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Markets News Monday: China says it will move gradually in making changes to the nation’s yuan/renminbi exchange rate
By Finfacts Team
May 24, 2010 - 10:29:42 AM
Chinese President Hu Jintao shakes hands with US Secretary of State Hillary Clinton as he attends the opening ceremony of the second round of China-US strategic and economic dialogue at the Great Hall of the People in Beijing, Monday, May 24, 2010. Photo: Xinhua
President Hu Jintao said on Monday that China will move gradually and independently in making changes to the nation’s exchange-rate mechanism as talks with the US opened in Beijing.
China will continue to “steadily advance” reform “under the principles of independent decision-making, controllability and gradual progress,” said Hu said. US Treasury secretary Tim Geithner said that a more market-driven currency would help Chinese officials to sustain growth, keep inflation low and adjust the nation’s growth model. So far, China has resisted calls from trading partners to let the yuan strengthen after maintaining a peg of about RMB 6.83 to the US dollar since July 2008.
"As permanent members of the UN Security Council, the largest developing country and the largest developed country, China and the United States face common tasks and shoulder important responsibilities ranging from promoting full recovery and sustainable growth of the world economy to managing regional hot-spots, meeting global challenges and safeguarding world peace and security," said Hu.
Addressing the opening ceremony of the second China-U.S. strategic and economic dialogue, he said the world is in the midst of major developments, changes and adjustments.
BP: Oil giant BP said today that undersea efforts to end the oil leak from a deepwater area of the Gulf of Mexico, continues to focus on progressing options to stop the flow of oil from the well through interventions via the blow out preventer (BOP) and to collect the flow of oil from the leak points. These efforts are being carried out in conjunction with governmental authorities and other industry experts.
BP said plans continue to develop a so called 'top kil' operation where heavy drilling fluids are injected into the well to stem the flow of oil and gas and ultimately kill the well. Successfully killing the well may be followed by cement to seal the well. Most of the equipment is on site and preparations continue for this operation, with a view to deployment in a few days.
The oil firm said its is a complex operation requiring sophisticated diagnostic work and precise execution. As a result, it involves significant uncertainties and it is not possible to assure its success or to put a definite timescale on its deployment.
Drilling of the first relief well, which began on May 2nd continues as does drilling of a second relief well, begun on May 16th. Each of these wells is estimated to take some three months to complete from the commencement of drilling.
US Interior Secretary Ken Salazar spoke to reporters outside of BP’s Houston offices on Sunday after meeting with the scientific team working on a new bid to stop the damaged well from gushing oil into the Gulf. “I am angry and I am frustrated that BP has been unable to stop this well from leaking and to stop the pollution from spreading,” Salazar said.“We are 33 days into this effort, and deadline after deadline has been missed.”
BP’s well was damaged in an April 20th explosion aboard the Deepwater Horizon drilling rig platform that killed 11 workers. "If we find that they’re not doing what they’re supposed to be doing, we’ll push them out of the way appropriately and we’ll move forward to make sure that everything is being done to protect the people of the Gulf Coast, the ecological values of the Gulf Coast and the values of the American people,” Salazar said.
Talk about revaluing the yuan is likely to be kept out of the limelight at this year's S&ED. Ha Jiming, chief economist at CICC, tells CNBC's Martin Soong why. He also offers his view on when China will allow the yuan to appreciate:
Economic View: Stability & Growth Pact Mark II; Goodbody chief economist Dermot O’Leary. comments - - "Proposals from the European Commission have a certain "after the horse has bolted" essence to them. Talks among European finance ministers on Friday focused on three areas: (1) reinforcing the Stability and Growth Pact (SGP); (2) addressing macro-economic imbalances and divergences in competitiveness and; (3) formulating a framework for crisis management. The SGP has been effectively dead for a number of years, especially since the larger members decided to flout the rules when it suited them a number of years ago. It is proposed that SGPII will have more teeth, with peer reviews of broad budgetary parameters before budgets are pushed through national parliaments and possible suspension of cohesion funds for countries that repeatedly breach the rules.
The second point of discussion aims to address the issue of divergence in competitiveness seen across the euro-zone since the single currency was introduced. For an economic and monetary union, more focus on internal imbalances and cost competitiveness will undoubtedly be positive over the longer tern, but it is unlikely to be an issue for some time given that those countries that lost competitiveness over the past decade will have to endure a painful real devaluation for some time.
The final point for discussion - a crisis management framework - looks to have the least amount of agreement among the EU states. The main point of contention appears to be some of Germany's proposals, particularly the issue of managed debt restructuring. EU Council President Van Rumpuy said there is no prospect for restructuring by Greece or any other country. The bottom line here is that there is still plenty more work to do. A preliminary report is due by June 17 while a final round of proposals is expected in October. With markets stills somewhat sceptical about the European's response to the crisis, one wonders whether this timetable will have to be shortened. There will be more twists and turns, but if agreement can be reached though, a safer and closer euro-area could be the end result."
Pimco's Mohamed El-Erian and Bill Gross discuss where they're putting Pimco's multi billion bond investment money right now:
Wider sovereign concerns have not begun: limiting crisis: Davy chief economist, Rossa White, comments - - "The last seven weeks have not been a crisis in confidence about government credit in a general sense. That would be the worst-case scenario for risk markets. It is worth pointing out that the blowout in spreads in peripheral Europe has been accompanied by a massive rally in 'core' government bonds (especially Germany) and in the US. It is of course important that those larger countries don't become complacent: Germany is set to cut its deficit even further, whereas the US must get more serious. But continued economic recovery will make servicing costs easier across the board.
The sharp drop in US bond yields has compensated for much of the deterioration in credit spreads. US ten-year bonds are at the top of their trading range of the last year, bringing ten-year yields down to almost 3.2% from a recent high of close to 4%. It will be fascinating to see if this again proves the turning point (around 3.2%) like early October or late November last year.
The US and Germany have both benefitted from safe-haven flows. That is to be welcomed. The recent crisis – weaker government credits being punished while stronger ones remained resilient – is far more favourable than a situation where faith in governments everywhere was tested."
Asia
The MSCI Asia Pacific rose 0.6% Monday, after falling to a 9-month low Friday.
The Nikkei dipped 0.27%; the Shanghai Composite jumped 3.48%; Australia's S&P/ASX 200 Index has advanced 2.09% and India's Sensex Index has climbed 0.83%.
Thailand's economy grew 12% in the first quarter of 2010 from a year earlier, its best rate in 15 years.
However, the data for next few quarters will reflect the damage from political protests which began in mid-March and ended last week with 80m dead and the burning of the Thai stock exchange and Asia's second biggest shopping centre, Central World.
Steve Vickers, president & CEO of FTI International Risk, believes the Abhisit regime is "hanging by the skin of its teeth". He tells Bernard Lo and Karen Tso that the situation in Thailand is worrying and likely to worsen over the course of the year:
In Europe, the Dow Jones Stoxx 600 has risen 0.40% Monday.
The ISEQ has added 0.45% in Dublin.
Market cap leader CRH is down 0.11%; Elan has gained 1.46%; AIB has declined 2.79% and BoI dropped 2.71%.
Five year chart of the pan-European Dow Jones Stoxx 600 to Friday, May 21, 2010.
Northern Ireland tech company First Derivatives (Buy, Closing Price £3.85); FY10 results - Building for the future: Goodbody's Dan Cavanagh commented - - "First Derivatives (FDP) has issued a strong set of FY10 results (year ended Feb 2010), the highlights of which were: (i) a 45% yoy increase in revenues to £25.5m, ahead of our forecasts at £21.9m, driven by robust organic sales (c.+41%) augmented by partial year contributions from the recent acquisitions (RDF (consolidated from Oct) and Hologram (April)); (ii) Operating profit outturn of £5.8m (broadly flat yoy and inline with our forecasts), with margins being impacted by the continued investment in management capacity, the recruitment of 40-50 new consultants, upon receipt of a government grant; and, (iii) Net debt of £20.6m, up from £12.7m at FY09 and modestly better than £21.3m forecast.
In a year when acquisitions were to the fore (£24m spend on three deals) and given the late H2 timing of these deals, the initial contribution was somewhat modest (c.3% of annual revenues). However, looking to FY11, these deals provide the foundation for an augmented growth trajectory. On the back of the FY10 results and the flow through of recent acquisitions, we are forecasting 30% top line growth for FY11 to £33m. However, an increase in operating costs, while building for future growth, lessens impact at the operating profit line. Accordingly, we are nudging up our FY11 EBITDA forecast by 2% to £8.2m, as integration of the recent deals, principally Cognotec, lowers the margin to 25%, but provides a strong foundation for future growth. We retain our view that the investment in both operating capacity and bolt-on deals, bodes well for the future growth of FDP and, accordingly, we retain our positive stance on the company."
Gold is trading at $1186.90 up $9.90 from Friday's spot price close in New York.
The Wall Street Journal reports that many fund managers and high-rollers have allocated small percentages of their portfolios to gold as a hedge against inflation. But billionaire Thomas Kaplan is the bull of bullion. He has gone further than perhaps any other major investor, betting the majority of his wealth on gold and other precious metals. And it reflects his deeply held conviction that global economic instability could bring rising demand for gold.
Through his firm, Tigris Financial Group, and affiliates, Mr. Kaplan has loaded up on bullion and bought up properties in 17 countries on five continents, where geologists are exploring for more. Tigris subsidiaries have taken stakes in mining companies, including tiny firms that have yet to produce an ounce.
The Journal says though he won't disclose how much physical gold he owns, Kaplan, who is 47 years old, controls up to 30% of the shares in some so-called junior miners. Together, his holdings amount to a nearly $2bn bet on gold, more than the Brazilian central bank's bullion is currently worth.
Irish Financials: Cost of guarantee to go up; Goodbody's Eamonn Hughes comments - - "Press reports over the weekend indicate that the Department of Finance has confirmed that banks will face higher rates for using the government guarantee scheme from the end of June. In recent weeks, speculation has increased that the Minister for Finance is seeking an extension of the existing guarantee from end September to end December. It will be subsequently phased out, but it appears the cost is rising and will probably not surprise too many people. It appears the new fee structure will have fees varying by credit worthiness and banks will have to submit reviews to the EU demonstrating their creditworthiness. Given most of the Irish banks are already in the midst of EU restructuring plans, much of the groundwork for these reviews is probably already complete.
Elsewhere, we note media commentary over the weekend that the EBS has indicated that investment by Cardinal, the party with which it is holding talks about investment, is not keen on pursuing any subsequent talks with ptsb on any consolidation theme and that its interest in EBS is solely in that financial institution. This would tie in with recent speculation that the much mooted Third Force is fading into the background and why we recently based our IL&P valuation on raising capital with third party involvement (though it still offers material upside)."
