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WSJ (It's been said before)
The iron-ore market is discovering why the archenemy of high commodity prices is, well, high commodity prices.
The benchmark price of iron ore has fallen 15% in the past three weeks after hitting its highest level since January, which in turn has sent shares of Australia’s pure iron-ore producer Fortescue Metals FSUGY tumbling 27%. Signals of high shipments from Australia and poor steel appetite from China suddenly reminded traders of the gulf that exists between supply and demand in this steelmaking ingredient.
Between April and mid-June, traders had pushed up prices nearly 40% because they thought that gulf was closing. One reason: many iron-ore mines were shutting down. Midsize Australian producer Atlas Iron closed its operations while China closed high-cost mines.
But as prices ticked up, Atlas slowly restarted mines, the latest one this week. That amounts to an extra 10 million tons or 1% of supply. China has brought back over 20 million tons, notes Citigroup -0.56 ’s Ivan Szpakowski. There is also the prospect of new supply from Australian mines later this year.
The oil market can sympathize, since higher prices have similarly encouraged U.S. producers to restore supply, only to cause prices to drop. Such encouragement is more problematic for iron ore. Oil fields need constant investment or else production declines quickly, which is why turning off capital expenditure helps rebalance supply. In contrast, iron-ore mines have longer lives and require little extra spending, meaning it takes tougher decisions—often permanent exits—to do the trick, says Mathew Hodge at Morningstar.
If mining companies such as Fortescue and Atlas can’t take these tough decisions, expect the market to mete out more tough love.
Write to Abheek Bhattacharya at abheek.bhattacharya@wsj.com
ARIA calls.
Economical use of capital, good trade
Wide spread. What price between the spread are you aiming for?
Does anybody follow ARRY? I sold into the Jan spike and had been dithering about re-entry.
1213 GMT Dividend yields from the top 40 miners reached 5% on average last year due in part to a fall in market capitalization, according to PWC. This marked the highest dividend yield in a decade compared to a 2.8% average over the period and was up from 4.3% in 2013. Interestingly, for iron ore majors BHP Billiton Ltd , Rio Tinto PLC , and Vale, the dividend yield was 6%. BHP and Rio together accounted for about a quarter of the Top 40's cash dividends in 2014. PWC, however, noted that the top 40 barely covered dividends in 2014. They borrowed last year to satisfy dividend payments. " This practice isn't sustainable in the long term," PWC notes. Eight of the top 40 had their credit ratings downgraded in 2014 and another 10 were placed on a negative outlook.(alex.macdonald@wsj.com)
FT - fear of the margin clerk.
China stocks plunge 6.5%, worst selloff in 4 months
Mainland markets were the biggest losers in the region on Thursday, as fears over tighter requirements on margin financing ignited risk-off sentiment. The rest of the region, meanwhile, shrugged off an inspiring lead from the U.S. overnight to trade mixed.
I've been pretty optimistic about the ability of the Chinese to manage their way out of their bubble, but this is of concern on its face
FT
China's capital rush: More capital has been raised this year than in the past three combined and more than half the $14bn proceeds are being ploughed straight back into financing the same equity boom that enabled them to tap the markets in the first place. The frenzied rallies in Shanghai and Shenzhen this year have largely been fuelled by margin lending where loans to invest in the market are secured against the stocks purchased. (FT)
That's hardly a recommendation
Didn't mean to imply otherwise.
Is ARIA really worth the bother at the current valuation?
Certainly on the ARIAD board, teeming with bulls. $15 bucks at least, as you know since you follow that board.
I own some with a good gain. Enough to hurt if Briga bombs, tho not as much as when Pona did.
Most, including me, were expecting the market event to manifest itself then. It didn't.
Lockup expiration today seems to be a non-event so far.
The event was rescheduled
Dew - What was CLF's price when you called a bottom some months ago?
The chart looks "constructive".
FT
China knocks on door of reserve currency club
The internationalisation of China’s renminbi faces its stiffest test yet as the International Monetary Fund debates whether to endorse the “redback” as a reserve currency alongside the dollar, euro, yen and sterling.
Becoming a constituent in the IMF’s Special Drawing Rights basket would be a big step forward for the currency, which remains tightly controlled by Beijing. Economist Louis Gave of GaveKal Dragonomics likens the move to Japan’s currency liberalisation in the 1980s and the subsequent run-up in yen assets.
“Very quickly, global equity and bond investors were chasing their own tails, pushing up the value of the yen together with Japanese equity and bond valuations to regular new highs.” (From which, of course, they subsequently retreated as the bubble imploded.)
However, the rewards for Beijing would be more than simply financial: acquiring SDR rights would be a powerful boost to its geopolitical ambitions.
“For China, SDR basket inclusion is symbolic to global recognition of its rise in status,” Paul Mackel, head of Asia forex research at HSBC, wrote in a recent report. “The very stringent requirements for currency inclusion in the SDR serve as a quality assurance to global users that the currency in question is indeed very liquid and stable as a store of value.”
That will feed into the IMF’s deliberations. “The crux of the matter is that this is ultimately going to be decided on political rather than economic merits,” says Eswar Prasad, economics professor at Cornell University and former China country director for the IMF.
China’s bid for more influence in the international monetary system began at the peak of the global financial crisis in March 2009, when central bank governor Zhou Xiaochuan published a paper in English titled “Reform the international monetary system”.
Mr Zhou argued that the global financial crisis had exposed the vulnerabilities of over-reliance on the dollar, and proposed beefing up the SDR so it could serve as “an international reserve currency that is disconnected from individual nations”.
In March this year Chinese Premier Li Keqiang told IMF managing director Christine Lagarde that China intended to accelerate reforms needed to meet the criteria for SDR inclusion.<snip>
China’s labour force is shrinking and the “migrant miracle” that powered its industrial rise is mostly exhausted, removing the factors that propelled the country’s meteoric development, according to leading economists.
The transformation will lead to slower growth, reduced investment and a loss of export competitiveness, they warn, increasing the urgency of implementing ambitious economic reforms aimed at finding new sources of expansion.
Today the Financial Times begins a series of articles on the end of the migrant miracle — the three decades of breakneck economic growth fuelled by the unprecedented migration of labour from the unproductive farm sector to work in factories and on construction sites.
Broad consensus has emerged that China has reached its “Lewis Turning Point” — the point at which the once-inexhaustible pool of surplus rural labour dries up and wages rise rapidly. Nobel-prize winning economist Arthur Lewis argued in the 1950s that a developing country with surplus agricultural labour could develop its industrial sector for years without wage inflation as it absorbed that surplus.
“Now we are at the so-called Lewis inflection point. I made this forecast in 2006, and today there is no need to change it,” said Ha Jiming, chief investment strategist for private wealth management at Goldman Sachs in Hong Kong and formerly chief economist at China International Capital Corp, the country's first Sino-foreign joint venture investment bank.
“The working-age share of China’s population peaks this year at 72 per cent, then it will start to fall rapidly, even more rapidly than what we saw in Japan in the 1990s,” he added.
Cai Fang, director of the Institute of Population and Labour Economics at the Chinese Academy of Social Sciences, a think-tank that advises the government, estimates that China’s potential gross domestic product growth decreased from 9.8 per cent in 1995-2009 to 7.2 per cent in 2011-15 and 6.1 per cent from 2016-20.
A shrinking labour force is one of the main drivers. Since Deng Xiaoping launched market reforms in 1978, 278m migrant workers from rural villages have moved to work in the cities.
But reallocating labour from farm to factory — resulting in higher overall growth as workers’ productivity soars — is now mostly complete.
“From 2005 to 2010, the growth rate of migrant workers was 4 per cent. Last year it was only 1.3 per cent. Maybe this year it will contract,” said Mr Cai.
China faces the more difficult task of raising productivity within the urban sector through improved capital allocation, technology and management acumen.
The second trend is an ageing population and the effects of the one-child policy, which has started to influence the number of young workers entering the labour force. As in developed countries such as Germany and Japan, the ranks of the elderly are rising. Ma Jiantang, director of China’s National Bureau of Statistics, said the population aged 15 to 60 peaked in 2011.
“The excess rural surplus labour is nearly exhausted — China is reaching its Lewis Turning Point,” the World Bank said last year.
Economists debate the precise date of the turning point based on inconsistent data and contrasting theoretical models. Some say that due to varying regional labour market conditions, it is more precise to speak of a “turning period” rather than a single point. But the basic measure is not in doubt.
“The fact that we have now passed the Lewis Turning Point is 100 per cent,” said Ross Garnaut, an economist at Australian National University and co-editor of a collection of papers on China.
Additional reporting by Ma Nan
Twitter: @gabewildau
VVUS is one of Sarissa/Denner's investments. They haven't done much with it.
Denner on CNBC now
ARRY - is there a devil lurking in the details?
Array BioPharma tops 3Q earnings and revenue expectations
BOULDER, Colo. (AP) _ Array BioPharma Inc. (ARRY) on Monday reported fiscal third-quarter net income of $58.3 million, after reporting a loss in the same period a year earlier.
On a per-share basis, the Boulder, Colorado-based company said it had net income of 37 cents. Losses, adjusted for non-recurring gains, were 11 cents per share.
The results topped Wall Street expectations. The average estimate of four analysts surveyed by Zacks Investment Research was for a loss of 19 cents per share.
The drug developer posted revenue of $6.6 million in the period, also topping Street forecasts. Five analysts surveyed by Zacks expected $6 million.
Array BioPharma shares have climbed 34 percent since the beginning of the year. The stock has climbed 56 percent in the last 12 months.
Take the $20 now while biotech is boiling.
Is it on offer?
Plus, and shares in IRA, ROTH accounts can not be lent out..
That's the whole point. The account holder cannot short the stock but he CAN lend them out - which is what the Schwab program does. Mine are in an IRA.
If the shares were in a margin account and in street name SCH could lend them without your permission or even knowledge.for that matter.
I am not a conspiracy theorist. but mine were lent out this morning. Wonderful timing. Now I am a conspiracy theorist/
OT
What tailwind did AMZN catch?
FT
Amazon loses $57m, market value jumps $27bn
<snip>
The jump added more than $27bn to Amazon's market valuation, which now sits at $209bn. In contrast, Macy's is worth $23bn while Chipotle, the fast growing Mexican fast food chain, is valued at $20bn.
Schwab has a program to borrow customers' stocks. The only one of my stocks they have an interest in is ARIA. 15%.
One company that offers this service is Private MD Labs, through Labcorp as it happens.
Easy and prompt and comprehensive. No connection except as a customer. Direct thru Labcorp may turn out to be cheaper.
http://www.privatemdlabs.com/
China Bubble Ready to Pop? asks CNBC. Of course it will, eventually, and a million people will say they predicted it - like Alan Abelson faithfully predicted the end of the 90's bull market every week in Barron's over a full decade.
Seems to be a disconnect here.
Ariad Pharmaceuticals (NASDAQ:ARIA) was downgraded by equities research analysts at Vetr from a “buy” rating to a “hold” rating in a research note issued to investors on Wednesday. They currently have a $10.56 price target on the stock. Vetr‘s price objective suggests a potential upside of 18.38% from the stock’s previous close.
Separately, analysts at HC Wainright set a $10.00 price target on shares of Ariad Pharmaceuticals and gave the company a “buy” rating in a research note on Monday, February 23rd.
Long but interesting read
Interview: Li Keqiang on China’s challenges
China’s turbocharged economy is growing at its slowest pace in a quarter of a century and is expected to slow further, the ruling Communist party is engaged in a sweeping anti-corruption purge and the country’s leaders are trying to clean up decades of rampant industrial pollution.
As he greets the Financial Times in the Great Hall of the People in Beijing’s Tiananmen Square, China’s second most powerful man seems to be taking all this in his stride.
Li Keqiang is directly responsible for managing what is now the world’s largest economy — at least in purchasing power terms — and leading Beijing’s efforts to move from the credit-fuelled, investment-led growth model of the past to a more sustainable future.
In his first interview with a western media organisation, Mr Li was relaxed, gregarious and clearly in command of his brief during an hour of questioning in the Hong Kong room of the Great Hall, a highly symbolic venue to receive a British newspaper editor.
His main message to the world was China’s continued commitment to the current global financial order, particularly in the wake of Beijing’s move to set up the Asia Infrastructure Investment Bank.
As late as January, no western country seemed ready to join an institution that poses such a clear challenge to the established, US-dominated global order. But since then, most of America’s allies have signed up in a striking example of how the centre of geopolitical power is shifting east.
The UK’s move last month to join the AIIB, despite protestations from Washington, prompted a scramble from other European and western allies that has left the US looking leaden-footed and isolated. Even senior US officials have described the episode as a stunning diplomatic victory for Beijing.
But throughout the interview, Mr Li refrained from even a hint of gloating and repeatedly insisted that China has no desire to create a new world order.
“China wants to work with others to uphold the existing international financial system,” Mr Li says. “[The AIIB] is intended to be a supplement to the current international financial system.”
He explicitly welcomed Britain’s application to join the bank and emphasised that the AIIB and the Japan- and US-dominated Asian Development Bank could “work in parallel in promoting Asian development”.
Antibiotic resistance
China has sometimes complained that the postwar liberal international order created by the Bretton Woods institutions — the International Monetary Fund and the World Bank — was set up in order to contain it and other Communist states. Some Chinese academics and officials have argued that it is now obsolete and needs replacing.
To the specific question of whether China wanted to replace the Bretton Woods institutions, Mr Li was categorical: “There is no such thing as breaking the existing order,” he insists.
“We gained advanced experience from working with the World Bank and other institutions and our [World Trade Organisation] membership has also helped Chinese companies gain deeper knowledge about how they can compete with others under international rules. So China has been a beneficiary of the current international system in terms of both peace and development.”
Mr Li even expressed cautious enthusiasm for the Trans-Pacific Partnership, a US-led trade initiative in Asia that has been seen by many as an “anyone-but- China club” since it pointedly excludes the world’s biggest goods trader.
Chinese leaders like to use metaphors in their speeches and Mr Li was most lyrical in explaining his concerns about quantitative easing and the US Federal Reserve’s plan to end unconventional monetary policy.
“It is quite easy for one to introduce QE policy, as it is little more than printing money,” he says. “When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean. Yet it is difficult to predict now what may come out of it when QE is withdrawn.”
He warns that most countries have not yet undertaken the necessary structural reforms to address the root causes of the global financial crisis and compares the world economy to a patient on an “IV drip and antibiotics” who has not been allowed to strengthen their immune system to recover on their own.
Unlike many interviews with senior Chinese leaders, this encounter was unscripted and the FT’s questions were not submitted to the premier or his staff beforehand.
Although the substance of the meeting was initially intended to be off the record, Mr Li later agreed to the FT publishing the entire discussion without any changes to his remarks — also unusual in the Chinese context.
Mr Li’s relaxed and casual demeanour contrasted with the ornate and imposing venue and the immaculately coiffed attendants serving hot towels, soft drinks and copious amounts of tea.
The son of a low-level party official from the rural province of Anhui, the 59-year-old Mr Li spent four years toiling on the land at the end of the 1966-1976 cultural revolution before he was accepted to study at the newly reopened Peking University law school in 1978.
His time at the country’s most prestigious university coincided with China’s version of glasnost, an extraordinary period of openness to long-banned western political ideas. Along with other students he helped translate The Due Process of Law by the late senior British judge Lord Denning and classmates from that time say he was influenced by liberal professors, some of whom believed strongly in constitutional democracy.
In 1998 he became China’s youngest governor, when he was appointed to run the impoverished province of Henan. His time there was marred by a scandal in which tens of thousands of peasant farmers contracted HIV from an official government blood donor scheme.
Seen as a protégé of former president Hu Jintao, Mr Li was considered by many to be his most likely successor until 2007, when it became clear that Xi Jinping would take that role. Since taking over as premier in early 2013, Mr Li’s priorities have been slashing the size and power of the country’s unwieldy bureaucracy while also pushing more sustainable urbanisation, financial reforms and declaring “war on pollution
Some political insiders in China have suggested the office of the premier has been overshadowed by President Xi’s consolidation of power since he and Mr Li ascended to their current roles.
But on the economy in particular, an area where the premier has traditionally taken the lead, Mr Li expressed confidence and gave the impression he was in charge of government policy at a time of growing concern over the slowdown.
China grew 7.4 per cent last year, the slowest pace in 24 years. But government data released on Wednesday revealed that growth fell to 7 per cent in the first quarter from the same period a year earlier, the lowest quarterly reading since the depths of the global financial crisis and down from 7.3 per cent in the fourth quarter of last year.
Most other economic figures were surprisingly weak in March, indicating that the slowdown is likely to continue.
Speaking two weeks before Wednesday’s figures were released, Mr Li acknowledged the difficulty his government faces maintaining employment and meeting the government’s growth target this year of “around 7 per cent”.
“It’s true that our economy is still under downward pressure,” he says. “It won’t be easy to achieve another 7 per cent growth this year.”
But he insists Beijing has the wherewithal to hit its target while also maintaining “fairly sufficient employment, [an] increase in household income and improvement of the environment”.
“We have the ability to keep economic operation within the proper range,” he says. “Since the fourth quarter of last year we have made fine-tuning adjustments to our fiscal and monetary policies but these adjustments are not a QE policy. Instead they are targeted regulatory steps and they have paid off.”
China cut interest rates for the second time in three months at the end of February and has also announced plans to overhaul local government finances and boost infrastructure investment in parts of the country where growth has slowed the most.
Some Chinese economists and academics who advise the government have told the FT they believe the leadership is more concerned about sliding growth rates than it has publicly acknowledged. Many believe the biggest risk to growth is the country’s slumping real estate sector, where prices and sales volumes have been falling for the past year but where things could still get a lot worse.
An enormous property boom, particularly of residential housing, had been the main driver of growth in China for a decade until it ran into trouble last year.
Mr Li acknowledges the real estate downturn — where housing sales dropped 7.6 per cent last year even as overall investment in the sector continued to increase by 10.5 per cent — is a particular area of concern.
“We want to have steady and sound growth of the real estate market. The government will continue to encourage the homebuying for self use or improved living conditions and guard against property bubbles. There may be certain conflicts of interest among these goals and we need to strike a proper balance among multiple goals and exercise proper regulation. This is not going to be easy but we?.?.?.?believe we can do it.”
Mr Li appeared more confident when quizzed on the question of falling prices in China, where factory gate prices have contracted for 37 straight months, the longest period on record.
“The tumble of international commodity prices did put our [producer price index] under much pressure,” Mr Li says. “So, in a certain sense, we are on the receiving end of deflation but this does not mean there is deflation in China.”
Consumer prices increased 1.4 per cent in March from a year earlier, well below the government’s stated target for this year of “around 3 per cent” but still in positive territory.
With Japan and Europe both engaged in unconventional monetary policies partly aimed at devaluing their currencies, many global investors are asking whether China may be tempted to devalue its own tightly controlled currency, especially if growth slows more than expected.
Historically, Beijing has resisted the temptation to enter into competitive devaluation, most notably during the 1997-98 Asian financial crisis. Mr Li holds a similar view to his predecessors although he does not categorically rule out the possibility that China could act to push down the renminbi.
“We don’t want to see further devaluation of the Chinese currency because we can’t rely on devaluing our currency to boost exports,” he says. “We don’t want to see a scenario in which major economies trip over each other to devalue their currencies. That would lead to a currency war. And if China feels compelled to devalue the renminbi in this process we don’t think this will be something good for the international financial system.”
Bargaining chip
Mr Li delved into topics ranging from relations with Japan to China’s anti-corruption drive, which has mostly been led by President Xi and which Mr Li says is “intensifying”.
“We want to ensure that government power will be exercised with restraint,” says Mr Li, “and the government will live up to its due responsibilities to boost market vitality, eliminate the space for rent-seeking behaviour and uproot corruption.”
According to public figures hundreds of thousands of officials have been investigated on suspicion of corruption or breaching Communist party discipline in the past two years.
On relations with Japan, Mr Li stuck closely to the party’s official script on the need for Tokyo to face up to atrocities committed during Japan’s occupation of China before and during the second world war.
“The current China-Japan relationship is still in a quite difficult spot. There is [a] wish from both sides for improved relations but such improvement needs a foundation,” Mr Li says. “The crux of the issue is how to view the history of the second world war and whether one can draw lessons from that part of history to ensure that the war will never repeat itself.”
While the premier is adamant China is not trying to challenge the existing global order Mr Li is also clear that changes are necessary to accommodate its rise and that of other developing countries.
We are ready to continue to play our role in building the current international financial system,” he says. “We are also ready to work with other countries to help make the system more just, reasonable and balanced.”
In that context, China’s moves to set up the AIIB and other institutions are probably best seen as bargaining chips and leverage that Beijing can use to push for faster reforms, rather than as alternatives or challenges to the existing global order.
Mr Li’s task is to make China’s voice on the global stage commensurate with its growing stature while simultaneously ensuring the domestic economy does not go off the rails. Whether he is successful on the former will probably not be known until after he has retired. The verdict on the latter will almost certainly be within his first five-year term, which ends in 2018.
More video
You would have to be nuts to buy a Ariad CALL with a $9 strike price expiring on Friday...
So what was the buyer thinking, or can we just put him down as a nut?
FT
The global economy is mired in a “stop and go” recovery “at risk of stalling again”, according to the latest Brookings Institution-Financial Times tracking index.
The index, released ahead of the International Monetary Fund’s twice-yearly forecasts this week, highlights how the modestly improved growth outlook in advanced economies has been offset by weakness in emerging markets.
“A modest reversal of fortunes between the advanced and emerging market economies belies the fact that both groups still face stunted growth prospects,” said Professor Eswar Prasad, an economist and senior fellow at Brookings.
The world economy grew 3.4 per cent last year, according to the IMF, roughly at its long-term average rate, which disappointed many officials who expected faster expansion because output is still recovering from the effects of the 2008-09 global financial crisis and faster-growing emerging economies now account for more than half of the world economy.
Last week, Christine Lagarde, head of the IMF, described the world’s current economic performance as, “just not good enough”.
The Tiger index — Tracking Indices for the Global Economic Recovery — shows how measures of real activity, financial markets and investor confidence compare with their historical averages in the global economy and within each country.
“Barring three economies with sustained growth momentum — the US, UK, and India — there are few others where short-term growth prospects look encouraging,” Prof Prasad said.
The Tiger growth index for advanced economies has improved modestly since the oil price almost halved in the second half of last year, reflecting increased household spending in Europe and Japan. But these weak economies still have some way to go before showing the momentum they normally enjoy in an economic upswing.
In the US there is evidence of a weak patch in the first quarter of the year with slower employment growth. According to Prof Prasad that suggests “the persistent strength of the US dollar and the burden of carrying the world economy on its shoulders might be weighing on the US economy”.
There is a varied picture in the large emerging economies of China and India, which are the world’s largest and third-largest economies, measured by purchasing power parity.
China’s economic prospects are slowing as the government attempts to rebalance activity from public investment towards higher domestic consumption. By contrast, India is enjoying the fruits of cheap oil and energy, which reduces import costs, the trade deficit and government borrowing. “India remains a bright spot among the emerging market economies, although the pace of reforms and the durability of growth remain significant elements of concern,” Prof Prasad said.
In the next tier of emerging economies, including Brazil, Turkey and Russia, prospects have dimmed as cheaper oil and commodity prices have exposed underlying structural weaknesses.
In the months ahead, the global economy is likely to face the first US interest rate rise for almost nine years, threatening to destabilise a fragile recovery and expose badly run economies to capital flight.
This prospect increases the need for reforms to boost the resilience of economies in every country, Prof Prasad said. “The urgency of structural reforms seems to have dissipated, with many economies relying on loose monetary policy and weak exchange rates to prop up growth and counter deflationary pressures”.
“In the absence of a strong revival of domestic demand supported by a more balanced set of policies, a robust and sustained global economic recovery will remain elusive,” he added.
Market agrees with your lack of enthusiasm. (I own a few RDS/A)
Snipped from the FT. Shell/BG
The deal is transformational for Shell. Its reserves will increase by about a quarter and its production rise 20 per cent. It will gain access to BG’s big gas discoveries off the coast of Tanzania, and also its enormous Queensland Curtis LNG project in Australia.
But Brazil is the key prize for Shell with the BG deal. Mr van Beurden said the enlarged group’s output from Brazil would be 550,000 barrels a day by the end of the decade — four times more than their current production. Wood Mackenzie, the energy consultancy, estimated that by 2025 Brazil will be the biggest single country position in the Shell-BG portfolio.
The deal will also cement Shell’s dominance of the business of producing, exporting and trading LNG. By 2018, Shell-BG will control sales of 45m tonnes per annum of LNG, making it easily the largest seller of the fuel in the world.
Shell was at pains to stress the financial strengths of the combined company. There would be savings of $2.5bn a year by 2018, and the enlarged group would divest assets worth $30bn between 2016 and 2018.
But for Shell shareholders, said Jason Gammel of Jefferies, there is a downside. He highlighted that the transaction will be dilutive in terms of earnings per share in 2016 and 2017, and that Shell’s net debt position will grow to about $61bn after the deal.
There was some concern among shareholders that the deal would strain Shell’s balance sheet and potentially put its dividend at risk.
Another potential hazard: antitrust issues. Mr van Beurden acknowledged that Shell would face competition questions in Australia, Brazil, China and Brussels, though the company had so far not identified any “insurmountable” problems.
But despite the risks, most investors saw the logic of the tie-up, and expressed admiration for Mr van Beurden’s boldness. “Any of the majors who don’t make such a move in this environment will regret it,” said Mr Whall. “Exxon really missed out here.”
More video
FT
Emerging markets: The great unravelling
James Kynge and Jonathan Wheatley
Developing economies are suffering their biggest capital outflows since the financial crisis
aced with recession, decade- high inflation, a fiscal crisis and water rationing, more than 1m Brazilians took to the streets last month to protest against corruption and mismanagement in their government. In China, growth is slowing as property prices fall, propelling more than 1,000 iron ore mines toward financial collapse. The patriotic citizens of Russia, meanwhile, are deserting their nation’s banks, switching savings into US dollars.
Such snapshots of growing distress in the world’s largest emerging markets are echoed among many of their smaller counterparts. Several countries in Sub-Saharan Africa are beset by dwindling revenues and rising debts. Even the turbo-powered petroeconomies of the Gulf, hit by a halving in the price of oil over the past six months to $55 a barrel, are moving into a slower lane.
Though these expressions of distress derive from disparate sources, one big and insidious trend is working to forge a common destiny for almost all emerging markets .
The gush of global capital that flowed into their economies in the six years since the 2008-09 financial crisis is in most countries now either slowing to a trickle or reversing course to find a safer home back in developed economies.
Highest outflows since 2009
On an aggregate basis, the 15 largest emerging economies experienced their biggest absolute capital outflow since the crisis in the second half of last year, as a strong US dollar drove emerging market currencies into a swoon and investors grew nervous over the prospect of a tightening in US monetary policy, according to data compiled by ING. At the same time, low commodity prices slammed GDP growth rates across the developing world.
These trends, analysts say, signal a “great unravelling” of an emerging markets debt binge that has swollen to unprecedented dimensions. Importantly, the pain inflicted by this capital flight is being felt beyond financial markets in the real economies of vulnerable countries and in a surging number of emerging market corporations that are forecast to default on their debts.
“Certain parts of the world are looking really vulnerable,” says Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “Places like Brazil, Russia, Colombia and Malaysia, that rely heavily on commodity exports, are going to get hit even harder, while those countries that have borrowed most excessively like Thailand, China and Turkey also look risky.”
Emerging markets chart
Analysts say that while emerging markets have been the setting for several recent financial squalls, the current exodus of capital could herald more fundamental changes. Indeed, although the “taper tantrum” of mid-2013 — triggered by the US Federal Reserve signalling its intention to unwind its monetary stimulus — caused turmoil in financial markets, its impact on real emerging market economies was transitory.
This time around, though, things look more serious. The International Monetary Fund said this week that total foreign currency reserves held by emerging markets in 2014 — a key indicator of capital flows — suffered their first annual decline since records began in 1995.
Without steady capital inflows, emerging market countries have less money to pay their debts, finance their deficits and spend on infrastructure and corporate expansion.
Real economic growth is set to suffer this year, analysts say. Capital Economics expects GDP growth in emerging markets to fall to 4 per cent from 4.5 per cent in 2014, as Russia slips deeper into recession, Brazil continues to struggle and China is hampered by its ailing property market.
Underlying such sober projections is a sense that an inflection point has been reached with the end of the commodity “supercycle” and the advent of low oil prices. “What is going on is a great unravelling of the market conditions of the past 15 years,” says Paul Hodges of International eChem, a chemicals and commodities consultancy.
Mr Bakkum also sees a significant reversal in the animating forces of global capitalism. “The EM capital outflows represent the gradual unwinding of the excessive inflows into the emerging world during the years of zero interest rates in the US,” he says.
However, the outlook is not universally bad. Investors have flocked to India, which has a reform-minded government and has gained from falling energy prices that have helped it slash its current account deficit. Indonesia and Mexico are also attracting investment for similar reasons.
Foreign exchange slump
Nevertheless, according to data collated by ING for the leading 15 emerging market economies, net capital outflows in the second half of last year totalled $392.4bn. This compared to a total of $545.9bn in capital outflows over three quarters during the 2008-09 crisis. If the first quarter of this year also shows a capital outflow, the total loss from emerging markets over three quarters could get close to that seen during the crisis. It is possible, analysts say, that outflows will not only continue in the first quarter of this year but may actually accelerate to eclipse the $250.2bn seen in the final three months of 2014.
Emerging markets chart
While in 2008-09 the US was a key catalyst of emerging market distress, this time China is seen as the chief bugbear. Slowing Chinese GDP growth, coupled with a slowdown in construction, is triggering a large bout of capital flight as investors think they will earn more by parking their money elsewhere.
The main expression of this reversal is the implosion of the “China carry trade”, in which Chinese investors borrowed at low rates of interest abroad to pump back into Chinese property and a range of shadowy financial products . But such investments now seem more risky, and a record $91bn fled the country in the final quarter of last year.
“It’s all China, directly and indirectly,” says Frederic Neumann, economist at HSBC. “Despite a solid current account surplus, capital outflows over the past six months have drained reserves from China’s vast forex chest?.?.?.?and with the renminbi more fairly valued today it is difficult to see China running big balance of payment surpluses again.”
In Brazil, fragility stems from a combination of falling commodity prices and the rising US dollar. Although the country managed to attract net capital inflows in the second half of last year, the cost of doing so was a punitive interest rate environment in which the policy lending rate is 12.75 per cent.
Paying debts
Like many emerging markets, critics say, Brazil failed to use its boom years to make the tough decisions needed to drive productivity growth. “To reform while you are facing headwinds is very difficult,” says Sergio Trigo Paz, head of EM debt at BlackRock. “Some emerging markets will struggle to keep their investment grade ratings.”
According to a study by McKinsey, total emerging market debt rose to $49tn at the end of 2013, accounting for 47 per cent of the growth in global debt since 2007. That is more than twice its share of debt growth between 2000 and 2007.
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Some of the most significant capital outflows are originating from countries that piled debts up the quickest. South Korea, for instance, saw its debt to GDP ratio rise by 45 percentage points between 2007 and 2013, while China, Malaysia, Thailand and Taiwan experienced debt surges of 83, 49, 43, and 16 percentage points respectively.
But it is not only countries that are vulnerable. Another area of concern is the rise of the emerging market corporate hard currency bond market. Ten years ago, it hardly existed. Today, it is estimated at more than $2tn, making it bigger than the $1.6tn US high yield bond market, an asset class familiar to investors for decades. Its growth was fuelled by expansionary monetary policies in the US and elsewhere and by the hunt for yield among investors and fund managers with targets that could no longer be met in developed markets.
But US policy is changing course. David Spegel, head of emerging market bond strategy at BNP Paribas, is among those expecting conditions for emerging market borrowers to deteriorate. In a recent report, “Harbingers of Default”, he underlined the dangers posed by capital outflows: “The persistent higher cost of funding will continue to erode credit quality for related higher-risk issuers, if sustained?.?.?.?Since most defaults typically coincide with significant investor outflows, we continue to believe that further bouts of EM distress may yet come to bear on the market, as forced selling is exacerbated by already low liquidity conditions.”
Indeed, Mr Spegel notes, current bond prices suggest investors expect the rate of default for non-investment grade EM bonds — about a third of the total — to rise from 2.8 per cent on Wednesday to 12 per cent in January 2017.
If the upshot of all this is merely that countries and companies that have engorged themselves irresponsibly on debt are set to receive a dose of market discipline, then all well and good. The danger for emerging markets, and the wider world, is that the capital outflows will snowball to an extent that robs EM countries of the lifeblood they require to create jobs and engender their people with hope for the future.
I'm not stupid
The idiot should be fired. He didn't smell the trap?
The IARC study is a shaky crutch to worry about round up - not that it is or even probably is carcinogenic, but that it might be.
Don't own any. Once the enviros get a hold of a cause, anything can happen. But it will take more than what the IARC has come up with.
FT
Pharmacyclics chief wins $3.6bn from takeover That is a seventy-fold plus return for Robert Duggan, who amassed his stake in 2009 when the share price was languishing at $1. AbbVie dug deep to outbid four rival suitors for the Californian group, stoking fears that big pharma is overpaying for biotech groups. (FT)
Their title is misleading. Is it legal to style your company with the name of a government agency?
would do better with someone else at the helm, and I suspect I'm not alone in that view.
You certainly aren't as you know from the ARIA board, but the candidate that has presented it self is Sarissa. Whether it was bad decisioning or whatever, the company has gone from the teens when they took over to 3 today even with an approved obesity drug - with some hair, admittedly.
I suppose it's needless to add that I owned some and lost money.
could a lot of the short position in Ariad be hedging?
As an Asian friend of mine from long ago used to say - beats on me!
they bought long Puts to hedge
Buying puts won't hedge a short position in the stock - it does the opposite since it increases the bearishness of your overall position. Selling puts might - selling a put is bullish, and if you sell enough you might wind up delta neutral without having to cover any underlying short. Except that you'll have to rejigger the position constantly to remain delta neutral.
Thanks for the background. I did take a position, too early at 34.85.
Seems to me that what we have here is not a lethal failure like a trial failure might be, but a botched execution that can be retrieved given time (and money).
From your comments on the iVillage board, ACAD does bear watching tomorrow. I may be oversimplifying, but the root cause of the delay seems to have been the incompetence of the outgoing CEO in managing the preparations for a launch.
Such people are too demanding.