Financial Teasers 6 March 2008

Top Stories

Dollar, pound drop to all-time lows against euro
Mounting anxiety about the economic health of the U.S. and U.K. is forcing the dollar and the pound to record lows against the euro. "Yet again the data is an indication that the U.K. economy is slowing, and that puts further pressure on the (Bank of England)," said Jeremy Stretch, a strategist at Rabobank. "It's a case that sterling continues to be seen as the ugly sister to the dollar." Telegraph (London) (06 Mar.)

Dollar may decline more if Fed cuts rates again: Ben Bernanke, chairman of the Federal Reserve, has suggested he may cut interest rates once again in an attempt to boost the sluggish U.S. economy. Many expect that will push the dollar down even further and cause inflation to swell. CNBC/Reuters (05 Mar.)

Credit crunch continues to spread as banks pull back
Banks in the U.S. and Europe have significantly curbed their support of trading in capital markets as the credit squeeze enters a new phase. Banks are reluctant to provide leverage to speculative investors and are scaling back on buying bonds that go unsold at debt auctions. Financial Times (subscription required) (05 Mar.)

Ambac's recapitalization plan disappoints investors
Shares of Ambac dropped nearly 20% Wednesday on news of the bond insurer's $1.5 billion recapitalization plan. Investors had hoped a group of banks would inject as much as $2 billion into Ambac. Instead, the monoline will sell $1 billion worth of common stock and $500 million of other instruments, substantially diluting values for the firm's existing shareholders.
Bloomberg/ClipSyndicate (06 Mar.) , Financial Times (subscription required) (05 Mar.)

Bank of China sells all CDOs
Bank of China Chairman Xiao Gang said the Chinese lender, which reported nearly $8 billion of subprime-related investments at the end of September, has sold all its collateralized debt obligations. Xiao did not disclose what the bank's subprime-related debt is currently. "It will be in everybody's interest to find out what exactly they are holding," said Dominic Chan, an analyst at CLSA Asia-Pacific Markets. People's Daily (China) (06 Mar.)

OPEC keeps output steady as oil hits all-time high
OPEC ministers, attributing record oil prices to forces beyond their control, decided at their meeting Wednesday to keep output steady. U.S. crude hit $104.64 a barrel. The U.S. had argued that even a small increase in output wold help curb prices and contain damage to the global economy. Reuters (05 Mar.)

Hedge fund accuses UBS of fraudulently marketing CDOs
Pursuit Partners says UBS, already dealing with one major investor lawsuit, marketed collateralized debt obligations as investment grade when the Swiss bank knew Moody's was about to downgrade them. The hedge fund has filed a lawsuit claiming it bought CDOs from UBS based on "fraudulent concealment" of information. BusinessWeek (06 Mar.)

Merrill's China investment banking chairman Feng resigns
After four years with Merrill Lynch & Co., Wilson Feng, the bank's Hong Kong-based chairman of China investment banking, has resigned and said he will pursue a position at a state-owned company. "I want to change my life," said Feng, 40. "It's a nightmare. My father won't recognize me if I stay in investment banking. I didn't see him for almost three years." Bloomberg (06 Mar.)

Gazprom settles natural gas dispute with Ukraine
Gazprom and Naftogaz, the national energy company in Ukraine, said they have resolved differences regarding the price of natural gas without having to disrupt Europe's supply. Gazprom had drastically reduced its natural gas supply to Ukraine to prompt the settlement of the country's $600 million bill. International Herald Tribune (05 Mar.)

Coffee demand spurs price hike
Maxwell House owner Kraft Foods has become the latest coffee company to raise prices as the cost of arabica and robusta beans hit their highest level in more than 10 years. With global demand for coffee outpacing supply, the price of robusta coffee futures contracts have soared. The May contract increased by about 40%. Financial Times (subscription required) (05 Mar.)

Other News

Bond insurers may move to set up shop in Bermuda
Financial Times (05 Mar.)

Market Activity

Italy intervenes in debt markets as yields surge
In an unusual move, the Italian treasury has stepped into the bond market to curb the soaring yields on government debt while hedge funds with heavy exposure to the debt are scrambling to raise cash. An Italian newspaper reported that investors have been urged to trade 10-year BTP treasuries for new five-year instruments. Telegraph (London) (06 Mar.)

Economics

ECB, Bank of England expected to hold interest rates steadyThe Bank of England and European Central Bank are expected to hold interest rates steady Thursday to focus on inflation. An expected slowdown in upcoming months, however, will likely spur future reductions in interest rates. MarketWatch (05 Mar.)

Europe's resilience allows Trichet to focus on inflation
Europe's economy is on track to outpace that of the U.S. for the second consecutive year. Europe is better able to withstand the global credit crunch because Europeans save more than Americans and spend less on stocks and homes, thus reducing the need to lower interest rates. That allows Jean-Claude Trichet, president of the European Central Bank, to focus on battling inflation. Bloomberg (06 Mar.)

Fed's "Beige Book" shows U.S. economy slowing this year
The Federal Reserve's "Beige Book" report shows that all 12 Fed districts are experiencing a deceleration of economic growth this year. The survey found that manufacturing was down in half of the Fed regions, while service industries were sluggish in most areas. Most regions are seeing rising costs for materials and energy. Reuters (05 Mar.)

China coping with increased inflation pressure
Financial officials in China say they are confident they can hold inflation rates to the 4.8% target despite increasing pressure for prices hikes due to a credit boom and food shortages. Ma Kai, chairman of China's planning agency, said a tight monetary policy will be maintained while striving to ensure supplies of meat, grain and other food. Forbes/Associated Press (06 Mar.)

Geopolitical/Regulatory

Officials tell Congress SWFs are beneficial to U.S.
Several witnesses testified before a House financial services subcommittee that sovereign wealth funds are not harmful, although better transparency would help. "Sovereign wealth funds have been a beneficial source of capital for U.S. financial institutions," said Scott Alvarez, general counsel for the Federal Reserve Board. Reuters (05 Mar.)

Lawmakers want Pentagon to explain air tanker contract
Members of the U.S. House Appropriations Committee have asked the Pentagon to explain why it gave a multi-billion-dollar contract for air tankers to a European company rather than to U.S.-based Boeing, and are warning they may kill the deal. Sue C. Payton, the Air Force's assistant secretary for acquisition, said the contract was awarded after fair and open bidding. The New York Times (registration required) (06 Mar.)

Financial Products

Merrill creates equity index for "frontier markets"
Aiming for clients with a greater hunger for risk, Merrill Lynch has launched a "frontier markets" equity index. The index will cover stocks from 17 countries, including Kuwait, Pakistan, Vietnam and Morocco. These markets are gaining fans because they are performing well in the credit crunch. CNNMoney.com/Dow Jones Newswires (05 Mar.)

Ethics

FSA discards proposed whistle-blowing rule
The Financial Service Authority as decided not to pursue a proposal that would have required investment banks to report regulatory violations by companies for which they raised equity. The FSA and industry representatives had discussed the proposal, but the regulator bowed to market pressure. Financial Times (subscription required) (05 Mar.)

Fidelity agrees to pay $8 million to settle SEC charges
Fidelity Investments will pay a fine of $8 million to settle charges by the SEC that the company's traders took gifts from brokers who were seeking Fidelity's business. The settlement includes no admission of guilt. The SEC probe targeted 13 former and current Fidelity employees, including Peter S. Lynch, once a star fund manager. The Boston Globe (06 Mar.)