Contributed by Beth Collinge of CTG – a division of ILX Group plc.
Global equities rebounded this week. Santander purchased Bank of America’s stake in its Mexican operations, seizing back full control of the business. BP may suspend its dividend to fund the cleanup of the Gulf oil spill. EU finance ministers backed Estonia’s bid to become the 17th member of the eurozone.
- After a poor start to the week, global equities rebounded on news that China’s exports in May rose 48.5 per cent year-on-year, cooling fears that the eurozone debt crisis and planned austerity measures would damp global growth.
- The dollar slipped while the euro rebounded from a four-year low on Tuesday in volatile currency trading. A decision from the German constitutional court to reject an injunction to prevent the country from contributing to the eurozone rescue package also boosted the euro. The euro recovered to stand up 1.2 per cent to $1.2115 against the dollar on the week, and 0.4 per cent stronger against the pound at £0.8305.
- In government bonds, US long-term debt sales attracted solid demand and the yield on 10-year notes was up 3bp on the week at 3.23 per cent.
- In commodities, U.S. light crude oil for July delivery fell $1.70 to $73.78 a barrel: gold hit an all-time high of $1,252 on Tuesday and closed at $1,217 spot.
- At central bank meetings this week the Bank of England and European Central Bank left rates unchanged at record low levels.
Mergers and Acquisitions
- Santander, the eurozone’s biggest bank, bolstered its overseas activities yesterday by purchasing Bank of America‘s minority stake in its Mexican operations and seizing back full control of the business. The Spanish bank paid $2.5bn for the 25 per cent stake that it sold to the US bank in 2003 for $1.6bn. BofA sold the stake to focus on its core businesses. Mexico should now account for about 7 per cent of profits, compared with 5 per cent previously.
- JPMorgan Chase unveiled a Chinese securities joint venture Wednesday in the latest move by a global investment bank to tap the mainland’s lucrative capital markets. The joint venture is subject to regulatory approval, which analysts say could take several months. If successful, the move could accelerate plans by other US banks to launch similar ventures.
- Securities and Exchange Commission (SEC) investigators are now focusing on a second mortgage-backed asset created by Goldman Sachs – the Hudson Mezzanine, a synthetic collateralised debt obligation which was structured by Goldman in late 2006.
- Separately, the Financial Crisis Inquiry Commission, which is compiling a report for Congress, issued a subpoena to Goldman Sachs “for failing to comply with a request for documents and interviews in a timely manner”. Phil Angelides, the panel’s chairman, suggested that the bank was stalling.
- The trial began in Paris of Jérôme Kerviel, a former trader at Société Générale who is accused of a breach of trust and forgery in racking up unhedged bets that ultimately led in January 2008 to a €4.9 billion loss (then worth $7.2 billion) at the French bank. Mr Kerviel insists he “hid nothing”.
- European interbank lending rates have diverged to their widest levels since they were launched in December 1998 because of stresses in the eurozone banking system. Euribor money market rates, which are set by 42 banks in Europe, have risen above euro Libor rates, which are set by 16 banks in London, due to greater tensions in the eurozone.
- At a meeting in Luxembourg (8 June) European Union finance ministers pledged to pursue plans for a levy on banks, in spite of disagreement over what to do with the proceeds and the decision by the world’s richest nations to drop plans for a global tax. Britain is opposed to the idea. The ministers also agreed legislation to give Eurostat, the Union’s statistical office, audit powers over member states’ national finances and powers to act if member states’ economic statistics were suspected to be flawed and indicated that Bulgaria could be a focus of attention. The ministers also agreed to increase their co-operation against value-added tax fraud, by creating a permanent anti-fraud network, to be called Eurofisc.
- The European Commission announced details of the European Financial Stability Facility (EFSF), which will have €440bn ($526bn) at its disposal to help out eurozone members struggling to issue debt. The EFSF, based in Luxembourg, will be headed by Klaus Regling, a former director-general of the European Commission. There are detailed rules that govern when a eurozone member will be able to turn to the EFSF. In current market conditions, countries are only likely to turn to the body for assistance when their borrowing costs in the bond markets exceed about 5 per cent. At the moment, only Greece falls into this category, although Portugal is dangerously close.
- Britain’s competition regulator, The Office of Fair Trading, will investigate the fees charged by investment banks on corporate share issue. The investigation will cover investment banks, including Goldman Sachs, UBS, Citigroup and Morgan Stanley. However, it will not look at broader competition concerns in the investment banking market. Big UK banks such as Royal Bank of Scotland, Barclays and HSBC are already facing a prolonged inquiry into whether they should be broken up and forced to sell off their riskier investment banking activities from their retail banking operations.
- France and Germany issued calls to accelerate efforts to tighten financial regulation and clamp down on short selling. They said that improving transparency on short positions in equities and debt, particularly sovereign debt, was “indispensable”. They also want harmonisation of payment and settlement delays in Europe’s financial markets.
- The Financial Crisis Inquiry Commission, which is investigating the causes of the financial crisis, is looking at the ratings business, dominated by Moody’s, S&P and Fitch, Currently, they largely rely on fees from the entities and companies selling bonds, with investors getting the information free. Following the financial crisis, the conflicts of this relationship are being questioned. The Securities and Exchange Commission this month introduced new rules requiring huge amounts of disclosure about the information used to rate securitised deals – called rule 17g-5. Last week, the European Commission made similar moves. New laws that could have two significant effects are being considered. One could increase the liability rating agencies face – opening them up to lawsuits from issuers and investors. The second could change the way ratings are allocated, with the proposal suggesting the SEC should assign raters to deals.
- Regulatory changes may encourage new entrants to the business, such as DBRS, the Toronto-based ratings agency, and K2 Global Partners set up by Jules Kroll. Others, such as consultancy Pricewaterhouse Coopers, are also eyeing the sector. The core of the model, where issuers of debt pay for ratings, remains controversial. The main alternative is that investors pay. However, many, including Warren Buffett, whose Berkshire Hathaway is the biggest shareholder in Moody’s, oppose that.
The Institute of International Finance (IIF) forecast that economic growth in the eurozone, the US and Japan will be cut by three percentage points between now and 2015 if current proposals to force banks to hold more capital and liquid assets go forward unchanged. The group is pushing hard for the Basel Committee on Banking Supervision to rewrite or at least delay implementation of the proposals, known as Basel III, which are due to be voted on later this year. The Basel committee has proposed tightening the definition of what can be counted as core tier one capital, the basic measure of bank capital. It also wants banks to hold enough liquid assets to survive a short-term market crisis and reduce their reliance on short-term wholesale funding.
- European Union finance ministers on Tuesday backed Estonia’s bid to become the 17th member of the eurozone, paving the way for the former Soviet republic to join the currency from January 1, 2011. Estonia’s budget deficit was 1.7 per cent of gross domestic product in 2009, well within the 3 per cent Maastricht limit, while its government sector debt was the lowest in the EU at 7.2 per cent of GDP. Advocates of expansion had warned that rejection would send a damaging signal to other aspirant euro members, such as crisis-hit Latvia and Lithuania, which are pursuing often painful reforms with the aim of joining in 2014.
- BP is ready to suspend its dividend to guarantee it can meet all the legitimate costs of cleaning up its huge oil spill in the Gulf of Mexico when its senior directors meet US President Barack Obama on Wednesday.