China’s manufacturing expanded at a slower pace than estimated in May, prompting stock declines across Asia on concern growth in the world’s third-largest economy may slow.
The Purchasing Managers’ Index fell to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said in an e- mailed statement today, less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. A separate index released by HSBC Holdings Plc and Markit Economics fell to 52.7, the lowest level in a year.
The figures came as reports showed a drop in property sales in Beijing, Shanghai and Shenzhen, offering signs that the government crackdown on property speculation is having an impact. The MSCI Asia Pacific Index, which in May had its biggest monthly drop since 2008 on concern the region’s growth will be hurt by Europe’s crisis, snapped a four-day winning streak.
“The fall in the headline PMI shown in the May surveys might be an early sign of a slowdown” in China, said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. It “may be exacerbated by euro-area weakness and recent measures from Beijing to rein in the property market.”
China’s Shanghai Composite Index fell for a third day, losing 1.93 percent to 2542.095 at 1:47 p.m. local time. Slower growth may compel China to delay raising benchmark interest rates or letting the yuan appreciate against the dollar even after the economy grew 11.9 percent last quarter.
Chances Fading
The “chances of further policy tightening are fading as a result of events in Europe and a still unfolding correction in the property market,” Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland, said before today’s data. He forecasts rates to stay unchanged this year and the yuan’s dollar peg to remain until at least the end of the third quarter.
Premier Wen Jiabao said yesterday in Tokyo that the world needs to guard against the possibility of a second economic slump. China will continue its proactive fiscal policy to consolidate its recovery, Finance Minister Xie Xuren said May 28.
Comparable indicators in manufacturing around the world in May are forecast to indicate global output growth has peaked. Australia’s manufacturing growth slowed in May and economists predict reports due today will show U.S. manufacturing cooled while Europe’s grew at the same pace as the previous month.
“The overheating risk is likely to ease as tightening measures filter through,” Qu Hongbin, chief China economist at HSBC, said in today’s release. “We see robust economic growth without double-dip risks not least because of massive existing infrastructure investment and resilient private consumption.”
Indicate Expansion
HSBC’s survey, covering more than 400 manufacturing companies, is weighted more toward smaller, privately owned business than the government’s PMI, according to the bank. Readings above 50 for both surveys indicate an expansion.
The central bank has kept the key one-year lending rate at 5.31 percent and the deposit rate at 2.25 percent since December 2008 after cuts to counter the financial crisis. The yuan is trading at about 6.83 per dollar under a policy in place since July 2008 to aid exporters.
The Shanghai Composite Index fell 9.7 percent in May, the biggest monthly decline since August, on concern the European debt crisis is worsening and the government will step up property measures. The benchmark has declined more than 20 percent this year. In contrast with investors’ pessimism, Capital Economics Ltd. said this week that the Chinese economy is “gliding to a soft landing.”
Slower Growth
“The economy may continue to maintain relatively fast growth, but the growth rate may slow,” Zhang Liqun, a researcher at the State Council’s Development and Research Center, said in the statement from the logistics federation. “The May PMI may be an indication that the economic rebound is stabilizing.”
An output index fell to 58.2 from 59.1 in April, today’s report showed. The new-order index slid to 54.8 from 59.3 and an export-order index dropped to 53.8 from 54.5. The input-price index decreased to 58.9 from 72.6.
The federation also said its average factory employment index for the past three months reached 52.7, the highest since the gauge began in 2005.
While year-on-year economic indicators for May are likely to show slower growth, “all this is telling us is that it is now a year since China’s stimulus started to be felt,” said Mark Williams, a London-based economist for the firm. Economic momentum “remains strong.”
Seasonal Adjustment
Williams also said that the official PMI normally falls in May, “a sign that the seasonal adjustment applied is not particularly effective.” Nomura Holdings Inc. and Bank of America-Merrill Lynch expressed similar views ahead of today’s data.
The manufacturing index, released by the logistics federation and the Beijing-based National Bureau of Statistics, covers more than 730 companies in 20 industries, including energy, metallurgy, textiles, automobiles and electronics.
Chinese policy makers are trimming stimulus this year after the $1.4 trillion lending binge that revived growth in 2009. Officials are targeting a 22 reduction in new loans and have sold bills and raised banks’ reserve requirements to suck money out of the financial system.
Restraining inflation expectations and keeping housing affordable are two of the government’s key goals after urban property prices jumped a record 12.8 percent in April from a year earlier. Wuhan Iron & Steel Group, the nation’s third- biggest steelmaker, said May 26 that demand for steel is declining, partly because of curbs on property loans.
Tuesday, June 1, 2010
Stocks Fall as China’s Manufacturing Growth Slows; Bonds Rise
Stocks tumbled, extending the biggest monthly decline in the MSCI World Index since February 2009, commodities dropped and bonds rallied on a slowdown in Chinese manufacturing. BP Plc fell the most since 1992 after it abandoned efforts to stop the biggest oil spill in U.S. history.
Futures on the Standard & Poor’s 500 Index slid 1.2 percent at 7:36 a.m. in New York, while the MSCI World retreated 0.7 percent. Crude oil and copper slipped for a second day, while gold traded within about 2 percent of a record high. The euro weakened as much as 1.6 percent to a four-year low against the dollar. BP Plc sank 15 percent, its biggest drop since 1992, while its bonds traded in line with debt of companies rated as many as five levels lower, according to Bank of America Merrill Lynch index data.
China’s Federation of Logistics and Purchasing said today its Purchasing Managers’ Index fell to 53.9 in April, lower than the median 54.5 estimate in a Bloomberg News survey of 18 economists, raising concern that the nation’s economy, the engine of global growth, is slowing. BP said a “top kill” attempt to plug the leak in the Gulf of Mexico using heavy fluids and debris had failed, ruling out stopping the flow of oil from the well until relief drilling is completed in August.
There are “emerging signs that the global recovery is already beginning to lose momentum especially in the two major economies of the U.S. and China,” Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London, wrote in a report today. “This was evident again today by the Chinese manufacturing PMI which dropped more sharply than expected.”
Santander, Prudential
More than three shares fell for every one that gained on the MSCI World, which extended its drop of 9.9 percent in May, the biggest monthly decline since February 2009. The Stoxx Europe 600 Index slumped 1.6 percent as all 19 industry groups weakened. Banco Santander SA, Spain’s biggest bank, slipped 3.9 percent in Madrid, while BNP Paribas SA, France’s largest, fell 3.5 percent in Paris. Losses were limited as Prudential Plc rose 6.1 percent in London on speculation its takeover of American International Group Inc.’s main Asian unit won’t proceed.
The yield investors demand to hold BP’s bonds rather than government debt widened to 1.48 percentage points, or 148 basis points. That’s almost double the 77 basis-point average for similarly rated industrial companies and higher than the 124 premium on notes graded five levels lower. BP is rated Aa1 by Moody’s Investors Service. The cost of protecting against a default on BP’s bonds rose to a record, with credit-default swaps tied to the company climbing 77 basis points to 177.
S&P Futures
The decline in U.S. futures indicated the S&P 500 may extend the 1.2 percent drop made on May 28. U.S. equity markets were closed yesterday for the Memorial Day holiday. Manufacturing in the U.S. probably expanded in May for a 10th month, economists said before a report from the Institute for Supply Management at 10 a.m. New York time today. The ISM’s factory index fell to 59 from an almost six-year high of 60.4 in April, according to the median estimate in a Bloomberg News survey of 62 economists. Readings greater than 50 signal growth.
The MSCI Asia Pacific Index sank 1.2 percent. Sony Corp., which gets 69 percent of its sales outside Japan, fell 1 percent in Tokyo as a stronger yen threatened to hurt the value of overseas revenue. Hitachi Ltd., Japan’s No. 3 company by revenue, slumped 3.5 percent after the Financial Times cited the company’s president as saying it’s affected by Europe’s debt crisis.
Emerging Markets
The MSCI Emerging Markets Index declined for the first time in five days, falling 2.1 percent. The MSCI China Index of Hong Kong-traded shares retreated 2.2 percent, while Zijin Mining Group Co. lost 2.8 percent on speculation demand from the world’s largest metals consumer will decline. The Micex Index in Russia, the biggest energy exporter, sank 2.7 percent and the ruble weakened 1.4 percent against the dollar.
Crude oil for July delivery retreated 2.4 percent to $72.18 a barrel. Copper for delivery in three months dropped 2.9 percent to $6,740 a metric ton on the London Metal Exchange. Aluminum, nickel and zinc also fell. Gold for immediate delivery rose 0.6 percent to $1,223.70 an ounce, 2.1 percent from the record $1,249.40 reached May 14. The 24-commodity S&P GSCI Total Return Index declined 1.8 percent, the most compared with closing prices since May 17.
The euro fell 1.2 percent against the dollar, extending its longest run of monthly declines in a decade to trade as low as $1.2111, its weakest since April 2006. The yen advanced versus all 16 of its most-actively traded peers and the Dollar Index rose for a third day. Government bonds gained, with 10-year Treasury yield declining four basis points to 3.26 percent. The 10-year German bund yield also dropped four basis points, to 2.62 percent.
Futures on the Standard & Poor’s 500 Index slid 1.2 percent at 7:36 a.m. in New York, while the MSCI World retreated 0.7 percent. Crude oil and copper slipped for a second day, while gold traded within about 2 percent of a record high. The euro weakened as much as 1.6 percent to a four-year low against the dollar. BP Plc sank 15 percent, its biggest drop since 1992, while its bonds traded in line with debt of companies rated as many as five levels lower, according to Bank of America Merrill Lynch index data.
China’s Federation of Logistics and Purchasing said today its Purchasing Managers’ Index fell to 53.9 in April, lower than the median 54.5 estimate in a Bloomberg News survey of 18 economists, raising concern that the nation’s economy, the engine of global growth, is slowing. BP said a “top kill” attempt to plug the leak in the Gulf of Mexico using heavy fluids and debris had failed, ruling out stopping the flow of oil from the well until relief drilling is completed in August.
There are “emerging signs that the global recovery is already beginning to lose momentum especially in the two major economies of the U.S. and China,” Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London, wrote in a report today. “This was evident again today by the Chinese manufacturing PMI which dropped more sharply than expected.”
Santander, Prudential
More than three shares fell for every one that gained on the MSCI World, which extended its drop of 9.9 percent in May, the biggest monthly decline since February 2009. The Stoxx Europe 600 Index slumped 1.6 percent as all 19 industry groups weakened. Banco Santander SA, Spain’s biggest bank, slipped 3.9 percent in Madrid, while BNP Paribas SA, France’s largest, fell 3.5 percent in Paris. Losses were limited as Prudential Plc rose 6.1 percent in London on speculation its takeover of American International Group Inc.’s main Asian unit won’t proceed.
The yield investors demand to hold BP’s bonds rather than government debt widened to 1.48 percentage points, or 148 basis points. That’s almost double the 77 basis-point average for similarly rated industrial companies and higher than the 124 premium on notes graded five levels lower. BP is rated Aa1 by Moody’s Investors Service. The cost of protecting against a default on BP’s bonds rose to a record, with credit-default swaps tied to the company climbing 77 basis points to 177.
S&P Futures
The decline in U.S. futures indicated the S&P 500 may extend the 1.2 percent drop made on May 28. U.S. equity markets were closed yesterday for the Memorial Day holiday. Manufacturing in the U.S. probably expanded in May for a 10th month, economists said before a report from the Institute for Supply Management at 10 a.m. New York time today. The ISM’s factory index fell to 59 from an almost six-year high of 60.4 in April, according to the median estimate in a Bloomberg News survey of 62 economists. Readings greater than 50 signal growth.
The MSCI Asia Pacific Index sank 1.2 percent. Sony Corp., which gets 69 percent of its sales outside Japan, fell 1 percent in Tokyo as a stronger yen threatened to hurt the value of overseas revenue. Hitachi Ltd., Japan’s No. 3 company by revenue, slumped 3.5 percent after the Financial Times cited the company’s president as saying it’s affected by Europe’s debt crisis.
Emerging Markets
The MSCI Emerging Markets Index declined for the first time in five days, falling 2.1 percent. The MSCI China Index of Hong Kong-traded shares retreated 2.2 percent, while Zijin Mining Group Co. lost 2.8 percent on speculation demand from the world’s largest metals consumer will decline. The Micex Index in Russia, the biggest energy exporter, sank 2.7 percent and the ruble weakened 1.4 percent against the dollar.
Crude oil for July delivery retreated 2.4 percent to $72.18 a barrel. Copper for delivery in three months dropped 2.9 percent to $6,740 a metric ton on the London Metal Exchange. Aluminum, nickel and zinc also fell. Gold for immediate delivery rose 0.6 percent to $1,223.70 an ounce, 2.1 percent from the record $1,249.40 reached May 14. The 24-commodity S&P GSCI Total Return Index declined 1.8 percent, the most compared with closing prices since May 17.
The euro fell 1.2 percent against the dollar, extending its longest run of monthly declines in a decade to trade as low as $1.2111, its weakest since April 2006. The yen advanced versus all 16 of its most-actively traded peers and the Dollar Index rose for a third day. Government bonds gained, with 10-year Treasury yield declining four basis points to 3.26 percent. The 10-year German bund yield also dropped four basis points, to 2.62 percent.
Covidien Agrees to Buy Ev3 for $2.6 Billion (Update1)
Covidien Plc, the medical-device company spun off from Tyco International Ltd., agreed to buy ev3 Inc. for $2.6 billion to add treatments for heart disease.
Covidien will pay $22.50 a share in cash for Plymouth, Minnesota-based ev3, the companies said in a statement today. Dublin-based Covidien is paying 19 percent more than the closing price May 28 for ev3’s stock.
The transaction is expected to be completed by July 31, the companies said. Ev3’s directors and officers plan to tender their shares, according to the statement. Warburg Pincus Equity Partners LP, which owns 24 percent of ev3, supports the deal, the companies said.
The purchase will reduce Covidien’s earnings per share this year and next, according to the statement. Ev3 makes catheters, stents and angioplasty balloons used in treating heart disease.
Ev3’s shares have risen 42 percent this year, closing May 28 at $18.92.
Covidien will pay $22.50 a share in cash for Plymouth, Minnesota-based ev3, the companies said in a statement today. Dublin-based Covidien is paying 19 percent more than the closing price May 28 for ev3’s stock.
The transaction is expected to be completed by July 31, the companies said. Ev3’s directors and officers plan to tender their shares, according to the statement. Warburg Pincus Equity Partners LP, which owns 24 percent of ev3, supports the deal, the companies said.
The purchase will reduce Covidien’s earnings per share this year and next, according to the statement. Ev3 makes catheters, stents and angioplasty balloons used in treating heart disease.
Ev3’s shares have risen 42 percent this year, closing May 28 at $18.92.
BP Plunges After Attempt to Plug Gulf Oil Leak Fails (Update2)
BP Plc fell the most in 18 years in London trading after abandoning an attempt to plug a leaking oil well in the Gulf of Mexico, the worst spill in U.S. history.
BP plunged as much as 17 percent to 411.5 pence, the steepest one-day drop since June 1992, and its bonds traded in line with companies rated as much as five levels lower. BP said on May 29 the attempt to plug the leak using heavy fluids and debris had failed. That rules out stopping the flow of oil from the well until relief drilling is completed in August.
“Until the flow of oil from this well can be halted, there will remain considerable uncertainty over the potential damages,” said Peter Hitchens, an analyst at Panmure Gordon & Co. in London. “Although we believe that the market has overreacted to the bad news, we feel that there will be little stimulus to the shares whilst this leak continues to pump oil into the sea.”
The company will now try to contain the spill by fitting a pipe over the leak later this week to bring the oil to a drillship on the surface, it said in a statement in London today. The operation may temporarily increase the flow of oil into the Gulf before a cap can seal the pipe. The cost of responding to the spill has risen close to $1 billion, BP said.
Investors demand a yield premium of 148 basis points on average to buy BP’s bonds rather than government debt, Bank of America Merrill Lynch’s energy industry index shows. That’s almost double the 77-basis point spread on notes sold by industrial companies with similar credit ratings. The shares traded at 419 pence at 12:04 p.m. London time.
Chief Executive Officer Tony Hayward’s effort to stop the leak and clean up the spill is becoming more urgent as hurricane season starts. Winds from the southwest could spread the spill this week to threaten the coasts of Mississippi and Alabama, the National Oceanic and Atmospheric Administration said.
BP said today it has so far spent $990 million responding to the explosion on the Deepwater Horizon rig on April 20 that killed 11 workers, as well as the cleanup from the oil spill.
Survival at Stake
The company’s survival is at stake, London-based investment bank Arbuthnot Securities Ltd. said today. The cost of the disaster and the share-price drop may make BP a takeover target or force the company to split up, analyst Dougie Youngson said in a note.
Credit-default swap contracts on BP rose to a record 136 basis points from 100.6 basis points on May 28, according to CMA DataVision prices in London. A basis point on a contract protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year.
Using robots at the mile-deep well, BP plans to shear away most of the damaged pipe that once rose from the well to the Deepwater Horizon.
It will then make a more precise cut with a diamond-toothed band saw to make a clean junction for a gasket-lined cap, which is intended to catch most of the oil and route it to the surface through a pipe, BP Managing Director Robert Dudley said in television interviews last weekend.
Engineers expect the method to work better than a smaller pipe used to capture 22,000 barrels of oil, he said.
The well has spewed from 12,000 barrels to 19,000 barrels of oil a day, a government panel estimated May 27. Government experts estimate the spill will increase over the four to seven days BP needs to fix the cap, White House Energy Adviser Carol Browner said on May 30.
Winning the Lottery
BP reiterated that the first relief well, which it began drilling May 2, is now at 12,090 feet, two-thirds of the way to completion. The drilling effort is “on track, even slightly ahead,” said BP’s Pack.
The chances of intercepting the damaged well with a relief well on the first try are equivalent to winning the lottery, according to David Rensink, the president-elect of the American Association of Petroleum Geologists. Initial failure is “almost a certainty,” he said.
President Barack Obama ordered BP’s cleanup efforts tripled in oiled areas that encompass 107 miles (172 kilometers) of shoreline and 30 acres of tidal marsh.
“Every day that this leak continues is an assault on the people of the Gulf Coast region, their livelihoods, and the natural bounty that belongs to all of us,” Obama said in a statement May 29. “It is as enraging as it is heartbreaking.”
BP plunged as much as 17 percent to 411.5 pence, the steepest one-day drop since June 1992, and its bonds traded in line with companies rated as much as five levels lower. BP said on May 29 the attempt to plug the leak using heavy fluids and debris had failed. That rules out stopping the flow of oil from the well until relief drilling is completed in August.
“Until the flow of oil from this well can be halted, there will remain considerable uncertainty over the potential damages,” said Peter Hitchens, an analyst at Panmure Gordon & Co. in London. “Although we believe that the market has overreacted to the bad news, we feel that there will be little stimulus to the shares whilst this leak continues to pump oil into the sea.”
The company will now try to contain the spill by fitting a pipe over the leak later this week to bring the oil to a drillship on the surface, it said in a statement in London today. The operation may temporarily increase the flow of oil into the Gulf before a cap can seal the pipe. The cost of responding to the spill has risen close to $1 billion, BP said.
Investors demand a yield premium of 148 basis points on average to buy BP’s bonds rather than government debt, Bank of America Merrill Lynch’s energy industry index shows. That’s almost double the 77-basis point spread on notes sold by industrial companies with similar credit ratings. The shares traded at 419 pence at 12:04 p.m. London time.
Chief Executive Officer Tony Hayward’s effort to stop the leak and clean up the spill is becoming more urgent as hurricane season starts. Winds from the southwest could spread the spill this week to threaten the coasts of Mississippi and Alabama, the National Oceanic and Atmospheric Administration said.
BP said today it has so far spent $990 million responding to the explosion on the Deepwater Horizon rig on April 20 that killed 11 workers, as well as the cleanup from the oil spill.
Survival at Stake
The company’s survival is at stake, London-based investment bank Arbuthnot Securities Ltd. said today. The cost of the disaster and the share-price drop may make BP a takeover target or force the company to split up, analyst Dougie Youngson said in a note.
Credit-default swap contracts on BP rose to a record 136 basis points from 100.6 basis points on May 28, according to CMA DataVision prices in London. A basis point on a contract protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year.
Using robots at the mile-deep well, BP plans to shear away most of the damaged pipe that once rose from the well to the Deepwater Horizon.
It will then make a more precise cut with a diamond-toothed band saw to make a clean junction for a gasket-lined cap, which is intended to catch most of the oil and route it to the surface through a pipe, BP Managing Director Robert Dudley said in television interviews last weekend.
Engineers expect the method to work better than a smaller pipe used to capture 22,000 barrels of oil, he said.
The well has spewed from 12,000 barrels to 19,000 barrels of oil a day, a government panel estimated May 27. Government experts estimate the spill will increase over the four to seven days BP needs to fix the cap, White House Energy Adviser Carol Browner said on May 30.
Winning the Lottery
BP reiterated that the first relief well, which it began drilling May 2, is now at 12,090 feet, two-thirds of the way to completion. The drilling effort is “on track, even slightly ahead,” said BP’s Pack.
The chances of intercepting the damaged well with a relief well on the first try are equivalent to winning the lottery, according to David Rensink, the president-elect of the American Association of Petroleum Geologists. Initial failure is “almost a certainty,” he said.
President Barack Obama ordered BP’s cleanup efforts tripled in oiled areas that encompass 107 miles (172 kilometers) of shoreline and 30 acres of tidal marsh.
“Every day that this leak continues is an assault on the people of the Gulf Coast region, their livelihoods, and the natural bounty that belongs to all of us,” Obama said in a statement May 29. “It is as enraging as it is heartbreaking.”
Prudential Fails in Bid to Cut Price of AIA Takeover (Update4)
Prudential Plc’s attempt to cut the price of its $35.5 billion takeover of American International Group Inc.’s main Asian unit failed, leaving the biggest acquisition in the British insurer’s history in jeopardy.
Prudential was seeking to lower the price to $30.4 billion, the London-based insurer said in a statement today. New York- based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement. Prudential gained as much as 4.8 percent in London.
“It’s all over,” said Barrie Cornes, a London-based analyst at Panmure Gordon & Co. with a “buy” rating on the stock. AIG “has effectively killed the deal.”
Prudential Chief Executive Officer Tidjane Thiam was trying to renegotiate the terms of the purchase after investors including BlackRock Inc. and Fidelity Investments said the takeover was too expensive, a person familiar with the deal said last week. Failing to complete the acquisition may stymie Thiam’s Asian expansion strategy and delay AIG’s plans to repay part of its $182.3 billion U.S. government rescue package.
“It’s a dead deal,” said Paul Mumford, who helps manage 417 million pounds ($603 million) including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”
Prudential climbed 19 pence, or 3.5 percent, to 560.5 pence as of 11 a.m. in London, valuing the insurer at 14.2 billion pounds. The share price was 602.5 pence on Feb. 26, the last trading day before the deal was announced.
IPO Plan
AIG may return to its earlier plan for a public offering if Prudential shareholders reject the deal, Jim Millstein, the Treasury’s chief restructuring officer, said on May 26 in Washington. AIG will be entitled to a breakup fee of 153 million pounds if Prudential is unable to complete the purchase.
AIG will push on with the IPO, CNBC reported today, citing an unidentified person familiar with the situation. The deal is expected in October, the TV channel said. Patricia Chua, a Hong Kong-based AIA spokeswoman, declined to make any further comment.
Thiam, who took over as CEO in October, “will probably have to review his position,” said Cavendish’s Mumford, who has opposed the deal since it was announced in March. The original takeover offer included about $25 billion in cash and the rest in securities linked to Prudential shares.
Prudential’s planned revision to $30.4 billion included $23 billion in cash, the insurer said today. Following AIG’s rejection, Prudential’s board is considering its position and a further announcement will be made “when appropriate,” it said.
‘Vote of Confidence’
“We see it as a vote of confidence in the deal, not in the management,” Chairman Harvey McGrath said on May 17. Asked if he would look to replace Thiam if the deal failed, he said, “we will take a view of the unfolding situation as and when it occurs.”
Prudential’s shareholders may now favor breaking up the business, according to Rupert Armitage, head of U.K. equities at Shore Capital Group Ltd. “It leaves them very vulnerable to a break up,” he said in a Bloomberg Television interview. “The chairman and the CEO, having staked their reputations on it, it puts them in an almost untenable position.”
The insurer has units in the U.K., U.S. and Asia and could be worth as much as 24 billion pounds if broken up, according to Panmure Gordon’s Cornes.
Shareholder Criticism
Prudential’s bid was hurt by a series of mistakes in dealing with regulators and shareholders. The 162-year-old British insurer also was trying to pull off a $21 billion rights offer, the biggest for an acquisition in history, at a time when Europe’s sovereign debt crisis was hurting corporate fundraisings worldwide.
Ivory Coast-born Thiam, 47, was criticized by shareholders in March for agreeing to join the board of Paris-based bank Societe Generale SA, a decision he reversed a day later. Prudential was also forced to delay the start of its rights offer in May after the U.K. regulator asked the firm to hold more capital in reserve.
Neptune Investment Management Ltd., a London-based investor, said on May 26 it had garnered 20 percent of shareholders to back its opposition to the AIA purchase. Thiam, who needed 75 percent of shareholders to back the offer, made a failed attempt to resurrect the deal by asking AIG to reduce the price two days later.
‘Bad Deal’
“You sell billions of cheap stuff to buy billions of expensive stuff,” James Clunie, manager of the 1.5 billion- pound Scottish Widows fund, said in an interview in Edinburgh on May 7. “It’s a bad deal. It doesn’t look sensible.”
The combined company would have been the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam. Paying $35.5 billion for AIA would have created an entity worth $60 billion by 2013, Thiam previously said.
The takeover is the biggest announced in the world this year, according to data compiled by Bloomberg. The collapse of the deal would deprive Prudential’s advisers of as much as 850 million pounds in fees for advising on the purchase and the rights offering.
Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc. AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley.
Prudential was seeking to lower the price to $30.4 billion, the London-based insurer said in a statement today. New York- based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement. Prudential gained as much as 4.8 percent in London.
“It’s all over,” said Barrie Cornes, a London-based analyst at Panmure Gordon & Co. with a “buy” rating on the stock. AIG “has effectively killed the deal.”
Prudential Chief Executive Officer Tidjane Thiam was trying to renegotiate the terms of the purchase after investors including BlackRock Inc. and Fidelity Investments said the takeover was too expensive, a person familiar with the deal said last week. Failing to complete the acquisition may stymie Thiam’s Asian expansion strategy and delay AIG’s plans to repay part of its $182.3 billion U.S. government rescue package.
“It’s a dead deal,” said Paul Mumford, who helps manage 417 million pounds ($603 million) including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”
Prudential climbed 19 pence, or 3.5 percent, to 560.5 pence as of 11 a.m. in London, valuing the insurer at 14.2 billion pounds. The share price was 602.5 pence on Feb. 26, the last trading day before the deal was announced.
IPO Plan
AIG may return to its earlier plan for a public offering if Prudential shareholders reject the deal, Jim Millstein, the Treasury’s chief restructuring officer, said on May 26 in Washington. AIG will be entitled to a breakup fee of 153 million pounds if Prudential is unable to complete the purchase.
AIG will push on with the IPO, CNBC reported today, citing an unidentified person familiar with the situation. The deal is expected in October, the TV channel said. Patricia Chua, a Hong Kong-based AIA spokeswoman, declined to make any further comment.
Thiam, who took over as CEO in October, “will probably have to review his position,” said Cavendish’s Mumford, who has opposed the deal since it was announced in March. The original takeover offer included about $25 billion in cash and the rest in securities linked to Prudential shares.
Prudential’s planned revision to $30.4 billion included $23 billion in cash, the insurer said today. Following AIG’s rejection, Prudential’s board is considering its position and a further announcement will be made “when appropriate,” it said.
‘Vote of Confidence’
“We see it as a vote of confidence in the deal, not in the management,” Chairman Harvey McGrath said on May 17. Asked if he would look to replace Thiam if the deal failed, he said, “we will take a view of the unfolding situation as and when it occurs.”
Prudential’s shareholders may now favor breaking up the business, according to Rupert Armitage, head of U.K. equities at Shore Capital Group Ltd. “It leaves them very vulnerable to a break up,” he said in a Bloomberg Television interview. “The chairman and the CEO, having staked their reputations on it, it puts them in an almost untenable position.”
The insurer has units in the U.K., U.S. and Asia and could be worth as much as 24 billion pounds if broken up, according to Panmure Gordon’s Cornes.
Shareholder Criticism
Prudential’s bid was hurt by a series of mistakes in dealing with regulators and shareholders. The 162-year-old British insurer also was trying to pull off a $21 billion rights offer, the biggest for an acquisition in history, at a time when Europe’s sovereign debt crisis was hurting corporate fundraisings worldwide.
Ivory Coast-born Thiam, 47, was criticized by shareholders in March for agreeing to join the board of Paris-based bank Societe Generale SA, a decision he reversed a day later. Prudential was also forced to delay the start of its rights offer in May after the U.K. regulator asked the firm to hold more capital in reserve.
Neptune Investment Management Ltd., a London-based investor, said on May 26 it had garnered 20 percent of shareholders to back its opposition to the AIA purchase. Thiam, who needed 75 percent of shareholders to back the offer, made a failed attempt to resurrect the deal by asking AIG to reduce the price two days later.
‘Bad Deal’
“You sell billions of cheap stuff to buy billions of expensive stuff,” James Clunie, manager of the 1.5 billion- pound Scottish Widows fund, said in an interview in Edinburgh on May 7. “It’s a bad deal. It doesn’t look sensible.”
The combined company would have been the largest life insurer in Hong Kong, as well as in Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam. Paying $35.5 billion for AIA would have created an entity worth $60 billion by 2013, Thiam previously said.
The takeover is the biggest announced in the world this year, according to data compiled by Bloomberg. The collapse of the deal would deprive Prudential’s advisers of as much as 850 million pounds in fees for advising on the purchase and the rights offering.
Prudential is being advised by Credit Suisse Group AG, JPMorgan Cazenove, Lazard LLC and Nomura Holdings Inc. AIG is being advised by Blackstone Group LP, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley.
BP Spill Menaces Wider Coastline During Storm Season (Update1)
Oil from the biggest spill in U.S. history could spread this week to threaten the coasts of Mississippi and Alabama, according a weather forecast that comes as the Atlantic hurricane season officially starts.
Winds from the southwest are predicted this week, pushing the oil from BP Plc’s broken well in the Gulf of Mexico to a wider area of the U.S. coast, the National Oceanic and Atmospheric Administration said in a statement on its Web site.
“Results indicate that oil may move north to threaten the barrier islands off Mississippi and Alabama later in the forecast period,” the agency known as NOAA said.
BP abandoned an attempt to plug the well spewing millions of gallons of oil and said it will now try to contain the spill by fitting a pipe over the leak later this week to bring the oil to a drillship on the surface. Ships seeking to funnel oil from the leak a mile under the sea may need to seek shelter in a port if a hurricane enters the Gulf of Mexico.
The U.S. hurricane season, which begins June 1 and ends Nov. 30, may be one of the most active on record, potentially hampering BP’s efforts as response cost rose to $990 million, or about $24 million a day, after an attempt to plug the gushing well failed.
BP is modifying its system to collect crude to a ship on the surface to achieve “greatest flexibility for operations during a hurricane,” according to a statement posted on its Web site yesterday.
Hurricane Forecast
As of yesterday, the Unified Area Command in Robert, Louisiana, reported oil along 100 miles of Louisiana coastline. Nearly 100 birds and five sea turtles have been found dead or visibly oiled, according to the Command’s latest report. Hundreds more birds and turtles may have been affected, the report says.
Fifteen to 20 named storms may develop in the season threatening both the Gulf of Mexico and the U.S. East Coast, according to Greg Holland, director of the Mesoscale and Microscale Meteorology Division of the National Center for Atmospheric Research.
The 2010 hurricane season in the Atlantic has an 85 percent chance of being above normal, with a 70 percent probability of 14 to 23 named storms with 8 expected to become hurricanes, NOAA said on May 27. “The conditions expected this year have historically produced some very active Atlantic hurricane seasons,” the agency said.
Katrina Damage
In 2005, Hurricane Katrina caused the levees protecting New Orleans to fail, flooding the city and killing more than 1,800 people. That hurricane, as well as Rita in September the same year, tore through the Gulf of Mexico with winds of 170 miles per hour (274 kilometers per hour), toppling production platforms, setting rigs adrift and rupturing pipelines.
In 2006, BP was still repairing oil installations such as the leaking well discovered in Grand Isle that were damaged during the 2005 hurricane season. In 2008, BP reported an oil discharge from a platform, one of 15 BP-operated rigs in the Grand Isle off the Louisiana Coast, which were being decommissioned after damaged from Katrina and Rita. BP couldn’t explain the origin of the leak that time.
Winds from the southwest are predicted this week, pushing the oil from BP Plc’s broken well in the Gulf of Mexico to a wider area of the U.S. coast, the National Oceanic and Atmospheric Administration said in a statement on its Web site.
“Results indicate that oil may move north to threaten the barrier islands off Mississippi and Alabama later in the forecast period,” the agency known as NOAA said.
BP abandoned an attempt to plug the well spewing millions of gallons of oil and said it will now try to contain the spill by fitting a pipe over the leak later this week to bring the oil to a drillship on the surface. Ships seeking to funnel oil from the leak a mile under the sea may need to seek shelter in a port if a hurricane enters the Gulf of Mexico.
The U.S. hurricane season, which begins June 1 and ends Nov. 30, may be one of the most active on record, potentially hampering BP’s efforts as response cost rose to $990 million, or about $24 million a day, after an attempt to plug the gushing well failed.
BP is modifying its system to collect crude to a ship on the surface to achieve “greatest flexibility for operations during a hurricane,” according to a statement posted on its Web site yesterday.
Hurricane Forecast
As of yesterday, the Unified Area Command in Robert, Louisiana, reported oil along 100 miles of Louisiana coastline. Nearly 100 birds and five sea turtles have been found dead or visibly oiled, according to the Command’s latest report. Hundreds more birds and turtles may have been affected, the report says.
Fifteen to 20 named storms may develop in the season threatening both the Gulf of Mexico and the U.S. East Coast, according to Greg Holland, director of the Mesoscale and Microscale Meteorology Division of the National Center for Atmospheric Research.
The 2010 hurricane season in the Atlantic has an 85 percent chance of being above normal, with a 70 percent probability of 14 to 23 named storms with 8 expected to become hurricanes, NOAA said on May 27. “The conditions expected this year have historically produced some very active Atlantic hurricane seasons,” the agency said.
Katrina Damage
In 2005, Hurricane Katrina caused the levees protecting New Orleans to fail, flooding the city and killing more than 1,800 people. That hurricane, as well as Rita in September the same year, tore through the Gulf of Mexico with winds of 170 miles per hour (274 kilometers per hour), toppling production platforms, setting rigs adrift and rupturing pipelines.
In 2006, BP was still repairing oil installations such as the leaking well discovered in Grand Isle that were damaged during the 2005 hurricane season. In 2008, BP reported an oil discharge from a platform, one of 15 BP-operated rigs in the Grand Isle off the Louisiana Coast, which were being decommissioned after damaged from Katrina and Rita. BP couldn’t explain the origin of the leak that time.
Bond Selloff Yields ‘Gems’ for Tepper, T. Rowe: Credit Markets
The worst month for corporate credit since markets seized up in 2008 means investors are finding value in everything from junk bonds to debt backed by commercial mortgages.
The extra yield investors demand to own corporate bonds instead of Treasuries widened 44 basis points last month to 193 basis points, or 1.93 percentage points, Bank of America Merrill Lynch index data show. High-yield company debt lost 3.57 percent. Spreads on high-rated commercial mortgage bonds jumped 67 basis points to 306. Leveraged loan prices tumbled 3.89 percent to 89.11 cents on the dollar.
“Corporates have entered this period with much stronger balance sheets and in particular I think many high-yield corporates are in a much stronger position to weather a storm,” said Dan Shackelford, a money manager who helps oversee $15 billion in fixed-income assets at T. Rowe Price Group Inc. in Baltimore. He said he’s more inclined to buy, “as opposed to throwing it all out and running for the hills.”
U.S. corporate profits rose 31 percent in the first quarter from a year earlier, the biggest gain since 1984, Commerce Department data released in Washington showed last week. Earnings surged as fast only six times in the past 60 years, according to Barclays Capital.
GDP Growth
Each of those periods was followed by real gross domestic product growth of at least 3 percent the following year. The last time it happened, in 2004, the economy expanded 3.6 percent, from 2.5 percent in 2003, and yield spreads on investment- and speculative-grade corporate debt narrowed to an average of 138 basis points, from 171.
“Junk bonds and credit have gotten so demolished,” said Burt White, who helps oversee $284 billion of securities as chief investment officer at LPL Financial Corp. in Boston. “You go in and pick up bargains.”
White favors industrial company bonds, bank loans and high- yield debt. Sanjay Joshi, a money manager at London & Capital Group Ltd., is buying bonds of commodity and retail companies.
“Measures to rebuild market confidence have been put in place,” said Joshi, who helps oversee more than $2.7 billion of assets. “We are seeing companies perform well with balance sheets healthier and a move into longer-term debt.”
Last Week’s Rally
Yield premiums on company bonds narrowed at the end of last week as reports showed a gauge of U.S. consumer sentiment rose and purchases of new homes jumped to a two-year high. European governments have pledged to slash record budget deficits, with Greece promising to implement austerity measures equal to almost 14 percent of GDP in exchange for $1 billion of European Union rescue funds.
That wasn’t enough to keep bonds from losing 0.45 percent on average in May, the first down month since dropping 0.57 percent in December, Bank of America Merrill Lynch indexes show.
Corporate bond issuance worldwide slowed to $69.9 billion, from $183 billion in April and the least since August 2003, according to data compiled by Bloomberg. At least 14 companies withdrew offerings, including New York-based retailer Jones Apparel Group Inc. and Regal Entertainment Group., the Knoxville, Tennessee-based theater chain operator.
David Tepper, who runs Short Hills, New Jersey-based hedge fund Appaloosa Management LP, favors bonds backed by mortgages on everything from skyscrapers to shopping malls after yield spreads on the highest-rated debt widened by the most since February 2009, as measured by Barclays indexes.
Tepper’s ‘Gems’
“There’s a lot of gems out there” in the commercial collateralized mortgage-backed securities market, Tepper said May 26 at the Ira Sohn Investment Research Conference in New York. He also recommended buying American International Group Inc.’s junior subordinated debt.
Michael Donelan, who oversees $3.5 billion of bonds at Ryan Labs Inc., snapped up Goldman Sachs Group Inc. notes last week after dumping financial debt in early May. Corporate spreads “have really priced in a lot of bad news,” said Donelan, the firm’s director of trading and head money manager based in New York.
Theodore Stamos, who helps oversee $70 billion of assets at Investec Asset Management Ltd., said he likes financial bonds after U.S. lawmakers “watered down” proposed regulatory changes for the industry presented to the Senate last month.
“In the medium to long term, we see value in financial names which have recently underperformed,” said Stamos, a credit analyst and money manager based in London. “We could see more stability in June, as we haven’t seen May’s kind of volatility since the stock market lows in March 2009.”
Market ‘Correction’
The selloff last month was a “deleveraging correction that has run its course” rather than a sign Europe faces a return to recession, BNP Paribas credit strategists led by Vivek Tawadey in London wrote in a May 28 report.
Markets rallied late last week as the Thomson Reuters/University of Michigan final May consumer sentiment index increased to 73.6 from 72.2 in April, according to a May 28 report. New-home sales in the U.S. increased 15 percent to an annual pace of 504,000 in April, the highest level since May 2008, while durable goods orders rose 2.9 percent, the biggest jump in three months, the Commerce Department said May 26.
Spreads on global high-yield bonds narrowed 35 basis points to 708 basis points on May 27 to 28 as markets recovered. That’s down from a seven-month high of 743 basis points on May 25 and marks the biggest two-day drop since September, Bank of America Merrill Lynch index data show.
Market ‘Thinness’
“Given the current thinness of the market, we must be cautious about drawing conclusions, but the bounce-back suggests there are investors who believe the fundamentals remain firm and will provide some support to prices,” according to Martin Fridson, the chief executive officer of Fridson Investment Advisors in New York.
Credit markets were dealt fresh blows over the holiday weekend. Spain, struggling with the euro area’s third-largest budget deficit, lost its top credit grade at Fitch Ratings and the European Commission said confidence in the region’s economic outlook worsened in May, contrary to economists’ expectations. The European Central Bank forecast banks will have to write off 195 billion euros of bad debts by 2011 and that their ability to sell bonds may be curtailed as governments finance deficits.
Fitch lowered Spain’s credit rating one step to AA+ from AAA after European markets closed May 28, saying that budget cuts “will materially reduce the rate of growth” of the country’s economy.
Consumer Sentiment
An index of executive and consumer sentiment in the 16 euro nations fell to 98.4 from 100.6 in April, the commission in Brussels said yesterday. Economists had forecast a confidence reading of 100.6, based on the median of 25 estimates in a Bloomberg News survey.
With governments facing “heavy financing requirements over the coming years” there’s a “risk of bank bond issuance being crowded out,” the Frankfurt-based ECB said in its biannual Financial Stability Report yesterday, when U.S. and U.K. markets were closed for public holidays.
The cost of insuring against a default by European banks rose, with the Markit iTraxx Financial Index of credit-default swaps on 25 financial companies climbing 14 basis points to a three-week high of 174 as of 11:04 a.m. in London, according to JPMorgan Chase & Co.
The Markit iTraxx Crossover Index of default swaps on 50 mostly junk-rated European corporates jumped 31.2 basis points to 586.2, Markit Group Ltd. prices show
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
Credit Havens
Debt investors found havens in investment-grade bonds of health care and service companies in May, which rallied 0.63 percent and 0.48 percent, compared with an average loss of 0.65 percent, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Insurers’ bonds gave up 2.14 percent and high-yield bonds lost 4.01 percent.
“There will be good buying opportunities to snap up bargains in the next one to three months,” said Felix Freund, a Frankfurt-based money manager at Union Investment GmbH, which oversees 160 billion euros ($196 billion) of assets. “The dust will eventually settle, and there are assets including corporate bonds that aren’t directly linked to the sovereign crisis and have sold off too much.”
The extra yield investors demand to own corporate bonds instead of Treasuries widened 44 basis points last month to 193 basis points, or 1.93 percentage points, Bank of America Merrill Lynch index data show. High-yield company debt lost 3.57 percent. Spreads on high-rated commercial mortgage bonds jumped 67 basis points to 306. Leveraged loan prices tumbled 3.89 percent to 89.11 cents on the dollar.
“Corporates have entered this period with much stronger balance sheets and in particular I think many high-yield corporates are in a much stronger position to weather a storm,” said Dan Shackelford, a money manager who helps oversee $15 billion in fixed-income assets at T. Rowe Price Group Inc. in Baltimore. He said he’s more inclined to buy, “as opposed to throwing it all out and running for the hills.”
U.S. corporate profits rose 31 percent in the first quarter from a year earlier, the biggest gain since 1984, Commerce Department data released in Washington showed last week. Earnings surged as fast only six times in the past 60 years, according to Barclays Capital.
GDP Growth
Each of those periods was followed by real gross domestic product growth of at least 3 percent the following year. The last time it happened, in 2004, the economy expanded 3.6 percent, from 2.5 percent in 2003, and yield spreads on investment- and speculative-grade corporate debt narrowed to an average of 138 basis points, from 171.
“Junk bonds and credit have gotten so demolished,” said Burt White, who helps oversee $284 billion of securities as chief investment officer at LPL Financial Corp. in Boston. “You go in and pick up bargains.”
White favors industrial company bonds, bank loans and high- yield debt. Sanjay Joshi, a money manager at London & Capital Group Ltd., is buying bonds of commodity and retail companies.
“Measures to rebuild market confidence have been put in place,” said Joshi, who helps oversee more than $2.7 billion of assets. “We are seeing companies perform well with balance sheets healthier and a move into longer-term debt.”
Last Week’s Rally
Yield premiums on company bonds narrowed at the end of last week as reports showed a gauge of U.S. consumer sentiment rose and purchases of new homes jumped to a two-year high. European governments have pledged to slash record budget deficits, with Greece promising to implement austerity measures equal to almost 14 percent of GDP in exchange for $1 billion of European Union rescue funds.
That wasn’t enough to keep bonds from losing 0.45 percent on average in May, the first down month since dropping 0.57 percent in December, Bank of America Merrill Lynch indexes show.
Corporate bond issuance worldwide slowed to $69.9 billion, from $183 billion in April and the least since August 2003, according to data compiled by Bloomberg. At least 14 companies withdrew offerings, including New York-based retailer Jones Apparel Group Inc. and Regal Entertainment Group., the Knoxville, Tennessee-based theater chain operator.
David Tepper, who runs Short Hills, New Jersey-based hedge fund Appaloosa Management LP, favors bonds backed by mortgages on everything from skyscrapers to shopping malls after yield spreads on the highest-rated debt widened by the most since February 2009, as measured by Barclays indexes.
Tepper’s ‘Gems’
“There’s a lot of gems out there” in the commercial collateralized mortgage-backed securities market, Tepper said May 26 at the Ira Sohn Investment Research Conference in New York. He also recommended buying American International Group Inc.’s junior subordinated debt.
Michael Donelan, who oversees $3.5 billion of bonds at Ryan Labs Inc., snapped up Goldman Sachs Group Inc. notes last week after dumping financial debt in early May. Corporate spreads “have really priced in a lot of bad news,” said Donelan, the firm’s director of trading and head money manager based in New York.
Theodore Stamos, who helps oversee $70 billion of assets at Investec Asset Management Ltd., said he likes financial bonds after U.S. lawmakers “watered down” proposed regulatory changes for the industry presented to the Senate last month.
“In the medium to long term, we see value in financial names which have recently underperformed,” said Stamos, a credit analyst and money manager based in London. “We could see more stability in June, as we haven’t seen May’s kind of volatility since the stock market lows in March 2009.”
Market ‘Correction’
The selloff last month was a “deleveraging correction that has run its course” rather than a sign Europe faces a return to recession, BNP Paribas credit strategists led by Vivek Tawadey in London wrote in a May 28 report.
Markets rallied late last week as the Thomson Reuters/University of Michigan final May consumer sentiment index increased to 73.6 from 72.2 in April, according to a May 28 report. New-home sales in the U.S. increased 15 percent to an annual pace of 504,000 in April, the highest level since May 2008, while durable goods orders rose 2.9 percent, the biggest jump in three months, the Commerce Department said May 26.
Spreads on global high-yield bonds narrowed 35 basis points to 708 basis points on May 27 to 28 as markets recovered. That’s down from a seven-month high of 743 basis points on May 25 and marks the biggest two-day drop since September, Bank of America Merrill Lynch index data show.
Market ‘Thinness’
“Given the current thinness of the market, we must be cautious about drawing conclusions, but the bounce-back suggests there are investors who believe the fundamentals remain firm and will provide some support to prices,” according to Martin Fridson, the chief executive officer of Fridson Investment Advisors in New York.
Credit markets were dealt fresh blows over the holiday weekend. Spain, struggling with the euro area’s third-largest budget deficit, lost its top credit grade at Fitch Ratings and the European Commission said confidence in the region’s economic outlook worsened in May, contrary to economists’ expectations. The European Central Bank forecast banks will have to write off 195 billion euros of bad debts by 2011 and that their ability to sell bonds may be curtailed as governments finance deficits.
Fitch lowered Spain’s credit rating one step to AA+ from AAA after European markets closed May 28, saying that budget cuts “will materially reduce the rate of growth” of the country’s economy.
Consumer Sentiment
An index of executive and consumer sentiment in the 16 euro nations fell to 98.4 from 100.6 in April, the commission in Brussels said yesterday. Economists had forecast a confidence reading of 100.6, based on the median of 25 estimates in a Bloomberg News survey.
With governments facing “heavy financing requirements over the coming years” there’s a “risk of bank bond issuance being crowded out,” the Frankfurt-based ECB said in its biannual Financial Stability Report yesterday, when U.S. and U.K. markets were closed for public holidays.
The cost of insuring against a default by European banks rose, with the Markit iTraxx Financial Index of credit-default swaps on 25 financial companies climbing 14 basis points to a three-week high of 174 as of 11:04 a.m. in London, according to JPMorgan Chase & Co.
The Markit iTraxx Crossover Index of default swaps on 50 mostly junk-rated European corporates jumped 31.2 basis points to 586.2, Markit Group Ltd. prices show
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
Credit Havens
Debt investors found havens in investment-grade bonds of health care and service companies in May, which rallied 0.63 percent and 0.48 percent, compared with an average loss of 0.65 percent, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Insurers’ bonds gave up 2.14 percent and high-yield bonds lost 4.01 percent.
“There will be good buying opportunities to snap up bargains in the next one to three months,” said Felix Freund, a Frankfurt-based money manager at Union Investment GmbH, which oversees 160 billion euros ($196 billion) of assets. “The dust will eventually settle, and there are assets including corporate bonds that aren’t directly linked to the sovereign crisis and have sold off too much.”
BP Needs ‘Lottery Win’ to Seal Oil Leak at First Try (Update1)
BP Plc would need the equivalent of a lottery win to succeed with its first attempt to end the Gulf of Mexico oil spill in August using a so-called relief well, the president-elect of the American Association of Petroleum Geologists said.
A relief well intercepts the damaged hole at an angle thousands of feet below the seabed and permanently closes it with heavy mud and cement. The method is the surest way for BP to end the largest oil spill in U.S. history, yet initial failure is “almost a certainty,” the association’s David Rensink said by telephone from Houston. “It would be like winning the lottery to get it on the first shot.”
BP faces some of the same challenges PTT Exploration & Production Pcl encountered last year in trying to stop a leak 2,600 meters (8,500 feet) below the seabed off northwest Australia.
The Thai oil and gas explorer finally plugged the Montara well in the Timor Sea after 10 weeks when a relief well enabled the company to pump 3,400 barrels of heavy mud to stanch the flow of oil. During one of the failed attempts to halt the leak on Nov. 1, a fire erupted while the Bangkok-based company was injecting the mud, engulfing and destroying the West Atlas drilling rig.
BP forecasts it will finish the first of two relief wells it has started drilling in early August, according to Doug Suttles, the executive in charge of the spill response. The first well has reached a depth of 12,090 feet, London-based BP said today in a statement, two-thirds of the way to completion. A second has reached 8,576 feet.
‘Hit-or-Miss’
The challenge is intersecting the damaged well, not the actual drilling, said Rensink, who becomes president of the association in July.
“What you’re doing is trying to intersect a well bore that is probably roughly a foot across with another well that is about a foot across,” he said. “It’s a hit-or-miss sort of thing. Ultimately the relief well will work. It’s just a matter of time, of continuing to poke at it until you intersect it.”
BP is drilling two wells because there is a risk it may not reach the target with just one, said Edson Nakagawa, head of the petroleum and geothermal division of Australia’s Commonwealth Scientific and Industrial Research Organization.
“Drilling in this kind of environment is challenging with the deep water, deep wells, high pressure and high temperature,” Nakagawa said from Perth today.
Timor Sea
The cost of responding to the leak has risen to $990 million, BP said today. The well has spewed 12,000 to 19,000 barrels of oil a day, a U.S. government panel estimated May 27. The spill began after the Deepwater Horizon rig hired by BP exploded April 20, killing 11 crew members.
PTTEP estimated as much as 400 barrels of oil a day may have leaked into the Timor Sea between Aug. 21 and Nov. 3. That would make it the third-biggest spill in Australian history, based on figures from the Maritime Safety Authority.
“There are similarities between Montara and the Gulf” spills, said Brian Evans, head of Petroleum Engineering at Curtin University of Technology in Perth. “What really separates them is the deep water in Gulf of Mexico,” he said by telephone today. “They are dealing with much higher pressures than the Apollo missions had in space.”
A commission set up to investigate what happened at the Montara field, about 250 kilometers (155 miles) northwest of Australia’s Kimberley coast, is expected to issue a report and make safety recommendations in mid-June, Australia’s Resources and Energy Minister Martin Ferguson said last month.
A relief well intercepts the damaged hole at an angle thousands of feet below the seabed and permanently closes it with heavy mud and cement. The method is the surest way for BP to end the largest oil spill in U.S. history, yet initial failure is “almost a certainty,” the association’s David Rensink said by telephone from Houston. “It would be like winning the lottery to get it on the first shot.”
BP faces some of the same challenges PTT Exploration & Production Pcl encountered last year in trying to stop a leak 2,600 meters (8,500 feet) below the seabed off northwest Australia.
The Thai oil and gas explorer finally plugged the Montara well in the Timor Sea after 10 weeks when a relief well enabled the company to pump 3,400 barrels of heavy mud to stanch the flow of oil. During one of the failed attempts to halt the leak on Nov. 1, a fire erupted while the Bangkok-based company was injecting the mud, engulfing and destroying the West Atlas drilling rig.
BP forecasts it will finish the first of two relief wells it has started drilling in early August, according to Doug Suttles, the executive in charge of the spill response. The first well has reached a depth of 12,090 feet, London-based BP said today in a statement, two-thirds of the way to completion. A second has reached 8,576 feet.
‘Hit-or-Miss’
The challenge is intersecting the damaged well, not the actual drilling, said Rensink, who becomes president of the association in July.
“What you’re doing is trying to intersect a well bore that is probably roughly a foot across with another well that is about a foot across,” he said. “It’s a hit-or-miss sort of thing. Ultimately the relief well will work. It’s just a matter of time, of continuing to poke at it until you intersect it.”
BP is drilling two wells because there is a risk it may not reach the target with just one, said Edson Nakagawa, head of the petroleum and geothermal division of Australia’s Commonwealth Scientific and Industrial Research Organization.
“Drilling in this kind of environment is challenging with the deep water, deep wells, high pressure and high temperature,” Nakagawa said from Perth today.
Timor Sea
The cost of responding to the leak has risen to $990 million, BP said today. The well has spewed 12,000 to 19,000 barrels of oil a day, a U.S. government panel estimated May 27. The spill began after the Deepwater Horizon rig hired by BP exploded April 20, killing 11 crew members.
PTTEP estimated as much as 400 barrels of oil a day may have leaked into the Timor Sea between Aug. 21 and Nov. 3. That would make it the third-biggest spill in Australian history, based on figures from the Maritime Safety Authority.
“There are similarities between Montara and the Gulf” spills, said Brian Evans, head of Petroleum Engineering at Curtin University of Technology in Perth. “What really separates them is the deep water in Gulf of Mexico,” he said by telephone today. “They are dealing with much higher pressures than the Apollo missions had in space.”
A commission set up to investigate what happened at the Montara field, about 250 kilometers (155 miles) northwest of Australia’s Kimberley coast, is expected to issue a report and make safety recommendations in mid-June, Australia’s Resources and Energy Minister Martin Ferguson said last month.
Cameron Gilt Bull Market Beats Bunds as AAA Remains (Update2)
U.K. government debt investors are gaining confidence in Prime Minister David Cameron’s plan to tame a budget deficit that the world’s biggest bond-fund manager described as a “bed of nitroglycerine.”
Gilts returned 2.2 percent since Cameron’s Conservatives agreed to govern with the Liberal Democrats on May 11, compared with 1 percent for U.S. Treasuries and 2 percent for German bunds, according to indexes from Bank of America Corp.’s Merrill Lynch unit. Ten-year gilt yields fell to the lowest in more than seven months on May 25, a day after the government announced 6.25 billion pounds ($9.1 billion) of spending cuts for 2010.
Fidelity International, Loomis Sayles & Co. and investors overseeing more than $1 trillion say Cameron, 43, will reduce the biggest deficit among the Group of Seven nations and avoid a downgrade of the U.K’s AAA credit rating. The coalition said it designed the cuts to send a “shockwave” through state departments and promised a “comprehensive and credible” plan to tackle the 156 billion-pound shortfall.
“The market is inclined to give the new coalition government the benefit of the doubt and see what the spending cuts look like,” said David Rolley, who helps oversee $106 billion as co-head of global fixed-income in Boston at Loomis Sayles. “There is local institutional bid for long-dated government paper, and that’s pretty useful.”
Financial Shock
Investors demanded 96 basis points in extra yield to hold U.K. 10-year bonds rather than German bunds as of 10:30 a.m. today in London, narrowing from a four-and-a-half-year high of 103 basis points, or 1.03 percentage points, on May 7.
The 10-year gilt yield fell two basis points to 3.56 percent, after reaching a low of 3.45 percent on May 25. British securities returned 4.4 percent in 2010, beating the 3.9 percent gain for Treasuries and trailing the 6.4 percent return for bunds, according to the Merrill Lynch indexes.
“The very first decision the government has made is to bring down the deficit and that’s good news,” said Axel Botte, a strategist at AXA Investment Managers in Paris who helps oversee about 500 billion euros ($615 billion). “It’s taken out some of the risk premium and after that vote of confidence, gilts are well placed compared to U.S. Treasuries and bunds.”
European nations are under pressure from investors to cut debt after Greece’s budget deficit soared to 13.6 percent of gross domestic product last year, precipitating the biggest shock to world markets since the 2008 collapse of Lehman Brothers Holdings Inc.
Merkel’s Share
Europe’s leaders pieced together a rescue package of almost $1 trillion amid speculation the euro area may break up. The extra fiscal obligations that German Chancellor Angela Merkel is taking on are making bunds riskier to investors relative to gilts. German lawmakers agreed to contribute as much as 148 billion euros to indebted European states.
Germany’s auction last week of five-year notes drew the lowest demand since March 2008. Investors bid for 6.1 billion euros of 5.45 billion euros of securities sold, a bid-to-cover ratio of 1.1, the least since the sale of similar securities on March 26, 2008, according to data compiled by Bloomberg. The government originally planned to sell 7 billion euros. The Bundesbank was forced to retain 22 percent of the offer.
‘Avoid’ Bunds
“Yields have to go higher,” Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich, said May 27 in an interview with Bloomberg Television. “Our advice to clients is really to avoid this intermediate-to-longer segment of the German yield curve.”
In the U.S., President Barack Obama is banking on measures to stimulate job growth and the economy to reduce the deficit. The White House budget office projects a record $1.55 trillion gap in the year ending Sept. 30, up almost 10 percent from last year’s $1.41 trillion.
The U.K. budget gap is like a “bed of nitroglycerine,” Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said in January. He cited the nation’s debt load and the potential for currency devaluation as risks for bondholders.
The coalition between the Conservatives and Liberal Democrats “is a step in the right direction,” Michael Amey, Pimco’s executive vice president of U.K. fixed income, said in an interview on May 20. “But that’s just the first of a number of steps that one will need to see before gaining comfort on a longer-term outlook for the gilt market.”
Schroders Is ‘Cautious’
Schroders Plc’s David Scammell said he is “cautious” on gilts because of the size of the government’s task. David Laws, the new government’s chief secretary at the Treasury until he resigned during the weekend following revelations about his parliamentary expenses, said he found a note from his predecessor, Liam Byrne, that said: “I’m afraid to tell you there’s no money left.”
“If they can’t do something that is deemed to be credible, we are in danger of higher yields and a downgrade,” said Scammell, a money manager at Schroders in London, which oversees about $223 billion of assets. “At the moment the U.K. is in the good-market camp. But it’s right on the edge.”
Cameron’s challenge is to maintain growth in a nation whose debt will rise to 77 percent of GDP this year and may approach 100 percent by 2014, according to Standard & Poor’s. The rating company affirmed its “negative” outlook on the U.K.’s AAA grade on March 29 “in the absence of a strong fiscal consolidation plan.”
Investec Turns Bullish
The U.K. prime minister promised to accelerate deficit reductions. A newly-created Office of Budget Responsibility, headed by former Treasury adviser Alan Budd, will produce new forecasts before a June 22 emergency budget.
“The situation in the U.K. is salvageable,” said John Stopford, co-head of global fixed income in London for Investec Asset Management Ltd., which oversees about $65 billion.
Stopford has an “overweight” position in the bonds after changing from “underweight.” That means his funds now hold a greater percentage of gilts than in the benchmark indexes he uses to measure performance.
Britain’s ruling parties said May 20 they are united over the need for swift action to reduce the record shortfall.
“I fully support the efforts of the chancellor of the exchequer, George Osborne, to deal with this problem urgently,” Liberal Democrat Business Secretary Vince Cable told reporters in London as the new government presented its policy program.
Shared Program
Osborne, a Conservative, said deficit reduction “takes precedence, and that’s very, very important.” The program commits the coalition to cutting the deficit at a faster pace than planned by the Labour government, he said.
Bank of England Governor Mervyn King said May 12 he backs the bid to start cuts this year.
For Standard Life Investments, the outlook for gilts has improved since before the election, when investors speculated a so-called hung parliament with no outright winner would lead to a minority government too weak to tackle the deficit.
“The market has given them a bit of a thumbs up,” said Richard Batty, a global investment strategist in Edinburgh who helps to oversee Standard Life’s $175 billion. “It seems the government can work more effectively on its fiscal plan than we thought it could a few months ago.”
Cameron, who called Liberal Democrat leader Nick Clegg a “joke” before the election, made deficit reduction a focus of his manifesto. Cable, who spoke for the Liberal Democrats on financial matters before the May 6 poll, said in April rising unemployment exposed the “folly of Tory plans to pull the rug from under the recovery” with early spending cuts.
Losing ‘Patience’
Any sign of a disagreement between the two parties over the deficit strategy may send bond yields soaring, according to Ignis Asset Management.
“The market could lose patience very quickly if it is disappointed by their efforts,” said Russ Oxley, head of rates in Glasgow at Ignis, which has about $100 billion of assets. “A market crisis would precipitate a downgrade.”
Concern that the U.K.’s rating will be lowered is premature, said Ian Fishwick, a money manager who oversees about $3.5 billion at Fidelity International, the London-based affiliate of Fidelity Investments, the world’s biggest mutual- fund company.
“The U.K. does have sufficient flexibility to deal with these problems and so long as it’s evident that they are moving in the right direction, I think the rating agencies will give the U.K. time,” he said. “The key thing that this government is going to do differently from the old government is to start tackling the deficit more quickly.”
Gilts returned 2.2 percent since Cameron’s Conservatives agreed to govern with the Liberal Democrats on May 11, compared with 1 percent for U.S. Treasuries and 2 percent for German bunds, according to indexes from Bank of America Corp.’s Merrill Lynch unit. Ten-year gilt yields fell to the lowest in more than seven months on May 25, a day after the government announced 6.25 billion pounds ($9.1 billion) of spending cuts for 2010.
Fidelity International, Loomis Sayles & Co. and investors overseeing more than $1 trillion say Cameron, 43, will reduce the biggest deficit among the Group of Seven nations and avoid a downgrade of the U.K’s AAA credit rating. The coalition said it designed the cuts to send a “shockwave” through state departments and promised a “comprehensive and credible” plan to tackle the 156 billion-pound shortfall.
“The market is inclined to give the new coalition government the benefit of the doubt and see what the spending cuts look like,” said David Rolley, who helps oversee $106 billion as co-head of global fixed-income in Boston at Loomis Sayles. “There is local institutional bid for long-dated government paper, and that’s pretty useful.”
Financial Shock
Investors demanded 96 basis points in extra yield to hold U.K. 10-year bonds rather than German bunds as of 10:30 a.m. today in London, narrowing from a four-and-a-half-year high of 103 basis points, or 1.03 percentage points, on May 7.
The 10-year gilt yield fell two basis points to 3.56 percent, after reaching a low of 3.45 percent on May 25. British securities returned 4.4 percent in 2010, beating the 3.9 percent gain for Treasuries and trailing the 6.4 percent return for bunds, according to the Merrill Lynch indexes.
“The very first decision the government has made is to bring down the deficit and that’s good news,” said Axel Botte, a strategist at AXA Investment Managers in Paris who helps oversee about 500 billion euros ($615 billion). “It’s taken out some of the risk premium and after that vote of confidence, gilts are well placed compared to U.S. Treasuries and bunds.”
European nations are under pressure from investors to cut debt after Greece’s budget deficit soared to 13.6 percent of gross domestic product last year, precipitating the biggest shock to world markets since the 2008 collapse of Lehman Brothers Holdings Inc.
Merkel’s Share
Europe’s leaders pieced together a rescue package of almost $1 trillion amid speculation the euro area may break up. The extra fiscal obligations that German Chancellor Angela Merkel is taking on are making bunds riskier to investors relative to gilts. German lawmakers agreed to contribute as much as 148 billion euros to indebted European states.
Germany’s auction last week of five-year notes drew the lowest demand since March 2008. Investors bid for 6.1 billion euros of 5.45 billion euros of securities sold, a bid-to-cover ratio of 1.1, the least since the sale of similar securities on March 26, 2008, according to data compiled by Bloomberg. The government originally planned to sell 7 billion euros. The Bundesbank was forced to retain 22 percent of the offer.
‘Avoid’ Bunds
“Yields have to go higher,” Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich, said May 27 in an interview with Bloomberg Television. “Our advice to clients is really to avoid this intermediate-to-longer segment of the German yield curve.”
In the U.S., President Barack Obama is banking on measures to stimulate job growth and the economy to reduce the deficit. The White House budget office projects a record $1.55 trillion gap in the year ending Sept. 30, up almost 10 percent from last year’s $1.41 trillion.
The U.K. budget gap is like a “bed of nitroglycerine,” Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said in January. He cited the nation’s debt load and the potential for currency devaluation as risks for bondholders.
The coalition between the Conservatives and Liberal Democrats “is a step in the right direction,” Michael Amey, Pimco’s executive vice president of U.K. fixed income, said in an interview on May 20. “But that’s just the first of a number of steps that one will need to see before gaining comfort on a longer-term outlook for the gilt market.”
Schroders Is ‘Cautious’
Schroders Plc’s David Scammell said he is “cautious” on gilts because of the size of the government’s task. David Laws, the new government’s chief secretary at the Treasury until he resigned during the weekend following revelations about his parliamentary expenses, said he found a note from his predecessor, Liam Byrne, that said: “I’m afraid to tell you there’s no money left.”
“If they can’t do something that is deemed to be credible, we are in danger of higher yields and a downgrade,” said Scammell, a money manager at Schroders in London, which oversees about $223 billion of assets. “At the moment the U.K. is in the good-market camp. But it’s right on the edge.”
Cameron’s challenge is to maintain growth in a nation whose debt will rise to 77 percent of GDP this year and may approach 100 percent by 2014, according to Standard & Poor’s. The rating company affirmed its “negative” outlook on the U.K.’s AAA grade on March 29 “in the absence of a strong fiscal consolidation plan.”
Investec Turns Bullish
The U.K. prime minister promised to accelerate deficit reductions. A newly-created Office of Budget Responsibility, headed by former Treasury adviser Alan Budd, will produce new forecasts before a June 22 emergency budget.
“The situation in the U.K. is salvageable,” said John Stopford, co-head of global fixed income in London for Investec Asset Management Ltd., which oversees about $65 billion.
Stopford has an “overweight” position in the bonds after changing from “underweight.” That means his funds now hold a greater percentage of gilts than in the benchmark indexes he uses to measure performance.
Britain’s ruling parties said May 20 they are united over the need for swift action to reduce the record shortfall.
“I fully support the efforts of the chancellor of the exchequer, George Osborne, to deal with this problem urgently,” Liberal Democrat Business Secretary Vince Cable told reporters in London as the new government presented its policy program.
Shared Program
Osborne, a Conservative, said deficit reduction “takes precedence, and that’s very, very important.” The program commits the coalition to cutting the deficit at a faster pace than planned by the Labour government, he said.
Bank of England Governor Mervyn King said May 12 he backs the bid to start cuts this year.
For Standard Life Investments, the outlook for gilts has improved since before the election, when investors speculated a so-called hung parliament with no outright winner would lead to a minority government too weak to tackle the deficit.
“The market has given them a bit of a thumbs up,” said Richard Batty, a global investment strategist in Edinburgh who helps to oversee Standard Life’s $175 billion. “It seems the government can work more effectively on its fiscal plan than we thought it could a few months ago.”
Cameron, who called Liberal Democrat leader Nick Clegg a “joke” before the election, made deficit reduction a focus of his manifesto. Cable, who spoke for the Liberal Democrats on financial matters before the May 6 poll, said in April rising unemployment exposed the “folly of Tory plans to pull the rug from under the recovery” with early spending cuts.
Losing ‘Patience’
Any sign of a disagreement between the two parties over the deficit strategy may send bond yields soaring, according to Ignis Asset Management.
“The market could lose patience very quickly if it is disappointed by their efforts,” said Russ Oxley, head of rates in Glasgow at Ignis, which has about $100 billion of assets. “A market crisis would precipitate a downgrade.”
Concern that the U.K.’s rating will be lowered is premature, said Ian Fishwick, a money manager who oversees about $3.5 billion at Fidelity International, the London-based affiliate of Fidelity Investments, the world’s biggest mutual- fund company.
“The U.K. does have sufficient flexibility to deal with these problems and so long as it’s evident that they are moving in the right direction, I think the rating agencies will give the U.K. time,” he said. “The key thing that this government is going to do differently from the old government is to start tackling the deficit more quickly.”
U.S. Stock-Index Futures Decline; Transocean, AIG Retreat
U.S. stock-index futures tumbled as Chinese manufacturing growth slowed more than estimated and BP Plc’s failure to plug its leaking well in the Gulf of Mexico weighed on oil-services and energy shares.
Transocean Ltd. plunged 8.1 percent in early New York trading while Halliburton Co. fell 3.4 percent. Hewlett-Packard Co. slid 1.3 percent after saying it will take a $1 billion charge to cut 3,000 jobs. American International Group Inc. fell 3.2 percent on speculation the sale of its main Asian unit to Prudential Plc won’t proceed.
Standard & Poor’s 500 Index futures expiring in June fell 1.2 percent to 1,075.2 as of 12:37 p.m. in London, after earlier falling as much as 1.8 percent. The S&P 500 lost 8.2 percent in May, its worst month since February 2009, on concern Europe’s debt crisis will hamper the global economic recovery. U.S. markets were closed yesterday for the Memorial Day holiday. Dow Jones Industrial Average futures lost 1 percent to 10,023 and Nasdaq 100 Index futures decreased 0.9 percent to 1,836.25.
“The problem with the Chinese data is the bad timing,” said Jacques Porta, a fund manager at Ofi Patrimoine in Paris, which oversees about $425 million in stocks. “It’s at a time when there are still debt problems in Europe. We’re in a context in which we lack visibility.”
Manufacturing Data
The nation’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. Readings above 50 indicate an expansion.
A gauge of manufacturing in the euro region dropped to 55.8 in May from 57.6 the previous month, Markit Economics said. That’s below an initial estimate of 55.9 released on May 21.
In the U.S., the Institute for Supply Management’s factory index fell to 59 last month from an almost six-year high of 60.4 in April, according to the median estimate in a Bloomberg News survey of 74 economists. The report is due at 10 a.m. New York time.
Figures from the Commerce Department may show construction spending rose 0.1 percent in April after a gain of 0.2 percent the prior month, according to economists’ estimates.
Hewlett-Packard
BP plunged as much as 17 percent in London trading after it abandoned an attempt to plug the leaking well in the Gulf of Mexico.
Transocean fell 8.1 percent to $52.15. Halliburton fell 3.4 percent to $23.99. Chevron Corp. lost 1.4 percent to $72.87 in Germany.
Hewlett-Packard slid 1.3 percent to $45.40 in New York. The company said it expects to cut 9,000 jobs and replace about 6,000 of those positions, recording costs of about $1 billion.
AIG fell 3.2 percent to $34.25 in New York. Prudential’s attempt to cut the price of its $35.5 billion takeover of AIG’s main Asian unit failed, leaving the biggest acquisition in the British insurer’s history in jeopardy.
Prudential was seeking to lower the price to $30.4 billion, the London-based insurer said in a statement today. New York- based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement.
“It’s a dead deal,” said Paul Mumford, who helps manage 417 million pounds ($603 million) including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”
Bank of America fell 0.8 percent to $15.61 in early New York trading. Citigroup Inc. slipped 1.5 percent to $3.90 in New York. Alcoa, the largest U.S. aluminum producer, slid 1.9 percent to $11.42 in Germany.
Freeport-McMoRan retreated 2.4 percent to $68.40 in New York as copper declined 3 percent in London.
Ev3 Inc., a medical device company, may gain. Covidien Plc agreed to buy ev3 for $2.6 billion in cash, or $22.50 a share. The stock closed at $18.92 during the last trading session.
Transocean Ltd. plunged 8.1 percent in early New York trading while Halliburton Co. fell 3.4 percent. Hewlett-Packard Co. slid 1.3 percent after saying it will take a $1 billion charge to cut 3,000 jobs. American International Group Inc. fell 3.2 percent on speculation the sale of its main Asian unit to Prudential Plc won’t proceed.
Standard & Poor’s 500 Index futures expiring in June fell 1.2 percent to 1,075.2 as of 12:37 p.m. in London, after earlier falling as much as 1.8 percent. The S&P 500 lost 8.2 percent in May, its worst month since February 2009, on concern Europe’s debt crisis will hamper the global economic recovery. U.S. markets were closed yesterday for the Memorial Day holiday. Dow Jones Industrial Average futures lost 1 percent to 10,023 and Nasdaq 100 Index futures decreased 0.9 percent to 1,836.25.
“The problem with the Chinese data is the bad timing,” said Jacques Porta, a fund manager at Ofi Patrimoine in Paris, which oversees about $425 million in stocks. “It’s at a time when there are still debt problems in Europe. We’re in a context in which we lack visibility.”
Manufacturing Data
The nation’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. Readings above 50 indicate an expansion.
A gauge of manufacturing in the euro region dropped to 55.8 in May from 57.6 the previous month, Markit Economics said. That’s below an initial estimate of 55.9 released on May 21.
In the U.S., the Institute for Supply Management’s factory index fell to 59 last month from an almost six-year high of 60.4 in April, according to the median estimate in a Bloomberg News survey of 74 economists. The report is due at 10 a.m. New York time.
Figures from the Commerce Department may show construction spending rose 0.1 percent in April after a gain of 0.2 percent the prior month, according to economists’ estimates.
Hewlett-Packard
BP plunged as much as 17 percent in London trading after it abandoned an attempt to plug the leaking well in the Gulf of Mexico.
Transocean fell 8.1 percent to $52.15. Halliburton fell 3.4 percent to $23.99. Chevron Corp. lost 1.4 percent to $72.87 in Germany.
Hewlett-Packard slid 1.3 percent to $45.40 in New York. The company said it expects to cut 9,000 jobs and replace about 6,000 of those positions, recording costs of about $1 billion.
AIG fell 3.2 percent to $34.25 in New York. Prudential’s attempt to cut the price of its $35.5 billion takeover of AIG’s main Asian unit failed, leaving the biggest acquisition in the British insurer’s history in jeopardy.
Prudential was seeking to lower the price to $30.4 billion, the London-based insurer said in a statement today. New York- based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement.
“It’s a dead deal,” said Paul Mumford, who helps manage 417 million pounds ($603 million) including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”
Bank of America fell 0.8 percent to $15.61 in early New York trading. Citigroup Inc. slipped 1.5 percent to $3.90 in New York. Alcoa, the largest U.S. aluminum producer, slid 1.9 percent to $11.42 in Germany.
Freeport-McMoRan retreated 2.4 percent to $68.40 in New York as copper declined 3 percent in London.
Ev3 Inc., a medical device company, may gain. Covidien Plc agreed to buy ev3 for $2.6 billion in cash, or $22.50 a share. The stock closed at $18.92 during the last trading session.
European Stocks Retreat as BP Slumps; U.S. Index Futures Drop
European stocks slid, extending the Stoxx Europe 600 Index’s biggest monthly drop in more than a year, as the rate of manufacturing expansion in China and Europe slowed. Asian shares and U.S. index futures fell.
BP Plc slumped the most in 18 years after Europe’s second- biggest oil company abandoned efforts to plug a leaking Gulf of Mexico well. Boliden AB led basic-resources producers lower as copper retreated on the London Metal Exchange. Prudential Plc advanced 3.9 percent on speculation its takeover of American International Group Inc.’s main Asian unit won’t proceed.
The Stoxx 600 declined 1.8 percent to 240.62 at 12 p.m. in London as all 19 industry groups retreated. The gauge slumped 5.8 percent in May, the biggest monthly drop since February 2009, amid concern that Europe’s debt crisis will hurt the economic recovery. U.S. and U.K. markets were closed for public holidays yesterday.
“Chinese manufacturing data is another sign showing the global economy is cooling down,” said Markus Steinbeis, head of equity portfolio management at the Unterfoehring, Germany-based unit of Pioneer Investments, which oversees about $221 billion globally. “The cyclical tailwind is fading and the market is a bit under pressure. Expectations for the macroeconomic environment and earnings are still ambitious.”
The MSCI Asia Pacific Index fell 1.2 percent today, the first drop in five days. Standard & Poor’s 500 Index futures slid 1.4 percent. The euro fell against the dollar, retracing 50 percent of the rally from October 2000 to July 2008.
China Manufacturing
China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. Readings above 50 indicate expansion.
A gauge of manufacturing in the euro region declined to 55.8 in May from 57.6 the previous month, Markit Economics said. That’s below an initial estimate of 55.9 released on May 21.
In the U.S., the Institute for Supply Management’s factory index fell to 59 last month from an almost six-year high of 60.4 in April, according to the median estimate in a Bloomberg survey of 74 economists. The report is due at 10 a.m. New York time.
Fitch Ratings lowered Spain’s credit rating to AA+ from AAA on May 28, capping off a month where the escalation of Europe’s debt crisis forced the European Union and the International Monetary Fund to offer as much as 750 billion euros ($920 billion) to countries in danger of financial instability. S&P in April cut Greece’s debt to junk and followed with reductions to Portugal and Spain.
Market Turmoil
Banque de France Governor Christian Noyer said credit- rating companies responded to market turmoil when making the downgrades, aggravating Europe’s debt crisis by failing to provide timely risk assessments. There had been “absolutely no change” in information available for months before the ratings were cut, showing the decisions could have been made earlier, Noyer said at a forum in Seoul today.
BP, the third-largest stock in the Stoxx 600, slumped 15 percent to 418.7 pence, the biggest intraday drop since 1992. The company said on May 29 a “top kill” attempt to plug the worst oil spill in U.S. history using heavy fluids and debris had failed. That rules out stopping the flow of crude from the well until relief drilling is completed in August.
Credit-default swaps on BP rose 36 basis points to a record 136, according to CMA DataVision. BP may break up or become a takeover target, London-based investment bank Arbuthnot Securities Ltd. said.
‘Can BP Survive?’
“There has been much speculation regarding both Tony Hayward’s future at the company and the possibility of the dividend being cut,” Arbuthnot analyst Dougie Youngson said in a note today. “The situation is beyond both of these points and the key question is now ‘can BP survive?’”
Saipem SpA slid 4.5 percent to 24.40 euros as Europe’s biggest provider of oilfield services by market value was cut to “neutral” from “add” at Evolution Securities Ltd.
Boliden, a Swedish copper and zinc miner, slid 3 percent to 91.70 kronor as base metals declined. BHP Billiton Ltd., the world’s biggest mining company, fell 3.4 percent to 1,849 pence. A measure of European basic-resource shares fell as much as 2.9 percent today.
Rio Tinto Group slumped 2.4 percent to 3,113 pence. The third-largest mine operator said the company is paying its “fair share” of Australian taxes after Prime Minister Kevin Rudd vowed to push ahead with plans to impose a 40 percent levy on profits.
Santander, BNP
Banco Santander SA, Spain’s biggest bank, and BNP Paribas SA, France’s largest, lost 3.8 percent to 8.01 euros and 3.4 percent to 44.75 euros, respectively, driving European banking shares lower.
Europe’s banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be curtailed by governments seeking to finance fiscal deficits, the European Central Bank said.
With governments facing “heavy financing requirements over the coming years” there’s a “risk of bank bond issuance being crowded out,” the Frankfurt-based ECB said in its biannual Financial Stability Report yesterday. “The risk that this implies for bank funding costs also raises the possibility of a setback to the recovery in banking sector profitability.”
Prudential surged 3.9 percent to 562.5 pence. AIG rejected a request from the U.K.’s largest insurer to cut the price of its $35.5 billion offer for AIA Group Ltd., fueling speculation the takeover won’t go ahead.
‘Dead Deal’
Prudential was seeking to lower the price to $30.4 billion, the London-based company said today. New York-based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement.
“It’s a dead deal,” said Paul Mumford, who helps oversee about $600 million including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”
Ryanair Holdings Plc gained 2.6 percent to 3.47 euros as Europe’s largest discount carrier said it will pay its first dividend after reporting an annual profit.
Net income in the 12 months through March 31 was 305 million euros, compared with a net loss of 169 million euros a year earlier. The carrier said it plans to pay a special dividend of 500 million euros in October, its first payment to shareholders since the company sold stock in 1997.
BP Plc slumped the most in 18 years after Europe’s second- biggest oil company abandoned efforts to plug a leaking Gulf of Mexico well. Boliden AB led basic-resources producers lower as copper retreated on the London Metal Exchange. Prudential Plc advanced 3.9 percent on speculation its takeover of American International Group Inc.’s main Asian unit won’t proceed.
The Stoxx 600 declined 1.8 percent to 240.62 at 12 p.m. in London as all 19 industry groups retreated. The gauge slumped 5.8 percent in May, the biggest monthly drop since February 2009, amid concern that Europe’s debt crisis will hurt the economic recovery. U.S. and U.K. markets were closed for public holidays yesterday.
“Chinese manufacturing data is another sign showing the global economy is cooling down,” said Markus Steinbeis, head of equity portfolio management at the Unterfoehring, Germany-based unit of Pioneer Investments, which oversees about $221 billion globally. “The cyclical tailwind is fading and the market is a bit under pressure. Expectations for the macroeconomic environment and earnings are still ambitious.”
The MSCI Asia Pacific Index fell 1.2 percent today, the first drop in five days. Standard & Poor’s 500 Index futures slid 1.4 percent. The euro fell against the dollar, retracing 50 percent of the rally from October 2000 to July 2008.
China Manufacturing
China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April, the Federation of Logistics and Purchasing said today. That was less than the median 54.5 estimate in a Bloomberg News survey of 18 economists. Readings above 50 indicate expansion.
A gauge of manufacturing in the euro region declined to 55.8 in May from 57.6 the previous month, Markit Economics said. That’s below an initial estimate of 55.9 released on May 21.
In the U.S., the Institute for Supply Management’s factory index fell to 59 last month from an almost six-year high of 60.4 in April, according to the median estimate in a Bloomberg survey of 74 economists. The report is due at 10 a.m. New York time.
Fitch Ratings lowered Spain’s credit rating to AA+ from AAA on May 28, capping off a month where the escalation of Europe’s debt crisis forced the European Union and the International Monetary Fund to offer as much as 750 billion euros ($920 billion) to countries in danger of financial instability. S&P in April cut Greece’s debt to junk and followed with reductions to Portugal and Spain.
Market Turmoil
Banque de France Governor Christian Noyer said credit- rating companies responded to market turmoil when making the downgrades, aggravating Europe’s debt crisis by failing to provide timely risk assessments. There had been “absolutely no change” in information available for months before the ratings were cut, showing the decisions could have been made earlier, Noyer said at a forum in Seoul today.
BP, the third-largest stock in the Stoxx 600, slumped 15 percent to 418.7 pence, the biggest intraday drop since 1992. The company said on May 29 a “top kill” attempt to plug the worst oil spill in U.S. history using heavy fluids and debris had failed. That rules out stopping the flow of crude from the well until relief drilling is completed in August.
Credit-default swaps on BP rose 36 basis points to a record 136, according to CMA DataVision. BP may break up or become a takeover target, London-based investment bank Arbuthnot Securities Ltd. said.
‘Can BP Survive?’
“There has been much speculation regarding both Tony Hayward’s future at the company and the possibility of the dividend being cut,” Arbuthnot analyst Dougie Youngson said in a note today. “The situation is beyond both of these points and the key question is now ‘can BP survive?’”
Saipem SpA slid 4.5 percent to 24.40 euros as Europe’s biggest provider of oilfield services by market value was cut to “neutral” from “add” at Evolution Securities Ltd.
Boliden, a Swedish copper and zinc miner, slid 3 percent to 91.70 kronor as base metals declined. BHP Billiton Ltd., the world’s biggest mining company, fell 3.4 percent to 1,849 pence. A measure of European basic-resource shares fell as much as 2.9 percent today.
Rio Tinto Group slumped 2.4 percent to 3,113 pence. The third-largest mine operator said the company is paying its “fair share” of Australian taxes after Prime Minister Kevin Rudd vowed to push ahead with plans to impose a 40 percent levy on profits.
Santander, BNP
Banco Santander SA, Spain’s biggest bank, and BNP Paribas SA, France’s largest, lost 3.8 percent to 8.01 euros and 3.4 percent to 44.75 euros, respectively, driving European banking shares lower.
Europe’s banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be curtailed by governments seeking to finance fiscal deficits, the European Central Bank said.
With governments facing “heavy financing requirements over the coming years” there’s a “risk of bank bond issuance being crowded out,” the Frankfurt-based ECB said in its biannual Financial Stability Report yesterday. “The risk that this implies for bank funding costs also raises the possibility of a setback to the recovery in banking sector profitability.”
Prudential surged 3.9 percent to 562.5 pence. AIG rejected a request from the U.K.’s largest insurer to cut the price of its $35.5 billion offer for AIA Group Ltd., fueling speculation the takeover won’t go ahead.
‘Dead Deal’
Prudential was seeking to lower the price to $30.4 billion, the London-based company said today. New York-based AIG “will adhere to the original terms of its previously announced agreement with Prudential,” it said in a separate statement.
“It’s a dead deal,” said Paul Mumford, who helps oversee about $600 million including Prudential shares at Cavendish Asset Management Ltd. in London. “The Pru will have to pull back gracefully now. It was a very costly mistake.”
Ryanair Holdings Plc gained 2.6 percent to 3.47 euros as Europe’s largest discount carrier said it will pay its first dividend after reporting an annual profit.
Net income in the 12 months through March 31 was 305 million euros, compared with a net loss of 169 million euros a year earlier. The carrier said it plans to pay a special dividend of 500 million euros in October, its first payment to shareholders since the company sold stock in 1997.
Rudd ‘Fully Committed’ to 40% Australia Resource Tax (Update1)
Australia’s government is committed to its planned additional tax on natural resource companies and the 40 percent rate is “right” because firms aren’t paying a fair amount, Prime Minister Kevin Rudd said.
“We do not expect to land an agreement with the mining industry any time soon,” Rudd told reporters in Canberra today. “The government remains fully committed” to the tax and “is not surprised that it is meeting fierce resistance.”
The comments are the strongest so far from Rudd and follow those from other members of his government who say companies exaggerate their benefit to the economy. Firms such as BHP Billiton Ltd. and Rio Tinto Group are leading a campaign to pressure the government to dilute the tax, which opinion surveys show lacks public support ahead of elections required by April.
“Public opinion is very fluid, people are confused about the tax,” Malcolm MacKerras, visiting fellow in political science at the University of New South Wales, said in a phone interview from Canberra today. “They tend to think the mining industry saved the economy from recession.”
Mackerras said he expects the election to be called in August and held in October.
Companies have taken out full-page advertisements in Australian newspapers to lobby for changes to the legislation and the Minerals Council of Australia is running television spots. Rudd is failing to win over voters, with 41 percent opposed to the tax and 36 percent in favor, according to a Newspoll survey published today in the Australian newspaper.
‘Massive Misinformation’
The government is spending A$38.5 million ($32.3 million) on a radio, print and television ad campaign to counter what Treasurer Wayne Swan has described as a “massive misinformation” campaign.
The 40 percent rate is “right” and talks with companies will continue on implementing the tax, which is scheduled to replace output-based royalties charged by the country’s state governments from 2012, Rudd said. “We don’t intend to be railroaded by any particular timetable.”
Australia, the world’s biggest shipper of coal and iron ore, announced the new tax on May 2 as part of an overhaul that also includes a phased cut in company tax rates to 28 percent from 30 percent by mid-2014.
Support for the opposition Greens party rose 4 percentage points to a record 16 percent amid debate on the tax, according to the Newspoll telephone survey of 1,149 people between May 28 and 30. Rudd’s Labor party and the opposition Liberal-National coalition slipped 2 percentage points in their primary vote to 35 and 41 percent, the survey showed.
Skirted Recession
Australia’s economy skirted last year’s global recession and surged in the final three months of 2009, buoyed by demand for the nation’s coal and iron ore by China and India and a jobs boom that pushed down unemployment to around half that of the U.S. and Europe.
Central bank governor, Glenn Stevens, left the nation’s benchmark interest rate unchanged at 4.5 percent earlier today, after raising it from a half-century low of 3 percent since October, amid concerns the global economy may be cooling. “Commodity prices have also softened, though those important for Australia remain at very high levels,” Stephens said.
Treasury Executive Director David Parker, head of the consultation panel in talks with the resource industry on the new tax, handed his first report to Swan on May 28, completing the initial phase of 18 months of negotiations.
‘Super’ profit
Rudd’s government and the mining and energy industry are clashing over the definition of a “super” profit, which the proposed tax sets at returns above the long-term Australian government bond rate of about 6 percent. The nation’s petroleum resource rent tax, also levied on profits at a rate of 40 percent and in place since July 1987, kicks in when returns exceed 11 percent.
Companies also don’t want the government guarantee to give a tax break of 40 percent on the cost of money-losing projects, as “they don’t plan to fail,” Tax Counsel Yasser El-Ansary, of the Institute of Chartered Accountants in Australia, said in a phone interview from Sydney.
The state government of Western Australia is considering a legal challenge to the tax should it proceed, the state’s Mines and Petroleum Minister Norman Moore said. Western Australia accounts for 62 percent of the nation’s mineral production, 73 percent of natural gas and 64 percent of crude oil and condensate.
Implementing the tax at returns of above 6 percent shows the federal government’s proposal is flawed, Moore said.
“It will just encourage people to put their money into government bonds, put their feet up and watch television,” he said.
Mining and petroleum production in the state was worth more than A$70 billion last year and the state has about A$170 billion worth of projects in the investment pipeline over the next five years, according to the government.
“We do not expect to land an agreement with the mining industry any time soon,” Rudd told reporters in Canberra today. “The government remains fully committed” to the tax and “is not surprised that it is meeting fierce resistance.”
The comments are the strongest so far from Rudd and follow those from other members of his government who say companies exaggerate their benefit to the economy. Firms such as BHP Billiton Ltd. and Rio Tinto Group are leading a campaign to pressure the government to dilute the tax, which opinion surveys show lacks public support ahead of elections required by April.
“Public opinion is very fluid, people are confused about the tax,” Malcolm MacKerras, visiting fellow in political science at the University of New South Wales, said in a phone interview from Canberra today. “They tend to think the mining industry saved the economy from recession.”
Mackerras said he expects the election to be called in August and held in October.
Companies have taken out full-page advertisements in Australian newspapers to lobby for changes to the legislation and the Minerals Council of Australia is running television spots. Rudd is failing to win over voters, with 41 percent opposed to the tax and 36 percent in favor, according to a Newspoll survey published today in the Australian newspaper.
‘Massive Misinformation’
The government is spending A$38.5 million ($32.3 million) on a radio, print and television ad campaign to counter what Treasurer Wayne Swan has described as a “massive misinformation” campaign.
The 40 percent rate is “right” and talks with companies will continue on implementing the tax, which is scheduled to replace output-based royalties charged by the country’s state governments from 2012, Rudd said. “We don’t intend to be railroaded by any particular timetable.”
Australia, the world’s biggest shipper of coal and iron ore, announced the new tax on May 2 as part of an overhaul that also includes a phased cut in company tax rates to 28 percent from 30 percent by mid-2014.
Support for the opposition Greens party rose 4 percentage points to a record 16 percent amid debate on the tax, according to the Newspoll telephone survey of 1,149 people between May 28 and 30. Rudd’s Labor party and the opposition Liberal-National coalition slipped 2 percentage points in their primary vote to 35 and 41 percent, the survey showed.
Skirted Recession
Australia’s economy skirted last year’s global recession and surged in the final three months of 2009, buoyed by demand for the nation’s coal and iron ore by China and India and a jobs boom that pushed down unemployment to around half that of the U.S. and Europe.
Central bank governor, Glenn Stevens, left the nation’s benchmark interest rate unchanged at 4.5 percent earlier today, after raising it from a half-century low of 3 percent since October, amid concerns the global economy may be cooling. “Commodity prices have also softened, though those important for Australia remain at very high levels,” Stephens said.
Treasury Executive Director David Parker, head of the consultation panel in talks with the resource industry on the new tax, handed his first report to Swan on May 28, completing the initial phase of 18 months of negotiations.
‘Super’ profit
Rudd’s government and the mining and energy industry are clashing over the definition of a “super” profit, which the proposed tax sets at returns above the long-term Australian government bond rate of about 6 percent. The nation’s petroleum resource rent tax, also levied on profits at a rate of 40 percent and in place since July 1987, kicks in when returns exceed 11 percent.
Companies also don’t want the government guarantee to give a tax break of 40 percent on the cost of money-losing projects, as “they don’t plan to fail,” Tax Counsel Yasser El-Ansary, of the Institute of Chartered Accountants in Australia, said in a phone interview from Sydney.
The state government of Western Australia is considering a legal challenge to the tax should it proceed, the state’s Mines and Petroleum Minister Norman Moore said. Western Australia accounts for 62 percent of the nation’s mineral production, 73 percent of natural gas and 64 percent of crude oil and condensate.
Implementing the tax at returns of above 6 percent shows the federal government’s proposal is flawed, Moore said.
“It will just encourage people to put their money into government bonds, put their feet up and watch television,” he said.
Mining and petroleum production in the state was worth more than A$70 billion last year and the state has about A$170 billion worth of projects in the investment pipeline over the next five years, according to the government.
Russia IPOs Leave Funds Cold as Deripaska Seeks Sales (Update1)
Billionaire Oleg Deripaska, who listed his United Co. Rusal in Hong Kong this year, says the city is Russia’s best chance to tap into Asian economic growth. Investors, who have watched debt-laden Rusal slump, are yet to be persuaded.
“Hong Kong is the gateway to Asia,” Deripaska said in an interview at Hong Kong’s Conrad Hotel. “I focus more and more on Asia because I believe we can do better business in Asia than in struggling economies” such as the U.K.
The challenge for the Russian companies seeking to follow Deripaska to Hong Kong will be to show Asian investors why they should care, at a time when initial public offerings worldwide struggle. Funds from RCM Asia Pacific Ltd. to Samsung Investment Trust say Russian IPOs don’t fit with their Asia-focused investment strategy.
“Those companies can list here, but who wants to buy them?” said Pauline Dan, Hong Kong-based chief investment officer at Samsung Investment, which oversees about $78 billion. “Our focus is on Hong Kong, China. It’s not as if China doesn’t have resources itself.”
That ambivalence may frustrate hopes by Russian companies to avoid European market turmoil by entering Asia, where wealth is accumulating faster than anywhere else, said Chris Weafer, chief strategist at UralSib Financial Corp. Many of them see Hong Kong as an “easy” alternative to London or New York, with regard to its liquidity and trading rules, as they seek to raise $100 billion over five years to repay debt and grow, he said.
Faltering Markets
Hong Kong, which raised the most IPO funds of any bourse in 2009 according to World Federation of Exchanges data, has not been immune to canceled share sales this year as sovereign-debt concerns in Europe roil global stocks. The MSCI World Index has fallen about 14 percent since its April 15 high.
Aluminum maker Rusal has dropped about 32 percent since its $2.24 billion IPO in January, while the benchmark Hang Seng Index has fallen 1.7 percent.
At least 20 companies around the world postponed or withdrew IPOs in May, including three from Russia: Deripaska’s Strikeforce Mining & Resources Plc had sought a listing in Hong Kong, sugar producer OAO Rusagro planned a sale in Moscow and fertilizer maker OAO UralChem had targeted London.
Rusal’s IPO, Russia’s first in Hong Kong, relied on support from outside Asia. Vnesheconombank, Russia’s state-run bank, took 30 percent of the offering, and two more of the five cornerstone buyers were U.S. funds, including Paulson & Co.
“Is Russia on the radar? Honestly? No,” said Ben Collett, head of equities for Louis Capital Markets brokerage in Hong Kong. “If you want to trade Russia then you’re in Europe.”
China Fit
Danny Yan, a fund manager at Taifook Asset Management Ltd. in Hong Kong, said unless a Russian company can show how a “significant” part of its business is related to China, he won’t buy it. Wariness among Chinese investors may scupper plans for some of the 40 Russian companies that have met with the Hong Kong exchange or enquired about a listing, according to figures from Igor Vdovin, a member of Russian business lobby RSPP.
“Hong Kong is ambitious in trying to attract listings from companies that are domiciled elsewhere, but our view so far is that this is not a natural fit,” said Mark Konyn, chief executive officer of RCM Asia Pacific, which oversees $11 billion.
Among the Russian companies with “Asian credentials” are the energy and metals exporters such as state-run oil producer OAO Rosneft, gas-export monopoly OAO Gazprom and OAO GMK Norilsk Nickel, UralSib’s Weafer said.
Rosneft, Norilsk
Rosneft signed a 20-year supply contract with China last year, while Norilsk sold 30 percent of its nickel to the nation and to India. Rusal plans to boost Asian sales to 30 percent of the total this year from 20 percent in 2009.
Rusal set its IPO price on Jan. 22, three days after the Hang Seng began a three-week, 10 percent decline. Rusal fell 11 percent on its first trading day, Jan. 27, a “reasonable” move given global market volatility, Deripaska said that day.
“It was priced toward the very top of the institutional demand curve before the market turned,” said Elena Khisamova, head of equity capital markets at VTB Capital, one of Rusal’s IPO managers. Still, Rusal’s sale was “a huge help in creating the path for future listings” from Russia, she said.
Deripaska, 42, might have struggled to list Rusal in London, where Russian stocks are traditionally brokered, because the U.K. may have insisted on stricter regulation for the debt-saddled company, Weafer said. Deripaska said in April 2008 he would pick a location based on the most “comfortable solution.”
Pay Down Debt
Rusal completed Russia’s biggest debt restructuring in corporate history in December, agreeing with more than 70 creditors to extend repayments of about $14 billion over seven years. Net debt shrank to $12 billion as of March 31 as the company used the IPO proceeds to repay lenders.
Taking into account the debt and Rusal’s $6 billion loss in 2008, the Hong Kong exchange enforced a minimum trading lot of 24,000 shares when the company went public. That put the stock beyond the reach of retail investors, the city’s most active traders, and Rusal isn’t included in any stock index, said Louis Capital’s Collett.
Rusal’s subsequent share slump may have hurt other Russian companies hoping to draw Asian investors, said Alisher Djumanov, CEO of Beijing-based Eurasia Capital.
“In Hong Kong, IPOs are associated with big gains,” Djumanov said. “Chinese investors kind of assume that if you invest in IPOs you can expect, at least in the beginning, some positive performance.”
Last year, IPOs in the city achieved an average first-day gain of 15 percent, according to data compiled by Bloomberg.
Perception Vs. Fundamentals
The success of Russian IPOs in Hong Kong will depend as much on perception as fundamentals, Collett said. Samsung Investment, for one, didn’t feel “comfortable” with Rusal’s management during the IPO marketing, fund manager Dan said.
“The perception of oligarchs here is bad,” Collett said. “The only thing that people know of Rusal is debt and question marks over Deripaska. They don’t know what those question marks are.”
Deripaska, a nuclear physics graduate, became director of a Siberian aluminum smelter in 1994, aged 26. At the time, several groups vied for control of the industry, including with contract killings, which gave rise to the name of the “aluminum wars.”
At the Siberian plant, Deripaska was supported by Trans- World Group, a trader part-owned by Uzbekistan-born entrepreneur Michael Cherney, who since 2008 has pursued legal claims for part of Deripaska’s aluminum fortune.
Planned Listings
Even after Rusal’s share decline and the delay of the Strikeforce listing, Deripaska still seeks more IPOs for his EN+ Group, the holding company for his Rusal stake and power utility OAO EuroSibEnergo. Hong Kong is a “priority” location for EN+ assets because of their geographical proximity to China, EN+ spokeswoman Elena Rollins said.
Chinese investors need time to “gain understanding” of Russian companies, said Yonghao Pu, UBS Wealth Management’s chief investment strategist for the Asia Pacific region.
That may take as long as 10 to 15 years because Russian companies need to build relationships in Asia, Eurasia Capital’s Djumanov said. Khisamova of VTB Capital disagrees.
“When we brought first Russian companies to London for equity-raising 5 to 10 years ago, we got the same type of questions,” Khisamova said. “After three, maybe five deals, London became very familiar with Russia and a platform of choice” for the nation’s companies.
“Hong Kong is the gateway to Asia,” Deripaska said in an interview at Hong Kong’s Conrad Hotel. “I focus more and more on Asia because I believe we can do better business in Asia than in struggling economies” such as the U.K.
The challenge for the Russian companies seeking to follow Deripaska to Hong Kong will be to show Asian investors why they should care, at a time when initial public offerings worldwide struggle. Funds from RCM Asia Pacific Ltd. to Samsung Investment Trust say Russian IPOs don’t fit with their Asia-focused investment strategy.
“Those companies can list here, but who wants to buy them?” said Pauline Dan, Hong Kong-based chief investment officer at Samsung Investment, which oversees about $78 billion. “Our focus is on Hong Kong, China. It’s not as if China doesn’t have resources itself.”
That ambivalence may frustrate hopes by Russian companies to avoid European market turmoil by entering Asia, where wealth is accumulating faster than anywhere else, said Chris Weafer, chief strategist at UralSib Financial Corp. Many of them see Hong Kong as an “easy” alternative to London or New York, with regard to its liquidity and trading rules, as they seek to raise $100 billion over five years to repay debt and grow, he said.
Faltering Markets
Hong Kong, which raised the most IPO funds of any bourse in 2009 according to World Federation of Exchanges data, has not been immune to canceled share sales this year as sovereign-debt concerns in Europe roil global stocks. The MSCI World Index has fallen about 14 percent since its April 15 high.
Aluminum maker Rusal has dropped about 32 percent since its $2.24 billion IPO in January, while the benchmark Hang Seng Index has fallen 1.7 percent.
At least 20 companies around the world postponed or withdrew IPOs in May, including three from Russia: Deripaska’s Strikeforce Mining & Resources Plc had sought a listing in Hong Kong, sugar producer OAO Rusagro planned a sale in Moscow and fertilizer maker OAO UralChem had targeted London.
Rusal’s IPO, Russia’s first in Hong Kong, relied on support from outside Asia. Vnesheconombank, Russia’s state-run bank, took 30 percent of the offering, and two more of the five cornerstone buyers were U.S. funds, including Paulson & Co.
“Is Russia on the radar? Honestly? No,” said Ben Collett, head of equities for Louis Capital Markets brokerage in Hong Kong. “If you want to trade Russia then you’re in Europe.”
China Fit
Danny Yan, a fund manager at Taifook Asset Management Ltd. in Hong Kong, said unless a Russian company can show how a “significant” part of its business is related to China, he won’t buy it. Wariness among Chinese investors may scupper plans for some of the 40 Russian companies that have met with the Hong Kong exchange or enquired about a listing, according to figures from Igor Vdovin, a member of Russian business lobby RSPP.
“Hong Kong is ambitious in trying to attract listings from companies that are domiciled elsewhere, but our view so far is that this is not a natural fit,” said Mark Konyn, chief executive officer of RCM Asia Pacific, which oversees $11 billion.
Among the Russian companies with “Asian credentials” are the energy and metals exporters such as state-run oil producer OAO Rosneft, gas-export monopoly OAO Gazprom and OAO GMK Norilsk Nickel, UralSib’s Weafer said.
Rosneft, Norilsk
Rosneft signed a 20-year supply contract with China last year, while Norilsk sold 30 percent of its nickel to the nation and to India. Rusal plans to boost Asian sales to 30 percent of the total this year from 20 percent in 2009.
Rusal set its IPO price on Jan. 22, three days after the Hang Seng began a three-week, 10 percent decline. Rusal fell 11 percent on its first trading day, Jan. 27, a “reasonable” move given global market volatility, Deripaska said that day.
“It was priced toward the very top of the institutional demand curve before the market turned,” said Elena Khisamova, head of equity capital markets at VTB Capital, one of Rusal’s IPO managers. Still, Rusal’s sale was “a huge help in creating the path for future listings” from Russia, she said.
Deripaska, 42, might have struggled to list Rusal in London, where Russian stocks are traditionally brokered, because the U.K. may have insisted on stricter regulation for the debt-saddled company, Weafer said. Deripaska said in April 2008 he would pick a location based on the most “comfortable solution.”
Pay Down Debt
Rusal completed Russia’s biggest debt restructuring in corporate history in December, agreeing with more than 70 creditors to extend repayments of about $14 billion over seven years. Net debt shrank to $12 billion as of March 31 as the company used the IPO proceeds to repay lenders.
Taking into account the debt and Rusal’s $6 billion loss in 2008, the Hong Kong exchange enforced a minimum trading lot of 24,000 shares when the company went public. That put the stock beyond the reach of retail investors, the city’s most active traders, and Rusal isn’t included in any stock index, said Louis Capital’s Collett.
Rusal’s subsequent share slump may have hurt other Russian companies hoping to draw Asian investors, said Alisher Djumanov, CEO of Beijing-based Eurasia Capital.
“In Hong Kong, IPOs are associated with big gains,” Djumanov said. “Chinese investors kind of assume that if you invest in IPOs you can expect, at least in the beginning, some positive performance.”
Last year, IPOs in the city achieved an average first-day gain of 15 percent, according to data compiled by Bloomberg.
Perception Vs. Fundamentals
The success of Russian IPOs in Hong Kong will depend as much on perception as fundamentals, Collett said. Samsung Investment, for one, didn’t feel “comfortable” with Rusal’s management during the IPO marketing, fund manager Dan said.
“The perception of oligarchs here is bad,” Collett said. “The only thing that people know of Rusal is debt and question marks over Deripaska. They don’t know what those question marks are.”
Deripaska, a nuclear physics graduate, became director of a Siberian aluminum smelter in 1994, aged 26. At the time, several groups vied for control of the industry, including with contract killings, which gave rise to the name of the “aluminum wars.”
At the Siberian plant, Deripaska was supported by Trans- World Group, a trader part-owned by Uzbekistan-born entrepreneur Michael Cherney, who since 2008 has pursued legal claims for part of Deripaska’s aluminum fortune.
Planned Listings
Even after Rusal’s share decline and the delay of the Strikeforce listing, Deripaska still seeks more IPOs for his EN+ Group, the holding company for his Rusal stake and power utility OAO EuroSibEnergo. Hong Kong is a “priority” location for EN+ assets because of their geographical proximity to China, EN+ spokeswoman Elena Rollins said.
Chinese investors need time to “gain understanding” of Russian companies, said Yonghao Pu, UBS Wealth Management’s chief investment strategist for the Asia Pacific region.
That may take as long as 10 to 15 years because Russian companies need to build relationships in Asia, Eurasia Capital’s Djumanov said. Khisamova of VTB Capital disagrees.
“When we brought first Russian companies to London for equity-raising 5 to 10 years ago, we got the same type of questions,” Khisamova said. “After three, maybe five deals, London became very familiar with Russia and a platform of choice” for the nation’s companies.
Ryanair to Pay First Dividend After Restoring Profit (Update2)
Ryanair Holdings Plc, Europe’s largest discount airline, will pay its first-ever dividend after reporting a full-year profit because of declining fuel costs.
Net income in the 12 months through March 31 was 305 million euros ($370 million) compared with a net loss of 169 million euros a year earlier, the Dublin-based carrier said today in a statement. Sales rose 2 percent to 3 billion euros.
Ryanair’s profit contrasts with the performance at full- service carriers British Airways Plc and Air France-KLM Group, which both reported losses for the period. Ryanair said it plans a special dividend totaling 500 million euros in October, its first payment to shareholders since the company sold stock in 1997, after deciding last year against expanding its fleet.
“The chasm between their business model and the rest of the airline industry is remarkably stark,” said Joe Gill, an analyst at Bloxham Securities in Dublin who recommends buying Ryanair stock. “The big surprise, though, is the timing of the special dividend. I guess they are more confident with their cash-flow predictions.”
Ryanair plans to make the payout in October, subject to shareholders’ approval. The carrier said it may provide a further 500 million euros to investors in fiscal 2013, in the absence of aircraft purchases.
Passenger numbers this year will probably rise 11 percent to 73.5 million travelers, while profit may increase by as much as 15 percent to 375 million euros, the airline said.
Ryanair rose as much as 6.5 percent to 3.60 euros and was up 1.2 percent as of 10:29 a.m. in Dublin trading. The stock has gained 3.8 percent this year.
The airline’s negotiations with Boeing Co. about a possible order for 200 planes broke down in mid-December as the companies failed to agree on unspecified conditions after settling on a price for the aircraft. The collapse prompted Ryanair to curtail its growth plan and provide cash to investors.
Payout ‘Appropriate’
“It doesn’t look like we’re going to make a deal to buy planes in the near term, so it was appropriate to return money to shareholders,” Chief Financial Officer Howard Millar said in a phone interview today.
The carrier’s sales were crimped at the start of this fiscal year after ash from the eruption of Iceland’s Eyjafjallajökull volcano closed European airspace for six days in April, grounding 100,000 flights. A second wave of ash in May closed terminals in Ireland and Scotland before spreading as far south as central Spain, the Canary Islands and Morocco.
Disruption from the ash cloud caused Ryanair to cancel more than 9,400 flights for 1.5 million passengers as of May 18, the company said. Ryanair estimated the cost of the cancellations at about 50 million euros. The airline, along with other European carriers including British Airways, has criticized regulators for being overly cautious in their approach to monitoring the ash cloud and shutting down airspace.
‘Unnecessary’ Disruptions
“The Icelandic volcanic-ash ‘monitoring’ led to repeated, unnecessary, closures of large swathes of European airspace,” Chief Executive Michael O’Leary said in the statement.
Ryanair’s fuel costs fell by 29 percent to 894 million euros. The carrier also benefited from buying hedging contracts to lock in lower costs for fuel as the price of crude oil tumbled in the second half of 2008.
The airline said today that it has extended hedging to cover 90 percent of the financial year ending in 2011 at a price of $730 per ton, and 50 percent for the following year at $750 a ton. That compares with about $690 a ton in northwestern European trading at the close of trading on May 28.
Net income in the 12 months through March 31 was 305 million euros ($370 million) compared with a net loss of 169 million euros a year earlier, the Dublin-based carrier said today in a statement. Sales rose 2 percent to 3 billion euros.
Ryanair’s profit contrasts with the performance at full- service carriers British Airways Plc and Air France-KLM Group, which both reported losses for the period. Ryanair said it plans a special dividend totaling 500 million euros in October, its first payment to shareholders since the company sold stock in 1997, after deciding last year against expanding its fleet.
“The chasm between their business model and the rest of the airline industry is remarkably stark,” said Joe Gill, an analyst at Bloxham Securities in Dublin who recommends buying Ryanair stock. “The big surprise, though, is the timing of the special dividend. I guess they are more confident with their cash-flow predictions.”
Ryanair plans to make the payout in October, subject to shareholders’ approval. The carrier said it may provide a further 500 million euros to investors in fiscal 2013, in the absence of aircraft purchases.
Passenger numbers this year will probably rise 11 percent to 73.5 million travelers, while profit may increase by as much as 15 percent to 375 million euros, the airline said.
Ryanair rose as much as 6.5 percent to 3.60 euros and was up 1.2 percent as of 10:29 a.m. in Dublin trading. The stock has gained 3.8 percent this year.
The airline’s negotiations with Boeing Co. about a possible order for 200 planes broke down in mid-December as the companies failed to agree on unspecified conditions after settling on a price for the aircraft. The collapse prompted Ryanair to curtail its growth plan and provide cash to investors.
Payout ‘Appropriate’
“It doesn’t look like we’re going to make a deal to buy planes in the near term, so it was appropriate to return money to shareholders,” Chief Financial Officer Howard Millar said in a phone interview today.
The carrier’s sales were crimped at the start of this fiscal year after ash from the eruption of Iceland’s Eyjafjallajökull volcano closed European airspace for six days in April, grounding 100,000 flights. A second wave of ash in May closed terminals in Ireland and Scotland before spreading as far south as central Spain, the Canary Islands and Morocco.
Disruption from the ash cloud caused Ryanair to cancel more than 9,400 flights for 1.5 million passengers as of May 18, the company said. Ryanair estimated the cost of the cancellations at about 50 million euros. The airline, along with other European carriers including British Airways, has criticized regulators for being overly cautious in their approach to monitoring the ash cloud and shutting down airspace.
‘Unnecessary’ Disruptions
“The Icelandic volcanic-ash ‘monitoring’ led to repeated, unnecessary, closures of large swathes of European airspace,” Chief Executive Michael O’Leary said in the statement.
Ryanair’s fuel costs fell by 29 percent to 894 million euros. The carrier also benefited from buying hedging contracts to lock in lower costs for fuel as the price of crude oil tumbled in the second half of 2008.
The airline said today that it has extended hedging to cover 90 percent of the financial year ending in 2011 at a price of $730 per ton, and 50 percent for the following year at $750 a ton. That compares with about $690 a ton in northwestern European trading at the close of trading on May 28.
Analysts Forecasts See 25% Stock Gain Defy El-Erian (Update1)
The biggest monthly drop in the Standard & Poor’s 500 Index since February 2009 is ratifying Mohamed El-Erian’s prediction for a new normal of below-average returns. Analysts say not so fast.
Combined price estimates from more than 2,000 forecasters tracked by Bloomberg show the S&P 500 will rise 25 percent in the next year, the fastest projected rate since February 2009, data compiled by Bloomberg show. The rally above 1,350 will be led by industries most tied to the economy, according to analysts who boosted individual share projections by an average of 0.9 percent in May, the 14th straight monthly increase.
The estimates show Wall Street firms are discounting El- Erian’s assertions as well as Europe’s credit crisis and instead focusing on economists’ growth projections, which call for U.S. gross domestic product to expand 3.2 percent this year and 3.1 percent in 2011. Analysts are telling investors to buy landlord AvalonBay Communities Inc. and tractor maker Deere & Co. to benefit from the fastest expansion in six years.
“There’s a lot of potential demand embedded in analysts’ expectations that I think will be very real,” said David Goerz, who oversees $17 billion at Highmark Capital Management Inc. in San Francisco. “Traders are trying to layer on a debt crisis similar to what they saw in 2008 and drawing the same conclusions, even though it couldn’t be more different.”
Estimates for companies in the S&P 500 show profits may jump 19 percent in 2010, the most since 1995, and 18 percent in 2011, according to data compiled by Bloomberg. The index trades for 13.4 times 2010 per-share earnings forecasts, compared with an average multiple of 16.4 times reported income since 1954.
Highest Since 2008
Should analysts’ forecasts for a 25 percent gain in the S&P 500 come true, the gauge would climb to 1,361 by next May, the highest level since June 2008. The projected advance reflects individual share-price estimates for all the companies in the index, adjusted according to their weighting in the index. Futures on the S&P 500 expiring this month fell 0.3 percent to 1,084.8 as of 7:50 a.m. in London today.
More than 77 percent of S&P 500 companies beat first- quarter profit estimates, data compiled by Bloomberg show. The surprises failed to keep the S&P 500 from tumbling 8.2 percent in May as Spain lost its AAA credit grade and bank funding costs increased to the highest levels since July.
The retreat cut the rally that began almost 15 months ago to 61 percent from as much as 80 percent at its peak on April 23. The plunge came as the London interbank offered rate for three-month dollar loans rose for 13 consecutive days through May 27 to 0.538 percent in a sign banks are becoming more reluctant to lend, the British Bankers’ Association reported.
Odds of Default
Credit default swaps on Greece signal a 45 percent chance the country will fail to repay its debt within five years even after the European Union pledged almost $1 trillion to ease the region’s budget crisis. The Athens Stock Exchange Composite Index has dropped 29 percent this year, the Euro Stoxx 50 Index has lost 12 percent and the S&P 500 has fallen 2.3 percent.
“Structural changes are often omitted from analysts’ assessments until the evidence is truly overwhelming and the implications have already imposed themselves,” El-Erian, who oversees $1.1 trillion as chief executive officer and co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., wrote in an e-mail to Bloomberg. “Structural changes are among the hardest things for analysts to identify and to price.”
‘Groundless’ Reports
The S&P 500 climbed 0.2 percent to 1,089.41 last week. Since falling as low as 1,040.78 on May 25, the benchmark index for American shares rallied 4.7 percent after China’s State Administration of Foreign Exchange said a report that it may reduce holdings of euro assets was “groundless.” The agency has $2.4 trillion of foreign-exchange reserves, the world’s largest.
None of the 13 U.S. equity strategists tracked by Bloomberg News has reduced his prediction for the S&P 500’s level at the end the year. The average outlook is for the measure to close at 1,268 on Dec. 31, a 16 percent gain.
“Growth is coming through pretty well and there’s obviously some spillover from what’s going on abroad, but it’s probably not enough to move the needle,” said Myles Zyblock, the chief institutional strategist at Royal Bank of Canada in Toronto. “We went from no worries at all to very pervasive worries about everything, so that might be a good time to scale back in a little bit.”
‘Best in Class’
AvalonBay shares may rise 10 percent to $108 in the next year, according to Paula Poskon, who covers developers for Robert W. Baird & Co. in McLean, Virginia. Poskon told investors to buy the Arlington, Virginia-based company on May 25. Her stock-price forecast is the most bullish among 14 analysts tracked by Bloomberg.
“As the global chaos brought a broad selloff to the market, it felt like it put best-in-class, high-growth stocks on sale,” said Poskon, whose picks have earned investors 38 percent over the past year. “I’m a believer in the growth story in the second half of 2011, 2012 time frame.”
Credit Suisse Group AG, based in Zurich, and Jefferies Group Inc. of New York are among at least 10 firms that lifted price estimates for Deere in May, pushing projections to $72.20 a share, Bloomberg data show. That implies a 25 percent climb by May 2011 for the world’s biggest farm-equipment maker. Rising demand for tractors and combines led Moline, Illinois-based Deere to raise its annual profit and sales forecasts on May 19 for the second time this year.
Buying Opportunity
Steve Leuthold, who oversees $4.2 billion at Leuthold Group LLC, said the S&P 500’s 11 percent retreat since April 23 represents a “huge buying opportunity” in a May 20 report. The firm recently bought semiconductor stocks on speculation the shares are cheap relative to the industry’s earnings prospects, said Director of Research Doug Ramsey in an interview from Minneapolis.
“There’s no way the European debt problems are going to be enough to derail the growth that’s taking place in our economy and in Asia,” said Ramsey, who estimates the S&P 500 will rally at least 19 percent by year-end. “We’re in the camp that hasn’t revised down because of the pullback.”
Combined price estimates from more than 2,000 forecasters tracked by Bloomberg show the S&P 500 will rise 25 percent in the next year, the fastest projected rate since February 2009, data compiled by Bloomberg show. The rally above 1,350 will be led by industries most tied to the economy, according to analysts who boosted individual share projections by an average of 0.9 percent in May, the 14th straight monthly increase.
The estimates show Wall Street firms are discounting El- Erian’s assertions as well as Europe’s credit crisis and instead focusing on economists’ growth projections, which call for U.S. gross domestic product to expand 3.2 percent this year and 3.1 percent in 2011. Analysts are telling investors to buy landlord AvalonBay Communities Inc. and tractor maker Deere & Co. to benefit from the fastest expansion in six years.
“There’s a lot of potential demand embedded in analysts’ expectations that I think will be very real,” said David Goerz, who oversees $17 billion at Highmark Capital Management Inc. in San Francisco. “Traders are trying to layer on a debt crisis similar to what they saw in 2008 and drawing the same conclusions, even though it couldn’t be more different.”
Estimates for companies in the S&P 500 show profits may jump 19 percent in 2010, the most since 1995, and 18 percent in 2011, according to data compiled by Bloomberg. The index trades for 13.4 times 2010 per-share earnings forecasts, compared with an average multiple of 16.4 times reported income since 1954.
Highest Since 2008
Should analysts’ forecasts for a 25 percent gain in the S&P 500 come true, the gauge would climb to 1,361 by next May, the highest level since June 2008. The projected advance reflects individual share-price estimates for all the companies in the index, adjusted according to their weighting in the index. Futures on the S&P 500 expiring this month fell 0.3 percent to 1,084.8 as of 7:50 a.m. in London today.
More than 77 percent of S&P 500 companies beat first- quarter profit estimates, data compiled by Bloomberg show. The surprises failed to keep the S&P 500 from tumbling 8.2 percent in May as Spain lost its AAA credit grade and bank funding costs increased to the highest levels since July.
The retreat cut the rally that began almost 15 months ago to 61 percent from as much as 80 percent at its peak on April 23. The plunge came as the London interbank offered rate for three-month dollar loans rose for 13 consecutive days through May 27 to 0.538 percent in a sign banks are becoming more reluctant to lend, the British Bankers’ Association reported.
Odds of Default
Credit default swaps on Greece signal a 45 percent chance the country will fail to repay its debt within five years even after the European Union pledged almost $1 trillion to ease the region’s budget crisis. The Athens Stock Exchange Composite Index has dropped 29 percent this year, the Euro Stoxx 50 Index has lost 12 percent and the S&P 500 has fallen 2.3 percent.
“Structural changes are often omitted from analysts’ assessments until the evidence is truly overwhelming and the implications have already imposed themselves,” El-Erian, who oversees $1.1 trillion as chief executive officer and co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., wrote in an e-mail to Bloomberg. “Structural changes are among the hardest things for analysts to identify and to price.”
‘Groundless’ Reports
The S&P 500 climbed 0.2 percent to 1,089.41 last week. Since falling as low as 1,040.78 on May 25, the benchmark index for American shares rallied 4.7 percent after China’s State Administration of Foreign Exchange said a report that it may reduce holdings of euro assets was “groundless.” The agency has $2.4 trillion of foreign-exchange reserves, the world’s largest.
None of the 13 U.S. equity strategists tracked by Bloomberg News has reduced his prediction for the S&P 500’s level at the end the year. The average outlook is for the measure to close at 1,268 on Dec. 31, a 16 percent gain.
“Growth is coming through pretty well and there’s obviously some spillover from what’s going on abroad, but it’s probably not enough to move the needle,” said Myles Zyblock, the chief institutional strategist at Royal Bank of Canada in Toronto. “We went from no worries at all to very pervasive worries about everything, so that might be a good time to scale back in a little bit.”
‘Best in Class’
AvalonBay shares may rise 10 percent to $108 in the next year, according to Paula Poskon, who covers developers for Robert W. Baird & Co. in McLean, Virginia. Poskon told investors to buy the Arlington, Virginia-based company on May 25. Her stock-price forecast is the most bullish among 14 analysts tracked by Bloomberg.
“As the global chaos brought a broad selloff to the market, it felt like it put best-in-class, high-growth stocks on sale,” said Poskon, whose picks have earned investors 38 percent over the past year. “I’m a believer in the growth story in the second half of 2011, 2012 time frame.”
Credit Suisse Group AG, based in Zurich, and Jefferies Group Inc. of New York are among at least 10 firms that lifted price estimates for Deere in May, pushing projections to $72.20 a share, Bloomberg data show. That implies a 25 percent climb by May 2011 for the world’s biggest farm-equipment maker. Rising demand for tractors and combines led Moline, Illinois-based Deere to raise its annual profit and sales forecasts on May 19 for the second time this year.
Buying Opportunity
Steve Leuthold, who oversees $4.2 billion at Leuthold Group LLC, said the S&P 500’s 11 percent retreat since April 23 represents a “huge buying opportunity” in a May 20 report. The firm recently bought semiconductor stocks on speculation the shares are cheap relative to the industry’s earnings prospects, said Director of Research Doug Ramsey in an interview from Minneapolis.
“There’s no way the European debt problems are going to be enough to derail the growth that’s taking place in our economy and in Asia,” said Ramsey, who estimates the S&P 500 will rally at least 19 percent by year-end. “We’re in the camp that hasn’t revised down because of the pullback.”
Malaysia May Sell $1 Billion in Debt by Sept. 30 (Update3)
Malaysia plans to raise about $1 billion from its first sale of conventional dollar bonds in eight years, after drawing bids for five times the Islamic debt it offered last week, a finance ministry official said.
The government may hire the same banks, including CIMB Group Holdings Bhd. and HSBC Holdings Plc, to arrange the sale by Sept. 30, said the official, who declined to be named as the discussions are private. Malaysia raised $1.25 billion from its first Shariah-compliant dollar bond in eight years last week.
Malaysia is tapping the international market as the government increases development spending to boost an economy that emerged from its first recession in a decade in the fourth quarter. The sale of Islamic debt attracted $5.5 billion of orders, compared with the offer of $1 billion, reflecting appetite for emerging-market assets amid a debt crisis in Europe.
“If they issue a similar amount before September, it should be very well subscribed,” said Chia Tse Chern, director of fixed income at UOB Asset Management Ltd., a unit of Singapore’s second-largest bank. “Malaysia very rarely taps the market. There are only two high-grade sovereign issuers in Asia, Korea and Malaysia, so there is a scarcity value.”
Malaysia is rated A- by Standard & Poor’s and A3 by Moody’s Investors Service. CIMB Group and HSBC officials weren’t available to comment. UOB Asset Management, which manages about $15 billion in assets, bought Malaysia’s sukuk notes last week, said Chia.
Bond Yields
The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 increased five basis points to 3.827 percent as of 1:56 p.m. in Kuala Lumpur, after falling 6.5 basis points yesterday, according to HSBC prices. The spread over similar- maturity U.S. Treasuries has narrowed to 175 basis points from 180 basis points when the bonds were sold on May 27.
The premium investors demand to hold bonds in developing nations over U.S. Treasuries narrowed 22 basis points last week to 325 basis points, according to JPMorgan Chase & Co.’s EMBI+ Index. A basis point is 0.01 percentage point.
Prime Minister Najib Razak, due to unveil a new five-year development plan this month, said he is confident the $195 billion economy will grow 6 percent in 2010. Malaysia had a budget deficit equivalent to 7 percent of gross domestic product last year, compared with 13.6 percent for Greece, 11.2 percent for Spain and 9.4 percent for Portugal.
The government may hire the same banks, including CIMB Group Holdings Bhd. and HSBC Holdings Plc, to arrange the sale by Sept. 30, said the official, who declined to be named as the discussions are private. Malaysia raised $1.25 billion from its first Shariah-compliant dollar bond in eight years last week.
Malaysia is tapping the international market as the government increases development spending to boost an economy that emerged from its first recession in a decade in the fourth quarter. The sale of Islamic debt attracted $5.5 billion of orders, compared with the offer of $1 billion, reflecting appetite for emerging-market assets amid a debt crisis in Europe.
“If they issue a similar amount before September, it should be very well subscribed,” said Chia Tse Chern, director of fixed income at UOB Asset Management Ltd., a unit of Singapore’s second-largest bank. “Malaysia very rarely taps the market. There are only two high-grade sovereign issuers in Asia, Korea and Malaysia, so there is a scarcity value.”
Malaysia is rated A- by Standard & Poor’s and A3 by Moody’s Investors Service. CIMB Group and HSBC officials weren’t available to comment. UOB Asset Management, which manages about $15 billion in assets, bought Malaysia’s sukuk notes last week, said Chia.
Bond Yields
The yield on Malaysia’s 3.928 percent Islamic notes due June 2015 increased five basis points to 3.827 percent as of 1:56 p.m. in Kuala Lumpur, after falling 6.5 basis points yesterday, according to HSBC prices. The spread over similar- maturity U.S. Treasuries has narrowed to 175 basis points from 180 basis points when the bonds were sold on May 27.
The premium investors demand to hold bonds in developing nations over U.S. Treasuries narrowed 22 basis points last week to 325 basis points, according to JPMorgan Chase & Co.’s EMBI+ Index. A basis point is 0.01 percentage point.
Prime Minister Najib Razak, due to unveil a new five-year development plan this month, said he is confident the $195 billion economy will grow 6 percent in 2010. Malaysia had a budget deficit equivalent to 7 percent of gross domestic product last year, compared with 13.6 percent for Greece, 11.2 percent for Spain and 9.4 percent for Portugal.
Subscribe to:
Posts (Atom)
