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Investors shaken as

renminbi’s

reputation as ‘one-

way bet’ sours

Last week the renminbi did something it has not done for years – it shocked the market.

During the final three trading sessions of the week, the Chinese currency dropped as much as 1.3 per cent against the US dollar, marking its biggest three-day fall since 2011. The renminbi is now 0.6 per cent weaker against the dollar than it was at the start of the year.

While the percentage decline may appear small compared with some of the recent double-digit swings in other emerging market currencies such as the Argentine peso or Kazakh tenge, a move of such magnitude in the renminbi is highly unusual.

It could also spell trouble for investors. After years of ultra-low volatility thanks to the managed peg against the dollar, the renminbi has often been the subject of large, highly-leveraged positions for investors viewing it as an effective one-way bet. ANZ’s Patrick Perret-Green said the sell-off had left some speculative investors with a “very bloody nose”.

Mitul Kotecha, FX strategist at Crédit Agricole CIB, said that last week’s move could be a signal of a shift in Chinese currency policy.

“The market was extremely long, and we’ve seen a big shakeout of these positions”, said Mr Kotecha. “They want to try and at least provoke more risk and more uncertainty in taking this trade. They are going to keep engineering volatility until that becomes the case.”

The sharp move follows a period during which the offshore renminbi rate has been trading at an increasing premium to the onshore rate. That split – a permanent feature of the market –is something made possible by China’s strict controls on its capital account.

Global investors usually take bets on the currency through its Hong Kong iteration, known by the shorthand CNH. Within China, companies and investors use the official onshore rate, or CNY.

Early last week, the CNH rate had reached its biggest spread over the CNY rate since 2010, suggesting that international enthusiasm for the renminbi had overtaken that from within China itself.

Currency analysts say this widening gap may have prodded the People’s Bank of China into action. The central bank sets the daily fixing rate around which the renminbi is permitted to fall or gain 1 per cent a day, and last week it guided the onshore currency weaker through higher fixes.

Some believe that the move by the PBoC to damp appreciation expectations is part of its wider, long-held aim of introducing more two-way volatility into the market.

It could also be an attempt to bring the onshore and offshore rates together before the central bank widens the daily trading band, something it has promised to do soon. The band was last changed in April 2012, when it was doubled from 0.5 per cent.

“This is a tactical move by the central bank to introduce more volatility before widening the trading band. They are creating conditions for that to happen,” said Shuang Ding, China economist at Citi. “If the currency continues to appr eciate and there is very little volatility, it will only fuel speculation of more appreciation.”

Weaker economic data out of China may also have played its part in the sell-off. Last week HSBC’s flash index of manufacturing activity fell to its lowest leve l in seven months, a sign that the country’s export engine is yet to fire up this year. Sentiment towards China has also been hit by growing troubles in the country’s vast shadow banking sector.

Many analysts believe the longer-term story of renminbi appreciation remains intact. HSBC still expects the renminbi to reach Rmb5.98 against the dollar by the end of the year, equivalent to about a 2 per cent gain from Monday’s spot rate.

And unlike in previous periods of renminbi weakness – such as in the summer of 2012 – this most recent bout has not been accompanied by large capital outflows from the country.

If anything, the opposite is true – the most recent data show that money continues to pour in, with China’s trade surplus growing by $32bn in January.

However, some believe that the apparent shot across the bow by the PBoC means that the days of low volatility are finally coming to an end.

“Based on how the [offshore renminbi] has been trading over the past couple of days, it is clear to me that the Chinese currency is no longer a safe haven,” Société Générale’s Benoit Anne wrote in a report.

Two UK banks' diverging fortunes, the latest EU-Greece banking spat, and US holding company requirements for foreign banks Feb 24, 2014 - 3:43 pm The banking team discusses the varying fortunes of HSBC and RBS, the latest spat between the EU and Greece over the treatment of the Greek banking system, and Deutsche Bank reveals some details about how it will cope with the new obligation for foreign banks operating in the United States to have a US holding companies. Patrick Jenkins is joined by Martin Arnold,banking editor; Sam Fleming, financial policy correspondent; Daniel Sch?fer, investment banking correspondent, and Peter Spiegel, Brussels bureau chief.

Why the euro inflation number is worse than it looks

February 24, 2014 5:33 pm by Claire Jones

in Share0

January’s eurozone inflation number, out earlier on Monday, showed price pressures in the currency bloc are not quite as subdued as first feared, registering 0.8 per cent — a touch higher than Eurostat’s initial estimate of 0.7 per cent.

It’s hardly a game changer: inflation is still less than half the 2 per cent target. But the slightly better figure will reduce pressure on the European Central Bank a little after it faced renewed calls to ease policy following the release of the flash estimate.

However, the detail of this morning’s release suggest disinflationary pressures might be even worse than feared. This excellent chart from Marchel Alexandrovich of Jeffries International shows why:

One of Mario Draghi’s five reasons for why the eurozone is not about to enter a Japan-style lost decade, where businesses and households rein in spending because of suspicions prices will tumble, is that falling prices in the currency bloc are far less broad based that in Asia’s second-largest economy.

Here’s what he had to say earlier this month:

Mario Draghi: The inflationary expectations continue to remain firmly anchored and we do not see much of a similarity with the situation in Japan in the 1990s and early 2000s. If we look at the definition of deflation, that is a broad-based fall in prices, self-feeding onto itself and happening in a variety of countries. We do not see that. Just to give you another piece of information: during the period of deflation in Japan, over 60% of all commodities experienced a decline in prices; the percentages for the euro area average are much lower.

On this score, the breakdown on the components of the inflation basket contained in Eurostat’s release this morning is worrying. Mr Alexandrovich’s chart shows that deflation is becoming more broad based across the bloc, and in all but one of the eurozone’s largest economies.

That doesn’t mean that the eurozone is turning Japanese just yet — deflation remains far less broad based than it was there. But it does not bode well.

South Sudan’s

factions vie for

control of oilfields

Soldiers stand near an oil refinery in Melut, Upper Nile state, South Sudan

Warring factions in South Sudan are battling for control of the country’s dwindling oil production in a sign both sides have given up on faltering peace talks and are instead seeking a military and economic stranglehold over the cash-strapped country.

Oil companies have evacuated non-essential staff from fields in Upper Nile state following renewed heavy fighting in Malakal, the regional capital, over the past week.

Malakal lies about 150km south of the fields in Upper Nile state that pump the bulk of the country’s crude. Oil production was hit earlier in the crisis when the rebels in late December took control of Unity state, the other oil-rich region.

Oil executives worry the forces loyal to Riek Machar,the rebel leader, will move beyond Malakal, trying to encircle the fields to gain leverage. They said however that a direct attack against the fields was unlikely.

An aide to Mr Machar said the fighting was heading towards the oilfields of Adar and Paloich, in Upper Nile state. “There can be no work because of the fighting. That will stop the oil,” the aide said. The Financial Times could not independently verify the claim about the rebel movements north of Malakal.

Colonel Philip Aguer, spokesman for South Sudan’s army, insisted the fields were so far safe in spite of rebel threats to “either divert or close down the oil industry”. His government last week intervened to overturn a local state directive to shut down the fields.

But an industry executive familiar with the situation described a more worrying scenario, with oil groups operating the fields in Upper Nile, including China National Petroleum Company and Malaysia’s Petronas, evacuating some staff from Paloich. “They are lifting as many non-essential workers as they can,” the executive said.

Industry officials say oil output has fallen to about 150,000 barrels per day, down 40 per cent from before the start of the conflict, which has killed thousands and displaced 900,000 people.

The output drop – and worries of further shutdowns – is forcing regular buyers of South Sudanese oil such as China to seek alternatives, triggering a rush for crudes of similar quality in Angola, Chad and as far away as Argentina. The crisis is also contributing to higher global oil prices of around $110 a barrel.

Regional and international mediators rushed to negotiate a ceasefire after the world’s newest country split in two in mid-December following a high-level political fallout out between President Salva Kiir and Mr Machar, his sacked vice-president. But the shaky January deal quickly fell apart as fighting flared.

Each of the two political leaders accuses the other of plotting an undemocratic takeover of the country, which in 2011 seceded from Sudan’s Khartoum government after decades of war.

The fighting in Upper Nile is so far the biggest violation of the ceasefire. Over the weekend, witnesses reported dead bodies on the empty streets of Malakal, with opposition forces in charge. The UN said some of the 20,000 civilians sheltering at its base in the town fought each other along ethnic lines, leaving at least 10 dead and sending 2,000 fleeing.

Mr Machar had originally suggested oilfields under his control could continue to pump and divert revenues into an escrow account, but since then he has appeared keener on halting oil production altogether. Without oil revenues, which make up 98 per cent of South Sudan’s income, Mr Kiir will find it difficult to maintain his government.

“Riek will cut off the oil production and squeeze Salva’s cash,” says a foreign observer in regular contact with Mr Machar. The observer added that the stalled peace talks in Addis Ababa, the Ethiopian capital, were “just theatre”.

But stopping production also risks eliciting a response from neighbouring Uganda and Sudan, both of whom are officially allied to Mr Kiir. Sudan’s own economic survival depends on its southern neighbour pumping oil, as it profits from pipeline transit fees

Danish pension

fund changes to

infrastructure

Denmark’s ATP, one of Europe’s largest pension funds, has sold

DKr20bn (￡2.2bn) of German bonds and interest rate swaps as it rotates towards owning more buildings, roads and utilities.

The move, ATP’s biggest repositioning in a decade, is the first big change under chief executive Carsten Stendevad, who joined the DKr592bn pension fund, which manages the Danish state supplementary pension, last spring.

“This significant adjustment will set the tone and direction for many of our activities in the years to come,” he told FTfm.

ATP’s sizeable existing property and infrastructure holdings will be moved from the fund’s investment portfolio, which aims to achieve excess returns, to its liability-hedging portfolio, which aims to protect fully the pension promises made to its members.

“We have been looking at how to get more infrastructure assets on our books. We used to think we would have this in the return-seeking portfolio but we have now broadened the type of assets we use in our hedging strategy,” said Mr Stendevad, who argued this would give the fund more freedom to invest.

“We now face the task of replenishing the investment portfolio either with other types of real estate and infrastructure assets or any other investments that fits into our five risk classes,” Mr Stendevad added.

Long-dated sovereign bonds and swaps are traditionally used for liability hedging, but ATP will now also use “safe” assets with steady cash flows, such as property, infrastructure and structured credit, to match liabilities beyond 40 years.

“We are not very fussed about labels but very fussed about the cash flow characteristics,” he said. “We will be as creative as we can. But every pension plan on earth is focusing on these assets so our target allocation is price dependent.”

Despite an investment return of 14.5 per cent last year, largely due to a 52 per cent return from its Danish equities, Mr Stendevad said ATP remained cautious about the outlook for 2014.

Buffett’s

Business Wire

ends feeds to high-

speed traders

Business Wire, which has published corporate news releases in the US for the last half century, will stop selling direct feeds to high-speed traders, amid concerns that the practice gives the firms an unfair advantage over other investors.

Warren Buffett, whose conglomerate Berkshire Hathaway owns Business Wire, stepped in personally to examine the direct sales, fearing that recent publicity around the practice could hurt the company’s reputation.

Business Wire had also been in talks with Eric Schneiderman, New York attorney-general, whose office is investigating the distribution of financial data to see if high-frequency trading (HFT) firms are finding ways to jump ahead of other investors.

In an era of computer-driven trading and superfast communications, a split-second advantage in receiving data can open an opportunity to profit from the market moves that may happen when other players receive the information.

In the case of corporate earnings statements scheduled for release after the end of the trading day, a direct line from Business Wire meant some firms were able to trade ahead of the market’s official close, according to the research firm Nanex.

Most investors access Business Wire releases through an intermediary data service, such as Bloomberg or Dow Jones. The Wall Street Journal, a subsidiary of Dow Jones,published a story highlighting Business Wire’s direct sales to HFT firms on February 6.

“These traders had absolutely no time advantage in receiving material news from Business Wire, which operates a patented internet delivery network that disseminates news simultaneously and in real-time to all market participants,” Cathy Baron Tamraz, Business Wire chief executive, said in a statement on Thursday.

”However, in discussions that have taken place with a few of our clients, we learnt that the article may have caused some misperceptions, and that was of deep concern to us.”

Ms Baron Tamraz said the decision to halt the sales was taken “in consultation” with Mr Buffett.

The sales were not illegal or in contravention of regulations on market fairness, she said.

The market still has a problem. It is not closing at exactly 4pm. Trades bleed over for almost a whole second.

- Eric Hunsader, founder of Nanex

Nanex examined the trading in certain stocks with earnings released at

4pm on behalf of T Rowe Price, a fund manager that became suspicious.

Eric Hunsader, founder of Nanex, said: “The market still has a problem. It is not closing at exactly 4pm. Trades bleed over for almost a whole second and that will affect the close because earnings are getting released at almost exactly 4pm.

“Just because Business Wire has stopped this practice, doesn’t solve the problem. The best solution is to require earnings to not be released until one minute after 4pm.”

Mr Schneiderman had been discussing Business Wire’s data dissemination practices since the company itself raised the issue with his office in October, according to sources familiar with the talks, which were described as informal and cordial.

“Business Wire’s decision to voluntarily step forward and stop selling its clients’ information directly to high-speed traders is a tremendous victory for our effort to eliminate advance trading on market-moving information and a demonstration of Business Wire’s commitment to being a responsible industry leader,” he said.

The attorney-general has labelled some HFT practices as “Insider Trading 2.0”.

Following his intervention last year, Thomson Reuters, the media and financial data provider, stopped its practice of releasing a consumer confidence survey created with the University of Michigan two seconds early to traders willing to pay extra to obtain it.

Additional reporting by Alan Rappeport

Non-bank lenders

step up EU

funding deals

Funding by alternative lenders, which allows companies to sidestep banks, is growing rapidly, with 56 deals recorded in the UK and Europe for the final quarter of last year, compared with 18 in the first quarter.

Alternative non-bank lenders are also increasingly operating outside the UK, with more than half (34) of the fourth-quarter’s deals relating to European companies, overtaking the UK’s tally – 22 deals – for the first time, according to a survey by Deloitte, the business advisory firm.

Alternative lenders include fund managers and insurers that raise debt funds financed by institutional investors. This week Legal & General, the UK’s biggest pension fund manager, said it would begin lending to mid-market companies.

“The next six months point to a strong 2014 in Europe for the alternative lending sector,” said Fenton Burgin, head of UK debt advisory at Deloitte.

“As the UK becomes a more competitive market place, US funders based in London are looking at Europe to buy debt and deploy excess liquidity from shareholders.”

Mr Burgin said France had seen 41 deals, the second-largest number since the survey started in the fourth quarter of 2012, but Deloitte expected growth to come from the peripherals such as Spain, Italy, Portugal and Greece.

“In the final quarter of 2013, the most significant deals with debt up to

€350m in Europe included Campbell Soup Europe and Aenova,” he said.

“We also saw a number of UK household names using alternative lenders for deals with debt up to ￡300m; Caffè Nero, Doc Martens, Zenith, Phase Eight and the independent brewery Hall & Woodhouse. Alternative lenders’ bespoke structures and greater flexibility provide an attractive option to traditional leveraged bank lending.”

The survey found that over the past five quarters senior debt – which is secured by collateral – was used in 36 per cent of European deals, while in the UK, the unitranche structure – combining senior and subordinated debt into one instrument – was dominant in 44 per cent of deals.

The majority of the deals in the survey were related to leveraged buyouts, with 43 per cent in the UK and 34 per cent of euro deals being used to fund a buyout.

In Europe, 15 per cent of the deals related to bolt-on merger and acquisition activity, compared with just 3 per cent in the UK. Deloitte said: “On the back of our analysis, we envisage that alternative lenders will play an increasingly important part in the market, as the M&A environment is expected to improve significantly over the year.”