Speculative bets against the euro this month have taken place on an unprecedented scale and yet the currency somehow continues to defy gravity against the dollar.
Statistics published Friday by the U.S. Commodity Futures Trading Commission showed a record number of net bets against the common currency in the week ended Jan. 24. This happened as talks between Greece and its private-sector creditors dragged on and as economic indicators reinforced expectations of a downturn in Europe.
It was the fifth straight week in which the data showed a record negative bias among futures traders against the euro. At $28.1 billion, the net balance was also 10% higher than in the previous week and had more than doubled since September.
And yet, the euro has been mostly stronger in 2012, bouncing off a 16-month low near $1.26 in mid-January versus the buck to trade above $1.31 on Monday, leaving currency investors scratching their heads.
Indeed, any outstanding negative bets made against the euro since Dec. 13, when it was last trading around current levels, are almost certainly under water.
So why is the euro continuing to hold up in the face of such seeming unpopularity? In large part, it is the fact that the regularly quoted CFTC numbers don't paint the entire picture. Investors and strategists say the CFTC positioning data shouldn't be used solely as a guide for the wider $4 trillion-a-day global foreign-exchange market. That's because they cover only speculative trades on the Chicago Mercantile Exchange and therefore represent only a part of overall activity.
The fact the CFTC weekly report points to a high number of negative euro bets doesn't necessarily mean the rest of the market is similarly ill-disposed, analysts say. Some strategists suggest that speculators may have taken advantage of the recent squeeze higher in the euro. That has allowed them to increase the size of their negative euro bets at a more attractive price.
Others suggest that some speculative traders holding short positions haven't joined the recent rally because they feel in the longer term the euro should be trading lower.
"Speculative participants are very much looking through the recent rise in euro crosses and have held on to their short positions. They are looking towards the weak euro-zone growth outlook and further European Central Bank monetary-policy easing going forward," said Michael Sneyd, currency strategist at BNP Paribas in London.
Other gauges of currency-market positioning suggest negative euro bets aren't as extreme as the CFTC data make out. For example, custodial banking giant BNY Mellon Corp.'s client flow, which is based on an analysis of more than $25.8 trillion in assets under BNY Mellon's custody and administration, suggests its customers have neither increased nor reduced their euro positioning since the start of the year.
"I don't think there has been a tidal wave of people buying euros. People are sitting on their hands," said Simon Derrick, senior currency strategist at BNY. "The fact that positioning has remained unchanged through January indicates how labyrinthine the different negotiations are," he said, with reference to Greece's debt-restructuring talks and euro-zone fiscal compact.
A gauge of positioning that looks at the options market also shows less-extreme sentiment against the euro. Risk-reversals indicate how much the market is biased one way or another in terms of "put" and "call" options.
"Risk reversals are actually showing the opposite of what the CFTC data have been indicating. They were at extremes in November, but this has been unwound. This suggests that speculators are selling euros via spot than through options," Mr. Sneyd said. He added that over the past few years risk reversals have been a leading indicator for turning points in the euro's exchange rate against the dollar.
That points to a continued rally for the euro, placing even more bets against it under water.
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Tuesday, 31 January 2012
Yen Jumps on Dollar, Euro
The yen surged to its highest level in nearly five months against the dollar and rose by more than a percent against the euro, as investors fleeing Europe's debt crisis took shelter in Japan's currency despite warnings from policy makers that yen strength was unwarranted.
Greece's efforts to get private bondholders to accept a write-down hit a standstill, just as European Union leaders assemble in Brussels to hash out details on a new fiscal accord. Fears that a deal could fall through led investors to abandon the euro, and shift money out of stocks into the relative safety of U.S. Treasurys and the dollar.
Yet it was the yen that stole the spotlight, with its gains outpacing the greenback. With the U.S. currency still suffering the after-effects of last week's Federal Reserve policy decision—in which the central bank vowed to keep borrowing costs low until 2014 at least—Japan's currency emerged as the safe-harbor of choice for traders.
A broadly firmer dollar recovered nearly two cents from Friday's six-week low against the euro. Yet analysts say the greenback's slide to its lowest level since October 2011 against the yen reflected fears of more Fed easing, which is a looming risk if Europe's debt crisis worsens. Meanwhile, the single currency weakened to its lowest level since Sept. 15 against the Swiss franc.
The yen and the franc "are moving in tandem," said Tommy Molloy, chief dealer at FX Solutions, frustrating the efforts of Swiss and Japanese policy makers trying to keep currency strength from undercutting demand for exports. "Everybody likes the yen because it's not the euro."
European debt fears are forcing investors to buy "anything but the euro," Mr. Molloy said. "The ability of the Bank of Japan to defend a line in the sand seems suspect at best given the price action."
In late-afternoon trade, the euro was at $1.3128 compared with $1.3219 late Friday. The dollar was at ¥76.30, compared with ¥76.71, while the euro was at ¥100.17, compared with ¥101.45. The pound traded at $1.5701 from $1.5729, while the dollar bought 0.9181 Swiss franc from 0.9140 franc.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 79.16, up 0.4%.
Concerns that a Greek default could reverberate across the 17-nation currency bloc have sent Portugal's borrowing costs skyrocketing, even as government yields in Spain and Italy have fallen from recent peaks. The European Central Bank's record near €500 billion ($660.95 billion) tender in December has eased a liquidity crunch across the euro zone by infusing banks with massive amounts of cash.
Yet Portugal's fate is linked to the outcome of Greece's negotiations. Even if Greece is able to secure a multibillion deal to write down its debt, the country's commitment to broad economic reforms is in question. Germany has floated the idea of appointing an EU commissioner to oversee Greece's finances, but Greek officials quickly rejected the idea as an imposition on the country's sovereignty.
A parade of leaders assembled at a Brussels summit to finalize an accord on tighter fiscal rules took the opportunity to urge the Hellenic republic to make good on its reform efforts, or risk jeopardizing future funding.
Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago, said that Greece "is the progenitor of the euro zone's debt drama. Given this status, it is pure prudence to have someone from the EU step in to assist with the execution of the reforms."
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Greece's efforts to get private bondholders to accept a write-down hit a standstill, just as European Union leaders assemble in Brussels to hash out details on a new fiscal accord. Fears that a deal could fall through led investors to abandon the euro, and shift money out of stocks into the relative safety of U.S. Treasurys and the dollar.
Yet it was the yen that stole the spotlight, with its gains outpacing the greenback. With the U.S. currency still suffering the after-effects of last week's Federal Reserve policy decision—in which the central bank vowed to keep borrowing costs low until 2014 at least—Japan's currency emerged as the safe-harbor of choice for traders.
A broadly firmer dollar recovered nearly two cents from Friday's six-week low against the euro. Yet analysts say the greenback's slide to its lowest level since October 2011 against the yen reflected fears of more Fed easing, which is a looming risk if Europe's debt crisis worsens. Meanwhile, the single currency weakened to its lowest level since Sept. 15 against the Swiss franc.
The yen and the franc "are moving in tandem," said Tommy Molloy, chief dealer at FX Solutions, frustrating the efforts of Swiss and Japanese policy makers trying to keep currency strength from undercutting demand for exports. "Everybody likes the yen because it's not the euro."
European debt fears are forcing investors to buy "anything but the euro," Mr. Molloy said. "The ability of the Bank of Japan to defend a line in the sand seems suspect at best given the price action."
In late-afternoon trade, the euro was at $1.3128 compared with $1.3219 late Friday. The dollar was at ¥76.30, compared with ¥76.71, while the euro was at ¥100.17, compared with ¥101.45. The pound traded at $1.5701 from $1.5729, while the dollar bought 0.9181 Swiss franc from 0.9140 franc.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 79.16, up 0.4%.
Concerns that a Greek default could reverberate across the 17-nation currency bloc have sent Portugal's borrowing costs skyrocketing, even as government yields in Spain and Italy have fallen from recent peaks. The European Central Bank's record near €500 billion ($660.95 billion) tender in December has eased a liquidity crunch across the euro zone by infusing banks with massive amounts of cash.
Yet Portugal's fate is linked to the outcome of Greece's negotiations. Even if Greece is able to secure a multibillion deal to write down its debt, the country's commitment to broad economic reforms is in question. Germany has floated the idea of appointing an EU commissioner to oversee Greece's finances, but Greek officials quickly rejected the idea as an imposition on the country's sovereignty.
A parade of leaders assembled at a Brussels summit to finalize an accord on tighter fiscal rules took the opportunity to urge the Hellenic republic to make good on its reform efforts, or risk jeopardizing future funding.
Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago, said that Greece "is the progenitor of the euro zone's debt drama. Given this status, it is pure prudence to have someone from the EU step in to assist with the execution of the reforms."
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Megaupload Users Face Possible Deletion of Data
Federal prosecutors are warning users of the now-defunct Megaupload.com website that private server companies could begin deleting files once stored by the file-sharing site as early as Thursday.
The Justice Department moved to shut down the popular site earlier this month, accusing Megaupload.com's owners and operators of running a scheme to violate copyright laws on movies, music and other entertainment.
The company denied the accusations, and users of the site said their data shouldn't be lost as a result of the government's prosecution of Megaupload's executives.
Four men, including Megaupload Ltd. founder Kim Dotcom, were arrested in New Zealand on charges including conspiracy to commit racketeering, conspiracy to commit copyright infringement and criminal copyright infringement. They have denied the charges while they await extradition hearings.
A fifth suspect has been arrested in the Netherlands, and two others have been charged but not yet apprehended by investigators.
Megaupload.com billed itself as a "cyberlocker," a means of storing large data files on distant servers. Federal prosecutors charge that in Megaupload's case, its claim of being a cyberlocker was a cover story for "criminal copyright infringement and money laundering on a massive scale'' that the government says netted the conspirators at least $175 million.
In a letter Friday to the federal judge in Virginia overseeing the case and the lawyers representing the defendants, prosecutors said the government has completed its searches of servers located in Virginia.
According to the indictment, Megaupload leased data-storage space from Carpathia Hosting Inc. and Cogent Communications Inc. Both companies have servers in the Virginia area.
"Now that the United States has completed execution of its search warrants, the United States has no continuing right to access the Mega Servers," the prosecutors wrote in the letter. People who want to access files stored with Megaupload should contact the two companies that operate the servers, Carpathia and Cogent, the prosecutors said in the letter.
"It is our understanding that the hosting companies may begin deleting the contents of the servers beginning as early as February 2, 2012,'' the prosecutors wrote, without specifying exactly how the expected deletions would be conducted.
Investigators have said only a small portion of Megaupload's users were able to store data for a significant period of time, because most data that weren't downloaded in a given time period—up to three months—was automatically deleted.
In a statement posted on its website, Carpathia Hosting said it "does not have, and has never had, access to the content on Megaupload servers and has no mechanism for returning any content residing on such servers."
The company also said the reference in the government's letter to the possible deletion of data beginning Thursday "is not based on any information provided by Carpathia to the U.S. government."
The Justice Department declined to comment beyond the contents of the letter filed in court.
A spokesman for Cogent didn't immediately respond to messages seeking comment.
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The Justice Department moved to shut down the popular site earlier this month, accusing Megaupload.com's owners and operators of running a scheme to violate copyright laws on movies, music and other entertainment.
The company denied the accusations, and users of the site said their data shouldn't be lost as a result of the government's prosecution of Megaupload's executives.
Four men, including Megaupload Ltd. founder Kim Dotcom, were arrested in New Zealand on charges including conspiracy to commit racketeering, conspiracy to commit copyright infringement and criminal copyright infringement. They have denied the charges while they await extradition hearings.
A fifth suspect has been arrested in the Netherlands, and two others have been charged but not yet apprehended by investigators.
Megaupload.com billed itself as a "cyberlocker," a means of storing large data files on distant servers. Federal prosecutors charge that in Megaupload's case, its claim of being a cyberlocker was a cover story for "criminal copyright infringement and money laundering on a massive scale'' that the government says netted the conspirators at least $175 million.
In a letter Friday to the federal judge in Virginia overseeing the case and the lawyers representing the defendants, prosecutors said the government has completed its searches of servers located in Virginia.
According to the indictment, Megaupload leased data-storage space from Carpathia Hosting Inc. and Cogent Communications Inc. Both companies have servers in the Virginia area.
"Now that the United States has completed execution of its search warrants, the United States has no continuing right to access the Mega Servers," the prosecutors wrote in the letter. People who want to access files stored with Megaupload should contact the two companies that operate the servers, Carpathia and Cogent, the prosecutors said in the letter.
"It is our understanding that the hosting companies may begin deleting the contents of the servers beginning as early as February 2, 2012,'' the prosecutors wrote, without specifying exactly how the expected deletions would be conducted.
Investigators have said only a small portion of Megaupload's users were able to store data for a significant period of time, because most data that weren't downloaded in a given time period—up to three months—was automatically deleted.
In a statement posted on its website, Carpathia Hosting said it "does not have, and has never had, access to the content on Megaupload servers and has no mechanism for returning any content residing on such servers."
The company also said the reference in the government's letter to the possible deletion of data beginning Thursday "is not based on any information provided by Carpathia to the U.S. government."
The Justice Department declined to comment beyond the contents of the letter filed in court.
A spokesman for Cogent didn't immediately respond to messages seeking comment.
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Facebook Readies IPO Filing (Video)
Facebook Inc. could file papers for its initial public offering as early as this coming week, people familiar with the matter said, as anticipation mounts for what is likely to be one of the biggest debuts for a U.S. company.
The deal, seen as defining moment for the latest Web investing boom, could raise as much as $10 billion and value the social network between $75 billion and $100 billion, said people familiar with the matter. A valuation of $75 billion would be below earlier expectations.
The website, which in less than eight years has attracted more than 800 million members, has changed the way people across the globe communicate, from organizing political protests to sharing baby pictures.
The Internet giant is close to picking Morgan Stanley to lead the deal, these people said. Wall Street banks, many of them struggling amid a crimp in trading profits, have been jostling for a leading role in the deal, which could yield them tens of millions of dollars in banker fees, potential new business and bragging rights.
A nod for Morgan Stanley would mark a disappointment for rival Goldman Sachs Group Inc., which a year ago was viewed as having an edge to lead the deal. One person familiar with the matter said that while Morgan Stanley would likely land the coveted "lead-left" spot on an IPO financial filing, Goldman would also likely play a significant role.
Spokespeople for Facebook, Morgan Stanley and Goldman Sachs declined to comment.
Facebook Inc. could file papers for its initial public offering as early as this coming week, people familiar with the matter said, as anticipation mounts for what is likely to be one of the biggest debuts for a U.S. company.
The deal, seen as defining moment for the latest Web investing boom, could raise as much as $10 billion and value the social network between $75 billion and $100 billion, said people familiar with the matter. A valuation of $75 billion would be below earlier expectations.
The website, which in less than eight years has attracted more than 800 million members, has changed the way people across the globe communicate, from organizing political protests to sharing baby pictures.
The Internet giant is close to picking Morgan Stanley to lead the deal, these people said. Wall Street banks, many of them struggling amid a crimp in trading profits, have been jostling for a leading role in the deal, which could yield them tens of millions of dollars in banker fees, potential new business and bragging rights.
A nod for Morgan Stanley would mark a disappointment for rival Goldman Sachs Group Inc., which a year ago was viewed as having an edge to lead the deal. One person familiar with the matter said that while Morgan Stanley would likely land the coveted "lead-left" spot on an IPO financial filing, Goldman would also likely play a significant role.
Spokespeople for Facebook, Morgan Stanley and Goldman Sachs declined to comment.
People familiar with the matter have said the company is targeting an IPO sometime between April and June.
A $10 billion Facebook offering would rank fourth among IPOs for U.S. companies, behind Visa Inc., General Motors Co. and AT&T Wireless, according to Dealogic. It would rank Facebook as the biggest U.S. Internet offering ever, replacing Google Inc., which raised $1.9 billion in 2004 at a $23 billion valuation.
At a $100 billion valuation, Facebook would be worth about the same as McDonald's Corp. and nearly half of Google.
Facebook's revenue is driven by its advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook has been able to increase its world-wide advertising revenue from $738 million in 2009 to $3.8 billion in 2011, according to estimates from research firm eMarketer. It isn't known if Facebook is profitable.
Facebook's final valuation will be determined by a variety of factors, people familiar with the matter said, such as investor demand for social media, the IPO market and the health of the European economy.
The IPO will mint a new generation of Silicon Valley millionaires on the level not seen since Google's offering. Some 3,000 people work at Facebook.
An IPO will also test the ability of Chief Executive Mark Zuckerberg, age 27, to manage a global company whose financial performance will be scrutinized every three months by investors. Mr. Zuckerberg started the company in 2004 out of his Harvard University dorm room. Overall, about 500 million users now log into the site daily, according to Facebook.
Mr. Zuckerberg had been reluctant to push forward with an IPO. People familiar with his thinking said he has been fearful of the damage an IPO could do to the company's culture. He wants employees focused on making great products, not the stock price, they said.
But outside forces are partly pushing his hand. Facebook executives began to realize in 2010 that Facebook would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that Facebook start publicly reporting financial information.
Mr. Zuckerberg decided it made more sense for Facebook to go public and reap some financial benefit from an IPO, rather than stay private but have to release its financial information, said people familiar with his thinking.
Leading the Facebook sale would be a huge win for Morgan Stanley, which last year cemented its position as the top Internet stock underwriter by leading the IPOs of LinkedIn Corp., Groupon Inc., and Zynga Inc. The bank's global tech banking team, led by Michael Grimes and Paul Chamberlain, is also based in Menlo Park.
Facebook would cap a recent wave of Web IPOs, some of which have struggled amid growing investor scrutiny of the new Internet companies. But investors and analysts said now could be a good time for a Facebook offering.
This year, the overall market has risen, and on Friday other Internet stocks rallied on news that Facebook would soon file for a deal. "The excitement around Facebook is still enormous," said Max Wolff, an analyst at GreenCrest Capital, which researches companies going public.
The recent IPO climate "hasn't been particularly strong," said Peter Falvey, co-head of the technology banking group at Morgan Keegan & Co. But Mr. Falvey added that with "the recent stock market strength and maybe some green shoots in the economy, there could be a fortuitous window for Facebook."
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BSkyB to Launch New Internet TV Service
British Sky Broadcasting Group PLC said Tuesday it will launch a new Internet-based pay-television service in the first half of 2012 amid mounting competition from Netflix Inc. and Lovefilm, as the U.K.'s biggest pay-TV operator reported a 8.4% jump in first-half net profit on strong demand for its products.
BSkyB, better known to its customers as Sky, said the new service will initially offer access to its movies, and will expand to offer sport and entertainment "soon afterwards."
No satellite dish or contract will be needed to use the new service. Instead, users will be able to pay monthly fees for unlimited access to the group's movies or rent a movie on a pay-as-you-go basis. That's in contrast to BSkyB's existing offering, which requires customers to sign-up to a contract. No details on pricing were available Tuesday.
"Alongside the continued growth of our satellite platform, this will be a new way for us to reach out to consumers who love great content, but may not want the full Sky service," BSkyB Chief Executive Jeremy Darroch said.
"Bringing a distinctive, new choice to the marketplace will help us meet the needs and demands of an ever-wider range of consumers," he added.
BSkyB's announcement comes a few weeks after U.S.-based Internet movie service firm Netflix began a long-awaited push into the U.K. and Ireland, pitting it against Lovefilm, a U.K.-based online-video rival that Amazon.com Inc. acquired in 2011. In response, Lovefilm cuts its prices.
YouView Ltd., an Internet-TV project backed by some of the U.K.'s top broadcasters, is scheduled to launch later this year.
BSkyB's existing contract customers can already access 39 live channels and on-demand content via its Sky Go product on their laptops, smartphones or iPads.
Morgan Stanley said in a note to investors that the new Internet-based pay-television service is "designed to address the Netflix/Lovefilm and YouView unbundling threat." While this may be a way to broaden Sky's revenue base, it may fuel fears of spin down and customers unbundling their contracts from BSkyB, the broker added.
In the European morning, BSkyB shares were up 18 pence, or 2.7%, at 684 pence, valuing the company at £11.98 billion ($18.82 billion).
BSkyB booked a net profit of £441 million for the six months ended Dec. 31, up from £407 million a year earlier, due to strong demand for its phone, broadband and high definition products.
First-half revenue rose 6% to £3.36 billion, broadly in line with expectations, from £3.19 billion a year earlier.
In the second quarter to Dec. 31, 100,000 new households signed up to BSkyB's services, taking its total customer base to 10.47 million. Demand for line rental, broadband, telephone and high definition TV services was strong in the period, it said.
BSkyB also announced it would offer fiber broadband to around 30% of U.K. households from April, offering up to 40 megabytes broadband speeds, for £20 a month.
BSkyB—which was at the center of a failed takeover bid by its biggest shareholder, News Corp., last year—said operating profit before exceptional items, one of the key figures tracked by U.K. analysts, rose 16% to £601 million in the first six months of its fiscal year, from £520 million a year earlier.
News Corp. abandoned its bid to take full control of BSkyB in July in the wake of a phone-hacking scandal at its now-closed U.K. tabloid newspaper, News of the World.
News Corp. holds a 39.1% stake in BSkyB. It also owns Dow Jones & Co., publisher of Dow Jones Newswires and The Wall Street Journal.
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BSkyB, better known to its customers as Sky, said the new service will initially offer access to its movies, and will expand to offer sport and entertainment "soon afterwards."
No satellite dish or contract will be needed to use the new service. Instead, users will be able to pay monthly fees for unlimited access to the group's movies or rent a movie on a pay-as-you-go basis. That's in contrast to BSkyB's existing offering, which requires customers to sign-up to a contract. No details on pricing were available Tuesday.
"Alongside the continued growth of our satellite platform, this will be a new way for us to reach out to consumers who love great content, but may not want the full Sky service," BSkyB Chief Executive Jeremy Darroch said.
"Bringing a distinctive, new choice to the marketplace will help us meet the needs and demands of an ever-wider range of consumers," he added.
BSkyB's announcement comes a few weeks after U.S.-based Internet movie service firm Netflix began a long-awaited push into the U.K. and Ireland, pitting it against Lovefilm, a U.K.-based online-video rival that Amazon.com Inc. acquired in 2011. In response, Lovefilm cuts its prices.
YouView Ltd., an Internet-TV project backed by some of the U.K.'s top broadcasters, is scheduled to launch later this year.
BSkyB's existing contract customers can already access 39 live channels and on-demand content via its Sky Go product on their laptops, smartphones or iPads.
Morgan Stanley said in a note to investors that the new Internet-based pay-television service is "designed to address the Netflix/Lovefilm and YouView unbundling threat." While this may be a way to broaden Sky's revenue base, it may fuel fears of spin down and customers unbundling their contracts from BSkyB, the broker added.
In the European morning, BSkyB shares were up 18 pence, or 2.7%, at 684 pence, valuing the company at £11.98 billion ($18.82 billion).
BSkyB booked a net profit of £441 million for the six months ended Dec. 31, up from £407 million a year earlier, due to strong demand for its phone, broadband and high definition products.
First-half revenue rose 6% to £3.36 billion, broadly in line with expectations, from £3.19 billion a year earlier.
In the second quarter to Dec. 31, 100,000 new households signed up to BSkyB's services, taking its total customer base to 10.47 million. Demand for line rental, broadband, telephone and high definition TV services was strong in the period, it said.
BSkyB also announced it would offer fiber broadband to around 30% of U.K. households from April, offering up to 40 megabytes broadband speeds, for £20 a month.
BSkyB—which was at the center of a failed takeover bid by its biggest shareholder, News Corp., last year—said operating profit before exceptional items, one of the key figures tracked by U.K. analysts, rose 16% to £601 million in the first six months of its fiscal year, from £520 million a year earlier.
News Corp. abandoned its bid to take full control of BSkyB in July in the wake of a phone-hacking scandal at its now-closed U.K. tabloid newspaper, News of the World.
News Corp. holds a 39.1% stake in BSkyB. It also owns Dow Jones & Co., publisher of Dow Jones Newswires and The Wall Street Journal.
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Santander Profit Tumbles 98%
Banco Santander SA on Tuesday said its fourth-quarter net profit plummeted 98% after the Spanish banking giant took a €1.81 billion ($2.38 billion) charge on its Spanish real estate holdings and wrote down goodwill on its Portuguese unit by €600 million.
Net profit in the quarter fell to €47 million from €2.10 billion a year earlier, the bank said, sharply undershooting analyst expectations for €1.7 billion.
The miss was a result of the hefty provisioning Santander did in the fourth quarter, of €3.18 billion in total, covering real estate, Portugal, its investment portfolio and amortization of intangibles and contributions to pensions.
"It makes sense to do a big clean-up now," said Juan Pablo Lopez, a banking analyst with Espirito Santo Investment. Spain's banks this quarter have front-loaded provisioning as they prepare for new regulation that will force them to sharply increase the percentage of loss coverage on foreclosed properties and loans to ailing home developers. The government plans to introduce the new banking rules this Friday.
Mr. Lopez said that investors now prefer banks to focus on bolstering their capital base instead of profits, so Santander had little incentive to meet expectations. "You eliminate doubts related to their real estate holdings, while the reduction of goodwill in Portugal has a positive impact on capital," he added.
Net interest income—the bank's main income stream—grew to €7.97 billion, at a faster pace than in recent quarters, and also ahead of analyst expectations for €7.72 billion. Costs rose 9.9%.
Full-year profit fell 35% to €5.35 billion. Santander said that for the first time in its history, the bank earned more profit from Latin America than from the rest of the world, some 51%.
During 2011, the euro zone's largest bank by market value grew lending by 4%, as growing demand for credit in Latin America offset a shrinking loan book in Europe. Net lending in Spain fell by 7%, the bank said, while it grew by 8% outside Spain. Overall deposits rose 3%, Santander said.
In the European morning, Santander was up 0.2% at €5.99. The shares are down 26% over the past year, hurt by a drawn-out sovereign debt crisis in Europe that has pushed European banking stocks sharply lower. Early Tuesday, European banking shares were mostly higher.
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Net profit in the quarter fell to €47 million from €2.10 billion a year earlier, the bank said, sharply undershooting analyst expectations for €1.7 billion.
The miss was a result of the hefty provisioning Santander did in the fourth quarter, of €3.18 billion in total, covering real estate, Portugal, its investment portfolio and amortization of intangibles and contributions to pensions.
"It makes sense to do a big clean-up now," said Juan Pablo Lopez, a banking analyst with Espirito Santo Investment. Spain's banks this quarter have front-loaded provisioning as they prepare for new regulation that will force them to sharply increase the percentage of loss coverage on foreclosed properties and loans to ailing home developers. The government plans to introduce the new banking rules this Friday.
Mr. Lopez said that investors now prefer banks to focus on bolstering their capital base instead of profits, so Santander had little incentive to meet expectations. "You eliminate doubts related to their real estate holdings, while the reduction of goodwill in Portugal has a positive impact on capital," he added.
Net interest income—the bank's main income stream—grew to €7.97 billion, at a faster pace than in recent quarters, and also ahead of analyst expectations for €7.72 billion. Costs rose 9.9%.
Full-year profit fell 35% to €5.35 billion. Santander said that for the first time in its history, the bank earned more profit from Latin America than from the rest of the world, some 51%.
During 2011, the euro zone's largest bank by market value grew lending by 4%, as growing demand for credit in Latin America offset a shrinking loan book in Europe. Net lending in Spain fell by 7%, the bank said, while it grew by 8% outside Spain. Overall deposits rose 3%, Santander said.
In the European morning, Santander was up 0.2% at €5.99. The shares are down 26% over the past year, hurt by a drawn-out sovereign debt crisis in Europe that has pushed European banking stocks sharply lower. Early Tuesday, European banking shares were mostly higher.
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Euro-Zone Jobless Rate Stuck At High
The unemployment rate in the 17 countries that use the euro remained at over a 13-year high in December, data showed Tuesday, with a growing divergence apparent among the member states.
According to figures released by the European Union statistics agency Eurostat, the euro-zone's unemployment rate was 10.4% in December, unchanged from a revised November level and compared with 10% in December 2010. Eurostat had originally reported the November rate was 10.3%.
The data also show the number of unemployed persons in the single currency area rose to 16.469 million in December. That was again a new record high for the measure and compares with 16.449 million in November and 15.718 million a year earlier.
However, while the euro-area jobless rate has edged higher in recent months, the unemployment rate in Germany has been moving in the opposite direction. According to new data published earlier Tuesday by Germany's Labor Agency, the seasonally-adjusted unemployment rate fell to a fresh record low of 6.7% in January, down from 6.8% in December.
Eurostat's data showed that in Portugal, a country struggling with soaring debt costs, the unemployment rate rose to 13.6% in December from November's 13.2%.
Other economies also reported increases. French unemployment rose to 9.9% from 9.8%, and in Ireland and Italy, the unemployment rates rose to 14.5% and 8.9% respectively.
In Spain, while the jobless rate was unchanged from a month earlier, at 22.9% it was the highest rate reported by Eurostat.
The data highlight the growing divergence between those countries bearing the brunt of the ongoing debt crisis and safe-haven Germany. Unemployment has risen sharply across some euro-zone states in the past year, so much so that at Monday's summit of European Union heads of state, it was agreed that more needed to be done, particularly to help the growing number of unemployed youth.
In some countries youth unemployment is over 30%, and a draft EU statement outlined a pledge by the European Commission to use untapped funds from the European Social Fund to help the jobless and set up apprenticeship schemes.
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According to figures released by the European Union statistics agency Eurostat, the euro-zone's unemployment rate was 10.4% in December, unchanged from a revised November level and compared with 10% in December 2010. Eurostat had originally reported the November rate was 10.3%.
The data also show the number of unemployed persons in the single currency area rose to 16.469 million in December. That was again a new record high for the measure and compares with 16.449 million in November and 15.718 million a year earlier.
However, while the euro-area jobless rate has edged higher in recent months, the unemployment rate in Germany has been moving in the opposite direction. According to new data published earlier Tuesday by Germany's Labor Agency, the seasonally-adjusted unemployment rate fell to a fresh record low of 6.7% in January, down from 6.8% in December.
Eurostat's data showed that in Portugal, a country struggling with soaring debt costs, the unemployment rate rose to 13.6% in December from November's 13.2%.
Other economies also reported increases. French unemployment rose to 9.9% from 9.8%, and in Ireland and Italy, the unemployment rates rose to 14.5% and 8.9% respectively.
In Spain, while the jobless rate was unchanged from a month earlier, at 22.9% it was the highest rate reported by Eurostat.
The data highlight the growing divergence between those countries bearing the brunt of the ongoing debt crisis and safe-haven Germany. Unemployment has risen sharply across some euro-zone states in the past year, so much so that at Monday's summit of European Union heads of state, it was agreed that more needed to be done, particularly to help the growing number of unemployed youth.
In some countries youth unemployment is over 30%, and a draft EU statement outlined a pledge by the European Commission to use untapped funds from the European Social Fund to help the jobless and set up apprenticeship schemes.
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Budget Treaty: Neither Panacea Nor Poison
As German Chancellor Angela Merkel sees it, Europe's new "fiscal compact" on budget discipline will turn the euro zone into a more-perfect currency union.
Critics see it as a distraction from the real roots of Europe's debt crisis, and as a straitjacket that will condemn Europe to eternal austerity and stagnation.
Most likely, it will do neither. The proposed treaty doesn't overcome doubts about the euro zone's long-term viability and membership, and its constraints on government budgets aren't as tough as they appear at first glance.
The treaty, which is due to be formally signed in early March by leaders of euro-zone countries and any other European Union nations that want to take part, obliges governments to balance their budgets and reduce public debt. So-called structural budget deficits, adjusted for economic up- and downturns, are to be capped at 0.5% of gross domestic product. Euro members have to write that rule into their national laws or constitutions, or else EU judges can fine them.
The 0.5% deficit limit would, if obeyed, mark a revolution in European governments' fiscal policies, ending more than 30 years of steadily rising public debt in much of the region. Critics fear it is too rigid, and would rob countries of the ability to spend their way out of future recessions.
In fact, the draft treaty allows plenty of fiscal elbow room, belying complaints that it would make Keynesian stimulus policies illegal. A "structural" budget balance allows for deficits to rise automatically in hard economic times, through higher social spending and lower tax revenues, provided the government saves money in good times.
In addition, the treaty says that structural deficits will be calculated "net of one-off and temporary measures." Stimulus measures to boost demand in times of recession are supposed to be temporary anyway. And the treaty allows for even-more deviation from a balanced budget if a downturn is "severe," which other euro-zone rules define as a GDP decline of more than 2%.
"The inability of weak sovereigns to fund themselves will lead to a prolonged period in which the bias is toward fiscal tightening across the euro area," Mr. Saunders said.
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Europe Tightens Fiscal Ties
Leaders of 25 European Union governments agreed Monday night on what some billed as a historic pact to move to closer fiscal union and signed off on the details of a permanent bailout fund for the euro zone—yet Greece's looming debt restructuring threw a shadow over the summit.
The leaders discussed Greece but provided no further clarity on the eventual outcome of an issue that was creating increasing nervousness in financial markets Monday.
European stocks fell Monday and the euro lost ground against the dollar, while Portugal's borrowing costs surged, with the 10-year government bond yield reaching euro-era highs. The summit ended after markets had closed in the U.S.
In a joint statement, the EU leaders noted "tentative signs" of economic stabilization in Europe but said financial market tensions continue to weigh on the economy.
The final shape of the deal to reduce Greece's debt is still unknown after months of wrangling between the Greek government, representatives of bondholders, and officials from the EU, the International Monetary Fund and the European Central Bank.
After Monday's meeting, senior officials said they expected a debt-restructuring accord in "coming days," in time to launch a bond-exchange offer to private investors by mid-February.
One question the summit didn't address: whether official creditors, such as the ECB, will also be needed to reduce Greece's debt to levels that it is likely to be able to sustain in the long term.
After the summit, Greek Prime Minister Lucas Papademos met with other senior European officials, including Jörg Asmussen, the German representative on the board of the ECB. Officials said the talks likely concerned conditions to be imposed on Greece so it can receive its new loans. But afterward, Luxembourg Prime Minister Jean-Claude Juncker, who attended the meeting, said it yielded no conclusions.
Mr. Papademos told a press conference that Greece would continue negotiations with private sector creditors this week with a goal to reach a deal that wouldn't require more financing from official lenders. "It's hard to predetermine if we will need additional financial support. Our intention is to avoid it," he said.
Banks that currently hold Greek bonds amounting to €206 billion ($270 billion) are in talks with Athens to slash the amount by half through a bond swap.
Asian markets rose in early trading Tuesday in part on the Greek prime minister's comments, with Japan up 0.4%, Australia up 0.2% and South Korea up 0.8%.
The uncertainty about the debt agreement—and whether it will be forced on unwilling bondholders—is raising questions particularly about Portugal, whose €78 billion bailout agreed upon last year is now looking inadequate to some investors.
Yields on two-year Portuguese bonds rose over 21%, indicating investors see a significant default risk. Portugal Prime Minister Pedro Passos Coelho said holders of Portuguese bonds will never face the write-offs that will be suffered by investors in Greece. "Portugal's debt is perfectly sustainable," he said after the meeting.
The fiscal pact agreed upon Monday is a German-sponsored treaty among the 17 euro-zone nations and eight other EU countries that imposes tighter budget discipline on euro members and is aimed at preventing a repeat of the Greek debt disaster. Britain and the Czech Republic are the only two EU countries not to join.
"Considering the time frame, this was a real masterpiece," German Chancellor Angela Merkel said. The pact was first mooted in December.
While the euro members share a central bank and monetary policy, absence of strong budget coordination has been one of the weaknesses that led to the crisis.
The leaders agreed that the European Court of Justice will be empowered to impose fines on euro countries running excessive deficits. Fines will be capped at 0.1% of gross domestic product. For Italy, for example, that could mean fines as high as $2 billion.
It will require governments to keep their budget deficits to an average of 0.5% of GDP over the economic cycle—and to reduce their total government debt toward 60% of GDP over time.
The EU has long-standing rules that are supposed to limit budget deficits in any year to 3% of GDP, and limiting government debt to 60% of GDP, but they have never been enforced.
Some analysts say the pact fails to address the current crisis or capture the problem of private debt, which lay at the root of the economic travails of countries such as Ireland and Spain. They also question whether it makes sense to impose big fines on governments struggling with budget shortfalls.
The agreement "offers little in the way of economic substance and does nothing to tackle the problems at hand," said Sony Kapoor, managing director of the Re-Define think tank. Instead, he said, its purpose is "to assure skeptical German voters and the ECB that troubled euro countries would be fiscally virtuous."
Some analysts also say the pact biases the euro zone toward recession. Not only does it limit governments' ability to use budgetary policy to avert an economic downturn, but the long-term requirement to lower government debt would make it harder for nations with high debts, such as Italy, to grow their way out of their problems.
However, supporters say the pact isn't as rigid as depicted and offers flexibility in the face of an unusual crisis.
While the leaders were expected to endorse a treaty creating the €500 billion ($660 billion) permanent bailout fund, known as the European Stability Mechanism, expected to come into operation at midyear, officials said a proposal to boost the bailout resources would be delayed until the leaders' next scheduled summit on March 1.
Germany has been resisting a proposal that would lift the €500-billion cap on the combined total resources of the new fund and the temporary fund. That would provide a total commitment of about €750 billion.
Complicating the discussions over cutting Greece's debts to private investors are new demands by Germany for greater oversight over Greece's budget affairs and growing concerns that Greece's funding needs might be bigger than originally thought.
A German proposal was circulated last week among euro-zone finance ministry officials calling for Athens to cede some control over its budget decisions to a special EU commissioner appointed by the euro zone as the price for the new bailout—Greece's second in two years. But officials said Mrs. Merkel didn't push the proposal.
But officials said that Ms. Merkel didn't push the proposal, and it didn't appear to have much chance of success.
"Greece's recovery plan can be implemented only by the Greeks," French President Nicolas Sarkozy said after the summit. "No country can possibly be placed in trusteeship. It would not be reasonable, democratic and efficient."
Both the fiscal pact and the treaty creating the ESM must be ratified by national parliaments.
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Queries on RBS Chief's Fate
The political fracas that pressed Royal Bank of Scotland PLC's chief executive to turn down his 2011 bonus has raised questions among people inside the bank, and among analysts, about how long he will remain at the helm.
The move by Stephen Hester comes at the start of what is expected to be another fractious bonus season in the U.K., as hefty banker payouts remain a cause for outrage amid the day-to-day struggles of ordinary Britons.
Compensation experts say that Mr. Hester is paid considerably less than he would receive at a firm that isn't state-controlled. But Mr. Hester, who took over as CEO in late 2008 after a government rescue of the bank, has been a lightning rod for criticism, given that RBS is still 83% government-owned after its bailout and is currently laying off thousands of employees.
On Sunday, the bank said Mr. Hester would waive his 2011 bonus award of about £963,000 ($1.51 million) in shares, which the board had only last week decided to give him. The move came after members of the U.K. opposition Labour Party called the payout "not fair," "immoral" and vowed to force a parliamentary vote on the matter. Britain's Daily Mail newspaper called the bonus "a reward for failure."
People familiar with the matter said Mr. Hester is increasingly frustrated with the public scoldings and suggested he could exit the bank, which is increasingly a target of political intervention, as early as the end of this year. But others familiar with his thinking said he would almost certainly stay at least until 2014, the scheduled completion of his planned five-year turnaround plan for the bank.
After the latest firestorm, Mr. Hester will seek to confer with members of government—including, possibly, Prime Minister David Cameron—to clarify the political backing he will receive for the terms of his pay going forward, in order to avoid a repeat of the recent public shaming, people familiar with the matter said Monday. A nod of support regarding pay could be a condition for him to stay on as chief executive, one of these people said.
Through an RBS spokesman, Mr. Hester declined to comment about such talks or his long-term plans.
Britain's bank chiefs have received public criticism over pay every year since the 2008 financial crisis. In 2009, many CEOs, including Mr. Hester, waived their bonuses. When Barclays PLC and HSBC Holdings PLC announce remuneration in coming weeks, their executives, too, are likely to face ire over pay.
The chief executive of Lloyds Banking Group PLC, also partially state-controlled, announced earlier he would waive his 2011 bonus.
The U.K., like the European Union, has cracked down on banker pay since the financial crisis. It has required a limit on cash bonuses and that large portions be paid in shares and deferred.
But such measures have seemingly done little to placate the British public, who still find six- and seven-figure bonuses hard to swallow amid the bleak economy.
The long-standing assumption in the U.K. has been that Mr. Hester would remain at RBS until the bank was fully, or at least partially, free of government control. But RBS's share price is languishing and the taxpayer stake won't be sold down anytime soon, people familiar with the bank say.
People familiar with the matter say that now, instead of measuring his success at the bank through a selloff of the government's holding, Mr. Hester may focus on different metrics for his progress, such as profitability and reductions in the bank's balance sheet. Success in those areas could allow him to exit gracefully before actually returning the bank to private hands, two people familiar with the matter say.
The RBS pay brouhaha also has fueled concern that the bank faces increased political meddling as time goes by.
When they were brought in, Mr. Hester and other senior management were told they could run the business on commercial terms, according to people familiar with the original negotiations. The government set up an agency, U.K. Financial Investments Ltd., to manage the state shareholding on an "arms-length" basis.
But some say the rules of the game have changed. "The longer [the government] is the shareholder, the worse it is likely to be in terms of the interference in the day-to-day running of the bank," said Tom Kirchmaier, a fellow in the Financial Markets Group at the London School of Economics.
A spokeswoman for UKFI declined to comment.
When Mr. Hester, 51 years old, and other new managers set out to clean up the bank after its break-neck expansion under former CEO Fred Goodwin, they anticipated it would be about three years before they sold off part of the U.K. government stake, according to people with knowledge of management's thinking.
But movement toward a sale was delayed as a result of the establishment of a government-appointed commission in mid-2010 that was charged with making U.K. banks safer. In September, the commission concluded that RBS should change its structure and isolate its retail business from investment banking, hitting the bank's share price. Troubles in the euro zone also drove banks' share prices lower.
On Monday, the bank's share price closed at 26.6 pence, down 1% and well below the government's buy-in price of 50.2 pence.
The uncertainty over when RBS will be free of state control has hit the morale of Mr. Hester and other executives there, say people familiar with the bank. "After three years, we'd thought we'd see the light at the end of the tunnel," said one."Now we are wondering, 'Is there an end of the tunnel?"'
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Monday, 30 January 2012
For Traders, It's All in the Timing
Forget the latest news on Europe's sovereign-debt woes or even global economic data. Some strategists said there often is another force moving currencies: the time of day.
There are modest but regular gains to be made by playing the clock, if you know when to watch it, they said.
Royal Bank of Scotland Group strategists tracked the euro's intraday movement against the dollar from 2006 through 2011 and found that the common currency fell 0.02 percentage point on average in London morning hours and rose 0.03 to 0.04 point in London afternoon hours. This trend even has been more pronounced since the euro crisis came to dominate market attention.
"Traders coming into the London opening tend to be flooded with a lot of bad news about the euro," said Bernard Lock, director and head of Asian-Pacific at hedge fund FX Concepts. "So it's quite natural" to see the euro sold in early European trading.
The yen, by contrast, tends to strengthen versus the dollar in Asian trading, said Jesper Bargmann, a Singapore-based currency trader at RBS.
"You come in in the morning and if the [dollar] has rallied a bit in London or New York, we probably will see a bit of selling" of the dollar against the Japanese currency, he said. "You can often pick up [0.20 or 0.30 of a yen] that way."
Patterns can be shorter term, as well. Société Générale analyst Lauren Rosborough said this week that there had been a trend for risk-sensitive currencies such as the Australian and New Zealand dollars to rise in the Asian day and fizzle in U.S. trading but that the cycle appeared to be breaking down.
Pocketing regular gains is the Holy Grail for investors and traders, but even time-of-day enthusiasts acknowledge the gains from this tactic will be incremental, as the law of averages trumps day-to-day news flow and other factors over time.
The RBS strategists said in a research note that traders could use the time-of-day patterns to reap some gains, though transaction costs could eat up as much as half of the profits. Many traders develop an instinctive feel for when in the day to enter or exit a given trade. The intraday rhythms are "always at the back of your mind," RBS's Mr. Bargmann said.
Even longer-term investors could benefit by changing the timing of trades they already planned to execute, the RBS analysts said. "The patterns we have identified for currencies help an investor avoid buying near the high or selling near the low of the day," they said in the note.
As for why intraday patterns might persist over time, RBS suggests that investors tend to be net buyers of foreign currencies, so their own currencies would tend to decline during their local trading sessions. But while this might account for the euro's typical decline in European trade and the dollar's typical softness in New York, it doesn't explain why the yen gains an average 0.04 percentage point during Tokyo trading hours.
The yen's moves over the past few days have obliterated the trend. But during a stretch last week, the yen stuck to the script.
At 5 p.m. EST on Jan. 17, the start of the next day's Asian trading session, the yen stood at ¥76.82 to the dollar. The currency rose steadily for the next eight hours, hitting its intraday high of ¥76.65 just as Asian trading was wrapping up. The amount of yen equal to one dollar falls as the currency's value rises.
A day later, the yen started Asian trading at ¥76.84, then rose to ¥76.76 over the next eight hours. In both sessions, the yen fell back in New York trading to end the day weaker.
Perceptions about when currency authorities might act also could influence time-of-day patterns. Although the yen tends to strengthen in Asia, Tokyo traders said market participants often wait until after 10 a.m. local time to push the yen higher because the Ministry of Finance typically picks the early Tokyo hours when it intervenes to sell yen.
Even traders who are skeptical of using time of day to predict a currency's direction said the patterns can help determine when trading volume is highest.
"If we expect a lot of liquidity during a certain period, we can execute better for our clients without moving the market," said Martin Watson, director of foreign-exchange e-trading for Citigroup Asia Pacific. The most liquid times are at about 8 a.m. EST, or 1 p.m. in London, when trading overlaps, and around the time of Tokyo and London exchange-rate fixings, he said.
The time between New York close and Tokyo open, by contrast, is notoriously illiquid, and individual orders can have a big impact on exchange rates. On March 17, for example, the yen rocketed 4.6% to a record against the dollar in moments, a move exacerbated, traders said, by the fact that many traders weren't around.
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Euro Looks for More Gains
The dollar faces a rocky week as foreign-exchange markets focus on the monthly U.S. employment report, a European Union meeting and details of a Greek bond restructuring.
Already, the U.S. currency is on the back foot after the Federal Reserve said it expects to keep interest rates low into 2014.
January nonfarm payrolls data, due Friday, have taken on added significance in the wake of a disappointing reading on fourth-quarter economic growth. Gross domestic product expanded by 2.8% between October and December, up from 1.8% annualized growth in the third quarter, but below economists' forecast of 3% growth.
An Eye on Jobs
If the employment data are weak, the dollar could fall, as it raises the odds that the Federal Reserve could introduce a new round of bond-buying sooner than expected. This would effectively pump more dollars into the market, hurting the greenback.
If the data are strong, the central bank may hold off on such an easing policy, reinvigorating the dollar.
Some Fed officials, including William Dudley, president of the Federal Reserve Bank of New York, think the Fed will have to take more steps to boost the sluggish economy.
Unemployment is "likely to remain unacceptably high for the near term," Mr. Dudley, a voting member of the Fed committee that decides on stimulus measures, said Friday at a quarterly regional economic media briefing.
On Wednesday, the Federal Open Markets Committee reiterated its intention to continue boosting the economy with low interest rates for the next few years. The committee said it anticipates economic conditions are likely to warrant exceptionally low levels for the federal funds target rate beyond its earlier estimate of mid-2013.
A Climb to $1.36?
"The easy policy in the U.S. means there is a rush to other currencies, and the euro will lead the charge," said Douglas Borthwick, head of trading at Faros Trading in Stamford, Conn.
He predicted the euro could reach $1.36 in the next two weeks. The currency stood at $1.3219 late Friday, up from $1.3109 on Thursday. The euro rose every day last week against the dollar, climbing a combined 2.2% for its biggest weekly gain since mid-October.
A resolution to Europe's sovereign-debt crisis is also high on investors' watch list.
On Monday, European Union leaders will gather in Brussels to finalize accords creating a permanent bailout mechanism and enforcing greater fiscal discipline among members while also seeking to tackle slow growth and high unemployment. Talks among the 27 EU leaders may be overshadowed should Greece and its creditors reach a deal to reduce its privately held debt.
"Everyone is waiting to see what greater fiscal integration in Europe will look like and how the Greek debt swap is structured," said Aroop Chatterjee, foreign-exchange strategist at Barclays Capital in New York. "The market will be looking at how the deal is structured because that will set the tone for other potential restructuring. If there is a deal, there will be pressure on other European countries to follow suit."
Meanwhile, the euro floor of 1.20 Swiss francs, established by the Swiss National Bank in September, could be tested during the week. The SNB regards the franc as too strong at that rate, and Swiss exporters say they are hurt by it. Friday, the franc reached its strongest point against the euro since September, as the common currency fell to 1.2060 francs, from 1.2086 francs.
That said, the bank has yet to sell francs to raise the euro's floor to 1.25 francs or higher, as some have expected. Failure to keep the franc's value down would undermine the central bank's credibility in the market, making future interventions more difficult.
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Already, the U.S. currency is on the back foot after the Federal Reserve said it expects to keep interest rates low into 2014.
January nonfarm payrolls data, due Friday, have taken on added significance in the wake of a disappointing reading on fourth-quarter economic growth. Gross domestic product expanded by 2.8% between October and December, up from 1.8% annualized growth in the third quarter, but below economists' forecast of 3% growth.
An Eye on Jobs
If the employment data are weak, the dollar could fall, as it raises the odds that the Federal Reserve could introduce a new round of bond-buying sooner than expected. This would effectively pump more dollars into the market, hurting the greenback.
If the data are strong, the central bank may hold off on such an easing policy, reinvigorating the dollar.
Some Fed officials, including William Dudley, president of the Federal Reserve Bank of New York, think the Fed will have to take more steps to boost the sluggish economy.
Unemployment is "likely to remain unacceptably high for the near term," Mr. Dudley, a voting member of the Fed committee that decides on stimulus measures, said Friday at a quarterly regional economic media briefing.
On Wednesday, the Federal Open Markets Committee reiterated its intention to continue boosting the economy with low interest rates for the next few years. The committee said it anticipates economic conditions are likely to warrant exceptionally low levels for the federal funds target rate beyond its earlier estimate of mid-2013.
A Climb to $1.36?
"The easy policy in the U.S. means there is a rush to other currencies, and the euro will lead the charge," said Douglas Borthwick, head of trading at Faros Trading in Stamford, Conn.
He predicted the euro could reach $1.36 in the next two weeks. The currency stood at $1.3219 late Friday, up from $1.3109 on Thursday. The euro rose every day last week against the dollar, climbing a combined 2.2% for its biggest weekly gain since mid-October.
A resolution to Europe's sovereign-debt crisis is also high on investors' watch list.
On Monday, European Union leaders will gather in Brussels to finalize accords creating a permanent bailout mechanism and enforcing greater fiscal discipline among members while also seeking to tackle slow growth and high unemployment. Talks among the 27 EU leaders may be overshadowed should Greece and its creditors reach a deal to reduce its privately held debt.
"Everyone is waiting to see what greater fiscal integration in Europe will look like and how the Greek debt swap is structured," said Aroop Chatterjee, foreign-exchange strategist at Barclays Capital in New York. "The market will be looking at how the deal is structured because that will set the tone for other potential restructuring. If there is a deal, there will be pressure on other European countries to follow suit."
Meanwhile, the euro floor of 1.20 Swiss francs, established by the Swiss National Bank in September, could be tested during the week. The SNB regards the franc as too strong at that rate, and Swiss exporters say they are hurt by it. Friday, the franc reached its strongest point against the euro since September, as the common currency fell to 1.2060 francs, from 1.2086 francs.
That said, the bank has yet to sell francs to raise the euro's floor to 1.25 francs or higher, as some have expected. Failure to keep the franc's value down would undermine the central bank's credibility in the market, making future interventions more difficult.
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Bernanke's Imprint on Fed Not Easily Erased
In his six years as chairman of the Federal Reserve, Ben Bernanke has stretched the central bank in once-unthinkable ways—pushing short-term interest rates to near zero and keeping them there for years, more than tripling the size of its securities and loan portfolio, rescuing financial firms that the Fed doesn't even regulate.
Lost in the glare of these radical actions is how much he has changed the institution itself. Under his leadership, the Fed has become more open about its plans for the economy and its own sometimes-divisive internal debates. Mr. Bernanke also has made the institution more consensus-oriented even as he assertively pushed the Fed into uncomfortable places. Last week's moves by the Fed were vintage Bernanke in all of these respects and will have long-lasting effects on how the central bank operates.
The Fed took two steps. First, it published detailed interest-rate projections of each of the 17 officials who participate in policy meetings, without identifying the officials by name. Second, it spelled out its goals for inflation and unemployment more explicitly than it has before.
The first step—publicizing the wide-ranging views inside the Fed of where people believe interest rates should go—effectively gives voice to the larger committee in which the Fed chairman operates. It was another example of the chairman trying to show he leads by consensus.
Mr. Bernanke is a believer in research by Alan Blinder, a Princeton professor and former Fed vice chairman, which has shown that groups are often more effective at decision making than individuals. Mr. Bernanke's predecessors—Alan Greenspan, Paul Volcker and Arthur Burns—ruled more by individual force. Mr. Bernanke took over the Fed in 2006 wanting to change that.
Last week's move was a significant step in that direction. Mr. Bernanke pointed to that, and to the possibility that he won't be sticking around after his term ends in 2014, in a news conference following the meeting. "The chairman's term is not infinite," he said. "At some point there'll be a new chairman. But there's a lot more continuity on the [Fed] collectively."
If a new Fed chairman comes in two years from now wanting some dramatic shift in direction, that person will be faced with the uncomfortable fact that his colleagues' views are out there for all to see.
Still, this hasn't been an easy transition. Consensus at the Fed has also meant sometimes confusing cacophony among officials about what steps to take next. A closer look at Mr. Blinder's research might help to show why. Mr. Blinder and John Morgan, a University of California, Berkeley, professor, drew their conclusions after conducting experiments on group decision-making with university students last decade. They never looked at the performance of groups larger than eight people, Mr. Blinder says. They wanted to keep the groups modestly sized in part because they worried students might bolt to some other campus activity in the middle of the experiments.
The Fed is a much bigger group than that. "Seventeen people can't jointly run anything," says Mr. Blinder. That helps to explain the cacophony, and also why Mr. Bernanke, despite his devotion to consensus, has often seen fit to assert himself to push the group where he wants it to go, as his eventual successor might too.
The group dynamic at the Fed is additionally complex because not all of those 17 Fed officials vote at policy meetings. Only five of the 12 regional Fed bank presidents get to vote at meetings, on a rotating basis, meaning seven people regularly get to talk but not decide.
There appeared at last week's meeting to be some tension between the collective view of the larger group of 17 officials at the meeting and the narrower group of 10 that voted. The median forecast of the larger 17 put short-term interest rates at 0.75% at the end of 2014. The policy statement approved by the 10 who voted suggested the Fed expected rates to be near zero "at least through late 2014," a bit more dovish about the outlook for interest rates than the forecasts implied. Mr. Bernanke said in a news conference later that the view of the formal voters would always "trump" the larger group. Fed votes are required by law.
The second step—spelling out more explicitly goals for inflation and unemployment—is something Mr. Bernanke has long wanted. Michael Bordo, a Rutgers University economic historian, says he hopes that is a move by the Fed toward more systematic policy after several years of what looks like ad hoc decision making.
For those who worry the Fed is going to allow inflation to rise substantially, the central bank has now said as emphatically as ever that it wants to keep inflation around 2%. Yet Mr. Bernanke fudged this point a little, by noting that if inflation is above the goal and unemployment is also high, he might choose to take a little extra time trying to bring inflation down with restrictive monetary policy.
Mr. Bordo says the Fed "lost a lot of credibility" with its actions during the financial crisis. He thinks the inflation goal has a chance to put the central bank on a steadier course, "but I'm not sure if they've gotten there yet."
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Merkel To Back Sarkozy Re-Election
German Chancellor Angela Merkel is so concerned that a shift to the left in France after the coming French election could derail the German-led austerity drive in Europe that she plans to join France's President Nicolas Sarkozy on the campaign trail in the coming weeks to forcefully support his re-election, her party said over the weekend.
In Paris, Mr. Sarkozy appeared embarrassed by Ms. Merkel's advances, essentially because he has not yet announced that he would seek a second mandate in the spring presidential election. "I did not know she voted in France," the French President said in an interview with multiple television channels on Sunday evening.
Such cross-border campaign support is not unusual in Europe, where national parties are grouped in European political families. For example, Mr. Sarkozy and Ms. Merkel met at conference of the center-right European People's Party in December, immediately before a summit where European leaders finalized plans for greater fiscal convergence and discipline.
Ms. Merkel's support is not a guaranteed asset for the French president, analysts say, because many voters see the German leader as imposing painful, unwanted austerity across the euro zone. However, public opinion polls in France have shown Ms. Merkel to be more popular there than Mr. Sarkozy.
Hermann Groehe, the general secretary of Ms. Merkel's Christian Democratic Union party, over the weekend praised the alliance of Ms. Merkel and Mr. Sarkozy in Europe's efforts to resolve the euro zone debt crisis. He also sharply criticized Mr. Sarkozy's challenger, the Socialist François Hollande.
"We can be proud of their joint demonstration of leadership," said Mr. Groehe on Saturday, speaking at a gathering of the French conservative party Union pour un Mouvement Populaire. "With courage and conviction they have laid the groundwork so that Europe can emerge stronger from the crisis."
The CDU said that Ms. Merkel would appear together with Mr. Sarkozy at several campaign events in France over the coming months to demonstrate the importance of their partnership.
In 2009, Mr. Sarkozy supported Ms. Merkel, when her party campaigned for re-election.
Further back in history, French and German leaders have often been from opposing sides of the political spectrum, providing few opportunities for leaders in office to play a part in the other country's election campaigns.
That was the case in the 1980s, and the first half of the following decade, when the Socialist François Mitterrand held power in France while the center-right Helmut Kohl was Germany's Chancellor.
Messrs Kohl and Mitterrand developed a close working relationship despite their different political ideologies, working closely together for years through historic change. Their close cooperation played a key role in the crafting of the Maastricht Treaty that laid the foundation for the euro.
In a rare blurring of political lines, former German Chancellor Gerhard Schroeder, who is affiliated with the center left, praised Mr. Sarkozy's policies after a meeting with the French President in Paris last month.
Asked if he had met with Mr. Hollande, the French Socialist leader, Mr. Schroeder told French daily Le Figaro: "No, I have not planned to."
read more: Olympus Wealth Management
Money From MF Global Feared Gone
Nearly three months after MF Global Holdings Ltd. collapsed, officials hunting for an estimated $1.2 billion in missing customer money increasingly believe that much of it might never be recovered, according to people familiar with the investigation.
As the sprawling probe that includes regulators, criminal and congressional investigators, and court-appointed trustees grinds on, the findings so far suggest that a "significant amount" of the money could have "vaporized" as a result of chaotic trading at MF Global during the week before the company's Oct. 31 bankruptcy filing, said a person close to the investigation.
Many officials now believe certain employees at MF Global dipped into the "customer segregated account" that the New York company was supposed to keep separate from its own assets—and then used the money to meet demands for more collateral or to unfreeze assets at banks and other counterparties as they grew more concerned about their financial exposure to MF Global.
Investigators also are examining other scenarios that have gained traction in recent weeks, such as the possibility that MF Global suffered steep losses on investments made using customer money. Officials investigating the case have looked into whether such investments were appropriate under rules at the time.
As money poured out of MF Global, much of it likely passed through J.P. Morgan Chase & Co. and other banks where the securities firm had accounts, as well as trade-clearing partners such as Depository Trust & Clearing Corp. and LCH.Clearnet Group Ltd., people familiar with the matter said.
Those companies have denied being knowingly in possession of any missing MF Global money, and any efforts to make them fill the hole would face daunting hurdles. And because the firms usually were middlemen between MF Global and other counterparties, the funds they touched were then scattered widely, complicating the search.
Of the $6 billion kept at MF Global by farmers, hedge funds, floor traders and other customers when panic erupted over its exposure to European sovereign debt and shaky financial outlook, about $5.3 billion has been located, according to James Giddens, the bankruptcy trustee for the securities firm's U.S.-based brokerage operation.
But hundreds of millions of customer dollars are potentially snarled in litigation with other parts of MF Global, including its U.K. arm, and U.S. officials might never be able to recover those funds. As a result, Mr. Giddens believes the shortfall is at least $1.2 billion, though regulators at the Commodity Futures Trading Commission and CME Group Inc., parent of the Chicago Mercantile Exchange and New York Mercantile Exchange, have estimated the total is smaller than that.
Since MF Global filed for Chapter 11 bankruptcy-court protection, hundreds of regulators and law-enforcement officials in the U.S. and U.K. have scoured emails, wire transfers and other documents from the company's final days. Mr. Giddens's investigations include about 14 lawyers and 60 forensic accountants.
Lawmakers have pushed for answers from Jon S. Corzine, the former New Jersey governor and Goldman Sachs Group Inc. chairman who led MF Global into its big European bet and was CEO when the company failed.
On Thursday, a House Financial Services subcommittee will zero in on the securities firm's risk-management practices and the role of credit-rating firms in the collapse. Among the people scheduled to testify at the hearing is Michael Roseman, a former chief risk officer at MF Global who raised serious concerns several times in 2010 about the growing bet on European bonds by Mr. Corzine.
So far, Mr. Giddens's office has returned about 72% of the money in customers' U.S. accounts when MF Global filed for bankruptcy at the end of October. Money in accounts outside the U.S. remains frozen, and officials have gotten few big breaks in the case.
"I'm trying to be optimistic, but as it drags on longer, you become leery," said Peter Suarez, who trades futures contracts from his home in Marlboro, N.J. Since some of his money is still tied up with MF Global, he has been forced to reduce his trading activity in wheat, stock indexes and the British pound.
Four days before the bankruptcy filing, MF Global appeared to have excess money of $200 million in its customer accounts, according to a statement sent to CME Group. CME, the CFTC and Securities and Exchange Commission, among others, regulated MF Global.
By Oct. 31, MF Global acknowledged there was a shortfall in its customer segregated account. That account normally held money required to be set aside by customers, excess amounts from customers and some of MF Global's own funds. While the firm could invest customer money and move around its own funds, federal rules require customer funds to be set aside and kept safe.
The person familiar with the probe said perhaps hundreds of millions of dollars in customer money likely went to J.P. Morgan. According to an Oct. 29 letter from the New York bank to MF Global, the securities firm moved $200 million out of its "commodity customer segregated account" to cover overdrafts in accounts at J.P. Morgan. The money wound up in "the MF Global U.K. Ltd. account," according to a copy of the letter reviewed by The Wall Street Journal.
In Congressional testimony in December, Mr. Corzine said he was trying to eliminate the overdraft by getting money moved from elsewhere in MF Global. Regulators now suspect the money might have belonged to customers, people familiar with the matter said.
Mr. Corzine testified that he was assured by people who worked for him that the money was moved properly, adding that he never directed anyone to misuse customer funds.
J.P. Morgan, a big creditor of MF Global, has said it is cooperating with authorities. A spokeswoman declined to comment Sunday.
Mr. Giddens also is looking at whether transfers of "tens of millions" from MF Global's margin account to Depository Trust & Clearing Corp., known as DTCC, during the last week of October might have involved customer funds, according to people familiar with the matter.
In a statement, a DTCC spokeswoman said the company "has no knowledge that any of the funds deposited by MF Global include any missing customer funds." DTCC said it is cooperating with Mr. Giddens. LCH.Clearnet declined to comment.
The shortfall is widely blamed on the pell-mell panic inside MF Global to keep the securities firm alive long enough to arrange a sale. A rescue deal fell through.
In recent weeks, though, some investigators have begun to explore whether MF Global was investing customer money in ways aimed at boosting returns for the firm, according to people close to the probe. Mr. Corzine, using options available under the rules at the time, was keen on the company earning more than it had in the past, people familiar with his thinking say.
Those investments, which don't include the company's European bond bet, might have suffered losses during the firm's prebankruptcy fire sale—especially if MF Global used so-called repurchase agreements to boost returns on customer money, according to the people close to the investigation.
read more: Olympus Wealth Management
Syrian Uprising Intensifies As Troops Defend Capital
Syria's government moved to defend Damascus as its military fought rebel troops outside the capital for a third day on Sunday, as the battle moved ever closer to President Bashar al-Assad's seat of power.
Rounds of fighting rocked at least four suburbs for most of Sunday, residents and activists said. They described a government offensive to regain control of restive towns around Damascus that have become the latest concentration of armed resistance against Mr. Assad's regime.
The sustained fighting appears to suggest the government is struggling to maintain control of some areas around the capital, 11 months into a conflict in which military and security forces had repeatedly crushed protests—and a gradually militarized opposition movement—across the country. Analysts said it likely also suggests the regime's loyal units were becoming severely overstretched, risking the government's defense of the capital itself as it increasingly deploys troops to the suburbs.
The fighting around Damascus, which has killed dozens of people in recent days, has come amid a surge in confidence by opposition fighters, just as Arab diplomacy on Syria's crisis appeared to reach another dead-end and Syria's political opposition made a new push at the United Nations Security Council for action against the regime.
At least 16 people were killed in areas around the capital Sunday, according to Local Coordination Committees, an activist network. Some 280 people have been killed across Syria since Monday, activist groups said, in one of the bloodiest bouts of the uprising, which has also seen the most definitive departure from a peaceful protest movement.
Activists said at least 50 tanks moved into al-Ghouta, the city's eastern agricultural belt, on Sunday, firing artillery and rockets while snipers shot from rooftops. Communications, electricity and water were cut off from a handful of towns, several activist groups said. Some activists said bodies lay in the street.
Closer to the capital, opposition fighters loosely organized under the dissident Free Syrian Army claimed some successes. In Douma, a suburb some nine miles from Damascus, they said they wrested control from the military. Less than four miles from Damascus's old city in Arbeen, dissident troops said they burned a tank and killed three government snipers.
The government said terrorists in the Damascus suburb of Sahnaya on Sunday remotely detonated a bomb that targeted a bus carrying soldiers, killing six and injuring six more. In Zabadani, the first Damascus suburb to slip out of government control last week, residents said government forces broke a cease-fire by shooting and killing a Free Syrian Army soldier, angering the resort town's remaining residents—many had already fled. In response, the dissident army attacked two security barricades on the outskirts.
The U.S. State Department said it would have no comment on Syria until Monday.
Damascus was wrenched from its relative insulation from the violence roiling Syria's other cities some 10 days ago, when government troops pulled out of Zabadani, a mountainous resort town about 20 miles northwest of Damascus, after days of fighting with dissident troops. The retreat, followed by a cease-fire negotiated by Assef Shawkat—Syria's deputy defense minister and the president's brother-in-law—marked a surprising first for Syria's opposition.
It left the town under the control of rebel troops and town councils that sprang up, with just state police allowed to stay under the negotiated cease-fire, residents said. That agreement broke down on Sunday when government forces killed a dissident soldier on a road out of town. But as both sides held their fire at nightfall, Zabadani hung in what one resident described as a "cautious calm."
Zabadani's mountainous terrain made it easier for dissident soldiers to launch attacks on the military, some soldiers said. The military pounded a string of suburbs as it fought to push back rebels and the armed fighters—mostly residents—backing them, activists said.
Leaders from the opposition Syrian National Council were due on Sunday to brief officials at the U.N., where Arab League Secretary-General Nabil al-Araby and Qatar's deputy prime minister are also seeking support for an Arab plan to end Syria's crisis. The plan, which calls on Mr. Assad to delegate power to a vice president pending elections, has been rejected by Russia, Syria's Security Council ally.
As often in Syria's crisis, the conflict on the ground outpaced the diplomacy. "We can finally say the military balance is starting to shift in our favor," said a senior commander with the dissident army near Syria's border with Lebanon. In another show of force, dissident troops said they were positioned in a suburb no more than five miles from the presidential palace in Damascus.
Their accounts couldn't be independently verified, but residents of two suburbs less than four miles from the center of Damascus's old city confirmed opposition fighters continued to fight the army Sunday night. Activists reporting fighting in Ain Tarma, 2½ miles from Damascus.
On Saturday, the Arab League suspended its monitoring mission, saying a spike in violence hampered the mission's work, criticizing the government for not holding up its end of a deal to stop the violence. Syria's government said it was "surprised" by the decision. Last week, it said it wouldn't give up a military campaign to root out who it describes as armed terrorists.
On Sunday in Damascus, reports of the two, often conflicting faces of the capital were stark. Activists reported tanks guarding central squares across the capital and the sounds of shooting and explosions near the city center. Security around the city has been tight, but the military has yet to deploy around large public squares. Residents in nearby parts of the capital said the streets appeared to be calm.
read more: Olympus Wealth Management
Germany Warns Greece on Aid Funds
Germany's finance minister issued an unusually blunt warning that the euro zone might refuse to grant Greece a fresh bailout, pushing Athens into default unless it persuades Europe it can overhaul its state and economy.
"Greece needs to decide," Wolfgang Schäuble said in an interview with The Wall Street Journal, when asked whether the euro zone would grant or withhold the second bailout package for the country since 2010, expected to be in excess of €130 billion ($172 billion).
Europe is "prepared to support Greece" with the new loan package, Mr. Schäuble said, but he warned: "Unless Greece implements the necessary decisions and doesn't just announce them…there's no amount of money that can solve the problem."
The remarks came as German officials last week floated the radical idea of appointing a European "budget commissioner" with veto powers over Greece's spending, partially suspending Greece's national sovereignty over its budget, in return for aid.
"Perhaps we and our partners must look into ways to assist Greece in this difficult task in an even closer manner," Mr. Schäuble said, alluding to the German oversight proposal.
Germany's proposal met with skepticism from other European policy makers and got an angry response from Athens. In a statement on Sunday, Greek Finance Minister Evangelos Venizelos said "bigger nations" shouldn't force Greece to confront a "dilemma of 'economic assistance or national dignity.' "
Greece's deteriorating finances and ever-growing funding needs are leading to renewed political tensions in the euro zone that threaten to reignite the region's debt crisis, which has shown tentative signs of stabilizing so far this year.
In Germany and other northern European creditor countries, frustration is rising with Greece's perceived failure to get a grip on public spending, improve tax collection or free up its economy. Many lawmakers in German Chancellor Angela Merkel's conservative-led coalition are unhappy about risking billions more on financially stricken Greece.
Berlin officials say their proposal for more-intrusive controls over Greece's budget is one of several ideas being discussed, and that they are flexible about the specifics—but that something needs to be done about Greece's slow compliance with the terms of its international aid.
Ms. Merkel is expected to discuss stronger enforcement of Greece's reform measures with Greek Prime Minister Lucas Papademos in Brussels on Monday, when European leaders gather for a summit whose official agenda is how to improve economic growth in the 17-nation euro area.
Greece's fiscal mess is increasingly taking center stage again, however, in a sign of how the euro zone has gone around in circles since the crisis began in Athens in late 2009.
Stubbornly high budget deficits mean that Greece is struggling to restore its solvency, despite an expected deal with bondholders that could reduce its private-sector debt by up to €100 billion. Many economists say euro-zone governments and the European Central Bank will also eventually have to forgive some of what Greece owes them.
Mr. Schäuble declined to rule that out, saying "we must see what the whole package will look like," and that the independent central bank would make its own decision.
The euro zone must decide by March whether to proceed with the second bailout deal for Greece, which some European officials say will require closer to €145 billion in international loans than the €130 billion agreed on in principle late last year.
The alternative—a full-blown default by Greece on its debts in late March—could spark another round of panic in European government bond markets, threatening the access to credit of other euro members with rising debts, including Spain and Italy.
Fear of such contagion is the main reason Germany and other creditors view further aid for Greece as the lesser evil. But Berlin officials are growing exasperated with Greece's political parties, which are seen as only half-heartedly behind the country's painful reform program, and with a Greek public administration that has failed to turn reforms into reality.
Mr. Schäuble, a 69-year-old conservative and the second-most powerful member of Germany's government after Ms. Merkel, is known as both a staunch believer in the euro and a steely guardian of Germany's purse. In the interview, he defended Germany's handling of the euro-zone crisis against recent international criticism.
At last week's World Economic Forum in Davos, Switzerland, top global policy makers and business leaders called for Germany to relax its drive for pan-European austerity, do more to support growth, and build a bigger financial safety net to reassure markets struggling euro-zone governments will stay liquid.
Mr. Schäuble insisted Germany is taking the best possible steps to support economic growth in Europe's biggest economy, and rejected calls for a significantly bigger euro-zone bailout fund.
"In the euro zone, we will regain the trust we have lost only through steady policies," rather than constantly revising decisions, Mr. Schäuble said. Germany's cautious, step-by-step response to the euro-zone "isn't that unsuccessful," he said, pointing to the relative financial calm in Europe since Christmas.
But while some analysts have suggested lately that the worst of the euro crisis might be over, Mr. Schäuble said it's "too early to sound the all-clear," given the continuing uncertainties in Greece and other struggling euro members.
Dismissing the idea that Berlin should pursue a more-expansionary fiscal policy to support the euro-zone economy, Mr. Schäuble said last year's 3% economic growth in Germany showed that careful budget consolidation is more effective.
"I don't know how it's best done in America, but in Germany it works like this: If you want more private demand, you have to take people's angst away," he said.
Many German consumers are anxious about rising public debt and its implications for the state's ability to pay for pensions and health care in an aging society. Mr. Schäuble cited the research of U.S. economists Kenneth Rogoff and Carmen Reinhart, who have argued high public debt is a drag on economic growth.
Germany's economy has stalled this winter after two years of solid growth, however, adding to criticism of the government's austerity focus. Mr. Schäuble said the slowdown is temporary. "A recession looks quite different from what's happening in Germany right now," he said.
read more: Olympus Wealth Management
UBS Trader Pleads Not Guilty
Kweku Adoboli, the UBS AG trader accused of making unauthorized transactions that cost the Swiss bank as much as $2.3 billion, pleaded not guilty to two counts of fraud and two counts of false accounting in a London court on Monday.
British authorities arrested Mr. Adoboli in connection with allegations of rogue trading in mid-September but the trader entered a plea for the first time only on Monday. The 31-year-old trader had more than once requested additional time to evaluate the evidence and obtain legal advice before deciding on a plea.
In a statement last September, UBS attributed the multibillion dollar loss to "unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months." The bank said the transactions were carried out by a trader on its Global Synthetic Equities desk in London. At the time, people familiar with the matter identified that trader as Mr. Adoboli.
Though UBS said that the rogue trades occurred in the months immediately before Mr. Adoboli's arrest in September, U.K. prosecutors have charged the trader with crimes stretching as far back as 2008.
In a hearing last autumn, Mr. Adoboli said through his lawyer that he was "sorry beyond words." On Monday, the trader appeared in a gray suit and blue tie, speaking only to confirm his name and his not-guilty plea on each of the four counts.
The scandal over the alleged rogue trading has rocked the Swiss bank in recent months, leading to the resignation last September of UBS chief executive Oswald Grübel and a joint investigation by British and Swiss financial regulators.
Though that joint investigation was initially seen as more of a fact-finding mission to determine what went wrong, people familiar with the situation told The Wall Street Journal this week that the regulators are now likely to penalize UBS for gaps in oversight that permitted the alleged rogue trading.
The U.K. Financial Services Authority and the Swiss Financial Market Supervisory Authority, or Finma, are likely to soon complete the investigation but it could take longer for the regulators to bring any enforcement action.
Mr. Adoboli, who grew up in Ghana and attended a private boarding school in Britain, is the son of a United Nations official and a graduate of the University of Nottingham. He began working at UBS in London after graduating from university, working his way up to a position on the company's London equities desk from a back-office job.
Monday's plea hearing comes about a month after Mr. Adoboli dropped his lawyer from the London law firm Kingsley Napley and switched to an attorney from another London law firm, Bark & Co., which specializes in matters related to fraud.
The judge at London's Southwark Crown Court said Mr. Adoboli's trial would begin Sept. 3.
read more: Olympus Wealth Management
Saturday, 28 January 2012
The Week Ahead--Week of January 29, 2012
It’s all Greek to me
Eurozone debt markets continued to show signs of further stabilization as Greek/private sector bondholder (private sector investors or PSI) negotiations continued to stumble along with repeated promises that a deal was soon to be reached, possibly over this weekend. The debt swap deal is a prerequisite to Greece receiving the next EU/IMF aid installment and avoiding a disorderly default. The details of the debt swap deal are reported to be a haircut of around 70% on existing bond holdings and an average interest rate of around 3.75% on the new Greek debt.
The key to avoiding a default event and potential market disruption will be the degree of PSI participation and whether the swap can plausibly be called ‘voluntary.’ On that count, the outcome is significantly more questionable, as a participation rate of 90+% is likely needed to avoid triggering credit default swaps and unleashing another wave of banking sector losses. So the details will matter and if a deal is reached this weekend, depending on its terms, there could be a volatile Sunday open.
Government bond yields in Spain and Italy dropped back significantly as one sign of calmer investors, but Portuguese yields surged to record highs over 14%, suggesting Portugal will be the next target of market angst. To be sure, following a Greek debt deal, if there is one, markets may simply revert to longer term solvency concerns of the larger EU countries, in a buy the rumor/sell the fact-type reaction. After all, Greece was never the real threat to EU financial stability.
On that front, Monday’s EU summit is expected to ratify the fiscal compact on budget deficits and surveillance, which will lock EU countries into austerity for years to come. The typical pattern has been for EUR, and risk assets generally, to appreciate going into such meetings, only to then relapse as the summit’s outcomes are deemed insufficient to stem the crisis. I think we could be looking at a similar scenario yet again, as the fiscal pact does little to alter current debt burdens and consigns most EU members to weak growth. In response, EU leaders are pledging to also develop growth strategies at the summit, but I’m a little more than skeptical as fresh fiscal stimulus does not seem likely. We’ll have to see what they ultimately come up with, but I’m not optimistic and would not be surprised by another post-summit wave of disappointment.
Technically, EUR/USD has now reached back to a key resistance zone in the 1.3220-50 area, which I highlighted in last week’s update. 1.3220 was the breakdown level from last December and 1.3245/50 is 38.2% of the decline from roughly 1.4250-1.2620 since late October. However, positioning is still excessively short, with CFTC COTR data showing the largest net-short EUR futures position on record as of Jan. 24, so a further short-squeeze can’t be ruled out. While I favor using current EUR levels to establish shorts for a resumption of the move lower, I can’t exclude further gains, so I would exit on strength over 1.3320/30 broken trendline support turned resistance. EUR/USD looks set to close the week above the daily Ichimoku cloud base at 1.3186, potentially signaling a move to the top of the cloud at around 1.3600.
What the Fed said and didn’t say
The FOMC this past week delivered a bit of a surprise by indicating that rates would remain exceptionally low until late-2014, extending their prior timeframe from mid-2013. The Fed also lowered its 2012 GDP forecast to 2.2/2.7% from Nov.’s forecast of 2.5/2.9%, and noted that significant downside risks to the recovery remained. The low-rates-for-longer pledge hit the USD sharply and sent gold prices soaring. But what the Fed didn’t say was that it was actively considering additional asset purchases, or QE3. True, Bernanke said it was still an option in his press briefing, but that doesn’t mean it’s close to being adopted yet. As such, the pronounced USD weakness following the Fed events may not be sustained. I would note that broad commodity indexes (CRB) and stocks did not express the same QE3-euphoria that FX did, with gold being the exception.
Bernanke will appear before the House Budget Committee on Thursday, Feb. 2. I would expect Republican members to grill him over any plans to further expand the Fed’s balance sheet with additional asset purchases, a major source of irritation to them. Bernanke will surely defend the Fed’s independence and its dual mandate, but in doing so, he may also indicate that QE3 is not currently under active consideration. If so, the USD could see a sharp rebound. This should not be the usual Fed appearance before a Congressional committee.
Key data and events next week
In addition to Monday’s EU Summit and Thursday’s Bernanke testimony, next week sees a number of key data points. Also, next week will see month-end portfolio hedging flows, some of which may have helped drive Friday’s USD slump. Given outsized gains in US stock/bond valuations relative to other G10 markets, we expect overall USD-selling to persist through Tuesday, other events being equal, typically culminating at the 1600GMT London fixing. In particular, our proprietary model suggests the strongest USD selling against CHF, CAD, AUD and JPY, with slightly less strong USD-sell signals against GBP and EUR.
On Wednesday, China will a release pair of critical manufacturing sector PMI’s, with the Jan. national PMI forecast to dip back into contractionary levels at 49.6 after 50.3. Later on Wednesday in the US, the ADP Jan. employment report will give us a first sense of how Friday’s US NFP may play out. Friday will also see non-manufacturing PMI’s out of China.
read more: Olympus Wealth Management
Eurozone debt markets continued to show signs of further stabilization as Greek/private sector bondholder (private sector investors or PSI) negotiations continued to stumble along with repeated promises that a deal was soon to be reached, possibly over this weekend. The debt swap deal is a prerequisite to Greece receiving the next EU/IMF aid installment and avoiding a disorderly default. The details of the debt swap deal are reported to be a haircut of around 70% on existing bond holdings and an average interest rate of around 3.75% on the new Greek debt.
The key to avoiding a default event and potential market disruption will be the degree of PSI participation and whether the swap can plausibly be called ‘voluntary.’ On that count, the outcome is significantly more questionable, as a participation rate of 90+% is likely needed to avoid triggering credit default swaps and unleashing another wave of banking sector losses. So the details will matter and if a deal is reached this weekend, depending on its terms, there could be a volatile Sunday open.
Government bond yields in Spain and Italy dropped back significantly as one sign of calmer investors, but Portuguese yields surged to record highs over 14%, suggesting Portugal will be the next target of market angst. To be sure, following a Greek debt deal, if there is one, markets may simply revert to longer term solvency concerns of the larger EU countries, in a buy the rumor/sell the fact-type reaction. After all, Greece was never the real threat to EU financial stability.
On that front, Monday’s EU summit is expected to ratify the fiscal compact on budget deficits and surveillance, which will lock EU countries into austerity for years to come. The typical pattern has been for EUR, and risk assets generally, to appreciate going into such meetings, only to then relapse as the summit’s outcomes are deemed insufficient to stem the crisis. I think we could be looking at a similar scenario yet again, as the fiscal pact does little to alter current debt burdens and consigns most EU members to weak growth. In response, EU leaders are pledging to also develop growth strategies at the summit, but I’m a little more than skeptical as fresh fiscal stimulus does not seem likely. We’ll have to see what they ultimately come up with, but I’m not optimistic and would not be surprised by another post-summit wave of disappointment.
Technically, EUR/USD has now reached back to a key resistance zone in the 1.3220-50 area, which I highlighted in last week’s update. 1.3220 was the breakdown level from last December and 1.3245/50 is 38.2% of the decline from roughly 1.4250-1.2620 since late October. However, positioning is still excessively short, with CFTC COTR data showing the largest net-short EUR futures position on record as of Jan. 24, so a further short-squeeze can’t be ruled out. While I favor using current EUR levels to establish shorts for a resumption of the move lower, I can’t exclude further gains, so I would exit on strength over 1.3320/30 broken trendline support turned resistance. EUR/USD looks set to close the week above the daily Ichimoku cloud base at 1.3186, potentially signaling a move to the top of the cloud at around 1.3600.
What the Fed said and didn’t say
The FOMC this past week delivered a bit of a surprise by indicating that rates would remain exceptionally low until late-2014, extending their prior timeframe from mid-2013. The Fed also lowered its 2012 GDP forecast to 2.2/2.7% from Nov.’s forecast of 2.5/2.9%, and noted that significant downside risks to the recovery remained. The low-rates-for-longer pledge hit the USD sharply and sent gold prices soaring. But what the Fed didn’t say was that it was actively considering additional asset purchases, or QE3. True, Bernanke said it was still an option in his press briefing, but that doesn’t mean it’s close to being adopted yet. As such, the pronounced USD weakness following the Fed events may not be sustained. I would note that broad commodity indexes (CRB) and stocks did not express the same QE3-euphoria that FX did, with gold being the exception.
Bernanke will appear before the House Budget Committee on Thursday, Feb. 2. I would expect Republican members to grill him over any plans to further expand the Fed’s balance sheet with additional asset purchases, a major source of irritation to them. Bernanke will surely defend the Fed’s independence and its dual mandate, but in doing so, he may also indicate that QE3 is not currently under active consideration. If so, the USD could see a sharp rebound. This should not be the usual Fed appearance before a Congressional committee.
Key data and events next week
In addition to Monday’s EU Summit and Thursday’s Bernanke testimony, next week sees a number of key data points. Also, next week will see month-end portfolio hedging flows, some of which may have helped drive Friday’s USD slump. Given outsized gains in US stock/bond valuations relative to other G10 markets, we expect overall USD-selling to persist through Tuesday, other events being equal, typically culminating at the 1600GMT London fixing. In particular, our proprietary model suggests the strongest USD selling against CHF, CAD, AUD and JPY, with slightly less strong USD-sell signals against GBP and EUR.
On Wednesday, China will a release pair of critical manufacturing sector PMI’s, with the Jan. national PMI forecast to dip back into contractionary levels at 49.6 after 50.3. Later on Wednesday in the US, the ADP Jan. employment report will give us a first sense of how Friday’s US NFP may play out. Friday will also see non-manufacturing PMI’s out of China.
read more: Olympus Wealth Management
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