Oct. 6 (Bloomberg) -- The same credit market collapse that drove Lehman Brothers Holdings Inc. into bankruptcy and sent bank borrowing costs in Europe to record highs is making the yen unbeatable.
Japan's currency was the best-performer in September and the only currency to appreciate against the dollar. Deutsche Bank AG, the biggest trader of foreign exchange, says the yen will rise 5 percent in coming months. New York-based Morgan Stanley is telling clients to buy the currency versus the euro and pound.
After seven years of providing the cheapest source of funds for investors buying higher-yielding New Zealand dollars, Australian dollars and Brazil reais, the yen is appreciating as $587 billion of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percent on a trade-weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.
``We are in a multi-year trend reversal,'' said Paresh Upadhyaya, a senior vice president at Putnam Investment LLC in Boston who helps manage $50 billion in currency assets. ``We are going to see a global central bank easing cycle. The yen is the place to be in this environment of economic slowdown and heightened volatility.''
This year will be the first since 2002 that the economies of the U.S., euro-region and Japan all expand less than 2 percent, according to data compiled by Bloomberg. The BOJ's effective exchange rate rose 5 percent from April through September of that year, the best six-month performance since the end of 1999.
`Counter-Cyclical Currency'
Strategists are turning more bullish, forecasting the yen will end the year at 107 to the dollar, compared with an expectation of 109.15 on Sept. 12, according to the median of 40 estimates compiled by Bloomberg.
The currency rose to 103.88 per dollar as of 12:46 p.m. in Tokyo from 105.32 late in New York on Oct. 3. Japan's currency also climbed 3.3 percent to 67.56 per New Zealand dollar and gained 4.3 percent to 78.10 against the Australian dollar. It advanced to 50.7812 versus the Brazilian real from 51.5240.
``The yen is a counter-cyclical currency,'' said Richard Benson, who oversees $14 billion of currency funds at Millennium Asset Management in London. ``When the global economy looks bad, the yen should do well.''
211 Percent Return
The currency lost 60 percent against the Australian and New Zealand dollars in the seven years ended June 30, and depreciated 24 percent versus the real and 20 percent to the British pound. The main cause was the so-called carry trade, where investors took out loans in Japan to take advantage of the lowest benchmark interest rates among the Group of 10 industrialized nations. They then sold the yen and invested the proceeds in high-yielding assets outside the country.
Investors who used the strategy to buy the New Zealand and Australian dollars, euro and pound, would have generated a return of 211 percent on average in the past seven years, according to data compiled by Bloomberg. The trades would have lost 13 percent this year.
The collapse of Lehman, the government takeovers of Fannie Mae, Freddie Mac, American International Group Inc. and Washington Mutual Inc. and the forced sales of Merrill Lynch & Co. and Wachovia Corp. reduced confidence in the world's financial system.
Payback Time
That in turn has made banks wary of lending to each other, pushing the three-month London interbank offered rate in dollars to 4.33 percent from 2.81 percent on Sept. 15, the day New York- based Lehman filed for bankruptcy protection, according to the British Bankers' Association in London. The increase in rates and drop in credit is forcing speculators to close out carry trades and pay back yen-denominated loans. The currency's biggest gain the past month has come against the real, rising 20 percent.
The slowing world economy is also helping the yen by boosting expectations that central banks will lower borrowing costs. Policy makers in Europe, Australia, New Zealand and Brazil will cut interest rates next year, according to the median estimates of economists surveyed by Bloomberg.
Futures on the Chicago Board of Trade showed an 84 percent probability yesterday the U.S. Federal Reserve will lower its 2 percent target rate for overnight lending between banks by a half-percentage point at its Oct. 29 meeting. Traders saw no chance of a cut a month earlier.
Carry Trade `Dead'
``The carry trade is dead,'' said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi in London. ``The world is deleveraging.''
The yen rose to 141.24 per euro today, the highest level since May 2006, and 182.31 versus the pound, the strongest since November 2003. It reached a four-month high of 103.54 against the dollar last week and was recently at 103.74.
Hedge funds and speculators increased bets that the yen will appreciate versus the dollar to the highest level since July 18, data from the U.S. Commodity Futures Trading Commission show. Wagers on an advance in the yen outnumbered those on a drop by 43,022 on Sep. 30. As recently as Sept. 2 they were betting on a decline in the yen.
Morgan Stanley strategists turned bullish last week, saying in an Oct. 2 report to clients thy yen may strengthen to 135 per euro and to 165 per pound from 188.10. Frankfurt-based Deutsche Bank expects it to rally to 100 to the dollar. Bank of Tokyo- Mitsubishi UFJ Ltd, Japan's largest bank by market value, raised its forecast last week to 100 per dollar by March from 102. It predicts the yen will gain 11 percent versus the pound in a year.
Bank Rescue
Further gains may depend on whether U.S. Treasury Secretary Henry Paulson's $700 billion plan to revive credit markets by purchasing depreciated assets from banks boosts investor confidence.
The carry trade ``is a strategy that has a good track record,'' said Pablo Frei, a money manager at Quaesta Capital in Switzerland, which oversees $1.2 billion in currency funds. ``You have to unwind carry during times of high risk. There will be a day that it will be put on again. The question is when.''
Quaesta Capital's currency funds have reduced the amount of money in carry trades to less than 5 percent of assets, from about 30 percent a year ago, Frei said.
Japanese Investment
Investors in Japan will continue to invest internationally to diversify their holdings as risk appetites return, capping the yen's strength, said Rebecca Patterson, global head of foreign exchange in New York for the private wealth management unit of JPMorgan Chase & Co.
Japanese mutual funds increased purchases of overseas assets to 36.89 trillion yen ($369 billion) by the end of last year, from 3.06 trillion yen in 2000, according to Japan's Investment Trust Association.
``What's happened in Japan in the last two, three years has been a structural shift of the Japanese mindset,'' said Patterson. ``They view these as long term investments. The yen negative flows will slow in times of trouble like this. But I don't see a lot of this is a longer-term shift.''
Carry trades became popular as swings in exchange rates fell to record lows because there was less risk that rapid changes would wipe out profits.
Now, that is changing. Implied volatility on major currencies rose to 16.69 percent on Sept. 17, the highest level since 1998, according to the JPMorgan G7 Volatility Index. The gauge of price swings touched 5.76 percent in June 2007, the lowest since the index's inception in 1992.
Yen Reserves
The percentage of currency reserves held in yen by foreign central banks increased for a third straight quarter through June, according to the International Monetary Fund.
Yen now accounts for 3.4 percent of global reserves, compared with 2.8 percent a year earlier, the lowest amount since at least 1999. The dollar is the world's largest reserve currency at 62.5 percent, IMF figures show. Morgan Stanley strategists said in their Oct. 2 report that the yen may overtake the pound, which is No. 3 at 4.7 percent, in ``coming quarters.''
``There are many risks in the United States and Europe,'' said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has $54.1 billion in assets and is Japan's eighth-biggest life insurance company. ``Fund managers are starting to shift their money to yen. They are starting to overweight yen in terms of currency allocation.''
Monday, October 6, 2008
Thursday, September 18, 2008
UK Slaps Ban on Short-Selling Financial Stocks
The UK Financial Services Authority imposed a temporary ban on short-selling financial stocks on Thursday, saying the measure was needed to prevent further instability in the financial sector.
The ban, which takes effect from midnight on Thursday Sept. 18, follows hours after UK bank Lloyds TSB bought rival HBOS following a dramatic fall in the latter's share price.
CNBC.com
"We have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," FSA Chief Executive Hector Sants said in a statement.
The move came after the U.S. Securities and Exchange Commission on Wednesday introduced rules under which short sellers and their broker-dealers must deliver securities by the close of business on the settlement date, three days after the sale.
Chancellor of the Exchequer Alistair Darling welcomed the FSA ban.
"I believe it is the right thing to do in the current market conditions and in the interests of financial stability," he said in a statement.
The FSA said the ban will remain in force until Jan. 16 next year and will be subject to an initial review after thirty days.
In addition, investors with an existing short position of more than 0.25 percent of a financial company's share capital must disclose their holdings every day from Sept. 23, the FSA said.
The ban, which takes effect from midnight on Thursday Sept. 18, follows hours after UK bank Lloyds TSB bought rival HBOS following a dramatic fall in the latter's share price.
CNBC.com
"We have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector," FSA Chief Executive Hector Sants said in a statement.
The move came after the U.S. Securities and Exchange Commission on Wednesday introduced rules under which short sellers and their broker-dealers must deliver securities by the close of business on the settlement date, three days after the sale.
Chancellor of the Exchequer Alistair Darling welcomed the FSA ban.
"I believe it is the right thing to do in the current market conditions and in the interests of financial stability," he said in a statement.
The FSA said the ban will remain in force until Jan. 16 next year and will be subject to an initial review after thirty days.
In addition, investors with an existing short position of more than 0.25 percent of a financial company's share capital must disclose their holdings every day from Sept. 23, the FSA said.
Fed, ECB, BOJ Take Joint Action to Alleviate Tensions (Update1)
Fed, ECB, BOJ Take Joint Action to Alleviate Tensions (Update1)
By John Fraher and Brian Swint
Sept. 18 (Bloomberg) -- The Federal Reserve, the European Central Bank and the Bank of Japan joined with their counterparts around the world to pump dollars into the financial system and head off a deepening crisis.
The Fed said it authorized other central banks to auction $180 billion in dollar funds to financial institutions, in a statement on its Website. A joint release said that the Bank of England, the Bank of Canada and the Swiss National Bank also participated.
``The action is designed to address the continued elevated pressures in U.S. dollar short-term funding markets,'' the banks said. ``The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.''
Central bankers have struggled to restore confidence in markets this week as banks hoarded money on concern more banks will follow Lehman Brothers Holdings Inc. into bankruptcy. The cost of borrowing in dollars for three months jumped the most since 1999 with the crisis spreading abroad as U.K. mortgage lender HBOS Plc slumped and Russia poured money into its banks.
``The lack of dollars has been making the financial crisis worse around the world which is why we now have this coordinated response,'' said Robert Barrie, an economist at Credit Suisse Group in London.
By John Fraher and Brian Swint
Sept. 18 (Bloomberg) -- The Federal Reserve, the European Central Bank and the Bank of Japan joined with their counterparts around the world to pump dollars into the financial system and head off a deepening crisis.
The Fed said it authorized other central banks to auction $180 billion in dollar funds to financial institutions, in a statement on its Website. A joint release said that the Bank of England, the Bank of Canada and the Swiss National Bank also participated.
``The action is designed to address the continued elevated pressures in U.S. dollar short-term funding markets,'' the banks said. ``The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.''
Central bankers have struggled to restore confidence in markets this week as banks hoarded money on concern more banks will follow Lehman Brothers Holdings Inc. into bankruptcy. The cost of borrowing in dollars for three months jumped the most since 1999 with the crisis spreading abroad as U.K. mortgage lender HBOS Plc slumped and Russia poured money into its banks.
``The lack of dollars has been making the financial crisis worse around the world which is why we now have this coordinated response,'' said Robert Barrie, an economist at Credit Suisse Group in London.
Monday, September 15, 2008
Wilbur Ross: Possibly a Thousand Banks Will Close
http://www.cnbc.com/id/26710362
In an exclusive interview with CNBC.com, Wilbur Ross, chairman and CEO of WL Ross & Co., says he sees possibly as many as a thousand bank closures in the coming months. And this will create opportunities for investors.
"I do think a lot of the regional ones will (close), just as they did in the last savings and loan crisis in the 1990s," Ross said. (Watch the full CNBC.com exclusive interview with Wilbur Ross on the left)
Ross says he will be looking to pick up smaller distressed institutions. "There will be opportunities, but we will need federal assistance in them, because what we're mainly looking for is stable sources of deposits, not so much the loan portfolio."
Ross feels that there will be too many people willing to provide capital to the large financials, which makes them less of a bargain than smaller banks.
When asked about his views on Bank of America's
cnbc_comboQuoteMove('popup_bac_ID0EJD15839609');
[BAC 33.74 0.68 (+2.06%) ]
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purchase of Merrill Lynch
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[MER 17.05 -2.38 (-12.25%) ]
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, Ross said that he didn't think that Merrill was in that dire a position.
"I think people in general felt better about Merrill's situation than about Lehman. I think ever since John Thain came in, he's done a wonderful job trying to fix what was a very difficult situation," Ross said.
He also noted that this was really now the second successful turnaround for Thain. "He (Thain)saved Merrill, went into BoFA ... Temasek, for example, went into something like a $5 a share profit out of this. So it's not a tragic ending."
"It will be very interesting to see where Thain ends up in the Bank of America hierarchy," Ross added.
In an exclusive interview with CNBC.com, Wilbur Ross, chairman and CEO of WL Ross & Co., says he sees possibly as many as a thousand bank closures in the coming months. And this will create opportunities for investors.
"I do think a lot of the regional ones will (close), just as they did in the last savings and loan crisis in the 1990s," Ross said. (Watch the full CNBC.com exclusive interview with Wilbur Ross on the left)
Ross says he will be looking to pick up smaller distressed institutions. "There will be opportunities, but we will need federal assistance in them, because what we're mainly looking for is stable sources of deposits, not so much the loan portfolio."
Ross feels that there will be too many people willing to provide capital to the large financials, which makes them less of a bargain than smaller banks.
When asked about his views on Bank of America's
cnbc_comboQuoteMove('popup_bac_ID0EJD15839609');
[BAC 33.74 0.68 (+2.06%) ]
cnbc_quoteComponent_init_getData("bac","WSODQ_COMPONENT_BAC_ID0EJD15839609","WSODQ","true","ID0EJD15839609","off","false");
purchase of Merrill Lynch
cnbc_comboQuoteMove('popup_mer_ID0EKAAC15839609');
[MER 17.05 -2.38 (-12.25%) ]
cnbc_quoteComponent_init_getData("mer","WSODQ_COMPONENT_MER_ID0EKAAC15839609","WSODQ","true","ID0EKAAC15839609","off","false");
, Ross said that he didn't think that Merrill was in that dire a position.
"I think people in general felt better about Merrill's situation than about Lehman. I think ever since John Thain came in, he's done a wonderful job trying to fix what was a very difficult situation," Ross said.
He also noted that this was really now the second successful turnaround for Thain. "He (Thain)saved Merrill, went into BoFA ... Temasek, for example, went into something like a $5 a share profit out of this. So it's not a tragic ending."
"It will be very interesting to see where Thain ends up in the Bank of America hierarchy," Ross added.
World May Face `Japan-Like' Economic Stagnation, GIC's Tan Says
By Shamim Adam
Sept. 15 (Bloomberg) -- The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.
Global growth will probably be weak in the next few years, and protectionist and populist policies are likely to emerge, said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. The sovereign fund, which oversees more than $100 billion, has pumped billions into UBS AG and Citigroup Inc. after they posted writedowns linked to U.S. subprime mortgages.
``Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,'' Tan said. ``Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.''
An asset-price bubble in Japan burst in the early 1990s, triggering a property and stock market collapse that heralded a decade of stagnation in the world's second-largest economy. Financial institutions worldwide have reported more than $500 billion in losses and writedowns since the beginning of 2007 and the credit-market collapse erased $11 trillion from global stocks in the past year.
The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world's largest economy have collapsed this year. The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.
`More Severe'
``If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,'' Tan said. ``A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.''
Lehman Brothers Holdings Inc. is preparing to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm, according to a person with direct knowledge of the firm's plans.
Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.
Emerging Markets
Japan's economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. The U.S. economy, which expanded at a 3.3 percent annual pace in the second quarter, has lost 605,000 jobs in the first eight months of the year.
Emerging markets will account for more than half of the world's growth in the next decade, from about a fifth in 2000, Tan predicts.
``Growth in emerging markets can be expected to remain relatively robust,'' he said. ``Emerging economies will displace the G-7 as the world's largest economies over the next two to three decades.''
A rising ``middle-class'' in emerging markets will also increase demand for commodities and increase supply constraints that may spur competition for resources, he said.
Natural Resources
``International tensions could rise as countries compete for natural resources, especially food, energy and water,'' Tan said. ``Commodity-producing countries are likely to exert stronger control over their natural resources, potentially exacerbating supply concerns. Countries that are reliant on imports of commodities could be more aggressive in their pursuit of supplies.''
Weaker employment and income growth could lead to a rise in protectionist policies, especially in the U.S. and Europe, Tan said. Governments need to increase conflict-resolution mechanisms and boost cooperation to solve issues amid the emergence of new major economies, he said, citing the World Trade Organization Doha Round of talks as an example.
Trade ministers have tried and failed to reach a breakthrough in the so-called Doha Round talks in each of the past three years. A nine-day summit at the WTO in Geneva collapsed on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.
``Significant stagnation as well as inflation risks suggest that challenges and potential conflicts arising from both protectionism as well as resource nationalism could seriously jeopardize globalization of production and markets,'' Tan said.
Sept. 15 (Bloomberg) -- The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.
Global growth will probably be weak in the next few years, and protectionist and populist policies are likely to emerge, said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. The sovereign fund, which oversees more than $100 billion, has pumped billions into UBS AG and Citigroup Inc. after they posted writedowns linked to U.S. subprime mortgages.
``Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,'' Tan said. ``Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.''
An asset-price bubble in Japan burst in the early 1990s, triggering a property and stock market collapse that heralded a decade of stagnation in the world's second-largest economy. Financial institutions worldwide have reported more than $500 billion in losses and writedowns since the beginning of 2007 and the credit-market collapse erased $11 trillion from global stocks in the past year.
The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world's largest economy have collapsed this year. The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.
`More Severe'
``If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,'' Tan said. ``A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.''
Lehman Brothers Holdings Inc. is preparing to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm, according to a person with direct knowledge of the firm's plans.
Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.
Emerging Markets
Japan's economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. The U.S. economy, which expanded at a 3.3 percent annual pace in the second quarter, has lost 605,000 jobs in the first eight months of the year.
Emerging markets will account for more than half of the world's growth in the next decade, from about a fifth in 2000, Tan predicts.
``Growth in emerging markets can be expected to remain relatively robust,'' he said. ``Emerging economies will displace the G-7 as the world's largest economies over the next two to three decades.''
A rising ``middle-class'' in emerging markets will also increase demand for commodities and increase supply constraints that may spur competition for resources, he said.
Natural Resources
``International tensions could rise as countries compete for natural resources, especially food, energy and water,'' Tan said. ``Commodity-producing countries are likely to exert stronger control over their natural resources, potentially exacerbating supply concerns. Countries that are reliant on imports of commodities could be more aggressive in their pursuit of supplies.''
Weaker employment and income growth could lead to a rise in protectionist policies, especially in the U.S. and Europe, Tan said. Governments need to increase conflict-resolution mechanisms and boost cooperation to solve issues amid the emergence of new major economies, he said, citing the World Trade Organization Doha Round of talks as an example.
Trade ministers have tried and failed to reach a breakthrough in the so-called Doha Round talks in each of the past three years. A nine-day summit at the WTO in Geneva collapsed on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.
``Significant stagnation as well as inflation risks suggest that challenges and potential conflicts arising from both protectionism as well as resource nationalism could seriously jeopardize globalization of production and markets,'' Tan said.
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