There’s a term in chess called zugzwang, which describes the point in a game when it’s your turn to move but every move you could make would worsen your situation. That’s pretty much what the chessboard looked like for Federal Reserve chairman Ben Bernanke when he testified before Congress this morning. What everyone most wants to know is when the Fed is going to start tapering off its bond-buying program (called Quantitative Easing), which has flooded the banking system with money for the past five years and kept interest rates abnormally low. And that was something Bernanke couldn’t answer. In his testimony, the Fed chairman gave a carefully hedged commitment that the central bank would continue buying bonds – currently $85 billion a month – until the economy is stronger. And he repeated last December’s official statement that the Fed intends “to maintain highly accommodative monetary policy as long as needed to support continued progress toward maximum employment and price stability.” When asked at what point the bond-buying policy might change, Bernanke was more evasive, saying that the Fed might need a few more meetings to make that decision. Asked if it would be decided by Labor Day, he demurred. Bernanke’s hedging isn’t primarily a sign of indecisiveness. His real problem is that given current economic conditions, there aren’t any good moves he can make. The conventional wisdom – and the presumption behind the Fed’s current policy – is that the economy is steadily improving, even if progress is slow. And while easy money eventually leads to higher inflation, that threat could still be several years away. So ideally, the Fed’s stimulus could get the economy back to a normal rate of growth before inflation becomes a problem, at which point the Fed could taper off its bond buying little by little and gracefully exit the picture. (MORE: The Unspeakably Wonky Idea That Can Solve the Corporate Tax Debate) But what if the economy isn’t getting better, or is improving so sluggishly that it will take years to get back to normal?
Doug Porter, chief economist at the Bank of Montreal, said the Canadian dollar is overvalued by 5% to 10% given levels of commodity prices.
Porter, speaking in an interview Tuesday at Bloomberg’s Canada Economic Summit in Toronto, said the Canadian dollar will continue to be supported by safe-haven flows in the next couple of years, keeping it trading near parity with the U.S. dollar before weakening in the “medium-term.”
There is also no urgency for the Bank of Canada to raise interest rates, Porter said, adding there is a case for the country’s central bank to drop its tightening bias because the housing market has cooled.
The highest inflation-adjusted yields on Canadian government bonds in almost three months suggest that incoming Bank of Canada Governor Stephen Poloz has room to reverse Mark Carney’s tightening bias and cut interest rates.
The difference between the return of the benchmark 10-year bond and the annual rate of inflation, known as the real yield, widened to 152 basis points on May 17, after Statistics Canada said consumer prices fell to 0.4 % in April. That’s above the average of 114 basis points since before the start of the global financial crisis in 2008.
“After the recent decline in inflation there are still question marks on if the central bank can or will maintain its hiking bias,” Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from Toronto. “Performance from here will be dictated by if the Canadian economy can hook on to the coattails of the emerging U.S. economy.”
Canada’s dollar fell to a more than two-month low against its U.S. peer Tuesday amid speculation improvement in the world’s largest economy would spur the Federal Reserve to reduce stimulus, known as quantitative easing.
The currency declined against the majority of its 16 most-traded peers as crude oil, Canada’s biggest export, snapped a four-day rally amid falling commodities. Fed Chairman Ben S. Bernanke will discuss the economic outlook in congressional testimony and the central bank will publish minutes of its latest meeting Wednesday.
Canada’s dollar is “really following the flow, which sees the U.S. dollar stronger across the board,” Jack Spitz, managing director of foreign exchange in Toronto at National Bank of Canada, said in a telephone interview. The U.S. currency is gaining on “the anticipation that QE tapering is in the cards.”
The loonie fell 0.6% to C$1.0306 per U.S. dollar at 10:55 a.m. in Toronto after touching C$1.0321, weakest since March 7. One loonie buys 97.03 U.S. cents.
Crude-oil futures fell 0.6 % to $96.11 a barrel in New York. The Standard & Poor’s 500 Index of stocks dropped 0.1 %.
Canada’s benchmark 10-year government bonds fell, with yields rising two basis points, or 0.02 percentage point, to 1.94 %. The 1.5% note maturing in June 2023 dropped 15 cents to C$96.05.
U.S. stocks were little changed, after the Standard & Poor’s 500 Index climbed for four straight weeks to an all-time high, as investors weighed corporate acquisitions.
Yahoo! Inc. rose 0.5% after agreeing to buy blogging network Tumblr Inc. for about US$1.1-billion. Actavis Inc. rallied 3.1% as it reached a deal to acquire Warner Chilcott Plc. Websense Inc. jumped 29 after agreeing to be bought by private- equity firm Vista Equity Partners. Red Hat Inc. slipped 3.8% amid an analyst downgrade.
If we have a correction, it’d be more or less some time around now and the summer
The S&P 500 gained less than 0.1% to 1,668.17 at 10:15 a.m. in New York. The Dow Jones Industrial Average declined 10.09 points, or 0.1%, to 15,344.31. Trading in S&P 500 stocks was 16% below the 30-day average during this time of day.
“There is still some nervousness, particularly as we go into mid-year, when there is typically seasonal signs of weakness,” Margie Patel, a senior portfolio manager at Wells Capital Management in Boston who oversees about US$1.5-billion, said in a telephone interview. “So if we have a correction, it’d be more or less some time around now and the summer. But the point is it’s going to be mild. It’s hard to be more than mild because the fundamentals are so good.”
The S&P 500 added 2.1% last week, closing at a record, as gauges of leading economic indicators and consumer sentiment beat estimates. The U.S. bull market has entered its fifth year, adding about US$11.5-trillion in market value, according to data compiled by Bloomberg. The S&P 500 has surged 147% from a 12-year low in 2009, driven by better-than- estimated corporate earnings and three rounds of bond purchases from the Federal Reserve.
Dallas Fed President Richard Fisher said in an interview on CNBC today that the odds favor dialing back purchases. He said he would have started tapering stimulus at the last Federal Open Market Committee meeting.
The most-indebted U.S. companies are rallying more than any time in almost four years compared with the rest of the stock market. S&P 500 companies with the lowest working capital, smallest earnings and highest debt ratios surged 27% this year, almost double the gains for businesses with the most cash and least borrowing, according to data compiled by Bloomberg and Goldman Sachs Group Inc.
Yahoo rose 0.5% to $26.65. The biggest U.S. Web portal is buying Tumblr as Chief Executive Officer Marissa Mayer seeks to lure users and advertisers with her priciest acquisition to date. Mayer, CEO since July, is betting that Tumblr will help transform Yahoo into a hip destination in the era of social networking as she challenges Google Inc. and Facebook Inc. in the US$17.7-billion display ad market.
Actavis added 3.1% to US$129.40 after saying it will buy Warner Chilcott for US$8.5-billion in a stock transaction that enables the company to expand in women’s health and urology. The combined annual revenue of the companies will be about US$11-billion, according to a joint statement. Warner Chilcott, the drugmaker that unsuccessfully pursued a sale last year, increased 2.3% to US$19.65.
Websense jumped 29% to US$24.75. The Internet-security company will be acquired by Vista Equity Partners in a deal valued at about US$906-million. The company is trying to transition from its roots blocking inappropriate websites in the workplace into a provider of broader online-security services.
Pandora Media Inc. gained 1.2% to US$16.25 as Barclays raised its recommendation on the biggest Internet radio provider to equal weight, similar to hold, from underweight.
“Pandora has made significant progress in improving its ability to monetize its growing mobile usage,” Barclays analyst Anthony DiClemente wrote in a report. We “see upside to current consensus revenue estimates,” he wrote.
Red Hat slipped 3.8% to US$52.88, ending 12 days of consecutive gains. The largest seller of Linux operating-system software was cut to market perform, an equivalent of neutral, from outperform at BMO Capital Markets by equity analyst Karl Keirstead.
The world’s major central banks may be shifting their tone subtly from “whatever it takes” to “we can only do so much”.
Financial markets supercharged this year by the extraordinary monetary stimuli of the top four central banks are once again asking how long this can last.
Friday’s stall of this year’s global stocks market rally was blamed by many on fresh policymaker chatter about when the U.S. Federal Reserve will or should start to wind down its bond-buying and money printing programs, or “quantitative easing”.
Ironically, the latest concern about the ‘beginning of the end’ of QE is flaring after a week of data from both sides of the Atlantic showing persistent weakness in the western economies and an absence of any discernible inflation pressures.
So while few strategists reckon the end of QE is nigh, the very debate itself may now force investors to rethink the long-term horizon even if a reversal of investment flows is unlikely.
“The U.S. and world economy is probably not strong enough to end the QE effort any time soon,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets. But “the market itself has had a very steep run and so a pause or consolidation becomes more likely and would be in fact desirable.”
Yet if the big four central bankers are listening to the counsel of their monitors at the International Monetary Fund and Bank for International Settlements, then the tone of the debate has indeed changed this week.
While applauding central banks’ success in stabilizing the financial system over the past five years, the two global monetary bodies on Thursday detailed the risks both of persisting with extraordinary QE for too long and also the potentially disruptive effects of turning off the taps.
And highlighting the lack of traction in boosting growth and jobs, the common theme from the IMF and BIS was that monetary policy alone may have reached the limits of what it can do and other reforms and approaches now needed to be considered.
“If the medicine does not work as expected, it’s not necessarily because the dosage was too low,” said BIS chief Jamie Caruana. “Refocusing the policy mix to rely more on repair and reform and not to overburden monetary policy is crucial because the balance of risks of prolonged very low interest rates and unconventional policies is shifting.”
Echoing that, IMF assistant director for monetary and capital markets Karl Habermeier wrote: “Monetary policy cannot do everything.”
In the coming week, leaders of all four top central banks – the Fed, Bank of Japan, European Central Bank and Bank of England – deliver keynote speeches amid all the unease at a disconnect between seemingly euphoric markets, struggling economies and evaporating inflation.
Fed chairman Ben Bernanke testifies to Congress on Wednesday, Bank of Japan governor Haruhiko Kuroda speaks after the bank’s latest policy meeting earlier that day and outgoing BoE head Mervyn King speaks in Helsinki on Friday.
Pointedly, ECB chief Mario Draghi returns to the financial community in London on Thursday for the first time since July when he drew a line under the euro crisis by pledging to do “whatever it takes” to protect the shared currency.
Given that phrase also neatly framed the determination of all G4 central banks to plough ahead with extraordinary monetary easing – the Fed’s stepped up bond-buying plan to cut U.S. jobless or the ‘shock-and-awe’ tactics of the new Japanese government and Bank of Japan – they may all now be taking stock.
What’s clear is that investors, if not the real economy, have run with their plan so far.
Total returns on Spanish or Greek equities and euro zone bank stocks are up between 40 and 50 percent since last July. Italian, French and German equities and Spanish and Irish 10-year government bonds have all returned 30 percent or more. While these have outperformed the 25 percent gains in Wall St’s S&P 500 since then, the latter has powered to all-time highs.
All pale in comparison with the eye-popping 75 percent rise in Japan’s Nikkei 225 in just six months and bond borrowing rates from the highest to lowest rated sovereigns and corporates across the globe have fallen or remained close to historic lows.
So if central banks now want to flag an inflection point in policy thinking, should investors take their cue from that too?
For many, the seismic shift in investor flows is still not as speculative as it may appear. Flows to both corporate bonds and largely defensive dividend-heavy equities this year are still fuelled largely by an exit from near zero-yielding money markets funds in search of long-term income rather than quick price rises or capital growth.
It’s the success of the central banks in convincing investors they will not tolerate another systemic or growth shock that is still driving that exit from cash bunkers. Far from being excessively optimistic about the world economy per se, many strategists reckon that investors will only change that behaviour when the central banks actually succeed in generating faster growth and credit expansion in the real economy – changing the inflation and interest rate horizon.
Credit Suisse economists said this was the peculiarity of the current QE-related “yield grab” – faster growth rather than low growth or stagnant economies was the bigger risk.
“This vulnerability likely becomes exposed in an environment of strengthening growth, which should in principle favour higher yielding assets, but would in practice be dominated by excess positioning.”
© Thomson Reuters 2013
Wal-Mart Stores Inc’s quarterly profit just missed Wall Street expectations on Thursday, with sales down 1.4% at its Walmart U.S. stores open at least a year.
The world’s largest retailer said U.S. sales suffered from a delay in income tax refund checks, cool weather, less grocery inflation than expected, and the payroll tax increase.
Shares of Wal-Mart fell 2.3% in premarket trading to US$78. The stock had hit a new high of US$79.96 on Wednesday.
Wal-Mart earned US$3.78-billion, or US$1.14 per share, in the first quarter ended on April 30, up from US$3.74-billion, or US$1.09 per share, a year earlier.
The analysts’ average forecast was US$1.15 per share, according to Thomson Reuters I/B/E/S. In February, Wal-Mart had forecast a profit of US$1.11 to US$1.16 per share.
First-quarter revenue rose 1% to US$114.19-billion.
Same-store sales at Walmart U.S. fell 1.4%, while the company had earlier expected such sales to be about flat. Visits to Walmart U.S. stores open at least a year fell 1.8%, while the average amount spent per visit rose 0.4%.
Wal-Mart forecast earnings of US$1.22 to US$1.27 per share for the current second quarter, up from US$1.18 a year earlier.
The company said it expected second-quarter same-store sales, excluding those of fuel, to be flat to up 2% at Walmart U.S. and up 1% to 3% at its Sam’s Club warehouse store chain.
LONDON/ZUG, Switzerland — Glencore Xstrata Chairman John Bond surprised investors on Thursday by announcing he had been voted out of the top job at the miner and trader at the group’s first annual shareholders’ meeting.
Bond gave no explanation, but as the meeting began in Zug, Switzerland, he handed responsibility for chairing the gathering to former BP boss Tony Hayward, the company’s senior independent director.
The results of the shareholder vote are due to be published by Glencore shortly.
A veteran of London’s financial sector who was formerly chairman of miner Xstrata, Bond agreed last November to stand down once Glencore and Xstrata merged, quitting after coming under fire over a 140 million pound ($223 million) “golden handcuffs” package for key Xstrata managers.
But he had been due to leave only after a replacement was found and his abrupt ousting is likely to raise questions over governance at the company, whose shares are still largely held by its top managers.
Glencore was widely criticised for its appointment of Hong Kong veteran and former legionnaire Simon Murray as chairman at the time of its stock market listing, as analysts and investors questioned whether he would act as a sufficient counterpoint to CEO and top shareholder Ivan Glasenberg.
Murray was replaced by Bond after the merger.
© Thomson Reuters 2013
DALLAS — Southwest Airlines Co. is delaying delivery of new airplanes and filling the gap with used planes to reduce spending over the next five years.
It’s also raising its dividend and could soon buy back more of its own shares.
Southwest said Wednesday that it will delay 30 firm orders for Boeing 737 jets, which CEO Gary Kelly said would cut capital spending through 2018 by more than US$500 million. The airline is also giving up or delaying options for additional planes.
Meanwhile Southwest will buy 10 used 737s from Canada’s WestJet over the next two years. They average about 11 or 12 years old and should bide Southwest over until Boeing begins producing a new, more fuel-efficient 737 model called the Max late in this decade, Southwest officials said.
The airline isn’t disclosing financial details of the Boeing and WestJet deals, which were announced at the Dallas company’s annual meeting.
Southwest is raising the quarterly dividend due on June 26 to 4 cents per share, up from a penny per share. It’s also boosting share-buyback authority to US$1.5 billion from US$1 billion. The company has bought US$725 million in its own stock since August 2011, increasing the value of remaining shares.
Southwest is alone among major U.S. carriers in being consistently profitable for many years and having an investment-grade credit rating. It was the only major U.S. airline to offer a dividend until Delta Air Lines Inc. announced last week that it too will begin paying a dividend. Delta also increased its share-buyback program.
Other kinds of companies routinely pay dividends and buy back shares, but the lack of dividends is fitting in the airline industry, where most big operators have lost billions and gone through bankruptcy in the past decade. Delta’s dividend and the increase at Southwest are further signs that the airlines believe they’ve turned a corner.
Mergers have reduced competition among airlines, helping to prop up fares, and the carriers have raised billions from new fees.
Southwest shares rose 20 cents to US$14.18 in afternoon trading. Shares of Delta, United Continental Holdings Inc. and US Airways Group Inc. were each up about 3% in a broad market rally.
The Associated Press
Appaloosa Management LP, the hedge-fund manager run by billionaire David Tepper, cut its stake in Apple Inc. by 41% last quarter as the computer maker slumped while stock markets rallied.
Appaloosa held 540,000 shares of the Cupertino, California- based technology company at the end of March, valued at US$239-million, down from 912,661 shares at the end of last year, according to a regulatory filing today. Apple extended losses after the filing, declining the most in three weeks.
Tepper, who had been investing in the stock since the end of 2010, pared his stake as Apple declined 17% in the first three months of the year, even as U.S. stocks added 10%. Tepper said in an interview with CNBC yesterday that he sold Apple shares because the maker of the iPhone and iPad devices hasn’t been “evolutionary” or “revolutionary” recently.
Apple closed down 3.4% at US$428.85 in New York on Wednesday. The stock has fallen dramatically from a record high in September amid concerns about slowing profit and sales, narrowing margins and intensifying mobile competition.
Appaloosa, which manages US$17.9-billion, trimmed its stake in Citigroup Inc., its biggest U.S.-listed stock holding, by 675,000 shares to 8.52 million shares, valued at US$376.9-million at the end of the first quarter, according to the filing.
The hedge-fund firm also reduced its holding in JPMorgan Chase & Co. by 1.3 million shares in the quarter, leaving it with 1 million shares, and cut its stake in American International Group Inc.