>>> Asian Update

Asian Market Update: China official PMIs slow further; AUD hits new lows on sliding building permits


***Economic Data***
- (CN) CHINA OCT NON-MANUFACTURING PMI: 53.8 V 54.0 PRIOR (9-month low; 2nd decline)
- (CN) CHINA OFFICIAL OCT MANUFACTURING PMI: 50.8 V 51.2E (5-MONTH LOW; 3rd decline)
- (CN) CHINA OCT FINAL HSBC MANUFACTURING PMI: 50.4 V 50.4E (3-month high)
- (AU) AUSTRALIA OCT TD SECURITIES INFLATION M/M: 0.2% (3-month high) V 0.1% PRIOR; Y/Y: 2.3% V 2.2% PRIOR
- (AU) AUSTRALIA SEPT BUILDING APPROVALS M/M: -11.0% (biggest decline since July 2012) V -1.0%E; Y/Y: -13.4% V -0.9%E
- (AU) AUSTRALIA OCT ANZ JOB ADS M/M: 0.2% (5-month low) V 0.8% PRIOR
- (AU) AUSTRALIA OCT RPDATA/RISMARK HOUSE PRICE INDEX M/M: 1.0% V 0.1% PRIOR
- (AU) AUSTRALIA OCT AIG PERFORMANCE OF MANUFACTURING INDEX: 49.4 V 46.5 PRIOR (3-month high, 3rd month of contraction)
- (KR) SOUTH KOREA OCT TRADE BALANCE: $7.5B V $5.0BE; Imports Y/Y: -3.0% v -1.3%e; Exports Y/Y: +2.5% v +1.4%e; $51.7B export volume is record high
- (KR) SOUTH KOREA OCT HSBC MANUFACTURING PMI: 48.7 V 48.8 PRIOR (2nd straight month of contraction)

***Index Snapshot (as of 02:30 GMT)***
- Nikkei225 closed, S&P/ASX -0.4%, Kospi -0.5%, Shanghai Composite +0.5%, Hang Seng -0.1%, Dec S&P500 flat at 2,010

***Commodities/Fixed Income***
- Dec gold -0.4% at $1,166, Dec crude oil -0.3% at $80.33/brl
- SLV: iShares Silver Trust ETF daily holdings fall to 10,711 tonnes from 10,681 tonnes prior; first rise since Oct 1st
- USD/CNY: (CN) PBoC sets yuan mid point at 6.1525 v 6.1461 prior setting (weakest setting since Sept 29th)
- (KR) South Korea sells 30-yr bonds, avg yield 2.945%
- (KR) South Korea sells KRW1.6T 3-yr govt Bonds; avg yield of 2.135%; Bid-to-cover: 4.1x

***Market Focal Points/Key Themes/FX***
- A triple-header of China PMI releases remain indicative of a pullback in the world's 2nd biggest economy. China official manufacturing PMI released over the weekend slowed for the 3rd time to a new 5-month low, though it still remained above expansion threshold. Stats bureau economist added the "current economic growth is still showing some downward pressure", though he would not expect deterioration in the overall trend of PMI figures. Non-manufacturing PMI hit a 9-month low, falling for the 2nd straight month. Finally, the HSBC manufacturing PMI matched consensus and hit a 3-month high, but was also below the official print. HSBC economist said "manufacturing sector continued to stabilize in October, however the sequential momentum likely weakened."

- Separately on the mainland, an NDRC researcher estimated 2014 GDP at 7.4%, below the official 7.5% target, with retail sales of 12.2% also below 14.5% expected. Meanwhile, the timing on the much-anticipated Shanghai-Hong Kong trading link remains uncertain, with local press reporting the trials have only started in Hong Kong and not Shanghai. Recall last week, a govt official said that testing had entered a "final phase." In Hong Kong, chief sec Lam reiterated protesters demands for a "referendum" are not realistic, adding that the central govt has already heard and addressed the Occupy movement calls for democracy.

- USD/JPY opened up another 60pip near the ¥113 handle, but came off those highs later in the session. Markets in Tokyo were closed for trading but will return tomorrow with another healthy dose of earnings from some of Japan's large firms. Meanwhile, NHK reported the govt is considering options to pay for a corporate income tax cut - something that was previously deemed a compromise along with another round of a sales tax hike. For now, Moody's analysts are looking at the most recent events, calling expanded BOJ easing a "positive development."

- Australia ANZ job ads saw another sequential increase, though at the slowest rate in 5 months. ANZ economist said "the outlook for the economy is improving and the transition to non-mining drivers of growth appears to be occurring, if only gradually." Private sector gauge of inflation ticked up slightly but still remained near the bottom end of RBA target 2-3% range. Building approvals was the most notable datapoint from Australia, falling at the fastest pace m/m since mid-2012. AUD/USD fell to its worst levels on that report, hitting a 2-week low near the $0.87 handle. Australia earnings were highlighted by Westpac reporting slightly improved profits, but lower net interest margins, sending WBC shares down slightly.

- The breakaway Donetsk People's Republic in east Ukraine held its own regional elections, with the self-declared PM Zakharchenko emerging as a "winner" by a large margin. EU's Ashton confirmed that those results will not be recognized, though Russian foreign ministry endorsed the elections as a step toward a "mandate to resolve the practical issues of re-establishing normal life in the region."

***Equities***
US markets:
- SAPE: Publicis said to be in talks to acquire Sapient (market value $2.5B); Deal may be announced as soon as Monday - financial press
- AMRE: To be acquired by EDENS for $26.55/shr in all-cash deal valued at $763M
- HLF: To settle class action lawsuit, denies any liability

Notable movers by sector:
- Energy: Huadian Fuxin Energy 816.HK +2.0% (9-month results)
- Industrials: Xiamen International Airport 600897.CN +1.2%, Xiamen ITG Group Corp 600755.CN +7.3%, Xiamen Port Development 000905.CN +3.8% (China Pres visits Fujian Province)
- Financials: Westpac Banking WBC.AU -1.0% (FY14 results; lower net interest margin)
- Technology: Brambles Limited BXB.AU +1.6% (Q1 results; raises FY15 underlying profit guidance); HTC 2498.TW +3.0% (Oct results)
- Consumer staples: Woolworths Limited WOW.AU -4.8% (Q1 results)

China Services Gauge Joins Manufacturing in Showing Slowdown (1)

+------------------------------------------------------------------------------+

China Services Gauge Joins Manufacturing in Showing Slowdown (1) 2014-11-03 02:43:45.683 GMT

(Updates with HSBC PMI report in seventh paragraph.)

By Bloomberg News Nov. 3 (Bloomberg) -- A gauge of China’s services industry fell to a nine-month low in October, joining manufacturing in signaling a broadening economic slowdown. The government’s non-manufacturing Purchasing Managers’ Index fell to 53.8 last month from 54 in September. The official manufacturing PMI released Nov. 1 was at 50.8 in October compared with September’s 51.1. Readings above 50 for both measures indicate expansion. The pullback in services and manufacturing will test the government’s determination to refrain from increased stimulus as the world’s second-largest economy heads toward the slowest full-year growth since 1990. The economy expanded 7.3 percent in the third quarter, the weakest pace in more than five years. “The momentum looks weak,” said Hua Changchun, a China economist at Nomura Holdings Inc. in Hong Kong. The effectiveness of the government’s targeted measures to boost the economy has waned, Hua said. The non-manufacturing PMI report showed a measure of expectations dropped 1 point from a month earlier, while readings of new orders, input prices and prices charged all increased from September, the report showed. Both PMI gauges are released by the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing. A separate PMI index from HSBC Holdings Plc and Markit Economics for October was at 50.4, unchanged from the preliminary figure and up from September’s final reading of 50.2. Higher new-export business was attributed to stronger demand from customers across key export markets, suggesting robust external demand is helping underpin the economy.

Economic Headwinds

The official PMI report released Nov. 1 showed growth slowed from September for output, new orders, new export orders, stockpiles and expectations. The economy “still faces some headwinds” although a downward trend is unlikely after the government implemented policies to stabilize growth in the third quarter, the statement said. “The biggest drivers of growth such as fixed-asset investment are still slowing,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd., said after the official manufacturing PMI. “Heavy industries like steel and coal are contracting on lower prices, and the negative impact of the weak property market is becoming more pronounced.” China will “stabilize” property-related consumption and make it easier for people to access mandatory housing savings, according to a government statement citing a State Council meeting chaired by Premier Li Keqiang. This came after the central bank on Sept. 30 relaxed mortgage rules for homebuyers who have paid off existing loans. China will support consumption in six areas, including property, e-commerce, environment-friendly products and tourism, according to the statement.

For Related News and Information: Top Stories:TOP<GO> China Backs Growth in Housing Again as Slowdown Prompts U-Turn NSN NE8MIW6S972H <GO> China Factory Gauge Rises as Workers Weather Slowdown: Economy NSN NDVMYO6S972G <GO> China’s GDP Growth Bolsters Case for Stimulus Refrain: Economy NSN NDSFCQ6JTSEN <GO>

--With assistance from Feiwen Rong in Beijing.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at +86-10-6649-7570 or xpi1@bloomberg.net To contact the editors responsible for this story: Malcolm Scott at +852-2293-1975 or mscott23@bloomberg.net James Mayger

WSJ : Publicis Groupe Said in Talks to Acquire Sapient

Publicis Groupe Said in Talks to Acquire Sapient

French Advertising Giant Seeks to Bounce Back From Failed Merger with Omnicom Group

Publicis Groupe SA is in talks to buy Sapient Corp. as the French advertising giant seeks to speed up its transformation into a digital-technology company and bounce back from its failed attempt to merge with Omnicom Group Inc.

A deal to buy Sapient, a U.S.-based digital-advertising specialist with a market capitalization of around $2.5 billion, could be announced as soon as Monday, people familiar with the matter said.

It is still possible the talks could fall apart at the last minute.

Spokeswomen for Publicis and Sapient didn’t return calls seeking comment.

Publicis, the world’s third-largest ad company, this Friday is scheduled to present to investors its plans for boosting growth from digital advertising, which is becoming increasingly dominated by data and technology. Chief Executive Maurice Lévy has been busy coming up with a new plan ever since the collapse of the planned merger with U.S. rival Omnicom in May and as sales growth has been slowing in recent quarters.

One rationale behind the Publicis-Omnicom merger was to give both companies more scale to better compete and negotiate with Web giants such as Google Inc. and Facebook Inc. Since the merger was called off amid internal power struggles, analysts have been wondering how Publicis and Omnicom would compete independently.

With Sapient, Publicis adds a more digital-focus to its wide array of agencies that runs from traditional creative firms such as Saatchi & Saatchi and Leo Burnett to digital shops such as Digitas.

Sapient, one of a slew of highflying tech consulting firms in the dot com boom, has gone through many transformations over the past decade. Once a tech consulting player that helped marketers build websites, the company has expanded its offering through acquisitions. Last year, Sapient bought mPhasize a company that helps marketers use data to help them figure out where to spend their ad dollars. In 2009, it became more of a traditional ad player when it bought Nitro Group LLC, a traditional ad agency based in New York.

The firm is one of the last big independent digital agencies. Its clients include Mondelez International Inc., Coca-Cola Co. and Target Corp. The company had revenue of $1.26 billion last year.

A deal to buy Sapient would be Publicis’ first major acquisition in the digital arena since it bought Amsterdam-based LBi for $500 million in 2012. Publicis has a track record of spending big to buy up digital ad firms. In 2011, the French company bought U.S. digital-ad firm Rosetta Marketing for $575 million, and in 2007, it bought Boston-based Digitas for $1.3 billion.

The big push into digital comes as the pressure builds on advertising holding companies’ business model.

Agencies are facing increasing competition from a new crop of digital, data analytics and tech companies that claim they can do some of the tasks that have long been handled by agencies.

Even the onetime cozy relationship between marketers and creative agencies is under threat. Years ago, brands would have an agency-of-record relationship with one creative firm, but nowadays, more marketers are working with many different companies to develop creative ad content, which they need more of so they can keep up with the rise of social media.

Marketers have continued to squeeze cost out of ad firms by pressuring them to reduce the fees they charge. Companies such as Procter & Gamble Co., Mondelez and Anheuser-Busch InBev are among the big marketers that have moved toward pushing back the date that they have to play suppliers, including agencies.

Besides such issues, Publicis has been suffering from the aftermath of its attempt to merge with Omnicom. Sales growth has underperformed major rivals in the past quarters, which Publicis has blamed in large part on the distraction caused by the plans to pull off the big merger.

Publicis has also faced some revenue shortfalls at some key digital agencies such as Razorfish, where some big clients cut back on spending and key managers left.

Mr. Lévy—who recently agreed to stay in his CEO role longer than expected—has been working on an internal strategy review over the summer aimed at getting the company’s priorities back on track and speeding up its transformation into a digital company. The company in September also announced a series of management changes in a bid to get its teams working more effectively.

Hinting that there would be more deals coming, Mr. Lévy has said in recent months that he wanted Publicis to resemble more of an "Internet company."

"I think that people have not even seen the tip of the iceberg," Mr. Lévy told analysts in a conference call on third-quarter revenue last week, referring to the rapid transformation technology is bringing to the ad industry. "What is boiling down in t

(BN) Evonik Picks Top-Priced Targets in Chemical Deals Hunt: Real M&A


Evonik Picks Top-Priced Targets in Chemical Deals Hunt: Real M&A
2014-11-03 00:00:01.2 GMT


(For a Real M&A column news alert: SALT REALMNA <GO>.)

By Brooke Sutherland
Nov. 3 (Bloomberg) -- Evonik Industries AG may find it’s
tough to be a buyer in a seller’s market.
Royal DSM NV, Clariant AG and Croda International Plc have
made the German chemical maker’s short list as it seeks a large
European takeover target, according to people familiar with the
matter. Despite the companies’ lackluster returns this year, all
three still trade at a premium to the median profit multiple
paid for recent chemicals deals, according to data compiled by
Bloomberg.
European chemical companies have gotten more expensive over
the last three years, with an index of 25 companies including
Clariant, Croda and DSM reaching a peak valuation in July.
Symrise AG, which makes flavors and fragrances, is even more
expensive than the other targets, but would best fill the holes
in Evonik’s portfolio, according to DZ Bank AG. If the valuation
is too high, Clariant looks better than DSM because it’s half
the size.
“It’s a good time for the sellers, but it’s not a good
time for the buyers,” Peter Spengler, a Frankfurt-based analyst
at DZ Bank, said in a phone interview. “It’s not peak valuation
now but it’s a little bit below peak.”

Evonik’s Revamp

Evonik is looking for deals that will help it expand into
less volatile, higher-margin businesses, after sales declined.
The company has been reorganizing to decrease sensitivity to
price swings.
Chief Financial Officer Ute Wolf said last month that the
Essen-based company has the resources to execute a “sizeable”
acquisition. Evonik will focus on deals that strengthen the
consumer, health and nutrition unit and the resource efficiency
division.
The maker of cosmetic ingredients is talking with advisers
about a potential deal with DSM and also evaluating companies
such as Croda and Clariant, according to people familiar with
the matter, who asked not to be identified because discussions
are private.
Even before accounting for a takeover premium, those three
targets are already expensive by some measures. They trade at an
average of 10.2 times earnings before interest, taxes,
depreciation and amortization. In the last five years, buyers
paid a median profit multiple of 8.8 for chemical companies in
deals larger than $1 billion, according to data compiled by
Bloomberg.

Clariant on Top

Among those three, Clariant “would be the best potential
target,” based on its size and what Evonik can afford, said
Spengler of DZ Bank. Clariant has the lowest profit multiple of
the three, trading at 9.1 times its Ebitda in the last year.
Clariant Chief Executive Officer Hariolf Kottmann has
revamped the company, which makes petrochemical catalysts and
shampoo ingredients, to improve profitability and focus more on
less-volatile specialty chemicals. Analysts project that net
income will rise next year to the highest level in more than a
decade and that free cash flow will jump to more than $400
million by 2016, according to data compiled by Bloomberg.
“Clariant really stands out,” Brian Hennessey, a fund
manager at Purchase, New York-based Alpine Woods Capital
Investors LLC, which oversees about $4.5 billion including
Clariant shares, said in a phone interview. The $5.8 billion
company will have “good free cash flow generation and a product
portfolio that’s defensively oriented but with still decent
growth.”
Symrise, which makes perfume oils and flavors for ice cream
and snack food, would be an ideal supplement to Evonik, said
Spengler of DZ Bank. Its operating margin, at 16 percent, is
about double Evonik’s. The only problem is Symrise is even more
expensive, with an Ebitda multiple of 15.

Go Small

Evonik will probably focus on niche acquisitions instead,
said Ronald Koehler, a Frankfurt-based analyst at MainFirst Bank
AG. That makes more strategic sense than a transformational
takeover of a conglomerate such as DSM, he said. Those kinds of
deals may also be cheaper.
“It’s potentially not the best time, but the industry is
thinking differently than portfolio managers,” Koehler said in
a phone interview. “They’re buying when they have cash and they
definitely right now have cash. At the end of the day, it’s also
availability, which is necessary.”

For Related News and Information:
Evonik Seeks Growth Through Acquisitions Amid Investment Cut
NSN NCTCM66KLVR6 <GO>
Evonik Said Exploring DSM Takeover Amid Chemical Deals Hunt
NSN NE9K1V6K50Y6 <GO>
Clariant Revamp Makes Chemical Maker Target for BASF: Real M&A
NSN NCSFSC6JTSEG <GO>
Top Deal Stories: DTOP <GO>
M&A Search: MA <GO>

To contact the reporter on this story:
Brooke Sutherland in New York at +1-212-617-0448 or
bsutherland7@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net
Whitney Kisling

>>> What to look at this Week End



- BMPS IM : KKR, Cerberus May Consider Investing in Monte Paschi: Messaggero
- BMPS IM : Paschi Board to Meet on ~EU1b Rights, Asset Sales: Repubblica
- BNP FP : CEO: French banks should only pay €10B of the €16B they are requested to pay to a proposed EU bailout fund
- CBK GY : Mentioned in the BArrons as an interesting Buy After passing easily the stress test
- CRG IM : Carige May Sell Creditis, Banca Ponti, Raise ~EU150m, Sole Says
- CPR IM : Campari May Sell Sella & Mosca, Zedda Piras Brands, Sole Say
- CSR LN : CSR targeted for stakebuilding by hedge funds amid speculation of counterbid 
- DGE LN : Diageo, Jose Cuervo Near Agreement to Swap Liquor Brands: WSJ
- INGA NA : Mentioned in the BArrons as an interesting Buy After passing easily the stress test
- KPN NA : America Movil CFO Sells EU275,000 of KPN Shares, Filings Show
- MEO GY : Metro Says Held ‘Loose Talks’ With Karstadt on Acquisition
- NISSAN(7201) : To lower its FY14/15 China sales volume target to 1.22M (flat y/y) vehicles from 1.43M prior target due to slowing China market
- REP SM : Said to be accelerating acquisitions due to lower oil prices
- CFR VX : Richemont named as top pick to play emerghing mkt in cover story of the BArrons
- SMDR LN : Salamander Holder RS Investments Backs Ophir Offer: Sunday Times
- STAN LN : U.S. Said to Probe Standard Chartered Banking in Dubai: Reuters
- STAN LN : Aberdeen Asset Backs Standard Chartered Management: Sunday Times
- TSCO LN : Tesco explores part sale of banking subsidiary; hires Lepe Partners for blinkbox disposal - Sunday Telegraph

>>> Salamander Energy’s largest shareholder pushes for Ophir Energy merger

Salamander Energy’s largest shareholder pushes for Ophir Energy merger 

Salamander Energy’s largest shareholder, RS Investment, has pressed the UK-listed oil group to accept Ophir Energy’s merger proposal, The Sunday Times reported. The report did not cite a source for the claim.

Salamander last week confirmed entering discussions with Ophir and a consortium led by the Spain-based oil group CEPSA and Jynwel Capital regarding two potential offers. Ophir has proposed an approximately 105p-per-share all-stock deal which it has been unwilling to revise despite demands from Salamander, the report said.

San Francisco-based RS Investment holds a 14% stake in Salamander and owns almost 10% of Ophir, the report said.

Salamander, which has a market capitalisation of GBP 275m (USD 440m), is believed to have rejected an approximately 145p-per-share offer from CEPSA earlier this year, the item reported. It noted that Salamander shares were trading at 106p by the end of last week.


Source Sunday Times

WSJ : U.S. Stocks Headed Into a Sweet Spot

History tells us stocks now are entering what normally is their strongest period for gains. But some investors worry that this year, current events could outweigh history.


Over the past 100 years, the best three-month stretch for stocks has been November through January. On average, the Dow Jones Industrial Average records strong gains in all three months, jumping 1.5% in December alone, according to Bespoke Investment Group.

The S&P 500 shows a similar trend since 1928, the period for which data are available. It has risen an average 3.4% over the three months, nearly double its 1.86% average gain for three-month periods in general.

Many money managers hope to see that now, even though stocks aren’t cheap.

“The fact that stocks in the U.S. are a bit stretched, which they are, doesn’t prevent them from moving ahead in the next three to six months,” said Russ Koesterich, chief investment strategist at BlackRock Inc., which manages $4.32 trillion.

Stocks have risen despite high prices all year. They rebounded from sharp pullbacks in January, April, July, September and October. The Dow is up 4.9% for 2014 and the S&P 500 has risen 9.2%, with both at record highs.

Investors offer several reasons for the November-to-January strength. Year-end is when many companies record their biggest sales, as consumers spend on the holidays and businesses invest in equipment for the new year. And January is when some retirement funds put fresh money into accounts.

But the higher stocks go, the more skittish investors become. The S&P 500 has almost tripled since its 2009 low and trades at 18.7 times component companies’ net profits for the past 12 months. That is well above its long-term average price/earnings ratio of 15.5, Birinyi Associates calculates.

With investors sitting on big gains, they are quick to take profits when they face anxiety about slow global growth, tensions with Russia or expectations the Federal Reserve will raise interest rates next year. So far, they have overcome their worries, most recently because of positive earnings reports, better U.S. and European economic numbers and a huge new Japanese stimulus program.

The risk is that investors could sell again if they get more bad news about earnings, the economy or global tensions.

“There are so many things that could shock markets that I think are very fully valued,” said Michael Farr, president of Farr, Miller & Washington, which oversees $1.1 billion in Washington. “I would caution investors to make sure they have a seat when the music stops.”

Mr. Farr has focused on conservative stocks that tend not to fall as heavily in downdrafts, avoiding stocks such as Facebook Inc. and Twitter Inc., he said.

There are reasons for worry: The pullbacks’ frequency has increased, and the October one was particularly sharp. And other types of investments are signaling that the world economy remains troubled.

Investors are holding large sums in the relative safety of U.S. Treasury bonds, which has kept bond prices high and yields low. The appetite for Treasurys reflects doubts about the global economic and political outlook.

With the Fed ending its long-running bond-buying program and preparing to raise target interest rates, many bond experts thought Treasury yields had to rise. But after starting the year at 3%, the yield of the benchmark 10-year Treasury note finished Friday at 2.335%.

Oil shows a similar pattern. Crude-oil futures finished Friday at $80.54 a barrel, down 18.2% for 2014 and off 11.6% in October alone. Soft oil demand is widely seen as a sign that China’s economy is slowing, crimping its need for raw materials. Industrial metals have behaved similarly.

Corporate earnings also could be better. With two-thirds of big companies reporting, their profits are up 7.3% for the third quarter. That is above the 4.5% analysts projected at September’s end, but below the 8.9% they expected in June, said John Butters, senior earnings analyst at FactSet. The results look good mainly because analysts cut their forecasts, notably in the weak energy and financial sectors.

“Overall, the numbers have come down and the companies have turned around and beat those estimates,” Mr. Butters said.

Analysts now are cutting estimates for future sales and earnings, at a time when investors believe companies need to boost sales to keep record profit margins up. Analysts now forecast 2.6% fourth-quarter sales gains, down from 3.8% forecast at the end of September.

And yet, money managers see reasons for optimism.

In addition to stocks’ normally strong performance from November through January, stocks also do well following off-year congressional elections and at the end of lame-duck presidential terms. That is true even when stocks have risen a lot in the previous year or two. Stocks also often advance when Washington is gridlocked, said Bespoke Investment Group’s co-founder, Paul Hickey.

And slow earnings and economic gains aren’t necessarily bad, especially if they hold down interest rates, inflation and wage gains. Capital costs and wages are two of the biggest expenses companies face, and keeping them low boosts profits.

“This slow, grinding growth, with very low interest rates and not much in the way of wage gains” is why profits are so high, said Mr. Koesterich of BlackRock. “Margins are a lot higher than people thought they would be, and they are staying there.”

“We could lose some steam as the Fed starts to raise rates” next year, he added, especially since Congress isn’t likely to spend on economic stimulus. But even then, he said, rates should remain so low that they shouldn’t derail the market.

WSJ : European Central Bank’s Bond Conundrum

European Central Bank’s Bond Conundrum
ECB Faces a Tougher Road in Emulating Fed, Bank of Japan

The Federal Reserve just closed the book on its government-bond purchases. The Bank of Japan 8301.TO -1.01% on Friday vastly expanded its program. Now attention turns to the question of whether the European Central Bank will speed up its printing presses and start buying sovereign debt.

It would be a much tougher road for the ECB. The eurozone’s central bank faces political and practical hurdles that would complicate any attempts to replicate the U.S. and Japanese programs, known as quantitative easing or QE.

The ECB meets Thursday, but isn’t expected to unveil new measures. At issue is whether any ECB purchases of government debt would lift inflation toward the bank’s target of near 2%. Annual eurozone inflation was just 0.4% last month.

ECB interest rates can’t go lower. That leaves purchases of public and private debt as the main lever to keep borrowing costs down, boost asset prices, weaken the euro and goose inflation.

The ECB is buying some private securities and is open to adding corporate bonds. Officials have flagged government-bond buying as possible, but reached no decision amid doubts such purchases would help the economy without supportive government measures.


One problem: Buying debt in private markets may not generate enough assets to meet ECB President Mario Draghi ’s goal of steering the central bank’s balance sheet toward early-2012 levels. That implies a rise of up to €1 trillion from just over €2 trillion now.

When central banks expand their balance sheets—the total value of their assets—they effectively pump new money into the economy in hopes of spurring activity. ECB bond buying started slowly: It purchased €1.7 billion in covered bonds—bank bonds backed by underlying collateral—in the first week.

“They’re running out of time,” said BNP Paribas BNP.FR +3.46% economist Ken Wattret. “If you want to expand the balance sheet more quickly you have to buy in bigger markets.”

The eurozone’s nearly €7 trillion government bond market would solve that problem. But many ECB officials are loath to take that step, instead eyeing asset-backed-securities purchases starting this month and the next batch of bank loans in December.

“I don’t think we should in the next few months be considering things like public-sector bond purchases,” though they should be studied just in case, said ECB member Ardo Hansson, who heads Estonia’s central bank, in an interview last week.

Austria’s central banker is hesitant, saying more government investment is a better idea. Germany’s Bundesbank firmly opposes buying government bonds. And no one at the ECB is publicly making a forceful case for buying them. The reasons are twofold. The policy is deeply unpopular in Germany, where it stirs fears of central banks printing money to finance runaway public spending. Opponents also say there is little evidence it would help the weak eurozone economy.

Fed bond buying nudged long-term U.S. interest rates lower, in part because so much borrowing in the country is financed through capital markets. Europe’s financial system is bank-based and therefore would be less responsive to quantitative easing, skeptics say.

There are other problems that bond buying wouldn’t affect. Tax and spending policies are hampering growth in France and Italy. Measures to boost Europe’s growth potential have been largely avoided.

Quantitative easing “is no magic wand,” said RBS economist Richard Barwell. “It’s only about credibility” for the ECB as a central bank determined to meet its inflation goal.

Europe has already had a dry run of sorts with quantitative easing. Mr. Draghi’s pledge in July 2012 to do “whatever it takes” to save the euro, backed by a bond-buying plan that hasn’t been used, led to lower bond yields across the eurozone. In other words, the ECB got quantitative easing-like effects on bond marketswithout spending money. But the economy saw little benefit.

If inflation stays near zero, inflation expectations slide and the euro firms, the ECB may have little choice but to buy government bonds.

“It’s a sign of the desperate situation of the euro area that people are so focused on something that will not turn the tide around,” said Charles Wyplosz of the Graduate Institute in Geneva, referring to quantitative easing. Still, he said, “It may help and doesn’t hurt, so why not do it?”

That’s far from “whatever it takes.” But in the end it may be the best argument Mr. Draghi can muster.

WSJ : Can Emerging Markets Save the West?

Can Emerging Markets Save the West?
West Might Not Be Able to Count on Emerging Markets’ Savings Much Longer

The usual worry about capital flows is that hot money moving from developed economies to emerging markets suddenly reverses, prompting a crisis. But it is worth thinking about this the other way round amid two fundamental shifts: the retirement of the West’s baby boomers and the increasing clout of emerging markets.

One curiosity of the global economy is that developed markets, despite aging workforces, haven’t seen as much saving as one might expect. So far, savings in emerging markets have compensated for this, notes HSBC ’s Karen Ward. Based on changes in the balance of workers and retirees in the U.S. from 1990 to 2010, the savings rate might have been expected to rise by 1.2 percentage points, HSBC says. In fact, it fell by 5.2 points, World Bank data show. But in China, the savings rate has risen by 13.1 points, much more than an expected 7.7-point gain.

Capital has flowed to developed economies in part because savers in emerging nations haven’t had deep markets at home to target. That has buoyed asset prices in developed markets and perhaps reduced the apparent need to save there. But HSBC argues savings have been misallocated: Too much has gone into government bonds and housing, and not enough into more productive investment.

Looking ahead, as the West’s baby boomers retire, they will need to cash in their assets. But who will buy them and at what price? Younger workers in the West, indebted and employed in lower-growth economies, may not pay up.

Can the increasing pool of savers in emerging markets step in again? That is far from clear. Financial systems in emerging markets are deepening, which could provide investors there with more domestic options. Prospective returns at home also may be better, particularly in bonds.

Politics may well prove decisive. Savers will want to invest where property rights and the rule of law are strong. This favors the West for now. But that could easily change. Younger Westerners may object to the sale of assets to emerging-markets investors; think of first-time buyers priced out of London’s cosmopolitan property market, for example.

Markets, having, grown used to free-flowing capital, may be on the cusp of a generational change.