Hong Kong defends currency peg for second day as stocks jump

Hong Kong's de facto central bank stepped in for a second day to prevent the currency from rising against the US dollar as demand surged for the city's stocks. 

PHOTO: BLOOMBERG

11 Apr7:57 AM

[HONG KONG] Hong Kong's de facto central bank stepped in for a second day to prevent the currency from rising against the US dollar as demand surged for the city's stocks.

The Hong Kong Monetary Authority bought US$1.7 billion during the Hong Kong day on Friday at HK$7.75 a dollar, the upper limit of a convertibility range that triggers intervention. It bought an additional US$1.46 billion during New York hours. On Thursday, it had added US$400 million, in the first injection since August 2014.

Hong Kong's 32-year-old peg came under pressure as the city's benchmark Hang Seng Index jumped 7.9 per cent this week, the biggest advance since 2011. Chinese investors twice used up their daily quota for purchasing Hong Kong equities this week through an exchange link.

"The HKMA will likely need to continue its intervention," Koon How Heng, a Singapore-based foreign-exchange strategist at Credit Suisse Private Banking & Wealth Management, wrote in a note on Friday. "Given the strong influx of southbound funds, the Hong Kong dollar may well be pinned down at 7.75 in the weeks to come."

The Hong Kong dollar was little changed at HK$7.75 versus the greenback as of 5:47 pm in Hong Kong on Friday, according to data complied by Bloomberg. The currency on Wednesday touched HK$7.75 for the first time since January.

Chinese investors bought 10.5 billion yuan (US$1.7 billion) of Hong Kong shares - the maximum allowed - on both Wednesday and Thursday. They acted after the Chinese regulators late last month announced that more fund managers could buy equities listed in the city.

Hong Kong pegged its currency to the US dollar in 1983 when negotiations between China and the UK over the city's return to Chinese rule spurred capital outflows. In 2005, policy makers committed to limiting the currency's decline to HK$7.85 per dollar and capping gains at HK$7.75.

The Hong Kong Monetary Authority injected a total of US$9.7 billion into the financial system to defend the peg in July and August last year, according to data compiled by Bloomberg.

BLOOMBERG

    
 

GE to sell bulk of finance unit, return up to US$90 billion to investors

General Electric will shed most of its finance unit and return as much as US$90 billion to shareholders as it becomes a "simpler" industrial business instead of an unwieldy hybrid of banking and manufacturing. 

PHOTO: REUTERS

11 Apr7:46 AM

[NEW YORK] General Electric will shed most of its finance unit and return as much as US$90 billion to shareholders as it becomes a "simpler" industrial business instead of an unwieldy hybrid of banking and manufacturing.

The company on Friday outlined a restructuring plan that includes buying back up to US$50 billion of its shares, selling about US$30 billion in real estate assets over the next two years and divesting more GE Capital operations. GE stock jumped 8.5 per cent.

"The stock has been under-owned by institutional investors, and that's going to change now," said Tom Donino, co-head of equity trading at First New York Securities.

The repurchase program, which will be partly funded by US$35 billion through money returned from GE Capital, is the second-biggest in history after Apple'S US$90 billion plan.

GE, which had 10.06 billion shares outstanding on Jan 31, said it expected to reduce that by as much as 20 per cent to 8 billion to 8.5 billion by 2018.

In all, GE said it planned to shed US$275 billion in GE Capital assets. That includes the previously announced spinoff of its Synchrony Financial credit card unit, the real estate transaction announced on Friday, and future sales of commercial lending and consumer banking businesses with assets of about US$165 billion.

The company plans to keep US$90 billion in finance assets directly related to selling its products such as jet engines, medical equipment and power generation and electrical grid gear.

GE has forecast earnings of US$1.70 to US$1.80 per share for this year, including 60 US cents from GE Capital, but expects profit to be "substantially higher" in 2018, executives said on a conference call with analysts.

Shrinking GE Capital will reduce earnings by 25 US cents per share, they said, but the stock buybacks should offset that impact.

The company already had a significant number of inquiries about GE Capital units before Friday's announcement, said Keith Sherin, the finance unit's chief.

Blackstone Group LP and Wells Fargo & Co confirmed that they were buying most of the assets of GE Capital Real Estate for about US$23 billion.

This is the biggest deal in the commercial property market since Blackstone's acquisition of office landlord Equity Office Properties Trust in 2007 for US$39 billion, including debt.

The moves announced on Friday will dramatically reduce GE's exposure to lending and other financial businesses.

GE chief executive Jeff Immelt told investors the company would try to generate 90 per cent of its profits from industrial operations by 2018. He had previously forecast that share would grow to 75 percent by 2016 from 55 percent in 2013.

"We just think the market timing is very good vis-a-vis the value of financial service assets," Immelt said in an interview."There have been moments in the past when there weren't a lot of buyers. Now there are."

Immelt and other GE executives said they planned to spend US$3 billion to US$5 billion a year on industrial acquisitions.

GE said it could return up to US$90 billion to investors through a combination of dividends, the US$50 billion in share buybacks, and completion of the Synchrony spinoff planned for late this year.

Executives gave several reasons for GE's accelerated retreat from financial businesses. One is that since the financial crisis, it has become more difficult for GE to fund its lending operations.

GE funded many of its loans and leases by borrowing money from bond markets. During the financial crisis it lost access to that funding, bringing it uncomfortably close to running out of cash.

Lenders like GE Capital and CIT Group, which cannot rely on bank deposits to fund their assets, have had to rethink the way they do business since the crisis. Many decided to either shed assets or become banks.

GE Capital's size and the potential risks in its lending portfolio made it subject to government regulation as a systemically important financial institution. GE said it would apply to escape that oversight in 2016 as it reduces the financial business' size.

GE said it would take after-tax charges of about US$16 billion for the restructuring in the first quarter, of which about US$12 billion would be non-cash.

Shares of GE were sluggish for the past year despite previous moves to reposition itself around the industrial businesses. Still, Friday's more dramatic move away from finance caught some analysts by surprise.

"What we did not expect was the speed with which management would move to undertake this transformation," Sanford Bernstein analyst Steven Winoker wrote. "We view today's announcement as an overwhelming positive for the company."

During the conference call, Barclays analyst Scott Davis told executives that while he had been a critic, "this is good stuff ... I guess you can keep your jobs a little longer."

JPMorgan Chase and Centerview Partners provided general financial advice to GE, while Bank of America Corp and Kimberlite Advisors advised on the real estate deal. Eastdil Secured and Wells Fargo Securities were advisers to Blackstone and Wells Fargo.

REUTERS

    
 

Substantial Goldman data transfer prompted code-theft probe

Aleynikov, who has already spent almost a year in prison, is facing a jury for the second time because state prosecutors in Manhattan charged him after his federal conviction was thrown out. His lawyer argues that his actions, downloading computer code in June 2009 as he left for another job, are a civil matter between him and Goldman Sachs and not a crime.

PHOTO: BLOOMBERG

11 Apr9:20 AM

[NEW YORK] A Goldman Sachs Group managing director told a jury he began investigating possible theft of the company's computer code after being alerted to data transfers of "reasonably substantial size."

"We were pretty sure we had lost information and we wanted to know what we had lost," Mark Freeman testified during the trial of Sergey Aleynikov, the former Goldman Sachs programmer accused of stealing the firm's high-frequency trading code.

Aleynikov, who has already spent almost a year in prison, is facing a jury for the second time because state prosecutors in Manhattan charged him after his federal conviction was thrown out. His lawyer argues that his actions, downloading computer code in June 2009 as he left for another job, are a civil matter between him and Goldman Sachs and not a crime.

Freeman, called by prosecutors to testify Friday, said he contacted other people at the bank after getting an e-mail alerting him to the data transfers, began a forensic analysis to determine what happened, and found a series of commands connected to Aleynikov's Goldman Sachs e-mail that, if executed, would have sent a group of files to a Gmail address associated with the programmer.

"We concluded that we had lost source code to a repository outside the firm" and that transfers may have been taking place for several months, said Freeman, a 26 1/2-year employee of Goldman Sachs.

Aleynikov, 45, is charged with unlawful use of secret scientific material and unlawful duplication of computer related material. If convicted, he faces as long as four years in prison.

Manhattan District Attorney Cyrus Vance Jr. claims Aleynikov stole the Goldman Sachs code and tried to cover his tracks when he left for a job that would have more than doubled his salary. The Russian-born programmer denies the charges and rejected an offer to plead guilty in exchange for not serving more time in jail.

Aleynikov was sentenced to eight years in prison after being convicted by a jury in Manhattan federal court in 2010. In 2012, the US Court of Appeals in New York threw out the verdict, ruling that his actions weren't a crime under federal law.

Aleynikov, whose 2009 arrest served as an inspiration for author Michael Lewis' best-selling book "Flash Boys," was the first of a group to be charged by Vance with stealing intellectual property from financial firms. Aleynikov has said that most of what he took was open-source code that he didn't intend to hurt the bank. He contends in the trial that the bank wasn't hurt economically, so his actions aren't a crime under state law.

Goldman Sachs partner Paul Walker, the firm's co-head of technology, told the jury Friday that the firm's high-frequency trading code is among its most valuable assets and is kept confidential because that's "where all of our intellectual property about how we operate this business lives."

The company protects the code by securing its facilities, restricting access to developers and programmers, requiring employees to sign confidentiality agreements and hiring an outside security group to detect and prevent data leaks, Mr Walker said.

The code provides the "sum of our investment over decades" in building a robust trading system and would be a "valuable asset" to anyone trying to replicate what Goldman Sachs had,'' and could allow competitors to make similar trades and reduce Goldman's profit and market share, Mr Walker said.

"The developer would have the answer in the back of the book," said Mr Walker, a former physics researcher who joined Goldman Sachs in April 2002 after 2 1/2 years at JPMorgan Chase.

Mr Walker said New York-based Goldman Sachs conducted an internal investigation on June 30, 2009, after discovering that Aleynikov downloaded about 32 megabytes of code, and notified the FBI the next day.

Goldman Sachs never lost any portion of the code because of Aleynikov and its high-frequency trading platform operated without interruption in the month before his arrest, Mr Walker said in response to questions from Kevin Marino, the programmer's lawyer.

"We concluded that a very valuable piece of computer code had been taken by an employee who left the firm," Walker said. "We concluded that he had taken a substantial portion" of the code for the platform.

Tarball Adam Schlesinger, a former Goldman Sachs executive who now works as a managing director for JPMorgan, testified Thursday that he began probing after Freeman called him. He said he found a script of commands in Aleynikov's home directory that created a mass of files known as a tarball that essentially backed up Goldman's entire source code. Mr Schlesinger said it appeared as if someone had attempted to "cover their tracks" by deleting their command history and backdating the script to make it seem as if it had been created years earlier.

"At that point I had no knowledge that Mr Aleynikov was involved," Mr Schlesinger said. "I figured there had to be a logical explanation for the transfer." The case is New York v. Aleynikov, 04447-2012, New York State Supreme Court, New York County (Manhattan).

BLOOMBERG

    

Blackstone swooped on regulation-weary GE to do mega real estate deal

It took Blackstone Group less than four weeks after an approach from General Electric Co to clinch the biggest real estate deal since the financial crisis. Yet the seeds of that deal were planted seven years ago, during the crisis. 

PHOTO: BLOOMBERG

11 Apr8:25 AM

[NEW YORK] - It took Blackstone Group less than four weeks after an approach from General Electric Co to clinch the biggest real estate deal since the financial crisis. Yet the seeds of that deal were planted seven years ago, during the crisis.

After the Wall Street meltdown, US regulators slapped rules on banks and other financial institutions aimed at curbing their risk taking. These requirements, including more burdensome capital requirements and the hiring of additional compliance staff, have raised the costs of real estate investing, driving some out of the business and prompting others to cut back.

As part of a wider restructuring, GE announced on Friday it would sell most of the assets of its GE Capital Real Estate unit to Blackstone and Wells Fargo for about US$23 billion.

This move away from finance operations will allow GE to break free from the regulatory constraints that came from its designation as a systemically important financial institution (SIFI).

The Financial Stability Oversight Council, a panel of regulators created after the financial crisis, has already labelled four non-bank financial firms such as large insurers as SIFIs. It has now set its sights on the asset management industry, reviewing whether activities and products offered by firms such as BlackRock and Fidelity Investments may pose risks to the broader economy.

Blackstone, however, is smaller than such traditional asset managers. It said in its latest annual report it considers it unlikely it would be designated a SIFI.

Major financial institutions such as Morgan Stanley, Goldman Sachs Group and American International Group have all scaled backed their real estate investment operations since 2007.

Blackstone stepped into the void. Its real estate business grew from US$18 billion in assets under management in 2007, a year before a housing market bust triggered the crisis, to US$80.9 billion as of the end of last December. "We have very consciously looked at where the banks are pulling back, or we spent a lot of time looking at the bank regulations... thinking okay, well that's a market that used to be a bank-driven market, they will pull back or they will change their pricing," Blackstone chief financial officer Laurence Tosi told the Credit Suisse Group Financial Services Forum in February.

Blackstone and other alternative asset managers have largely stayed below the regulators' radar thanks to their structure. Unlike banks, Blackstone does not take deposits.

The investors in its funds agree to lock up their money for 10 to 12 years, so there is no risk of sudden outflows, reducing the possibility of systemic risk to the financial system.

Blackstone's private real estate funds draw institutional holders such as public pension funds and insurance firms, while its real estate investment trusts attract retail investors.

The GE deal is Blackstone's largest since it acquired office landlord Equity Office Properties Trust from Chicago real estate magnate Samuel Zell in 2007 for $39 billion, including debt.

Blackstone had already bought about US$6 billion in assets from GE in recent years, including Australian office buildings and Japanese apartments. GE Capital has also been a major financier of Blackstone's real estate deals.

GE reached out to Blackstone in mid-March, seeking a buyer with a big real estate platform with the capacity to buy both equity and debt property assets, according to people close to the deal. "The distance between Blackstone and everyone else is like the Grand Canyon," said an investment banker who has advised the company.

The deal values the assets at book value, with a built-in mechanism to mitigate Blackstone's risk for buying them with limited due diligence, one of the people added. It would otherwise have taken months to assess each property. It is unclear what that mechanism entails.

Blackstone is acquiring roughly 24 million square feet of office properties in the US and 18 million square feet of office, logistics and shopping malls in Europe. It also agreed to purchase loans in the United States, Mexico and Australia.

From single-family homes in the United States to distressed commercial property in Europe, real estate has overtaken private equity as Blackstone's most high-profile and lucrative business. It accounted for 43 per cent of its economic net income in 2014.

REUTERS

    
 

Asian currencies led by Singapore dollar head for biggest weekly decline since January

PUBLISHED ON APR 10, 2015 1:38 PM

SINGAPORE (Bloomberg) - Asian currencies headed for their biggest weekly drop since January, led by Singapore's dollar and Thailand's baht, as the greenback strengthened on signs the U.S. is moving closer to raising borrowing costs.

The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, rallied this week as minutes of the March policy meeting released on Wednesday showed there was some support for a June rate increase. The Singapore dollar fell the most in a month before a central bank review on Tuesday at which it may ease for the second time this year.

The Bloomberg-JPMorgan Asia Dollar Index dropped 0.7 per cent from April 3 as of 11:58 a.m. in Hong Kong, according to data compiled by Bloomberg. The Singapore dollar weakened 0.7 per cent to $1.3593 against its U.S. counterpart, Thailand's baht declined 0.4 per cent to 32.54 and China's yuan fell 0.23 per cent to 6.2093.

"Nobody wanted to be giving up entirely on the dollar," said Leong Sook Mei, the Singapore-based Southeast Asia head of global markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. "There's uncertainty over whether there will be a June or September Fed rate rise."

Oil drillers pull rigs out of US fields for 18th week

11 Apr7:51 AM

[SAN FRANCISCO] Oil explorers idled rigs in US fields for an 18th week, deepening an unprecedented retrenchment in drilling and bringing the count to the lowest since December 2010.

Rigs targeting oil in the US fell by 42 to 760, with Texas's Permian Basin and Eagle Ford shale formation taking the biggest hits, Baker Hughes said on its website on Friday. The 42-rig drop followed more modest slides in the two weeks prior that appeared to show the pace was easing.

Traders are watching the weekly rig counts as they wait for US production to drop and rebalance oil markets. The country has lost more than half its oil rigs since October as a more than US$50-a-barrel collapse in crude prices prompts drillers to scale back spending in shale formations.

"This week's count was a little bit surprising - there's nothing smooth about these drops," James Williams, president of energy consultant WTRG Economics, said by phone on Friday. "What is clear is that US. oil production will, if it hasn't already, peak by next month, and by the second half of this year, we will be seeing measurable declines."

Evercore ISI analysts including James West said in a research note on Thursday that the "impending supply drop" will coincide with increased US refinery runs heading into the peak summer driving season and work to correct "the global supply-demand imbalance."

The US benchmark West Texas Intermediate oil for May delivery rose 50 cents to US$51.29 a barrel at 2:08 p.m. on the New York Mercantile Exchange, down 52 percent from the 52-week high of US$107.73 reached June 20.

The slowdown in drilling has yet to make a real dent in US oil production, which reached a weekly record in March because of bigger and higher-yielding shale wells. Output climbed 18,000 barrels a day last week to 9.4 million, Energy Information Administration data show.

"It takes a while for the production to moderate," Janelle Nelson, a Minneapolis-based portfolio analyst with RBC Wealth Management's portfolio advisory group, said by phone on April 8.

"There may be fewer rigs drilling, but they're drilling the best wells with the best productivity with the best operators."

Goldman Sachs Group said in an April 6 research note that US production is showing signs of nearing a peak.

"The US rebalancing is materializing," Goldman analysts including Damien Courvalin in New York wrote in the report. "We find however that the current US oil rig count points to US crude oil inventories rising again during this coming fall's refinery turnarounds."

Crude stockpiles swelled by another 10.9 million barrels to a record 482.4 million in the week ended April 3, EIA data show.

Contributing to the worldwide glut of oil is output from the Organization of Petroleum Exporting Countries, which accounts for about 40 per cent of the world's oil and has resisted calls to curb production.

OPEC will increase crude exports by 200,000 barrels a day this month, according to tanker tracker Oil Movements.

Crude prices will have to remain low in the coming months to achieve a decline in US production that's steep enough to rebalance global oil markets, Goldman said in its report. "While the decline in the US rig count has been faster than we expected," the bank said, "it remains insufficient."

Gas rigs rose by three to 225 and miscellaneous rigs fell by one to three, bringing the total rig count down by 40 to 988, the lowest level since August 2009.

BLOOMBERG

  
 

Hong Kong poised to overtake Japan as world's No 3 stock market

Hong Kong is set to overtake Japan as the world's third-largest stock market, spurred on by surging Chinese demand for shares in the former British colony. 

PHOTO: BLOOMBERG

10 Apr10:30 PM

[TOKYO] Hong Kong is set to overtake Japan as the world's third-largest stock market, spurred on by surging Chinese demand for shares in the former British colony.

The value of equities listed in Hong Kong rose to US$4.9 trillion on Thursday, catching up to the US$5 trillion total for Japanese stocks. Mainland shares in Hong Kong jumped 8.9 per cent this week, the best performance of 93 equity gauges tracked by Bloomberg, helping put Hong Kong on course to take third spot behind the US's US$24.7 trillion and mainland China's US$6.9 trillion. Turnover in Hong Kong surpassed Japan on both Wednesday and Thursday.

The stock mania that pushed the Shanghai Composite Index up 87 per cent in the past 12 months spread to Hong Kong this week, after valuation discounts in the city reached the most extreme levels since 2011 and mainland authorities made it easier for domestic funds to use a cross-border bourse link. Baring Asset Management Ltd. says the rally in Hong Kong has room to run.

"There will be more convergence between the mainland Chinese market and Hong Kong," said Khiem Do, who helps oversee about US$60 billion at Baring Asset in Hong Kong. "The trend will be positive for Hong Kong."

Flows from across the border started to accelerate after the securities regulator increased access to the bourse link for mainland fund managers on March 27. Chinese investors bought the maximum daily allowance of 10.5 billion yuan on Wednesday and Thursday for the first time since the program started in November.

Japan is poised to drop to No. 4 even as the nation's shares almost double under Prime Minister Shinzo Abe. The Nikkei 225 Stock Average briefly traded above 20,000 Friday for the first time in 15 years. Stocks are climbing as the Bank of Japan pumps record amounts of money into exchange-traded funds and nation's public pensions shift from bonds to equities.

"If Japan was overtaken while Japanese shares were declining, that would signal we're in a downfall," said Koji Toda, chief fund manager at Resona Bank Ltd in Tokyo."

But the Japanese market is actually rising on hopes that monetary easing will help us escape deflation. And if Chinese stocks are rallying on expectations the government will prop up the economy, that's great news for all economies."

Hong Kong's value relative to Japan is helped by the city's currency peg to the US dollar. The yen has weakened 17 per cent against the greenback over the past two years, reducing the value of Japanese shares in US dollar terms.

A similar story is playing out at the nations' bourses. Hong Kong Exchanges & Clearing overtook CME Group as the world's largest exchange by market value on Wednesday. Japan Exchange Group Inc, which operates the Tokyo Stock Exchange, stands at No 7, even as shares soared since listing at the start of 2013.

Valuations favor Hong Kong. The Hang Seng Index traded at 12.9 times estimated earnings at Thursday's close, with the Hang Seng China Enterprise Index of mainland companies valued at 9.6 times expected profit. That compares with 15.5 for Japan's Topix index, and 17.7 for the Standard & Poor's 500 index.

The Shenzhen Stock Exchange, China's other main stock- trading venue, is planning to link with Hong Kong later this year. Baring Asset's Mr Do says that will send more mainland money into Hong Kong.

"In China, the authorities have indirectly discouraged investors from punting the property market and the high-yield market," said Mr Do. "So where do they go? There's only one other avenue: Hong Kong stocks."

WP

    
 

Euro's reserve status at risk as central banks dump holdings

PUBLISHED ON APR 10, 2015 2:07 PM

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Quantitative easing may be helping Europe achieve its economic targets, but it's also undermining the long-term viability of the euro by tarnishing its allure as a global reserve currency. -- PHOTO: REUTERS

LONDON (Bloomberg) - Quantitative easing may be helping Europe achieve its economic targets, but it's also undermining the long-term viability of the euro by tarnishing its allure as a global reserve currency.

Central banks cut their euro holdings by the most on record last year in anticipation of losses tied to unprecedented stimulus. The euro now accounts for just 22 per cent of worldwide reserves, down from 28 per cent before the region's debt crisis five years ago, while dollar and yen holdings have both climbed, the latest data from the International Monetary Fund show.

"As a reserve currency, the euro is falling apart," said Daniel Fermon, a strategist at Societe Generale in Paris. "As long as you have full quantitative easing, there's no need to invest. The problem for the moment is we don't see a floor for the currency. Money's flowing out."

European Central Bank President Mario Draghi has in the past welcomed the drop-off in reserve managers' holdings because a weaker exchange rate makes the continent more competitive. Yet firms warn the currency's waning popularity reflects a more lasting loss of confidence in an economy that shrank in two of the past three years.