Asia Stocks, Won Gain on U.S. Economic Outlook

Asian stocks rose for a third day, while U.S. futures and the South Korean won climbed, after Federal Reserve Chairman Ben S. Bernanke said the world’s biggest economy is gradually recovering and he has the tools to spur growth. Gold and the Swiss franc fell.

The MSCI Asia Pacific Index added 1.8 percent as of 12:44 p.m. in Tokyo. Standard & Poor’s 500 Index futures increased 0.9 percent, while Treasury 10-year notes declined for the first time in three days. The won strengthened 0.6 percent versus the dollar, while the franc lost 0.4 percent. Gold for immediate delivery sank as much as 1.2 percent. Gasoline prices slid as refineries along the U.S. East Cost operated at or near normal levels following Tropical Storm Irene.

Raw material suppliers and exporters led gains in Asia after Bernanke said on Aug. 26 in Jackson Hole, Wyoming, the U.S. economy isn’t deteriorating enough to warrant any immediate stimulus.

Stocks Gain

Australia’s S&P/ASX 200 Index rallied 1.6 percent, South Korea’s Kospi Index jumped 2.7 percent and Taiwan’s Taiex Index increased 2 percent. The Nikkei 225 Stock Average was 1.4 percent higher before Japan’s ruling party today chooses Naoto Kan’s successor as prime minister.

Inotera Memories Inc. (3474) advanced by the 7 percent daily limit in Taipei after a two-day surge in the price of memory chips. Hyundai Merchant Marine Co. rose 3.6 percent in Seoul after Daewoo Shipbuilding & Marine Engineering Co. signed an agreement with Hyundai Elevator Co. to buy Hyundai Merchant shares.

The Shanghai Composite Index dropped 1.1 percent, paced by a retreat in Industrial and Commercial Bank of China Ltd., after economists from brokerages including Bank of America Corp.’s Merrill Lynch unit and Mizuho Securities Asia Ltd. said banks have been ordered to set aside reserves on a broader range of deposits. China’s one-year swap rate, the fixed cost of receive the seven-day repurchase rate, rose 19.5 basis points to 4.265 percent, the highest level since July 22.

Fed Meeting

S&P 500 index (SPX) futures signal the gauge may extend its 1.5 percent rally on Aug. 26. The index increased 4.7 percent last week, its first gain in more than a month. Stocks initially fell on Aug. 26 after Bernanke announced no new plan to stimulate growth.

He said a second day has been added to the next Federal Open Market Committee meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response. He didn’t close the door in today’s speech to options he has previously discussed, including a third round of government bond buying.


U.S. Economy 

Data today may show personal spending rose 0.5 percent in July, following a 0.2 percent decrease the previous month, according to the median forecast of economists surveyed by Bloomberg. Separate reports today may show pending home sales increased 13.6 percent in July, after a 17.3 percent gain previously, while the Dallas Fed’s index of manufacturing activity declined 8.5 percent in August.
Treasuries fell for the first time in three days, sending yields on 10-year notes up two basis points to 2.21 percent.

The won climbed to 1,075.35 per dollar, while Malaysia’s ringgit strengthened 0.3 percent to 2.9795 per dollar, the biggest increase in a week. The Swiss franc weakened against all 16 most-actively traded peers and traded at 80.99 centimes against the U.S. currency.

“Market players are interpreting Bernanke’s speech in an optimistic way, weighing possibilities for another stimulus in the near future,” said Ryoo Hyun Jung, chief currency dealer with Citibank Inc. in Seoul. “The speech has shifted sentiment from risk-averse to some risk-taking.”

The cost of protecting Asia-Pacific corporate and sovereign bonds from default declined, with the Markit iTraxx Australia index dropping three basis points to 171 basis points, according to Credit Agricole CIB prices. That will be its lowest level since Aug. 25, according to data provider CMA.

Gold, Gasoline

Immediate-delivery gold lost as much as 1.2 percent to $1,806.50 an ounce before trading at $1,822. The metal has slumped as much as 11 percent from its Aug. 23 all-time high of $1,913.50 as equities rebounded. December-delivery bullion in New York rose 1.5 percent to $1,824.20 an ounce, after gaining 2.5 percent earlier.

Oil for October delivery traded little changed at $85.38 a barrel on the New York Mercantile Exchange, following two days of gains. Gasoline for September delivery dropped as much as 2 percent today to $2.8765 a gallon in electronic trading on the New York Mercantile Exchange, extending a 1.1 percent drop on Aug. 26. Irene weakened from a hurricane and headed toward Canada.

Dry Weather

Corn and soybeans gained on concern that dry weather in the U.S. Midwest will erode crop yields. December-delivery corn rose 0.9 percent to $7.74 a bushel, extending Friday’s 3.2 percent advance, the biggest increase since Aug. 11. Soybeans for November delivery climbed 0.3 percent to $14.2775 a bushel.

U.S. farmers may harvest 12.484 billion bushels of corn this year, the Professional Farmers of America newsletter said Aug. 26 after completing a four-day tour of Midwest fields. The estimate was 3.3 percent below the U.S. Department of Agriculture’s forecast. Iowa and Illinois, the biggest growers of corn and soybeans, had the hottest July since 1955, and rainfall has been below normal this month.(Bloomberg)

Asia Hedge Fund Startups Fall 38% as Big Funds Favored

The number Asian hedge fund startups fell 45 percent in the first half of the year as investors preferred larger funds amid volatile markets, according to Eurekahedge Pte.

There were 60 new Asian hedge funds set up in the first six months of 2011, of which 14 were based in Singapore and 11 in Hong Kong, Eurekahedge said in an e-mailed reply to queries from Bloomberg News. There were 109 Asian hedge funds which started in the first half of last year and 169 in all of 2010, the Singapore-based industry data provider said.

Hedge funds found it tough to raise capital as investors shifted to experienced managers or established firms with steady returns and staff dedicated to risk assessment after the collapse of Lehman Brothers Holdings Inc. in 2008 saw many funds freeze assets. Firms managing more than $500 million received almost 62 percent of the capital invested in Asia-focused hedge funds in the second quarter, according to Chicago-based Hedge Fund Research Inc.
 
“In this volatile environment, some asset allocators believe they will be safer in large funds with a high pedigree, which makes it difficult for startups with more talented but less known managers to raise capital,” said Frank Brochin, managing director at New York-based StoneWater Capital LLC, which invests in Asian hedge funds.

Sze, Fuchs

Azentus Capital Management Ltd., a Hong Kong-based hedge fund set up by Morgan Sze, global head of Goldman Sachs Group Inc.’s principal strategies business, increased assets to more than $1.9 billion, three people with knowledge of the matter said in July. Benjamin Fuchs, who leads the Global Opportunities Group proprietary trading desk at Nomura Holdings Inc., aims to start his own Hong Kong-based hedge fund with at least $400 million, two people with knowledge of the plan said.

The MSCI Asia Pacific Index fell 2 percent in the first six months, after a 14 percent rally last year, as investors became concerned that an earthquake in Japan in March would stall the nation’s emergence from deflation, U.S.’s sovereign-debt would be downgraded and Chinese growth would slow as inflation accelerated. Standard & Poor’s downgraded U.S.’s debt rating on Aug. 5.
The formation of a strong management team is the “main difficulty” of starting a hedge fund, said Roland Thng, a managing partner of Singapore-based Dektos Investment Corp., which aims to start a macro hedge fund by the first quarter of next year.

Business Sustainability

Thng, previously a currency trader at Oversea-Chinese Banking Corp., teamed up with Mario Manca, a former private banker at Barclays Wealth Management who has experience in risk management and business development, to set up the fund. Thng had attempted to start Dektos as a “one-man shop” a year and a half ago, he said.

“I soon realized that this model doesn’t work,” Thng said. “Having a strong management team will allow regulatory agencies and investors to have strong confidence in the sustainability of the business.”

Asian hedge funds may attract less money in coming weeks from U.S. institutional investors as they wait for a clearer reading of the global economic outlook, according to Pacific Alternative Asset Management Co., which invests in hedge funds.

The MSCI Asia Pacific Index declined 14.5 percent yesterday from this year’s high on May 2 on concern Standard & Poor’s downgrade of the U.S. credit rating to AA+ from AAA could worsen an economic slowdown, the European sovereign debt crisis will spread and China’s steps to stem inflation will slow growth.

Investors poured $600 million into Asian hedge funds in June, even as managers lost about 1 percent that month, according to Eurekahedge. The region’s strategies lost 0.3 percent in the first half, while U.S. funds gained 2.2 percent, according to the data provider.

Asia-focused hedge funds managed $89.5 billion in the second quarter, compared with a peak of $111.4 billion in 2007, according to Hedge Fund Research.(Bloomberg)

U.S. 30-Year Bond Rises on Speculation Data to Show Economy Is Slowing

U.S. 30-year bonds rose, sending yields toward the lowest level since 2009, before government reports this week forecast to show companies reduced orders for equipment and the economy grew slower than earlier reported.

The longest maturities, those most sensitive to inflation, gained as the U.S. economy showed signs of faltering. Treasuries due in 10 years and less fell on speculation yields that dropped to record lows this month will deter investors when the government sells $99 billion of notes starting tomorrow. The extra yield investors demand to purchase 30-year bonds instead of two-year notes narrowed to as low as 3.17 percentage points, the least since September.

“The financial markets are whipping themselves up for a fear of a double-dip” recession, said Roger Bridges, who oversees the equivalent of $15.6 billion of debt as the Sydney- based head of bonds at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. “Treasuries are very expensive. So long as this fear keeps on going, they will continue” to be so.

Thirty-year yields declined one basis point to 3.38 percent at 12:21 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.75 percent security due in August 2041 rose 1/4, or $2.50 per $1,000 face amount, to 107. The yield fell to 3.34 percent on Aug. 18, the least since January 2009.

Ten-year rates advanced two basis points, or 0.02 percentage point, to 2.08 percent. The record low was 1.97 percent set Aug. 18.

Inflation Expectations

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.01 percentage points. The spread was 1.96 percentage points on Aug. 18, the least since October. The five-year average is 2.06 percentage points.
Japan’s 10-year yield was little changed at 0.985 percent, versus this year’s low of 0.97 percent set on Aug. 19.

U.S. bookings for durable goods excluding transportation fell 0.5 percent in July after rising 0.4 percent in June, according to the median forecast of economists surveyed by Bloomberg News. The data is due for release on Aug. 24.

A report on Aug. 26 may show gross domestic product grew at a 1.1 percent annual pace in the April-to-June quarter, down from 1.3 percent estimated last month, a separate survey shows. New home sales were probably unchanged in July from June, figures may show tomorrow.

Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke will signal as soon as this week that the central bank will begin a third round of so- called quantitative easing to boost the economy, a scenario the world’s biggest bond dealers said is unlikely.

Pricing in QE3

Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2 percent.

“The market is pricing in another round of large-scale asset purchases, looking for confirmation possibly as early as the Jackson Hole symposium” in Wyoming this week, Anshul Pradhan, a fixed-income research analyst at Barclays in New York, said in an interview last week. “The probability of that is low. If the Chairman does disappoint, then there should be a reversal in the outperformance of 10-year notes.”

Central bankers from around the world will meet in Jackson Hole at an annual conference sponsored by the Fed Bank of Kansas City. Bernanke triggered financial rallies a year ago when he said at the same gathering that the Fed was prepared to “do all that it can” to ensure economic recovery and suggested it would purchase more securities if growth slowed.

Bond Auctions

The government is scheduled to auction $35 billion of two- year notes tomorrow, the same amount of five-year debt on Aug. 24 and $29 billion of seven-year debt on Aug. 25. Two-year yields were little changed at 0.20 percent, versus the record of 0.16 percent set Aug. 9.

“Treasury yields will rise,” said Zeal Yin, who invests in U.S. government debt for Taipei-based Shin Kong Life Insurance Co., Taiwan’s second-largest life insurer with the equivalent of $41.4 billion in assets. “The recovery will be slow” though the U.S. will avoid a recession, he said.

Shin Kong Life sold Treasuries last week, Yin said.

Bank of America Merrill Lynch, one of the 20 primary dealers authorized to trade directly with the Fed, recommended 10-year notes as a strategy to contend with a possible U.S. recession.

“A core long in 10-year Treasuries may be the best medium- term strategy as events continue to unfold,” bank strategists Ralph Axel, Bin Gao and Adarsh Sinha wrote to clients on Aug. 19. An investor who owns bonds has a so-called long position.(Bloomberg)

Junk Yields Surpass 10% as Growth Slowdown Halts Bond Sales: Euro Credit

Junk-rated European company bond yields climbed above 10 percent for the first time in a year as investors demand more compensation for the region’s stalling economic growth.

According to Bank of America Merrill Lynch’s Euro High-Yield Constrained Index, yields on speculative-grade debt climbed to as high as 10.1 percent on Aug. 11, the most since June 2010 and 2 percentage points up on the start of this month. That’s double the rate on Italian and Spanish 10-year government debt after the European Central Bank bought the securities to bring down yields to contain Europe’s sovereign crisis.


Borrowers unwilling to pay the higher premiums demanded by investors as the risk of recession looms means there have been no new junk bond sales in Europe since July 26, according to data compiled by Bloomberg. Gross domestic product in the 17- nation euro region rose 0.2 percent in the second quarter, the worst performance since it emerged from recession in 2009.

Deteriorating Conditions

The extra yield buyers demand to own junk bonds instead of benchmark German bunds has almost doubled in the past four months as investors seek havens for their cash, Bank of America Merrill Lynch data show. The spread is at 816 basis points, or 8.16 percentage points, up from this year’s low of 476 basis points on April 11.

According to data compiled by Bloomberg, the world’s biggest brickmaker raised 100 million euros ($143 million) from a sale of 5.25 percent bonds on June 21 priced to yield 279 basis points more than German government debt.

Austerity Bites

Confidence in junk-rated debt is deteriorating as nations such as Italy and Spain tackle the debt crisis by implementing austerity measures that may hamper economic growth and hurt companies’ ability to pay debt.

Corporate defaults in Europe could rise as concerns so- called peripheral countries will be unable to pay their debt seeps into the region’s financial system, Moody’s said in an Aug. 8 report. The ratings firm estimates the global default rate may increase to 1.8 percent in 2012 from 1.5 percent at the end of 2011 while the risk of recession persists.

Returns Erased

Speculative-grade bonds lost investors 1.1 percent this year after forfeiting 5.2 percent since the end of July, according to Bank of America Merrill Lynch data. That’s after the securities earned 14.7 percent last year and a record 76.4 percent in 2009.

European-based mutual funds reduced holdings of high-yield bonds for the first month this year in June, pulling 1.1 billion euros out of junk-rated debt, according to Fitch Ratings. That compares with a net inflow of 5.1 billion euros in the first half. Funds added 290 million euros of investment-grade debt in June after cutting 230 million euros in May, Fitch said.

“Prior to the most recent resurgence of the eurozone crisis we’ve seen both quality companies and companies in much more challenged circumstances managing to get deals done,” said Norval Loftus, chief investment officer at Allegra Investment Management Ltd. in London. “That second type of company is going to find it much more difficult to obtain financing even at significantly higher spreads.” (Bloomberg)

Singapore to Keep Thrust of Economic Policies Amid Adjustments, Lee Says

Singapore will maintain the thrust of the policies that have helped the economy, even as it will make adjustments to address specific concerns, Prime Minister Lee Hsien Loong said in a televised speech today.

Investors are waiting to see what Singapore will do after the May general election, and the island will maintain policies that are important to the country and helpful to investors, he said. The nation will keep its policies pragmatic and constructive, he said.(Bloomberg)

No plan to change GDP forecast after austerity: Tremonti

Italy does not currently plan to change its economic growth forecasts as a result of its latest austerity plan, Economy Minister Giulio Tremonti said on Saturday.

Italy forecasts economic growth of 1.1 percent this year and 1.3 percent in 2012.

"For now we don't plan to change our forecasts," Tremonti told a news conference to explain the plan, which contains tax hikes and spending cuts worth some 45.5 billion euros to balance the budget in 2013.

Analysts say the austerity program, approved by the cabinet late on Friday, will hit consumer confidence and weaken already weak domestic demand.

Tremonti said he believed measures of "liberalization and simplification" contained in the plan could help growth and that benefit would also come from a plan to celebrate some national holidays on Sundays rather than working days. (Reuters)

US Economy: Second-quarter U.S. productivity falls 0.3%

The productivity of U.S. businesses fell 0.3%` in the second quarter while first-quarter figures were revised lower to show a decline, as labor costs rose faster than the amount of goods and services produced.

Economists surveyed by MarketWatch had expected productivity to decline by 0.9% in the second quarter. Productivity in the first quarter, meanwhile, was revised to a 0.6% decline instead of a previously reported increase of 1.8%, the Labor Department said Tuesday. The amount of goods and services produced, known as real output, grew at an annual rate of 1.8%. Hours worked rose 2.0%. Compensation per hour rose 1.9% at an annual rate, but hourly wages adjusted for inflation actually fell 2.1%. The unit cost of labor, meanwhile, rose by a 2.2% annual rate. (Market Watch)

U.S. economy gains 117,000 jobs in July Private sector adds 154,000; unemployment rate falls to 9.1%

The economy added 117,000 jobs in July and the unemployment rate fell slightly to 9.1%, the government said Friday, in a better-than-expected report that temporarily calmed concerns about another recession.

On Wall Street, stocks rose after markets opened before turning sharply lower in volatile trading. Investors are still jittery after Dow Jones Industrial Average on Thursday sank more than 500 points, a stunning decline triggered partly by fresh worries about the U.S. economy.

The jobless rate has stayed above 8% for 30 straight months, the longest stretch of high unemployment since the Great Depression in the 1930s. What’s more, the drop in the unemployment rate in July stemmed mainly from a decline in the labor force as discouraged job seekers stopped looking for work. 

During times of rapid growth, the U.S. typically adds at least 200,000 jobs a month, but much larger increases would be required for months on end to yank the unemployment rate back down to pre-recession 

levels. 

The rate of hiring in July wasn’t even enough to absorb the natural increase in the labor force, which requires about 125,000 new jobs a month.

Companies in the private sector hired 154,000 workers, but governments at all levels continued to trim jobs, putting the overall gain at the critical headline figure of 117,000. 

The biggest increases occurred in health care (31,000), retail (26,000) and manufacturing (24,000). Government shed 37,000 jobs, marking the ninth consecutive decline. 

 The latest employment data, although better than forecast, ignited fresh calls in Washington to pass new laws to boost job creation. President Obama on Friday, for example, urged Congress to create a tax credit for companies that hire former members of the military.

Investors, for their part, have shown just how worried they are about the U.S. and global economy. Equity gains since the beginning of the year were wiped out entirely over the past week.

The economy has now seen growing around 2% or less in 2011, down from prior projections of as much as 3%. Few expect the jobless rate to fall much from its current level of 9.1%, meaning that many of the nation’s 13.9 million unemployed are unlikely to find work. Almost 45% have been without a job for at least six months. (Market Watch)