Good Morning Ladies & Gentlemen,
In recent Newsletters, other than talking about the US's problems, I have concentrated on the sovereign default by Greece, Spain and Portugal - partly due to hopeless economic numbers but more because of various 'soft' issues.
For, just as the numbers in a company's balance sheet theoretically provide all that is required to understand and value it, the reality is that squishy issues, such as the quality of management, staff morale or even simple luck can make a mockery of these numbers.
I also emphasised the futility of gnawing at the bone of the de facto bankruptcy of these three countries. Backward looking investment never makes money; better surely to recognise the sovereign default cycle has further to go, and so spend time identifying the next unexpected candidate.
On the numbers alone, the most likely casualties are the UK and US in that order, but both have good odds of escaping. Many hard issues help.
In America, one such is the Dollar's currently irreplaceable role as the world's reserve currency. In the UK, the relatively excellent debt duration (i.e. it is spread over many years rather than near-term) is a plus.
Each also has good soft issues: the market likes the new British government's tax and slash policies so is a willing buyer of UK debt, whilst the Asian central banks have so many US bonds they'd simply self destruct if they refuse to keep buying.
The standout surprise candidate for sovereign default by end-2012 is .... wait for it .... Belgium.
A decent country; civilised, at peace, wealthy and globally competitive in several areas. Moreover, first glance at the numbers gives no particular reason to expect Belgium to default.
Its potential financial problems have been on the radar screen for so long that we have grown used to them, rather like those many parents who fail to recognise the repulsiveness of their offspring. With net government debt of €400bn, it is hardly a huge world borrower in absolute terms.
Yet default could occur almost entirely by accident and the ripples be far greater than its size warrants, because of its position as the de facto federal capital of the EU. Belgium's hastening car crash is not in current bond prices or exchange rates.
There are five reasons why Belgium has hung together for the last 180 years: Britain, God, the King, fear and most importantly, money!
Before addressing these, it is necessary to understand why Belgium exists at all. When in 1815 Britain was the Big Beluga after the battle of Waterloo, it wanted a buffer state to contain France. The easy solution was to give the area now known as Belgium to one of its staunchest allies, Holland.
Unfortunately, King William I of the now-renamed United Netherlands was not, even according to Dutch history books, the smartest primate in the zoo, and he suffered from the diplomatic skills of a water buffalo.
Holland (or the Kingdom of the Netherlands to give it its official name) had a long history of Calvinism. This was unpopular with the newly acquired Dutch and French Catholic subjects alike.
Moreover, by deliberately ensuring the French were under-represented in all parts of government, yet overtaxed, the embers of resentment smouldered. These grew hotter in 1823 after an attempt to make Dutch the official language for the whole population. Surprisingly, full rebellion was ignited by the staging of a sentimental patriotic opera in Brussels in 1830. The crowds poured out of the theatre and went on the rampage.
As Britain still wanted a buffer state, and was still the world superpower at that time, it quickly moved to ensure the creation of a new country called Belgium, uniting Flanders and Wallonia (hence Flanonia might have been more appropriate).
The people, having suddenly been rebranded, opted for a French king.
Britain growled, ever mindful of France's latent imperial ambitions, thus a minor German duke's second son was chosen instead. After nine years' skirmishing, as Holland held onto a few strong points, and a minor invasion by France, Holland withdrew to sulk.
The Dutch king's alienation of his many Dutch speaking but Catholic subjects in Belgium united them with their French counterparts, providing a powerful glue to hold society together well into the late twentieth century.
Now, like most of Western Europe, society has rapidly turned secular.
In 1967, 43% of the population attended Catholic mass every Sunday. By 1998 (the last year in which the Roman Catholic Church produced data) this was down to 11%.
It is estimated to have fallen by 0.5% p.a. ever since, possibly accelerating given the latest sex-scandal investigations. (The Bishop of Bruges confessed to an unpleasant 20-year history and resigned; the police then raided and sealed off the Archbishop's palace, also the national catholic HQ on similar charges. The investigation continues.)
In line with this trend, reverence for the monarchy has also waned, although most of the country's kings have done a good job given they have forever walked the high wire over ferocious political and linguistic divisions. Little needs to be said of the fear quotient.
Belgium has suffered from three highly aggressive neighbours: Germany, France and the Netherlands. It was a popular sport for each to routinely stomp all over the area. They have all changed their ways. Leaving aside a lack of clout, the British are now wholly ignorant of how or why they created Belgium at all.
Belgium is a federation of three states: Flanders in the North, where Dutch (Flemish) is spoken by the native Flemings; Wallonia in the South where the official language is French; and thirdly the all-important region of Brussels. This is surrounded by Flanders although the majority of the region speaks French.
The linguistic divide is well-known, but this is not of the Mandarin vs. Cantonese or Castilian vs. Catalan spat variety. It is aggressive. Ten metres either side of the official linguistic border, the other language does not exist. Municipalities can and often do insist official documents and meetings only take place in their local language.
This draconian legal divide was foolishly legislated into place in 1980 and has become more intolerant every since. Belgian politics are so culturally divided that all 12 of the major parties break down on linguistic lines and cannot stand in the other language area.
Post-independence the balance of power shifted to the French speakers. The richer Flemish Belgians were highly dependent on Holland's colonial trade and capital. Post independence, this stagnated and so they concentrated on successfully out-breeding the French over the next 150 years.
Meanwhile the French speaking south boomed. The development of iron, steel, coal and heavy industry - funded by French, and to a lesser extent German, capital and supplied by the major mineral deposits nearby - put all the financial and industrial power into Walloon hands.
Like their previous masters in Holland, this was gradually abused. Almost all higher education was in French; plump political posts always went to French-speakers.
Meanwhile, the Flemish-speakers developed into a distinct but majority underclass. By the early 1970s, the wheel had again turned. Today, 75% of GDP is accounted for by the service sector as industry withers.
The majority Flemings now sit in the financial chairs and have not hesitated to embark on a little light payback, such as splitting up key universities into Flemish and French speaking sections from 1968 onwards. The relative wealth of the Flemings is simply overwhelming.
Their income per head is 118% of the EU average - the French-speakers 85%. Per capita productivity is 20% higher. They make up over 70% of the skilled labour force. French unemployment is twice that of the Flemish speakers.
Per capita, subsidies for French speakers are 50% more than for the Flemish. In short, Flanders funds and props up Wallonia.
This has not been lost on the ever chaotic voting system. Recent headlines have screamed that the independence parties have taken over. A slight exaggeration.
True, the Flemish speaking, free market and pro-independence Vlaams Belang (VB) party won the most seats in the 150- member lower house, with an increase from 17 to 27 (in line with the wealth divide, the second largest party with 26 seats is the French-speaking Socialist "welfare" party).
But this does not ensure separation, even though in those areas where it was allowed to stand, VB and its sympathisers won over 40% of the votes. Belgian law requires that at least four of the 12 "major" parties (seven Flemish and five French) form a government with at least one from each state. Hence, once again various caretakers are manning the desk. There is no elected government.
The most heated and longest debates in parliament concern two issues: language superiority and the French speakers demanding, and to date getting, an ever greater and disproportionate share of the welfare pie. Up north, not surprisingly this is unpopular.
The result is net government borrowing equal to 100% of GDP. Not quite as bad as Greece and a few other miscreants, but add a budget deficit of 6% of GDP and a too-high a structural deficit, and Belgium is in the top fifth of over-borrowed nations globally, a position it has steadfastly maintained for the last 30 years. It has even been worse. Throughout most of the late 1980s and 1990s net government debt averaged 114% of GDP.
As with several Mediterranean countries, Belgium was a huge beneficiary of joining the Euro (it was the first to do so) because the implicit German guarantee allowed heavy borrowing at much lower interest rates.
Before joining the Euro zone, general government net interest payments in 1992 absorbed a whopping 10.3% of GDP. In 2009, even after the collapse and necessary bailing out of its banks, especially the big two of Fortis and Dexia, interest payments were only 3.6%.
High debt and gradual linguistic separation have been a constant for 30 years. The recent elections confirm the trend of accelerating separatism. Yet these are likely to morph faster than expected into a financial problem because of Brussels.
Much to the dislike of most politicians across Europe, Brussels is the de facto Federal Capital. A small city; and only 1.1m people live within the "Brussels region". It is wealthy, with income per head 233% above the EU average. Moreover, despite being only a tenth of the Belgian population, it accounts for over a fifth of GDP. The reasons are well-known.
Since the early 1950s treaties presaging the European Union, money has poured into Brussels. The EU Commission alone employs 25,000 people, the EU parliament another 7,000. There are over 10,000 registered lobbyists and more diplomats and countries represented in Brussels than in Washington.
Then there are 1,200 accredited journalists (which may explain why expenditure on expenses accounts alone was €800m in Brussels in 2009). Just for direct running costs (i.e. rentals and electricity), the EU pumps $1bn into Brussels every year.
Yet this money fountain is not only the EU. 40% of the population comes from outside Belgium, as it is headquarters to a range of other organisations which have developed into an administrative cluster. The better known includes groups like NATO, where Brussels is the European HQ with 5,000 employees. The range includes the weird, such as the heavily funded, big employing World Customs Organisation or EurATOM.
All these foreigners, usually funded by their overseas governments, are amongst the very highest earners in Europe, creating a major multiplier effect on schools, restaurants, cleaners, auto sales or house building.
Originally majority Flemish-speaking, now most locally born Brussels residents speak French, the result of policies introduced when they were at the top of the economic tree. Yet Flemings - residents and commuters - still dominate the better paid and skilled jobs, hence Brussels is the only part of Belgium where both languages must co-exist by law.
Some local French speaking politicians have been muttering darkly about doing to Flanders what Flanders wants to do to Wallonia, i.e. spin out of Flanders or even Belgium itself. This is because the money spigot is about to jam.
As the third richest region in Europe (after Luxembourg and London) it could in theory exist as a wealthy city-state cum federal capital, but such a dream is a chimera. Derided Eurocrats live a life apart. Even Brussels-born residents who benefit from their largesse often complain that the many organisations have created rich ghettos from which they are excluded.
That these Eurocrats are out of touch has been demonstrated both by pay and expenses enough to make a third world dictator blink, and recent demands for pay rises.
There is a commonsense test to apply to the financial future of Brussels. Most European countries are net recipients of aid from the EU. Of the minority putting money in, Germany dominates. Other small contributors such as Scandinavia or the UK are co-joined triplets with Germany.
Forced to slash their own capital, social, and welfare budgets following the financial crash, they will not put more into Brussels.
It is a matter of time before each country decides to reduce its net or gross cheques written out to various Brussels organisations; hence the second most important engine of Belgium's economy (after the wider economy of Flanders) suffers its first ever post-war squeeze. This means it has less largesse to spread around - particularly in Wallonia.
Moreover, Brussels is no longer so logical a geographic centre for a federal capital since the EU expanded eastwards.
This has not been lost on the Germans (Brussels' most significant honey provider). Its press and politicians have suggested for example that NATO be moved from a largely neutral country with minimal military capability to one with a little more vim, such as Germany. France would murder to get its hands on more EU institutions.
Even the UK, ever-equivocal about what it really wants form the EU, and outside the Euro zone, would like a few pointless but foreign funded pork barrels like EurATOM. Such major political changes will take time. Turning off the money spigot is easier and will happen sooner.
What is evolving in Belgium is old news. The problem now, as for divorcing couples, is how to divide up the assets, or more precisely in Belgium's case, its sovereign debt.
It is noteworthy that the government is chary in producing full data on how much Brussels and Flanders subsidise the minority Walloons, but roughly speaking the national debt should probably be split about 35:65 Dutch:French.
Yet relatively poor Wallonia simply could not service nearly €260bn of national debt (€175,000 per person in employment). Meanwhile, wealthy Flanders would emerge with a budget surplus, a minute structural deficit and debt to GDP lower than any EU nation outside of Scandinavia.
The imperative for Flanders, along with the scope for argument, is clear.
There is a growing risk of a faster than expected dissolution of Belgium which will result in sovereign default; this is based on a belief in the inability of the individual nations within the Euro zone, let alone the EU institutions themselves, to realise that as nations unravel, speed is of the essence.
To repeat, the net €400bn national debt is miniscule in the overall scheme of things - less than half the loss racked up by America's AIG in 2007-8. And in wealthier times, the dream then shared by most of its members, of a politically united Europe would have ensured a quick bailout led by Germany.
Mrs Merkel has already discovered that small cash subsidies to the profligate, such as Greece, are very expensive electorally. So foot dragging and evasion are sure to be the political order of the day. As the divorce commences, little is gained in double guessing the next phase.
Whether Flanders goes alone as a fabulously rich small state or joins up with Holland (now the religious issue is moribund) is a moot point. Equally, whether France chooses to absorb Wallonia into greater France (Sarkozy's wild card to escape likely electoral defenestration?) or to subsidise Wallonia as a client state again, is also an unknown.
On every topic, there is no agreement on how these regions should evolve, nor who is responsible for the debts, further ensuring delay.
If markets have re-learned one lesson recently, it is that small events have disproportionate results.
Belgium ranks as the world's 20th economy by size, accounting for 0.8% of world GDP. Greece before the fall was No. 28, with 0.6%; its problems continue to shake markets, both because they were unexpected and because of the risk of a domino effect.
So too would be the problem with Belgium.
It is yet another reason why government bonds are toxic and why at some stage their yields will blow out, thus capital values fall.
Obviously, not holding Belgian shares on a medium term basis is sensible unless valuation work has fully taken account of these unexpected risks (clients have zero exposure). Once again the Euro would fall and the German export machine boom. Equity markets would rattle around for a while but then absorb the key lesson.
For Belgium is yet another example, as if one was needed, that the supply of government bonds over coming years will continue to soar to unprecedented levels even.
On to the numbers on the boards this week:
|
| US Markets
How the US did this week ..... | |
 Wall Street finished flat on Friday after spending most of the day in negative territory because of concerns about the slowing rate of economic growth.
The S&P 500 closed fractionally higher at 1,101.60, but down 0.09 per cent for the week. The Dow Jones Industrial Average was slightly lower, closing at 10,465.94, but up 0.4 per cent for the week.
The Nasdaq Composite was 0.1 per cent higher at 2,254.70, but lower by 0.4 per cent for the five days. The S&P gained 6.9 per cent in July, its best monthly gain in a year.
The market dropped 2.3 per cent at the open after GDP data was released but later trimmed losses.
US economic growth slowed to an annual rate of 2.4 per cent, coming in just below consensus forecasts of about 2.5 per cent. A larger trade deficit and slower growth in consumer spending meant that the economy expanded less than in the first quarter. The first-quarter figure was revised up to 3.7 per cent from 2.7 per cent.
But both the University of Michigan's consumer sentiment index and the Chicago PMI gauge of business activity were slightly better than expected, going some way to soothing investors' worries.
The S&P 500 Consumer Discretionary sector led the late day rally, up 0.7 per cent, on news that consumers were feeling less negative than predicted.
In earnings news, Chevron reported a threefold rise in quarterly profit as increased output, higher energy prices and wider margins at its refineries helped it top analysts' profit forecasts. Shares rose 0.3 per cent to $74.89.
Insurers Metlife and Aon both rose after reporting better-than-expected second quarter results.
Metlife was up 4.6 per cent to $42.06 after it moved back into the black, making second-quarter net income of $1.84 per share after a loss of $1.74 for the same period last year.
Recent acquisitions helped offset a fall in commissions at Aon Corporation, the world's largest insurance brokerage. Earnings per share were 63 cents compared with 50 cents for the same period last year. The shares rose 2.8 per cent to $37.67.
But Genworth Financial, the mortgage guarantor and life insurer, slumped 14 per cent to $13.58 after posting a weak second-quarter profit and issuing a cautious outlook.
There was positive news from several pharmaceuticals. Merck & Co reported better-than-expected earnings on the back of strong sales of its treatments for diabetes, arthritis and HIV. But the shares fell 1.7 per cent to $34.46 because revenue missed estimates.
Drugmaker Warner Chilcott rose 5 per cent to $25.60 after the company raised its full-year outlook.
Amgen, the world's largest biotechnology company, rose 2.2 per cent to $54.53 after reporting a better-than-expected second quarter profit. It said that the launch of its new drug for osteoporosis was on track.
Biotechnology company Geron jumped 17.3 per cent to $5.63 after it said that the Food and Drug Administration had lifted its hold on an early-stage trial of its embryonic stem cell-based therapy.
Charles River Laboratories International fell 2.7 per cent to $31.08 after it agreed to end its merger agreement with Wuxi PharmaTech, paying $30m to break the contract. The company also announced a $500m share buy-back.
In deal news, Walt Disney has sold film studio Miramax to Filmyard Holdings for more than $660m, ending months of talks between the media group and bidders. Disney shares fell 0.1 per cent to $33.69. |
| European Markets
What has been happening in Europe this week ..... | |
 European stocks recovered from a sharp fall to close only slightly lower, and to notch up the biggest monthly gain since March, with US data giving mixed signals on economic growth.
The FTSEurofirst 300 index of top European shares fell 0.31% to a close of 1,043.66 points. The index rose 5.3% in July, the most in four months.
GERMANY
German stocks rose, extending their monthly gain, as a report showed US business activity expanded at a faster pace than projected, signaling manufacturing is driving growth in the world's largest economy.
Merck KGaA and Continental AG rose more than 1.5% as analysts recommended the shares. HeidelbergCement AG lost 3.4% after reporting a decline in second-quarter net income and giving no forecast.
The DAX Index rose 0.2% to 6,147.97 at the 5:30 p.m. close in Frankfurt, extending its weekly gain to 0.3%. The measure has increased 3.1% this month as demand at bond auctions in Greece, Spain, and Portugal eased concern that Europe's sovereign-debt crisis will derail the economic recovery. The broader HDAX Index rose 0.1% today.
Merck climbed 1.7% to 68.30 euros. The pharmaceutical and chemicals company was raised to "outperform" from "underperform" at Credit Suisse Group AG.
Continental, Europe's second-largest auto-parts supplier, rallied 1.9% to 48.95 euros. The stock was raised to "buy" from "accumulate" at Equinet AG, which said the company is "an excellent possibility to play the ongoing recovery of the automotive market as it is also well positioned to continue growing once the recovery of the broad market is over."
European Aeronautic, Defence & Space Co. rose 3% to 18.07 euros in Frankfurt after raising its target for 2010 net income and revenue as deliveries of passenger jets at its Airbus unit increase.
Sales will grow to more than 44 billion euros ($57.5 billion) from 42.8 billion euros in 2009 and adjusted earnings before interest and tax should reach about 1.2 billion euros, EADS, based in Paris and Munich, said. In March, the company predicted Ebit of 1 billion euros and stagnant sales.
EnBW Energie Baden-Wuerttemberg AG climbed 1.2% to 37.23 euros as the utility raised its 2010 earnings outlook after it transmitted more power with higher fees and the company sold its GESO utility operator later than planned.
HeidelbergCement sank 3.4% to 38.65 euros, ending the stock's longest winning streak since March. The world's largest maker of aggregates used to produce concrete and asphalt gave no forecast, only stating that it plans to benefit over proportionally from the economic recovery this year and next. The recovery's strength and the impact of budget-deficit cutting on infrastructure spending are still unclear, Chief Executive Officer Bernd Scheifele said. Rival Lafarge SA cut its outlook for cement demand in its markets in 2010.
Second-quarter net income for HeidelbergCement fell 64% to 120 million euros, as a year earlier it had a gain from selling a stake in Indonesia's second-largest cement maker and a tax gain. Net income trailed the mean estimate of 207.7 million euros in a Bloomberg survey.
GEA Group AG tumbled 2.9% to 17.37 euros. The engineering company, whose machines milk a third of the world's dairy cows, said second-quarter net income fell to 28.8 million euros from 32.4 million euros.
Software AG slumped 3.8% to 85.56 euros as Germany's second-largest software maker was downgraded to "sell" at Piper Jaffray Ltd. and at B. Metzler Seel. Sohn & Co. KGaA.
The seasonally adjusted number of unemployed in Germany dropped for the thirteenth consecutive month in July, as improved economic conditions boost the country's labour market.
There were 20,000 fewer unemployed in Germany in the month of July compared to June, data released by the Federal labour Agency showed Thursday. That matched economists' expectations and June's revised figure. Earlier, the agency had reported 21,000 fall in the number of unemployed in June. The seasonally adjusted rate of unemployment eased to 7.6% in the month from 7.7% recorded in June. That was also in line with economists' expectations.
Earlier in the day, data released by the Federal Statistical Office showed that the jobless rate according to the International labour Organization concept was 7% in June, unchanged from May. It also said the number of persons in employment amounted to 40.3 million, showing an increase of 131,000 persons or 0.3% from a year ago.
German inflation rose slightly in July, but continued to remain well below the European Central Bank target, preliminary data from the Federal Statistical Office showed Wednesday.
The consumer price index, or CPI, rose 1.1% annually following a 0.9% rise in June. That was a touch lower than the 1.2% increase economists had forecast. On a monthly basis, the CPI increased 0.2% in July, slightly faster than the 0.3% rise forecast. The annual increase in consumer prices was driven by rises in prices of fuel, fruit and vegetables.
The harmonized index of consumer prices, or HICP, grew 1.2% in July compared to the previous year. The HICP growth accelerated from 0.8% recorded in June. On a monthly basis, the HICP climbed 0.3%. Reinforcing that price pressures are subdued in the biggest Eurozone economy, economists expect core inflation to have eased to 0.6% in July from June's 0.8%.
As the fragile recovery does not exert inflationary pressure in the Eurozone, the ECB is likely to keep its key interest rate unchanged until sustainable recovery establishes. In July, the central bank retained its record-low interest rate of 1% for the fourteenth straight month. The ECB aims to keep inflation below, but close to 2% over the medium term.
FRANCE
The French benchmark index was covered in red by closing, down by 8.77 points or 0.24% to close at 3643.14. The index opened at 3647.21 recording a high of 3680.07 and a low of 3600.83. Within the index, 22 shares ended in the red and 18 ended higher.
The worst performing shares in terms of subtracted value for the index were led by BNP Paribas as it plummeted 1.29% to end at €52.71; following was GDF SUEZ as it shed 1.72% to settle at €25.49, while coming in third was DANONE which slumped 1.56% to close at €43.04.
Meanwhile, those offsetting some of the losses and ending higher were TOTAL SA which inclined 0.36% to settle at €38.71; Alcatel/Lucent which ended higher by 11.07% at €2.30 and SCHNEIDER Electric SA which inclined 2.43% to settle at €88.50.
French producer prices remained unchanged in June from the previous month.
The producer price index, or PPI, on the French market remained unchanged on a monthly basis in June, the statistical office INSEE said on Thursday. Economists were looking for an increase of 0.3%. Meanwhile, the price index for manufactured products also showed a flat reading in June, after rising 0.4% in May.
Producer prices for mining and quarrying, energy, water slipped 0.2% month-on-month in June, while price index of electrical & electronic equip., computers, mach. Grew 0.4%. Prices for transport equipment dropped 0.3%. Price index for food products, beverages, tobacco remained stable.
Year-on-year, the PPI increased 3.5% in June, slower than 3.9% growth expected by economists'. The price index for manufactured products rose 3.2% and mining and quarrying, energy, water climbed 6.1%. Price index for food products, beverages, tobacco slipped 0.8%.
The producer prices in the foreign markets increased 0.3% in June from the previous month. At the same time, The price index for other manufactured products rose 0.5 %, following a 1% rise in May. Prices for food products grew 1.1 %.
On all markets, the French producer prices were up 0.1 % in June from the preceding month. Year-on-year, the PPI rose 3.4% in June, slower than 3.8% in the previous month. The prices index for refined petroleum products climbed 28.5%, but slower than 45.3% in May.
Further, the statistical office said, prices of imported industrial products rose 0.7% month-on-month in June, faster than a 0.1 % rise in the previous month.
The number of unemployed jobseekers in France declined by 8,600 to 2.7 million in June, the economy ministry said in a report on Tuesday. The number of unemployed dropped 0.3% from the prior month.
Finance Minister Christine Lagarde said that the latest figures confirm a stabilization of the labour market.
The statistical office Insee said in a report released on June 3 that the ILO jobless rate in the first quarter of 2010 remained stable at 9.9%. The employment rate of the population aged 15 to 64 years increased in the first quarter to 63.8%, due to the temporary contract employment.
BELGIUM
The Bel 20 in Brussels ended the week at 2,517.30, a drop of 0.81% on the day.
Belgian financial group KBC said it reached a deal for a staff-led buyout for its British Peel Hunt brokerage as it focuses on its core activity following its state-led bailout during the credit crunch.
Belgian consumer prices rose 2.57% on the year in July, a touch lower than the 2.46% recorded in June, the Belgian Economics Ministry said Thursday.
Higher prices at Belgian holiday resorts, natural gas, potatoes, restaurants and cafes were the main contributors to the increase in inflation, the ministry said.
But the price of fruit, cut flowers and fuel and electricity all fell, the ministry said.
ArcelorMittal, the world's largest steelmaker, forecast a sharp decline in earnings in the third quarter due a slowdown in China, a seasonal drop in activity and higher raw material costs.
The company, with output more than double that of its nearest rival, also said on Wednesday it was considering spinning off its stainless steel division to shareholders.
ArcelorMittal said its much-watched core profit (EBITDA) would fall to between $2.1 billion and $2.5 billion in the third quarter, the mid-point being 23% below the second quarter number and worse than analysts had been expecting.
The market had on average forecast a figure of $2.6 billion Euros, based on a Reuters poll of 12 analysts.
"Although the third quarter will be impacted by a combination of seasonal factors and the effects of the economic slowdown in China, underlying demand continues to show improvement," Chief Executive Lakshmi Mittal said in a statement.
"The challenge for the second half of the year will be to pass on the full extent of cost increases to our customers," he continued.
THE NETHERLANDS
In Amsterdam the AEX headed into the weekend on 330.64, down 0.45%.
Dutch staffing company Randstad Holding NV said Thursday its second-quarter net profit surged as businesses in major economies in the United States and Europe hired more staff amid the recovering global economy.
Net profit rose to Euro55.9 million ($72.63 million) for the quarter from Euro11.6 million a year ago as revenue grew 16% to Euro3.5 billion from Euro2.99 billion in 2009's second quarter.
Chief Executive Ben Noteboom said Randstad is seeing "big jumps in industrial placements" around the world.
He said economies in the United States, Germany and France were "clearly growing" and were leading Randstad's growth.
The company says it expects to pay a dividend to shareholders over 2010.
The results marked the first time quarterly revenue had grown since the third quarter of 2008.
Netherlands service sector sentiment index increased in July from the preceding month.
The service sector sentiment index rose to minus 4 in July from minus 7 in the preceding month, a report by the Central Statistical Bureau showed on Tuesday.
The opinion of business service providers on the economic climate improved in July from the previous month and they were also more optimistic about future employment. Similarly, the temp job agencies are very optimistic in July. Their expectations about turnover in the next three months, future employment in their branch and price developments are positive, the agency said.
Dutch producer confidence worsened further in July as the industry remained less optimistic on production in the next three months.
The producer confidence index dropped to a four-month low of minus 2.4 in July from minus 0.7 in June, Statistics Netherlands said Tuesday. The index was, however, 12.2 percentage points higher than last year. During the month, firms appeared less optimistic than in June about production growth in the next three months.
Businesses were also less positive about the stock of finished goods than last month, while the outlook on the order position improved. Still, entreprenEurs who were pessimistic on order position outnumbered those with an optimistic outlook. In July, companies were more optimistic about the improvement in sales abroad, but to a lesser extent than the previous quarter. Around 25% firms highlighted insufficient demand as a major obstacle to production growth, compared to 30% last month. Meanwhile, capacity utilization was 80.2% in July.
SWITZERLAND
Zurich's SMI drew a line under the trading week at 6,200.78, dipping 0.32% in the process.
Syngenta shares fell 2.2% to 227.60 Swiss francs, erasing two days of gains. The chemical maker was downgraded to "neutral" from "overweight" at JPMorgan, which said that cost inflation was putting pressure on the company's margins.
EFG International AG, the Swiss bank controlled by Greek billionaire Spiro Latsis and his family, plummeted 20% to 12.55 francs, its largest decline since March 2009. It swung to a loss in the first half after writing off 859.5 million francs ($829.2 million) on three asset managers.
Advanced Digital Broadcast Holdings SA, the Swiss maker of digital-television equipment, slumped 6.5% to 29.70 francs, its steepest fall in a week. It said its earnings per share were $0.50 in the first half and sales were $141 million. The company said that a "slight delay" in bringing new products to the market had pushed some sales into the second half.
Swiss engineering company ABB Ltd late Tuesday said its open offer to increase the stake in its Indian subsidiary to 75% from 52.11% has been successful.
During the three-week offer period shareholders of ABB India tendered approximately 23% of the outstanding shares.
ABB will acquire the shares on a proportionate basis since the offer has been oversubscribed by approximately 1.5%.
The offer of Rs 900 per share, which was announced on May 17, 2010, values the transaction at approximately $965 million
The share purchase is aimed at facilitating the long-term development of ABB's business in India.
A post-offer public announcement, in accordance with local requirements, with details of the shares tendered in the open offer will be published once the acquisition of shares has been completed.
UBS bank said on Tuesday that its consumption indicator for Switzerland rose to 1.81 in June from a revised reading of 1.71 in May. That was the highest level since July 2008. The sharp increase in new car registrations was the main driver of the rise in the UBS consumption indicator in June, the bank added.
The UBS consumption indicator is calculated from five sub-indicators - new car registrations, business activity in the retail sector, the number of domestic overnight stays in hotels by Swiss citizens, the consumer sentiment index and credit card transactions via UBS at points of sale in Switzerland.
Apart from the sharp increase in new car registrations, the rise in the number of domestic overnight stays in hotels by Swiss citizens and improved consumer sentiment also contributed positively. Business activity in the retail sector was disappointing.
According to the estimates of the State Secretariat for Economic Affairs, private consumption was 2.3% higher in the first quarter of this year than in the previous year after being adjusted for inflation. The UBS said it expects the consumption indicator to rise further in the coming months.
Several of the components used to calculate the consumption indicator are set to improve considerably in the coming months, such as, the consumer sentiment index and business activity in the retail sector, the UBS asserted.
AUSTRIA
The ATX in Vienna rounded out the Friday session and the week at 2,483.86, down 0.91%.
People's Party (ÖVP) Economy Minister Reinhold Mitterlehner has said the Austrian economy will prove think tanks wrong by growing stronger than predicted.
The Institute for Economic Research (WIFO) and the Institute for Higher Studies (IHS) said earlier this year they expected the country's economy - still considered to be in a fragile condition after the global recession - to grow by 1.2% and 1.5% respectively.
The International Monetary Fund (IMF) said recently it expected the Austrian economy to grow by 1.5% year on year in 2010.
But the minister said Wednesday: "I'm confident the Austrian economy will do better this year. I expect a stronger year on year improvement than 1.5%."
Mitterlehner however also said an annual two% rise was "unlikely".
These estimations come just days after federal statistics agency Statistik Austria revealed the country's economy suffered the biggest post-war year on year decline last year as the Austrian gross domestic product (GDP) dropped by 3.9% compared to 2008.
Meanwhile, the Austrian trade industry - a key factor for the well-being of the country's economy - is showing signs of recovery as foreign trade businesses reported a 13.6% improvement in export rates last April compared to the same month in 2009.
Verbund chief Wolfgang Anzengruber has said planned investments might be delayed due to the continuing debate over a capital increase.
The government has been at odds for weeks over whether it should console the energy provider with 500 million Euros in an overall one-billion-Euro capital increase. The Austrian State holds a 51% interest in the company.
A decision has been postponed after business newspapers already reported that ministers of the coalition of Social Democrats (SPÖ) and People's Party (ÖVP) had come to an agreement.
Now it is rumoured SPÖ officials want Federal Railways (ÖBB) to receive half a billion Euros as well. The company is close to the State, and several board members have links to the Social Democrats.
Anzengruber said on Wednesday Verbund would press on with investments into hydro power plants and new technologies, but warned that it could be forced to delay activities if the capital increase failed to happen.
ÖVP Economy Minister Reinhold Mitterlehner said he expected a decision over whether the coalition backed a capital increase in the next ministerial meeting set to take place after the parliamentary summer break on 24 August.
Anzengruber said that the firm - Austria's leading electricity company - saw a 5.1% decline in sales revenue to 1.58 million Euros in the first half of this year, while operating results shrank by 28.4% to 382.3 million Euros.
The firm CEO cited low water supply and weak wholesale electricity prices as main reasons for the negative development.
Verbund caused outcry earlier this year by raising the price for one kilowatt hour from 6.5 cent to 7.3 cent as of 1 May.
Labour Chamber president Herbert Tumpel attacked the Vienna-based company for "putting new pressure on its customers".
Meanwhile, a survey by Eurostat, the European Commission's (EC) statistics agency, found that the average price for energy provided to European Union (EU) households dropped by 1.5% from the second half of 2008 to the same period of last year, whereas energy provided by Austrian companies soared by 7.7%.
The body also announced that gas became 1.5% more expensive in the EU, while its price jumped by only 0.7% in Austria.
SWEDEN
The OMX in Stockholm completed a hectic trading week on 1,047.26, declining 0.17% on the day.
The Swedish state-owned energy group Vattenfall on Thursday reported that net profits almost doubled year-on-year in the second quarter of 2010, while sales increased by nearly a fifth.
Net profits increased to 5.2 billion kronor (714 million Dollars), compared to 2.6 billion kronor in the same period of 2009.
Net sales in the quarter increased by 18% to 49.7 billion kronor, Vattenfall said.
The group mainly credited higher electricity generation volumes for all the types of energy that Vattenfall offers, as well as lower operating and maintenance costs, for pushing up profits.
Vattenfall's electricity production from hydropower, wind power, fossil fuel and nuclear power increased 20% in the quarter.
The group also welcomed the Swedish parliament's decision in June to allow the replacement of the country's 10 nuclear reactors with new facilities, chief executive Oystein Loseth told analysts during a conference call.
The decision limits Sweden to operating no more than 10 reactors.
The annual growth rate for Swedish Monetary Financial institutions' lending to households was 8.9% in June, but slower than 9.1% in the previous month, a report by the Statistics Sweden showed on Tuesday. A year earlier, the growth rate was 7.8%.
The Monetary Financial Institutions', include banks and housing credit institutions, lending rates to households totaled SEK 2.428 trillion in June. The statistical office said the majority of this was housing loans, which amounted to SEK 1 625 billion. Meanwhile, households consumption loans reached SEK 155 billion. The growth rate for households' housing loans was 10.5% while it was 5% for consumption loans.
Lending to non-financial corporations continued to show negative growth. In June, it slipped 3.5%, after a 3.3% fall in May. A year ago, the growth rate was 4.5%. Lending to non-financial corporations amounted to SEK 1.698 trillion in June, down from SEK 1.76 trillion last year.
The average rate for a new household loan through monetary financial institutions was 2.39% in June, compared to 2.17% in the previous month. The new household loan, with periods up to three months rose to 2.12% in June from 2.02% in May. The majority of the housing loans were still taken with floating rates, but the percentage with fixed rates is increasing, the statistical office said.
Swedish retail sales fell a seasonally-adjusted 0.2% month-on-month in June following a 1.3% growth in May, Statistics Sweden said Thursday.
The decline was unexpected as economists were looking for a 0.6% increase. In the second quarter, the seasonally adjusted sales grew 1.3% quarter-on-quarter compared to 0.1% rise in the first quarter. Year-on-year, retail sales volume increased a working day adjusted 2.8% in June, slightly faster than the 2.6% rise in May.
Economists were expecting a 3% increase in sales. Retail trade in consumer non-durables increased 0.6% annually and in durable goods rose 4.7% after adjusting for the number of working days. At current prices, retail sales rose 4.2% year-on-year compared to 3.8% growth in the previous month.
Swedish consumer confidence improved more than expected in July, the National Institute of Economic Research, or NIER, said Thursday. The corresponding index rose to 23.3 from 22 in June.
Economists were looking for a reading of 22.1. Consumer sentiment strengthened for the third consecutive month. Compared to June, households interest rate expectations increased this month. However, their assessment of the general economic situation in 12 months' time dampened.
Meanwhile, the economic tendency indicator fell to 111.3 in July from 111.6 in June, still signaling considerably stronger than normal sentiment among businesses and consumers.
The confidence indicator for the manufacturing industry fell five points between June and July. This fall is due to firms´ more subdued production plans than in previous months, the survey found.
DENMARK
Copenhagen's OMX closed out the Friday trading session on 410.83, down 1.02%.
Danish jobless rate increased in June from the previous month.
The seasonally adjusted jobless rate rose to 4.2% in June from 4.1% in the previous month, a report by the Statistics Denmark showed on Thursday. The jobless rate was 4.2% in April. The unemployment rate for men and women was 4.8% and 3.5%, respectively.
The number of unemployed persons totaled 114,000 in June, larger than 112,900 persons in the previous month.
On an unadjusted basis, the jobless rate rose to 3.8% in June from 3.4% recorded a year ago. The number of unemployed persons increased to 104,300 from 93,100 in the previous year.
Danish economy expanded at a faster pace in the first quarter. The gross domestic product increased to 0.5% sequentially from 0.2% growth in the fourth quarter of 2009. The annual consumer price inflation eased to a six-month low of 1.7% in June, compared to 2.2% in the previous month.
Changed banking rules would have killed popular short-term loans
Many homeowners are breathing a sigh of relief after proposals to make it all but impossible to issue one-year variable loans were shelved by the Basel Committee on Banking Supervision until 2018.
Banks can also look forward to significantly fewer restrictions than were previously suggested by the committee, which establishes global guidelines for the regulation of the world's banks.
Denmark currently has the world's third largest bond mortgage market behind only Germany and the US. Although Denmark is not an official member of the Basel Committee, it generally follows the committee's recommendations.
The Danish Bankers Association, the Association of Mortgage Banks, Nationalbanken and the Financial Supervisory Authority had all previously warned that the proposal would have made it too expensive for financial institutions to issue one-year variable rate mortgages, typically known as 'flex' loans.
However, the Economic Council - or 'wise men', as they are commonly known - had argued that limiting flex loans 'would not necessarily be bad for the economy if households were in reality forced to exchange part of the very short adjustable rate mortgages for more stable, possibly fixed-rate mortgages'.
The full implementation of Basel 3 is planned to take place at the end of 2012.
Danish pump manufacturer Grundfos is planning to make India its global research and development (R&D) base, a top company official said Friday.
The $4.5 billion-turnover company is also setting up a new facility at Sriperumbudur near here to cater to neighbouring country markets.
"We have 16 acres of land at Sriperumbudur where we plan to build a bigger facility and move in there by 2012. However, details about the capital expenditure, the products to be made and the markets to be served are being discussed," Grundfos India Managing Director N.K. Ranganath told reporters here.
The 12-year-old, Rs.208-crore Grundfos India is responsible for markets in Bangladesh, Bhutan and the Maldives.
Launching a new range of water pumps targeting the domestic residential segment under the DAB brand belonging to group company DWT, Italy, he said Grundfos is planning to convert Grundfos India's Thoraipakkam facility here into a R&D centre to house around 300 engineers over the next five years.
FINLAND
In Helsinki the OMX finished the week at 6,637.69, a 0.72% session drop.
The Ministry of Finance's budget proposal totals Eur 50.4 billion, with the budget deficit standing at Eur 8.7 billion. Central government debt will rise next year to Eur 85 billion, which is around 46% of GDP.
On-budget expenditure will be around 4% lower than that budgeted for 2010. The lower expenditure is partly accounted for by the removal from the expenditure of stimulus measures and loans granted to certain states. Of the budget proposal's expenditure, administrative branch appropriations account for Eur 48.4 billion and interest expenses Eur 2.1 billion.
On-budget revenue is projected to be around 3% higher in 2011 than that budgeted for 2010 and 6.5% higher if the use of the cumulative surplus budgeted for 2010 is not taken into consideration. Tax revenue will account for 85% of all on-budget revenue and is projected to grow by nearly 8% due to economic growth and tax changes that come into force in 2011.
Energy taxation will shift, in terms of all fuels, to taxation based on energy content and carbon dioxide emissions, emphasising environmental steering. Energy taxes will be increased in connection with structural change by around Eur 750 million from the beginning of 2011 to compensate for tax revenue losses arising from the abolition of the employer's national pension contribution. This increase will not affect transport fuels. The excise duty on diesel fuel will be increased from the beginning of 2012 and at the same time the vehicle motive force tax levied on cars will be reduced.
In 2011 an excise duty on sweets, ice cream and other such products will be introduced and the excise duty on soft drinks will be increased.
An easing of the employment tax criteria will compensate for the tax-tightening impact of rising earnings levels and an increase in social insurance contributions. In addition, taxation of pension income will be reduced such that the tax rate of pension income is no higher than the tax rate of corresponding earned income.
The tax base of the waste tax will be broadened and the tax increased.
The global economy is recovering from the recession that followed the financial crisis, and world trade will grow fairly rapidly during the next 18 months. The Finnish economy, after the winter downturn, is returning to a growth track, driven by traditional export demand. Growth is also supported by private consumer demand, which reflects the fact that employment has weakened less than in previous recessions. The unemployment rate will remain lower than forecast in June both this year and next.
In the current year, GDP is projected to grow by just over 1.5%. The prospects for economic growth remain positive for 2011, which will also lead to a pick-up in investment. GDP is forecast to grow next year by more than 2.5%. Due to under-useof capacity, domestic consumer price pressures will be modest this year, so prices will be affected most by a rise in import prices resulting from increases in world market prices of raw materials. The inflation forecast for this year is around 1.5% and for next year around 2.5%. Next year, price pressures will intensify due to a rise in import prices and through more buoyant economic activity both domestically and internationally.
Despite the economic recovery, the financial position of public finances will weaken further this year. In 2011 as economic growth accelerates, taxation tightens and social security contributions rise, the financial position of public finances will strengthen, but remain even so in deficit. Public debt will rise further as a result of central and local government borrowing, and the debt ratio will exceed 51%.
Accelerating economic growth and an improving employment situation will be reflected next year particularly in a reduction of the central government deficit. Central government tax revenue will also grow as a result of increases in value-added taxation and energy taxation. Despite the reduction in the deficit, central government will still have to cover its spending by borrowing around Eur 8.7 billion in 2011. The improved economic prospects will not therefore be sufficient to stabilise the central government's financial position.
In the current year, the financial position of the municipal sector will remain around -0.5% of GDP. The weak development of tax revenue will compel municipalities to continue savings measures, although the differences between municipalities in terms of savings needs are great. In 2011 growth of local government tax revenue will prove to be better than previously forecast. The local government deficit will fall as consumer spending increases moderately and municipalities continue to balance their finances in the wake of the crisis.
Confidence among Finnish consumers climbed to a thirty five-month high in July with households' expectations about the domestic economic growth and employment conditions improving notably.
The consumer confidence index rose to 19.1 in July, the highest since August 2007, from 18.7 in June, Statistics Finland said Tuesday. The indicator improved for the second straight month. During the month, consumers' view on the general economic outlook rose to its strongest level in three years and was better than the long-term average, the statistical agency said.
The indicator for the general economic outlook in the next 12 months rose to 21.5 in July from 15.1 in June. The consumer survey, carried out between July 1 and 19, also pointed out that the households' view on the employment outlook improved in July compared to the previous month.
Fears regarding unemployment in the country alleviated to some degree compared to the previous month as 35% expected a fall in unemployment compared to 30% in June. A less proportion of people than in June believed that there will be an increase.
However, consumers' expected a deterioration of their personal financial conditions. The relevant indicator fell to 9.2 this month from 10 recorded in June. Respondents predicted a 2.2% increase in consumer prices over the next 12 months and forecast a long-term average inflation of 2.1%.
Saving was considered worthwhile by 63% of consumers in July compared to 56% a year ago. At the same time, 64% were able to set aside some money as savings and 75% looked forward to some kind of savings in 12 months' time. Compared to last year, less number of households believed that the time was favorable to buy durable goods.
In a separate release, the statistical agency reported a notable drop in the Finnish jobless rate last month. The unemployment rate fell to 8.8% in June from 10.5% in May. The number of unemployed had dropped to 248,000 in June from 255,000 last year.
Finnish jobless rate dropped in June from the preceding year.
The jobless rate decreased to 8.8% in June from 9.1% recorded in the previous year, a report by the Statistics Finland showed on Tuesday. In May, the jobless rate was 10.5%. The unemployment rate for men fell to 8.4% from 10.2% last year, while these rate for women rose to 9.3% from 7.9%.
The number of unemployed totaled 248,000 persons in June, smaller than 255,000 persons in the previous year. The number of unemployed men decreased by 25,000 and that of unemployed women increased 18,000. At the same time, the number of employed persons dropped to 2.56 million from 2.57 million a year ago. There were 28,000 more employed men and 37,000 fewer employed women than the preceding year.
The total labour force reached 2.81 million in June, smaller than 2.82 million last year. The labour force participation rate decreased to 69.4% from 70.1% a year ago.
NORWAY
Oslo's OBX pulled the curtains on the trading session Friday at 327.73, down 1.03%.
Norwegian energy giant Statoil's net income surged during second-quarter 2010, the group said Thursday, attributing the result to higher oil prices and a lower tax rate.
Net income for the period was 3.1 billion kroner (504 million Dollars). In the second quarter of 2009 the result was zero, while the pre-tax income increased 9% year-on-year to 26.6 billion kroner.
Revenues in the second quarter 2010 were 129.2 billion kroner, up 23% year-on-year, the state-controlled group said.
"Statoil's second quarter is characterised by strong operational performance and a high activity level," chief executive Helge Lund said.
The results were however lower than analysts had forecast and the share price dropped some 3% in opening trading.
Due to the Deepwater Horizon accident in the Gulf of Mexico, Statoil - like other oil companies - has had to halt a "very exciting" exploration programme, Lund told reporters.
The accident would likely "increase efforts" to improve security in the offshore business, he said.
The average second-quarter oil price measured in kroner was up 32% year-on-year, while the average natural gas price was down 12% measured in the Norwegian currency, the group said.
Norwegian industrial confidence improved in the second quarter, reflecting the modest gains posted by the manufacturing industry and a better short-term outlook, a survey by Statistics Norway revealed Wednesday.
The seasonally adjusted industrial confidence indicator for the manufacturing industry rose to 5 in the second quarter from 3 in the first three months of the year, signaling a further improvement in business conditions. The index climbed for the sixth consecutive quarter.
Norwegian industrial managers reported a weak growth in business activity in the second quarter, but expected the conditions to improve in the third quarter. The small gain in the second quarter was mainly driven by better conditions in export markets.
However, further drop in employment and continued fall in market prices along with severe competition restricted production growth during the April to June period. Average capacity utilization was at 77.5%.
Industrial managers considered the general outlook for third quarter to be positive as an expected increase in new orders from oil and gas sector will cause output to spike, the survey, conducted from June 10 to July 20, showed.
Meanwhile, producers of intermediate goods recorded further growth in output in the second quarter, though employment continued to fall. Consumer goods industries also recorded an increase in output. For both industries, demand from domestic as well as external markets continued to rise in the second quarter.
With a more than one-year delay, Norway and the EU Friday signed an agreement on EEA contributions for the period 2009-2014. Norway will in the period allocate an annual 347 million Eur to projects in the newest member countries of the Union.
The 12 newest member states, as well as Portugal, Spain and Greece will be beneficiaries of the money, which first of all will be granted to green projects, labour rights, research and human resources. The total contribution for the period - 1388 billion Eur - is up 22% from the previous four-year period.
It is believed that parts of the money will be allocated also to cross-border projects between the new member states and their non-member neighbors in Eastern Europe.
SPAIN
The IBEX in Madrid drew to a close Friday on 10,499.80, a drop of 1.50% for the session.
The results of the stress tests, unveiled last Friday, were absolutely satisfying and are very positive for the financial sector, Spanish Finance Minister Elena Salgado said. Among the 91 banks tested across Europe, seven failed, of which five were Spanish banks.
According to an interview with the El Pais newspaper published on Wednesday, Salgado said the failed five Spanish banks account only for 2.3% of the country's financial system. Hence, she said their failure in the test to prove resilience against financial shocks is not a major concern.
All of Spain's major banks passed the stress tests conducted in July, but unlisted regional banks Banca Civica, Espiga, Cajasur, Diada and Unnim Savings Bank failed. They have a combined capital shortfall of about 2 billion Euros.
Salgado assured customers of these institutions that their savings are safe. She also urged these banks to pick up their normal activity as early as possible and strengthen their capital within a reasonable time.
Further, the minister said Spanish unemployment most likely fell in the second quarter, though at a slower pace. The country's statistical office is due to release second quarter employment data on Friday. With regard to deficit reduction, Salgado said it is still difficult to understand why should one embark on deficit reduction even before the economy start growing and it still warrant further impulses.
The Spanish central government's budget shortfall for the first six months of the year shrank by 24.7% compared to the same period a year ago, official figures showed on Wednesday.
The central government deficit stood at Eur 29.77 billion, which is equivalent to 2.8% of the country's one-year national output. A year ago, the deficit-to-GDP ratio stood at 3.8%.
The government said the fall in the deficit came due to rising tax revenues, up 10.6%. Income tax revenue climbed 3.6% and VAT revenue was up 31.3%.
The central government balance does not represent the entire public sector balance sheet however, as it excludes the social security system and also the balance sheets of the various regional governments.
The Spanish government has approved numerous budget cuts aimed at bringing down the country's large budget deficit. The country currently had a deficit of 11.2% of GDP last year, which it has pledged to bring under 3% by 2013.
Inflation in Spain jumped more than economists had expected in July to its highest since November 2008, official data showed on Thursday.
Statistical office INE said the harmonized consumer price index rose 1.9% annually, faster than the 1.5% increase in June. Analysts had predicted an inflation rate of 1.7%.
INE said the rise in inflation was mainly driven by increasing food prices and organized tour charges. The statisical office did not release a detailed breakdown of the results, which will be released later next month.
PORTUGAL
Lisbon's PSI General concluded the week Friday at 2,624.19, down 0.5% on the day.
Portugal has become the first Eurozone country to agree to set aside cash - or other assets - against derivative transactions in a decision intended to reduce its funding costs. Banks regularly post collateral in derivatives trades in order to protect the other party in the event that a deal were to be be unwound when it is trading at a loss. But sovereign borrowers typically do not post collateral.
To posting collateral could help countries by lowering the costs banks charge them for derivatives, for example in hedging against currency or interest rate moves.
That, in turn, could potentially lower volatility and prices in sovereign credit default swaps (CDS), say bankers, which should have a positive effect on their borrowing costs.
Long running talk of sovereigns putting up cash, or other assets, in swap agreements with banks have been closely watched by bankers and regulators seeking to reduce counterparty credit risk in the derivatives market, in the wake of the global financial crisis.
Borrowers in debt markets, whether companies or countries, often use interest rate or currency derivative swaps to manage their finances.
These agreements can move into profit at any point in time for either side of the transaction, depending on the shifts in the market. By posting collateral, the risks are reduced for the party on the other side of the transaction.
Portugal's Banco Comercial Portugues said Wednesday its first-half net profit rose 11% on year, due to increased lending income and trading income.
The country's No. 2 bank by market capitalization said its first-half net profit grew to Eur163.2 million from Eur147.5 million a year earlier. Last year's profit included a Eur21.2 million gain from the sale of a 49.9% stake in Banco Millennium Angola.
A Dow Jones Newswires poll of three analysts had forecast an Eur169.1 million net profit in the first half.
BCP's net interest income--the difference between what a bank charges for loans and what it pays for deposits and other funding--climbed to Eur705 million from Eur675.6 million in the first half. Trading income was Eur314.6 million, compared with Eur214.1 million a year earlier.
The bank set aside Eur384.2 million to cover non-performing loans, up from Eur279.1 million a year earlier.
Brazilian telecommunications company Oi says it is forming a strategic partnership with Portugal Telecom by selling it a minority stake.
The Brazilian company also known as Telemar Norte Leste SA says in a Wednesday statement that the two companies signed a letter of intent in which the Portuguese company agrees to acquire a 22.4% stake in Oi for 8.44 billion reals ($4.8 billion).
Oi has in turn agreed to purchase a 10% share of Portugal Telecom. The statement does not say how that exchange is worth.
The agreement was announced the same day Spain's Telefonica said it will acquire Portugal Telecom's share in Brazil's largest cell phone operator, Vivo, for Euro7.5 billion ($9.77 billion).
ITALY
Italy's benchmark FTSE MIB Index declined for a second day this week, falling 75.41, or 0.4%, to 21,021.56 at the 5:30 p.m. close in Milan. The gauge increased 2% this week and 8.9% this month.
Autogrill declined 14.5 cents, or 1.5%, to 9.5 euros, a fifth straight loss. The world's biggest manager of airport and highway restaurants said in a statement that second-quarter net income fell to 32.6 million euros versus 38.1 million euros a year earlier.
Banca Generali rose 9.5 cents, or 1.1%, to 8.54 euros after saying profit in the first half almost doubled to 43.7 million euros from 23.9 million euros a year earlier as a jump in commissions more than offset a decline in lending income.
Bulgari sank 26.5 cents, or 4.2%, to 6.02 euros, taking this week's loss to 7.3 euros. The world's third-largest jeweler reported second-quarter profit that missed analysts' estimates on declining sales in Europe, and confirmed its full-year revenue forecast of at least 5% growth.
"Even though management confirms its sales growth and EBIT guidance, we do not rule out that the market could be disappointed by the lack of good surprises," Kepler Capital Markets said in a note.
Enel rose for a second day, gaining 3.75 cents, or 1%, to 3.77 euros. Natixis Securities lifted its recommendation to "neutral" from "reduce," on management confirming guidance on operating profit and debt reduction and because the "share price appears to have reached a floor."
The country's largest utility posted a 31% decline in first-half profit as a gain linked to the purchase of a stake in Spanish power company Endesa SA wasn't repeated. Enel will meet its 2010 debt target and the initial public offering of its Green Power unit is still targeted for October, Chief Executive Officer Fulvio Conti said.
FastWeb lost 34 cents, or 2.8%, to 11.76 euros, a second consecutive decline. Deutsche Bank AG downgraded the telecommunications company to "hold" from "buy," because of "disappointing results."
Fastweb also had its recommendation cut to "reduce" from "hold" at Banca Akros.
Italcementi, Italy's biggest cement maker, sank 19.5 cents, or 3%, to 6.28 euros. Construction stocks were the worst performers in Europe today. Lafarge SA, the world's biggest cement maker, said second-quarter profit fell 15% and pledged to extend costs cuts and asset sales to reduce its debt as it trimmed its forecast for demand in 2010.
Italcementi reported second-quarter net income of 37.9 million euros. The company didn't provide a comparable figure for the year earlier period.
Mediaset dropped for a third day, losing 7.25 cents, or 1.5%, to 4.93 euros. Prime Minister Silvio Berlusconi's television broadcaster had its price estimate lowered to 4.9 euros from 5.1 euros at Natixis Securities, which reiterated a "reduce" rating.
Parmalat plummeted 6.3 cents, or 3.3%, to 1.86 euros, the biggest loss since May 7. Cheuvreux removed Italy's biggest dairy food company from its "selected list" and downgraded the stock to "underperform." The brokerage noted that "despite the better currency trend, the guidance is unchanged," due to "risks in Italy and Venezuela."
Telecom Italia eclined 2.95 cents, or 2.9%, to 97.75 cents, snapping a four-day increase. Cheuvreux reiterated a "sell" recommendation on Italy's biggest phone company and suggested "to short Telecom Italia compared with the European telecom index ahead of second-quarter results."
"Telecom Italia's strategy remains ineffective as it is hampered by the shareholding structure and debt burden," the brokerage said in a note.
Zignago Vetro climbed 20.25 cents, or 4.9%, to 4.36 euros, the steepest increase since Dec. 11. Equita Sim SpA upgraded the specialist bottle maker to "buy" and added the stock to its "small cap portfolio."
Italy's business sentiment improved in July after easing in June, a survey conducted by the research institute ISAE showed Thursday.
The business sentiment index came in at 98.3 in July, up from a revised reading of 96.3 in June. The expected reading was 96.4. "Both we and the consensus were expecting a broad stabilization of the index, after the slight drop recorded in June," economists at UniCredit Research said.
The latest reading is in line with the recent solid performance of industrial production in the second quarter, UniCredit Research noted. "While we keep expecting some moderation in the pace of economic growth in the second half of the year, the indication stemming from business sentiment in July might point to more resilience in industrial activity than previously envisaged," the group said.
A survey of retailers showed a fall in confidence. Retailers' sentiment dropped to 99.4 from June's 103. At the same time, services confidence rose to 98.9 from 95.5 in June.
Elsewhere, data from the Italian statistical office Istat showed that hourly wages increased 0.1% in June from the previous month, taking the annual growth to 2.5%. Economists had expected a monthly growth of 0.2% and an annual 2.6% increase.
GREECE
In Athens, the Athex Composite ended both the session and the week Friday on 1,681.98, down 1.55%.
Greek producer price inflation eased for the second consecutive month in June.
The producer price index, or PPI, rose 6.5% year-on-year in June, but slower than 7.9% in the previous month, the statistical office said on Thursday. Producer prices increased for the eighth successive month since November 2009. A year earlier, the PPI decreased 9.2%.
Producer price index for the domestic market grew 6.1% annually in June, while the price index for the non-domestic market increased 8.1%.
On a monthly basis, the PPI increased 0.8% in June, compared to a 0.5% fall in the previous month. At the same time, producer prices for the domestic market grew 6.1% and for the non-domestic market increased 8.1%.
Net flow of credit to Greek households eased further in June, the Bank of Greece said Wednesday. The annual rate of credit growth rose 1.5% in June, slower than 2% in May.
Similarly, there was modest easing in net flow of housing loans, slowing 2.5% in June compared to 3% in May. Consumer credit growth remained flat on an annual basis in June after declining 0.1% in May. Meanwhile, credit growth to domestic enterprises remained unchanged at 3.4% during the month.
The recent deficit crisis, along with the stringent spending cut measures, has reduced borrowings in the country. The Socialist government of George Papandreou has imposed a slew of austerity measures in return for a 110 billion Euro bail-out from the European Union and the International Monetary Fund.
Under the austerity program, Greece pledged to reduce its budget deficit by 30 billion Euros, or 11% of GDP over four years. Athens accumulated a deficit of 13.6% of GDP in 2009, much higher than the 3% ceiling set by the EU for all its members. Greece expects to bring down its deficit to below the 3% threshold by 2014.
In the first quarter, the economy contracted 2.5% annually, faster than the 2.3% contraction in the previous quarter. Sequentially, the gross domestic product dropped 1% compared to 0.8% fall in the previous quarter.
Greece's visible trade deficit narrowed 28.2% annually to Eur 1.58 billion in May, the Hellenic Statistical Authority said Monday.
Excluding oil products, the deficit recorded a 11.5% year-on-year decrease. A year ago, the deficit was Eur 2.2 billion. During the month, merchandise exports, including oil products, declined 3.5% year-on-year compared to 15.9% fall last year. At the same time, exports, eliminating shipments of oil products, dropped 8.6%.
Imports of goods declined 18.8% annually compared to 32.1% drop last year. Excluding oil products, imports fell 10.3%. The value of imports, that included value of ships, dropped 21.1% year-on-year.
Exports to EU member states grew 10.1% annually, while the dispatches to the countries outside Europe declined 21.9%. At the same time, imports from the EU states dropped 9.5% in May and imports from non-EU countries dipped 33.3%. During the first five months, the trade deficit was Eur 9.3 billion, down from Eur 12.3 billion deficit recorded a year earlier. During the period, imports fell 15.9% year-on-year and excluding oil-products, imports dropped 4.2%. Meanwhile, exports increased 0.9% annually during the five-month period. Excluding oil products, shipments rose 0.3%. |
| The UK Market
Did it follow the Global trend ..... |  The rally on London's equities market continued to falter on Friday, with losses for heavily-weighted mining stocks as traders looked through US economic data.
The reading for gross domestic product in the second quarter showed growth of 2.4%, only narrowly under forecasts for growth of 2.5%.
The selling was took the FTSE 100 back under the 5,300-point level at which previous rallies have ebbed away. It fell 55 points to 5,258.02, a loss of 1%, staying around levels seen before the release of the much-anticpated data, to which there was little reaction.
Over the month, the benchmark index stood 7% higher by the end of the close of trade.
Resource stocks stayed under pressure. The sector took the biggest overall toll on the market, with BHP Billiton the largest loser, down 1.3% at £19.64. Anglo American bucked the trend, and ended the session with a smaller fall than those seen across the rest of the sector. It fell 0.7% to £25.24 after it resumed dividend payments following a two-year hiatus with a $0.25 per share interim pay-out.
British Airways stood out on the leaderboard. The embattled airline, which has been mired in a bitter industrial dispute with unions representing its cabin crew, reported a widening first-quarter loss, in part because of the effect of the Icelandic volcanic ash cloud in April. But it said the effect of the disruption had been in line with previous guidance, helping it stand by forecasts that it would break even by the end of the current financial year. BA's shares rose 1.7% to 219p.
The rally in the banking sector, which came after a strong showing for UK balance sheets in Europe-wide stress tests, was re-established after profit taking trimmed gains in late trade on Thursday. Lloyds Banking Group turned round to rise 0.5% to 69.5p.
There was a defensive feel across the leaderboard, helped in part by EDF's sale of its UK arm to Cheung Kong Infrastructure of Hong Kong for £5.8bn. United Utilities rose 4.5% to 586p. with fellow water provider Severn Trent up 2.6% at £13.13.
Shell, Europe's largest oil company, lost 1.6 percent to 1,754.5 pence and HSBC, the region's biggest bank, declined 1.6 percent to 646 pence. BP Plc retreated 1.8 percent to 405.95 pence. The three companies led the FTSE 100 index lower.
Shire lost 2.4 percent to 1,455 pence. Bernstein cut its recommendation on the shares to "market perform" from "outperform," according to a report.
United Business Media declined 3.9 percent to 550.5 pence. The publisher of InformationWeek said first-half net income dropped to 45.5 million pounds ($71.5 million) from 48 million pounds a year earlier. |
| Asia Pacific Regional Markets
Did they set the tone or follow the lead ..... |  JAPAN
Tokyo stocks fell on Friday as the Dollar plunged to a fresh eight-month low against the Yen, offsetting mostly good corporate earnings reports from Sony, Panasonic, and other high-profile companies.
The Nikkei Stock Average fell 158.72 points, or 1.6%, to 9537.30. The Topix index of all the Tokyo Stock Exchange First Section issues also fell 11.77 points, or 1.4%, to 849.50, with all 33 subindexes closing in negative territory.
Trading volume topped 2.1 billion shares, the most seen since July 22.
Stocks weakened from the opening bell, taking cues from overseas markets and mounting concern about the health of the US economy ahead of second quarter GDP data set for release later in the global trading day and a key July jobs report due next week.
Earnings reporting season hit full stride with a plethora of firms announcing results Friday and Friday, mostly after the close of trading.
Sony ended up 3.6% to Y2,705 after going bid-only early in the session, following a surprise upward revision of its full-year earnings forecasts delivered Thursday afternoon. The company credited brisk sales of electronics products and improvement in its LCD television business.
Sony raised its net profit forecast for the current fiscal year to Y60 billion from its prior Y50 billion projection.
Panasonic returned to the headlines for the second straight session, closing up 6.0% to Y1,142 on very heavy volume. The firm reported strong April-June earnings after Friday's market close, formally announced plans to buy the remaining shares of majority-held subsidiaries Sanyo Electric and Panasonic Electric Works, and registered to issue new shares worth up to Y500 billion.
A Barclays Capital analyst noted that several management issues remain with Panasonic, including uncertainty about the exact additional synergies to be gained from the subsidiary buyouts. Panasonic's stock plunged 7.7% Friday.
Sanyo ended down 8.7% at Y136 on massive volume after Panasonic's announced takeover bid price of Y138 fell well below Sanyo's Y149 prior day closing level. Panasonic Electric Works also ended off 2.2% at Y1,099 after jumping 15% on Thursday.
The Dollar's plunge to Y86.25 midday--a fresh eight-month low against the Yen--dragged heavily on many exporters, including Nissan, which reported first quarter results that beat most estimates, pushing its shares up initially. But they closed off 0.7% at Y664.
The Dollar was seen trading at Y86.44 as of 0600 GMT.
Real estate shares were hammered by poor earnings from Mitsui Fudosan, Nomura Real Estate Holdings, and Mitsubishi Estate. The three fell 3.9% to Y1,280, 4.1% to Y1,218, and 2.5% to Y1,064, respectively, as slow condominium sales and high office vacancy rates took a toll.
For the week, the Nikkei added 1.1%, and closed July with a gain of 1.6%. Year-to-date, however, the index remains down 9.6%.
September Nikkei 225 futures closed down 160 points, or 1.7%, at 9530 on the Osaka Securities Exchange.
SOUTH KOREA
South Korean shares closed lower in thin trade Friday as domestic investors sold steel shares on concerns that the companies may have to slash their product prices and booked profit in bellwether Samsung Electronics.
The Korea Composite Stock Price Index, or Kospi, fell 0.7%, or 11.55 points, to close at 1759.33. Analysts expect the Kospi to move in a 1750-1780 range next week, before breaking through the resistance at the 1800 level in the first half of August.
Analysts expect foreign investments to buoy the main index, after foreigners went on a buying spree for the eighth consecutive day. Investors are also expected to keep a close watch on second-quarter GDP data in the US tonight and July trade data in Korea on Sunday.
Foreigners bought a net KRW80.08 billion in shares, while local retail and institutional investors each sold a net KRW83 billion and KRW14 billion, respectively.
Steel firms fell sharply, leading Kospi's fall. Posco fell 4.1% to KRW492,000 on speculation that the world's No. 4 steel maker by output is under government pressure to cut its steel product prices in the second half and not pass an increase in raw materials costs to customers. Despite recording its biggest-ever quarterly net profit, Samsung Electronics skidded 2.1% to close at KRW810,000 mainly on profit taking and also because the company's executives were somewhat cautious on the business outlook for the latter half of this year, analysts said.
Samsung Electronics Friday reported a record quarterly net profit of 4.28 trillion won, or about $3.6 billion, for the second quarter, up from KRW2.33 trillion a year earlier.
Meanwhile, there were some gainers that supported the index.
Car maker Kia Motors was up 2.3% at KRW30,900 after it reported a 61% jump in second-quarter net profit while Hyundai Motor added 3.5% to close at KRW149,000, extending gains after it reported stronger-than-expected second-quarter earnings Thursday.
KT Corp. also rose 0.7% to KRW42,800 despite reporting a sharp 32% fall in its second-quarter net profit Friday on a solid earnings outlook with the rise in sales of wireless data services, analysts said.
Meanwhile, Woori Finance fell 3.9% to close at KRW14,700 on market concerns that the stake sale process will be prolonged given Woori's massive size, which came after the South Korean government said earlier Friday that it seeks to sell all or most of its 57% stake in the company through a sale or a merger and aims to name a preferred bidder by the first quarter of 2011.
HONG KONG
Hong Kong stocks ended lower Friday on moderate profit-taking, but alumina and aluminum producer Chalco bucked the downtrend on news it is diversifying its business by buying a stake in an iron-ore joint venture.
The blue-chip Hang Seng Index fell 64.01 points, or 0.3%, to 21,029.81 after trading between 20,945.63 and 21,095.90 during the session. The index rose 1% over the past week.
Market volume totaled HK$51.45 billion, down from HK$56.32 billion Thursday.
Traders said although the market rose 5% over the previous eight consecutive sessions, profit-taking pressure was mild. Any major falls may prompt bargain hunting, they said.
Traders said the index will likely trade in a range of 20,500-21,200 in the near term.
Chalco jumped 2.5% to end at HK$6.88 after resuming trade, but was off an intraday high of HK$7.07. The metals firm said it has agreed to pay US$1.35 billion for a 44.65% stake in the Simandou iron-ore project in Guinea. Investors favored the deal as it signifies diversification of the blue-chip company's earnings base.
Cheung Kong Infrastructure rose 0.7% to HK$29.10 while HK Electric ended 0.6% higher at HK$47.05. Both stocks rose after resuming trade in the afternoon session, driven by news that a Cheung Kong Infrastructure-led consortium has agreed to buy Electricite de France SA's U.K. electricity distribution networks and is in exclusive talks to finalize the deal. Traders said the deal is strategically positive as both companies can broaden their earnings base by increasing overseas investment amid a maturing market in Hong Kong.
Port operators outperformed, with China Merchants jumping 3.2% to HK$29.40 and Cosco Pacific gaining 2.9% to HK$10.60. Taifook Securities said undervalued stocks have attracted rotational buying interest.
However, ASM Pacific, a unit of Dutch semiconductor equipment maker ASM International, fell on profit-taking, shedding 0.8% to HK$71 after rising 10.4% Thursday on strong results.
A fund manager who declined to be named said the firm's business "would have to be pretty spectacular to bring it back to an appealing valuation given where the stock price is."
CHINA
China's shares ended lower Friday because of liquidity concerns related to Everbright Bank's imminent listing and the fund-raising plans of the country's other lenders.
The benchmark Shanghai Composite Index, which tracks both A and B shares, ended down 0.4%, or 10.49 points, at 2637.50. The index is up 2.5% this week. The Shenzhen Composite Index fell 0.1%, or 1.44 points, to 1075.44.
Shanghai's benchmark index is likely to resume its recent uptrend in the short term following a 27% slump in the first half, analysts said.
"Given liquidity pressure remains because of banks' fund-raising efforts, the recent rise in the general market is more like a technical rebound than a reversal in direction," Guotai Junan said in a note to clients.
But it said it is cautious on the market's medium-term prospects as the recent market rally was partly due to speculation China will ease some of its tightening policies.
Citigroup was more optimistic, saying recent economic data out of China will support the market. Citigroup analyst Minggao Shen said he expects the Shanghai index to trade in a 2800-3100 range before the end of the year.
Banks fell because of renewed concerns about a share glut after China Everbright Bank said Friday it will pre-market its initial public offering, which could raise up to CNY20 billion, next week ahead of a Shanghai listing Aug. 18.
The offering is set to be China's second-largest this year and comes just a month after Agricultural Bank of China completed a share offering that could become the world's largest ever. Three of China's biggest banks, ICBC, China Construction Bank and Bank of China, are awaiting regulatory approval for planned rights offerings and convertible bond issues to raise a maximum CNY205 billion.
ICBC dropped 1.1% to CNY4.31, Agricultural Bank of China fell 1.4% to CNY2.79, China Construction Bank shed 0.6% to CNY4.95 and Bank of China was down 0.8% at CNY3.58.
Chalco bucked the trend, with its stock surging 6.7% to CNY10.89, after its parent Aluminum Corp. of China agreed Thursday to tie up with Anglo-Australian miner Rio Tinto to jointly develop an iron-ore project in Guinea.
TAIWAN
Taiwan share prices closed down 0.49% Friday, led by high-tech heavyweights, after their counterparts fell on Wall Street overnight amid concerns over the global economy, dealers said.
The weighted index fell 38.36 points to 7,760.63 after moving between 7,731.19 and 7,781.24 on turnover of NT$103.87 billion (US$3.24 billion).
The market opened down 0.43% on the US market weakness, and pressure continued throughout the trading session as the semiconductor sector extended losses from the previous session amid rising fears of slowing sales growth in the second half of this year, dealers said.
A total of 2,021 stocks closed down and 1,310 were up, with 272 remaining unchanged.
The foodstuff sector posted the heaviest losses, down 1.4%. Plastics and chemicals closed down 0.8%, construction shares were 0.6% lower, machinery and electronics issues ended down 0.5% and the paper and pulp sector closed the day 0.3% lower.
Financial shares fell 0.1%, while both cement and textiles rose 0.2%.
Several major high-tech stocks, including TSMC, United Microelectronics and flat panel maker AU Optronics witnessed falls in their American depository receipt prices overnight.
TSMC fell 0.95% to NT$62.40 and UMC lost 1.73% to close at NT$14.20.
AU Optronics shed 1.62% to end at NT$30.35, and rival Chimei Innolux fell 2.40% to finish the trading session at NT$34.60.
Among non-high-tech stocks, Taiwan Cement rose 1.53% to close at NT$29.80 and textile firm Far Eastern New Century gained 0.41% to reach NT$37.15.
THE PHILIPPINES
The stock market ended the week little changed as investors stayed on the sidelines ahead of more corporate income results.
Most companies comprising the key Philippine Stock Exchange index will report their first-half performance within the next 2 weeks.
At the close of trading, the PSEi fell 2.40 points or 0.07% to 3,426.95. Despite Friday's losses, the main gauge was still up 1.6% month-on-month.
The broader all-share index edged down 0.87 points or 0.04% to 2,182.79.
Except for the industrial and holding firm sectors, all subindices were in red.
Decliners beat advancers, 72 to 54, while 45 issues were unchanged.
Value turnover came in at only P2.92 billion from Friday's P3.42 billion.
Ayala Corp. was the most actively traded stock by value. Its shares rose by as much as 1.9% before closing flat at P317 apiece.
Second most active was Metropolitan Bank and Trust Co., which added 0.3% to P60.
Third most active was DMCI Holdings Inc., which rose 0.2% to P18.72. DMCI expects its net income this year to reach P6 billion.
SINGAPORE
The Straits Times index rose 0.4% to a three-month peak of 2,997.
Expectations that healthy economic conditions in the first half would continue for the rest of the year supported markets in July, with Singapore's STI up 5.37%.
In Singapore, DBS Group fell 0.7% after Southeast Asia's biggest bank posted an unexpected S$300 million loss in the second quarter after it took a S$1.02 billion goodwill charge on its Hong Kong business.
UBS raised its profit estimate and price target of Las Vegas Sands Corp, driven by strength in Singapore operations.
UBS increased their 2010 profit view of the casino operator to 77 cents a share from 61 cents a share, while the Wall Street is expecting the firm to earn 51 cents a share.
Las Vegas Sands, which operates the popular Venetian and Palazzo casinos in Las Vegas, opened its Marina Bay Sands (MBS) casino at Singapore in April and generates about 80% of its revenue from Asia.
Revenue from Marina Bay Sands came in at $216.4 million for the second quarter, the company said in a statement.
MALAYSIA
The FBM KLCI closed higher for the sixth straight day Friday, helped by last minute buying in selected heavyweights and rotational plays on lower liners, dealers said.
At 5pm, the FBM KLCI rose 2.51 points or 0.19% to close at a new two-year high of 1,360.92.
The benchmark index opened 0.90 of a point lower at 1,357.51 in the morning and traded within 1,354.76 and 1,360.92 .
A dealer said the local market started the day in a negative note as players took cue from the overnight slip on Wall Street.
However, continued buying in selected blue chips such as Sime Darby in the afternoon session helped the key index to finish the day in positive territory.
OSK Research said the FBM KLCI this week had continued to inch higher after surpassing the psychological level of 1,350, something it failed to do in the previous 2009-2010 rally.
Although the index experienced great indecisiveness two days ago, the market is now trading at another new peak for the 2009-2010 rally, it said.
"The immediate technical outlook of the FBM KLCI remains bullish," it added.
At close, the Finance Index shed 2.96 points to 12,331.62, the Plantation Index declined 11.26 points to 6,399.38 but the Industrial Index gained 17.84 points to 2,667.67.
The FBM Emas Index rose 11.12 points to 9,212.77 but the FBM70 Index declined 18.97 points to 9,184.01 and the FBM Ace Index slipped 8.96 points to 3,794.77.
Losers led gainers 378 to 348 while 274 counters were unchanged, 364 untraded and 25 others suspended.
Volume declined to 918.318 million shares valued at RM1.422 billion from 999.630 million shares valued at RM1.481 billion Thursday.
Topping most active stocks were SAAG Consolidated which shed half sen to 7.5 sen and Time dotCom which inched up 1.5 sen to 62.0 sen.
Sinotop Holdings lost seven sen to 24.0 sen while Malton increased 8.5 sen to 50.0 sen.
Among top gainers, British American Tobacco rose RM1.02 to RM44.90 and Petronas Gas increased 45.0 sen to RM10.
As for the heavyweights, Maybank rose four sen to RM7.74 while CIMB Group declined five sen to RM7.40.
Sime Darby gained 11 sen to RM7.80 while Maxis shed two sen to RM5.29.
The Main Market volume declined to 857.246 million shares worth RM1.408 billion from 904.895 million shares valued at RM1.461 billion Thursday.
The volume of warrants eased to 28.204 million units worth RM4.293 million versus 50.583 million units worth RM7.924 million previously.
Turnover on the ACE Market also dropped to 27.826 million shares valued at RM5.207 million compared with 33.708 million shares worth RM5.529 million Thursday.
Consumer products accounted for 91.836 million shares traded on the Main Market, industrial products 118.880 million, construction 50.161 million, trade and services 258.705 million, technology 42.228 million, infrastructure 58.900 million, finance 63.620 million, hotels 10.671 million, properties 139.207 million, plantations 14.018 million, mining nil, REITs 8.915 million, and closed/fund 105,400.
THAILAND
The Stock Exchange of Thailand (SET) composite index moved up 1.24 points, or 0.15%, to close at 855.83 points on Friday.
Some 4.55 billion shares worth 22.32 billion baht (about 697 million US Dollars) changed hands.
Telecoms shares rallied as Thailand is at last expected to hold an auction for third-generation mobile phone licences between Sept. 22 and 28, an industry regulator said.
The second-largest mobile operator, Total Access Communication, gained 5%, with its Singapore-listed shares up 5.2%. True Corp, which controls unlisted True Move, Thailand's third-largest mobile operator, rose 2.8%, while market leader Advanced Info Service was up 1.1%.
Thailand recorded net foreign inflows of $179.5 million for July until Thursday while Indonesia had net inflows of $529 million, according to Thomson Reuters data. They had both seen inflows in June after suffering outflows in May.
INDONESIA
Indonesian stocks on Friday fell back from a record high the previous day, as higher-than-estimated unemployment in Japan and a weaker Macquarie Group earnings outlook overshadowed increased profit targets at Sony and Panasonic, weighing on Asian markets.
The Jakarta Composite Index fell 27.53 points, or 0.9%, to close at 3,069.28, the first drop after setting record highs in the three previous days. The benchmark index gained 5.3% this month and was up 0.8% for the week.
Volume was on the light side on Friday, with 6.1 billion shares worth Rp 3.3 trillion ($369.6 million) changing hands. Decliners outnumbered gainers 126 to 87.
Meanwhile, the rupiah continued to gain strength, reaching levels not seen since in 37 months.
The rupiah rose for a seventh day, the longest winning streak since February 2007, on optimism that economic growth in Southeast Asia's biggest economy will boost demand for its assets.
The central bank "entered the market to smooth out" currency fluctuations, Bank Indonesia Deputy Governor Hartadi Sarwono said after the rupiah climbed to a three-year high.
Overseas investors pumped $218 million into Indonesian stocks in the last four days, boosting net purchases for the year to $1.4 billion.
The rupiah traded at 8,949 per US Dollar as of the stock market's close. The currency, which gained 1.2% in July for its second monthly advance, earlier in the day reached 8,933, the highest level since June 2007.
Bank Indonesia will continue to guard against excessive gains in the rupiah, Hartadi said. Policy makers can influence exchange rates by buying or selling currencies.
On the stock market, PT Citra Marga Nusaphala Persada, a toll-road operator, jumped 17% to Rp 1,040, its steepest increase since August 2009.
The company said first-half net income rose by 12 times to Rp 399 billion from Rp 31 billion a year earlier.
Retailer PT Ramayana Lestari Sentosa fell 11% to Rp 780, its sharpest drop since 2004. Ramayana said first-half net income declined to Rp 48.9 billion from Rp 79.6 billion a year earlier.
PT Sarana Menara Nusantara, a builder of telecommunications towers, dropped 9.2% to Rp 6,400, its biggest decline since March 12. Sarana said it swung to a first-half loss of Rp 38.7 billion from earnings of Rp 354.9 billion a year earlier.
INDIA
The Indian bourses commenced the week on a lower note and ended the choppy session on a weak note as auto stocks dragged the index down after poor result posted by Maruti Suzuki. The index bounced back on second day by gaining momentum after RBI`s rate hike announcement, touching a high of 18,149.56 on that day and positive global cues. Wednesday saw the market erasing earlier gains and ending the session on a disappointing note dragged by Reliance Industries, L&T and HUL.
The benchmark index Sensex snapped previous losses and ended the choppy session on a flat note with positive bias due to July F&O expiry series. However, the index exhibited weakness on Friday, closing the week on a sharply lower note below 18,000 levels and Nifty below 5,400 mark. Overall, it was a volatile week.
The 30 share index, Sensex dropped 262.69 points, or 1.45%, to 17,868.29 in the week ended July 30, 2010. On the other hand, the broad based NSE Nifty lost 81.50 points, or 1.50%, to 5,367.60 in the same period.
Mid-cap stocks declined 25.23 points, or 0.34%, to 7,407.91 in the week. While small-cap shares dipped by 90.35 points, or 0.96%, to 9,348.97 during the week.
Major gainers over the week in the sectoral indices were BSE PSU, which marginally rose 0.53%, BSE Consumer durable moved up 0.46%, Bankex and FMCG gained 0.42% each, Auto and IT up 0.13% and 0.03% respectively.
On the other hand, BSE Capital goods slumped 4.82%, Oil & gas and Realty plunged over 3% each, Power dropped 1.81% and Metal down 0.75% were the losers in the sectoral indices over the week.
Food inflation fell to single digit at 9.67% for the first time this year at a time when the government is facing a concerted Opposition attack on rising food and fuel prices. Inflation fell by 2.80% points for the week ended 17th July from 12.47% in the previous week, as prices of vegetables, especially potatoes and onions, declined.
FMCG player Dabur India reported a consolidated net profit of Rs 1,067.9 million, a rise of 16.85% (Y-o-Y), over the prior year period. During the same period, net sales stood at Rs 9,164.8 million for the quarter ended on Jun. 30, 2010, a rise growth of 23.41% against the prior year period.
Bharat Forge, the flagship company Kalyani Group swung to profit on consolidated basis for the quarter ended June 30, 2010. During the quarter, the company reported a consolidated net profit of Rs 620.70 million as against the loss of Rs 461.40 million. Consolidated total income of the company was at Rs 10,126.40 million, a rise of 66.29% over the prior year period.
Bharat Petroleum Corporation swung to loss for the quarter ended June 2010. During the quarter, the company reported loss of Rs 17,181.00 million compared with a profit of Rs 6,141.20 million in the same quarter previous year. Total income for the quarter rose 32.01% y-o-y to Rs 345,534.00 million.
Reliance Power announced a y-o-y decline of 25.79% in the consolidated net profit for quarter ended June 2010 to Rs 1,954.06 million. Consolidated total income was at Rs 4,267.45 million, a y-o-y rise of 27.19% over the prior year period.
Reliance Natural Resources registered sharp decline of 41.80% y-o-y in net profit to Rs 100.37 million for the quarter ended Jun. 30, 2010. Total income during the quarter decreased 19.58% y-o-y to Rs 928.55 million.
Oil and Natural Gas Corporation announced a fall of 24.48% y-o-y in net profit to Rs 36,611.40 million for the quarter ended Jun. 30, 2010. Total income during the quarter dropped 10.64% y-o-y to Rs 1,42,302.20 million for the June 2010.
Steel Authority of India reported a decline of 11.56% in the net profit at Rs 11,766.50 million for the quarter ended Jun. 30, 2010. During the quarter, total income has decreased 1.90%, y-o-y to Rs 95,195.20 million.
Hero Honda Motors posted a marginal decline of 1.68% y-o-y in net profit to Rs 4,916.90 million for the quarter ended Jun. 30, 2010. Total income during the quarter rose 12.36% y-o-y to Rs 43,500.30 million.
Central Bank of India announced a rise of 26.24% y-o-y in net profit to Rs 3,368.10 million for the quarter ended June 30, 2010. Total income during the quarter climbed 14.45% y-o-y to Rs 36,579.70 million.
Engineering and construction major, Larsen & Toubro announced a decline in its net profit for the quarter ended June 30, 2010. During the quarter, the profit fell to Rs 6,661.70 million from Rs 15,982 million, which included exceptional gain of Rs 10,200 million, in the prior year period. In the same period, total income of the company was at Rs 81,120.70 million, a rise of 6.27% over the prior year period.
AUSTRALIA
The Australian share market fell for a second consecutive day in quiet trading Friday as weaker offshore markets generated some minor profit taking before the weekend.
Cyclical sectors led broad-based declines as caution prevailed ahead of important economic data out of the US and China.
The benchmark S&P/ASX 200 closed down 30.6 points, or 0.7% at 4493.5, after hitting a four-day low of 4480.6. Volume was very light after allowing for activity generated by Thursday's expiry of July equity options contracts.
For the week, the index finished up 0.8% to record its fourth straight weekly gain, which saw the index bounce as much as 8.4%.
The S&P/ASX 200 hit a five-week high of 4531.6 on Thursday, as China's Shanghai Composite hit a two-month high and base metal prices rose. But Shanghai was down 0.8% late Friday, following modest falls on Wall Street, which were caused by disappointing earnings reports and worrisome comments from St. Louis Federal Reserve chief James Bullard.
Bullard said the Fed's zero interest rate target could cause a Japan-like deflation trap and that further quantitative easing might be necessary.
Locally, financials were the biggest drag on the index, with major banks down 0.6%-1.1% and Suncorp-Metway down 1.7% at A$8.37. Macquarie Group hit a three-week low of A$35.80 after warning that profits from its three biggest divisions would fall in fiscal 2011 unless market conditions improve. However, Macquarie recovered to close down 3.1% at A$37.20.
BHP Billiton fell 0.8% to A$40.12 and Rio Tinto fell 1.2% to A$70.61, despite a 0.8% rise in London Metal Exchange copper prices overnight.
In the energy sector, Santos fell 2.0% to A$13.30 and Origin fell 1.2% to A$15.44, while in the industrial sector, Programmed Maintenance Services fell 25% to A$1.90 after a disappointing market update.
Going into the interim reporting season, traders said investors were cautious after recent disappointing updates from the likes of QBE Insurance, Insurance Australia Group, Austar, Macquarie, Harvey Norman and Programmed Maintenance Services.
However, strategists maintained that the market was excessively cheap.
Australian financial markets activity will be thinned by a New South Wales state bank holiday on Monday but the Australian equities market will be trading as normal.
NEW ZEALAND
New Zealand shares rose for the third straight day as optimism the globe will avoid a double-dip recession. Shares including Freightways Ltd. and Pumpkin Patch led the advance.
The NZX 50 Index gained 14.09, or 0.5%, to 3047.11. Within the index, 20 stocks rose, 19 fell and 11 were unchanged.
Freightways rose 2.6% to $2.82. The courier firm this week announced it had set up the infrastructure to allow traders on the TradeMe website to arrange shipments through the company's network.
APN New & Media, the publisher of the New Zealand Herald, gained about 2% to $2.60 and children's clothing retailer Pumpkin Patch rose 1.7% to $1.84.
PGG Wrightson Ltd. fell 1.9% to 53 cents after halting negotiations on internalising NZ Farming Systems Uruguay's management contract pending the outcome of Singapore-based Olam's 55 cents a share takeover offer which values the Uruguay company at $134.3 million. Farming Systems traded at 56 cents Friday, one cent above the offer.
Telecom Corp. has finally rid itself of its struggling Australian retail business, confirming it sold the consumer division of its AAPT unit for A$60 million to iiNet Ltd. The shares gave up earlier gains to end the day at $1.99.
The phone company also sold its 18.2% stake in iiNet for A$70 million, about A$11 million below the carrying value as at June 30.
Pyne Gould Corp. fell 2.4% to 41 cents and Steel & Tube declined 1.8% to $2.21. |
| Global Commodities
'Food for thought' or 'a Grain of truth' ..... |  Coffee prices on Friday hit their highest level in 12 years on the back of low availability of premium Arabica coffee from key producer Colombia, after a string of disappointing crops in the Latin American country.
In New York, ICE September Arabica coffee jumped 3.2% to 178.75 cents a pound, the highest since February 1998. In London, Liffe September lower quality robusta coffee rose 3% to $1,810 a tonne.
Industry executives believe prices could rise towards 200 cents a pound in New York before the arrival of the new Brazilian crop later this year. "Until October, it is going to be tight on high-quality coffee," said one.
Colombia coffee production last year plunged to a 33-year low of 7.8m bags, each of 60kg, down nearly a third from 11.1m bags in 2008.
After a meeting with Brazilian officials, the London-based International Coffee Organisation said on Friday that the "current tight demand-supply situation" in the coffee market was "likely to persist in the near- to medium term".
Executives said, nonetheless, that after the arrival of the Brazilian crop - which is expected to be the largest ever - prices should decline in early 2011.
Elsewhere in commodities markets on Friday, global wheat prices surged further, propelled by fears of lower production from Russia, Kazakhstan and Ukraine - three of the world's top 10 exporters - because of a drought in the region.
In Paris, Liffe November European milling wheat hit €194.50 a tonne, the highest level in 22 months. The contract was later up 2.3% at €192.30 a tonne.
In Chicago CBOT September soft winter wheat rose to a fresh 13-month high of $6.37 a bushel, up 1.5% on the day. Wheat prices in Chicago, the global benchmark, have jumped 36.7%% so far this month.
The International Grain Organisation on Thursday said wheat production would drop to 651m tonnes in 2010-11. That projection was down from the 664m tonnes it forecast last month and sharply lower than the 677m tonnes harvested in the 2009-10 season. The IGC said consumption would hover around 655m tonnes in 2010-11.
Industry executives fear that Russia could impose export limits if the drought damage is worse than currently expected, tightening supplies for importers in North Africa and the Middle East. Executives said bread price rises were likely.
Traders are also concerned about supplies from Canada, which exports the bulk of the world's top quality, high-protein wheat. Planting in Canada's prairies was delayed this year by unusually heavy rains and officials said output was expected to decline by at least 25 per compared with 2009.
Meanwhile, oil prices moved lower, but remained anchored within the trading range of $70-$80 a barrel that has been in place for most of the year. Nymex September West Texas Intermediate dropped 54 cents to $77.82 a barrel while ICE September Brent fell 48 cents to $77.11 a barrel. |
| Global Currencies
In for a Penny, in for a Pound ..... |
The Dollar fell below Y86 for the first time in eight months on Friday as mounting concerns about the US economy led to broader weakness for the greenback.
The slightly weaker than expected data on second-quarter US growth were the trigger for the latest move downward, but traders were also looking ahead to manufacturing and employment data next week that are expected to point to further weakness in the world's largest economy.
The greenback fell to a low of Y85.93 before recovering to Y86.63 later in the day, down 0.9% against the Japanese currency on the week.
Apart from two trading days in November last year, the Japanese currency is at its strongest against the Dollar since 1995. There is speculation that it could test its 14-year peak of Y84.80, reached in November, or even the record high against the Dollar of Y79.70 it hit in 1995. The sharp rise in the yen has put investors on alert for a possible currency intervention by the Japanese authorities, with some citing Y85 as a level at which Tokyo might intervene. "Certainly we cannot imagine the [Finance] Ministry remaining quiet as [the] US Dollar-yen rate probes the year-to-date lows," said Simon Derrick, currency strategist at Bank of New York Mellon.
Yoshihiko Noda, the Japanese finance minister, on Friday said he was watching the foreign exchange market closely, although a government panel said monetary policy easing, rather than direct intervention, was the best way to deal with the currency's strength.
The yen's strength came as the greenback fell against a broad range of currencies: on a trade-weighted basis it was down 0.9% over the week.
Weaker than expected data on durable goods orders and a downbeat survey on manufacturing conditions from the Federal Reserve contributed to the gloom surrounding the US economic recovery.
Mr Derrick said the recovery was "always at risk once its various stabilisers were removed".
"The US economy's first tentative steps are therefore unsettling and there are already audible calls for the return of quantitative easing," he said.
At the same time, the euro rallied to its highest in three months as traders became more optimistic on the prospects for the single currency, after the release of the long-awaited European bank stress tests last week produced no unpleasant surprises.
However, analysts at Danske Bank sounded a note of caution on the medium-term prospects for the single currency. "We still believe investors will demand a premium for holding euros, as European debt and money markets still aren't functioning optimally and the European banking sector remains fragile," they said.
The euro gained 0.9% to $1.3025 over the week, at one point rising above $1.31. The pound was 1.5% stronger at $1.5662, its highest level in five months, while the Australian Dollar was up 1% over the week, at a three-month peak of $0.9068.
South Africa's Rand gained against the Dollar on Friday supported by better-than-expected trade data.
The Rand gained 5% in July mainly on speculation that British HSBC could buy local bank Nedbank.
It has retreated from a 3-1/2 month high of 7.2850 to the Dollar hit on Thursday and dealers see the currency maintaining its gains, with potential to test a key level of 7.25, which has been breached only twice in the past year.
The Rand was trading at 7.2930 against the Dollar, 0.57% firmer than New York's close of 7.3350.
And finally in the currency markets, ending as always with the RMB. On the over-the-counter market, the Dollar was at CNY6.7750 around 0930 GMT, down from Thursday's close of CNY6.7761. It traded between CNY6.7730 and CNY6.7752. For the week, the yuan appreciated 0.08% against the Dollar. |
| China
Key news eminating from China this week ..... |
 China's quest to transform the RMB into an international reserve currency - and thereby challenge America's dominance of the global monetary system - may take decades, if it happens at all. But this month, for the third time this year, China took another big step in that direction. Regulators lifted a raft of restrictions blocking the free flow of RMB in Hong Kong, the semi-autonomous region that is open to international investors and is the designated launchpad for the RMB's global expansion. Any company in the world can open a RMB bank account in Hong Kong and exchange the currency as they please, while financial institutions in the former British crown colony are free to create investment products denominated in the Chinese currency. There are also no longer any restrictions on the type of corporations that can be granted RMB loans or on the type of loans that can be extended - a key liberalisation that could eventually trigger an offshore RMB credit boom. As soon as the measures were announced, Hong Kong banks unveiled a slew of RMB-denominated products, scrambling to gain a foothold in a market they hope will surge over the coming years. But the liberalisation has ramifications far beyond HSBC, Standard Chartered and the other banks that sense large profits on the horizon. It comes after two other big steps in June, when China cut the RMB's de facto peg to the US Dollar and dramatically expanded the year-old programme that allows Chinese companies to settle cross-border trades using the RMB. Given the rapid succession of the last three moves, it appears the People's Bank of China may be revving up the RMB internationalisation process even faster than was originally anticipated. The latest move in Hong Kong is significant because it allows the creation of new ways for foreign companies to hold - and invest - any RMB that they receive through trade with China. The current dearth of opportunities for international holders of the RMB to invest their money is seen as one of the biggest obstacles to widespread adoption of the Chinese currency. The growing availability of RMB-denominated investment products in Hong Kong would play a "critical role" in boosting offshore usage of RMB, said Enoch Fung, economist at Goldman Sachs. As things stand, Hong Kong's RMB banking system is minuscule. There were just Rmb85bn ($12.5bn) of RMB deposits in Hong Kong as of May - amounting to just 1.5% of the territory's total deposits. But that figure is expected to grow rapidly as more and more cross-border trade is settled in the Chinese currency, rather than the US Dollar. To that end, Beijing last month announced a huge expansion of the RMB cross-border trade settlement scheme, extending it from Hong Kong, Macau and a handful of nations in south-east Asia to companies in all countries, and domestically from five cities to 20 provinces. Cross-border trade in RMB totalled Rmb70.6bn in the first half of the year - about 20 times the Rmb3.6bn recorded in the second half of 2009. Meanwhile, bankers hope that the measures will trigger a feedback loop in which the creation of more RMB-denominated products in Hong Kong spurs greater cross-border trade settlement, and vice versa. Yet Beijing has not relinquished all control of the RMB in Hong Kong. While local banks are allowed to provide RMB conversion services and loans to whichever companies they please, they can only square their open positions with Bank of China (Hong Kong), the city's RMB clearing bank, if the transactions are related to trade. That means that the growth of the offshore market will be largely constrained, for a while at least, by the amount of trade settlement. For the market to really take off, China would need to relax more of its controls on cross-border RMB flows. However, most analysts believe that, after the rush of activity over the past two months, Beijing will for the time being do little more than sit back and wait to see what happens. ************************************ China's currency remains "substantially" undervalued, the staff of the International Monetary Fund said on Wednesday, but the IMF's executive board was divided on the issue. The disagreement among the 24-member board weakens the pressure on China further to revalue the RMB after it abandoned its peg to the Dollar in June. "The RMB remains substantially below the level that's consistent with medium-term fundamentals," said Nigel Chalk, the IMF's mission chief, on the conclusion of the fund's annual consultation with China. But the executive board - made up of experts appointed by individual IMF member countries or groups of countries - came to a much weaker assessment. "Several directors agreed that the exchange rate is undervalued. However, a number of others disagreed with the staff's assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus," they said. China has blocked publication of the IMF's full staff assessment for the last three years. It is not clear whether it will allow the report to be published this year. In mid-June, China said it would increase the flexibility of its exchange rate, but since then the RMB has only risen by 0.8% against the Dollar. The RMB was trading at 6.78 to the Dollar on Wednesday. The US has long complained that China undervalues its currency in order to increase its exports. A group of US lawmakers, led by Senator Charles Schumer, have been pushing for a bill that would allow the government to impose duties on countries with exchange rates that were held artificially low. Lael Brainard, the US Treasury's top international official, repeated the Obama administration's view that the RMB was undervalued this week. She said that the US was watching how quickly the RMB moved. The rest of the IMF's assessment was glowing. The executive board "commended China's proactive and decisive policy response to the global economic crisis", and said that "growth is expected to continue to be robust, while the inflation outlook appears benign". The IMF forecasts growth of 10.5% for the Chinese economy this year and a current account surplus of 5% of gross domestic product. "The policy challenge now is to calibrate the pace and sequencing of exit from the fiscal stimulus and credit expansion, while making further progress in reorienting the economy toward private consumption," it said. The IMF advised China to maintain its economic stimulus in 2010 but to phase it out gradually in 2011. It urged China to continue liberalising its financial system, to consider a property tax and to continue improvements in healthcare and pension coverage. ************************************ Danone has sold its stake in a Chinese juice maker for €200m ($260m), less than half the amount Coca-Cola was prepared to pay in a deal that collapsed last year. The value of Danone's stake in Huiyuan Juice Group has fallen sharply since the Chinese government blocked Coca-Cola from taking over the country's largest privately owned juice producer. The French group said on Wednesday it had agreed to sell its 23% stake in Huiyuan to SAIF, a Hong Kong private equity group. Coca-Cola proposed a $2.4bn all-cash bid to buy Huiyuan two years ago in what would have been the largest foreign takeover of a Chinese company. But Beijing rejected the deal in March 2009 in the first big test case under China's revamped antitrust laws. The ruling was seen as protectionist and populist by many people outside China. Coca-Cola had been willing to pay HK$12.20 a share to buy Danone's 23% stake as well as 36% owned by Zhu Xinli, Huiyuan's founder, and the 7% stake held at the time by US private equity group Warburg Pincus. Danone said it was ceding the stake in the juice group, which was held in its waters division to concentrate on natural mineral and spring water. The world's biggest yoghurt-maker is selling its share in the juice maker for HK$6 per share, roughly a 10% premium to Huiyuan's July 27 closing price of HK$5.43. Danone has transformed itself into a health foods company after selling beer, biscuits, cheese and snacks assets. The French group reiterated its commitment to the Chinese market, saying it would continue to expand all four of its main businesses - yoghurts, waters, baby food and medical nutrition - already implanted there. Danone has 20 factories and 9,000 employees in China but has faced obstacles. Last year Danone said it would quit its troubled joint venture with Wahaha, China's leading soft-drinks producer. The move ended a high-profile commercial dispute that had sparked political tensions between Paris and Beijing. Danone and Warburg Pincus made cornerstone investments in Huiyuan months ahead of its Hong Kong listing in February 2007. However, after the failure of the Coca-Cola deal, Warburg Pincus sold its stake into the public market last year. ************************************ In most countries, the revelation that local governments would default on a fifth of their bank loans would be greeted with alarm. In China, however, the news came as a pleasant surprise. The fact that nearly 80% of those projects have at least some capacity to service their debt is quite amazing it is felt. Analysts said that their working assumption had been that a minimum of 30% of the total Rmb7,700bn ($1,100bn, €875m, £732m) bank lending to Chinese local governments was unlikely to be repaid. That made the 20% estimate relatively good news, even if it was only a preliminary figure provided by the banks themselves before a more formal assessment by the banking regulator this year. Such a bleak outlook on local governments' ability to service debt reflected the fact that many loans were handed out to projects that were never meant to make large profits. During the global financial crisis, bank lending in China was used as a substitute for fiscal spending to boost GDP growth and create jobs. For the 20% of loans to local governments that might not be repaid, a lot of it was probably spent on pure public works projects such as building parks or public toilets or planting trees. While other countries racked up huge deficits to pay for stimulus packages, Beijing was able to delay the final bill for its stimulus by getting the state-controlled banking system to put up the money first. Even the much-vaunted Rmb4,000bn stimulus package announced in November 2008 included only Rmb1,200bn of central government money, with the rest coming from local governments and bank loans. Some analysts suggested that if more of Beijing's stimulus had come from the central government budget it would have been more transparent, with less waste and corruption. Chinese banks have been transformed in the past decade from insolvent basket cases to the world's most valuable and profitable lenders, in terms of market capitalisation and absolute profits. That was achieved through state capital injections, huge carve-outs of bad loans, better risk management and partial privatisation through stock market listings in Hong Kong and Shanghai. But Beijing still owns majority shares in all the big banks. So when the crisis hit in 2008 it essentially ordered them to return to their old habits of handing money to favoured government projects. Because the banks were acting on Beijing's orders, few analysts expected them to be forced to pick up the tab when local governments, which are not allowed to raise money from bond markets in China, default on loans. What China needs to do now is introduce a proactive restructuring plan for local government debt so it can avoid having to bail the banks out again later. This virtual government guarantee for the banking sector implies that Chinese government debt is much higher than Beijing admits. China's official central government debt is only about 17% of GDP, but Standard Chartered estimates that the actual debt to GDP ratio could be as high as 80% if hidden liabilities, such as local government debt, were included. That figure is well above what used to be considered healthy but hardly shocking compared with European debt levels and Tokyo's government debt-to-GDP ratio of 200%. Analysts and economists mostly agree that as long as strong growth continues, China is unlikely to suffer a banking or financial crisis as the result of hidden liabilities. |
| Summary
The coming week looks like ..... | 
The past week has seen more better-than-expected data out of Europe, but mixed data out of the US. While US earnings results have softened a bit in the last week, they have still been strong, with 75 per cent of the companies to have reported so far exceeding expectations. And while cost control has played a big role, 67 per cent of companies have so far surprised on the upside in terms of revenue growth.
In Europe, 60 per cent of companies to report so far have exceeded earnings expectations and 69 per cent have exceeded revenue expectations. This is providing solid support for equities and also provides a positive omen for the profit reporting season over the next month.
Having absorbed the GDP yesterday, the US is then hit with the July manufacturing PMI on Monday night. This number is a closely watched forward indicator of economic growth, and it has ticked down the last two months. It is still, however, in expansion territory. Wall Street does not want it to slip below 50, and 55 is expected.
Indeed, Monday is global manufacturing PMI day, with all of Australia, China, the UK, EU and US reporting. Service and construction sector PMIs follow later in the week.
The US will also see readings next week on construction spending, factory orders, pending home sales, vehicle sales, chain store sales and consumer credit, and it is unemployment week. The ADP private sector unemployment number for July will be released on Wednesday and the official non-farm payrolls next Friday.
In Australia, the big news was far weaker-than-expected inflation in the June quarter. On top of this, soft data for private credit growth in June and a 0.7 per cent fall in capital city house prices, according to RP Data-Rismark, reinforce the case for Australian interest rates to remain on hold.
It is now quite clear that six interest rate hikes and a sharp fall in affordability have brought to an end the recent surge in house prices - housing finance, auction clearance rates and now house prices have all clearly softened. By the same token, I don't see this as the start of a collapse in house prices as the shortage of housing will put a floor under prices. Rather, I see subdued growth in average house prices over the year ahead.
Global shares were mixed over the last week, but commodity prices and the Australian dollar remained strong.
In the week ahead, the big focus will be the US ISM and jobs data and the Chinese manufacturing conditions index (or PMI). Regional surveys in the US suggest that the manufacturing ISM will likely fall to around 53 for July, from a reading of 56.2 in June. The lay-off of census workers is expected to result in a 70,000 fall in payroll employment in July, but the continued modest recovery in the economy points to a rise of around 100,000 for private payrolls.
In Australia, the RBA is almost certain to leave interest rates on hold, with the benign June quarter inflation reading giving it plenty of time to better assess the outlook for the global and Australian economies.
Most people have pencilled in a September rate hike, but it's quite conceivable that, with underlying inflation now better behaved and uncertainty continuing regarding the strength of the global recovery, the RBA will wait several months before feeling the need to raise interest rates again. The RBA's Statement on Monetary Policy is likely to reinforce the impression that the bank still retains a tightening bias but there is no hurry to move again.
The Australian June half-profit reporting season will get under way in earnest, with stocks such as Crane Group, AXA, Alumina and Rio Tinto due to report.
Key themes from the reporting season are expected to be: a return to profit growth with earnings per share likely to have risen 10 per cent in the 2009-10 financial year following a 20 per cent slump in 2008-09; a possible increase in dividends reflecting the improvement in cash flows, balance sheets and financing conditions; a negative impact on earnings for Europe-exposed companies from the strong rise in the Australian dollar versus the euro; and possible caution regarding the outlook for earnings in 2010-11. Resources, with likely 20 per cent profit growth, as well as banks, the media and retail sectors are expected to record the strongest profit growth.
China Everbright Bank will pre-market its CNY20 billion (US$2.9 billion) initial public offering from Monday to Thursday next week, and its shares will make their debut on the Shanghai Stock Exchange on Aug. 18, the mid-sized bank said Friday.
The listing will take place just a month after Agricultural Bank of China's multi-billion-dollar stock-market debut, indicating Beijing is accelerating the pace of local banks' fund-raising efforts to shore up their capital bases, which were depleted last year by a lending binge in support of the country's economic stimulus program.
Among other state banks that plan to tap the stock market are: Industrial & Commercial Bank of China, which is seeking to raise up to CNY45 billion in a rights issue in Shanghai and Hong Kong; Bank of China, which aims to raise CNY60 billion in a rights issue in both markets; and China Construction Bank, which plans to raise CNY75 billion in a rights issue, also in both markets.
In Japan, The Ministry of Finance will offer 2.2 trillion yen ($25.3 billion) of 10-year JGBs on Tuesday. JGBs have been rallying recently and market players are wary of driving prices too high and spoiling investor appetite for the new 10-year paper.
Bond buyers are presented with a difficult choice. They can forego buying the 10-year as it might yield even less in the near future, but if they don't buy now they may have to wait a while before the paper becomes affordable.
The Bank of England is expected to leave interest rates at their record low next week and for the rest of this year, as policymakers try to shore up the recovery in the face of deep government spending cuts.
The Monetary Policy Committee will have their latest growth and inflation forecasts to hand for their Aug 4-5 meeting, and given Governor Mervyn King's dovish comments this week, they may show a softer outlook for growth over the two-year horizon, though a higher inflation profile.
King told parliament's Treasury Committee this week that the recovery was still far from assured and that if anything, the policy debate centered on how much stimulus was still needed, rather than when to start withdrawing support.
He noted the economy still faced significant risks from planned government spending cuts, constraints on bank lending and weak conditions around the world.
Spain and Austria are the only countries planning to auction government bonds in the first week of August, heralding the start of what is traditionally the slowest month for primary market activity in the euro zone, while the rest of the year is also set to see declining bond supply.
But stockmarkets around the world next week will see lighter volume with August typically being a 'holiday' month.
So while it may be that a lot of market people are taking a break, asset prices can easily become volatile if there is something significant enough to move them in a quiet period.
In the coming week, that could be European banks, many of which are due to report earnings.
Since the generally positive stress test results were released last Friday, Europe's financial sector stocks have risen around 5 percent. Indeed, they are up 22 percent since hitting a 2010 low on June 8.
A lot of this is because investors reckoned the sector was oversold after the Greek debt crisis. Both ING Investment Management and AXA Investment Managers, for example, have recently lifted their exposure to European banks.
The next test for this sector will be the results.
They are due from HSBC, Standard Chartered, BNP Paribas, Barclays, Societe Generale, Commerzbank, Lloyds Banking Group and RBS.
Investors in particular will be looking for guidance from the ECB about how comfortable it is with the pace at which European banks are weaning themselves off extraordinary liquidity measures.
Finally, the U.S. jobs data caps the week, giving a snapshot on the impact an apparently slowing U.S. economy is having on already lagging employment patterns.
It is usually a big market mover and will quite likely be again, even if a lot of people get the result on the beach.
On to commodities next week and Copper, up 11 percent this month in London, may rise next week as investors allot more money to commodities I feel, finally.
Analysts believe the metal will gain next week. Copper for delivery in three months was up 3.2 percent for this week at $7,255 a metric ton on the London Metal Exchange.
Hedge funds and other large speculators boosted their net- long position, or bets on higher prices, for New York copper futures to 3,915 contracts as of July 20 from 2,862 contracts on June 29, according to U.S. Commodity Futures Trading Commission data. Investors put $15.4 billion of new money into raw materials in the second quarter, up from the prior three months, Barclays Capital said July 16.
I would not be surprised to see fresh money hitting commodities as we head into August, given the rally seen so far in July. This buying, in turn, will likely trigger further technically driven buying I think.
All told, the market has the potential to move dramatically one way or the other next week but I think any movement will be limited simply because of the lower volume of market participants. |
As always, I will keep you posted with major developments as/when they occur in the week ahead.
In the meantime, I wish you all a very pleasant weekend.
Market Newsletter Written By
Adrian Page
Managing Director
Financial Page International | |
|
|
|
|
