Les Echos : Bouygues Telecom - Orange : quatre acteurs condamnés à s’entendre

Tous les opérateurs ont intérêt à éliminer l’un d’entre eux.

Je te tiens, tu me tiens, par la barbichette »: c’est le petit jeu auquel se livrent les télécoms depuis qu’a été annoncé l’hypothétique mariage d’Orange avec Bouygues Telecom. Car c’est bien l’ensemble du marché qui est concerné par une telle opération. D’abord parce que tous les opérateurs ont intérêt à éliminer l’un d’entre eux, car cela signifierait une baisse de l’intensité concurrentielle. Ensuite parce que, pour obtenir le feu vert de l’Autorité de la concurrence, Orange et Bouygues Telecom vont devoir vendre des actifs (clients, fréquences, réseau, boutiques...) à leurs concurrents. Or le vivier d’acheteurs est étroit : il se résume surtout à Free et à SFR.
En réalité, les parties sont condamnées à s’entendre. Stéphane Richard, le PDG d’Orange, n’a pas le droit d’échouer sur une opération d’aussi grande ampleur. « C’est une question de fierté pour lui, qui s’est énormément engagé. Et depuis des années il dit qu’un un marché à trois acteurs est préférable », estime un protagoniste. La partie n’est pas facile à jouer pour Orange, car s’il achète Bouygues Telecom 10 milliards, il va falloir revendre à un bon prix les actifs à céder, sinon il y aura perte de valeur. Si la transaction se fait, l’opérateur historique pourrait toutefois passer à l’étape supérieure, celle de la consolidation européenne.
SFR a tout intérêt à récupérer des clients dans le mobile après l’hémorragie subie depuis le rachat par Numericable. Il en a regagné certains fin 2015, mais à coups de promotions très agressives. L’apaisement du marché consécutif au passage à trois opérateurs lui serait bénéfique. Et tout ça pour à peine 2 milliards d’euros, alors qu’il était prêt à en dépenser dix l’an dernier, pour le même résultat ou presque...
Free a toujours fait mine de ne pas être le plus intéressé par la consolidation. Le rôle du « maverick » lui va comme un gant, et il pourrait le jouer pendant quelques années, alors qu’il continue à déployer son réseau. Mais il pourrait aller plus vite s’il récupérait les antennes de Bouygues Telecom. Il pourrait surtout enrichir son portefeuille de fréquences basses, essentielles pour augmenter sa couverture en 4G.
Enfin, pour Martin Bouygues, c’est un peu la solution de la dernière chance. « Qu’est-ce qu’il lui reste après avoir raté le rachat de SFR en 2014 et refusé le chèque de 10 milliards de Patrick Drahi, le patron d’Altice (Numericable-SFR) ? », pointe ce même protagoniste. On aurait très bien pu imaginer un rapprochement Bouygues Telecom-Free, cela aurait même été plus logique entre le numéro trois et le numéro quatre du marché. Mais Martin Bouygues et Xavier Niel ne s’adressent pas la parole...
Enfin, difficile pour Martin Bouygues de faire croire que Bouygues Telecom peut survivre seul sans s’adosser à un grand groupe, en cas d’échec des négociations. Car c’est lui-même qui est allé chercher Stéphane Richard pour parler mariage en fin d’année passée. Le retard de l’opérateur dans la fibre est en outre un vrai handicap pour son avenir dans une industrie en pleine convergence. Dans ce contexte, la solution Orange représente une belle sortie par le haut pour l’industriel.

>>> Asian Update

Asian Market Update: Nikkei225 soars as another Japan GDP contraction adds to the case for deeper easing; China trade components disappoint


***Economic Data***
- (CN) CHINA JAN TRADE BALANCE (CNY TERMS): 406B V 389BE; EXPORTS Y/Y: -6.6% V +3.6%E; IMPORTS Y/Y: -14.4% V 1.8%E; Overall trade volume CNY1.88T, -9.8% y/y; USD terms: Trade Balance: $63.3B v $60.6Be
- (JP) JAPAN Q4 PRELIMINARY GDP Q/Q: -0.4% V -0.2%E; ANNUALIZED GDP: -1.4% V -0.8%E; biggest contraction in a year Q/Q and annualized
- (JP) JAPAN DEC FINAL INDUSTRIAL PRODUCTION M/M: -1.7% V -1.4% PRELIM; Y/Y: -1.9% V -1.6% PRELIM
- (AU) AUSTRALIA JAN NEW MOTOR VEHICLE SALES M/M: +0.5% V -0.5% PRIOR; Y/Y: 5.1% V 2.2% PRIOR
- (NZ) NEW ZEALAND JAN PERFORMANCE OF SERVICES INDEX: 55.4 V 58.5 PRIOR; 2nd straight month of decline
- (KR) South Korea DEC "L" Money Supply: -0.4% v 0.4% prior; M2 Money Supply: -0.1% (first decline in over a year) v 0.4% prior
- (KR) South Korea Jan Bank Lending to Households (KRW): 641T v 639T prior
- (KR) SOUTH KOREA JAN EXPORT PRICE INDEX M/M: 0.6% V0.3% PRIOR; Y/Y: -1.3% V -6.2% PRIOR
- (UK) UK FEB RIGHTMOVE HOUSE PRICES M/M: 2.9% V 0.5% PRIOR; Y/Y 7.3% V 6.5% PRIOR

***Index Snapshot (as of 04:30 GMT)***
- Nikkei225 +6.7%, S&P/ASX +1.3%, Kospi +1.3%, Shanghai Composite -1.6%, Hang Seng +2.7%, Feb S&P500 +0.9% at 1,874

***Commodities/Fixed Income***
- Apr gold -1.6% at $1,219/oz, Mar crude oil -0.9% at $29.19/brl, Mar copper +1.8% at $2.07/lb
- (CN) PBOC SETS YUAN MID POINT AT 6.5118 V 6.5314 PRIOR; 21st straight firmer setting relative to Close; Strongest Yuan setting since Jan 4th
- GLD: SPDR Gold Trust ETF daily holdings fall 5.0 tonnes to 711.0 tonnes
- SLV: iShares Silver Trust ETF daily holdings rise to 9,710 tonnes from 9,591 tonnes; highest since Jan 20th; first rise since Nov 13th
- FCG.NZ: Reports Jan Australia milk collection -5% y/y; NZ milk collection -2% y/y
- (CN) PBOC to inject CNY10B in 7-day reverse repos
- (JP) BOJ offers to buy ¥400B in 1-3yr JGBs, ¥420B in 3-5yr JGBs, ¥450B in 5-10yr JGBs

***Market Focal Points/FX***
- Asian equity markets are generally higher, tracking a sharp rally on Wall st on Friday. Nikkei225 is soaring with about a 7% gain, boosted by weaker Yen, as disappointing Q4 GDP lifted the outlook for more policy easing from the central bank. USD/JPY was up some 80pips heading into Tokyo close, testing ¥114 handle. Shanghai Composite has returned from a week-long break, and after opening down by nearly 3% has since cut that decline in half. In other USD majors, AUD/USD is up 70pips around 0.7170, NZD/USD was up 50pips above 0.6660, and EUR/USD down about 20pips around 1.1220.

- Japan Q4 GDP registered its biggest contraction in a year - both q/q and annualized - at -0.4% and -1.4%. Just about every component was soft: Exports shrank -0.9% v 2.6% final Q3 GDP, private consumption was down -0.8% v -0.6%e, v 0.4% prior, though Capex rose 1.4% v -0.2%e, v 0.7% final Q3 GDP. Cabinet officials cheered strong investment and wrote off soft consumption to warm weather diminishing demand for winter items. Some analysts also zeroed in on GDP deflator of 1.5% v 1.6%e flashing a warning of slowing inflationary trend. Japan PM Abe spoke throughout the session - initially noting the impact of further sales tax hikes on consumers will have to be considered and then adding that the govt is prepared to take appropriate action on forex to address excessive volatility - comments which sent JPY toward session lows above 113.80. Separately, BOJ Gov Kuroda said he would not expect bank deposit rates to go negative, while Econ Min Ishihara reiterated Japan's economic fundamentals are firm. Also of note, a report in FT citing Japan Investment Trusts Association (JITA) chairman said Japan investment industry is seeking an exemption from BOJ's negative rates policy, helping Financials sector to the top of Tokyo's performers.

- China returned from holiday break with a disappointing set of trade data. While trade surplus topped expectations in both CNY and USD terms, import and export components were much weaker than expected. In CNY, Imports fell -14.4% V 1.8%E and exports fell -6.6% V +3.6%E. In USD terms, Exports Y/Y were -11.2% v -2.0%e and imports -18.8% v -3.9%e. Iron ore imports were up 4.6% y/y, but crude oil and coal were down in mid-high single digits. Some analysts attributed disappointing reports to the timing around the Lunar New Year holiday. Separately in China, PBoC Gov Zhou spoke with the press over the weekend, stating there is no basis for continued CNY depreciation and also called China balance of payments as positive, capital outflows as normal, and the exchange rate basically stable against a basket. Despite speculation of more weakening moves on Yuan currency by the PBoC, today's fix was actually surprisingly stronger. China commerce ministry also put out a report of Spring Festival holiday sales rising 11% y/y to CNY754B, similar to 11% rate of growth in 2015.

- Stateside, the death of US Supreme Court justice Scalia - one of the most conservative voices in the court - has sparked off a contested exchange between the two parties. Democrat leaders and the White House expect a nomination to take place before the end of Obama's term this year, while Republican leadership calls for the vacancy to be filled when a new President is elected.

***Equities***
US equities / ADRs:
- BP: Reaches agreement with state-owned Oman Oil Co to expand exploration and production sharing agreement of the Khazzan natural gas field - financial press

Notable Asia movers:
- AMC.AU: Reports H1 Net A$305.5M v A$321.3M y/y; Rev A$4.55B v A$5.20B y/y; +9.6%
- NCM.AU: Reports H1 Net $81M v $200M y/y, Rev $1.55B v $1.78B y/y; -0.6%
- BEN.AU: Reports H1 NPAT A$209M v A$227M y/y, Net interest income A$587M v A$604M y/y; -4.0%
- RRL.AU: Newmont Mining thought to be getting a lot of interest for its A$268M stake in Regis - AFR; -6.5%
- AZJ.AU: Reports H1 NPAT A$237M v A$308M y/y, Rev A$1.76B v A$2.08B y/y; -11.7%

>>> Canal+ et BeIn Sport, cela se précise


Les discussions sur un possible rapprochement entre Canal+ et BeIN Sports ont semblent-ils pris une tournure décisive. En effet, selon Le Monde, les deux interlocuteurs sembleraient proches d'un accord qui prendrait la forme d'un accord de distribution exclusive, et non pas d'un rachat pur et simple de la chaîne qatari par le groupe Vivendi, propriétaire de Canal+. Inquiet de la perspective de voir le nouveau duo tiré les prix des droits TV vers le bas, les instances du football professionnel français auraient été rassurées par Vincent Bolloré lui-même, souligne le quotidien, qui outre "un gros numéro de charme" a également mis en avant l'arrivée probable d'un nouveau poids lourd dans la compétition sur les droits TV : Patrick Drahi, patron du groupe Altice, qui vient de s'offrir les droits de la Premier League de football pour pas moins de 300 millions d'euros. L'inconnue de taille, pour l'heure, est également l'attitude de l'Autorité de la concurrence qui veille au grain. Déjà, le 10 février dernier, L'Equipe révélait que l'instance s'apprêtait à lancer une consultation du marché avec toutes les parties prenantes, preuve s'il en est que bons nombres d'incertitudes demeurent

>>> Barron's Summary: Positive on DWN.DE, CUB, ESL, KEY, BMY; Cautious

Barron's Saturday summary: Positive on DWN.DE, CUB, ESL, KEY, BMY; Cautious on VIA, LNKD, JPM, RACE, CS 

Cover story: The rise of Donald Trump and Bernie Sanders in the presidential race "could be one more reason why stock markets are under pressure and could remain so for awhile"; Investors, who are generally more comfortable with establishment candidates, have reason to be nervous about the campaign's direction. 

Tech Trader: Amid the recent rout in the tech sector, mega-cap companies such as AAPL, CSCO, GOOGL, and FB remain powerful in their markets, while smaller players such as QLIK, DATA, and LNKD are feeling the pain, partly because of high valuations and expectations. 

Trader: When the Chinese market gets back in the swing of things next week after the Asian New Year break, there could be volatility if growth slowdown fears return; Cautious on VIA: Nothing much is likely to change at the company as long as Sumner Redstone remains a presence, and long-term oriented investors who find the shares attractive because they're undervalued may have to wait some time for a payoff; Cautious on LNKD: Amid skepticism and worry in the tech market, company's growth is likely to keep decelerating, shares remain overvalued, and margins are declining. 

Profile: Mammen Chally, lead manager, Hartford Core Equity fund, looks for three traits in a company: improving quality via capital structure or competitive situation; business momentum; and lower-than-average valuation (top 10 holdings: GOOGL, MSFT, CVS, JPM, COST, MDLZ, AAPL, AGN, MO, PNC). 

Interview: Don Morgan, chief investment officer at Brigade Capital, says the risk/return ratio in the bond market is favorable relative to other asset classes, and that high-yield bond prices could rise sharply (picks: Albertson's 7.45% due 2029, AMD 7.75% due 2020, Consol Energy 5.875% due 2022, Savine Pass (Cheniere) 5.75% due 2024, Puerto Rico 5% GO due 2041). Features: 1) Positive on BMY: Company's cancer-fighting medicine Opdivo has earned FDA approval and has the potential for $8-9B in annual sales, making the pharma giant's shares a good bet for long-term investors; 2) Positive on KEY: Shares of bank look cheap by historical standards, and its acquisition of FNFG could prove more lucrative than investors expect; firm's 2.9% dividend payout could go up this year, and shares could return 30% or more; 3) Positive on CORE: Wholesale distributor is benefiting as the stores it serves see more foot traffic, but its customers remain vulnerable to growing competition from WMT and DG, and to the severity of tobacco-sale restrictions. 

Small Caps: Positive on CUB: Shares of the maker of fare-collections systems for transit services have fallen, but the resultant selloff looks like an overreaction, and a buying opportunity for investors; Positive on ESL: Selloff following a poor earnings report in February offers an opening for investors; company has an attractive franchise, and an activist investor could take interest. 

Follow-Up: Cautious on JPM: Chief Jamie Dimon's decision to buy shares gave them a boost, but investors in the banking sector still worry about potential problems in the global economy and trouble with European firms; Cautious on CS: Despite a plunge in shares, bargain hunters should take a pass and seek safer firms that trade cheaply; the bank continues to face heat from regulators related to tax evaders; Cautious on RACE: Shares are selling far below their IPO price, and are likely to stay there until the bull market returns. 

European Trader: "Bloodletting in the European banking sector may not be over despite last week's brutal selloff," and uncertainty remains amid negative interest rates and other issues in the eurozone; Positive on Deutsche Wohnen: German property stock is worth a look for investors. 

Asian Trader: Some investors wonder if all the bad news in Thailand is already reflected in the market, paving the way for bargain hunting, but that view is premature. 

Emerging Markets: Venezuela's "political disarray and shortage of dollars have put its bonds in a tinderbox," and though default may not be imminent, many observers see it as an eventuality. Commodities: Orange juice is no longer the consumer staple it once was, and a case can be made that its futures market "will go the way of the dodo." 

CEO Spotlight: UA founder and chief executive Kevin Plank says the "athleisure" trend is here to stay, and that the company plans to expand internationally to ease its dependence on North America and gain ground on rival NKE.

>>> AGEAS has EUR 3bn available for acquisitions

AGEAS has EUR 3bn available for acquisitions 

AGEAS (EBR:AGS), the Belgian insurer, is interested in acquisitions and has about EUR 3bn at its disposal. However, the company is not actively pursuing M&A in the Belgian financial services sector at present, AGEAS CEO Bart de Smet indicated in an interview about his work and life in De Tijd.

AGEAS would look at every company in the financial services sector in Belgium that comes onto the M&A market, De Smet said.

Asked specifically about a potential acquisition of Belgian financial services company Ethias, De Smet commented that AGEAS will be interested if Ethias is put up for sale. However, the company is not available on the market, De Smet added.

Similarly, AGEAS would look into an acquisition of Belgian state-owned bank and insurer Belfius' insurance subsidiary, De Smet said. However, the company is not yet for sale, the AGEAS CEO noted.

Investment bankers regularly approach AGEAS with M&A opportunities, as the company has about EUR 3bn at its disposal, De Smet said.

The Greek market in particular offers very interesting opportunities, De Smet noted, given the very low valuation of insurance companies there.

De Tijd

FT : Shareholders question dividend policy of oil majors

Shareholders question dividend policy of oil majors

Large international oil companies are facing disagreements among their shareholders over whether they should maintain their dividend payments in the face of the plunge in crude prices.
Companies such as Royal Dutch Shell and Chevron insist that they will keep their dividends unchanged, even though they are failing to cover payments from cash flows.

Some investors are warning the big European oil groups against cutting dividends amid fears it could provoke an exodus of shareholders who have become used to high payouts against a backdrop of low global interest rates.
“Many investors rely on the big oil groups for dividends as they are some of the biggest payers. Cuts would not be welcomed by investors,” said Matthew Beesley, global head of equity at Henderson and an investor in BP, Total and BG, which is soon to become part of Royal Dutch Shell.
Shares in Shell and BP offer yields of more than 8 per cent, putting them among the top 10 payers in the FTSE 100.
ExxonMobil, Chevron, Shell, BP and Total, the five largest western oil companies, paid out a total of about $46bn in dividends last year.
For big oil companies, cutting dividends would raise fundamental questions about their proposition to investors. They have mostly been increasing their output only slowly, if at all, and in the view of some analysts are too exposed to relatively high-cost assets such as deepwater oilfields and liquefied natural gas projects.
“For big oil CEOs, it would always be a difficult call to cut the dividend,” said Eric Oudenot of the Boston Consulting Group. “It could be the last decision they would make in that job.”
Eni of Italy cut its dividend last year, and has been followed recently by US exploration and production companies including ConocoPhillips and Anadarko Petroleum as they seek to keep borrowings under control while investing — albeit at lower levels — in future production.
Charles Whall, of Investec Asset Management, which holds shares in BP, Shell and Total, said the European companies were not like the US groups that had cut payouts. BP and Shell had stronger balance sheets and unlike the US production companies they had refining divisions that were not hurt by the fall in crude prices, he said.
“The financial flexibility the big oil majors have means they should be able to maintain their dividends. Only a multiyear recession might force them to cut.”

Large US institutional investors are increasingly sceptical about companies’ enthusiasm for distributing cash.
One large shareholder in the oil majors said: “Outside of Exxon, I don’t think any upstream company should pay a dividend and I don’t think any European major is in a position to pay a dividend in the next two or three.”
The investor added: “Companies are borrowing money to pay a dividend while they are not investing enough to maintain production and that is not a sustainable model.”
US investors have also been raising concerns about share buybacks.
Bess Joffe, head of corporate governance at TIAA-CREF, which is a Top 20 shareholder at Exxon and Chevron, and also has significant stakes in the European oil majors, said her organisation would be paying close attention to executive pay, to make sure that managers were not artificially keeping the share price up — for example through share buybacks — so as to keep their own bonuses high at the expense of long-term investment.
All of the large oil companies have suspended share buyback programmes, although Exxon was making purchases in the fourth quarter of last year.

WSJ : China Markets Brace for Wild Swings in Year of the Monkey

China Markets Brace for Wild Swings in Year of the Monkey

After recent global market turmoil, analysts say Chinese stocks unlikely to emerge unscathed from Lunar New Year holiday

HONG KONG—Investors in Chinese stocks are facing a tumultuous return to action Monday after a weeklong holiday in mainland markets for the Lunar New Year shielded them from the global market turmoil.

Chinese shares are already among the world’s worst-performing this year, with the main benchmark Shanghai Composite Index down 21.9% at 2763.49. The market has almost halved in value since its peak last June, dropping some 47% since then.

But analysts say both the Shanghai and Shenzhen stock exchanges could face further sharp losses at Monday’s open, as they catch up with the past week’s mostly gloomy global markets.

Japanese stocks sank 11% last week and the yen shot up, defying a recent move by the Bank of Japan to introduce negative interest rates, partly designed to keep the local currency weaker and help Japanese exporters. Markets in Europe and the U.S. whipsawed as investors lost faith in banking stocks, while Australian shares entered bear market territory, having fallen more than 20% since their most recent peak in late April.

Meanwhile, Chinese stocks trading in Hong Kong lost 6.8% and the city’s benchmark Hang Seng Index fell 5% in the two days markets were open here at the end of last week.

“There will be an incredible amount of strong psychological pessimism in China this week,” said Richard Kang, co-founder and former chief investment officer of New York-based Emerging Global Advisors LLC. “[Global assets] are going up and down together, it’s very macro-driven right now.”

China was at the epicenter of market mayhem at the start of 2016, as shares fell sharply and the country’s currency, the yuan, dipped in value.

Before last summer, Chinese market slumps had little impact beyond the country’s borders, mainly because stock-buying there remains largely driven by local retail investors. Foreign investors still account for a small amount of stock ownership in China.

But the Chinese selloff early this year was met with a confused response from Beijing policy makers, who flip-flopped on new measures to stem the market bleeding and were criticized for failing to communicate clearly a change in currency strategy. That contributed to a perception among global investors that Chinese leaders have lost their grip on the country’s economy.

The nervousness in markets around the world has now taken on new dimensions. Central banks are struggling to boost growth, despite the Bank of Japan joining the European Central Bank in setting negative interest rates for the first time. Bank profits face a squeeze as the margin between what they pay out on deposits and what they make on lending narrows. Low oil prices are also continuing to weigh on energy stocks.

Chinese markets seem unlikely to escape the prevailing gloom, analysts say. “We’re in a time now where global investors are hypersensitive to any reasons to sell,” said Louis Lu, fund manager at CSOP Asset Management in New York.

China’s mainland market was relatively stable before the holiday break, as the central bank worked harder than usual to maintain liquidity. The Shanghai benchmark rose 1% in the week ending Feb. 5.

Already cheap valuations for stocks there could limit further downside, say some analysts. Blue-chips trading on the mainland are already among the cheapest in the world based on their price relative to their expected future earnings, even less expensive than blue-chips trading in Russia, where the economy is in recession.

A rising Japanese yen could also give China’s central bank more impetus to guide the yuan stronger, a potential balm for equity investors. The yuan strengthened about 1% against the U.S. dollar last week in the freely-traded offshore market, although the domestic market for the currency was closed. Beijing signaled last year that the yuan should move in line with a basket of currencies, not just the greenback.

Still, there is an Achilles’ heel for investors in China: Analysts say capital outflows are increasing, and a slowing domestic economy could warrant another sharp devaluation in the Chinese yuan before year-end.

Over the holiday break, China said its foreign-currency reserves plunged for the third consecutive month in January to $3.23 trillion.

Fresh economic releases this week, including Chinese trade, inflation and new loans data, are expected to deepen concerns that Chinese growth is deteriorating. Exports likely dropped 2.4% year-over-year in January in dollar terms—steeper than a 1.4% decline in December—according to economists’ forecasts of data due Monday. The trade surplus may have widened slightly, but analysts say that is unlikely to have offset capital outflows.

Investors say Chinese authorities will likely hold back on fresh monetary easing, which would speed up capital outflows now, although government funds could buy up select shares to support the market directly, as they have done in the past.

FT : The toxic twins of European finance return

The toxic twins of European finance return

The markets are saying they are losing faith in Draghi’s pledge to do ‘whatever it takes’

The rout in European financial markets last week was a wat­ershed event. What we witnessed was not necessarily the beginnings of a bear market in equities or an uncertain harbinger of a future recession. What we saw — at least here in Europe — is the return of the financial crisis.
Version 2.0 of the eurozone crisis may look less frightening than the original in some respects but it is worse in others. The bond yields are not quite as high as they were then. The eurozone now has a rescue umbrella in place. The banks have lower levels of leverage.

But the banking system has not been cleaned up, there are plenty of zombie lenders around and in contrast to 2010 we are in a deflationary environment. The European Central Bank has missed its inflation target for four years and is very likely to miss it for years to come.
The markets are sending us four specific messages. The first and most imp­ortant is the return of the toxic twins: the interaction between banks and their sovereigns. Last week’s crash in bank share prices coincided with an increase in bond yields in the eurozone’s periphery. The pattern is similar to what happened during 2010-12. The sovereign bond yields have not quite reached the same dizzy heights, though Portugal’s 10-year yields are almost 4 per cent.
The combination of high bond yields, expansionary fiscal policies, persistently high public and private sector debt and low growth rates is clearly un­sustainable. Italy’s position may be better than Portugal’s but it is still not sustainable. Italian 10-year yields rose to more than 1.7 per cent; German yields are a little over 0.2 per cent. The gap, or the spread, is the metric of stress in the system, which is rising again.
The financial markets are telling us that they are losing faith in Mario Draghi’s pledge of 2012 when he promised to do “whatever it takes” to defend the member states of the eurozone against a speculative attack. With this promise the ECB president ended the first phase of the eurozone crisis, but did so at a cost. The urgency to resolve the underlying structural problems suddenly disappeared.
The second message is that Europe’s banking union has failed. The banking union the EU ended up with was a foul compromise: joint bank supervision and a joint resolution regime, but no deposit insurance and no government backstop to bail out failing lenders.
It is no coincidence that bank share prices collapsed just as the European Bank Recovery and Resolution Directive entered into full force. The directive sets out a common bail-in mechanism for a failing bank. Italy applied this law last year in the bailout of four regional banks, causing losses to bondholders. Investors in other banks fear that they, too, may be bailed in. One of the reasons why investors in Deutsche Bank began to panic last week has been the large amount of contingent convertible bonds (cocos) issued by the bank. If the bank were to run into trouble these would convert into equities, and be immediately wiped out if a resolution procedure were to kick in.
The third message is the market ex­pectations of future inflation have suffered a permanent shift. The ECB is taking market-based estimates of future inflation seriously — perhaps too seriously. Its favourite metric is an inflation rate for a horizon of five to 10 years away from today. That measure last week fell to its all-time low of just over 1.4 per cent. It is telling us that the markets no longer believe that the ECB will hit its inflation target of less than 2 per cent even in the long run.
The fourth message is that the markets fear negative interest rates. This is because the vast majority of Europe’s 6,000 banks are old-fashioned savings and loans: they take in deposits and lend them out. The banks would normally adjust the rates they offer to their savers in line with the rates the ECB charges them, maintaining a profit margin between the two. But if the ECB imposes a negative rate on the banks, this no longer works. If the banks im­posed negative rates on savings accounts, small savers would take their money and run. The banks could, of course, reduce their reserves at the central bank and lend the money instead. Or they could invest in risky securities. But that prospect is not necessarily reassuring to bank shareholders either, especially if they do not see good lending and investment opportunities.
Looking back, the cardinal error committed by the European authorities was the failure in 2008 to clean up their banking system after the collapse of Lehman Brothers. This was the original sin. Many other mistakes subsequently compounded the problem: pro-cyclical fiscal austerity, the ECB’s multiple policy failures and the failure to create a proper banking union. It is interesting that every single one of these decisions was ultimately the result of pressure brought by German policymakers.

FT : Market turmoil causes sharp losses at US hedge funds

Market turmoil causes sharp losses at US hedge funds

Some of the largest and well known US hedge funds have suffered further sharp losses from this year’s rout in equities and commodities, raising the prospect that investors pull more money from the industry.
Popular bets in equities, currencies and commodities have backfired on a number of hedge funds this year, confounding some of the industry’s highest profile investors such as Bill Ackman’s Pershing Square, Glenview Capital run by Larry Robbins, while Carl Icahn has been hit hard by the slumping energy sector.

The current market turmoil follows poor results for many hedge funds during 2015, increasing worries for managers about rising redemptions, a process that intensifies further selling of assets like equities.
“It has been a challenging short-term period for many hedge fund managers,” said Adam Blitz, chief executive of Evanston Capital Management. “High levels of market volatility, and in some cases illiquidity, have caused the prices of many individual securities to become divorced from their fundamental value.”
One of the biggest losers since the start of the year has been Mr Ackman, adding a further 18.6 per cent loss as of February 9, to the 20.5 per cent his Pershing Square hedge fund dropped last year. Shares in Pershing Square Holdings, a publicly traded vehicle, have tumbled more than 20 per cent this year, a decline that mirrors the drop for all of 2015.
Mr Robbins’s Glenview Capital recorded losses of more than 13 per cent in January, while Senvest Management’s fund was down 12.6 per cent in the same month. It sustained losses of 17 per cent last year.
While many of these losses remain on paper, as the hedge funds have not yet exited their positions, they will require a significant rebound in asset prices to return them to profit.
Equities that at one point were popular with hedge funds, such as SunEdison, the renewable energy company, and Community Health Systems, the healthcare group, have spurred industry losses, as investors dumped holdings.
Activists such as Mr Ackman are having particular difficulty, as they are often concentrated on certain stocks, such as Valeant, the drugs company, and not heavily hedged.
Icahn Enterprises, Carl Icahn’s publicly traded investment vehicle, has slid to its lowest level in three years, after the veteran activist made a string of losing bets on energy companies, including Chesapeake Energy and Cheniere Energy.
Hedge funds that focus on predicting the direction of interest rates and currencies have seen one of their biggest trades reverse as the Japanese yen has risen sharply against the US dollar since the start of this year.
In contrast to losses suffered by activists, global macro funds have been challenged by an inability to anticipate the recent market sell-off.
Hedge funds such as Brevan Howard had already been wrongfooted by the market reaction to the European Central Bank’s pronouncements late last year — pushing its flagship fund to its second consecutive annual loss.
It has now been forced to reassess its once strong belief that the Bank of Japan would succeed in driving down the value of the yen.