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Investment banks eye potential trading boost from ECB stimulus


LONDON(Reuters) – Investment banks feeling the pinch from increased regulation since the financial crisis could reap an earnings reward from a boost in trading activity under the European Central Bank’s (ECB) trillion-euro quantitative easing (QE) program.

The flood of money into markets from the ECB’s bond-buying has brought an increase in the volatility that traders crave as investors stake bets on the impact the scheme will have on inflation and long-term interest rates.

“QE is likely to underpin a sustained period of strength in euro capital markets,” Citigroup said in a research note on Friday. “There has been a sharp spike in rates and foreign exchange volatility, which also points to a strong quarter for wholesale banks’ macro revenues.”

Revenue from fixed income, currencies and commodities trading, the so-called FICC universe, have historically been a rich source of profit for banks, but new capital rules and moves towards electronic trading have squeezed the sector in recent years.

The 10 biggest investment banks’ revenue from FICC fell 7 percent in 2014, industry analytics firm Coalition calculates.

What’s more, the investment bank balance sheets that support trading markets have declined by 20 percent since 2010 and by 40 percent in risk-weighted asset terms, Morgan Stanley analysts estimate. The analysts said that a further 10-15 percent reduction is likely over the next two years.

The trading environment in Europe, however, could be about to take a turn for the better.

“ECB moving to QE could provide a real fillip to earnings,” Morgan Stanley analyst Huw van Steenis said. “Fixed income trading may buck the trend of five years of shrinkage.”

Anshu Jain, the co-chief executive of Deutsche Bank, one of continent’s largest trading banks, said in January that the ECB’s bond-buying program would be of “profound importance” for Europe and its banks.

“You may see a progression which hurts net interest margins but benefits sales and trading revenue,” Jain said on an earnings call with analysts.

Citigroup said that the best-placed banks would be those with significant euro-denominated franchises, including BNP Paribas, Deutsche Bank, HSBC and Societe Generale. JPMorgan is the biggest bank by revenue in the FICC space.

DIRECT IMPACT

While it’s too early to tell the exact impact of the QE program, which is expected to last until at least September 2016, the fees earned from the central bank’s buying alone could be significant.

Economists at the U.S. Federal Reserve estimate that Wall Street firms could have made as much as $653 million in fees selling bonds to the Fed during its monetary stimulus program.

When the ECB launched its LTRO (longer-term refinancing operations) scheme in late 2011, revenues in the rates business of global investment banks improved the following year, increasing to $29 billion in 2012 from $27.4 billion the previous year, data from Coalition shows.

But traders and analysts question how much is really down to the first-order effects of ECB action or second-order effects such as volatility.

Price fluctuation has certainly picked up this year after months in the doldrums.

Banks benefit because such volatility allows them to charge higher margins on trades because of the greater risk around execution. It also helps them sell hedging instruments to investors.

But QE also presents risks. One of the biggest fears for traders is that ECB buying and the reluctance of some investors to sell because of regulation or client obligations could reduce the amount of debt actively traded in the longer term.

Signs of that squeeze are already showing in the soaring cost of borrowing in secured lending markets.

“Volatility and volumes are good for traders. Volatility but no volumes … are awful for traders,” one euro zone government bond trader said on condition of anonymity.

A survey of dealers this month showed concern that the Japanese government bond was not functioning well under lingering concerns that its QE program, launched in 2013, is reducing bond market liquidity.

However, data shows there has been no dramatic change in trading volumes over that period.

    Even if ultra-low yields in government bonds put off some investors, bankers say they will be able to capitalize on those that rush to put their cash into assets with better returns.

“You trade flows,” one investment banker said. “The trend is only just starting.”

Data shows that cash is already flowing out of government bonds and money markets towards junk bonds and emerging markets.

    But the real rewards will come if the ECB’s stimulus serves to hoist inflation and bond yields with it.

“If QE is successful, long-term rates will go up and generally higher rates will lead to more activity and hedging opportunities. Banks will benefit as much as asset managers,” another investment banker said.

(Editing by David Goodman)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/aL9eEmGU8nY/story01.htm

Denmark applies to join China-backed AIIB investment bank


BEIJING (Reuters) – Denmark has applied to join the Beijing-led Asian Infrastructure Bank (AIIB), China’s Ministry of Finance said on Sunday, becoming the latest European power to join the institution despite misgivings of the United States.

The Ministry of Finance said that Denmark has written to China to “announce its intention to apply to be a founding member” of the AIIB.

“China welcomes Denmark’s decision,” the ministry said in a statement on its website, adding that China will first seek the views of other members. If the decision is approved, Denmark will officially be a founding member of the AIIB on April 12, the ministry said.

Danish Minister of Trade and Development Mogens Jensen called China’s establishment of the AIIB “a significant and exciting development in the world order”.

“Since many Danish trade interests as well as development cooperation interests will be at stake in AIIB, there are many reasons to engage in and influence AIIB’s investment decisions from its beginning,” Jensen said in a statement.

On Saturday, Russia, Australia and the Netherlands became the latest countries to say they plan to join the AIIB, adding clout to an institution seen as enhancing China’s regional and global influence.

China has set a March 31 deadline to become a founding member of the AIIB, which is seen as a significant setback to U.S. efforts to extend its influence in the Asia Pacific region and to balance China’s growing financial clout and assertiveness.

The AIIB has been seen as a challenge to the World Bank and Asian Development Bank, institutions Washington helped found and over which it exerts considerable influence.

The United States has urged countries to think twice about joining the AIIB until it could show sufficient standards of governance and environmental and social safeguards.

But the United States’ European allies Britain, France, Germany and Italy announced this month they would join the bank, leading the Obama administration to reassess its stance.

(Reporting by Sui-Lee Wee; Editing by Kim Coghill)

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China central bank governor calls for vigilance on deflation


BOAO, China (Reuters) – China’s central bank governor Zhou Xiaochuan warned on Sunday that the country needs to be vigilant for signs of deflation and said policymakers were closely watching slowing global economic growth and declining commodity prices.

Zhou’s comments are likely to add to concerns that China is in danger of slipping into deflation and underline increasing nervousness among policymakers as the economy continues to lose momentum despite a raft of stimulus measures.

“Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not,” Zhou said at a high-level forum in Boao, on the southern Chinese island of Hainan.

Zhou added that the speed with which inflation was slowing was a “little too quick”, though this was part of China’s ongoing market readjustment and reforms.

Beijing is determined to keep the world’s second-largest economy from taking the same path of recession and deflation that has blighted its neighbor Japan for the past 20 years.

The central bank’s newspaper warned last month that China is dangerously close to slipping into deflation.

The People’s Bank of China (PBOC) has cut interest rates twice since November and taken other steps to support growth, but economists believe it will be forced to take more aggressive measures in coming months if prices and the economy weaken further.

NO TIMETABLE ON LIBERALIZATION

Zhou also said China had a “clear direction” in terms of interest rate liberalization – a long-term goal – although he added it was difficult to put a clear timetable on the move. He pointed to comments made last year when he said the country’s deposit rates were likely to liberalized in one to two years.

Last week, Zhou said China could undermine structural reforms if it adopts an excessively loose monetary policy, while pledging to relax capital controls to help make the yuan currency fully convertible.

Zhou also said on Sunday that China hoped to work on streamlining regulations around foreign exchange this year and that through the adoption of new rules China would eventually be able to achieve capital account convertibility.

SLOWING COMMODITY PRICES

China is also “cautious” about the wider global slowdown, falling inflation and tumbling commodity prices, Zhou said. The price of oil, for example, is down by over 50 percent since mid 2014, aggravating a broader commodity price rout which has pushed down inflation in all the major industrial economies.

China is particularly susceptible as the world’s largest net importer of petroleum and iron ore.

Earlier this month, China announced an economic growth target of around 7 percent for this year, down from 7.4 percent in 2014, already the slowest in 24 years.

But weak data so far in 2015 suggest the new target may already be at risk, with sluggish domestic demand, a cooling property market, industrial overcapacity and high debt levels dragging on activity.

China’s annual consumer inflation quickened to 1.4 percent in February from a 5-year low of 0.8 percent the previous month.

However, Qian Yingyi, a member of the central bank’s monetary policy committee, told Reuters earlier this month that the bounce could be a one-off blip as a result of the Lunar New Year holiday.

Producer prices declined 4.8 percent in February, the sharpest drop since October 2009 and extending a long-running factory deflation cycle to nearly three years.

(Reporting by Adam Jourdan, Writing by Sui-Lee Wee; Editing by Kim Coghill)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/IXWoP-DWKug/story01.htm

ChemChina chairman says hopes to re-list Pirelli in Italy


BEIJING (Reuters) – The chairman of China National Chemical Corp (ChemChina) said on Sunday he hopes to re-list Italy’s Pirelli (PECI.MI) on the Italian stock exchange after his firm agreed earlier this month to acquire the world’s fifth-largest tire maker.

Ren Jianxin also warned that a counterbid for Pirelli would hurt the Italian firm’s investors and long-term strategy. ChemChina has agreed to become majority owner of Pirelli as part of a multi-layered 7.3 billion euro ($8 billion) deal, putting one of Italy’s oldest household names in Chinese hands.

“We were worried that due to cheap liquidity, there might be blind competition,” Ren told reporters. “But a counterbid will hurt Pirelli investors and also its long-term strategy.”

On Thursday, Pirelli CEO Marco Tronchetti Provera told Reuters his firm is not talking to others about a possible counterbid.

Ren described his partnership with Tronchetti as a “very beautiful marriage” and said the Italian will be CEO for the next five years, and after which, the Italian would select his successor. In Thursday’s interview, Tronchetti said he may stand down as CEO before five years if the right successor could be found. He also said Pirelli may be re-listed within four years, though not necessarily in Milan.

The deal, agreed with Pirelli’s top shareholders last week, is the latest in a series of takeovers in Italy by cash-rich Chinese buyers taking advantage of a weak euro EUR= just as Europe is slowly emerging from economic stagnation.

Ren said he does not want to see the Pirelli brand hurt by ChemChina’s investment.

The deal will give ChemChina access to technology to make premium tires which can be sold at higher margins, and give the Italian firm a boost in China, the world’s biggest autos market.

The bid will be launched by a vehicle controlled by the Chinese state-owned group and part-owned by Camfin investors, who include Tronchetti, Italian banks UniCredit (CRDI.MI) and Intesa Sanpaolo (ISP.MI), and Russia’s Rosneft (ROSN.MM).

(Writing by Sui-Lee Wee; Editing by Michael Perry and Ian Geoghegan)

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Best Buy warns of profit hit as it consolidates Canadian stores


CHICAGO (Reuters) – Best Buy Co Inc (BBY.N) plans to close some stores and consolidate its operations in Canada, the U.S. electronics retailer’s second-largest market, in a move that will hurt earnings this year, the company said on Saturday.

The retailer said it will close 66 of its Future Shop brand stores in Canada and convert 65 of them to Best Buy brand stores. The move to a single brand will cut 500 full-time and 1,000 part-time jobs, and cost the company about US$200 million to US$280 million in restructuring charges, Best Buy said.

Best Buy also said it plans to spend C$200 million (US$160 million) to improve its online operations in Canada, increase staffing at remaining stores, and launch a range of home appliances, among other initiatives.

The largest U.S. electronics retailer expects these changes to cut earnings per share by 10 cents to 20 cents in the current year. That is up to 8 percent of the average analyst estimate for fiscal 2016 earnings per share of $2.56, according to Thomson Reuters StarMine.

Analysts said the consolidation made sense as Best Buy and Future Shop often offered similar promotions and products. Some of their stores were so close to each other that they shared parking spaces.

“We believe the long-term benefits of the store closings will more than offset the short-term costs,” said Moody’s Vice President Charlie O’Shea.

After the restructuring, Best Buy will be left with 136 large-format stores and 56 Best Buy Mobile stores in Canada.

Since 2012, Best Buy has removed layers of management, cut jobs, shut stores and boosted cash reserves to grapple with intense competition from Amazon.com Inc (AMZN.O) and other online retailers.

The efforts resulted in a better performance for Best Buy during the 2014 holiday season. Earlier this month, Chief Executive Hubert Joly said Best Buy planned a cost-cutting campaign to find savings of $400 million over the next three years.

Other retailers that have scaled back operations in Canada, or plan to do so, include Target Corp (TGT.N) and Sony Corp (6758.T). Target has said its Canadian business suffered from poor locations and customer complaints.

(Reporting by Nandita Bose in Chicago; Additional reporting by Euan Rocha and Solarina Ho in Canada; Editing by Tiffany Wu)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/AglnRlwN4d4/story01.htm

President Xi says China should not focus on growth rate only


BOAO, China (Reuters) – Chinese President Xi Jinping said on Saturday that the country should not focus on its economic growth rate only, reiterating China’s push for a more sustainable, higher-quality expansion.

Chinese leaders have announced an economic growth target of around 7 percent for this year, below the 7.5 percent goal in 2014 and the slowest rate in a quarter-century.

Xi, who was speaking at a forum in Boao on the southern Chinese island of Hainan, said 7 percent growth was still impressive and would be a big driver of momentum.

He said the Chinese economy was resilient and had much potential, allowing for a host of policy tools. Analysts anticipate further interest rate cuts in China this year.

The theme of the Boao forum is: “Asia’s New Future: Towards a Community of Common Destiny”.

(Reporting by Adam Jourdan; Writing by Ben Blanchard and Engen Tham; Editing by Michael Perry)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/wwJEoUl3yQA/story01.htm

Chevron exits Caltex Australia stake for $3.7 billion


PERTH (Reuters) – U.S. energy giant Chevron sold its entire stake in refiner Caltex Australia Ltd for A$4.7 billion ($3.7 billion) in Asia’s biggest block deal this year, as falling oil prices and high costs hurt margins.

Offshore institutional investor demand for the 50 percent stake in Australia’s biggest refiner was strong, with bidding driving the final price to A$35 a share, a spokeswoman for Goldman Sachs, the sole underwriter for the deal, confirmed on Saturday.

The bank offered the 135 million shares at a floor price of A$34.20 each late on Friday, a discount of 9.7 percent to the closing price.

Caltex shares have risen 10.7 percent this year, outpacing a 9.4 percent rise in the benchmark Australian share index.

The $3.7 billion deal is Asia’s largest block transaction this year, eclipsing the government of India’s $3.6 billion sale of its stake in Coal India Ltd in January.

Australia has seen a rush of block trades in the past month as investors look to capitalise on strong valuations following a share market that is rising on hopes of more interest rate cuts.

A halving in global oil prices since mid-2014 has added to the pressures on Australian refiners, which are grappling with ageing equipment, cheaper imports and high costs. Many firms, including Caltex Australia, have closed refineries while others have restructured operations.

Chevron is the latest global major to exit Australia’s refining industry. Last year, Royal Dutch Shell Plc sold its Australian petrol station and refinery operations for A$2.9 billion and BP Plc, which shut down its Bulwer Island oil refinery in Queensland, is also selling its Australian bitumen business.($1 = 1.2905 Australian dollars)

(Reporting by Morag MacKinnon; With additional reporting by Denny Thomas and Byron Kaye; Editing by Kim Coghill)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/-2AAlAgCs4g/story01.htm

Stocks likely to drift as investors await Fed, earnings


NEW YORK (Reuters) – Wall Street investors may find little reason to make big moves next week as they await monthly U.S. jobs data and any news that could change expectations for the first interest rate hike in almost a decade.

The Labor Department report is due on Friday, when the stock market will be closed for Good Friday, leaving investors unable to trade on the data until the following week.

In the meantime, investors will continue adjusting to lowered earnings forecasts for the first quarter and the uncertain direction of the dollar.

Stocks have trended downward since rallying on the Federal Reserve’s March 18 statement, in which it suggested a less-aggressive approach to raising interest rates than investors had expected.

“We’re in this sort of information void right now,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about $67 billion in assets. “We don’t yet have the earnings season and there’s almost nothing so significant as to rattle the equities market right now, so we’re sort of in a pause.”

Uncertainty surrounding the timing of the Fed’s rate move has been one of the key factors for the market, creating more volatility and putting greater emphasis on economic data that could sway the Fed’s outlook.

Adding to concerns about the Fed has been a dramatic rise in the U.S. dollar, which has weighed on U.S. stocks because of increased worries about earnings for U.S. multinational companies. The earnings season officially kicks off April 8, when Alcoa (AA.N) reports.

Up-and-down moves have left the SP 500 .SPX virtually flat compared with the end of 2014.

“It’s like the market is trying figure out what that next driver will be to hang its hat on,” said Joe Bell, senior equity analyst at Schaeffer’s Investment Research in Cincinnati.

A recent Reuters poll shows the majority of Wall Street’s top banks see the Fed holding off until at least September before raising rates. But the jobs report could shift those views again, especially since February marked the 12th straight month that employment gains have been above 200,000, the longest such run since 1994.

While Wall Street’s fear gauge, the CBOE Volatility Index .VIX, is above levels seen for most of the last two years, it remains well below its October high.

That indicates institutional investors are not overly concerned about a big downward move at the moment, according to Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin, Texas.

History suggests a tighter Fed policy may not result in a pickup in volatility, according to Jonathan Golub, chief U.S. market strategist for RBC Capital Markets in New York. The VIX drifted lower as the last rate hike cycle in 2006 began, he noted.

“It’s because when the Fed is tightening, it’s usually a sign – especially when they start – that things are getting pretty good,” Golub said.

(Reporting by Caroline Valetkevitch; Editing by Dan Grebler)

Article source: http://feeds.reuters.com/~r/reuters/businessNews/~3/esKdxvCOgV8/story01.htm

Wall St. ends four-day skid on late tech rally


NEW YORK (Reuters) – U.S. stocks rose modestly on Friday after late news of merger talks in the semiconductor space boosted the technology sector and helped major indexes snap a four-day losing streak.

The Wall Street Journal reported chipmaker Intel Corp (INTC.O) is in talks to buy rival Altera Corp (ALTR.O), citing people familiar with the matter, sending the PHLX semiconductor index .SOX up 2.8 percent.

Intel shares jumped 6.4 percent to $32 as the biggest boost to the Dow, SP 500 and Nasdaq 100 .NDX indexes. Altera shares surged 28.4 percent to $44.39.

“We’ve seen a lot of MA news recently and it’s helping the market,” said Stephen Massocca, chief investment officer at Wedbush Equity Management LLC in San Francisco.

“There is definitely an MA cycle going on, so that is a good thing.”

Equity markets were largely unfazed by Fed Chair Janet Yellen’s comments at a monetary policy conference in San Francisco. She said the U.S. Federal Reserve is giving “serious consideration” to beginning to reduce its accommodative monetary policy and a rate hike may be warranted later this year, although a downturn in core inflation or wage growth could force it to hold off.

“I don’t think there is anything new or different here,” said Massocca.

The Dow Jones industrial average .DJI rose 34.43 points, or 0.19 percent, to 17,712.66, the SP 500 .SPX gained 4.87 points, or 0.24 percent, to 2,061.02 and the Nasdaq Composite .IXIC added 27.86 points, or 0.57 percent, to 4,891.22.

Healthcare also helped buoy indexes as biotech stocks .NBI bounced 1.9 percent higher after suffering a 7-percent drop in the prior four sessions, while energy .SPNY was the worst performing SP sector as crude prices resumed their decline.

Investors have been cautious ahead of the start of earnings season, as traders look to see how much the strong U.S. dollar will hurt corporations’ bottom lines. For the week, the SP 500 fell 2.2 percent, the Dow lost 2.3 percent and the Nasdaq declined 2.7 percent.

U.S. consumer sentiment fell month-over-month in March, a survey released on Friday showed, though the decline was smaller than forecast.

The final reading of gross domestic product for the last quarter of 2014 was unchanged at a 2.2 percent rate of expansion. After-tax corporate profits fell at a 1.6 percent rate in the fourth quarter as a strong dollar dented the earnings of multinationals.

Advancing issues outnumbered declining ones on the NYSE by 1,842 to 1,187, for a 1.55-to-1 ratio; on the Nasdaq, 1,592 issues rose and 1,106 fell, for a 1.44-to-1 ratio favoring advancers.

The benchmark SP 500 index posted 6 new 52-week highs and 6 new lows; the Nasdaq Composite recorded 38 new highs and 38 new lows.

Volume was light, with about 5.66 billion shares traded on U.S. exchanges, well below the 6.78 billion average so far this month, according to BATS Global Markets.

(Editing by Chizu Nomiyama and Nick Zieminski)

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