Analysis: Russian-style quantitative easing may sow trouble

MOSCOW (Reuters) – It has been dubbed quantitative easing, Russian-style. A surge in central bank lending to Russian banks is sustaining rapid loan growth, but also risks fueling inflation and a potential credit bubble.

On the face of it, Russia’s central bank has been acting tough. To clamp down on inflation it has recently hiked interest rates – in stark contrast with the ultra-loose monetary policies seen in western economies.

But while Russia has tightened the monetary screws with one hand, it has been opening the flood gates with the other.

“They are sending conflicting signals,” said Natalia Orlova, chief economist at Alfa Bank. “They are raising interest rates … and at the same time they continue to fund loan growth.”

Total credit extended by the central bank has mushroomed to 2.5 trillion roubles ($80 billion) as of November 1 from negligible levels in mid-2011, and is approaching levels seen at the height of the 2008-9 financial shock.

And the central bank’s role in financing banks looks set to keep growing as Russia’s authorities endeavor to halt a possible slide in bank lending that would deepen an economic slowdown and undermine support for President Vladimir Putin.

At least in theory, more central bank funding for banks is a way to prop up the economy by encouraging banks to lend, supporting spending by companies and consumers.

FUNDING SQUEEZE

At the root of the central bank’s growing lending is an intensifying squeeze on banks’ market funding. Overnight interbank lending rates have risen steadily from below 3 percent at the start of 2011 to around 6 percent today.

Many bankers blame the central bank. Last month German Gref, the head of Russia’s largest bank Sberbank (SBER.MM), criticized its September rate hike, arguing that higher borrowing costs would crimp lending and damage economic growth.

But the deeper roots of the funding shortage lie in Russian banks’ own behavior.

“The cause of the problem is that the banks have deployed more liquidity than they have attracted in the form of customer funding,” said Yaroslav Sovgyra, associate managing director at credit rating agency Moody’s in Moscow.

In the first 10 months of this year, total lending by Russian banks grew by 15 percent, outpacing the 9.4 percent increase in client deposits, according to the central bank’s monthly banking sector review.

The shortfall means that banks are instead turning to the central bank to fill the gap. Moody’s predicts that the share of central bank funding in banks’ liabilities, now some 6 percent, will reach 15 percent by the end of next year.

Under pressure from banks, the central bank has promised to accept a wider range of collateral in future, and extend the maximum duration of central bank refinancing operations from the present three months to up to one year.

That raises concerns that what began as an emergency measure is rapidly becoming the new norm.

“Banks generally should resort to central bank funding in a difficult situation, when you need liquidity as a matter of extraordinary support,” said Sovgyra. “But not during the normal course of business to finance loans.”

INFLATION OVERSHOOT

The central bank’s monetary injections may help to explain disconcertingly high inflation, which is set to overshoot the central bank’s 6 percent inflation target for the year.

“Without these injections core inflation would be much lower — it’s quite obvious,” said Alfa’s Orlova, who predicted that the central bank would also miss its 6 percent target next year due to political and economic pressure to support banks.

Analysts are also worried that the expansion in central bank credits will dilute asset quality, both of the central bank itself and of the banks it is lending to.

They point out that growth in retail lending — the riskiest segment of the market — has recently accelerated to over 40 percent, notwithstanding the recent hike in central bank rates.

Concerned by the rapid increase, the central bank is now tightening regulations to damp down the riskiest retail lending. But it seems less inclined to rein in corporate lending, the main cause of Russian banks’ troubles in the 2008-9 crunch.

Leading bankers see the situation differently.

“If you look at penetration of loans in the economy it still significantly lags emerging market peers, and is obviously far away from the developed economies,” said Herbert Moos, chief financial officer of VTB Bank (VTBR.MM), Russia’s No.2 lender.

The ratio of loans to GDP, around 45 percent, compares with 55 percent in Poland and 150 percent in the European Union – suggesting that Russia is a long way from the kind of debt crisis now plaguing western economies. Retail loans represent just 10 percent of GDP.

But some Russian bankers paint a less reassuring picture.

“A lot of banks are involved in speculation, because the central bank provides a big volume of resources,” said Andrei Larkin, deputy chairman of mid-size Absolut Bank.

“Banks take a big risk of a liquidity gap. In general the money is short-term, and the assets are long-term.”

Leading bankers acknowledge the latter problem, but argue that the solution is for Russia to go even further in copying the quantitative easing policies seen in the West by providing multi-year financing.

“It’s not only about inflation and monetary stability,” said VTB’s Moos. “If Russia wants to support growth of its own economy, it needs to provide improved longer-term financing.”

Sceptics say that Russia can hardly be compared to western countries, which are resorting to highly unorthodox measures to revive stagnant lending and avert a deflationary debt spiral.

“Obviously that might be necessary if you have a problem effectively with loan growth – like you have in the U.S. or euro zone – but that’s not a problem here,” said Clemens Grafe, chief economist at Goldman Sachs in Moscow.

“You can’t fund your loan growth with short-term repos (central bank loans), and you shouldn’t fund it with long-term repos either, because that is essentially printing money.”

($1 = 31.1612 Russian roubles)

(Editing by Douglas Busvine/Jeremy Gaunt; Graphic by Vincent Flasseur)

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Hurricane Sandy disrupts Northeast telecom networks

NEW YORK (Reuters) – Power outages and flooding caused by Hurricane Sandy disrupted telecommunications services on Tuesday and coverage was spotty for everything from cellphones and home telephones to Internet services in Northeastern states.

Verizon Communications said in the early hours of Tuesday that its wireline service was suffering as flooding in its central offices in lower Manhattan affected its back-up generators and batteries.

The company said that its engineers were on site during the night and were beginning to assess damage.

“Verizon is discovering that many poles and power lines/Verizon cables are down throughout the region due to heavy winds and falling trees,” the company said in a statement.

Sprint Nextel, the No. 3 U.S. mobile provider said it was seeing outages at some cell sites because of the power outages across all the states in Sandy’s path including New York, New Jersey, Connecticut, Pennsylvania, Washington DC, Maryland, North Virginia and New England.

People complained of outages to their cable telephone, Internet and television services from providers ranging from Comcast Corp, Cablevision Systems Corp and Verizon in New Jersey, Connecticut, and New York.

Cablevision said it was experiencing widespread service interruptions primarily related to loss of power. Comcast had no immediate comment.

Cellphone service also appeared to be spotty for other top providers AT&T Inc and T-Mobile USA, a unit of Deutsche Telekom, according to some customers.

AT&T declined to comment on whether it was having network problems but said that it “will continue to monitor” its wireline and wireless networks.

“Once we have a clear sense what’s happening and where we’ll communicate it,” spokesman Mark Siegel said.

Verizon Wireless declined immediate comment expect to say that it is assessing the situation. A T-Mobile USA representative was not immediately available for comment.

Several Time Warner Cable customers in Brooklyn said that their Internet, television and phone services stopped working Monday night but were back again by Tuesday morning.

Time Warner Cable said that while it has not seen any major damage to its infrastructure, its customers who do not have electricity do not have cable services.

Millions of people in the eastern United States awoke on Tuesday to flooded homes, fallen trees and widespread power outages caused by Sandy, which swamped New York City’s subway system and submerged streets in Manhattan’s financial district.

At least 15 people were reported killed in the United States by one of the biggest storms to ever hit the country. Sandy dropped just below hurricane status before making landfall on Monday night in New Jersey. [ID:nL3E8LU2KJ] (Additional reporting by Jennifer Saba in New York and other Reuters reporters)

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Hurricane Sandy losses worse than Irene: disaster forecasters

Reuters – Hurricane Sandy appears to have easily caused more losses than last year’s Hurricane Irene, but final totals will be hard to come by for some time because of the scale of the disaster, catastrophe forecasting companies said on Tuesday.

Sandy left millions without power, caused widespread flooding that may shut New York City’s subways for days, and killed potentially dozens of people up and down the U.S. east coast.

RMS, one of the three primary firms used by the insurance industry to calculate disaster exposures, indicated that Sandy should outdo the roughly $4.5 billion in insured losses Irene caused after hitting the northeast in August 2011.

“Sandy event is much more severe … and has impacted NYC to a much worse degree than Irene,” RMS said in a storm report early Tuesday.

Its assessment follows that of peer Eqecat, which said late Monday that Sandy was likely to cause anywhere from $5 billion to $10 billion in insured losses and from $10 billion to $20 billion in economic losses.

If Eqecat is correct, Sandy would rank as the fifth-worst hurricane in history, based on inflation-adjusted losses, according to the Insurance Information Institute.

A better picture should emerge in the days ahead as insurers get their catastrophe teams into the most affected areas and begin making assessments. Allstate said it had more than 1,100 claims staff staged and ready to go once the storm has passed.

Eqecat and its peers are likely to refine their estimates as well. AIR Worldwide, the other large disaster modeler, is due to release its own initial estimate over the next day.

Most financial analysts expect that an insured loss of even $10 billion would have little effect on the insurance and reinsurance industries, aside from a probable hit to fourth-quarter earnings.

Shares in U.S.-listed insurers will not trade again on Tuesday because of the ongoing market closure, but in Europe insurers and reinsurers opened on relief that losses are apparently manageable.

European reinsurance analysts at Citi said Tuesday the losses were unlikely to have any impact on pricing for next year, which is expected to be flat at best in the January contract renewals due to excess industry capacity.

(Reporting by Ben Berkowitz; editing by Prudence Crowther)

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Stock index futures edge lower; cash indexes shut

 

Credit: Reuters/Andrew Kelly

LONDON (Reuters) – U.S. stock index futures traded a touch lower on Tuesday, with cash equity indexes set to remain closed for a second day due to a severe storm hitting the East Coast.

Futures for the S&P 500 fell 0.2 percent, Dow Jones futures shed 0.1 percent and contracts on the Nasdaq 100 were down 0.4 percent at 0940 GMT.

Sandy, one of the biggest storms ever to hit the United States, battered the nation’s eastern seaboard on Tuesday, swamping New York City streets with record levels of floodwater, blacking out power to millions of people and bringing transport to a halt through much of the region.

NYSE Euronext (NYX.N) said it plans to test a new contingency plan to help resume trading as Wall Street turns its attention to whether markets can resume functioning on Wednesday. That is a key session because it marks the end of the month, when traders price portfolios.

The storm also prompted dozens of companies, including Pfizer (PFE.N), McGraw-Hill (MHP.N), Thomson Reuters (TRI.N), Ralph Lauren (RL.N) and Time Warner (TWC.N), to delay their quarterly results.

Ford is expected to report third-quarter earnings per share of $0.30, down from $0.46 last year, and analysts will focus on the automaker’s operations in Europe, where the company will be cutting costs, according to recent interviews with the management.

Video-games makers Electronic Arts (EA.O) and Take-Two Interactive Software (TTWO.O) also post quarterly results. EA’s holiday release Medal Of Honor has not yet generated the buzz the company had expected and this could push the company to lower its 2013 guidance, analysts say.

Apple Inc (AAPL.O) CEO Tim Cook on Monday pushed out the powerful head of the company’s mobile software products group, sources said, in a major management shake-up that also claimed the recently hired chief of the retail stores division.

European stocks rose on Tuesday, led by Swiss bank UBS (UBSN.VX) after it confirmed cost-cutting plans and UK energy firm BP (BP.L) after it raised its dividend.

Japan’s Nikkei .N225 average fell 1 percent to a two-week closing low on Tuesday after the Bank of Japan eased monetary policy by increasing the size of its asset-buying and lending programme by $138 billion, largely as expected.

S&P 500 futures fell 4.9 points on Monday and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 69 points and Nasdaq 100 futures NDc1 fell 15.75 points.

(Reporting By Francesco Canepa; editing by Stephen Nisbet)

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Exclusive: UAE’s Dana Gas won’t repay bond – sources

DUBAI (Reuters) – Dana Gas DANA.AD is set to become the first United Arab Emirates (UAE) company to fail to pay an Islamic bond on maturity, three sources familiar with the matter said on Tuesday, sending its stock and bond prices sharply lower.

The UAE’s largest listed natural gas firm, hit by payment delays from Egypt and Iraq’s Kurdistan region, will not repay a $920 million convertible Islamic bond, or sukuk, when it matures on Wednesday, the sources said.

However, Sharjah-based Dana has won more time to hammer out a deal with bondholders, they added.

Dana Gas declined to comment.

Although indebted firms in the Gulf Arab state have extended maturities on billions of dollars in bank loans since the onset of the financial crisis in 2008-09, no sukuk have been restructured or unpaid on maturity.

Saudi and Kuwaiti companies have defaulted on Islamic bonds in the past, leading to complex debt negotiations which have dragged on for years. Kuwait’s Investment Dar, which co-owns luxury carmaker Aston Martin, defaulted on a $100 million Islamic debt issue in 2009.

Dana has a $1 billion sukuk maturing on October 31. It repurchased about $80 million of the sukuk in 2008, leaving $920 million outstanding.

The five-year sukuk, which was issued with a 7.5 percent coupon, has gained international interest as a majority of the debt is said to be owned by large investment firms including BlackRock Inc (BLK.N) and Ashmore Group (ASHM.L).

A source said that London-based Spinnaker Capital was among large holders. An executive at Spinnaker in London said it does not own Dana Gas bonds currently and has not held them before. BlackRock owns about 30 percent of the outstanding sukuk, according to two separate market sources.

There is “absolutely no chance” of a white knight swooping in to repay the bond by the due date, a source close to the talks said.

In 2009, the Abu Dhabi government stepped in at the eleventh hour to help Dubai repay developer Nakheel’s $4.1 billion Islamic bond.

The sources said Dana, in which Crescent Petroleum owns a 20-percent stake, reached a standstill agreement with creditors in early October giving it six months to repay the bond.

Some creditors are preparing for a potential “post-default scenario”, one source familiar with the discussions said, in which no deal would be reached at all.

STOCKS AND BONDS SINK

Shares in Dana fell 8.5 percent to 0.43 dirhams on the Abu Dhabi bourse after the Reuters report before closing down 4.26 percent.

The shares have been battered by concerns over how Dana will find funds to repay the bond and limited communication from the company on the matter. The sukuk has a conversion price of 1.926 dirhams.

The sukuk, which is lightly traded, was quoted at a bid price of 68 cents on the dollar on Tuesday, down from 78 cents on the dollar on Monday, according to prices quoted by Nomura.

Dana is to issue a statement on Wednesday or early Thursday detailing its plans to restructure the bond, said two sources, who spoke on condition of anonymity as the matter is not public.

There was a “high probability” the Dana sukuk will be restructured, London-based investment firm Exotix said in a report earlier this year, adding its restructuring valuation on the privately-owned firm was 61.5 percent of par value.

Dana, which also has a 3-percent stake in Hungarian group MOL MOLB.BU, is not seen as a strategic entity for the UAE and so any government support is unlikely.

PAYMENT PROBLEMS

In May, Dana said it wanted to find a consensual deal with sukukholders to repay the bond, and said it had hired Blackstone Group (BX.N), Deutsche Bank (DBKGn.DE) and law firm Latham & Watkins as advisers.

Investors have hired Moelis and law firm Linklaters as advisers.

Dana, which has operations in the UAE, Egypt and Iraq’s Kurdistan region, says its cash flow has been affected by global economic conditions and regional events, including Egyptian unrest last year which delayed payments.

The company had a cash balance of 601 million dirhams ($164 million) as of June 30, 2012. Outstanding receivables on Egypt gas deliveries stood at 729 million dirhams and 1.2 billion dirhams in the Kurdistan region at that time.

In a recent interview, Dana board member and Crescent Chief Executive Majid Jafar said Egypt was paying the company for all fuel it was receiving from its operations and was optimistic outstanding payments would be settled.

Jafar said last week talks between the company and creditors were still ongoing, and have been “amicable and friendly.”

(Additional reporting by Mirna Sleiman, Rachna Uppal, David French and Daniel Fineren; Editing by Andrew Torchia and Mark Potter and David Cowell)

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UBS to cut 10,000 jobs in fixed income retreat

1 of 3. A man walks past a logo of Swiss bank UBS in Zurich October 30, 2012. Switzerland’s biggest bank UBS unveiled plans to wind down its fixed income business and fire 10,000 bankers in one of the biggest bonfires of finance jobs since the implosion of Lehman Brothers in 2008.

Credit: Reuters/Arnd Wiegmann

ZURICH (Reuters) – Swiss bank UBS unveiled plans on Tuesday to fire 10,000 staff and wind down its fixed income business, returning to its private banking roots as it adapts to tough capital rules that make it harder to turn a profit from trading.

Zurich-based UBS will focus on wealth management and a smaller investment bank, ditching much of the trading business that ran up $50 billion in losses in the financial crisis.

Some UBS staffers took to social media to air their frustration after dozens of traders were stopped from entering the bank’s London offices on Tuesday.

Some staff turned up to work to find their employee cards no longer worked at the turnstile and were then escorted to human resources, according to various sources within the bank.

Once at human resources, they received their personal items in a bag with a letter saying they would have two weeks paid leave, after which they were to return to pick up their redundancy package, the sources said.

Chafing at their brusque treatment by the Swiss bank, several tweeters revived “U’ve Been Sacked,” an invented acronym for UBS which circulated in 1998 after the bank fired hundreds of staff following the merger of the two big Swiss banks which formed today’s UBS.

Chief Executive Sergio Ermotti, a former Merrill Lynch and UniCredit banker who took over after the Adoboli affair, is leading the three-year overhaul aimed at saving 3.4 billion Swiss francs ($3.6 billion), on top of cuts of 2 billion francs.

Former investment bank co-head Carsten Kengeter will lead the isolation and winding down of its fixed-income activities that are no longer profitable as a result of strict capital rules on riskier business introduced after the financial crisis.

The remaining investment bank – handling equities, foreign exchange trading, corporate advice, and precious metals trading – will be run by Andrea Orcel, a recent Ermotti hire from Bank of America who co-ran the unit with Kengeter until Tuesday.

“This decision has been hard but it is necessary to create a UBS that is fit for the future,” Ermotti said. “The business model we are creating will be unique in the banking industry.”

The measures translate to a 15 percent staff cut, taking UBS’s overall staff to 54,000, from 63,745 now, already down from a 2007 peak of 83,500 as banks have shed tens of thousands of jobs globally since the financial crisis of 2008.

Of the job cuts, 2,000 will be front-office investment banking staff, the revenue generators. Cuts among support staff will bring the layoffs to above 5,000 in the securities unit alone, Ermotti said in Zurich.

About 2,500 positions will go in Switzerland, slightly more than that in the United States, and the rest in Britain, Ermotti said.

A smaller investment bank will leave UBS focused on its private bank, which looks after the affairs of the wealthy. With 1.6 trillion francs in assets, it is the second-largest operation of its kind in the world after Bank of America.

UBS shares, which soared 7.3 percent on Monday in anticipation of the announcement, were up another 4.3 percent at 13.69 francs by 1256 GMT in exceptionally heavy trading, their highest since July 2011, compared with a 0.7 percent rise for the European bank sector index.

“This is a transformational change for UBS, which investors wanted to happen for a long time,” said Kepler Capital Markets analyst Dirk Becker. “After the completion of this downsizing UBS is an attractive investment case, but we still believe the execution risk must not be underestimated.”

UBS, which took a government bailout in 2008 after more than $50 billion in mortgage losses, is effectively admitting the failure of an attempt to crack the fixed-income big league launched a decade ago by former chairman Marcel Ospel.

The bank suffered a $2.3 billion hit last year blamed on trader Kweku Adoboli, now on trial on charges of fraud and false accounting.

Deutsche Bank said on Tuesday it hopes to benefit from the UBS cuts as its investment bank delivered record third-quarter sales and trading revenue.

Credit Suisse said last week it was also cutting more costs to boost its profits and capital but did not announce the same kind of radical restructuring as UBS. [ID:nL5E8LP122]

RETREAT

The overhaul represents a retreat to strengths in advisory stemming from UBS’s purchase of Warburg, a British merchant bank, in 1995.

The bank aims to pay out more than 50 percent of profits to shareholders from 2015, after paying its first post-crisis dividend last year, a modest 0.10 francs a share. It has put away funds in the third quarter for an unspecified dividend this year, financial chief Tom Naratil told journalists.

The costs related to the investment banking split will also lead to a fourth-quarter and full-year loss, when taken together with charges on the bank’s own debt, UBS said.

The private bank also faces challenges, with profits falling as Swiss banking secrecy is weakened as foreign governments push to recoup tax on undeclared funds in offshore accounts.

However, the unit secured 7.7 billion francs in net new money from clients in the third quarter, which represents the highest result in a third quarter – typically a slow one for the business due to summer holidays – in five years.

Vontobel analyst Teresa Nielsen said the focus on wealth management should boost that business as UBS will be considered safer by clients and an employer of choice for their advisors.

“We expect UBS to continue to show increasing strength in its wealth management as its reputation continues to improve, potentially even taking market share from Credit Suisse, Julius Baer and other competitors,” she said.

UBS swung to a third-quarter net loss of 2.172 billion francs, hit by the restructuring charges and 863 million francs written off the value of its own debt. Analysts in a Reuters poll had forecast a net profit of 457 million francs.

UBS is aiming to reduce risk-weighted assets to below 200 billion francs by the end of 2017, from 301 billion currently. Of this the investment bank will account for roughly 70 billion francs, less than half of what it accounts for today.

($1 = 0.9366 Swiss francs)

(Additional reporting by Philipp Halstrick, Anjuli Davies, Helene Durand, Spencer Anderson and Oliver Hirt.; Editing by Emma Thomasson, Will Waterman and Giles Elgood)

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World shares gain as U.S. storm damage seen limited

By Richard Hubbard

LONDON | Tue Oct 30, 2012 9:14am EDT

LONDON (Reuters) – World shares rose modestly while the dollar weakened on Tuesday as the initial impact of a massive storm in the United States looked to have been less severe than feared.

The greenback was also knocked by a resurgent yen after the Bank of Japan disappointed many investors by easing policy less aggressively than had been hoped after a slump in factory output and exports during September.

However, activity was subdued everywhere since U.S. share and bond markets were closed on Tuesday as one of the biggest storms to hit the country, codenamed Sandy, left large areas of New York City without power or public transport.

The FTSEurofirst 300 index of top European shares .FTEU3 was up 0.75 percent at 1,101.90 points and, after gains earlier in Asia, the MSCI world equity index .MIWD00000PUS had risen 0.3 percent to 328.88 points.

U.S. stock index futures, which kept trading in Europe, edged lower but volumes were very light. .N

Strategists said it was too early to tell what impact the destruction caused by Sandy might have on markets.

“Volumes are very low with Wall Street (closed), which makes today’s gains quite fragile, and the potential impact of the storm for the insurance sector, estimated at around $20 billion, has not been priced in yet,” said Patrice Perois, trader at Kepler Capital Markets in Paris.

Demand for the dollar and U.S. bonds tends to rise in times of reduced appetite to take on risk, but if widespread damage prompts speculation the U.S. Federal Reserve could ease monetary policy further to shore up the economy, they could fall back.

Across European stock markets’ attention was on corporate earnings with results from well known names like Deutsche Bank (DBKGn.DE), Swiss banking giant UBS (UBSN.VX) and oil major BP (BP.L) lifting prices. UBS shares leapt over four percent as it confirmed a plan to cut 10,000 jobs.

Britain’s FTSE 100 index .FTSE was up 0.8 percent, Germany’s DAX index .GDAXI up 0.9 percent and Switzerland’s SMI index .SSMI up 0.5 percent.

MODEST BOJ MOVE

In currency markets, the yen rose broadly after a new plan from the Bank of Japan to increase its asset purchases by 11 trillion yen ($138 billion) disappointed some market players who had positioned for a more aggressive increase.

“It was a very skeptical response to the BOJ policy meeting, made worse by the fact they have revised lower the growth and inflation outlook,” said Jane Foley, senior currency strategist at Rabobank. “That has seen the yen unwind a lot of the softer tone we saw going into this meeting.”

The dollar hit a one-week low of 79.28 yen and was down 0.3 percent against a basket of major currencies at 79.67 points. .DXY

The weaker dollar helped the European common currency climb 0.4 percent to $1.2958, with lower yields on Spanish and Italian bonds adding to the better mood.

But gains for the euro are still expected to be limited by continuing questions over whether Greece can agree a deal with its creditors, and when Spain might request financial aid.

Spain fell deeper into recession in the third quarter and prices rose sharply in October, according to new data, keeping pressure on the government to take some action as the prospect of further civil unrest grows.

“Spain’s economy is suffering terribly, which will continue to hit government revenues, and a modest decline in bond yields will not solve the problem,” said Kit Juckes, strategist at Societe Generale.

Prime Minister Mariano Rajoy has maintained an ambivalent stance towards applying for a politically embarrassing rescue that would kickstart an ECB bond-buying programme and ease financing costs.

Investors, too, seem willing to wait; 10-year Spanish bond yields were little changed at 5.66 percent.

German government bonds, the benchmark of European fixed-income markets, were also mostly flat.

Italy was even able to sell 7 billion euros of new five- and 10-year government bonds at its lowest cost since May 2011.

Italian 10-year yields were 3 basis points lower on the day at 4.98 percent, having risen about 25 basis points in the last two weeks.

OIL FLOATS

In oil markets, prices were edging higher as traders awaited news of the damage inflicted by Sandy on refineries and pipelines, although weaker demand from the storm-hit region capped gains.

Brent crude for December rose 13 cents to $109.57 a barrel, recovering from a fall to $108.75 earlier, while U.S. crude for December was up 40 cents at $85.94.

U.S. gasoline futures were little changed at $2.7530 a gallon, after climbing more than 5 cents on Monday on expectations of tighter supply.

“People are just holding back a little bit to see if there’s any real damage and impact, and at the moment it’s too hard to see,” said Bjarne Schieldrop, an analyst at SEB in Oslo.

(Additional reporting by Nia Williams, Blaise Robinson and Alice Baghdjian; Editing by Alastair Macdonald)

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Home prices climb further in August

 

Credit: Reuters/Lucy Nicholson

NEW YORK (Reuters) – Home prices gained further traction in August, the latest sign that the housing market is on the mend, a closely watched survey showed on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.5 percent on a seasonally adjusted basis, in line with economists’ forecasts.

It was the seventh straight month of increases, extending the longest continuous string of gains since prices were boosted by the homebuyer tax credit in 2009 and 2010.

The stabilization in home prices this year, along with a rise in sales and tighter inventories, has pointed to a housing market that is finally turning the corner, six years after its far-reaching collapse.

“The improvements we’ve seen are very sustainable and very solid,” said Russell Price, senior economist at Ameriprise Financial in Detroit. “They’re on very firm footing in the housing market.”

On a non-seasonally adjusted basis, prices fared better, gaining 0.9 percent.

Prices in the 20 cities climbed 2 percent year-over-year, topping expectations for a 1.9 percent increase.

The U.S. stock market was closed for a second day in a row in the wake of a powerful storm that hit the east coast. Overall, the impact of the storm to the economy is expected to be short-term.

The sustained good news in home prices “makes us optimistic for continued recovery in the housing market,” David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said in a statement.

“Even as we end the seasonally strong home buying period, the statistics are positive,” said Blitzer.

Compared to a year ago, prices in Phoenix surged 18.8 percent, the fourth month in a row the hard-hit city has seen double-digit yearly gains, the report said. Phoenix has been one of the standouts this year as prices have snapped back.

Prices in Las Vegas – also one of the more distressed areas in the years since the end of the housing boom – were up 0.9 percent compared to a year ago, the first annual increase since January 2007.

Of the 20 cities in the index, three saw a yearly decline in prices, with Atlanta faring the worst, down 6.1 percent.

“Housing has a pretty solid footing, but some pockets of the country still have problems,” said Craig Dismuke, chief economic strategist with Vining Sparks in Memphis, Tennessee.

Data on consumer confidence from the Conference Board had also been scheduled to be released on Tuesday but was pushed back to November 1 in light of the storm.

(Additional reporting by Richard Leong; Editing by Claudia Parsons)

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Air France seeks Airbus compensation for A380 glitches: report

PARIS (Reuters) – Air France-KLM (AIRF.PA) is seeking compensation from Airbus (EAD.PA) for service disruptions caused by technical glitches affecting its fleet of A380 superjumbo aircraft, French daily Les Echos reported.

The carrier wants compensation for the loss of revenue from grounding its fleet as well as inspecting and repairing wing cracks, which have led to delays and flight cancellations, Les Echos said on its website without citing sources.

European air safety regulators this year ordered checks for A380 wing cracks in the entire superjumbo fleet after engineers found cracks in almost all planes inspected.

The plan to inspect and repair Air France’s superjumbo fleet would be equivalent to idling one of the jets for a year and a loss of revenue of between 30 and 50 million euros ($64.53 million), according to the newspaper.

Emirates Airline, the world’s largest operator of A380 jets, has said it plants to seek compensation from the planemaker.

Air France-KLM and Airbus declined to comment.

The airline is separately continuing to discuss the details of its order for 25 long-haul A350 aircraft, announced in September 2011, the newspaper said. ($1 = 0.7749 euros) (Reporting by Cyril Altmeyer; Writing by Elena Berton; Editing by Helen Massy-Beresford)

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Ford profit beats forecasts on record North America margins

 Credit: Reuters/Bogdan Cristel

DETROIT (Reuters) – Ford Motor Co on Tuesday posted a third-quarter profit that trounced Wall Street forecasts due to higher vehicle prices and record-high profit margins of 12 percent in North America.

The No. 2 U.S. automaker posted an operating profit of $2.2 billion, or 40 cents per share, beating the average estimate of 30 cents per share, according to Thomson Reuters I/B/E/S.

Worldwide, Ford earned $800 million more in pricing than it did last year. Half of the pricing increase came from North America, where Ford earned more than $2 billion and posted margins over 10 percent for the third quarter in a row.

“To me, the story isn’t just the results in the quarter, but the consistency of the results,” Chief Financial Officer Bob Shanks told reporters.

Ford’s strength in North America has offset a sharp downturn in Europe, where Ford lost $468 million in the quarter, and its lagging position in growth markets in Asia, especially China.

Ford expects to U.S. auto sales will be 14.7 million this year. In the third quarter, Ford earned about $2.3 billion in North America. Contribution costs, which includes the cost of commodity hedging, fell by $500 million in the market.

“Twelve percent segment margins is just insane,” said Jefferies analyst Peter Nesvold, who has a “buy” rating on Ford. He added: “It is hard to believe that any OEM can sustain 12 percent segment margins over the long term.”

Ford’s third quarter revenue fell 3 percent to $32.1 billion, better than the $30.9 billion expected by analysts. Net income in the quarter was about $1.6 billion, or 41 cents a share, on par with results from last year.

EUROPE PLAN ECHOS U.S. TURNAROUND

Ford hired Alan Mulally as chief executive in 2006 to steer the automaker’s turnaround in North America, which began in late 2005 with the “Way Forward” plan engineered by Mark Fields, who had led North and South American operations for 7 years.

From 2006 to 2009, Ford cut capacity in North America by a little more than one-fifth. New models helped Ford earn an additional $10 billion in revenue from 2006 to 2010.

Mulally’s “One Ford” strategy connected Ford’s once-disparate business units to lower costs and boost profits. Cost cuts and an improved lineup helped Ford avoid the government financing that was needed to keep U.S. rivals General Motors Co and Chrysler Group LLC afloat in 2009.

“Stronger profitability is the highlight and gives confidence that the One Ford plan can continue to deliver,” RBC Capital Markets analyst Joseph Spak said in a note.

“We believe this playbook should eventually drive improved European profitability,” Spak said.

Last week, Ford announced three plant closures in Europe to cut costs by as much as $500 million. Ford also signaled a willingness to do more if needed.

The company is also taking steps to keep its inventory at around 40 days supply, lower than the typical 50 days, to deal with lower demand for cars and trucks in Europe.

In the first nine months of 2012, Ford lost a little more than $1 billion in the region in the region. Ford expects to lose at least $3 billion in Europe over the next two years, including at least $1.5 billion this year.

Ford earned $9 million in South America. It also $45 million in Asia Pacific and Africa, the first profit for the region since the second quarter of 2011.

(Reporting By Deepa Seetharaman and Ben Klayman; Editing by Alden Bentley and David Gregorio)

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