Stocks in Europe Drop With Euro; Asian Shares Advance

The euro declined on speculation the European Central Bank will cut interest rates to a record low tomorrow after a report showed Germany’s services industries unexpectedly shrank last month. Metals fell and European stocks pared their drop.

The euro depreciated 0.7 percent to $1.2524 at 11:17 a.m. in New York. Copper decreased 0.9 percent and Brent crude dropped 0.8 percent. The Stoxx Europe 600 (SXXP) Index was little changed after falling 0.5 percent. Standard & Poor’s 500 Index futures were little changed. Italy’s 10-year bond snapped four days of gains.


A gauge of German services fell to 49.9 in June, less than the earlier reading of 50.3, according to London-based Markit Economics, with a figure below 50 indicating contraction. Other reports showed euro-area services and manufacturing output contracted for a fifth month and China’s services expanded at the slowest pace in 10 months. ECB President Mario Draghi will probably cut the benchmark rate by a quarter-percentage point to 0.75 percent, according to the median forecast of economists in a Bloomberg survey.

“Slow growth dynamics and uncertainty are pressuring the euro,” said Gavin Friend, a London-based markets strategist at National Australia Bank Ltd. “The ECB will probably cut tomorrow. Draghi has hinted that an easing of policy is on the way. The euro will probably lag behind, with other currencies rallying more.”
IMF Outlook

The International Monetary Fund cut its U.S. growth estimate yesterday and said the Federal Reserve may need to further ease monetary policy.

The Stoxx 600 was little changed after rallying 5.2 percent over the previous three days. The gauge is still on course for a fifth straight week of gains, the longest stretch since January, as European leaders agreed to address flaws in their bailout programs to ease the sovereign-debt crisis and speculation grew that central banks will take steps to boost the economy.

Futures on the S&P 500 (SPX) fluctuated after the index completed its biggest three-day rally of the year. U.S. equity and bond markets are closed today for the Independence Day holiday.

A report on July 6 is forecast to show that U.S. employers added 90,000 to payrolls in June after a gain of 69,000 in May, according to a Bloomberg survey of economists. Alcoa Inc., America’s biggest aluminum producer, is due to kick off the U.S. earnings-reporting season July 9.

The euro fell 0.8 percent against the yen, dropping versus 13 of its 16 major peers. Sweden’s krona climbed to its strongest level against the euro since December 2000 after Sweden’s central bank left its main interest rate unchanged.
Bunds Gain

The yield on Italy’s 10-year bond rose 14 basis points to 5.77 percent, widening the spread with German bunds by 21 basis points to 430 basis points. Italy’s budget deficit rose in the first quarter to 8 percent of gross domestic product, the highest in three years. The yield on five-year German debt fell seven basis points to 0.48 percent, the lowest level on a closing basis since June 18. Spain’s 10-year yield climbed 16 basis points to 6.50 percent.

Brazil’s Bovespa rose 0.5 percent, leading gains among major Latin American indexes. Usinas Siderurgicas de Minas Gerais SA (USIM5) rose 4.6 percent after rallying 8.3 percent yesterday on a report that the steelmaker is raising prices. The MSCI Latin America index retreated 0.6 percent.

The Kospi Index gained 0.4 percent in South Korea as Hyundai Motor Co. (005380) advanced 1.7 percent after it sold more cars in the U.S. The Hang Seng China Enterprises Index of mainland companies slipped 0.3 percent. The MSCI Emerging Markets Index (MXEF) fell less than 0.1 percent.

From Bloomberg

European Stocks Decline From Two-Month High; HSBC Falls

European stocks declined, dragging the Stoxx Europe 600 Index from a two-month high, as service- industry measures in the U.K. and Germany missed forecasts. U.S. index futures fell, while Asian shares advanced.

HSBC Holdings Plc (HSBA) dropped 1.2 percent as Bank of America Corp. said Europe’s largest bank will struggle to meet analysts’ estimates. Iberdrola SA tumbled 5.9 percent as utilities dropped. Chr. Hansen A/S, the maker of natural food colors and cheese cultures, climbed 11 percent after reporting earnings that exceeded estimates.

The Stoxx 600 slipped 0.3 percent to 256.55 at 11:33 a.m. in London, after rallying 5.2 percent over the previous three days. The index is still on course for a fifth straight week of gains, the longest stretch since January, as European leaders agreed to address flaws in their bailout programs to ease the sovereign-debt crisis and speculation grew that central banks will take steps to boost the economy.

“Seeing equities fall back after a 7 percent rise as a result of the summit meeting last week suggests that common sense is returning to the market,” said Henrik Drusebjerg, a strategist at Nordea Bank AB in Copenhagen. “If investors are hoping that tomorrow’s central bank meetings will see initiatives on top of lowering interest rates, they will be disappointed.”

The European Central Bank and the Bank of England will announce interest-rate decisions tomorrow. ECB officials will cut their benchmark rate by 25 basis points to a record low 0.75 percent, according to the median forecast in a Bloomberg survey of 62 economists. Five predict a cut of 50 basis points and 11 foresee no change.
U.S. Stocks

Futures on the Standard & Poor’s 500 Index (SPX) expiring in September declined 0.2 percent, while the MSCI Asia Pacific Index added 0.4 percent. U.S. equity markets are closed for the Independence Day holiday today.

The number of shares changing hands in Stoxx 600 companies was 34 percent less than the average over the past 30 days, according to data compiled by Bloomberg.

A U.K. gauge of services activity based on a survey of purchasing managers fell to 51.3 in June, an eight-month low, from 53.3 in May, Markit Economics and the Chartered Institute of Purchasing and Supply said. The median forecast of 25 economists in a Bloomberg survey was for a reading of 52.9. A measure above 50 indicates expansion.

A German services PMI dropped to 49.9 last month from 51.8 in May, according to a separate report from Markit.
Retail Sales

Euro-area retail sales unexpectedly increased in May as gains from France to Ireland and Portugal helped offset decreasing demand in Germany. Sales advanced 0.6 from April, when they slipped 1.4 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast sales to remain unchanged, the median of 16 estimates in a Bloomberg survey showed.

A report on July 6 is forecast to show that U.S. employers added 90,000 people to payrolls in June, after a gain of 69,000 in May, according to a Bloomberg survey of 78 economists. Alcoa Inc., America’s biggest aluminum producer, is due to kick off the U.S. earnings-reporting season on July 9.

“If the U.S. non-farm figures on Friday add to the disappointing figures that we have seen this week it would confirm that the U.S. slowdown is really happening,” Nordea’s Drusebjerg said.
HSBC Drops

HSBC fell 1.2 percent to 563.5 pence as Bank of America said the bank’s targets are ambitious and analysts’ earnings estimates may be too high.

Iberdrola (IBE), an owner of wind parks from Europe to the U.S., sank 5.9 percent to 3.51 euros as a measure of utilities in the Stoxx 600 retreated 0.8 percent.

Henderson Group fell 2.4 percent to 101.7 pence as the fund manager was cut to equal weight, the equivalent of a hold recommendation, at Morgan Stanley.

Man Group Plc (EMG), the world’s largest publicly traded hedge fund, lost 5.6 percent to 66.9 pence, the lowest price since October 1999, as the net asset value of its Man AHL Diversified fund decreased 2.5 percent last week.

JPMorgan Chase & Co. cut its price estimate for the shares to 45 pence from 110 pence, saying the company’s second-quarter performance was disappointing. The brokerage kept its neutral recommendation on Man.

Chr. Hansen climbed 11 percent to 170.20 kroner in Copenhagen, the biggest gain since January. The company reported third-quarter earnings before interest and taxes that exceeded estimates and raised its full-year forecasts.

Societe Television Francaise 1 (TFI) advanced 2.9 percent to 6.72 euros. UBS AG (UBSN) upgraded the owner of of France’s most-watched television channel to buy, saying the shares look cheap.


From Bloomberg

Diamond Exit Raises Speculation of Investment-Bank Split

When Robert Diamond took over Barclays Plc (BARC)’s shrinking securities unit in 1997 he vowed to turn the business into a leading global firm.

Fifteen years later, his success in creating a top investment bank, whose profit reached $4.7 billion in 2011, may hasten its split from the lender after the London-based bank admitted to trying to rig global interest rates. Diamond quit as Barclays’s chief executive officer yesterday and hours later Chief Operating Officer Jerry del Missier followed.

The departure of Diamond may presage a reorganization of Barclays after regulators in the U.K. and the U.S. pointed to the need for change at the company. The interest rate debacle is intensifying political pressure in the U.K. to build higher walls between banks’ consumer lending and investment-banking divisions to protect savers and taxpayers.

“Now is a very sensible time to pause, draw breath, assess what’s happened and look again at this question of a ring fence or separation,” said Clive Hollick, a former CEO of United News & Media Group Plc and member of the House of Lords Economic Affairs Committee.

Barclays was hit by a record 290 million-pound ($455 million) fine last week for rigging the London Interbank Offered Rate, a benchmark for more than $360 trillion of securities. Diamond, as CEO of the investment bank from 1997 through 2010, oversaw the unit where Libor rates were submitted.
Costs, Complexities

The U.K. Treasury plans to implement recommendations of the Independent Commission on Banking, which proposed financial firms should build firewalls between their consumer and investment-banking operations. Bank of England Governor Mervyn King said on June 29 the Libor revelations reinforced the argument for implementing the proposals as soon as possible.

“Barclays management should begin talking to people about the costs and complexities around a break up, the potential scale of U.S. liabilities” related to Libor, “and how it can insulate itself,” said Gareth Hunt, head of European research at Canaccord Genuity in London. There may be assets like U.K. consumer banking which can be ring-fenced or split off, he said.

U.K. regulators are weighing whether to start a criminal probe into Libor-fixing and Diamond, 60, will be questioned by British lawmakers on the Treasury Select Committee today. Barclays is one of at least 12 banks, including Citigroup Inc. and HSBC Holdings Plc (HSBA), under investigation for manipulating Libor.
Libor Rates

In a sign of worsening relations between Barclays and its regulators, the company released a note yesterday of a 2008 call purporting to show that Paul Tucker, then the central bank’s markets director, hinted the firm could cut its Libor rates.

“Tucker stated that the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently,” Diamond said in an Oct. 30, 2008 e-mail to then CEO John Varley and Del Missier.

Diamond didn’t believe he had received any instruction or that he gave any order to Del Missier to lower the lender’s submissions, Barclays said in evidence to lawmakers yesterday. Del Missier, 50, concluded that the Bank of England had instructed the firm not to keep Libor so high and mistakenly instructed employees to lower their submissions, Barclays said.

A Bank of England spokesman declined to comment on the document, as did a Barclays official.
Higher Ranking

Damage to the franchise he helped create prompted Diamond to go, the banker said in a statement yesterday. The American was the chief architect of Barclays’s expansion into investment banking, creating a business that had 24,000 employees at the end of last year, more than three times as many as when he took over the unit.

The division, known until March as Barclays Capital, earned pretax profit of 2.97 billion pounds last year, or almost half of the bank’s total. Barclays ranks fifth in advising on global mergers this year, data compiled by Bloomberg show. The firm wasn’t in the top 20 in 2007, the year before it bought the North American operations of Lehman Brothers Holdings Inc.

“Diamond’s been incredibly successful in turning what was a minor player into a top tier investment bank,” said George Godber, a fund manager who helps oversee about $250 million at Matterley Asset Management in London, and doesn’t hold Barclays stock. “Now you’re likely to see political pressure mount for a separation of Barclays’s investment-banking unit.”

Diamond, a year after joining what was then Barclays de Zoete Wedd, took the helm and steered the firm through the sale of its money-losing European equities unit to focus on bonds, loans and foreign exchange.

It was a rocky start. In 1998, Barclays Capital reported a loss after bets on Russia soured amid the country’s devaluation.
Lehman Purchase

Diamond, who rose through the fixed-income trading ranks at New York-based Morgan Stanley and Credit Suisse First Boston before Barclays, continued to hire and expand the business. He lost out on the CEO job to Varley, 56, and became president of the bank in 2005.

Diamond propelled Barclays into the top ranks in equities and mergers by leading the bid to buy the Lehman operations when the New York-based firm collapsed at the height of the subprime- mortgage crisis. He struck a deal to acquire the North American investment-banking business of the bankrupt firm for $1.75 billion and then embarked on a hiring spree to add stock underwriting and merger advisory businesses and bankers in Europe and Asia to match its standing in the U.S.
‘Sit Back’

Not everyone advocates a change of direction.

“I think they should sit back and relax,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA. “The investment bank is a top three in the world, no argument about it. Why on earth, having made this investment and a very good acquisition of Lehman Brothers, would someone come in and change their strategy?”

Barclays made it through the credit crisis without direct government support. Since then, tightening global capital standards and Europe’s sovereign debt woes have kept investment- banking profitability below pre-crisis levels.

After becoming CEO of Barclays at the start of 2011, Diamond vowed to boost return on equity to 13 percent. The measure stood at 6.6 percent at the end of last year. Net income for 2011 fell to 3 billion pounds from 3.56 billion pounds as investment-banking revenue shrank.

Barclays has dropped 37 percent in London trading since Diamond took over, compared with a 14 percent decline in HSBC, Britain’s largest bank, leading to impatience among some investors.

“Their leverage is still high, they’ve got regulatory worries, they’ve got capital worries, you can’t look at them and say it’s a conservative investment,” said John Smith, a senior fund manager at Brown Shipley & Co., which manages 2.3 billion pounds, including Barclays shares. “I would like to see them break the bank in two so you have a low-risk retail bank offering savings and loans and an investment bank where they’re using their own money to take on a lot of risk.”

From bloomberg

Draghi’s Giant Leap on Rates May Be Small Step for Euro Economy

European Central Bank President Mario Draghi may take a giant leap in monetary policy tomorrow for limited economic gain.

ECB officials meeting in Frankfurt will not only take the benchmark interest rate below 1 percent for the first time to a record low of 0.75 percent, they will also cut the deposit rate to zero, according to Bloomberg News surveys of economists. The easing will do little to aid an economy sliding into recession and may fuel speculation about what the ECB can do after its conventional policy options are spent, some economists said.

“It’s a bold move and will lead the ECB into uncharted territory,” said Julian Callow, chief European economist at Barclays Capital in London. “With soaring unemployment and few signs of the economy recovering, some strong monetary medicine is needed. But let’s be honest, a rate cut by itself will not end the recession, we need much more for that.”

Europe’s sovereign debt crisis, which has forced five of the 17 euro nations to seek bailouts, is curbing growth across the continent and damping the global economic outlook. While ECB rate cuts might not stimulate demand, they would lower borrowing costs for troubled banks. They could also build on the confidence boost that euro-area governments provided last week when they took steps toward a deeper economic union.
‘Signaling Effect’

The ECB will announce its rate decision at 1:45 p.m. in Frankfurt tomorrow. Of 62 economists surveyed by Bloomberg, 46 predicted a quarter-point cut in the benchmark rate, five forecast a half-point reduction and 11 projected no change. In a separate survey of 22 forecasters, 12 said the 0.25 percent deposit rate will be cut to zero, two predicted a reduction to just above zero and eight expected no change.

“A rate cut will have a very, very limited effect on inflation and activity,” said Jens Sondergaard, senior European economist at Nomura International Plc in London, who nevertheless predicts the ECB will lower rates. “You may ask why bother in the first place, but it’s wrong to dismiss rate cuts. They have an important signaling effect, and markets want reassurance that measures are being taken.”

Bond and equity markets rallied last week after euro-area leaders opened the way to recapitalizing banks directly with bailout funds once Europe sets up a single banking supervisor. They also dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s crippled lenders.

Yields on Spanish 10-year bonds fell to 6.25 percent yesterday from 6.94 percent on June 28, while the Italian equivalent dropped to 5.63 percent from 6.19 percent.
Global Action

Europe’s debt crisis has pushed central banks around the world into action to protect their economies.

The Bank of England last month committed to activate a sterling liquidity facility to aid banks, and economists predict it will expand stimulus further at its policy decision tomorrow. It will increase its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds, according to the median forecast in a survey of 41 economists.

The Federal Reserve said on June 20 it will expand the Operation Twist program to extend the maturities of assets on its balance sheet, a move that will lower longer-term interest rates in financial markets.

The central banks of China, Australia, the Czech Republic, Kazakhstan, Vietnam and Israel also cut rates in June, while the Swiss National Bank is buying euros to defend its franc ceiling.

Draghi last month questioned the effectiveness of cutting ECB rates, arguing that “price signals” have a “relatively limited immediate effect” amid financial-market tensions.
‘No Inflation Risks’

Since then, the euro-area economic data have deteriorated. Unemployment rose to a record 11.1 percent in May, services and manufacturing output contracted for a fifth month in June and economic confidence slumped to the lowest in more than two and a half years. The euro economy will shrink 0.3 percent this year, according to the European Commission.

While inflation is at 2.4 percent, in breach of the ECB’s 2 percent limit, Draghi said on June 15 that there are “no inflation risks in any euro-area country.”

“The economic case for a 50 basis-point rate cut is pretty watertight, but for now it’s easier to just cut by 25 basis points,” said Ken Wattret, chief euro-area economist at BNP Paribas in London. “That is enough to show you are standing ready to do something. And it will definitely help the banks that have borrowed in the LTRO.”
Three-Year Loans

The ECB has lent banks more than 1 trillion euros ($1.26 trillion) for three years in its so-called Longer Term Refinancing Operations, with the interest determined by the average of the benchmark rate over the period of the loans. Societe Generale SA estimates that cutting the key rate by 50 basis points would save banks 5 billion euros a year.

Cutting the deposit rate may also lower money-market rates and encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. Almost 800 billion euros is currently being deposited with the ECB each day.

On the other hand, there is a risk that lower money-market rates could hurt banks’ profitability, potentially hampering credit supply to companies and households and reducing banks’ incentive to lend to each other.

The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. The euro overnight index average, or Eonia, stood at 0.33 percent yesterday.
Rewarding Governments

The impact of lower borrowing costs on the economy may be too small for the ECB to expose itself to the perception that it’s rewarding governments for their latest crisis-fighting efforts, said economists at UBS AG in London and Helaba Trust GmbH in Frankfurt, who predict no change in rates.

“We acknowledge that the decision is close, but on balance, given the marginal benefit of a small rate cut and the perception that a rate cut will be interpreted as a quid pro quo for good behavior, the Council will stay on hold,” UBS economists including Amit Kara wrote in a note to clients.

Draghi said after the last policy meeting on June 6, when the ECB kept rates on hold, that “there has never been a quid pro quo between monetary policy and government policy.”

Still, the ECB doesn’t have a compelling reason not to act, said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “There is no big reason to hold fire even if the benefit is small,” he said. “To me, having a little benefit is better than having no benefit at all.”
‘What Next?’

If the ECB moves closer to zero with rates, it may face questions on what else it can do to stimulate the economy.

Elga Bartsch, chief European economist at Morgan Stanley in London, advocates “large scale asset purchases,” while Christian Schulz, senior economist at Berenberg Bank in London, suggests yield caps for “reform-compliant and solvent sovereigns” and another round of “very long-term” loans.

“They will have no more ammunition in terms of their interest-rate weapon,” said Sondergaard at Nomura. “And if we continue to have disinflationary pressures, the question will be: ‘What can you do next?”’

From Bloomberg

Diamond Exit Raises Speculation of Investment-Bank Split

When Robert Diamond took over Barclays Plc (BARC)’s shrinking securities unit in 1997 he vowed to turn the business into a leading global firm.

Fifteen years later, his success in creating a top investment bank, whose profit reached $4.7 billion in 2011, may hasten its split from the lender after the London-based bank admitted to trying to rig global interest rates. Diamond quit as Barclays’s chief executive officer yesterday and hours later Chief Operating Officer Jerry del Missier followed.

The departure of Diamond may presage a reorganization of Barclays after regulators in the U.K. and the U.S. pointed to the need for change at the company. The interest rate debacle is intensifying political pressure in the U.K. to build higher walls between banks’ consumer lending and investment-banking divisions to protect savers and taxpayers.

“Now is a very sensible time to pause, draw breath, assess what’s happened and look again at this question of a ring fence or separation,” said Clive Hollick, a former CEO of United News & Media Group Plc and member of the House of Lords Economic Affairs Committee.

Barclays was hit by a record 290 million-pound ($455 million) fine last week for rigging the London Interbank Offered Rate, a benchmark for more than $360 trillion of securities. Diamond, as CEO of the investment bank from 1997 through 2010, oversaw the unit where Libor rates were submitted.
Costs, Complexities

The U.K. Treasury plans to implement recommendations of the Independent Commission on Banking, which proposed financial firms should build firewalls between their consumer and investment-banking operations. Bank of England Governor Mervyn King said on June 29 the Libor revelations reinforced the argument for implementing the proposals as soon as possible.

“Barclays management should begin talking to people about the costs and complexities around a break up, the potential scale of U.S. liabilities” related to Libor, “and how it can insulate itself,” said Gareth Hunt, head of European research at Canaccord Genuity in London. There may be assets like U.K. consumer banking which can be ring-fenced or split off, he said.

U.K. regulators are weighing whether to start a criminal probe into Libor-fixing and Diamond, 60, will be questioned by British lawmakers on the Treasury Select Committee today.

In a sign of worsening relations between Barclays and its regulators, the company released a note yesterday of a 2008 call purporting to show that Paul Tucker, then the central bank’s markets director, hinted the firm could cut its Libor rates.
Libor Rates

“Tucker stated that the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently,” Diamond said in an Oct. 30, 2008 e-mail to then CEO John Varley and Del Missier.

Diamond didn’t believe he had received any instruction or that he gave any order to Del Missier to lower the lender’s submissions, Barclays said in evidence to lawmakers yesterday. Del Missier, 50, concluded that the Bank of England had instructed the firm not to keep Libor so high and mistakenly instructed employees to lower their submissions, Barclays said.

A Bank of England spokesman declined to comment on the document, as did a Barclays official.

Damage to the franchise he helped create prompted Diamond to go, the banker said in a statement yesterday. The American was the chief architect of Barclays’s expansion into investment banking, creating a business that had 24,000 employees at the end of last year, more than three times as many as when he took over the unit.
Higher Ranking

The division, known until March as Barclays Capital, earned pretax profit of 2.97 billion pounds last year, or almost half of the bank’s total. Barclays ranks fifth in advising on global mergers this year, data compiled by Bloomberg show. The firm wasn’t in the top 20 in 2007, the year before it bought the North American operations of Lehman Brothers Holdings Inc.

“Diamond’s been incredibly successful in turning what was a minor player into a top tier investment bank,” said George Godber, a fund manager who helps oversee about $250 million at Matterley Asset Management in London, and doesn’t hold Barclays stock. “Now you’re likely to see political pressure mount for a separation of Barclays’s investment-banking unit.”

Diamond, a year after joining Barclays de Zoete Wedd, took the helm and steered the firm through the sale of its money- losing European equities unit to focus on bonds, loans and foreign exchange.

It was a rocky start. In 1998, Barclays Capital reported a loss after bets on Russia soured amid the country’s devaluation.
Lehman Purchase

Diamond, who rose through the fixed-income trading ranks at New York-based Morgan Stanley and Credit Suisse First Boston before Barclays, continued to hire and expand the business. He lost out on the CEO job to Varley, 56, and became president of the bank in 2005.

Diamond propelled Barclays into the top ranks in equities and mergers by leading the bid to buy the Lehman operations when the New York-based firm collapsed at the height of the subprime- mortgage crisis. He struck a deal to acquire the North American investment-banking business of the bankrupt firm for $1.75 billion and then embarked on a hiring spree to add stock underwriting and merger advisory businesses and bankers in Europe and Asia to match its standing in the U.S.

Not everyone advocates a change of direction.

“I think they should sit back and relax,” said Christopher Wheeler, a London-based analyst at Mediobanca SpA. “The investment bank is a top three in the world, no argument about it. Why on earth, having made this investment and a very good acquisition of Lehman Brothers, would someone come in and change their strategy?”
Break-Up Potential

Barclays made it through the credit crisis without direct government support. Since then, tightening global capital standards and Europe’s sovereign debt woes have kept investment- banking profitability below pre-crisis levels.

After becoming CEO of Barclays at the start of 2011, Diamond vowed to boost return on equity to 13 percent. The measure stood at 6.6 percent at the end of last year. Net income for 2011 fell to 3 billion pounds from 3.56 billion pounds as investment-banking revenue shrank.

Barclays has dropped 36 percent in London trading since Diamond took over, compared with a 12 percent decline in HSBC Holdings Plc (HSBA), Britain’s largest bank, leading to impatience among some investors.

“Their leverage is still high, they’ve got regulatory worries, they’ve got capital worries, you can’t look at them and say it’s a conservative investment,” said John Smith, a senior fund manager at Brown Shipley & Co., which manages 2.3 billion pounds, including Barclays shares. “I would like to see them break the bank in two so you have a low-risk retail bank offering savings and loans and an investment bank where they’re using their own money to take on a lot of risk.”


From bloomberg

Home Sales Show Bernanke’s Low Rates Are Gaining Traction

For Mike and Kathryn Fry, the time was right to take advantage of the Federal Reserve’s low interest rates to buy a home.

While the couple had considered buying in recent years, they never pulled the trigger. That changed in April, when they decided on a three-bedroom, two-bathroom colonial home in Arlington, Virginia, and took out a 30-year fixed-rate mortgage at 3.75 percent.

“It was a combination of our personal finances being ready and rates being great,” said Mike Fry, 28, who works for a financial-services company. “The market seemed good, and we found a house in our price range.”

Their experience shows how Fed Chairman Ben S. Bernanke’s low interest-rate policy may finally be starting to pull housing out of a six-year tailspin, providing a boost to the broader economy. Home buyers are increasingly taking advantage of record-low borrowing costs as barriers such as falling prices and an overhang of foreclosures start to dissipate.

“The Fed is very much focused on the housing market because that’s typically the best way to channel low interest rates -- through home sales and refinancing,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. in New York. “We are seeing some signs that the credit channel is unclogging modestly, and the Fed is going to be quite pleased with that.”
Home Sales

Sales of existing homes rose 9.6 percent in May from a year earlier, with 4.6 million homes changing hands at a seasonally adjusted annual rate, according to a June 21 report from the National Association of Realtors. A 15 percent jump in an index of contracts to buy existing homes that same month suggests the market will continue to improve.

The U.S. offers a contrast to the U.K., where the housing market is slowing amid concern over the economic outlook. Reports today showed U.K. mortgage approvals fell in May and construction shrank at the fastest rate in 2 1/2 years in June.

Stocks in the U.S. rose today after a report showing orders placed with American factories rose in May for the first time in three months, easing concern that manufacturing is faltering. The Standard & Poor’s 500 Index gained 0.6 percent to 1,374.02 at 2:57 p.m. in New York.

Fewer banks are tightening their underwriting standards, and more homeowners are taking advantage of low rates to refinance their mortgages. Companies such as Discover Financial Services are jumping into the mortgage-lending business as the industry revives.
Luxury Homes

“People have been on the sidelines now for five years,” Douglas Yearley, chief executive of Toll Brothers Inc., the largest U.S. luxury-home builder, said in a June 14 presentation. “And they need to, want to buy a house and they’re coming back out. They’re taking advantage of these great interest rates.”

That was the case for Jennifer and Ethan Ackerman, who bought a four-bedroom home in Alexandria, Virginia, in May.

“We thought we got a great interest rate five years ago with our first house at 5.25 percent, and now rates are below 4 percent, so we just thought this is a great time to buy,” said Jennifer Ackerman, 38, a director at a non-profit professional organization. “That was the real driving factor along with our family expanding and our old house being really small.”

At 1,900 square feet, their new place is twice as large as their old duplex and cost just 40 percent more. She estimated their new house would have cost $100,000 more five years ago.
Fannie, Freddie

Many banks, burned by the housing bust, remain reluctant to lend to any but the most creditworthy borrowers. Fannie Mae and Freddie Mac, which buy home loans and package them into securities with guaranteed payments to investors, require a minimum credit score of 660 for most home buyers. Fannie Mae and Freddie Mac borrowers have average credit scores of 763 and 758 respectively, according to the firms.

Banks say they may lose money if they lend to borrowers, who later default, and are forced to buy the loans back from Fannie and Freddie. The Federal Housing Finance Agency, which regulates the two government-sponsored enterprises, is working on ways to mitigate banks’ fear of the risk of repurchasing loans at a loss.

Fewer banks are tightening their underwriting standards, according to the latest annual survey of 87 banks with more than $3 billion in assets conducted by the Office of the Comptroller of the Currency.
Underwriting Standards

Ten percent of banks reported easier underwriting standards, the most since 2007, according to the survey, released last week. Twenty-five percent reported tightening standards, the least since 2007.

Standards on prime residential mortgage loans and home- equity loans were about unchanged in the Fed’s April survey of senior loan officers after tightening earlier.

The survey also indicated demand was strengthening for prime mortgage loans. And banks that said they would increase their exposure to residential real estate assets over the coming year outnumbered those that said would shrink exposure.

Discover Financial Services, led by Chief Executive Officer David Nelms, has acquired businesses to expand beyond the firm’s core credit-card operations and began offering mortgages. The company started offering them last month after buying the assets of Home Loan Center Inc. for $55.9 million.

“Home loans is a product our customers have been asking Discover for,” Nelms said in a June 19 conference call.
Monthly Payments

Low rates are also encouraging homeowners to refinance their properties, cutting monthly payments and leaving households with more to spend on other goods. The average rate on a 30-year fixed loan was 3.66 percent last week, compared with 6.8 percent in July 2006, according to Freddie Mac.

Refinancing volume in the week ended June 15 hit the highest level in three years, Mortgage Bankers Association data show. Still, that was down 27 percent from January 2009, when rates on 30-year loans fell below 6 percent.

One impediment: mortgages that are more than the value of the home after housing prices declined 33 percent from April 2006 to April 2012 on a seasonally-adjusted basis.

“The big remaining problem for the housing market is access to credit,” said Millan Mulraine, senior U.S. strategist for TD Securities in New York. “Until we can unlock that Pandora’s Box, the full impact of the low interest rates won’t be felt.”

Mulraine sees signs that process could be beginning. Home prices in the S&P/Case-Shiller index of property values in 20 cities posted 0.7 percent gains in both April and March, the best two-month stretch since 2009.
Stocks Surge

The housing recovery has fueled a 51 percent surge in the Standard & Poor’s Supercomposite Homebuilding Index this year through yesterday, compared with an 8.6 percent gain in the broader S&P 500 Index.

Housing-related industries are also seeing gains. Sherwin- Williams Co., the Cleveland-based paint company, has surged 48 percent this year through yesterday, while Home Depot Inc., the largest U.S. home-improvement retailer, rose 26 percent. USG Corp. (USG), the Chicago-based maker of Sheetrock wallboard, has soared 96 percent to a two-year high.

Bernanke and his fellow Fed policy makers are counting on housing to help spur the broader economy. They cut their key interest rate almost to zero in December 2008 and have kept it there since, while also buying $2.3 trillion of Treasuries and mortgage debt to reduce long-term borrowing costs.
Consumer Wealth

“Housing usually plays a very important role in economic recovery, both through the construction itself and related industries, but also because higher house prices increase consumer wealth and promote consumer spending,” Bernanke told reporters at a June 20 press conference.

In the 11 quarters following every recession since 1970, residential investment contributed 0.4 to 0.8 percentage point to economic growth on average, accounting for 11 to 17 percent of gains, according to a June 14 report from the Joint Center for Housing Studies of Harvard University.

Mike Fry, the first-time homeowner in Virginia, said buying a home has altered the way he and his wife think about spending and borrowing.

“It’s definitely made us change our spending habits because we have more to do around the house, like fixing the fence after the storm this weekend,” Fry said. “We’re starting to save for a renovation in a few years.”

From bloomberg

Forecast XAUUSD 04-07-2012 Trend Down

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Orders to U.S. Factories Rise for First Time in Three Months

Orders placed with U.S. factories rose in May for the first time in three months, easing concern that manufacturing is faltering. Auto sales for June also exceeded analysts’ estimates.

The 0.7 percent increase in bookings followed a revised 0.7 percent drop in the prior month, the Commerce Department said today in Washington. The median forecast of economists in a Bloomberg News survey called for a rise to 0.1 percent.

Europe’s debt crisis and a slowdown in Asian markets including China is restraining exports, weighing on the outlook for manufacturers like Joy Global Inc. and DuPont Co. (CAT) Business investment, a mainstay of growth, will provide less of a boost to the economy as a weakening labor market holds back American consumers from boosting purchases of vehicles and other goods.

“Orders were so weak in prior months that the healthy gain in May is not enough to buck the softening trend,” said Ellen Zentner, a senior economist at Nomura Securities International Inc. in New York, who projected a gain of 0.9 percent. “Business caution has become more pervasive.”

Stocks rallied after the report. The Standard & Poor’s 500 Index climbed 0.6 percent to 1,374.02, a two-month high, at the close of trading in New York.

Estimates in the Bloomberg survey of 52 economists ranged from a drop of 1.3 percent to a gain of 1 percent. The Commerce Department revised the April figure from a previously reported drop of 0.6 percent.
Excluding Transportation

Excluding transportation equipment, factory orders increased 0.4 percent in May after falling 0.9 percent the prior month.

Bookings for durable goods, those meant to last at least three years climbed 1.3 percent, also the first gain in three months. They make up just over half of total factory demand. Today’s reading was more than the 1.1 percent gain estimated by the government on June 27. Demand for non-durable goods, including petroleum, increased 0.2 percent.

Orders for capital goods excluding aircraft and military equipment, a measure of future business investment, advanced 2.1 percent, more than the 1.6 percent gain estimated last week, after falling 1.5 percent the prior month.

Shipments of those goods, used in calculating gross domestic product, increased 0.6 percent, more than previously projected, after dropping 1.5 percent in April.
Household Spending

An unemployment rate exceeding 8 percent is restraining household spending, which accounts for about 70 percent of the economy. Cars and light trucks sold at a 13.7 million annual rate in May, the weakest this year and down from April’s 14.4 million pace, Ward’s Automotive Group data showed.

Sales accelerated to a 14.1 million annual rate in June, helping the industry stay on pace for the best year since 2007. The pace compares with the 13.8 million light-vehicle rate that was the average estimate of 15 analysts surveyed by Bloomberg.

Factory inventories decreased 0.2 percent in May for a second month, today’s report showed. The draw down in stockpiles may prompt some economists to cut estimates for second-quarter gross domestic product.

Factory shipments climbed 0.5 percent in May, the report also showed. The gain in sales combined with the drop in stocks brought the inventory-to-shipments ratio down to 1.27 months, the lowest reading since September, from 1.28 months in April.

Manufacturing accounts for about 12 percent of the economy and has been at the forefront of the recovery that began June 2009. Cooling business investment means it may offer less support to the expansion in the second quarter.
ISM Index

The Institute for Supply Management’s index fell to 49.7 in June, the first contraction in almost three years and worse than the most-pessimistic forecast in a Bloomberg News survey, a report showed yesterday.

Regional figures reinforce the slowdown. Manufacturing in the Philadelphia area shrank in June at the fastest pace in almost a year, while New York-region factories expanded at the slowest rate in seven months.

Executives at Wilmington, Delaware-based DuPont, the third- largest U.S. chemical maker, said while growth in North America is holding up, they are concerned about a slowdown in China and Germany’s dependence on exports.

“My number one worry is what will happen in Europe over the next six to nine months,” Diane Gulyas, group vice president of DuPont’s performance-materials segment, said on a conference call with analysts on June 14.

Joy Global, the maker of P&H and Joy mining equipment, cut forecasts for full-year earnings and revenue as companies ease capital expenditure amid concern over the slowdown in China. Equipment orders fell 62 percent in the fiscal second quarter from a year earlier primarily due to a weak U.S. coal market, the Milwaukee-based company said in May.

The rest of the world is reporting weaker results. Euro- area manufacturing contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A manufacturing purchasing managers’ index for China fell to 48.2 last month from 48.4 in May, HSBC Holdings Plc and Markit said yesterday.


From bloomberg

The Euro’s Latest Reprieve

NEW YORK – Like an inmate on death row, the euro has received another last-minute stay of execution. It will survive a little longer. The markets are celebrating, as they have after each of the four previous “euro crisis” summits – until they come to understand that the fundamental problems have yet to be addressed.

There was good news in this summit: Europe’s leaders have finally understood that the bootstrap operation by which Europe lends money to the banks to save the sovereigns, and to the sovereigns to save the banks, will not work. Likewise, they now recognize that bailout loans that give the new lender seniority over other creditors worsen the position of private investors, who will simply demand even higher interest rates.

CommentsIt is deeply troubling that it took Europe’s leaders so long to see something so obvious (and evident more than a decade and half ago in the East Asia crisis). But what is missing from the agreement is even more significant than what is there. A year ago, European leaders acknowledged that Greece could not recover without growth, and that growth could not be achieved by austerity alone. Yet little was done.

CommentsWhat is now proposed is recapitalization of the European Investment Bank, part of a growth package of some $150 billion. But politicians are good at repackaging, and, by some accounts, the new money is a small fraction of that amount, and even that will not get into the system immediately. In short: the remedies – far too little and too late – are based on a misdiagnosis of the problem and flawed economics.

CommentsThe hope is that markets will reward virtue, which is definedas austerity. But markets are more pragmatic: if, as is almost surely the case, austerity weakens economic growth, and thus undermines the capacity to service debt, interest rates will not fall. In fact, investment will decline – a vicious downward spiral on which Greece and Spain have already embarked.

CommentsGermany seems surprised by this. Like medieval blood-letters, the country’s leaders refuse to see that the medicine does not work, and insist on more of it – until the patient finally dies.

CommentsEurobonds and a solidarity fund could promote growth and stabilize the interest rates faced by governments in crisis. Lower interest rates, for example, would free up money so that even countries with tight budget constraints could spend more on growth-enhancing investments.

CommentsMatters are worse in the banking sector. Each country’s banking system is backed by its own government; if the government’s ability to support the banks erodes, so will confidence in the banks. Even well-managed banking systems would face problems in an economic downturn of Greek and Spanish magnitude; with the collapse of Spain’s real-estate bubble, its banks are even more at risk.

CommentsIn their enthusiasm for creating a “single market,” European leaders did not recognize that governments provide an implicit subsidy to their banking systems. It is confidence that if trouble arises the government will support the banks that gives confidence in the banks; and, when some governments are in a much stronger position than others, the implicit subsidy is larger for those countries.

CommentsIn the absence of a level playing field, why shouldn’t money flee the weaker countries, going to the financial institutions in the stronger? Indeed, it is remarkable that there has not been more capital flight. Europe’s leaders did not recognize this rising danger, which could easily be averted by a common guarantee, which would simultaneously correct the market distortion arising from the differential implicit subsidy.

CommentsThe euro was flawed from the outset, but it was clear that the consequences would become apparent only in a crisis. Politically and economically, it came with the best intentions. The single-market principle was supposed to promote the efficient allocation of capital and labor.

CommentsBut details matter. Tax competition means that capital may go not to where its social return is highest, but to where it can find the best deal. The implicit subsidy to banks means that German banks have an advantage over those of other countries. Workers may leave Ireland or Greece not because their productivity there is lower, but because, by leaving, they can escape the debt burden incurred by their parents. The European Central Bank’s mandate is to ensure price stability, but inflation is far from Europe’s most important macroeconomic problem today.

CommentsGermany worries that, without strict supervision of banks and budgets, it will be left holding the bag for its more profligate neighbors. But that misses the key point: Spain, Ireland, and many other distressed countries ran budget surpluses before the crisis. The downturn caused the deficits, not the other way around.

CommentsIf these countries made a mistake, it was only that, like Germany today, they were overly credulous of markets, so they (like the United States and so many others) allowed an asset bubble to grow unchecked. If sound policies are implemented and better institutions established – which does not mean only more austerity and better supervision of banks, budgets, and deficits – and growth is restored, these countries will be able to meet their debt obligations, and there will be no need to call upon the guarantees. Moreover, Germany is on the hook in either case: if the euro or the economies on the periphery collapse, the costs to Germany will be high.

CommentsEurope has great strengths. Its weaknesses today mainly reflect flawed policies and institutional arrangements. These can be changed, but only if their fundamental weaknesses are recognized – a task that is are far more important than structural reforms within the individual countries. While structural problems have weakened competitiveness and GDP growth in particular countries, they did not bring about the crisis, and addressing them will not resolve it.

CommentsEurope’s temporizing approach to the crisis cannot work indefinitely. It is not just confidence in Europe’s periphery that is waning. The survival of the euro itself is being put in doubt.