Alison notes

The Turkish central bank has done it again, wrong-footing monetary policy predictions with its latest interest rate moves. On Thursday, the central bank hiked its overnight lending rate by widening the interest rate corridor. While most analysts correctly predicted the central bank would leave its policy rate unchanged, few foresaw the overnight lending rate hike to 12.5 percent from 9 percent. As Societe Generale’s emerging markets strategist Gaelle Blanchard put it: ”They managed to find another trick. This one we were not expecting.” In August, the central bank shocked the market by cutting its benchmark rate despite inflation running well above its 5.5 percent target. Relying on higher banks’ reserve rate requirements to curb credit, it argued then that the rate cut was necessary to fend off the threat of a domestic recession heightened by a slowdown in global demand. Initial market disapproval dissipated soon enough. Other emerging economies grappling with rising prices — including Brazil and Indonesia — also decided that the global recession threat was more significant than inflation. Now, however, the Turks are warning of rising inflationary pressures. Containing the weakness of the lira — down 11 percent since August despite foreign-exchange auctions to support the currency — is crucial in this respect. Analysts say the central bank’s latest moves bring the interest rate tool back into its arsenal. A 4 percentage point rise in the lending rate would squeeze lira liquidity and make the carry trade expensive. Despite the central bank’s more hawkish tone, analysts appear no more clued in as to the near-term rate direction. For instance, both BNP Paribas and Capital Economics hail Turkey’s return to “orthodox” monetary policy. But BNP Paribas expects the central bank to raise its policy rate should risk sentiment worsen while Capital Economics sees rates kept on hold until 2013 when policy tightening is likely.  

* Shares little changedOct 18 (Reuters) - Johnson & Johnson’s third-quarter earnings fell on lower U.S. sales, but the weaker dollar and strong demand overseas helped the company beat Wall Street forecasts.J&J said on Tuesday that it had earned $3.2 billion, or $1.15 per share, compared with $3.42 billion, or $1.23 per share, a year earlier.Excluding special items, J&J earned $1.24 per share. Analysts on average had expected $1.21, according to Thomson Reuters I/B/E/S.Revenue rose 6.8 percent to $16 billion, just shy of Wall Street estimates of $16.02 billion. It would have risen just 2.6 percent if not for the weaker dollar, which boosts the value of sales in overseas markets.U.S. sales slipped 3.7 percent, hurt by declines in all three product segments: prescription drugs, consumer products and medical devices.But overseas, where the company generates most of its sales, revenue jumped 16.4 percent, with half of the gain attributable to foreign exchange factors.Johnson & Johnson forecast a full-year profit of $4.95 to $5.00 per share, lifting the low end of its forecast by 5 cents.The company’s shares rose 1 cent to $63.80 in trading before the market opened.

* Risks seen skewed towards flight to quality before EU summitBy Emelia Sithole-MatariseLONDON, Oct 18 (Reuters) - The French risk premium over benchmark German bonds hit a 16-year high on Tuesday after Moody’s warned on France’s rating outlook and as German bond prices jumped on ebbing hopes of a quick solution to the euro zone debt crisis.The cost of insuring French debt against default also rose to near record highs after Moody’s warned on Monday it may place France’s triple-A rating on negative outlook in the next three months if the country’s share of the cost of bailing out banks and euro zone states stretch its budget too far.Finance Minister Francois Baroin said France’s rating was solid as Paris was taking steps to cut the deficit, though he warned a gross domestic product growth target of 1.75 percent by 2012 was probably too high.Bunds extended Monday’s gains as equities fell after the Moody’s comments and data showing slowing Chinese economic growth but trading was expected to be volatile before a weekend European Union summit.The 10-year French/Bund yield spread was last 11 basis points wider at 107 bps, its widest since 1995.”Ultimately France is at the heart of the nexus as regards the ongoing debt risk transfer that’s occurring in the euro zone, whether it be from periphery to core or from the private financial sector to the public sector,” Rabobank strategist Richard McGuire said.”France is caught in the crosshairs of both of those channels of debt risk transfer, which sees it most vulnerable to losing its triple-A rating and most vulnerable to the upwards pressure on long-end core yields.”The cost of insuring against a French default rose by 80,000 euros to 192,000 euros for an exposure of 10 million euros, according to five-year credit default swaps data from Markit — almost twice the costs of insuring triple-A-rated Dutch bonds.The French/Dutch 10-year yield spread also near its widest in 16 years at 61 bps.VULNERABLERabobank strategists said they continued to play the risk of a potential French ratings cut via a long position in Dutch 10-year bonds versus French debt.”This position has breached our revised target of -50 bps (mid-price), aided by Moody’s cautionary comments on France’s AAA rating,” they said in a note.”We are opting to move our target to -60 bps and lock in 20 bps of profit by bringing our stop in to -40 bps. We are mindful, however, of the sizeable imminent event risk in the form of this weekend’s EU summit and will reassess this position in the coming days accordingly.”The Bund future was last 72 ticks up at 135.34, having risen to a one-week high of 175.75 earlier, with technical indicators pointing to more gains.”The nervousness is very high and negative comments will have a larger impact than positive comments. The balance of risk is we’re definitely going to see more positive performance in Bunds,” Nordea analyst Niels From said.The contract tested support at 132.94 on Monday, the 38 percent retracement of the June-to-September bull trade, forming a potentially bullish engulfing pattern.If the contract closed on Tuesday above the 134.80 opening price, this would open the door for further gains, UBS technical analyst Richard Adcock said in a note.Cash 10-year Bunds yielded 2.03 percent , 6.3 bps less on the day and retreating from seven-week highs above 2.20 percent hit last week on market optimism the European summit would unveil sweeping new crisis-fighting measures.”There’s more hedge fund intra-day type of buying and in Bund futures. Moody’s warning with regards to France’s triple-A rating also gave support to German Bunds … but the market is very choppy and driven by the headlines,” a trader said.Other lower-rated euro zone sovereigns underperformed the German benchmark. The Italian/German spread stood at 384 bps, 13 bps wider than on Monday.

* Libya, Syria, Egypt, Tunisia, Yemen, Bahrain hurt mostBy Peter Apps, Political Risk CorrespondentLONDON, Oct 14 (Reuters) - The uprisings that swept the Middle East this year have cost the most affected countries more than $55 billion, a new report says, but the resulting high oil prices have strengthened other producing countries.A statistical analysis of International Monetary Fund (IMF) data by political risk consultancy Geopolicity showed that countries that had seen the bloodiest confrontations — Libya and Syria — were bearing the economic brunt, followed by Egypt, Tunisia, Bahrain and Yemen.Between them, those states saw $20.6 billion wiped off their gross domestic product and public finances eroded by another $35.3 billion as revenues slumped and costs rose.But as the major oil producers such as the United Arab Emirates, Saudi Arabia and Kuwait avoided significant unrest — often through increasing handouts as oil prices rose — they saw their GDP grow. Oil prices rocketed from around $90 a barrel of Brent crude at the start of the year to just short of $130 in May before retreating to around $113 now.”As a result, the overall impact of the ‘Arab Spring’ across the Arab realm has been mixed but positive in aggregate terms,” the report estimated, saying overall the year to September saw some $38.9 billion added to regional productivity.Libya looks to have been the worst affected, with economic activity across the country — including oil exports — halted at an estimated cost to GDP of $7.7 billion, or more than 28 percent. Total costs to the fiscal balance were estimated at $6.5 billion, roughly 29 percent of gross domestic product.In Egypt, nine months of turmoil eroded some 4.2 percent of gross domestic product with public expenditure rising to $5.5 billion just as public revenues fell by $75 million.HANDOUTS NOT REFORM?In Syria, where protests have continued throughout the year in the face of a bloody crackdown, the impact is hard to model but early indications suggested a total cost to the Syrian economy of some $6 billion or 4.5 percent of GDP.The report said the number of Yemenis below the poverty line was expected to be pushed above 15 percent as a result of currency falls and protracted unrest. Total cost to the economy was estimated at 6.3 percent of GDP, with the fiscal balance deteriorating by $858 million, 44.9 percent of GDP.Tunisia, where the protests began in late 2010, lost some $2.0 billion from its GDP, roughly 5.2 percent, with negative impacts across almost all sectors of the economy including tourism, mining, phosphates and fishing. Tunisia’s government increased expenditure by some $746 million, pushing its fiscal balance some $489 million into the red.Saudi Arabia’s newly instituted handouts and wider public investment programme, the report estimated, amounted to some $30 billion — perhaps seen by the kingdom’s rulers as a way of avoiding real reform. But increased oil prices and production helped boost gross domestic product by more than $5 billion and push up public revenues by $60.9 billion.In Bahrain, oil helped cushion the impact of weeks of protest, with the fall in GDP relatively low at some at 2.77 percent. Public expenditure rose some $2.1 billion, partly because of cash transfers of $2,660 to each family.None of these steps, the report argued, addressed the underlying causes behind the unrest. A better solution, it said, was much broader international support through the G20 or United Nations aimed at much wider reform.

NEW YORK Oct 13 (Reuters) - Bill Gross, manager of the world’s largest bond fund, ramped up buying of mortgage-backed securities in September on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.Gross increased mortgage debt to 38 percent of assets in his $242 billion PIMCO Total Return Fund in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”PIMCO’s latest bet on mortgages isn’t going unnoticed.Gross, who helps oversee $1.2 trillion as co-chief investment officer at PIMCO, made headlines earlier this year and came under heavy criticism when the manager widely known as the “bond king” bet heavily against U.S. Treasuries — one of the biggest outperformers of this year.His move into mortgage-backed securities also comes as the PIMCO Total Return fund’s cash equivalents and money-market securities fell to negative 19 percent September, from negative 9 percent in August.In having a so-called negative position in cash equivalents and money-market securities, it is an indication of derivative use and short-term securities being put up as collateral as a way to boost leverage and increase the fund’s holdings in bonds with longer maturities such as mortgage-backed securities, Treasuries and corporate bonds, according to Eric Jacobson, director of fixed-income research at Morningstar who has covered PIMCO for more than a decade.Over the years, some analysts in the fixed-income world have pointed out that Gross’ use of derivatives to boost leverage and exposure to higher-yielding assets is what distinguishes the Total Return Fund from an ordinary plain vanilla bond fund.”One very basic thing to know, too, is that PIMCO classifies anything with a duration of one year or shorter as cash — regardless of sector,” Jacobson added.Jacobson said after careful examination of the PIMCO fund’s effective duration of 7.14 years — about double over the last six months — “it doesn’t necessarily mean PIMCO raised their pure interest-rate risk to the United States. They didn’t double down on Treasuries.”Rather, PIMCO took on “loose” interest rate risk to other credit and government markets, he said, noting that the Total Return fund increased exposure in non-U.S. developed and emerging markets securities in September.Duration is a bond’s sensitivity to interest rate fluctuations, and going longer duration is an investment strategy when rates are expected to remain low or drop further and vice versa.All told, the PIMCO Total Return fund’s bad call on Treasuries earlier this year has cost it.It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent. But on a three-year basis, the fund is up 10.14 percent against the benchmark’s 9.36 percent returns. The fund has also held up well over the last five years, with the fund up 7.80 percent versus the BarCap’s 5.48 percent returns.

* Research in Motion scrambled to restore service to millions of BlackBerry users around the world as the company’s worst-ever outage vexed office workers, officials, emergency responders and others who rely on the messaging device.* People convicted of insider trading are facing considerably harsher sentences than in the past, according to a Wall Street Journal analysis.* Dow Jones & Co faced on Wednesday fresh scrutiny over an alleged deal to boost the reported circulation numbers of The Wall Street Journal Europe, in which the paper sold bulk copies to a consulting firm and simultaneously directed money to the firm for separate services.* Asian shares were mostly higher, with exporters leading the charge in Tokyo while a strong Australian employment report buoyed the Australian dollar. The Nikkei rose 1 percent.* The pay-phone business is shrinking rapidly, but that hasn’t deterred Pacific Telemanagement Services, a little-known California company that agreed earlier this month to buy nearly all Verizon’s 50,000 remaining pay phones.* Apple Inc won a victory on Thursday in its global patent battle with Samsung Electronics when a judge in Australia upheld a temporary injunction blocking the South Korean company from selling its Galaxy Tab 10.1 tablet computer in the Pacific nation.* Slovakia’s largest opposition party, after a bit of parliamentary gamesmanship, cleared the way Wednesday for the country to endorse changes to the 440 billion euros ($600 billion) euro zone bailout fund that European political leaders have deemed essential to the bloc’s efforts to beat back the sovereign-debt crisis.* The cash-strapped apparel maker Liz Claiborne Inc said Wednesday that it has agreed to let J.C. Penney Co buy its namesake brand as the company looks to reduce its debt.* U.S. offshore-drilling officials issued their first citations related to the Deepwater Horizon oil spill Wednesday, accusing BP Plc and two of its contractors of breaking several rules. While citations against BP were widely expected, the government’s decision to pursue the contractors Transocean Ltd and Halliburton Co for infractions jolted the contracting industry, which traditionally avoids liability in such accidents.