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Wall Street chalks up biggest gain in four years

Wall Street racked up its biggest one-day gain in four years on Wednesday as fears about China’s economy gave way to bargain hunters emboldened by expectations the U.S. Federal Reserve might not raise interest rates next month.

Led by Silicon Valley stalwarts Apple, Amazon and Google, the surge put the brakes on a six-day losing streak that saw the SP 500 surrender 11 percent.

In a sign that a faltering Chinese economy and slumping global financial markets could affect U.S. monetary policy, New York Fed President William Dudley said the prospect of a September rate hike seemed “less compelling” than it was just weeks ago.

All 10 major SP 500 sectors jumped, led by a dizzying 5.3 percent jump in the technology index .SPLRCT, its largest one-day rise since 2009.

Some of the late-day rally was driven by short-term traders, including many who had bet the market would fall and rushed to cut their losses, said Michael Matousek, head trader at U.S. Global Investors Inc in San Antonio.

A strong rally on Tuesday had evaporated in the final minutes of trading and turned negative.

“A lot of people were anticipating the last half of the day would roll over and fall off and that hasn’t happened,” Matousek said. “You could see the buying accelerating at mid-day and people saying ‘I’m wrong’, and starting to cover their shorts.”

The Dow Jones industrial average .DJI finished 3.95 percent higher at 16,285.51. Its gain of 619.07 points was its biggest since 2008.

The SP 500 .SPX gained 3.9 percent to 1,940.51 and the Nasdaq Composite .IXIC added 4.24 percent to end at 4,697.54.

Dudley’s dovish comments came even after data on Wednesday that appeared to strengthen the case for a rise in interest rates at a Fed policy meeting on Sept 16-17.

Durable goods orders rose 2 percent in July, compared with analysts’ average forecast of a 4 percent fall. Orders for core capital goods, a proxy for business investment, rose 2.2 percent in the biggest gain in 13 months.

Shares in Apple (AAPL.O), which had taken a beating in recent weeks because of concern about demand in China for iPhones, provided the biggest boost to the SP 500 and Nasdaq composite index, jumping 5.73 percent to $109.69.

Up to Tuesday’s close, the Dow had lost 10.71 percent in the past six trading days and the Nasdaq composite .IXIC had shed 11.5 percent.

The SP is now down 5.8 percent in 2015.

“We’re still in a period of searching,” said Kurt Brunner, a portfolio manager at Swarthmore Group in Philadelphia, Pennsylvania. “You have more people taking advantage of upside. But we’re in for some sloppy trading and I don’t think it’s over today. I don’t think it’s a straight shot up.”

The recent pummeling in U.S. shares reduced valuations some investors had seen as pricey. The SP 500’s valuation was down to about 14.8 times expected earnings as of Tuesday’s close, compared to around 17 for much of 2015 and below a 15-year average of 15.7, according to Thomson Reuters StarMine data, the most recent available.

Google (GOOGL.O) surged 7.72 percent after Goldman Sachs raised its rating to “buy” from “neutral”. Amazon (AMZN.O) jumped 7.38 percent.

After the bell, Apple supplier Avago Technologies (AVGO.O) posted fiscal third-quarter earnings per share that beat analysts’ expectations and its shares rose 2 percent.

During Wednesday’s session, NYSE advancing issues outnumbered decliners 2,474 to 646. On the Nasdaq, 2,136 issues rose and 713 fell.

Underscoring the market’s frailty, the SP 500 index showed no new 52-week highs and 28 new lows, while the Nasdaq recorded five new highs and 142 new lows.

Volume was heavy, with about 10.5 billion shares traded on U.S. exchanges, far above the 7.6 billion average this month, according to BATS Global Markets.

(Editing by Saumyadeb Chakrabarty, additinal reporting by Tanya Agrawal, Sweta Singh; Editing by Nick Zieminski and Christian Plumb)

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Schlumberger to buy oilfield gear maker Cameron in $14.8 billion deal

Schlumberger Ltd (SLB.N) will buy equipment maker Cameron International Corp (CAM.N) for $14.8 billion, as the world’s top oilfield services firm scrambles to offer a broader range of products at lower prices to oil companies slashing budgets.

The deal, which values Cameron around the market cap it had when oil prices were still $100 a barrel, marks the second big merger among energy services companies since crude prices LCOc1 entered a 60 percent slide last year.

Halliburton and Baker Hughes, Schlumberger’s rivals, agreed to a $35 billion tie-up in November.

Schlumberger said the acquisition will allow it to bundle its offerings, which range from surveying a site to drilling wells, with ones from Cameron that include pressure valves and blowout preventers, one of which was at BP’s Macondo well that exploded in 2010.

The two companies know each other well. They set up a joint venture, OneSubsea, to target the deepwater industry in 2012.

They have been eyeing each other since then, a person familiar with the deal told Reuters who spoke on the condition of anonymity, noting that Schlumberger has a history of acquiring its partners.

“The deal should allow a more complete solution to customers and should allow SLB to grow market share,” said BMO Capital Markets analyst Daniel Boyd. “Smaller companies offering discrete products and services will likely be at a disadvantage going forward.”

Schlumberger said the combined company would have pro-forma revenue of $59 billion in 2014. That is 20 percent more than Schlumberger’s revenue for 2014 and compares with $57.42 billion generated together by Halliburton Co (HAL.N) and Baker Hughes Inc (BHI.N).

The Halliburton and Baker Hughes deal is yet to close as U.S. antitrust enforcers believe the $35 billion merger will lead to higher prices and less innovation, according to a Reuters source. Billions in divestitures are planned in the hope of winning clearance.

Schlumberger, in comparison, said it expects no antitrust hurdles and has no plans to divest any part of Cameron’s portfolio to get regulatory approval. An anti-trust lawyer described the product lines as complementary.

“With SLB-CAM, there is not much in the way of overlapping businesses … we do not envision an overly difficult antitrust review,” Oppenheimer analyst James Schumm said.

Cameron’s shares were up about 41 percent at $60, below Schlumberger’s $66.36 per share cash-and-stock offer, in afternoon trading on Wednesday. Schlumberger’s shares fell as much as 7.5 percent to $68.01, their lowest in two-and-a-half years.


The Macondo well explosion in April 2010 killed 11 workers and spilled millions of barrels of oil into the U.S. Gulf of Mexico.

Investigators found Cameron’s blowout preventer had battery and wiring troubles that hindered the proper functioning of the devices’ blind shear rams, which are designed to slice through drilling pipes and cap a well in an emergency.

Cameron agreed to a $250 million settlement with BP PLC (BP.L) to help pay for costs associated with the spill.

Schlumberger’s offer on Wednesday values Cameron at $12.74 billion, based on the company’s diluted shares as of June 30.

Cameron shareholders will get $14.44 in cash and 0.716 of a Schlumberger share for each share held.

Schlumberger said it expects the deal to add to earnings by the end of the first year after the deal closes. The deal is expected to close in the first quarter of 2016.

Goldman Sachs Co is Schlumberger’s financial adviser and Baker Botts LLP and Gibson Dunn Crutcher LLP are its legal counsel. Cameron’s financial adviser is Credit Suisse and Cravath, Swaine Moore LLP is its legal counsel.

(Additional reporting by Mike Stone in New York and Terry Wade and in Houston; Editing by Savio D’Souza, Sayantani Ghosh and Bernard Orr)

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Monsanto drops pursuit of Swiss agribusiness rival Syngenta

U.S. agribusiness leader Monsanto Co. (MON.N) on Wednesday abandoned pursuit of Swiss rival Syngenta AG (SYNN.VX), which had rejected a recently sweetened $47 billion offer.

Syngenta shares fell more than 18 percent on the news, while Monsanto shares jumped more than 7 percent.

The Swiss agrichemicals group said its board unanimously rejected the offer, which it said “significantly undervalued the company.” Monsanto, the world’s largest seed company, said it still believes in the value of a combination. It will focus on building its core business and meeting long-term growth objectives and also said it was resuming a share buyback program.

Some farmers had feared that a combined company would have too much power to raise prices for seeds and herbicides. Both companies had acknowledged that a deal would face antitrust scrutiny in several countries.

Syngenta Chairman Michel Demaré said the company had engaged with Monsanto in good faith and would prosper without the deal.

“Our board is confident that Syngenta’s long-term prospects remain very attractive with a leading portfolio and a promising pipeline of new products and technologies. We are committed to accelerate shareholder value creation,” he said in a statement.

Still, some Syngenta shareholders expressed disappointment over the scuttled deal and questioned Syngenta’s ability to improve its financial fortunes.

“They have to justify to their shareholders that they can create the value that they have just turned down,” said Pauline McPherson, co-fund manager of Kames Capital’s global equity fund, which holds Syngenta stock.

Billionaire hedge fund manager John Paulson, whose Paulson Co. had taken a stake in Syngenta, had no comment.

Monsanto confirmed that it made a revised offer to Syngenta on Aug. 18, raising a previous offer to 470 Swiss francs per share, valuing the company at roughly $47 billion. It also confirmed it raised a reverse break-up fee to $3 billion.

Syngenta said the verbal proposal set a price of 245 Swiss francs in cash and a fixed ratio of 2.229 Monsanto shares per Syngenta share. At market close on Aug. 25 this equated to a price of 433 Swiss francs per Syngenta share.

Monsanto has said that it wanted to acquire Syngenta primarily to boost its agrichemicals portfolio, which now relies mainly on glyphosate-based herbicides branded as Roundup.

Monsanto is known for its development of genetically altered crops, while Syngenta is the world’s largest agrichemical company and has a broad portfolio of insecticides, herbicides, fungicides and seed treatments used by farmers around the world.

The takeover effort became a public spectacle of sorts over recent months as leaders at both companies argued the merits the proposed deal through the media, videos and other online forums.

Monsanto’s management also tried to force Syngenta’s management team to come to the bargaining table by wooing support from Syngenta shareholders, and met with several farm groups to solicit support for the deal.

But Syngenta’s management team refused repeatedly to open their books and begin negotiations. Syngenta officials insisted that Monsanto was undervaluing the company and that an attempted combination would raise serious antitrust issues in many countries, possibly provoking lengthy and costly delays.

Many U.S. farmers had feared a deal would limit their choices and spell higher prices for seeds and chemicals. The National Farmers Union (NFU) said it was relieved that Monsanto dropped its bid.

“This is clearly not only good news for family farmers, but for economically competitive markets as well,” said NFU President Roger Johnson.

Syngenta also said Monsanto had been unclear on key issues including estimated revenue syngergies.

Monsanto said it could handle antitrust hurdles, and said it would sell off Syngenta’s seeds and genetic traits businesses. The deal would have brought “substantial synergies” translating to higher profits for a combined company, Monsanto said.

Monsanto officials “are pretty fed up. There is a complete frustration about the whole pursuit and that is why this is the end of the Syngenta talks,” said Piper Jaffray analyst Brett Wong.

Wong said Monsanto would probably stake out another acquisition target soon to boost its crop chemicals holdings.

Syngenta slid to 309.50 Swiss francs, while Monsanto shares jumped to $96.77.

Monsanto officials also said they still plan to deliver on a five-year plan to more than double fiscal-year 2014 ongoing earnings per share by 2019.

(Additional reporting by Oliver Hirt in Zurich, Svea Herbst in Boston, Sinead Cruise in London and Mike Stone in New York; Editing by Chizu Nomiyama and David Gregorio)

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Global stock markets diverge, commodities fall as China jitters persist

NEW YORK Wall Street was sharply higher on Wednesday while European shares and commodities prices fell as investors balanced strong U.S. economic data and interest rate comments with fears about China’s slowing economy.

The benchmark SP 500 was up 2.6 percent in afternoon trading, helped by stronger-than-expected data on durable goods orders and comments that appeared to make a September interest rate hike less likely.

New York Fed President William Dudley said a rate hike next month seems less appropriate given the threat posed to the U.S. economy by recent global market turmoil.

Most U.S. Treasuries prices turned broadly lower in the late afternoon, erasing earlier gains.

The stock market remained choppy even though investors viewed the hint of caution about rate hikes as reassuring amid slowing China growth and after its recent currency devaluation.

“It’s not surprising given the sudden change in valuations that we’re going to have difficulty finding a consistent level in pricing,” said Stephen Massocca, chief investment officer at Wedbush Equity Management LLC in San Francisco. “It’s very easy to start a stampede in one direction or the other. All that I can predict is that volatility will stay elevated for at least a few more days.”

Massocca said the period of volatility could potentially come to an end soon because the market will have had time to digest China’s Aug. 11 currency devaluation.

The CBOE Market Volatility Index .VIX was still elevated at 31, indicating significant uncertainty, although the “fear index” was well below Monday’s 6-1/2 year peak of 53.3.

The Dow Jones industrial average .DJI rose 418.7 points, or 2.67 percent, to 16,085.14, the SP 500 .SPX gained 48.77 points, or 2.61 percent, to 1,916.38 and the Nasdaq Composite .IXIC added 125.05 points, or 2.77 percent, to 4,631.54.

Europe’s FTSEurofirst 300 index of major companies .FTEU3 closed down 1.9 percent in a choppy trading day. China’s key share indexes also ended lower after attempts to move higher were slapped back by waves of selling, reflecting hopes for more government and central bank support.

The Shanghai Composite Index .SSEC ended down 1.3 percent, its fifth straight day in the red. [.SS]

The dollar index .DXY, which measures the greenback against a basket of major currencies, pared its gains after the Dudley comments but was up 0.6 percent in afternoon trading.

Despite China’s struggles, Asia markets had some bright spots. Japan’s Nikkei .N225 saw a 3.2 percent jump and Korea’s KOSPI .KS11 showed its biggest jump in two years with a 2.6 percent increase.

Oil prices were hurt by a bigger-than-expected increase in U.S. gasoline stocks, compounding negative sentiment from worldwide equities that pushed fuel prices to 6-1/2-year lows.

U.S. crude CLc1 settled down 1.8 percent at $38.60 a barrel while Brent crude futures LCOc1 were last down 0.3 percent at $43.07. [O/R]

Copper CMCU3, often considered a proxy for Chinese and global economic activity, was down 2.9 percent while prices of gold XAU=, traditionally a safe-haven asset, were off 1.2 percent.

(Additional reporting by Sujata Rao in London, Saikat Chatterjee in Hong Kong; Editing by Giles Elgood and Nick Zieminski)

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Bill Gross’s Janus bond fund drops second consecutive day

NEW YORK Bill Gross’s Janus Global Unconstrained Bond Fund (JUCAX.O) suffered its second day of declines in its net asset value on Tuesday, wiping out gains for the year, according to fund-research firm Morningstar Inc on Wednesday.

The $1.5 billion Janus fund’s returns stood at negative 2.63 percent year-to-date as of Aug. 25, which places Gross’s portfolio behind 92 percent of its peers category, Morningstar said. The Janus Global Unconstrained Bond Fund was down 0.42 percent on Tuesday after a 2.86 percent decline on Monday.

“Looking to their asset allocation as of July 31, the fund has 6 percent or so exposure to equity-related securities and has 20 percent in high-yield bonds while another 14 percent in non-rated bonds,” said Todd Rosenbluth, director of ETF Mutual Fund Research at SP Capital IQ Global Markets Intelligence. “This is an approach that will not benefit from a flight to quality of investment-grade corporates and Treasuries.”

Unconstrained bond funds had become some of the most popular investment vehicles in the 2013 Taper Tantrum after the Fed hinted at the possibility of tapering its bond purchases sooner than previously expected, causing bond yields to rise sharply.

In the Taper Tantrum investors liked the funds because they have the flexibility to invest in all types of bond securities globally and often choose corporate credit securities rather than interest-rate sensitive assets.

The inflows continued for some unconstrained bond funds into 2014, but then as bonds rallied that year and rates fell, some of the funds underperformed, and investors began moving out of some of them.

Rosenbluth said, “Investors would have been better in a traditional bond fund.”

A Janus spokeswoman did not respond to requests for comment.

Wednesday, Gross tweeted about New York Fed President William Dudley’s remark that he was confident China had the policy tools to stabilize the economic and financial situation. “Sort of like the “successful” tools other central banks have used for 6 years???” Gross said on Twitter.

Last month, Janus Capital Group Inc (JNS.N) announced Gross would be getting help running his mutual fund from Kapstream Capital Pty Ltd’s Kumar Palghat after the Denver-based Janus acquired a majority stake in Kapstream.

(Reporting by Jennifer Ablan; Editing by Phil Berlowitz)

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FX pegs under pressure in emerging markets as commodity prices fall

LONDON Plunging commodity prices are testing the viability of emerging currencies’ long-standing pegs to the dollar, with some already abandoned as countries balk at the cost of clinging to fixed exchange rates.

Kazakhstan unshackled its tenge last week, and bets are growing that from Hong Kong to Saudi Arabia, dollar pegs are at risk.

“Markets are now questioning the sustainability of other dollar pegs, wondering which will be the next domino to fall,” Deutsche Bank told clients.

A peg fixes the value of one currency relative to another and uses central bank reserves to enforce the relationship. Pegs are relatively rare these days among the bigger economies, partly because of the 1997-2002 emerging market crises that were exacerbated by the cost of clinging to fixed exchange rates.

Kazakhstan’s tenge has fallen 30 percent KZT= since it was depegged last week under pressure from falling commodity prices and steep depreciation in neighboring Russia’s rouble.

Russia ended its own flexible or “crawling” peg to the dollar after burning billions of dollars in reserves to defend the rouble RUB= while Ukraine and Belarus followed suit earlier this year UAH= BYR=.

Now pressure is mounting on others, especially “petro-pegs” such as in Azerbaijan, Saudi Arabia and Nigeria.

Justifying the cost of clinging to them will become increasingly difficult for those reliant on commodities and exposed to China’s weakening economy, says Simon Quijano-Evans, chief EM strategist at Commerzbank.

That’s especially so as commodity exporters with flexible exchange rates such as Brazil and South Africa start to benefit from their currencies’ 10-20 percent depreciation this year.

Dollar pegs made some sense for countries whose revenues, either from tourism as in the Caribbean or from oil as in the Gulf, are mainly in dollars, especially when commodity prices were high and the dollar was weak.

Now the opposite is true.

“Your economy is going to suffer if your main trade partner is suffering and you cannot allow your currency to adjust while other countries are adjusting theirs,” Quijano-Evans said.

China this month devalued the yuan, widened its trading band to the dollar and pledged to give markets a greater say in setting daily exchange rates. The yuan’s 3 percent fall since then CNY= prompted Vietnam to devalue the dong and widen its own trading band to the dollar VND=.

Mindful of past crises, policymakers will be reluctant to sharply run down reserves to support overvalued currencies.

What’s more, the investment flows and export revenues that fed reserve growth are dwindling and current account surpluses have almost vanished.

“Pegs are sustainable only as long as you run a big current account surplus and there are inflows that allow central banks to support their currencies,” said Cristian Maggio, a strategist at TD Securities.


The tenge may provide a clue as to who is next. It looked overvalued prior to its float, standing 11 percent above its average over the decade, Deutsche Bank calculated.

By this measure, Deutsche says, four currencies appear overvalued: the Saudi riyal, the United Arab Emirates dirham, the Nigerian naira and the Egyptian pound, all of them tied to the dollar via “hard” or soft, flexible pegs.

Analysts see the naira and pound as vulnerable, because both countries have limited reserves and are keeping official exchange rates steady only by rationing hard currency. Both have weakened in parallel markets NGN= EGP=.

Traders meanwhile are testing Gulf central banks’ by pushing currencies down in forward markets – one-year dollar-riyal forwards for instance are at 12-year highs SAR1Y= as traders lock in rates to protect against riyal devaluation.

Saudi reserves of $660 billion mean the authorities can easily defend its 30-year old peg for years, though prolonged oil weakness and rising U.S. interest rates will seriously squeeze finances.

“You have to distinguish between willingness and the ability (to defend pegs). Saudi, Qatar and UAE have a real safety net, far stronger than in African and some (ex-Soviet) countries,” said Michael Bolliger, head of EM asset allocation at UBS Wealth Management.

Venezuela, Angola and Algeria, oil producers with managed currencies and lacking deep pockets, are also facing pressure.

Pegs to the euro have been tested too, including the Danish crown’s three-decade-old link EURDKK=, after Switzerland scrapped its exchange rate cap in January. The difference here is that pressure has been upward, with central banks forced to buy euros to hold the pegs.

Similar bets are now evident against the Hong Kong dollar’s peg to the greenback. But while Hong Kong may suffer from China’s slowdown, it still enjoys large capital inflows, imports energy and has seen reserves rise by $12 billion this year. Few therefore expect it to lose its peg.

(Reporting by Sujata Rao; Editing by Nigel Stephenson/Ruth Pitchford)

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Airbus to delay delivery of first A380 to Russia’s Transaero

PARIS European planemaker Airbus (AIR.PA) is delaying the delivery of Russian carrier Transaero Airline’s (TAER.MM) first A380 superjumbo, an Airbus spokeswoman said on Wednesday, as the recession-hit Russian economy dents travel demand in the region.

“The contract is still in place,” the spokeswoman said. “We are looking at rescheduling the delivery of the first plane, which was planned for this year.”

She added that there were no details of the new delivery schedule.

Bloomberg had earlier cited an Airbus executive as saying the delivery delay was no big surprise given the turbulence in the Russian market.

Transaero has ordered four of the superjumbos.

The Airbus spokeswoman said the delay would not affect Airbus’ plans to breakeven on the A380 program this year.

(Reporting by Cyril Altmeyer; Writing by Victoria Bryan; Editing by James Regan)

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Strong capital spending plans boost growth outlook

WASHINGTON A gauge of U.S. business investment plans recorded its largest increase in just over a year in July, suggesting the United States was in good shape to withstand growing strains in the global economy.

The Commerce Department said on Wednesday non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, increased 2.2 percent last month, the biggest rise since June last year.

“The economy had a tailwind heading into the recent market rout. That tailwind will help to carry us through the turbulent waters that lie ahead,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.

July’s increase in the so-called core capital goods orders was on top of an upwardly revised 1.4 percent increase in June and marked two straight months of hefty gains. Economists had forecast only a 0.4 percent rise in July after a previously reported 0.9 percent increase in June.

The report added to employment, industrial production, retail sales, housing and consumer spending data in highlighting the U.S. economy’s resilience.

The string of upbeat reports suggests the Federal Reserve could still raise interest rates this year despite a global markets sell-off, triggered by worries over China’s slowing economy, and policymakers’ concerns about low inflation.

New York Fed President William Dudley said on Wednesday prospects of a September rate hike “seems less compelling to me than it was a few weeks ago.”

Stocks on Wall Street rallied, with all major indices trading more than 1 percent higher. Prices for U.S. government debt fell, while the dollar rose against a basket of currencies.


A strong dollar and deep spending cuts in the energy sector have undercut business investment.

Schlumberger Ltd (SLB.N), the world’s No. 1 oilfield services provider and rival Halliburton (HAL.N) have slashed their capital expenditure budgets for this year following a more than 60 percent plunge in crude oil since June last year.

While Wednesday’s report and recent data on oil drilling suggest the spending cuts in the energy sector were ebbing, renewed weakness in oil prices suggest a turnaround in business investment will only be gradual.

In addition, the dollar’s 16.8 percent gain versus the currencies of the United States’ main trading partners since June 2014 remains a challenge for multinational corporations such as Whirlpool Corp (WHR.N) and Procter Gamble Co (PG.N).

Still, the surge in core capital goods orders in July bodes well for economic growth prospects in the third quarter.

“It points to a sharp acceleration in the pace of business capital investment activity in the third quarter and provides some upside risks to our expectation for growth,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

Shipments of core capital goods, which are used to calculate

equipment spending in the government’s gross domestic product

measurement, rose 0.6 percent last month after an upwardly revised 0.9 percent increase in June.

Core capital goods shipments were previously reported to have risen 0.3 percent in June and the upward revision suggests second-quarter GDP could be bumped up when the government publishes it second estimate on Thursday.

June data on business inventories and construction spending have already suggested second-quarter growth could be revised to as high as a 3.4 percent annualized pace from the 2.3 percent rate reported last month. Third-quarter growth estimates are around a 2.8 percent rate.

A 4.7 percent increase in transportation equipment buoyed overall orders for durable goods – items ranging from toasters

to aircraft that are meant to last three years or more – which rose 2.0 percent in July.

Transportation was lifted by a 4.0 percent rise in orders for automobiles and parts, as automakers kept most assembly lines running during the summer instead of shutting them down for retooling. That increase offset a 6.0 percent decline in aircraft orders.

Unfilled orders for durable goods rose 0.2 percent in July, the largest gain since November, while inventories were unchanged.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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‘Bad bank’ path worn by Ireland and Spain looks steep for Greece

LONDON Greece is under growing pressure to take care of banks’ problem loans so they are free to lend again, but the depth and complexity of its crisis will make it tough to replicate the comprehensive “bad bank” models set up in Ireland and Spain.

Deciding how to deal with more than 100 billion euros ($115 billion) of non-performing loans held by banks is a central part of Greece’s recovery plan – and one of the biggest headaches for policymakers.

Ireland and Spain’s big, state-backed ‘bad banks’, or asset management companies, bought bad loans from banks at knock-down prices and are managing and selling them on to investors, who can renegotiate terms to claw back as much as possible.

Setting up such a structure can be risky, and the Irish and Spanish models have not been trouble-free, but politicians and analysts say they have helped put both eurozone countries on the recovery path.

“It is needed (in Greece), but it is not the easiest place to have a bad bank,” said Oliver Ellingham, a board member at NAMA, Ireland’s bad bank, and a former executive at BNP Paribas.

A senior Greek banker said there was no appetite among the local banks to form a unified vehicle like NAMA, and reservations go wider than that.

Greece’s deep economic recession, political turbulence, inadequate insolvency laws and problem loans spanning residential mortgages, small businesses and big companies all make carving out non-performing loans (NPLs) difficult and could deter investors from buying them, several restructuring advisers and investors said.

As a result, two of the advisers said although a full-scale bad bank would be Greece’s best option, officials in Athens and at the European Central Bank in Frankfurt, which now supervises eurozone banks, were likely to opt for more limited plans that would be easier and quicker to implement.

They said that could mean sticking with the individual “troubled loan” units being set up within each of the four big lenders – National Bank of Greece (NBGr.AT), Piraeus (BOPr.AT), Alpha Bank (ACBr.AT) and Eurobank (EURBr.AT). Alternatively, a vehicle could be created that takes each bank’s worst corporate loans, the restructuring sources said.

Economy Minister George Stathakis said on Wednesday the government had not committed to a particular option.

“A bad bank could restructure those loans using more balanced criteria that would take into account the economic and social consequences,” he told a news conference.

“This was one proposal that we put on the table and it is part of the discussions. There are other solutions.”


Bad bank supporters say they speed up dealing with bad loans, which could otherwise take decades to run down and paralyze credit supply.

“It’s more aggressive, but a quicker and cleaner way to solve the problem of non-performing loans (NPLs) and makes the remaining core banks more investable,” said Christy Hajiloizou, credit analyst at Barclays in London.

A bad bank can also be more clinical with unpopular decisions, such as liquidating companies or repossessing homes, and more efficient at collecting money from borrowers. Banks can be slow to accept they made lending mistakes, especially if they still have a relationship with the borrower.

“There’s a completely different mindset to resolving NPLs, which involves treating people with respect but can mean being incredibly tough on customers,” Ellingham said.

Critics of bad banks say they burden taxpayers with losses as banks often take a big capital hit when the loans are transferred at knock-down prices. A state may spend billions of euros buying the assets and recapitalizing banks at the same time, hoping to recoup its outlay over many years of sales.

Bad banks can also cost millions in set-up and advisory fees, and if assets are mispriced, they can allow hedge funds to reap the rewards of a recovery.


The influential group of eurozone finance ministers this month said Greece had to explore “the possibility of a bad bank” given the scale of its NPL problem.

The leftist Syriza party included a plan for a bad bank when it was elected in January but did not get the necessary funding when it negotiated a third bailout with creditors.

If Athens does opt for a bad bank, it will need to show it would be an independent body able to clear up the mess and be free of bureaucracy and cronyism, restructuring advisers said.

They said with elections expected on Sept. 20, a review of banks’ assets due by mid-October and a recapitalization of banks targeted by the end of the year, the timeframe is tight and external advisors are being pulled in to consider options.

Greece has pledged to tackle its NPL problem with or without a bad bank, and change insolvency laws, improve judicial staff and insolvency administration and open the market for servicing and disposing loans.

The aim is to lure the U.S. private equity, hedge fund and other specialists who are the biggest buyers of distressed assets in Europe. [ID:nL5N1043PP]

At NAMA, which six years ago paid 32 billion euros to buy loans with a face value of 74 billion euros from Ireland’s stricken banks, about 90 percent of assets sold so far have gone to U.S. investors.

And decision-makers in Athens and Frankfurt will have taken note: NAMA says it expects to make up to 1 billion euros in profit when it completes the rundown of its assets by the end of the decade. [ID:nL5N0YI20N]

($1 = 0.8721 euros)

(Additional reporting by Greg Roumeliotis and George Georgiopoulos in Athens; editing by Philippa Fletcher)

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