Good morning New York
FT ALPHAVILLE
Japan's mini crash: Blame China, not just Ben. The Nikkei 225 was clearly over-cooked. But just how over-cooked, we found out on Thursday when it fell 7.3 per cent. Paul notes that falls in the Nikkei >7 per cent are few and far between. There was the Tsunami, of course. And before that you have to go back to the big 1998 correction, and before that the full-on 1987 crash. But it also needs to be seen in context: Japan had seemingly been on an unstoppable roll…
And, as the FT noted, it was apparently the small guys leading the charge. Unlike the rout of two years ago, which was led by institutional investors fearing a nuclear meltdown, brokers said that Thursday's dash for the exits was led by retail – or smaller – investors. Amari, Japan's economy minister, tried to calm everybody down: "Stock prices and the exchange rate are correlated, so it's natural that such a big fall in stocks brings about a swing to a stronger yen," Amari said. "We will continue to calmly proceed with pragmatic policies."
Financial litigators of the world, unite: This, says Joseph, would be the International Financial Litigation Network, "a group seeking to facilitate effective cross-border representation for clients in global financial disputes," founded in a Sixth Avenue conference room on Wednesday. They (wisely) decided not to call themselves the International Network for Financial Litigation in the end. But it is about fighting complex, global fraud.
NEWS
Ben Bernanke suggested the Federal Reserve could begin ending QE "in the next few meetings" if the jobs market continues to improve. "If we do that, it would not mean that we are automatically aiming towards a complete wind-down," he cautioned, in testimony to Congress (Financial Times). Minutes of April's FOMC meeting showed some officials were ready to "adjust the flow of purchases downward as early as the June meeting" (Wall Street Journal).
China factory data to test political calculations: The purchasing managers' index for the manufacturing sector is on track to fall to a seven-month low of 49.6 in May from 50.4 in April, according to a preliminary survey published by HSBC. The decline was worse than expected and, in dropping below the index's midpoint of 50, it signalled that China's industrial activity had started contracting. (Financial Times)
Risk-on currencies benefit: The Japanese yen and Swiss franc made strong gains against other currencies amid a sell-off in global equities, with risk sentiment dented after China's manufacturing sector contracted unexpectedly in April, according to a flash HSBC purchasing managers' index. The dollar fell more than 2 per cent to hit Y100.83 against the yen while the euro fell 1.8 per cent to dip below Y130. The Swiss franc rebounded from losses the previous day after the head of Switzerland's central bank said the country was still considering more measures to weaken the franc. The euro fell 1.2 per cent to SFr1.2420. The dollar fell 1.4 per cent to SFr0.9634. (Financial Times)
Hewlett-Packard showed signs that its turnaround is working. Operating profits of 87 cents a share in the second quarter beat analyst forecasts of 81 cents, and revenues fell less than expected in HP's Enterprise Services unit (Financial Times). Net income fell to $1.08bn or 55 cents per share, compared to 80 cents or $1.55bn a year earlier. HP shares rose up to 14 per cent in extended trading on Wednesday (Reuters).
The International Monetary Fund is considering the biggest changes to its policy on sovereign debt restructuring in over a decade. The discussions include ways to ask bondholders to reschedule their debt early in an IMF bailout, and options for dealing with holdouts, who survived the Greek PSI intact and who have won recent legal victories against Argentina over its 2001 default. Set to be published later this week, the fund's proposals are nevertheless unlikely to revive the idea of a full legal mechanism for processing sovereign defaults (Financial Times).
Ford exits Australia amid mounting losses: Ford is to cease production in Australia by 2016 and cut about 1,200 jobs – almost half its local workforce – after concluding the business case for producing vehicles locally "did not stack up". "Our costs are double that of Europe and nearly four times Ford in Asia," said Bob Graziano, president of Ford Australia. Ford has been manufacturing in Australia since 1925. (Financial Times)
Shrinking subsidiaries: "Some of the biggest U.S. companies, including Google and FedEx have quietly removed hundreds of offshore subsidiaries from their publicly disclosed financial filings over the past several years. Software maker Oracle Corp., for instance, disclosed more than 400 subsidiaries in its 2010 annual report. By 2012 the list had been whittled to eight—five of which were located in Ireland. Oracle declined to comment." (Wall Street Journal)
The European Commission plans to make investor "burden sharing" a bigger part of the conditions for EU banks to receive state aid. The new rules would use Spain's rescue of its banks as a template for bailing-in shareholders and junior bondholders before public funds are injected into banks, and could be enforced as early as late summer (Financial Times).
General Electric is considering an IPO of its consumer finance business, its chief executive said. Jeff Immelt told a conference in Florida that GE planned to shrink the assets of its financial services unit by $50bn to $100bn by the end of 2014, and to redirect them towards commercial businesses such as aircraft leasing and equipment finance. The consumer operations of GE Capital could be floated off in one or more listings, with GE using the cash to fund share buybacks. "The market, I think, is open. If we miss it, that's on me," Immelt said (Financial Times).
Ratings agencies have come under attack for not upgrading mortgage-backed securities amidst the US housing recovery. Agencies have given investment-grade ratings to some 10 per cent of MBS not insured by the US government, but one hedge fund estimates that at least a quarter should qualify. Others have pointed to the market moving ahead of ratings: "It literally would take a complete catastrophe for the bonds in the tops of these structures to be principally impaired from here," said Kyle Bass of Hayman Capital (Financial Times).
Markets: Global stocks are in sharp retreat, led by a savage plunge in Tokyo, as traders are spooked by the prospect of reduced central bank support and a slowing Chinese economy. The six-month rally in the Nikkei 225, which had seen the Tokyo benchmark surge about 80 per cent on hopes for government and Bank of Japan stimuli, cracked, with the index ending down 7.3 per cent, its biggest daily drop in two years. The index had been comfortably in positive territory in early trading, rising as much as 1.8 per cent. But a broad afternoon sell-off ensued as volatility in the Japanese bond market and a rising yen encouraged wholesale profit-taking. The yen has strengthened from Y103.6 to Y101.56 against the dollar in a matter of hours, while yields on Japanese government bonds tracked lower as investors sought refuge in credit markets. Yields on 10-year JGBs hit 1 per cent for the first time in a year in the opening minutes of Tokyo trading, but fell back to 0.85 per cent by late afternoon writes the FT's Global Markets compere Jamie Chisholm.
