Aviation authorities ground Boeing 787 Dreamliner | Chinese FDI posts first annual drop since 2009 | NYSE says systems glitch might have caused trading issue
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17 January 2013
CFA Institute: Financial NewsBrief
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IMF sends Greece and Portugal more aid
The International Monetary Fund has approved payment of €3.24 billion in aid to Greece. However, IMF Managing Director Christine Lagarde emphasized that "[f]orceful structural reforms and broad-based domestic support will be needed to meet challenges." The IMF also made a rescue tranche available to Portugal, despite the country's struggles to reach deficit targets. Tax revenue was well below expectations, affected by austerity. Reuters (16 Jan.), The Washington Post (tiered subscription model)/The Associated Press (16 Jan.), Reuters (16 Jan.), The Wall Street Journal (tiered subscription model)/Dow Jones Newswires (16 Jan.)
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Aviation authorities ground Boeing 787 Dreamliner
Aviation authorities in Europe, India and Japan joined the U.S. Federal Aviation Administration in grounding Boeing's 787 Dreamliner. The FAA said the aircraft would stay grounded until airlines proved that its lithium-ion batteries are safe. Authorities acted after a second incident involving the batteries forced an emergency landing this week. Reuters (17 Jan.), The Seattle Times (17 Jan.), Bloomberg (17 Jan.)
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Chinese FDI posts first annual drop since 2009
Full-year foreign direct investment into China declined in 2012 for the first time in three years. FDI dropped 3.7% compared with 2011, the Ministry of Commerce says. Manufacturing investment fell 6.2%. Last month, FDI declined 4.5% compared with December 2011, the 13th drop during the past 14 months. Bloomberg (15 Jan.), Xinhuanet.com (China) (16 Jan.)
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NYSE says systems glitch might have caused trading issue
NYSE Euronext said the New York Stock Exchange experienced a systems issue that might have allowed some improper trades. For a brief time, some trades processed at the NYSE despite equal or better prices at competitors. The glitch is the latest in a series of issues at exchanges in recent months. "In scope, this is minor," said Christopher Nagy, a consultant for exchanges and trading firms. "But, combined with this string of events that we've seen, it certainly draws suspicion in terms of what exactly is going on with the stability of the systems at exchanges." Financial News Online (U.K.) (subscription required)/Dow Jones Newswires (17 Jan.)
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U.S. industrial activity at highest level since 2008
Fueled largely by strength in manufacturing and mining, industrial output in the U.S. expanded 0.3% in December, reaching its highest level since 2008, the Federal Reserve said. Capacity utilization edged up from November's 78.7%, to 78.8% in December, the central bank said. Nasdaq.com/Dow Jones Newswires (16 Jan.)
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Reader Survey
If the U.S. fails to resolve its debt-ceiling crisis and defaults on its debt, how do you expect world financial markets will react?
There will be a short-term sell-off, but, once resolved, markets will rebound  60.32%
Long-term borrowing costs will increase, and the U.S. will lose its "reserve currency" status  21.34%
Markets likely will recognize this as more of a political dispute and largely ignore it  18.34%
Poll analysis:
More than 60% of the 1,265 respondents to this week's poll expect that if the U.S. government fails to resolve its debt-ceiling crisis and defaults on its debt, any negative market impact would be short-lived. Approximately 22% of respondents think the consequences of default would be more long lasting, with long-term borrowing rates rising and the U.S. losing its reserve currency status. Only 18% of respondents view the debt-ceiling crisis as a largely political dispute that is likely to be ignored by markets. The U.S. government will hit the statutory limit on its ability to borrow sometime between mid-February and early March. At that point, unless Congress authorizes an increase in the debt ceiling, the government will not be able to meet all of its financial obligations. There is currently a standoff in Washington, D.C., with the Republicans tying any increase in the debt limit to future spending cuts, a precondition opposed by President Barack Obama and the Democrats. There is also disagreement over what exactly constitutes a default. Without a debt-limit increase, the government would be able to pay about 60% of its bills. The Republicans have suggested that by prioritizing payments, the government can pay the interest on its debt and thus avoid technical default, an approach that has been dismissed by Obama and the Democrats as legally tenuous and logistically impossible. Although the political squabbling has garnered most of the headlines, there are real financial consequences at stake. Fitch Ratings has indicated that the proposed prioritization plan would "very likely" result in a downgrade of the country's credit rating. Fitch also warned that any deal should include meaningful steps toward deficit reduction. Certain to follow any downgrade would be increased borrowing costs, which would have a negative effect on the economy. If this crisis sounds familiar, it is because the U.S. went through it before. The debt-ceiling wrangling in July 2011 led to a downgrade of U.S. debt and a 15% sell-off for U.S. stocks. Although stocks did recover in 2011 and the country's reserve currency status was never in jeopardy, without meaningful long-term fiscal reforms, markets in the future may not be so forgiving. -- David T. Larrabee, CFA, Director, Member and Corporate Products, CFA Institute
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Market Activity
Asian-Pacific markets mixed, but China takes a hit
Asian-Pacific markets were mixed Thursday, with China leading losses ahead of economic-growth data expected to be released Friday. China's Shanghai Composite and Taiwan's Taiex each gave up 1.1%. Hong Kong's Hang Seng Index slid 0.1%. South Korea's Kospi edged down 0.2%. Japan's Nikkei 225 rose 0.1%. Australia's S&P/ASX 200 advanced 0.4%. India's Sensex was up 0.7% at midafternoon. MarketWatch (17 Jan.), The Economic Times (India) (26 Feb.)
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Fed officials concerned about overheated markets
Officials with the Federal Reserve are starting to express concern that the bank's low-interest policies are overheating the market for some investments including bonds, agricultural land and leveraged loans. Chairman Ben Bernanke said the Fed must "pay very close attention to the costs and the risks" of the policies it backs. Bloomberg (17 Jan.)
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Economics
U.S. trade deficit with China may be overstated, researchers say
A set of trade measurements suggests that the U.S. trade deficit with China may be significantly smaller than statistics indicate. The Organization for Economic Cooperation and Development and the World Trade Organization found that if exports and imports were measured on a value-added basis, the U.S. trade deficit with China would drop as much as 25%. The Washington Post (tiered subscription model) (16 Jan.)
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New car registrations in Europe drop 8.2%
The registration of new cars in Europe in 2012 dropped 8.2% from 2011, to 12.05 million, the lowest number since 1995, according to the European Automobile Manufacturers' Association ACEA. The decline was the most since 1993, when annual sales dropped 16.9%. Deutsche Welle (Germany)/DAPD Nachrichtenagentur/Deutsche Presse-Agentur/Reuters (16 Jan.)
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U.S. economy is growing at modest pace, Fed says
The U.S. economy has continued expanding in recent weeks, but there were few signs of an increased pace, according to the Federal Reserve's Beige Book. The report says uncertainty about government spending and the state of Europe's economy are a drag on hiring. "Hiring plans were more cautious for firms doing business in Europe or in the defense sector," the Fed said. Reuters (16 Jan.)
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Germany repatriates gold to restore reserve confidence
Germany plans to have half of its gold reserves stored in Frankfurt by 2020. The €27 billion worth will be shipped from the Bank of France and the Federal Reserve Bank of New York, but none stored at the Bank of England will be touched. "With this new storage plan, the Bundesbank is focusing on the two primary functions of the gold reserves: to build trust and confidence domestically, and the ability to exchange gold for foreign currencies," according to the central bank. Bloomberg (16 Jan.), The New York Times (tiered subscription model) (16 Jan.), The Wall Street Journal (tiered subscription model)/The Associated Press (16 Jan.)
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Analysis: Many housing markets are still in trouble
About the same number of housing markets worldwide are rising and falling, but the general trend is decline because markets headed downhill are falling faster than strengthening markets are rising, according to The Economist. "At some point, central banks will have to take away the balm of easy money," the magazine notes. "If housing markets remain so fragile when they are getting so much help, they may break when it is removed." The Economist (tiered subscription model) (12 Jan.)
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China's trust-loan spike triggers default fears
A 679% surge in lending by Chinese trust companies last month compared with December 2011 is raising concern about whether borrowers are at risk of defaulting. Trust loans, totaling $42 billion, accounted for 16% of aggregate financing, which includes stock and bond financing. Bloomberg (16 Jan.)
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Geopolitical/Regulatory
CFTC proposal on ID theft could affect advisers
The Commodity Futures Trading Commission has proposed rules aimed at preventing identity theft. The rules would apply to all entities under its supervision, including some financial advisers. The measure is patterned after the Federal Trade Commission's Red Flags Rule. Financial-Planning.com (16 Jan.)
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Exchanges criticize Germany's proposed HFT rules
German lawmakers are debating proposed rules on high-frequency trading. Exchanges argue that the rules would do little to improve market safety. "Minimum resting times for orders will increase volatility," according to an e-mail from Boerse Berlin co-CEO Artur Fischer. "At times of high volatility, no trading will take place and prices will have to be estimated rather than be based upon real volume." Bloomberg (16 Jan.)
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Russian official says currency war is coming
Alexei Ulyukayev, first deputy chairman of Russia's central bank, says a wave of currency weakening is pushing the world toward a currency war. "Japan is weakening the yen, and other countries may follow," he said. The comments come less than a month before Group of 20 finance ministers are scheduled to meet in Moscow. Bloomberg (16 Jan.), Reuters (16 Jan.)
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SEC Republicans scuttle proposal on political-spending disclosure
The Securities and Exchange Commission's Republican members refuse to support a rule that would force companies to disclose political spending. "That should not be one of our priorities," Republican Daniel Gallagher told the U.S. Chamber of Commerce. "That is just a political wish list." Instead, the SEC will focus on rules mandated by recent legislation, he says. Reuters (17 Jan.)
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Financial Products
DoubleLine plans 3 stock mutual funds
DoubleLine Capital, best known for bond funds, aims to launch three stock mutual funds. The firm has registered the DoubleLine Equities Small Cap Growth Fund, the DoubleLine Equities Growth Fund and the DoubleLine Equities Global Technology Fund with the Securities and Exchange Commission. Former TCW Group portfolio managers Husam Nazer and Brendt Stallings would run the funds. Barron's (free content)/Focus on Funds blog (16 Jan.), Reuters (15 Jan.), MutualFundWire.com (16 Jan.)
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