deal. Its competition wing is mandated to stop mergers that are likely to raise prices, reduce quality or dull innovation. In this case the concern is that the exchanges? derivatives businesses?DB?s Eurex and NYSE Euronext?s Liffe?would share over 95% of European trading for some assets. There may also be concerns that a merged exchange would be able to force investors to use its clearing facilities (for which it could ratchet up charges) once trades have been made.But there are reasons to think that the deal could be beneficial to investors. Exchanges are platforms on which buyers and sellers can meet, so a lower number of exchanges, which increases the potential for buyer-seller matches, can be better than a fragmented system. In addition, making all trades on one exchange could lower investors? costs. This is because some assets (...
Austerity and the markets: The perils of prudence
Thu, 26 January 2012 16:02:58 GMT
THE fiscal hawks should be pleased. For all the hand-wringing about public profligacy, budget deficits across the rich world fell by about 1% of GDP last year. Moreover, that was almost all the result of policy actions (spending cuts and tax rises) rather than cyclical effects.Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year, the International Monetary Fund said on January 24th. But this may not be good news. Austerity can unnerve markets, not calm them.The IMF studied the correlation between credit-default-swap spreads and a variety of economic indicators last year. Long-run indicators?for deficits, economic growth and spending on pensions and health care?had little impact on spreads. But larger near-term primary deficits (which exclude interest) were associated with notably wider spreads. So, too, was weaker current-year growth.This is surprising. In theory solvency should be a function of longer-term growth and fiscal trends, but markets instead seem to care more about the short term. Carlo Cottarelli and Laura Jaramillo of the IMF say tighter fiscal policy, by hurting the near-term growth outlook, could actually lead to wider, rather than narrower, spreads. Cut the deficit too aggressively, in other words, and the negative impact on...
Buttonwood: Not so smart
Thu, 19 January 2012 16:07:07 GMT
IT IS easy to accept that small investors might be irrational?piling into dotcom stocks in late 1999, for example, or buying half-built Miami condominiums in 2006. But corporate executives are supposed to be ?in the know?. That, after all, is why there are such stringent laws against insider dealing.Take share buy-backs. Investors often see a decision by a company to buy back its own shares as a positive indicator. If the executives think the shares are a bargain, everyone else should.But are executives any good at market timing? Not according to the calculations of Andrew Lapthorne, a quantitative strategist at Société Générale. In January 2008, just as the stockmarket was starting one of its worst years in history, companies in the S&P 500 were using almost 40% of their cashflow to buy back their own shares. By March 2009 equities were finding a bottom, but the proportion of cashflow used to buy back shares had dropped to 19.6%.An even lower proportion, 5.9%, was being used to purchase shares as 2010 dawned. That turned out to be a pretty good year, with the S&P 500 gaining 12.8%. Executives had...
Free exchange: The hangover
Thu, 19 January 2012 16:07:07 GMT
ALMOST half a decade after the onset of the rich world?s credit bust, depressing evidence of its after-effects is visible in everything from feeble output figures to swollen jobless rolls. But for a truly grim picture, read a new report on deleveraging by the McKinsey Global Institute. It points out that in many rich countries the process of debt reduction hasn?t even started. America has begun to pare its debt burden, although the drop is small compared with the build-up in 2000-08 (see chart). But many European countries are more, not less, in hock than they were in 2008. There the hangover could last another decade or more.These transatlantic differences stem from the trajectory of private debt. Government borrowing soared everywhere after 2008 as government deficits ballooned. But in America the swelling of the public balance-sheet has mirrored a shrinking of private ones. Every category of private debt?financial, corporate and household?has fallen as a share of GDP since 2008. The financial sector?s debt is now at its 2000 level. Corporate indebtedness, never very high, has shrunk. So, more importantly, has household debt....
Austrian banks: Vienna 2.0
Thu, 19 January 2012 16:07:07 GMT
EUROPEAN banks have to raise enough capital to reach a 9% core Tier-1 ratio by June 30th. But they are also under pressure to keep providing credit. That puts west European banks with units in central Europe in a quandary: whether to pull back on lending there to concentrate on home markets. A withdrawal of this sort would hit the region hard. Credit growth in central Europe depends largely on three Austrian banks?Raiffeisen Bank International, Erste Bank and Bank Austria, owned by Italy?s UniCredit?and a handful of other west European banks (see chart). A bevy of multilateral bigwigs descended on Vienna on January 16th to urge against ?excessive and disorderly? deleveraging by lenders to the region.This week?s meeting was dubbed ?Vienna 2.0? after the Vienna Initiative of 2009, which helped maintain foreign banks? exposures to central Europe. Yet the landscape has changed since then. The model of the diversified banking conglomerate makes less sense in a world where national regulators are trying to prevent outflows of capital and liquidity. UniCredit, perhaps the most diversified bank in Europe, is less...
American banks: Losing altitude
Thu, 19 January 2012 16:07:07 GMT
BY THE time JPMorgan Chase finished reporting its fourth-quarter results on January 14th, any optimism about a lovely, if surprising, sign-off to a difficult year had been squashed. Its return on equity was just over 11%, and if that is how the institution widely thought to be the best managed and best balanced of the big American banks performed, the only question was how poorly the rest would fare.If there was a positive spin on the final quarter of 2011, and the overall year, it was that things were worse three years ago. No big bank, for example, went bust or seems on the verge of doing so. Bank of America, notable for its vast potential to make both profits and losses, has seen its share price rise substantially off its lows so far this year, a consequence either of the innate benefits of scale or, as some mutter, a hesitation on the part of regulators to bury it in yet more mortgage-related litigation. ...
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