Wednesday FX View: Risky Bets Flee After Bank of China Warning

Original Article from Seeking Alpha Dollar Currencies

Andrew Wilkinson submits:

The magnitude of the concerns surrounding the fiscal state of Greek financial affairs has today ripped deeper into the health of the euro. The problem is reminiscent of the wealthy tourist struggling with the hustle and bustle of a busy town center, only to be constantly hounded by a young beggar. No matter how the tourist tries to ignore the demands of the young urchin, he simply won’t go away. And although time is a great healer, the market appears to have grown suspicious that the solution from the government of Greece is nothing more than a string of poor and unworkable assumptions. The fear of onlookers from outside the Eurozone is that if Greece can do this, then others might also resort to bad assumptions to solve its nation’s books on paper and further weaken the credibility of a euro that has found itself languishing after the official submission of the Greek government.

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HK shares snap six days slump; China banks rally

* HK shares turn course after six day slide
* China banks recover after RBS sells stake in BOC
* HSBc drops after broker cuts profit estimate,target price
(Updates to midday)
By Parvathy Ullatil
HONG KONG, Jan 14 (Reuters) – Hong Kong shares were on course to end a six-day losing spell on Wednesday, rising 1.4 percent, with Chinese banks outperforming after an equity selldown in Bank of China (3988.HK) eliminated an overhang on the sector.
However index heavyweight HSBC Holdings (0005.HK) fell 2.3 percent to HK$71.3, its lowest level since after the September 11, 2001 attacks on the United States, following a Morgan Stanley report that slashed its target price to HK$52.
The U.S. investment bank cut its profit estimate for the UK-based lender by 17 percent for 2008 and 39 percent for 2009 and said HSBC may have to raise $20 billion to $30 billion to shore up its capital.
The benchmark Hang Seng Index .HSI ended the morning session 194.99 points higher at 13,863.04 after a six day slide, its longest since September, 2008.
Mainboard turnover rose to HK$43.8 billion ($5.6 billion) as compared with HK$25 billion by midday Tuesday.
“Most markets in Asia Pacific have moved up today on hopes that Tuesday’s mixed performance on Wall Street indicates the market has hit a bottom after a five day fall,” said Andrew To, sales director with Taifook Securities.
“If the HSI can hold above 13,800 points for a few days, it should form a good support and trigger short covering. We may rechallenge 15,000 points around Chinese New Year,” he said.
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Wall Street Breakfast: Must-Know News

• Morgan Stanley Smith Barney. Citigroup (C) and Morgan Stanley (MS) confirmed they’re merging their wealth management units into Morgan Stanley Smith Barney. Morgan will pay $2.7B for a 51% stake with the option of taking full control after five years. Citi will book a pre-tax gain of $9.5B, and an after-tax gain of $5.8B. The joint venture will employ 20,390 brokers in over 1,000 firms, surpassing the 16,000-strong ‘thundering herd’ of brokers that Bank of America (BAC) acquired in Merrill Lynch. However, some question the timing of the deal, wondering if creating the largest group of financial advisers is prudent when many investors and brokers are shying away from Wall Street giants and analysts expect a resurgence of ’boutique’ brokerage firms.
• Citi keeps shrinking. Citigroup’s (C) deal with Morgan Stanley (MS) is just one part of its radical restructuring operation. Abandoning the much-touted ‘financial supermarket,’ sources say Citi is preparing to break the mega-bank into investment and commercial units, essentially dismantling the 1998 merger between Citicorp and Travelers that created Citigroup. It will jettison several business units and scale down its proprietary trading, shrinking itself by about a third and focusing on large corporations and wealthy individuals instead of less-affluent customers. Sources say the changes will be unveiled when Citi released Q4 earnings next week. Citigroup declined to comment.
• Bernanke backs new efforts for toxic assets. In a speech at the London School of Economics yesterday, the Fed’s Bernanke threw his support behind a big U.S. stimulus plan, saying "a substantial fiscal package… could provide a significant boost to economic activity." However, he also said that Obama’s plan is ‘unlikely’ to revive growth on its own without ‘a comprehensive plan to stabilize the financial system and restore normal flows of credit.’ To that end, he raised three options for Obama’s Treasury in the event that it actually decides to address troubled assets with TARP money: 1) public purchases of troubled assets, as previously proposed by Paulson, 2) government provision of asset guarantees in return for warrants, or 3) creating and capitalizing ‘bad banks’ that would purchase assets from financial institutions in exchange for cash and equity in them. (Read the full text of Bernanke’s speech)
• HSBC at risk. Shares of HSBC (HBC) fell 7.3% in London after analysts at Morgan Stanley said Europe’s largest bank may be forced to raise up to $30B and cut its dividend in half. Unlike most rivals, HSBC has not had to raise capital during the financial crisis, but the analysts warned its capital position has eroded: "Historically, HSBC has carried about 120 basis points of surplus capital at the group level – this has now all but gone at a time when we think it better for the buffer to have increased," they said, adding it now has "one of the weaker capital ratios in Europe and the second weakest in Asia."
• Yahoo turns to Bartz for rescue. Yahoo (YHOO) named Carol Bartz its new CEO, as expected, and announced that President Sue Decker is resigning. Talking up Bartz, chairman Roy Bostock said "she is the exact combination of seasoned technology executive and savvy leader that the board was looking for." Not everyone agrees. Bartz’s appointment is largely viewed by Wall Street as safe but unspectacular, and some worry about her lack of professional experience with internet companies and online advertising. Known as a tough-talking straight-shooter, Bartz will be under immediate pressure from investors who have watched Yahoo’s share price erode over the last year. Bartz was previously executive chairwoman of Autodesk (ADSK) and had served as its CEO for 14 years.
• Deutsche’s major Q4 loss. Deutsche Bank (DB) warned of a loss of roughly €4.8B ($6.4B) in Q4 vs. profits of around €1B a year earlier. Germany’s biggest bank, Deutsche lost around $1B on bad bets involving CDS-hedged bonds, and another $500M trading equities. CEO Josef Ackermann released a statement Deutsche Bank has "scaled back or exited trading strategies most affected by market turbulence." The bank cited ‘exceptional market conditions’ for its poor performance, notably in credit trading, equity derivatives and equities proprietary trading. Its official Q4 FY ‘08 earnings report is due Feb. 5. Shares -11% premarket (7:00 ET).
• Quotables. "I’ve never quite been in this situation before of getting a massive pay cut, no bonus, no longer allowed to stay in decent hotels, no corporate airplane," complained Bob Lutz, General Motor’s (GM) Vice Chairman. "I have to stand in line at the Northwest counter. I’ve never quite experienced this before." Poor guy.
• Barclays lays off workers, again. Barclays (BCS) is cutting around 2,100 jobs globally in its investment banking and money management units. The bank had built these units aggressively over the last five years but now says it wants to be ‘appropriately sized, given the current market conditions.’ The move will likely raise speculation about further cost-cutting in Barclays’ retail and corporate banking division. Shares -14% premarket (7:00 ET).
• RBS sells China stake. In line with yesterday’s whispers from unnamed sources, Royal Bank of Scotland (RBS) confirmed it has sold its 4.26% equity stake in Bank of China for around $2.3B. "The decision to sell the stake forms part of the ongoing strategic review of the group’s businesses announced in October," RBS said in a statement.
• U.S. keeps its Triple-A. S&P affirmed its AAA rating for the U.S., but said risks to the country’s top sovereign rating have increased "noticeably" since September. S&P’s "reasonable worst-case scenario" sees net general government debt rising from its 2008 level of 42% of GDP to as much as 75% by 2011. On the plus side, S&P said U.S. strengths include one of the most flexible economies of any nation and the fact the U.S. dollar is one of the world’s most used currencies.
• Retail sales drop. Retail chain store sales fell 2.3% from a week ago, ICSC reported, and fell 2.2% Y/Y. "A seasonal weakening in traffic, less gift-card redemption and adverse weather all came together to weaken demand sharply for the first full week of 2009." Redbook reported a 2.3% decline in the first week of January vs. the previous month, while sales were down 1.9% Y/Y.
• Budget deficit balloons. The U.S. Budget Deficit swelled to a record $485B in FQ1, compared to a deficit of $455B for all of fiscal 2008. December’s budget shortfall was $83.6B, vs. a $48.3B surplus a year ago. Congressional estimators project an unparalleled deficit of $1.2T for 2009, not including any Obama stimulus.
• Consumer confidence? What’s that? A whopping 65% of Americans now rate the economy as ‘poor,’ a record in 23 years of weekly polls, according to ABC News. Another 29% say it’s ‘not so good’ for a net negative rating of 94% – matching the all-time high. ABC’s Consumer Comfort Index remains at a dismal -49.
• Trade balance. November’s Trade Balance of -$40.4B, down from October’s -$56.7B, was less than economists’ $51B forecast. Exports: $142B (-$8.7B); imports: $183B (-$26B). For now, the global slowdown is crimping U.S. demand for exports more than it is foreign demand for U.S. products.

Today’s Markets

• Asia markets closed in the green. Nikkei +0.3% to 8,438. Hang Seng +0.3% to 13,705. Shanghai +3.5% to 1,929. BSE +3.3% to 9,370.
• In Europe at midday, London -2.3%. Paris -1.3%. Frankfurt -1.95%.
• U.S. futures: Dow -0.7%. S&P -0.8%. Nasdaq -0.85%. Crude +3.1% to $38.94. Gold +0.7% to $826.30.

Wednesday’s Economic Calendar

7:00 MBA Mortgage Applications
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
10:30 EIA Petroleum Status
1:00 PM Fed’s Stern speaks on macroeconomic policy
2:00 PM Fed’s Beige Book
Notable earnings after Wednesday’s close: XLNX

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Wall Street Breakfast: Must-Know News

• Bush, Obama ask for TARP’s part II. Pres. Bush has requested the second half of TARP funds from Congress, after being asked to do so by Obama. Worried about a ’still fragile’ economy, Obama felt "it would be irresponsible for me… to enter into the administration without any potential ammunition should there be some sort of emergency or weakening of the financial system." Obama’s team is already working to satisfy the concerns of lawmakers on the use of TARP funds, as many Republicans and some Democrats are expected to oppose releasing the money. A vote could come as early as Friday.
• Satyam shakedown continues. After gaining nearly 45% in India yesterday on hopes of a government rescue, Satyam (SAY) shares are falling again as reality sinks in (-9.2% as of 5:30 ET). The new government-appointed board acknowledged it would take time to get the company back on track, and said one of its top priorities is appointing an independent accountant. In the meantime, non-Indian computer-service providers like IBM (IBM) and Accenture (ACN) are in a stronger position to pick up new contracts as investors worry about India’s corporate governance.
• Elan considers merger, sale. Drugmaker Elan (ELN) has hired Citigroup Global Markets (C) to review the company’s strategic options, including a possible merger or sale. Elan’s shares lost 72% last year on concerns about its ability to pay back $1.15B in debt and the safety of its Tysabri multiple sclerosis drug, and then gained over 25% last week on rumors, later proved to be untrue, that the company was in talks with Pfizer (PFE). Shares +10.6% in Ireland (5:30 ET).
• Spain opens Madoff probe. Spanish prosecutors are investigating how Banco Santander (STD), Europe’s second-largest bank, managed to lose €2.3B ($3.1B) of its clients’ money by investing with Madoff. Two-thirds of the losses came from the Latin America, a market where Santander does almost a third of its business and wants to expand. Santander itself lost just €17M. Officials are trying to find out what exactly was the nature of Santander’s relationship with Madoff’s firm, and when the bank first realized there were any problems with the investments. Until this scandal, Santander had provided a rare beacon of stability in otherwise tumultuous financial markets.
• RBS cashing out of China? Royal Bank of Scotland (RBS) is said to be selling a stake in Bank of China Ltd. With 10.8B shares, RBS is Bank of China’s second largest shareholder. The move would follow the leads of UBS (UBS), which cashed out its 1.6% stake in Bank of China at the end of December, and Bank of America (BAC), which last week sold $2.8B of shares in China Construction Bank (previously I, II). Details of the sale could be announced as early as today.
• AIG asset sales. Sources say AIG (AIG) is in talks to sell its Canadian life insurance unit to Bank of Montreal (BMO). An agreement could be reached as soon as today.
• Infosys sees record profits. Infosys (INFY), India’s second-largest computer-services provider, posted record Q3 profits as more companies turned to outsourcing to cut their costs. The company stands to win additional orders as clients defect from rivals Satyam (SAY) and Wipro (WIT). Net income rose 33%, the fastest rate in six quarters, reaching 16.4B rupees ($336M) vs. 15.4B consensus. (more details below)
• U.K. reaches for bailout #2. The U.K. government is getting ready to roll out another giant bailout plan totaling billions of pounds, aimed at saving companies and jobs. Sources say the plan could be announced in the next ten days, or possibly as soon as tomorrow. The U.K. economic outlook has continued to deteriorate rapidly, despite a £500B ($758B) bailout package already in place.
• German stimulus grows. In its second attempt to address Germany’s worst recession since World War II, Angela Merkel’s coalition agreed last night to spend an extra €50B ($66B) over two years to help the economy. The plan includes measures such as lowering health insurance payments, investing in schools and roads, reducing the lowest income-tax rate and €100 checks for each child. "If we’d failed to do what we did last night, we’d have risked the collapse of parts of our industrial base…," said one lawmaker. "We’re in an exceptional situation."

Earnings: Tuesday Before Open

• Infosys Technologies (INFY): Q3 EPS of $0.56 beats by $0.01. Revenue of $1.17B (+8.0%) vs. $1.18B. (PR)

Earnings: Monday After Close

• Alcoa (AA): Q4 EPS of -$0.28 misses by $0.18. Revenue of $5.69B (-19.1%) vs. $5.26B. (PR)

Today’s Markets

• Asia markets closed down on a bleak earnings outlook. Nikkei -4.8% to 8,414. Hang Seng -2.2% to 13,668. Shanghai -1.95% to 1,863. BSE -0.4% to 9,071.
• In Europe at midday, London -2.2%. Paris -2.5%. Frankfurt -2.2%.
• U.S. futures: Dow -0.8%. S&P -0.9%. Nasdaq -1.0%. Crude -2.0% to $36.83. Gold -0.2% to $819.30.

Tuesday’s Economic Calendar

• 7:45 ICSC Retail Store Sales
  8:00 Bernanke speaks on the crisis and policy response
  8:30 International Trade
  8:55 Redbook
  2:00 PM Treasury Budget
  5:00 PM ABC Consumer Confidence Index
  5:00 PM Fed’s Lacker speaks on the economic outlook
• Notable earnings before Tuesday’s open: INFY

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Wall Street Breakfast: Must-Know News

• 2009: Hoping for a turnaround, bracing for a thud. 2008 was a tumultuous, messy year, shaking investors’ belief in basic market premises, including the value of the buy-and-hold strategy and the idea that stocks will outgain other assets over time. Volatility was startling, the stock market had its third worst year in over a century and the government spent billions of dollars frantically trying to plug holes in the economy. Some analysts believe a dismal ‘08 at least provided a bottom to this market, citing November’s multiyear lows and the upswing that followed, though others expect another sag in 2009. Forecasters for 2009 have covered the full range of outlooks, from continued heavy losses to healthy recovery. Investors, meanwhile, are hoping 2009 brings a turnaround, but aren’t counting on one.
• Bank deal bonanza. Bank of America (BAC) completed its purchase of Merrill Lynch (MER) yesterday, ending Merrill’s 95-year run as an independent broker. The purchase came out to around $33B in stock and has created what is now the largest U.S. bank with around $2.7T of assets. Also completed was the roughly $12.7B purchase of Wachovia (WB) by Wells Fargo (WFC). The merger more than doubles the size of Wells Fargo and creates the fourth-largest U.S. bank by assets.
• Chrysler still on the hook. General Motors (GM) received $4B of federal money but Chrysler is still waiting for the first installment of its federal bailout. It’s unclear why GM received money before Chrysler, but Treasury officials assure they are "working expeditiously with Chrysler to finalize that transaction." Officials added, however, that it’s at their discretion on a case-by-case basis to decide when automakers receive emergency aid. CEO Robert Nardelli called discussions with the Treasury ‘positive’ and ‘productive,’ and expressed his hope that financing would be finalized as soon as possible.
• City National’s bank bailout gets a second look. The Treasury Department’s inspector general is examining the decision to award bailout funds to City National Bank (CYN), part of a growing concern that the bank bailout isn’t working well, or at all. In a document released this week, Treasury’s Paulson admitted the difficulty of keeping track of the funds distributed and their effects on the economy. The City inquiry is not based on suspicion of any wrongdoing; it’s being used as a case study review to see how the Treasury’s bailout has been working and why certain institutions were selected to participate.
• FDIC goes back to the future. With at least 171 banks on the FDIC’s ‘problem list,’ the agency is turning to a tool last used during the savings and loan crisis. Called ‘loss sharing,’ the mechanism provides an incentive for healthy banks to take on the troubled assets of a failed institution, with the government agreeing to cover the majority of future losses. The FDIC tried out the model several times in 2008, including in its initial rescue effort for Wachovia (WB) and as part of an aid package to Citigroup (C), and is feeling out industry interest in the approach.
• Steel industry looks for stimulus. The ailing U.S. steel industry (NUE, X, MT) is pressuring President-elect Obama for a public works initiative that could be worth $1T over two years to boost flagging demand for U.S.-made steel. "What we are asking," Nucor CEO Daniel DiMicco says, "is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a ‘buy America’ clause."
• Time Warner wants its MTV. Viacom (VIA) and Time Warner Cable (TWC) reached a last minute deal on a new programming agreement, preventing popular Nickelodeon, Comedy Central and MTV television shows from being pulled off the cable service. The companies’ previous contract expired New Year’s Eve and failure to close a new deal would have affected 13.3M Time Warner customers. Details of the deal were not disclosed, though sources say a compromise was reached on the key issue of increasing affiliate fees.
• UBS cashes out of BoC. UBS (UBS) sold its 1.3% stake in Bank of China for $808M, netting a $316.4M profit. A three-year lockup period on the holdings expired earlier this week. The sale marks the first withdrawal by a foreign strategic investor in a Chinese lender as firms consider cashing out of investments to bulk up their balance sheets. The lockup period also expired for Royal Bank of Scotland (RBS), Bank of China’s second biggest shareholder with an 8.25% stake. RBS has not yet expressed an interest in selling the stake.
• Quotables. Warren Buffett’s Berkshire Hathaway (BRK.A) fell 32% in 2008, marking its worst performance in over thirty years. Buffett, however, appears unfazed. "It’s happened to me three other times. It happened when it went from 90 to 40 back in 1974, and it happened in 1987. It went down 50 percent in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times."

Today’s Markets

• Hong Kong jumpstarts the new year with a solid gain. Elsewhere in Asia markets were modestly higher. Hang Seng +4.55% to 15,043. BSE +0.55% to 9,958. Kospi +2.9% to 1,157. Japan and China closed.
• In Europe, markets start things off on the right foot. London +1.2%. Paris +2.3%. Frankfurt +1.9%.
• U.S. stock futures are modestly higher, while oil retreats from Wednesday’s huge gain. Dow futures +0.6% to 8780. S&P +0.6% to 906. Nasdaq +0.5%. Crude -6.4% to $41.70. Gold -1.7% to $869.40.

Friday’s Economic Calendar

• 10:00 ISM Manufacturing Index
  4:30 PM Money Supply

Seeking Alpha editor Eli Hoffmann contributed to this post.

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