Bernanke Prepared to Use 'All Tools' to Address Credit Crisis
Fed Reserve Chairman Ben Bernanke reassured Senate Banking Committee chairman and Democratic Presidential candidate Christopher Dodd that Bernanke was "absolutely" ready to use "all tools available to him" to tackle the current credit crisis in the U.S. The two met along with Treasury Secretary Henry Paulson in closed-door meeting on Tuesday. In a post-meeting press conference, Dodd said the thinks "the Fed gets it" about the seriousness of the present crisis, but added, "I’m still concerned that Treasury doesn’t understand the importance of the issue. We’re in a 37-year high rate of foreclosures in this country, a 10-year low on housing starts. It’s a very serious issue," he said. In a statement Monday, Dodd said credit market woes are serious enough to threaten "the American dream" as "millions of Americans face foreclosure on their homes." Dodd said he did not ask Bernanke to cut the federal funds rate, saying it was "dangerous" to have "someone in politics telling an independent agency what they ought to do on rate cuts." Dodd noted he was not happy with the Treasury's decision not to consider lifting caps on the amount of mortgages Fannie Mae and Freddie Mac can hold. In a CNBC interview Tuesday morning, Paulson said, "We’re thinking through options to reduce the strain in the mortgage markets and clearly focused... on actions that can be taken, things that we can do to help mortgage holders who are in danger of losing their homes." He said lifting Fannie Mae's and Freddie Mac's caps accomplishes little, because problems are concentrated in jumbo and subprime lending markets, not in the markets these two companies are active. Nicolas Beckmann, co-head of U.S. interest rate trading at BNP Paribas, said Dodd's comments and recent decisions from the Fed are beginning to successfully bring "some calm back to the financial markets."
Sources: New York Times I, II, Reuters
Commentary: What Fed Bailout? • NDR Credit Conditions Index Shows Decline Likely To Continue • More Fed Rate Cuts? Be Careful What You Wish For
Stocks/ETFs to watch: SPY, DIA, AGG
Bank of America Bearish on Builders; Says 'Sell' Toll
Bank of America on Tuesday downgraded a trio of homebuilders and slashed price targets on others, saying the group will be hit hard by the broadening mortgage crisis, which is making it more difficult to secure home loans. It estimates demand for new homes could slide 35% this year, rather than the 20% it had forecast when subprime problems first emerged, with sales declining to 700,000. “Our market checks point to a recent spike in cancellations as lenders pull loan commitments and buyers fail to qualify,” the firm told clients. “Lower cash flow will strain liquidity, particularly for high leverage builders.” Analysts cut their ratings on Hovnanian Enterprises and Standard Pacific to “neutral” and slashed Toll Brothers to “sell” from “neutral,” while slicing the target prices on all of the home builders they cover by about 33%. Dwindling mortgage availability, the broker said, will result in more home purchases being canceled, which could constrain the builders’ access to liquidity and borrowing. Creditors, so far, have been flexible on their loans to the builders, BofA said, but warned they could become “more rigid” about enforcing covenants if more purchases are canceled and cash from those deals doesn’t materialize. The analysts estimate that some 40% of home buyers who got a mortgage last year probably would not qualify now. Particularly damaging to Toll Brothers, a luxury builder, are so-called jumbo mortgages that cannot be purchased by government-sponsored enterprises such as Fannie Mae and Freddie Mac, which accounted for 15% of mortgages issued in 2006. The firm added that the credit crunch also could impact remodeling, which it believes could drop by 20%, hurting building-products companies such as USG Corp. and Black & Decker. Toll releases its third-quarter earnings today.
Sources: TheStreet.com, MarketWatch
Commentary: Bank of America Downgrades Three Homebuilders: A Look At Past Calls • Affordability Over Sustainability - A Cause of the Mortgage Crisis • U.S. Foreclosures Surge
Stocks/ETFs to watch: TOL, HOV, BDK. Competitors: SPF, DHI, CEN. ETFs: XHB, ITB
Fed's Lacker: Jumpy Market Insufficient Grounds for Rate Cut
Richmond Federal Reserve Bank President Jeffrey Lacker said Tuesday that market turbulence is grounds for a change in the federal funds rate only if it affects the inflation or growth outlook. "Financial market volatility, in and of itself, does not require a change in the target federal funds rate," he said. "Interest rate policy needs to be guided by the outlook for real spending and inflation." Lacker's remarks followed a meeting between Fed Chair Ben Bernanke and Senate Banking Committee Chairman Christopher Dodd at which Bernanke pledged to use "all available tools" to calm the markets. Last Friday, the Fed cut the discount rate on direct loans to banks but left the benchmark rate at 5.25%, where it has been for over a year. Lacker said he expects growth to come in "somewhat below its long-term trend" for 2007, and forecasts that "the drag from housing will continue for some time." He also warned that it is "still too soon to be confident that the moderation [in inflation] we have been seeing represents a downward trend."
Sources: Reuters, Bloomberg, MarketWatch
Commentary: Bernanke Prepared to Use 'All Tools' to Address Credit Crisis • What Fed Bailout? • Risk Aversion Remains Despite Fed Move; Treasury Yields Plummet
Stocks/ETFs to watch: DIA, AGG, SPY
Related: Full text of speech by Jeffrey Lacker to the Charlotte Risk Management Association
U.S. Foreclosures Surge
The number of U.S. homes in foreclosure jumped 9% from June to July, having climbed almost 93% since the same time last year. Data released Tuesday by RealtyTrac showed that Americans were filing one foreclosure for every 693 households last month. A total of 43 states had an increase in foreclosures since July 2006, but nearly half of them came from just California, Florida, Michigan, Ohio, and Georgia. Nevada had the highest foreclosure rate, filing one per every 199 household. Detroit, filing a foreclosure for every 99 homes, topped the list of metropolitan areas. Rick Sharga, RealtyTrac's executive VP of marketing, said his firm estimates about 2 million foreclosures are going to be filed this year as variable-rate mortgages reset higher, and added, "if they default like the subprimes have been defaulting this year, we won't be out of the woods for another nine to 12 months."
Sources: Press release, Bloomberg
Commentary: Let the Markets Crash • Treasury Bill Yields Collapse • Flight To Safety Has Barely Started
Stocks/ETFs to watch: XHB, ITB, IYG, XLF
TD Ameritrade and E*Trade in Merger Talks -- WSJ
The Wall Street Journal reports TD Ameritrade and E*Trade have been holding merger discussions over the past few weeks, which could result in a deal valued at as much as $20 billion. The combined company would have 11 million accounts, compared to Charles Schwab's 6.9M and Merrill Lynch's more-than 7M. The expected cost savings from combined operations are enticing, but sources say three hurdles stand between a merger agreement: First, TD Ameritrade is closely watching the quality of E*Trade's mortgage portfolio, which has been a growth engine, but is bringing volatility to its shares amidst widespread mortgage lending market turmoil. Secondly, the issue of who will run the combined company. Lastly, TD Bank, a 39% shareholder of TD Ameritrade, opposes a merger, and brings uncertainty considering what kind of control it will have post-merger. Shares of E*Trade jumped 6.4% to $15.57 on Tuesday, but are still down more than 30% over the past month. Ameritrade gained 1.1% to $16.35, but has lost more than 20% in recent trading.
Sources: Wall Street Journal
Commentary: E*Trade Plummets Over Mortgage Concerns • E*Trade's Growth Slows On Fewer Transactions and New Accounts • JANA, SAC Suggest TD AMERITRADE Merge With E*Trade, Charles Schwab
Stocks/ETFs to watch: ETFC, AMTD. Competitors: SCHW. ETFs: FDN, HHH, KCE
Earnings call transcripts: TD Ameritrade Holding F3Q07, E*TRADE Financial Q2 2007
Nymex Holdings in Merger Talks
Nymex Holdings Inc., parent of the New York Mercantile Exchange, said in a statement following an investor meeting Tuesday that it has held talks about a "potential business combination" and is seeking a "meaningful premium." Deutsche Bank analyst Rob Rutschow, who attended the meeting, said "management was quite frank about the possibility of a sale of Nymex." Nymex is also considering firing 100-150 people and selling its Manhattan HQ, which is worth up to $500 million. A merger "could result in cost savings of up to $250 million, as well as potential revenue synergies from better distribution in Europe," the statement said. Nymex has not named names, but NYSE Euronext, Deutsche Boerse and CME Group are considered potential suitors. Five months ago, NYSE Group bought Euronext for $14.6 billion and Deutsche Boerse agreed to buy the International Securities Exchange for $2.8 billion. NYSE Euronext CEO John Thain said in April that he is interested in exploring acquisitions that could bolster his exchange's U.S. options business. Nymex shares gained 2.6% Tuesday to close at $118.78.
Sources: Press release, Bloomberg, Reuters, Forbes, MarketWatch
Commentary: Nymex Explores Sale to CME, NYSE or Boerse -- Bloomberg • NYSE Euronext: Eyeing What's to Come
Stocks/ETFs to watch: NMX, NYX, CME. Competitors: ICE, ISE
Earnings call transcripts: Nymex Holdings Q2 2007
Accredited Home to Transfer $1 Billion in Loans
Accredited Home Lenders, struggling to push through its takeover by the Lone Star private equity firm, will sell $1 billion of loans at a probable loss to fend off creditors as the mortgage debt market worsens. The company said it will sell the loans to an unnamed investor in exchange for the right to buy them back at a higher price, thereby protecting that portion of the portfolio from depreciation. Fox-Pitt Kelton analyst Matthew Howlett estimates Accredited is selling the loans at a loss in the area of $0.93 on the dollar. Mortgage debt has lost great value this year, prompting lenders' bankers to demand either collateral or their money back. As a result, over 50 mortgage lenders, including two in the country's top 10, have entered Chapter 11 this year. With the transfer, Accredited will no longer be accountable to its creditors for this portion of its debt if it declines further in value. "If the market improves to a rational level, our intention is to repurchase these quality loans by mid-November and sell or securitize them," said CEO James Konrath. "Clearly they're trying to maintain liquidity and remain an operating company until the [Lone Star] deal closes," said Keefe, Bruyette & Woods analyst Bose George, who rates the loan deal a "marginal" positive. Accredited still has $600 million of loans not covered by the agreement.
Sources: Forbes, Bloomberg, MarketWatch
Commentary: Lone Star Files Counterclaim Against Accredited Home • Lone Star, Accredited Deal is Still On - For Now • Accredited Home Sues Lone Star
Stocks/ETFs to watch: LEND. Competitors: FNM, FRE
Dean Damages Could Cost Insurers $1.5B
Insurers breathed a collective sigh of relief Tuesday after Hurricane Dean was downgraded to a category 1 storm without having inflicted damages as catastrophic as had been feared. Disaster modeling firm Risk Management Solutions put the likely costs to insurers at $750M to $1.5B, well below the costs that could have been incurred had Dean, which previously was rated a category 5 storm, hit popular vacation spots on the northeastern coast of Mexico’s Yucatan Peninsula. Risk Management said the majority of costs likely will come from Jamaica, with just $300M in claims likely to emerge from Mexico. Had Dean, the first hurricane of the 2007 season, tracked 150 miles further north and hit the popular tourist areas of Cozumel and Cancun, Risk Management said the costs in Mexico could have tripled. “Though Jamaica has taken a large hit, the track for a category 5 storm could hardly have been better planned to minimize the damage,” RMS said. In 2005, Hurricane Katrina and other big storms cost the industry a record $58B, according to the Insurance Information Institute. The news was also good for the oil industry as major refineries escaped damages. Crude futures dropped below $70 a barrel for the first time in nearly two months, closing down 2.3% at $69.47/bbl. on the New York Mercantile Exchange, while natural gas futures closed at their lowest level in 2½ years. “Oil and gas have proven that when a market rallies in anticipation of an event like a hurricane, and it does not happen, the downside reaction is larger than it would have been had we not had the storm in the first place,” said Alaron Trading analyst Phil Flynn.
Sources: Reuters, MarketWatch I, II, III
Commentary: A Baker's Dozen On Current Market Issues • Predictions For Another Bad Hurricane Season
Stocks/ETFs to watch: KIE, PIC, IAK
Analog Devices Tops Forecasts
Analog Devices, said late Tuesday Q3 net income fell to $120 million ($0.37/share), down from $145 million $0.39/share) last year. The leading maker of analog and digital integrated circuits said Q3 revenue edged up 3% to $680 million, from $664 million a year ago. The results topped Wall Street forecasts of $0.36/share on revenue of $672.2 million. ADI forecasted FQ4 EPS between $0.36 $0.40 cents and revenue from $680 million to $710 million. “The third quarter was another solid quarter for ADI, turning out largely as we had planned in terms of our revenue growth, product sales mix, and operating expenses,” said CEO Jerald G. Fishman (see full earnings call transcript). “Order rates remained strong during the third quarter in both the OEM and distribution channels.” ADI's thousands of chip designs are used by companies such as Alcatel-Lucent, Dell, Ericsson, Philips, Siemens, Sony, and Ford. Shares fell 1.1% in AH trading; they are up almost 15% YTD.
Sources: Press release, Reuters, MarketWatch
Commentary: Earnings Provide Chance For a Quick Analog Devices Trade This AM
Stocks/ETFs to watch: ADI. Competitors: STM, TXN
Google Puts Commercials in YouTube Videos
Following a trend of other video sites, beginning today Google announced it will sell advertising on YouTube videos to take advantage of the growing popularity of on-line video. The ads will be sold only on clips from select content partners, who will share the revenue in a system similar to Google’s AdSense Network. YouTube has revenue-sharing deals with more than 50 partners. Advertisers can target their commercials to specific genres. Google will charge advertisers $20 for every 1,000 times the ads are played. Initial advertisers include Warner Music Group and Twentieth Century Fox film studio. The format involves a semitransparent ad on the bottom 20% of the video that starts 15 seconds after the video begins to play, and disappears up to 10 seconds later if it’s not clicked off. The video itself pauses while the commercial plays. Testing of the format began in June on 200 videos from 20 providers and found that 75% of viewers watched the entire ad. YouTube said they had five-to-10 times the click-through rate of standard ads that appear on Web sites. Researcher ComScore said visitors to Google’s sites watched 1.8 billion clips in May, accounting for 22% of videos viewed in the U.S. Meanwhile, researcher EMarketer said spending on Web video advertising may almost double to $775M this year from $410M in 2006. Google bought YouTube last November for $1.65B.
Sources: Wall Street Journal, Bloomberg, New York Times
Commentary: Google Launches YouTube Video Ads • Google Sees Bright Future For Television
Stocks/ETFs to watch: GOOG. Competitors: YHOO, MSFT, TWX. ETFs: HHH, FDN
Wal-Mart to Sell DRM-Free Music
Retailing giant Wal-Mart announced Tuesday it has begun selling digital music downloads from its website without DRM copyright protection, bringing it into more direct competition with Apple's iTunes online music store. DRM technology protects music from piracy, but also limits the devices on which it can be played. In May, Apple launched iTunes Plus, a service offering DRM-free music at $1.29 per song rather than the $0.99 per song ($9.99 per album) charged at the main site. Wal-Mart will sell DRM-free music from labels EMI and Universal for $0.94 per song ($9.22 per album). Apple CEO Steve Jobs has urged the music industry to cease using DRM and thereby allow consumers to choose for themselves how to play music they purchase. The music industry is concerned that the removal of the software will encourage piracy and discourage the purchase of CDs. Nevertheless, Universal said this month that it will test the sale of DRM-free music through Wal-Mart, Amazon and gBox -- but not iTunes. In June, Amazon.com announced a similiar move (full summary), although DRM-free songs have not yet appeared on its website. Music purchased from Wal-Mart's site will be playable on "virtually any device," including the iPod, the iPhone and Microsoft's Zune, according to senior director Kevin Swint. Wal-Mart will continue to sell copyright-protected songs at $0.88 per track.
Sources: Wall Street Journal, Reuters, Business Week, Slashdot, Red Herring, Motley Fool, Financial Times, 24/7 Wall Street
Commentary: Universal Music Group Readies DRM-Free Music, Sans iTunes • Steve Jobs: We're Ready To End DRM Now • Apple's DRM-free Music: Balancing Consumer Rights with Accountability
Stocks/ETFs to watch: WMT, AAPL. Competitors: COST, TGT. ETFs: PRFS, RTH, XLP
Earnings call transcripts: Wal-Mart F2Q08
Tribune Shareholders Overwhelmingly Approve Zell Buyout; More to Come
Shareholders of Tribune Co., the second largest U.S. newspaper publisher, overwhelmingly approved Tuesday a complex buyout deal worth $8.2 billion led by real estate mogul Sam Zell which values Tribune at $34 per share -- more than 20% higher than TRB's current $28/share. Such a wide spread is not common in pending buyouts, but the deal is far from definite. Lehman Brothers analyst Craig Huber said in an Aug. 14 note the odds of the deal going through "were no more than 50-50," because to finance the deal, Tribune will need another $4.2 billion, bringing its total debt above $14 billion. Tribune has said that it believes that the banks financing the deal, J.P Morgan, Merrill Lynch, Citigroup, and Bank of America, are fully committed, but this may change as banks continue to recoil from credit-risk. The deal also hinges on FCC approval, which requires them allowing prospective buyers to own TV stations and newspapers in the same market. This could push the deal off until to next year. If such a time gap were to occur, Tribune's profitability is likely to decrease as time goes on, raising concerns that Zell's interest may wane. Zell was not at the shareholders' meeting, but sources close to him report his interest has not changed. If the deal were to fall through, Standard and Poor's and Fitch have commented that Tribune's assets would fetch billions less than its current debt in a distress sale. Tribune's corporate debt rating was cut yesterday by S&P to B+, which said that it will cut the rating again if the deal goes through. Shares of Tribune gained $0.96 (3.6%) to $27.98.
Sources: Press release, Bloomberg, MarketWatch I, II
Commentary: Tribune Company: Low Risk, High Reward • Tribune Deal Means Zell Wins and Workers Lose
Stocks/ETFs to watch: TRB, JPM, MER, C, BAC. Competitors: NYT, GCI, WPO
Earnings call transcript: Tribune Q4 2006
Dubai World to Invest $5B in MGM Mirage and Resort Project
State-owned Dubai World said it will buy 14 million shares of MGM Mirage from the company at $84/share, a 13% premium over Tuesday's close of $74.32, purchase another 14 million shares from investors, and pay $2.7 billion for a 50% stake in MGM's CityCenter Las Vegas resort project. MGM's board approved the deal on Tuesday. Kirk Kerkorian retain majority ownership over the company via Tracinda Corp.; his stake is now 51.65%, down from 54.14%. MGM stands to receive $3.9B from the deal, allowing for more acquisitions or pursuing other developments, and also helps to reduce debt, according to company management. Dubai World Chairman Sultan Ahmed Bin Sulayem told Bloomberg, "MGM is the number-one entertainment company in Las Vegas, and there really is no No.2 or No.3. We're attracted to the high-end hotels market, and Las Vegas is high-end and high-growth." MGM owns a third or more of the Las Vegas Strip and about half the hotel rooms. Dubai World can purchase up to a 20% stake in MGM, and will pay an additional $100M if CityCenter opens on budget and on schedule by year's end 2009.
Sources: Bloomberg, Wall Street Journal
Commentary: MGM Mirage: The Most Attractive Gambling Stock • Deutsche Bank: MGM Shares Have More Than 25% Upside • Kerkorian's Bellagio, CityCenter Buyout Plan Doubtful, Shares Drop
Stocks/ETFs to watch: MGM. Competitors: HET, LVS, LVS, WYNN, BYD, PENN. ETFs: PEJ
Earnings call transcripts: MGM Mirage Q2 2007
Nordstrom OKs $1.5B Buyback
Nordstrom Inc.'s board of directors on Tuesday authorized the Seattle-based retailer to spend $1.5B to buy back shares of its stock in open market transactions over the next two years. The luxury retailer last repurchased shares in the second quarter, completing a $1B program authorized in May 2006. Shares gained 1.2% in after-hours trading Tuesday to $46.05; they are down 7.7% YTD.
Sources: Press release
Commentary: Nordstrom Posts Beat Q2 Profit, Guides Higher • Number One Retail Category: Online Clothing Sales • July Same-Store Sales Roundup
Stocks/ETFs to watch: JWN
Earnings call transcript: Nordstrom Q2 2007
TRANSPORT AND AEROSPACE
GM Targeting 60,000 Volt Electric Cars by 2010 -- Bloomberg
Bloomberg reports people knowledgeable of General Motors' plans say the automaker may build as many as 60,000 Volt electric cars for its market debut, loosely scheduled for late 2010. At such volume, GM may be able to sell the Volt for under $30,000, sources say. Skeptics, including Menahem Anderman, president of Advanced Automotive Batteries, an industry consultant, say the reported 60,000 target "is totally ridiculous at this point" because GM would need to be placing orders now. In addition, Anderman says GM's main battery supplier, privately owned A123Systems Inc., "has no experience in high-volume manufacturing on such a scale." At any rate, achieving sales of 60,000 Volt cars would be impressive considering it took Toyota's Prius almost five years to reach that mark. A Toyota U.S. executive commented that "If anyone thinks the Prius of today is going to be the Prius of 2011 or 2012, they underestimate Toyota." Shares of GM gained 0.4% to $31.08 on Tuesday.
Commentary: GM Restructuring Positives May Outweigh Rescap Risks • Automakers Lower 2007 Forecasts; Toyota Delays New Hybrid • The Slowdown In Housing Does Indeed Affect Auto Sales
Stocks/ETFs to watch: GM, TM. Competitors: F, DCX, HMC, NSANY. ETFs: PRFG
Earnings call transcripts: General Motors Q2 2007
ENERGY AND MATERIALS
BHP Posts Record H2 Profit on High Prices, Demand
BHP Billiton Ltd., the biggest mining company in the world, reported its eighth consecutive record profit on Wednesday. H1 2007 net income came in at $7.2 billion from $6.1 billion a year ago, while full-year net income was up 28.4% to $13.42 billion. Analysts were expecting $7.5 billion for H1 and $13.7 billion for the full year. Underlying net profit was up 35% to $13.68 billion, ahead of Street expectations of $13.49 billion. Full-year revenue was up 21% to $47.47 billion. Full-year pretax earnings for the stainless steel materials unit more than quadrupled to $3.7 billion, while earnings for base metals were up 28% to $6.9 billion. The average price of nickel, used in stainless steel, more than doubled in the period, and the price of copper was up an average 12%. Demand for commodities is being driven by China, which buys 1/5 of BHP's products, according to BHP CEO Charles Goodyear. He does not expect the tightening credit markets to have a "material impact" on global demand. Although the credit crunch has dragged down commodities along with the broader equity markets -- the UBS Bloomberg CMCI index tracking 26 commodities fell 6.2% in August -- BHP maintains that "[o]ur customers in China and India believe domestic supply and demand criteria are much more important factors in their markets."
Sources: Bloomberg, MarketWatch, Forbes, Wall Street Journal I, II
Commentary: Best, Worst ADRs Year To Date • Billiton Considering Bid for Alcoa -- Report
Stocks/ETFs to watch: BHP. Competitors: AA, RTP. ETFs: ADRA
Medtronic Sales Fall Short
Medtronic Inc. reported first-quarter earnings that rose 13%, but shares fell 2% AH as sales came in shy of forecasts amid ongoing sluggishness in the U.S. market for implantable cardiac defibrillators [ICDs] and slower-than-expected sales in the neuromodulation business. “We continue to be cautious about the exact timing and degree of rebound of the U.S. ICD market,” President William A. Hawkins said on a conference call (full transcript). ICDs had been a hot market until rival Boston Scientific made several high-profile recalls in 2005. Earnings for the quarter were $675M ($0.59/share) on revenue of $3.13B, up from $599M ($0.51/share) on revenue of $2.90B a year ago. Excluding items, earnings were $711M ($0.62/share). Analysts had expected earnings of $0.62/share on revenue of $3.17M. Revenue grew as follows during the quarter: cardiovascular 8%, including coronary stents 27%, diabetes 23%, spinal 12%, neuromodulation 5%, and ear, nose and throat 13%. Thirty-eight percent of Medtronic’s revenue came internationally, where sales grew 16% to $1.179B, driven by double-digit revenue growth in all major geographic areas. Separately, the company said it has been informed by the FDA that an advisory panel will review its premarket approval application for the Endeavor drug-eluting stent in October. The company believes the stent could achieve monthly sales of $30M in the U.S. It also said it will partner with Bayer Group to co-market a new blood glucose meter for Medtronic patients outside the U.S., and distribute Johnson & Johnson’s LifeScan meter in the U.S. starting next year.
Sources: Press release, Dow Jones, MarketWatch, Reuters, AP
Commentary: Medtronic's Earnings Ahead of Expectations • Five Stock Picks from Robert H. Stovall
Stocks/ETFs to watch: MDT, BAY, JNJ. Competitors: BSX, STJ. ETFs: IHI, IYH
People's Bank of China Hikes Again on Inflation Concerns
The People's Bank of China [PBOC] raised its one-year lending rate by 0.18% to 7.02% and the one-year deposit rate by 0.27% to 3.6% (effective Wednesday), following the latest economic readings of GDP growth of 11.9% in Q2 and inflation up 5.6% in July, as its trade surplus continues to surge. The higher increase of the deposit rate signals the PBOC's attempt to limit the outflow of funds from savings to the stock market. Bloomberg mentions this is the second time this year the PBOC has hiked deposit rates further than lending rates. The CSI 300 Index (consisting of Shanghai and Shenzhen A-shares) rose 25% in the past month, even as a global equities rout wiped at least $5.5 trillion from stock markets worldwide, reports Bloomberg. A Hong Kong-based Deutsche Bank analyst commented on the PBOC's concern about inflation (although largely food-driven; see full summary) and asset bubbles, saying, "We can't rule out another interest rate hike this year." The Shanghai Composite gained 1% to a new record close of 4,955.21 and the yuan lost 0.05% to 7.5906/$1, ahead of the PBOC's announcement.
Commentary: China's Latest Financial Coup: Buy 'H' Shares • Chinese Markets Beginning To Crack • China: Surging Food Prices Push Inflation to Highest in 10 Years
Stocks/ETFs to watch: Bond funds: SHY, IEF, TLT. Currency funds: DBV, FXE, FXY. China funds: CAF, FXI, PGJ
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