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Merkel damps expectations of euro zone Greek deal

July 20, 2011 in Banking Industry News


By Luke Baker and Andreas Rinke

BRUSSELS/HANOVER, Germany |
Wed Jul 20, 2011 7:45am EDT

BRUSSELS/HANOVER, Germany (Reuters) – German Chancellor Angela Merkel, Europe’s reluctant paymaster, doused expectations of any comprehensive solution to Greece’s debt crisis at an emergency euro zone summit on Thursday.

“Further steps will be necessary and not just one spectacular event which solves everything,” Merkel told reporters on Tuesday.

Widespread hopes for a single solution to make the Greek crisis disappear were unrealistic, she said, as officials wrestled with complex options for involving private bondholders in a second rescue of the debt-stricken euro zone state.

The euro eased against the dollar after the German leader said demands were too high for Thursday’s talks, which are only part of an incremental series of steps to address Greece’s debt and competitiveness problems.

The European currency area is facing the biggest crisis of its 12-year existence, with contagion threatening major economies such as Italy and Spain after three small members — Greece, Ireland and Portugal — needed bailouts.

In a sign of concerns about the potentially broad ramifications of the crisis, President Barack Obama spoke with Merkel on Tuesday.

“They agreed that dealing effectively with this crisis is important for sustaining the economic recovery in Europe as well as for the global economy,” the White House said in a statement.

French President Nicolas Sarkozy was to meet Merkel on Wednesday in Berlin to prepare for Thursday’s summit, his office said.

The International Monetary Fund urged euro zone leaders to act swiftly to increase the size of their 440 billion euro rescue fund and allow it to buy debt on the secondary market, two issues that are unlikely to be settled this week.

“It would be very costly not just for the euro zone but for the global economy to delay tackling the sovereign crisis,” IMF official Luc Everaert said, presenting an IMF staff report.

“We need more Europe, not less,” he said.

A confidential euro zone paper drafted ahead of the 17-nation summit and obtained by Reuters showed a tax on banks and cheaper, longer-dated official loans would be the least risky way to provide extra funding for debt-stricken Greece.

With financial markets on edge two days before the crucial meeting, other options for private sector involvement that could trigger a selective or outright Greek default with far-reaching consequences remain on the table, the paper showed.

Banking sources said they expected leaders to agree on a range of possibilities for private bondholders to contribute, rather than a single option.

French European Affairs Minister Jean Leonetti confirmed late on Monday that euro zone officials were eyeing a bank tax to raise extra money to help Greece, which needs a further 115 billion euros in funding by mid-2014 on top of a 110 billion euro EU/IMF bailout agreed last year.

The French and German banking federations protested against the idea, saying it was the wrong approach to help Greece.

A source familiar with the talks said a small levy on banks could raise 10 billion euros a year, yielding the 30 billion euros over three years targeted by Germany, which has led the drive for private sector involvement in a new Greek program.

A tax would appear to have the drawback of lumping together banks that have an exposure to Greece and those that do not, but the source said it could be structured so that the main burden fell on those with Greek holdings. He did not say how.

OPTIONS

A banking source and a national government official said the inclusion of a tax proposal was aimed at pressuring banks and insurers into agreeing on an acceptable form of voluntary private sector involvement in supporting Greece.

Talks on this led by the International Institute of Finance (IIF), a banking lobby, were continuing in Rome on Tuesday.

“‘If you don’t come up with anything we can live with, we will impose a tax’, is the threat that is hanging over the talks. This makes the negotiations even more difficult,” one banking source said.

Another banking source said the IIF-led talks would continue after Thursday and could turn into a forum for discussing an eventual restructuring of Greece’s 350 billion euro debt — nearly 160 percent of annual economic output.

The options paper, dated July 16 but which officials said still reflects the wide open state of debate, showed that a tax on the financial sector was the only proposal deemed unlikely to cause a selective default.

It suggested the levy could be combined with a commitment by Greek banks to roll over their big holdings of government debt, and an extension of the maturity and a further reduction of the interest rate on euro zone loans to Athens.

The document gave no figure but officials have said they are considering extending the loans to 30 years and cutting the interest rate to 3.5 percent from the original 5.5 percent, which was reduced to 4.5 percent in March.

A German newspaper reported on Tuesday that a panel of economic advisors to the government favored a “haircut” on Greek debt of around 50 percent in view of the worsening euro zone debt crisis.

The European Central Bank has insisted that any solution must avoid causing a credit event, which would trigger a payout of default insurance, or a full or selective default.

ECB President Jean-Claude Trichet warned again this week that the central bank would not accept Greek government bonds as collateral to obtain liquidity in such circumstances, forcing euro zone governments to rescue Greek banks.

Another ECB policymaker, Ewald Nowotny of Austria, appeared to offer a glint of flexibility, saying a solution could depend on the duration of a selective default. But his spokesman said later he stood by the central bank’s official line.

“There are some proposals that deal with a very short-lived selective default situation that would not really have major negative consequences,” Nowotny told CNBC in an interview broadcast on Tuesday.

The euro zone paper said other options such as an EU-funded Greek government buy-back of its own debt on the secondary market, a German-proposed bond swap for longer maturities and a French plan for a voluntary rollover of maturing Greek debt would all generate additional costs for official lenders.

In those scenarios, euro zone governments would have to provide billions of euros to recapitalize Greek banks and provide them with collateral to obtain ECB funding, it showed.

A buy-back of Greek debt would do most to reduce Athens’ debt mountain and make it more sustainable. But it would also be the most costly option for the public purse, requiring billions of euros in additional euro zone loans on top of support for Greek banks and ECB collateral, the paper showed.

Another EU source said the outcome of Thursday’s meeting was likely to be a mix of several options, with a bank tax, some form of debt swap and substantial extra loans to Greece from the euro zone’s EFSF rescue fund.

(Additional reporting by Philipp Halstrick in Frankfurt, Emilia Sithole-Matarise in London, Philip Blenkinsop and Jan Strupczewski in Brussels, Paul Carrel in Frankfurt, Sarah Marsh and Gernot Heller in Berlin and Jeff Mason in Washington; writing by Paul Taylor; editing by Janet McBride)

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Airline shares fall as investors expect fall slowdown

July 19, 2011 in Global Markets News


ATLANTA |
Mon Jul 18, 2011 1:43pm EDT

ATLANTA (Reuters) – Shares of major U.S. airlines fell to one-year lows on Monday on uncertainty over the economy and expectations that travel will slow down in the fall.

“Some of the big airlines are trading close to recessionary levels,” said Ray Neidl, a senior aerospace sector specialist with Maxim Group. “The market does look three or four months ahead to the slow fall season.”

Among major airlines, Delta Air Lines Inc (DAL.N), Southwest Airlines, AMR Corp’s (AMR.N) American Airlines and US Airways Group (LCC.N) hit 52-week lows. Industry leader United Continental Holdings (UAL.N) was down 3.8 percent at $20.06, and the Arca airline index .XAL was down 4.7 percent.

The overall market was also lower, and some analysts said airlines were also suffering because of nervousness over the U.S. congressional stalemate ahead of the August 2 deadline for an increase in the United States’ borrowing limit.

“If the debt ceiling isn’t raised, the airlines will see a substantial rise in interest rates and interest costs, making the firms less valuable,” Morningstar analyst Basili Alukos said.

Major U.S. airlines will start reporting earnings this week, with AMR Corp’s (AMR.N) American Airlines to disclose on Wednesday.

SkyWest Inc (SKYW.O), a provider of regional flights to big airlines, warned after markets closed on Friday that it expected breakeven results for the second quarter and said results for the rest of the year would probably be markedly lower than it expected. Its stock was down nearly 17 percent at $12.28 in afternoon trading on Monday.

Neidl said he expected strong results from most major U.S. airlines, but he added that carriers were not getting enough fare increases to cover high fuel prices.

Airlines were able to raise fares in the first quarter, Neidl said, but you “saw that slow down dramatically” in the second quarter. Economic uncertainty could make future fare increases difficult and bring discounting this fall, he added.

A new systemwide U.S. fare increase appeared to falter on Monday. Southwest Airlines and American both rolled back initial matches of a domestic rise of up to $10 roundtrip initiated by industry leader United Continental on Friday, according to Rick Seaney, chief executive of FareCompare.com.

“Most of the news that’s been coming out has a nervous market getting even more nervous for the market and for the airline sector,” Neidl said.

(Reporting by Karen Jacobs, additional reporting by Kyle Peterson in Chicago)

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Pressure rises for Greek debt buy-back, swap

July 18, 2011 in Banking Industry News


By Annika Breidthardt and George Georgiopoulos

ATHENS/BERLIN |
Sun Jul 17, 2011 8:01pm EDT

ATHENS/BERLIN (Reuters) – German Chancellor Angela Merkel called on Sunday for private investors to make a major contribution to bailing out Greece, as pressure rose for radical action to cut the country’s debt burden.

Officials proposed a range of schemes for Europe’s bailout fund, the European Financial Stability Facility, to finance a buy-back or a swap in which private owners of Greek government bonds — banks, insurers and other investors — would accept cuts in the face value of their holdings.

European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued.

“This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily,” Bini Smaghi told Sunday’s To Vima newspaper in an interview.

Wolfgang Franz, head of Germany’s “wise men” economic advisers to the government, said the huge size of Greece’s 340 billion euro ($480 billion) debt pile meant it was “inevitable and justified” for the private sector to accept losses.

“One possibility would be that the current EFSF euro rescue mechanism swaps — at a significant discount — Greek bonds into bonds it issues and guarantees,” Franz was quoted as telling Focus magazine at the weekend.

Alarmed by the spread of market jitters over Greece to Italy and Spain, where bond yields have surged in the past 10 days, European governments are struggling to put together a second bailout of Greece that would supplement a 110 billion euro rescue launched in May last year.

Germany is insisting private investors be involved in the second bailout, and Merkel indicated on Sunday that if they did not voluntarily agree to a major contribution now, they might eventually be forced into a more costly solution to the crisis.

“The more we can involve private creditors now on a voluntary basis, the less likely it is that we will have to take next steps,” Merkel told public broadcaster ARD without elaborating on what those steps might be.

Three weeks of talks between European officials and the private sector have failed to reach a deal on the second bailout of Greece, but the lobby group representing commercial banks said on Sunday that some progress had been made.

“Progress has been made and the discussions are continuing,” the Institute of International Finance said in a brief statement. It said the talks were focusing on “several options related to Greece’s financing needs and longer-term debt sustainability.

Last week, European Council President Herman Van Rompuy announced that euro zone leaders would hold a summit in Brussels on Thursday this week to discuss the rescue of Greece.

But Merkel, while describing the summit as “urgently necessary,” said she would only attend if lower-ranking officials had already prepared a clear rescue plan. “I will only go there if there is a result,” she said.

BUY-BACK

Other options on the table include an extension of the maturities of Greek bonds. But German weekly magazine Der Spiegel, citing finance ministry sources, reported at the weekend that a debt buy-back had become the option most likely to attract a consensus.

Greece could cut its public debt by 20 billion euros if it bought back its sovereign bonds at market prices as part of a rescue deal, the magazine said.

Legal and technical obstacles may lie in the way of any step to involve the private sector in helping Greece. Bini Smaghi acknowledged, for example, that current EFSF rules did not provide for it to buy bonds from the secondary market; changing the rules might require approval by national parliaments.

Another potential obstacle is the ECB, since the central bank’s president Jean-Claude Trichet has opposed any measure that would cause credit rating agencies to declare Greece in default, even on a limited basis.

But in an interview to be published on Monday, Trichet held out the possibility that a default could be managed smoothly. He said the ECB would stop accepting defaulted bonds as collateral in its money market operations — a blow to Greek banks which depend on the operations for funding — but suggested governments might provide other collateral.

“The governments would then have to step in themselves to put things right…The governments would have to take care the Eurosystem is presented with collateral that it could accept,” Trichet told the Financial Times Deutschland without elaborating.

A deal on a private sector contribution to Greece would probably not by itself come close to solving the problem; officials and private economists estimate the country’s debt would have to be cut by about half, to 80 percent of gross domestic product, to make it manageable in the long term.

As part of the second bailout, officials are also looking at other measures to help Greece including up to 60 billion euros of additional emergency loans from European governments and the International Monetary Fund; steps to recapitalise Greek and European banks; and ways to stimulate economic growth in Greece.

As a key shareholder in the IMF, the United States is important to continued IMF support of Greece. U.S. Secretary of State Hillary Clinton, visiting Athens on Sunday, voiced support for Greece’s effort to overcome its crisis, saying it was taking hard steps needed for future growth.

But former U.S. Treasury Secretary Lawrence Summers, writing in a column contributed to Reuters, said Europe needed to act much more aggressively than it had done so far to prevent the Greek crisis from damaging both the region’s single currency and the global economic recovery.

He recommended steps including sharp cuts in interest paid on bailout loans, allowing countries to buy European Union guarantees for their issues of new debt, and a menu of options for private investors to become involved.

“It is to be hoped that European officials can engineer a decisive change in direction but if not, the world can no longer afford the deference that the IMF and non-European G20 officials have shown toward European policymakers over the last 15 months,” Summers wrote.

Also on Sunday, Portuguese Prime Minister Pedro Passos Coelho said his government would impose additional spending cuts in the next four weeks to address a budget slippage it had discovered and meet the target for cutting its budget deficit under a 78 billion euro bailout by the EU and the IMF.

He said the slippage of some 2 billion euros would be partly covered by an extraordinary tax which the government had already announced that would bring 1.25 billion euros to state coffers. The rest would come from spending cuts.

(Writing by Andrew Torchia; Editing by Jon Boyle)

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UPDATE 1-ECB’s Bini Smaghi favours EFSF debt buybacks

July 17, 2011 in Banking Industry News


Sat Jul 16, 2011 2:44pm EDT

* Says EFSF bond buybacks could be helpful tool

* Believes Greek banks must seek mergers with foreign peers

* Asks Greek political parties to support reforms

(Adds quotes, background)

By George Georgiopoulos

ATHENS, July 16 (Reuters) – Allowing the EFSF bailout
mechanism to buy back bonds from the secondary market would help
deal with Europe’s debt crisis, European Central Bank Executive
Board member Lorenzo Bini Smaghi told a Greek newspaper.

Euro zone policymakers are exploring ways to extend a rescue
deal for overborrowed Greece and give it more time to repair its
public finances. At the same time, authorities are trying to
prevent the debt crisis from escalating in the bloc’s periphery.

One option being looked at is enabling the European
Financial Stability Facility (EFSF) to provide funds for buying
back bonds from private investors, a move that could help the
country lighten its debt load.

“We have said that a useful option would be for the
temporary EFSF mechanism to buy bonds in the secondary market.
This option, however, is not included in the design of the EFSF.
If there was a way to change this, it would be useful,” Bini
Smaghi told Sunday’s To Vima newspaper in an interview.

“This would allow the private sector to sell bonds at market
prices, which are currently below nominal value. At the same
time, the public sector could benefit monetarily.”

Euro zone officials have rattled markets by struggling to
reach a deal on how to involve private sector investors in
tackling Greece’s debt mountain, a key demand of Germany before
it signs off on more support for Athens.

“Governments have asked for the private sector’s involvement
(PSI). We believe that if this takes place it must be voluntary
and based on a credible adjustment programme by Greece. If there
is a PSI it must be designed by governments,” he was quoted as
saying. “It must not constitute a credit event.”

Bini Smaghi said Greece needs to do in two years what it has
not done in 10 to correct its fiscal derailment and regain
market trust.

The government last month passed a five-year austerity
package of spending cuts, tax rises and state asset sales to
ensure continued funding under a current EU/IMF bailout scheme.

“Markets do not trust Greece and the only ones left to fund
it are European taxpayers. Experience shows that the more you do
in the first two years, the better it is for the programme’s
success,” Bini Smaghi said.

He said failure to solve Greece’s debt problem could
heighten risks for other countries as well, urging the political
opposition to support the government’s efforts to emerge from
the crisis and support economic reforms.

“It is a shame that the Greek political opposition does not
offer support so that the economy can achieve what is needed in
the next years to emerge from the crisis,” Bini Smaghi said.
“Political parties must place Greece’s interest above theirs.”

He also told the paper Greek banks should sell assets abroad
and seek mergers with foreign lenders to attract capital.

“I am not proposing the buyout of all Greek banks from
foreign ones, but if you could attract foreign banks it would
help growth,” he said.

(Editing by David Cowell)

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ECB’s Bini Smaghi favours EFSF debt buybacks

July 17, 2011 in Banking Industry News


By George Georgiopoulos

ATHENS |
Sat Jul 16, 2011 2:55pm EDT

ATHENS (Reuters) – Allowing the EFSF bailout mechanism to buy back bonds from the secondary market would help deal with Europe’s debt crisis, European Central Bank Executive Board member Lorenzo Bini Smaghi told a Greek newspaper.

Euro zone policymakers are exploring ways to extend a rescue deal for overborrowed Greece and give it more time to repair its public finances. At the same time, authorities are trying to prevent the debt crisis from escalating in the bloc’s periphery.

One option being looked at is enabling the European Financial Stability Facility (EFSF) to provide funds for buying back bonds from private investors, a move that could help the country lighten its debt load.

“We have said that a useful option would be for the temporary EFSF mechanism to buy bonds in the secondary market. This option, however, is not included in the design of the EFSF. If there was a way to change this, it would be useful,” Bini Smaghi told Sunday’s To Vima newspaper in an interview.

“This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily.”

Euro zone officials have rattled markets by struggling to reach a deal on how to involve private sector investors in tackling Greece’s debt mountain, a key demand of Germany before it signs off on more support for Athens.

“Governments have asked for the private sector’s involvement (PSI). We believe that if this takes place it must be voluntary and based on a credible adjustment program by Greece. If there is a PSI it must be designed by governments,” he was quoted as saying. “It must not constitute a credit event.”

Bini Smaghi said Greece needs to do in two years what it has not done in 10 to correct its fiscal derailment and regain market trust.

The government last month passed a five-year austerity package of spending cuts, tax rises and state asset sales to ensure continued funding under a current EU/IMF bailout scheme.

“Markets do not trust Greece and the only ones left to fund it are European taxpayers. Experience shows that the more you do in the first two years, the better it is for the program’s success,” Bini Smaghi said.

He said failure to solve Greece’s debt problem could heighten risks for other countries as well, urging the political opposition to support the government’s efforts to emerge from the crisis and support economic reforms.

“It is a shame that the Greek political opposition does not offer support so that the economy can achieve what is needed in the next years to emerge from the crisis,” Bini Smaghi said. “Political parties must place Greece’s interest above theirs.”

He also told the paper Greek banks should sell assets abroad and seek mergers with foreign lenders to attract capital.

“I am not proposing the buyout of all Greek banks from foreign ones, but if you could attract foreign banks it would help growth,” he said.

(Editing by David Cowell)

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Europe at impasse on Greece, IMF backs investor role

July 14, 2011 in Banking Industry News


By John O’Donnell and Dina Kyriakidou

BRUSSELS/ATHENS |
Wed Jul 13, 2011 7:35pm EDT

BRUSSELS/ATHENS (Reuters) – The IMF joined Germany on Wednesday in pushing for private sector investors to help cut Greece’s debt mountain as the euro zone sought to break an impasse on how and when to grant the country urgent aid.

With Germany hanging back, euro zone officials struggled even to set a date for leaders to meet to agree a way forward, raising fears financial markets might exploit a policy vacuum with a new onslaught on the bloc’s high debtors.

“The principle of having a euro chiefs’ meeting is accepted by the main players, including Germany,” said one EU diplomat, adding that it was likely to happen next week despite earlier signals from Berlin that there was no rush to finalize a second package of aid.

First, however, countries have to agree how to involve private sector investors in tackling Greece’s debt burden, a key demand of Germany before it signs off more support for Athens.

The International Monetary Fund backed the idea, saying in its latest review of Greece’s troubles: “Comprehensive private sector involvement is appropriate, given the scale of financing needs and the desirability of burden sharing.

“Greece’s debt service capacity may also need to be bolstered by combining appropriate PSI and official support,” IMF officials wrote, referring to private-sector involvement.

Ratings agency Fitch cited the uncertainty for private bondholders and foot-dragging on giving more official aid to Greece when it downgraded the country further into junk territory on Wednesday.

Markets have been rattled by the failure of finance ministers to reach agreement earlier this week.

Italian central bank chief Mario Draghi, soon to take the helm of the European Central Bank, and Ireland’s premier both said a definitive plan was needed and quickly — echoing a strongly-worded attack from Greece’s prime minister earlier in the week.

The market spotlight was taken off the euro zone, at least temporarily, after the Federal Reserve Chairman Ben Bernanke said the U.S. central bank could resort to more monetary stimulus if a sluggish economy weakens further.

Fitch had also offset an earlier downgrade of Ireland to junk status by Moody’s when it said Italy could keep its credit status by sticking to fiscal targets.

But many remained on edge after a market attack on Italy — the euro zone’s third biggest economy — raised fears that its needs would prove too great to meet if it got sucked into the crisis.

“Moody’s problem is not with Ireland, Ireland’s problem is with Europe,” Prime Minister Enda Kenny told parliament, as the cost of insuring Irish debt climbed.

“There is no point in having a meeting that won’t bring about a conclusion in a comprehensive sense to something that is not going to go away unless it is dealt with.”

WRANGLING

Should the leaders meet, they will need to pin down how private owners of Greek government bonds can be persuaded to shoulder a portion of the cost of a new rescue package, a key demand of Germany, Europe’s biggest economic power.

They will weigh up the potential impact on markets if securing such involvement is declared a debt default by ratings agencies, as expected.

Meanwhile countries have appeared to be subsiding into a bout of internal wrangling.

“Markets reacted very badly after euro zone finance ministers could not reach an agreement,” an EU diplomat said, referring to a finance ministers’ meeting on Monday. “If they cannot agree, we take the fight to the highest level.”

Herman Van Rompuy, who presides over meetings of EU leaders, had originally informed ambassadors he wanted to hold a summit on Friday evening.

But Germany, which one EU official said was angry about being “backed into a corner,” was reluctant, pushing the date of the gathering into next week.

STRESS TESTS

Another worry for the leaders are the results of stress tests of European banks.

In Italy, bank stocks and the bond market have been hit by growing concerns that it could be next in line after Greece, Ireland and Portugal to be sucked into the crisis.

Draghi said Italian banks would comfortably pass the tests but echoed Kenny’s call for a comprehensive EU response.

“We have to recognize that management of the financial crisis has not gone smoothly with partial and temporary interventions,” he said in a speech.

“We must now bring certainty to the process by which sovereign debt crises are managed, by clearly defining political objectives, the design of instruments and the amount of resources,” he said.

There are two main proposals on the table for securing the private sector’s involvement in reducing Greece’s debt burden.

One would be to buy back Greek bonds at a discount. Another is to swap Greek debt for longer-dated securities with a lower coupon.

However, it remains unclear how a buy-back of Greek bonds would be financed. It could involve using the 440 billion euro ($625 billion) European Financial Stability Facility (EFSF).

The ECB remains opposed to any option that would be deemed a default.

ECB policymaker Jens Weidmann said the EFSF should not be used to buy bonds in the secondary market and it would be unacceptable for the ECB to accept Greek debt as collateral if the country were in default.

“Containment of the crisis should not mean that we undermine our principles. We must draw a red line,” he told Die Zeit newspaper.

But Germany’s finance ministry said funds from the euro zone’s rescue mechanism could in theory be used by members of the bloc to buy back their own bonds, suggesting a shift in Berlin’s stance.

(Additional reporting by Julien Toyer and Luke Baker in Brussels, and by Noah Barkin and Gernot Heller in Berlin; Writing by Mike Peacock and John O’Donnell; Editing by Mike Peacock/Ruth Pitchford)

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HK, China shares rise on GDP, bank earnings

July 13, 2011 in Banking Industry News


Wed Jul 13, 2011 12:41am EDT

* Hang Seng index up 1 percent, Shanghai Comp up 1.2 percent

* AgBank results lift shares 4.2 pct, boost banking sector

* China Q2 GDP at 9.5 percent, beats slowdown fears

(Updates to midday)

By Vikram Subhedar and Clement Tan

HONG KONG, July 13 (Reuters) – Hong Kong and Shanghai shares
staged a mild rebound on Wednesday as economic data suggested
China was in little danger of a hard landing while a strong
earnings forecast from a large lender lifted the beleaguered
banking sector.

China’s economy grew 9.5 percent in the second quarter,
countering worries that the country was headed for a sharp
slowdown although the numbers suggests the government will stay
on course to tighten monetary policy.

The Hang Seng index rose 1 percent to 21,868.8 by the
midday trading break with near-term support at its June low at
21,508. Turnover on the exchange eased from Tuesday’s levels,
suggesting investors were not buying in a big way.

The benchmark is coming off its worst two-day decline in 17
months on the back of a sluggish banking sector, a worsening
euro zone debt crisis and a Moody’s report that reignited fears
about Chinese corporate governance.

On the mainland, the Shanghai Composite was up 1.2
percent after posting its biggest single-day drop in 7 weeks on
Tuesday.

“The move yesterday was a little exaggerated. The rebound
this morning compensates for that, but it also shows investors
remain jumpy,” said Zhang Qi, an analyst with Haitong Securities
in Shanghai.

China’s No.3 lender, Agricultural Bank of China
led a bounce in banks after it forecast first-half net profit
rising by more than 45 percent.

Shares were trading up 4.2 percent and pulled up shares of
larger rivals China Construction Bank , up 2.4 percent,
and Industrial Commercial Bank of China , up 2
percent.

Chinese banking shares have come under pressure as
uncertainties around local government debts kept investors at
bay, despite valuations at or near the troughs seen during the
depths of the financial crisis in 2008.

CCB and ICBC shares now trade at 6.7 times and 7.3 times
forward-12 month earnings multiples, according to Thomson
Reuters Starmine, lower than levels seen in the post-Lehman
aftermath.

While more clarity on bad loans will be required for
sustained strength in banks, the biggest weights on the
benchmarks, strong corporate earnings and easing worries about a
Chinese hard lending could pave the way for a rebound in Asia’s
worst performing markets this month.

“On a 12 months forward looking view, we believe July is the
best month to build long positions if one has not done
so already in June,” said Wendy Liu, head of China research at
RBS in Hong Kong.

(Editing by Jonathan Hopfner)

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Alcoa Q2 profit jumps on metal, alumina prices

July 12, 2011 in Global Markets News


By Steve James

NEW YORK |
Mon Jul 11, 2011 7:16pm EDT

NEW YORK (Reuters) – Alcoa Inc, America’s biggest aluminum producer, posted a big jump in second-quarter profit on Monday, matching Wall Street estimates, partly due to soaring prices for the metal and alumina, its raw material.

But some analysts said a recent softening of aluminum prices might affect the company’s third-quarter results and Alcoa’s stock slipped 7 cents to $15.84 in after-hours trade on the New York Stock Exchange.

“The real issue is going to be looking ahead because the third-quarter aluminum price could be down 5 cents a pound,” said Charles Bradford, of Bradford Research in New York.

“I think (analysts) are going to have to take the third-quarter estimates down.”

Indeed, many analysts had already lowered their estimates for the second quarter as the price of aluminum has slipped in recent weeks. However, Alcoa’s earnings matched the consensus of 32 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 27 percent to $6.6 billion, beating Wall Street estimates of $6.3 billion.

But the company said strong demand for aluminum and higher prices were offset by higher energy and materials costs and a weaker U.S. dollar, which makes it more expensive to import raw materials.

“The big story here is the beat on the revenue line — $6.6 billion — that was certainly ahead of our expectations,” said Bridget Freas, an analyst at Morningstar, in Chicago.

“Even though they’ve had a little more cost than expected during the quarter, volumes have improved significantly,” Freas said.

On a conference call with analysts, Alcoa’s Chief Executive Officer Klaus Kleinfeld said demand growth for aluminum was continuing to grow, especially in the aerospace sector.

“Although the economic recovery is uneven, the overall outlook for Alcoa — and for aluminum — remains positive,” he said, adding that Alcoa still projects global aluminum demand will grow 12 percent this year and will double by 2020.

“The aerospace sector has positive momentum and we expect 7 percent aluminum sales growth globally this year.”

Kleinfeld said that at this year’s Paris Air Show, planemakers Airbus and Boeing received more than double the number of orders than they had expected. There was a backlog of 7,300 aircraft orders around the world, he said, noting that Alcoa recently signed a multi-year contract with Airbus worth about $1 billion to supply aluminum-lithium alloys for aircraft manufacture.

“We also have a positive view of the auto industry,” — another big buyer of lighter aluminum to build more fuel-efficient vehicles, said Kleinfeld.

Alcoa expects aluminum sales to the sector to grow by 4 percent to 8 percent globally this year and by 8 percent to 11 percent in North America.

For the heavy truck and trailer industry, Kleinfeld said he sees it growing by a whopping 60 percent to 65 percent in North America this year and by 7 percent to 12 percent globally.

The only dark spot is the building and construction industry, which has not come back in the industrialized world since the 2008 recession.

“It’s a mix of two worlds — it’s pretty much dead in Europe and North America,” where the sector is expected to decline this year, he said. But in China, which is building up its infrastructure, commercial construction demand for aluminum is expected to grow by 10 percent to 12 percent.

In its earnings release, Alcoa — often viewed as a bellwether of the U.S. economy — said net earnings were $322 million, or 28 cents per share, compared with $136 million, or 13 cents per share in the same quarter of 2010. The Pittsburgh-based company said income from continuing operations, excluding the negative impact for special items of $38 million, was $364 million, or 32 cents a share.

See graphic: r.reuters.com/mac62s

Alcoa’s average realized price per metric ton of aluminum rose 23 percent in the second quarter to $2,830 from $2,309 a year earlier. Shipments of aluminum products rose 7 percent to 1.268 million tonnes from 1.182 million.

Aluminum sold in a range of $2,500 to $2,600 a tonne on the London Metal Exchange during the second quarter, up from $1.977 in the same quarter a year earlier. On Monday it was selling at around $2,478, or $1.12 a pound.

Alcoa reported a 7-percent hike in realized prices for alumina — the raw material from which aluminum metal is smelted. Alumina production in the second quarter increased from the previous quarter to a record 4.1 million metric tons.

(Reporting by Steve James, editing by Bernard Orr)

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Earnings surprises may spark rally

July 11, 2011 in Banking Industry News


By Caroline Valetkevitch

NEW YORK |
Sun Jul 10, 2011 11:13am EDT

NEW YORK (Reuters) – Wall Street heads into earnings season this week playing a typical game: Worrying about results a lot, and then rallying on pleasant surprises.

Analysts have been lowering earnings estimates of late and nervousness about the U.S. economic picture abounds, especially after Friday’s poor June jobs report.

However, profit growth could still be strong in the second quarter — and that could boost stocks. The Standard Poor’s 500 .SPX fell 0.4 percent in the second quarter, but rallied in recent days on hopes for economic improvement.

Over the last month, analysts have revised downward their earnings estimates for SP 500 companies, with the mean change in earnings estimates a negative 6.4 percent, according to Thomson Reuters StarMine data.

“I think there’s going to be a lot of anxiety going into it, and I think companies are going to continue what they’ve done for the last few quarters: Put out better-than-expected numbers, and guidance should be OK,” said Scott Billeaudeau, portfolio manager at Fifth Third Asset Management, in Minneapolis.

SP 500 components’ earnings are expected to have increased an average of 7.3 percent in the second quarter from a year ago, down from first-quarter growth of 18.9 percent, Thomson Reuters data showed.

But the number could jump if most companies beat analysts’ forecasts. Early estimates for first-quarter profit growth were at about 13 percent.

“The general economic data is suggesting some softness in the overall economy both globally and in the U.S. … so that drives somewhat more realistic expectations for companies,” said Natalie Trunow, chief investment officer of equities of Calvert Investment Management in Bethesda, Maryland, which manages about $14.8 billion.

This week, investors will get a steady stream of economic indicators along with the earnings reports. The international trade deficit for May and minutes from the Federal Reserve’s June meeting will be released on Tuesday. Retail sales and the Producer Price Index for June will come out on Thursday, followed by the Consumer Price Index for June on Friday.

BANKS UNDER THE GUN

Financial services companies have seen the biggest downward revisions in earnings estimates in the last 30 days, with banks taking some of the biggest hits, including Goldman Sachs (GS.N) and Morgan Stanley (MS.N).

JPMorgan Chase (JPM.N) will be the first of the big banks to report, with results due on Thursday. Results from top tech player Google (GOOG.O) also are expected Thursday, while aluminum company Alcoa (AA.N) unofficially starts the season with earnings after the bell on Monday.

The SP financial index .GSPF dropped 6.3 percent in the second quarter as worries escalated about the impact of the euro-zone debt problems on the global economy. The mean change for earnings estimates in the sector in the last 30 days is a negative 34.4 percent, StarMine data showed.

DISASTERS AND DISAPPOINTMENTS

Analysts have also said the aftermath of Japan’s earthquake, months of extraordinary weather in the United States, and rising food and commodity prices took a toll on companies in the second quarter.

StarMine analysis showed companies, including Platinum Underwriters Holdings (PTP.N), were likely to disappoint with results because of tornado damage claims.

But companies have kept costs in check and that should support stronger results, while also giving a boost to stock prices, Billeaudeau said.

“I think things underneath the macro, global, political noise continue to percolate,” said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs. But “you’re going to see higher-quality companies showing the surprises this quarter (versus) last.”

Based on his own analysis, he expects industrials and utilities to surprise to the upside, especially for companies involved in “machinery, and roads and rails” and for electric utilities.

On the flip side, he sees a high probability for earnings disappointments in health care, consumer staples and materials sectors.

An SP health-care index .GSPA led gains in the SP 500 in the first half of the year as the market shifted to defensive shares, with the sector up 14 percent since the start of the year, followed by an SP energy index .GSPE, up 11 percent.

The health-care sector may be subject to profit-taking once earnings start after its strong run so far this year, according to Tobias Levkovich, Citigroup’s chief U.S. equity strategist, who made the point in a research note.

Some analysts expect total upside surprises to be less than in previous quarters, with the percentage of companies beating expectations likely to fall in the mid-60s percentage range, below the 70 percent range, where it has been.

SP 500 earnings overall could beat estimates by a “modest” 1 percent to 3 percent, Charles Blood, senior market strategist at Brown Brothers Harriman, wrote in a research note.

“Margins typically rise in the second quarter,” Blood wrote, “but our primary concern and one of the biggest investment debates, is, ‘How much room do companies have for further improvement?’”

(Reporting by Caroline Valetkevitch; Editing by Jan Paschal)

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