U.S.Mortgage Bonds Without Government Backing Face Tough Time

  According to an article published today by the Wall Street Journal:
"The market for mortgage bonds that aren't backed by the government suffered a setback this month, when one offering was shelved and another had to slash its price amid tepid investor demand".

"The struggles reflect the fits and starts suffered by banks and mortgage finance firms trying to revive the market for bonds backed by mortgages without government support, or so-called nonagency debt. The market for such bonds essentially collapsed under high default rates and poor investment performance during the financial crisis, following trillions of dollars of issuance during the housing boom.

The market was largely dormant until earlier this year, when more frequent sales to investors hungry for higher-yielding bonds lifted volume for 2013 to $12 billion. But investors have become more demanding since U.S. Treasury yields started rising in May.Government officials and regulators have been eager for nonagency mortgage market to recover, anticipating it can fill a void in home loan finance as they work to wind down U.S. housing-finance firms Fannie Mae and Freddie Mac. To reduce the roles of Fannie and Freddie, the Federal Housing Finance Agency is requiring the firms to sell debt that transfers some risks of default to private investors.

Investors remain especially concerned with the impact rising interest rates could have on nonagency bonds backed by jumbo loans–the ones packaged up by PennyMac and Shellpoint. Jumbo loans are those that exceed the $417,000 limit for government backing in most regions.

The Jumbo loan borrowers, are typically the slowest to refinance their debt as mortgage rates increase, which means mortgages can remain in the bonds longer than anticipated. That leaves investors with a bond filled with longer-term assets that pay lower rates than newer bonds, which pushes down the value of the debt.

Investors also worry they will have trouble exercising their right to demand lenders repurchase bad mortgages, a practice that at the heart of legal fights over boom-era loans. And the small size of the new-issue jumbo bond market makes it harder to trade the issues, discouraging some investors."

IMF Concludes 2013, Consultation with Italy Part I

Italy’s economy has been in recession for almost two years. GDP contracted by 2.4 percent in 2012, and at a similar annualized rate in the first half of 2013. The contraction was led by a sharp fall in domestic demand, reflecting tight credit conditions, fiscal adjustment, and depressed confidence. The unemployment rate is at post-war highs of 12 percent, with youth unemployment nearing 40 percent. Weak demand has also contributed to the narrowing of external imbalances. The current account deficit has declined from 3½ percent of GDP in 2010 to near zero in the first half of 2013, reflecting mainly a collapse in imports and steady exports.
A modest recovery is expected to start in late 2013, supported by net exports. After sharp declines in previous years, domestic demand is expected to recover slowly in the face of stiff headwinds from tight credit conditions. On this basis, growth is projected at -1.8 percent this year, before rising to 0.7 percent next year.
The ratio of nonperforming loans has almost tripled since 2007, while outflows of nonresident deposits and limited access to wholesale financing have raised the cost of funding. Credit conditions remain tight. 
Notwithstanding the weak economy, stress tests results suggest that the Italian banking system as a whole is able to withstand the losses under an adverse macroeconomic scenario.
The nominal budget deficit fell to 3 percent of GDP in 2012 on the back of sizeable fiscal adjustment, allowing the country to exit from the European Union’s Excessive Deficit Procedure, and is projected to be close to that level in 2013. In structural terms, the overall balance is projected to be near zero this year. 
After fiscal consolidation,and the announcement of the ECB of its outright money transactions,sovereign yields have fallen considerably.Debt, however, continues to rise and is forecast to exceed 130 percent of GDP in 2013.

In the absence of further structural reforms, medium-term growth is projected to remain low. The origins of Italy’s low trend growth pre-date the crisis and stem from its stagnant productivity, difficult business environment, and leveraged public sector.

Source: IMF 

Ukraine Faces Old-Style Emerging Market Crisis

 According to an article published in the Wall Street Journal of today:
"Ukraine faces and old style emerging market crisis, a currency pegged to the dollar,falling foreing exchange reserves, mounting  debt-service needs and a potential standoff with the International Monetary Fund are familiar ingredients for emerging-markets veterans. Ukrainian dollar-denominated bond yields have hit 10%, but investors should remain wary.
It took full advantage of easy money conditions earlier this year, raising $2.25 billion from international markets. But times have changed. Ukraine's economy stagnated in 2012 and is now turning down again, and government promises of reform have fallen short. Last week, Moody's cut it's debt rating to Caa1 and threatened to downgrade it again, a decision that probably cuts Ukraine off from markets.
That leaves an uncomfortable position. The central bank's foreign-exchange reserves have fallen to $21.7 billion, covering less than three months of imports—a level the IMF regards as critical. Meanwhile, Ukraine faces foreign-debt service payments of $10.8 billion to the end of 2014, Moody's says. Ukraine has adopted unorthodox tactics, including borrowing short-term in dollars in the domestic market and raising a $750 million syndicated loan with help from Russia's Sberbank.

The coming months are crucial. Ukraine is angling to sign a trade deal with the European Union. That might help with gaining support from the IMF, potentially boosting capital-markets access. But 2010's IMF package quickly went off the rails after the government backtracked on promises to raise gas and heating tariffs, which are heavily subsidized and politically sensitive. A deal with the EU could yet cause a backlash from Russia, which accounts for 30% of Ukraine's trade, according to Standard Bank.

Ukraine could yet face a currency crisis that would put it under severe pressure''.

The Big Challenge for the Fed is a sustainable recovery of the Economy

According to an article published in the Wall Street Journal:
""The Federal Reserve has plenty of items on its list of things to worry about. But a fear that its policies might inculcate another batch of asset bubbles is no longer as high on it.

But since late May, when Chairman Ben Bernanke first indicated the Fed might start reeling in its bond-buying program, investors have become much more gun-shy about reaching for yield. That is because long-term interest rates rose sharply—while the yield on the 10-year Treasury has fallen since the latest Fed meeting, at 2.64% it is still well above its early May lows.

Shares of real-estate investment trusts, whose steady dividends were drawing in yield-hungry investors, have fallen sharply, for example. 

 The Fed has, even if inadvertently, bought itself some breathing room on this front. The bigger challenge is pushing the economy into sustainable recovery".

U.S. Consumer Sentiment fell to 77.5 in September

U.S. consumer sentiment slid in September to its lowest in five months as consumers saw higher interest rates and sluggish economic growth ahead, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment slipped to 77.5 in September from 82.1 in August - the lowest final reading since April.

The September figure was lower than the 78.0 economists had expected in a Reuters poll, but higher than a mid-month preliminary reading of 76.8.

Looming Congressional showdowns over a possible government shutdown and the need to raise the debt ceiling or else face the possibility of default have renewed worries about fiscal policy and legislative gridlock.

Other gauges also hit their lowest final reading since April: the gauge of consumer expectations, at 67.8, and the index of current conditions, at 92.6.

Economists fear consumer sentiment could weaken further if higher interest rates start to slow momentum in a housing revival that has been one of the brightest spots in the overall U.S. recovery.

The one-year inflation expectation rose to 3.3 percent from 3.0 percent while the five-to-10-year inflation outlook edged up to 3.0 percent from 2.9 percent.

Source: Reuters

Brazil: Gerdau Group bets on Efficiency and Diversification

Until 2007, with the exuberance of the global steel market, driven by China, Gerdau group went on a shopping spree. It has gained strength, expanded its geographic reach and took the opportunity to start diversifying. Thus it became the largest manufacturer of long steel in the Americas - second in the world - and one of the global leaders in steel for the automotive industry. The 2008 crisis that shook the world's economies demanded a new strategic configuration.

Currently, the global industry scenario is of steel oversupply, competition with Chinese, Russian, Korean and Turkish products, difficulties to export, depressed prices and tight profit margins. The strategy is: more horizontal and vertical diversification in the production chain and seeking management, efficiency and cost gains to stay competitive.

“Today, our focus involves flat steel, with projects in Brazil, investment in iron ore, expanding the specialty steel business in Brazil and the US and entry into India, and management to have efficiencies in all our operations,” the businessman says.

This year the company merged Gerdau Aços Longos in Brazil with Açominas, creating a single company, Gerdau Aços Brasil.

“We are firmly working in this strategy to differentiate ourselves, seeking better earnings,” the executive says. 

Currently, with annual sales of around 19 million tons of steel, the group gets 36% of its revenues in Brazil, 30% in the US, 21% in specialty steels (Brazil, US and Spain) and 13% in Latin America. Sales totaled R$38 billion last year. In generating operating profit, Brazil accounts for almost three-fifths - around 58%. Then it comes specialty steel with 21%, the US with 12% and Latin America with 9%. The installed capacity in 60 plants and rolling mills is 25.5 million tons. The group occupies the fourteenth position in the world ranking of the World Steel Association (WSA).

In Mexico, Gerdau is investing $600 million in a heavy profiles plant, within a plan to meet Americas demand for this product also from Brazil and the US. This project aims mainly toward import substitution and export to regional markets. “In the region, there is much to do in infrastructure in Peru, Colombia, Guatemala, Chile, Venezuela and Mexico itself.” The plant will have capacity of 1 million tons of steel and 700,000 end products (profiles).

Source: Valor International

London Stocks Fall Sharply on U.S. Concerns

UK markets were registering heavy losses on Friday morning as investor scaled back risk ahead of the weekend, as concerns over monetary policy and budget talks in the US continued to dampen sentiment.

Negotiations in Washington continue to limit upside on markets with investors nervous ahead of the October 1st deadline, hope that politicians can agree on a extension to the current debt-ceiling limit of $16.7tn to avoid a government shutdown when the new fiscal year begins. 

According to analyst Mark Zandi from Moody's Analytics, a three-to-four-week shutdown could shave 1.4 percentage points off US economic growth in the fourth quarter. He currently estimates an expansion of 3% without a government closure.

FTSE 100: SSE, Centrica attempt to rebound

Utility peers SSE and Centrica were high risers this morning, rebounding after some sharp falls earlier in the week following Ed Miliband's proposals to freeze energy bills if Labour is voted into power in 2015. Centrica has specifically attacked the plans, saying that it would not be "economically viable" to operate if prices were controlled against a background of rising costs.

Randgold Resources was a heavy faller after Bank of America Merrill Lynch cut its gold-price forecast by 17% to $1,294 an ounce for 2014. Nevertheless, the bank said Randgold remains amount its preferred 'buys' in the sector due to low costs, a rising grade profile and strong balance sheet. TheStreet Ratings, however, cut its rating for the stock from 'buy' to 'hold'.

Other miners, including Antofagasta, Vedanta Resources, Rio Tinto, Anglo American and BHP Billiton, were also providing a drag on markets today as metal prices fell. Rio was shrugging off some upbeat comments from Nomura which labelled it as "one of the cheapest stocks" within its peer group.

SABMiller, Diageo and Coca-Cola HBC were trading lower this morning after Credit Suisse downgraded the European beverages sector from 'overweight' to 'benchmark', saying it is the "third-most expensive sector in Europe [...] and has the second-worst earnings revisions".

Second-tier miners were performing in line with their FTSE 100 peers today as metal prices declined. EVRAZ, 
Polymetal, Hochschild, Centamin, Petra Diamonds and Kazakhmys were among the worst performers.

Source: LiveCharts

Jack Ma wants to keep a tight grip on Alibaba's Board

Alibaba Group Holding Ltd founder Jack Ma wants to keep a tight grip on the Chinese e-commerce company he founded even after he takes it public, and U.S. law gives him several ways to do so.
A source close to the company told Reuters that Alibaba, now effectively controlled by a group of 28 "partners" including Ma, senior executives and other insiders, is intent on keeping a similar structure when it goes public. Listing in the U.S. makes that possible, a key consideration in choosing New York over Hong Kong, the source said.
 Many U.S. companies, including Facebook and Google, use a dual-class stock structure to keep power within the hands of the companies' founders, Alibaba is likely to pursue a different approach, the source said.

But several corporate lawyers, said that one likely route for the 28 partners would be to list Alibaba by effectively creating a new partner that would become the publicly traded company.

Setting up the corporation that way - known as an "Up-C corporation," or umbrella partnership - can give the original partners much stronger voting rights, lawyers said.

While Japan's Softbank Corp, which owns 35 percent of Alibaba, and Internet company Yahoo, with 24 percent, each have a seat on Alibaba's four-person board of directors, neither company is represented among the 28 partners. In fact, there are no outside investors in the partners' group.

The partners' powers may increase after the IPO as it gains control of an expanded board of directors. Yahoo will lose its board seat when it sells half its stake in Alibaba in the IPO.

Under the structure the company envisions, Alibaba's shareholders would still have the ability to approve or reject all the directors. 

Source: Reuters

ECB'S GUIDANCE DETERRED VOLATILITY, BIAS REMAINS TOWARD RATE CUTS, SAYS CœURÉ

European Central Bank (ECB) member Benoît Cœuré noted that the implementation of a forward guidance has deterred market volatility and the Eurozone monetary authority continues to have an easing bias which makes further rate cuts possible.

While admitting that it was too early to determine if the forward guidance had "worked", Cœuré was convinced that in its absence, "money market rates would have displayed more upward volatility than was observed." 

The ECB member did make clear that the central bank was not targeting specific value for money market rates, but sought to make sure that "their fluctuations remain within reasonable bounds and do not hurt economic recovery". 

According to Cœuré, the guidance itself is a useful tool that "explicitly incorporates an easing bias, thereby accounting for the possibility of further cuts in policy rates". 

The majority of analysts currently expect ECB rates to remain at 0.5% until April 2015 and, rather than a cut, expect another round of long-term refinancing operations (LTROs) designed to flood credit markets with liquidity. The new LTRO could be implemented as soon as the end of the year, according to a recent Reuters poll. 

Source: LiveCharts

FED'S GEORGE SAYS TAPERING SIZE IRRELEVANT, WARNS ON DELAY

Federal Reserve Bank of Kansas City President Esther George indicated that the size of the initial tapering (reduction of the Fed's asset purchase program) may be irrelevant, but warned that delaying its start may have costs. 

George is the foremost monetary policy hawk with voting rights on the Federal Open Market Committee (FOMC) and has dissented at every meeting this year. At the most recent September 18th meeting, George voted against the policy action because she was "concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations," according to the FOMC statement. 

Speaking at a Colorado Economic Forum on Thursday, George noted her disagreement with Fed colleagues. "My preferred course of action would have been to begin tapering asset purchases at last week's meeting," she said. 

She reminded listeners that tapering is simply a slowing down of the extraordinary measures and should not in itself be considered a tightening of monetary policy. "Delaying action not only allows potential costs to grow; it also has the potential to threaten the credibility and predictability of future monetary-policy actions," she warned. 

George also explained that winding down unconventional measures was justified given the current state of the economy. "An initial reduction in the pace of its sizable asset purchases would be appropriate given the ongoing improvement in economic conditions," she said.

However, George seemed unconcerned about the actual size of the first reduction. "I don't know that the initial amount really matters in the context of its impact," she said, though she stressed that "what is important, though, is that we will have to be clear, once we start, on where we will be going with the end of the program."

Source: LiveCharts

U.S. consumer spending rises, incomes up most in six months

U.S. household spending rose in August as incomes increased at their fastest pace in six months, signs that momentum could be growing in the U.S. economy despite  months of harsh government austerity.

American families spent 0.3 percent more last month, which was in line with the median forecast in a Reuters poll, Commerce Department data showed on Friday.

Incomes rose 0.4 percent, the biggest gain since February.

Even after taking into account tax bills and price increases, incomes rose by the most since March.

Indeed, the strength in consumer spending also appears to have stopped a worrisome decline in the inflation rate.

The Commerce Department data showed that the 12-month core inflation rate, which excludes volatile food and energy prices, has been largely steady since April, coming in at 1.2 percent in August.

Source: Reuters