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Are the financial markets really Europe’s savior? - Reuters Blogs
If the euro is saved, the much-maligned power of global financial markets will deserve much of the credit.
The conventional wisdom among many on the intellectual left is that unbridled financial players threaten to destroy the European Union, one of history’s noblest, war-ending projects. The truth, however, is something else. To be sure, speculators lack noble motives, and global capital is a blunt instrument that tends to overshoot. But markets are forcing European leaders to fix their fatally flawed monetary union, a union that can only last with deeper economic integration and greater political (and democratic) legitimacy.
Last weekend’s agreement by Spain to accept a bank bailout, based on a European aid package of $125 billion, is a dramatic case in point. Senior Obama administration officials, in a series of urgent conversations with their European counterparts, warned that Spain posed the possibility of a “Lehman moment,” with global reverberations that no one could predict. If European leaders didn’t demonstrate to markets that they would pool their resources to address the banking meltdown of Europe’s fourth-largest economy, the contagion could have spread, what remained of U.S. and global growth could have evaporated, and the European Union itself would have been endangered.
In retrospect, it may have been wiser to build Europe without a common currency, one senior Obama administration official told me, given all the historical and national differences. However, now that the euro is used by 17 countries and has become a global reserve currency, the euro zone can’t be dismantled without unacceptable European and global risk. Thus, U.S. officials had been urging European leaders to settle the Spanish bank crisis before the Greek election next Sunday, June 17, and the G-20 meeting June 18-19, to avoid convening on the brink of financial catastrophe.
In the end, however, it wasn’t President Obama who forced a Spain deal through his lobbying with the top three euro country leaders – Chancellor Angela Merkel, French President François Hollande and Italian President Mario Monti. (Side note: One does wonder whether British Prime Minister David Cameron isn’t beginning to feel left out). Instead, it was the unrelenting pressure of European and global creditors and investors, who were withdrawing in droves from Spain, unsure whether a German-led Europe would provide the financial bazooka required.
The simple fact is that Europe some time ago ceased having a true monetary union. Although no country has withdrawn from the euro, markets have quit treating it as a trusted, common currency. As Irish economist Colm McCarthy writes: “Europe’s single financial market has been sundered through deposit flight and nation-by-nation re-matching of assets and liabilities.”
At an event jointly hosted by the Atlantic Council and Germany’s Suddeutsche Zeitung on Friday, IMF chief Christine Lagarde worried about political cycles running behind economic and market cycles, as “a movie we have watched one too many times.”
It looks something like this. Tensions escalate and, out of necessity, policy makers take action. But just enough for the danger to subside. Then the urgency is lost, momentum wanes, then the policy discourse begins to fracture, too focused on their own backyards and not enough on the big picture. And so tensions start to rise again.
But, with the passing of each cycle, we reach a higher and higher level of uncertainty, and the stakes rise. At this point, stability is at stake. Growth is at stake. In the case of Europe, the cycles are now threatening the very existence of the European project.
Markets tell politicians what they don’t want to hear. Economist Jean Pisani-Ferry says bond markets won’t be convinced until they see Europe has a banking union (Europe-wide banking supervision, deposit insurance, and crisis resolution), sufficient tax pooling (so that EU-level institutions can take charge of financial stability), and mutualization of enough of the costs of the crisis to convince markets that their bets against the euro are in vain.
Markets will continue to test Europe’s leaders until they are convinced they are committed to correcting their system’s flaws. And resisting markets is like complaining about the rain, and this one is a deluge. Global markets have a weight that no one anticipated when the Maastricht Treaty created the single currency in 1992. Since then, global financial stock has quadrupled through 2010 to $212 trillion, from $54 trillion in 1990, according to the McKinsey Global Institute. More stunning yet, Lagarde says the total amount of outstanding OTC derivatives in 2011 was $648 trillion in 2011, compared with just $12.1 trillion in 1992.
Josef Ackermann, former Deutsche Bank chief executive and now chairman of Zurich Insurance Group, said at the Atlantic Council last week that markets have done Europe a favor by forcing upon it financial and structural reforms and greater discipline. “There’s no politician who stood up and said we have to change that – not one,” he said. Without markets shifting credit spreads, he believes Greek profligacy would have gone on for some more years. “We’ve completely changed the discipline of European countries going forward, and that’s a good thing.”
Beyond that, however, he says politicians need to do much more to convince voters of Europe’s value. “A fragmented Europe has no way for self-determination,” he warned. “We will have to accept what the United States, China, India, Brazil and other countries [dictate to] us. This cannot be the future of our children.”
If Europe manages this crisis successfully, Ackermann argues, it will instill a new self-confidence that will express itself globally as Europe jointly conquers a historic challenge. Conversely, it follows that failure could dramatically reduce Europe’s influence and unity for at least a generation to come.
PHOTO: A demonstrator hangs fake Euro notes on her leg during a protest against Spain’s bailout at La Constitucion square in Malaga, southern Spain, June 10, 2012. REUTERS/Jon Nazca
New money for Charleston County schools’ literacy improvement effort stays in budget - The Post and Courier
Charleston County Superintendent Nancy McGinley typically is stoic during School Board meetings, but the prospect of eliminating new money for the districts major reform strategy moved her to immediately cover her face with her hands.
The School Board eventually decided Monday night to include her proposed $3.5 million boost for literacy improvement programs in its 2012-13 budget during the first of two scheduled readings.
I try not to react and wear my heart on my sleeve, but literacy is my heart, she said afterward. Our responsibility is to maximize learning and continue to invest in whats working, and thats why the idea of abandoning a major reform agenda was just so anti-progress.
Board members Elizabeth Moffly and Elizabeth Kandrac voted against the 2012-13 proposed general operating fund budget and against any new funds for literacy. The board made literacy its No. 1 priority in 2010, and it has invested millions since then to improve students reading.
Results have shown those efforts have been most effective in the early grades, and thats where school leaders want to expand offerings this fall.
The $357.3 million budget is about 6.9 percent bigger than the one in place for this year, and it wouldnt increase taxes for the upcoming school year.
It would, however, raise taxes the following year for everyone from homeowners to small businesses. For those who pay taxes on owner-occupied homes, tax bills would decrease in 2012-13 and rise in 2013-14 to the same level as the current year.
Moffly, who was supported by Kandrac, suggested increasing reliance on one-time money in the upcoming school year budget and cutting funds for downtown Lowcountry Tech, a program championed for years by the Charleston NAACP that will be offered on the same campus as the Charleston Charter School for Math & Science.
I dont want to see a delayed tax increase seeing as we promised taxpayers we wouldnt do that, Moffly said. I think we need to learn how to be self-sustaining.
District officials countered that they havent increased taxes in four years, and theyve done everything from furlough teachers to outsource day custodians to live within their means.
School board Chairman Chris Fraser said a lot could change between now and the budgets final reading in two weeks, and the board sent the administration a consistent message that the budget needed to be tightened.
He said hes hopeful district leaders will further reduce the proposed future tax increase. And he said he thought the board majority strongly supports growing literacy programs.
Weve set some aggressive expectations in terms of performance, and that takes an investment, he said.
Board member Brian Thomas was not present at the meeting.
Reach Diette Courrg at @Diette on Twitter or 937-5546.
Asia stocks retreat as Spain optimism fades - My Fox Boston
Source: MarketWatch
SYDNEY -- Asian shares mostly fell Tuesday, giving back much of the steep gains made in the previous session, as initial euphoria over Spain's bank bailout gave way to uncertainty over the details.With Wall Street equities tumbling overnight, Japan's Nikkei Stock Average fell 1.7 percent and South Korea's Kospi lost 1.3 percent, although Australian investors returned from a three-day weekend to push the S&P/ASX 200 index up 0.3 percent.
Japanese stocks had gained two percent Monday, while South Korean shares climbed 1.7 percent, after weekend news that Spain's banks could accept up to €100 billion (US$125 billion) in aid.
Opening later, Hong Kong's Hang Seng Index dropped 1.1 percent -- a day after it soared 2.4 percent on the Spanish boost -- and the Hang Seng China Enterprises Index lost 1.3 percent. Over on mainland China, the Shanghai Composite Index shed 0.6 percent.
European and US stock markets closed lower Monday as investors fretted about the finer points of the proposed aid package, pushing yields on Spanish bonds higher.
"Spain's bailout has opened a debate about the position of private-sector bondholders in the pecking order if Spain one day defaults. If Spain gets funds from the [European Stability Mechanism], then private bondholders are subordinate to European institutions," said Kathleen Brooks at Forex.com.
RBC Capital strategists said that the news of the bailout also raised other questions, such as the likely reaction of ratings agencies.
"The loans will add directly to the Spanish government's liabilities and so increase the debt-to-GDP ratio by around 10 percent, leaving further downgrades likely," they said.
Global growth concerns, meanwhile, sent benchmark US crude futures below $83 a barrel for the first time since October. As a result, energy firms were among the worst performers in Japan on Tuesday.
European concerns sent the euro falling below the ¥99 mark after spending much of the previous Japanese stock session above ¥100, with the move hurting exporters with large EU exposure.
The pain was felt in Seoul as well, with LG Electronics Inc. falling 2.3 percent and Samsung Electronics Co. losing 1.2 percent.
Large miners fell in Australia, reversing gains seen at the end of last week, with BHP Billiton Ltd. down 1.1 percent and Rio Tinto Ltd. falling 1.4 percent.
However, shares of Qantas Airways Ltd. jumped 6.9 percent after an Australian Financial Review report that the airline is preparing efforts to defend against a possible hostile takeover.
Read More: Asia stocks retreat as Spain optimism fades
Stocks slip as Spain hopes fade - Sydney Morning Herald
US stocks fell, while the euro and commodities erased early rallies, as optimism over Spain's bailout plan gave way to skepticism that the rescue will succeed in taming the European debt crisis. Treasuries advanced.
The Standard & Poor's 500 Index lost 0.8 per cent to 1,314.89 at 3:18 p.m. in New York after climbing as much as 0.7 per cent in the first minutes of trading. The euro weakened 0.2 per cent to $US1.2494 after surging 1.2 per cent. Oil declined 2.7 per cent to $US81.86 a barrel, reversing a 3 per cent jump, and the S&P GSCI Index of commodities slid 1.4 per cent. Ten-year Treasury note yields decreased four basis points to 1.59 per cent after surging nine basis points earlier.
Spain asked euro-region governments over the weekend for as much as 100 billion euros ($US126 billion) to help shore up its banking system. Spanish and Italian bonds rallied as European markets opened, only to erase the gains as costs of default swaps to protect Spanish government debt rose. Spain's benchmark stock index reversed an almost 6 per cent gain.
"The Spanish deal is another Band-Aid," Matt McCormick, who helps oversee $US6.2 billion at Bahl & Gaynor Inc. in Cincinnati, said in a telephone interview. "Many investors are viewing this with skepticism. The problem is not going to be fixed by this amount. It's not a solution, and people know the difference. Expect more volatility not less."
Lingering Crisis
European officials have failed to control the debt crisis that started in Greece at the end of 2009 and has now required a bailout of the euro area's fourth-largest economy. Concern about a deepening of the region's turmoil almost drove the S&P 500 into a bear market last year as the index tumbled more than 19 per cent between April 29 and Oct. 3. Since then, the index surged as much as 29 per cent to a four-year high in April, then lost 6.6 per cent through last week.
Financial, commodity and technology shares fell at least 0.6 per cent to lead losses among the 10 main groups in the S&P 500, while telephone and utility companies gained. Hewlett- Packard Co., Bank of America Corp., Caterpillar Inc. and Microsoft Corp. lost more than 1.7 per cent for the biggest declines in the Dow Jones Industrial Average.
Nvidia Corp. rallied 2.3 per cent after Apple Inc. said its latest MacBook Pro computer uses a new Nvidia graphics chip. Apple slipped 0.9 per cent, erasing a 1.4 per cent rally, as it introduced new computers at its developers conference.
Thirty-year US bonds rose for the first time in six sessions, sending yields down three basis points to 2.71 per cent. The rate is up from a record low of 2.5089 per cent on June 1.
The average yield on bonds issued by the Group of Seven nations has fallen to 1.120 per cent from 3 per cent in 2007, Bank of America Merrill Lynch index data show. Germany's two-year note yield fell below zero for the first time on June 1, while Switzerland's has been negative since April 24, meaning investors are paying for the right to lend the nation money.
European Shares
The Stoxx Europe 600 Index ended the session little changed after increasing as much as 1.9 per cent. Banco Santander SA fell 0.3 per cent, erasing a gain of as much as 9.7 per cent. Bankinter SA rose 0.5 per cent and Banco Bilbao Vizcaya Argentaria SA was little changed after each jumped more than 10 per cent earlier.
The IBEX-35 Index of Spanish stocks slipped 0.5 per cent, reversing a 5.9 per cent rally. Greece's ASE Index rose 0.8 per cent, paring an earlier 4.5 per cent jump.
France's CAC 40 Index lost 0.3 per cent The benchmark gauge surged as much as 2.3 per cent earlier as industrial production increased 1.5 per cent in April. Economists had predicted a 0.1 per cent decline.
The Dollar Index was little changed after earlier slumping as much as 1 per cent. Norway's krone strengthened against 15 of 16 major peers, climbing 0.2 per cent versus the dollar, after data showed consumer prices rose more than estimated last month.
Spain's two-year yield rose 28 basis points to 4.57 per cent, after falling to as low as 3.94 per cent, on concern investors holding the securities may rank behind official creditors in seniority following the bailout. Italy's 10-year yield jumped 26 basis points to 6.03 per cent, the highest since January.
"We've seen these dominoes fall: Greece, Ireland, Portugal, now Spain is getting on the dole and the next big one to be watching is Italy," Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, told Bloomberg Television. "And when Italy comes into pressure, I'm suggesting we have to be careful with France too."
Commodities
Nickel, sugar and copper rose at least 1.7 per cent to lead gains among 11 of 24 commodities in the S&P GSCI Index, while natural gas and oil fell the most.
Goldman Sachs Group Inc. said today it expects a 29 per cent return for commodities over the next 12 months. Gains for raw materials will be led by a 41 per cent jump in energy and 23 per cent gain in industrial metals, Goldman Sachs said.
The MSCI Emerging Markets Index rose 0.9 per cent. The Hang Seng China Enterprises Index of mainland companies climbed 2.4 per cent, the most in two months, after China's exports grew last month at more than double the pace analysts estimated and crude oil imports rose to a record. Overseas shipments climbed 15.3 per cent from a year earlier, exceeding all 29 estimates in a Bloomberg News survey. Benchmark gauges in South Korea, Taiwan, Thailand and Indonesia increased at least 1 per cent.
India's Sensex slipped 0.3 per cent, reversing a 1.1 per cent gain after S&P said the country may lose its investment-grade rating.
FMCG companies like ITC, HUL, Nestle and pharmaceutical stocks losing favour - Economic Times
Fund managers are cutting or limiting exposure to these shares as they feel there is very little scope for further gains in many of them despite steady earnings prospects.
Among consumer goods, Hindustan Unilever is trading 26 times 2012-13 estimated earnings. ITC is trading at 22 times, while Nestle commands the highest valuation of 30 times 2012-13 earnings.
"Even on 2013-14 estimates, the valuations look expensive and have a large premium over Nifty. We have gradually started trimming positions in these stocks," said Saibal Ghosh, chief investment officer of Aegon Religare Life Insurance.
Benchmark indices, Sensex and Nifty, are trading at 12-13 times 2012-13 estimated earnings.
BSE's FMCG index has gained 17% so far this year, while BSE Healthcare index has risen 12% in the period. In comparison, Sensex has advanced 7%.
Investors have stocked up on shares of consumer goods and pharma companies, the so-called defensives, because in uncertain conditions their earnings are known to be relatively steady irrespective of the economic vagaries. These stocks are usually investors' top picks when earnings uncertainty is the highest such as the current situations.
"Some stocks among both FMCG and pharmaceuticals are ridiculously expensive. We like the earnings growth story of the sector but the valuations are such that we have become selective," said Anand Shah, chief investment officer of BNP Paribas Mutual Fund.
Echoing Shah, Raamdeo Agrawal, joint MD at Motilal Oswal Financial Services said, "Valuations of FMCG stocks are definitely stretched, and are at the higher end of their valuation range over the last decade," he said.
Analysts said higher ownership by institutional investors in these stocks has restricted the scope for further upsides. As a result, many investors are dipping their toes in sectors such as banks, which have underperformed the market, because of cheaper valuations and lower institutional ownership.
"Rate-sensitive sectors make sense for now, but you can't be overly positive on those stocks," Ghosh said. If the market continues to be choppy, then the defensive stocks will still have a bias," he said.
Analysts are more cheerful about the prospects of consumer companies overdrug makers because of regulatory uncertainty. Pharma companies face the risk of a significant fall in their earnings if the new drug pricing policy is implemented. GlaxoSmithKline, Ranbaxy and Pfizer could see their profitability slide by 10-24% by 2014 in this event, said a report by Edelweiss.
"While clarity on the price control mechanism is yet to emerge, constant intervention by the Supreme Court should ensure implementation of the new policy soon. While the exact impact will be known only after finalisation of the policy, prima facie, companies with limited India exposure are likely to be least affected by any price-control mechanism," the report said, adding that Cipla and Cadilla will also be heavily affected, followed by Sun Pharma, Lupin and Dr Reddy's.
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