The Dow Jones industrial average rose 37.66 points or 0.24 percent, to 15,606.59, the S&P 500 gained 4.63 points or 0.26 percent, to 1,766.74 and the Nasdaq Composite added 14.457 points or 0.37 percent, to 3,954.585.
(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)
LONDON (Reuters) - After a bone-dry summer, world markets seem awash with cash again and it looks like spilling into 2014.
Even though the U.S. Federal Reserve has kept its $85 billion-a-month of bond buying constant throughout, fevered speculation surrounding its easy money spigot has by itself dictated the massive ebb and flow of liquidity seen this year.
The rethink of Fed intentions after September 18 - when the central bank declined to cut back its asset purchases as expected - has raised all financial boats in one big wave.
Since the Fed demurred six weeks ago, the S&P500 index of top Wall St stocks has jumped 3.5 percent. So too have 10-year U.S. Treasury bonds. High-yield corporate "junk" bonds are also up more than 3 percent, as are gold and the euro. Even indices of the most esoteric and speculative 'frontier markets' have added more than 3 percent.
The global surge has been remarkable as an evaporation of this year's U.S. dollar's gains has removed huge pressure from emerging market currencies and, in turn, eased the strain on some $7.2 trillion of emerging central bank reserves. And given these reserves are largely banked in western bonds, a virtuous circle of liquidity appears to have formed.
And by pumping up the euro and Japanese yen, the retreating dollar has upped chances of further easing - quantitative or otherwise - by the Bank of Japan and European Central Bank.
The global liquidity pool - one seeded by central banks and supercharged by the markets themselves - seems to expand anew.
Major stock markets from Tokyo, London, Frankfurt and New York have now clocked up year-to-date gains of between 20 and 30 percent and the latter two are in uncharted territory. Property hotspots in many of the same locales are similarly motoring.
Is this the mirror of the financial bubble that blew up pre-2007, as long-term bears such as Societe Generale's Albert Edwards insist it is?
With huge amounts of spare capacity still across developed labour markets and economies and little or no sign of rising inflation, policymakers seemed unperturbed.
But scale of money building up appears very real.
'MOST EXTREME EVER'
JPMorgan analysts reckon investor flows behind the latest market surge are akin to the indiscriminate, liquidity-fueled equity and bond buying seen at the start of the year before talk of Fed tapering saw an equity bias emerge as many funds fled bonds and the economy sped up.
More "Asset Reflation" than "Great Rotation" this time around, they surmise.
To be sure, U.S. Mutual fund data from Thomson Reuters' Lipper showed that last week alone there were hefty net inflows to equity, bond and money funds alike - more than $11 billion net to domestic equity, almost $5 billion to overseas equity and more than 3 billion to all taxable bond funds.
So what's the scale of this global sea of liquidity?
JPM splits the notion of liquidity into two buckets - one looks at how the banking system absorbs and distributes new QE money from central banks and another is the broad view of money supply in the wider economy of households, firms and investors.
The former can be febrile, as we saw during the summer.
When the central banks pump in new zero-yielding money, or excess reserves to the banking system, the banks just buy bills and bonds from other banks as the money gets passed around like a 'hot potato', bidding up asset prices and depressing yields.
That is until policy uncertainty lifts interest rate volatility and threatens bond prices, as it did after May, and forces those 'excess reserves' to go to ground and hunker down in cash again until the coast is clear.
With the Fed speaking softly again, one-month U.S. Treasury bond volatility indices have fallen to their lowest since May - half of June's peaks.
On one level, it shows the power that policyspeak alone still has in controlling this money and many argue the stretch for yield during the first four months of the year prompted the Fed to deliberately fire its verbal shots across the bow.
The other measure of global liquidity, however, appears positively explosive.
JPMorgan estimates its measure of "excess liquidity" in the global system is still surging into record territory, with global M2 aggregates up by $3 trillion, or 4.6 percent, so far this year - far outstripping a 2 percent global inflation rate.
Two thirds of that M2 expansion came from emerging markets, where domestic loan growth shows few signs of being fazed by the mid-year financial market turbulence.
Using these "excess liquidity" gauges as a guide to asset prices and assessing their power over time, the report concludes that remains a powerful upsurge.
"The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of magnitude," it concluded.
(Editing by Ron Askew)
Food and Civil Supplies Minister Adaish Partap Singh Kairon, who met union Food, Consumer Affairs and Public Distribution Minister K.V. Thomas in New Delhi Tuesday, said the ministry would announce relaxation in prescribed parameters of paddy procurement within the next two days, an official release said here.
Kairon had met Thomas to seek his personal intervention to relax specifications for paddy procurement so that farmers did not suffer.
Farmers in some districts of Punjab are complaining that their paddy stocks were not being purchased by government agencies due to strict parameters set by the central government for the moisture content and colour of the produce.
The central ministry had last week sent inspection teams to grain markets across Punjab to look into the problem of paddy not being procured.
The teams also assessed the damage caused to paddy in terms of discoloration and moisture content due to inclement weather as the state was lashed by unseasonal and unprecedented rains and hailstorm in September.
Kairon told Thomas that it was incumbent on the part of the central government to bail out the state's farmer in this crisis, instead of penalizing them for something that was not their fault and happened "because of unusual climatic conditions that damaged food grains which was beyond anyone's control".
He said Thomas also assured him that the Food Corporation of India (FCI) would be directed to procure its quota of 10 percent paddy from the total arrival. The FCI has procured less than five percent of its quota this year.
Over 80 lakh tonnes of paddy has been procured in Punjab so far. The procurement started Oct 1.
Shares of telecom operators gain after July-Sept results are in line with expectations.
Tata Communications Ltd gains 10 percent after it posts a consolidated net profit in the September-quarter from a net loss a year earlier.
Bharti Airtel Ltd
Dr.Reddy's Laboratories Ltd gains 2.5 percent a day ahead of its July-September earnings.
(Reporting by Abhishek Vishnoi)
CHICAGO (Reuters) - Cummins Inc , the U.S. maker of engines and other vehicle components, reported lower-than-expected quarterly profit on Tuesday and cut its full-year outlook, citing weak sales to most of the industries its serves, including mining.
The news sent Cummins shares tumbling as much as 9.2 percent.
The Columbus, Indiana-based company said sales of all its products had also contracted sharply in India in the most recent quarter as a result of declining business confidence and manufacturing activity there.
Like many emerging markets, India has seen an exodus of foreign investment in recent months as expectations have grown that the U.S. Federal Reserve will begin to taper its massive stimulus program.
"Of all of our markets, India is currently the most challenging," Cummins CEO Tom Linebarger told analysts during a conference call to discuss this results.
"Customers cut orders to lower working capital and preserve cash as business confidence declined in the face of weak industrial activity and rising inflation." Truck production alone tumbled 33 percent in the third quarter in India, Linebarger said, and September's production numbers were the lowest in a decade.
Cummins now expects full-year revenue to fall 3 percent versus its previous forecast of revenue being flat in 2013.
The company also cut its forecast for profit before interest and taxes to a range of 12.5 to 13 percent of total sales, down from 13 to 14 percent of sales.
Cummins, which supplies the engines that run hauler trucks, loaders and excavators used in mines all over the world, said lower capital equipment spending by resource companies also caused earnings to fall short of expectations and prompted the cut in its forecast.
Cummins was the latest U.S. company to blame the mining sector's weakness for its financial woes, joining heavy-equipment maker Caterpillar Inc and steelmaker Timken Co .
Miners, facing investor backlash over unpopular takeovers and budget overruns and suffering from falling metal prices, have slashed spending on new equipment and have even begun to cannibalize components from old mining equipment in order to avoid spending money on new spare parts.
Cummins posted third-quarter net income of $355 million, or $1.90 a share, up from $352 million, or $1.86 a share, last year.
Analysts, on average, expected a profit of $2.11, according to Thomson Reuters I/B/E/S.
Sales in the quarter fell 1 percent to $2.5 billion.
Cummins shares were down 7.1 percent at $125.27 on the New York Stock Exchange on Tuesday afternoon, off an earlier low at $122.54.
(Reporting by James B. Kelleher in Chicago and Sagarika Jaisinghani in Bangalore; editing by Kirti Pandey, Jeffrey Benkoe and Matthew Lewis)
Chief Minister N. Kiran Kumar Reddy will write to the central government, seeking assistance for relief works in districts affected by cyclone 'Phailin' and the last week's heavy rains and floods. He will also seek central help for some parts of the state facing drought.
The state government will also write to the central government to send a team to study the World Bank proposal for assistance for a long-term project for cyclone relief in coastal areas, said a statement from the chief minister's office Tuesday.
At a meeting with the ministers and top officials, the chief minister reviewed relief works in the flood-affected areas.
Earlier, state Revenue, Relief and Rehabilitation Minister N. Raguveera Reddy said a comprehensive report on the damages would be sent to the central government in three days.
As per the initial estimates, the natural disaster led to losses to the tune of Rs.3,500 crore.
The heavy rains and floods claimed 53 lives and damaged crops over 11.42 lakh hectares.
The minister directed the district collectors to pay an ex-gratia of Rs.1.5 lakh each to the families of the deceased. The kin of the victims above 18 years would be paid another Rs.50,000 under 'Apathbandhu' scheme.
Over 48,500 houses were damaged in 16 districts. The minister said new houses would be sanctioned under the next round of 'Racchabanda' or mass contact programme.
He also promised that the government would suitably compensate the farmers who lost their crops. He said the loans of the affected farmers would also be rescheduled after talks with the bankers.
REUTERS - When Janet Yellen became president of the Federal Reserve Bank of San Francisco in June 2004, a massive real estate bubble was building in the vast nine-state area that it oversees.
Her staff alerted her that banks were overinvesting in speculative commercial real estate at a time when housing prices in the region were ballooning.
But as chief regulator in the Federal Reserve's largest district, Yellen conveyed two starkly different messages.
In public remarks across the Western region's nine states, she downplayed risks that were building in the financial sector, reporting positive economic signs even as warning signals began to emerge.
Behind the scenes at the Fed, she contends that she and her staff were "pleading with Washington" to issue supervisory guidance that would enable bank examiners to take a tougher line on risky real estate lending.
Yellen, who was nominated earlier in October to be the next chair of the U.S. central bank, played a little-examined role at the Fed in expressing unease about what she dubbed the "600-pound gorilla" - her reference at a Fed meeting in June 2007 to the real estate bubble and signs it could turn into a bust. When the bust came it led directly to the financial crisis.
The difference between her public remarks and internal Fed role could draw scrutiny when the Senate Banking Committee holds a hearing on her nomination in mid-November.
Yellen declined to comment for this article when contacted through the Fed.
FRONT ROW
She certainly had a front row seat on the real estate bubble.
Yellen's region included three of the four states hardest hit by foreclosures - Nevada, Arizona and California. The same states also led the nation in the percentage of consumer bankruptcies.
Eight banks supervised by her team failed, the second-highest number among the Fed's 12 regional banks. A big culprit was unchecked investments in real estate, including speculative land development loans.
But Yellen confronted the limits of quietly leaning on Washington for corrective action.
As she later told a panel probing the roots of the crisis, she felt one Fed action - an advisory opinion in 2007 that asked banks to control commercial real estate lending - was worthless. One could "rip it up and throw it in the garbage can," she said. "It wasn't a tool that was of any use to us in controlling this risk."
Yellen, 67, has been credited with seeing signs of the crisis before many other Fed officials.
When she landed the regional Fed job after teaching at the University of California, Berkeley, housing prices were climbing to alarming levels.
In Los Angeles and San Diego, home prices more than doubled between the beginning of 2000 and when Yellen took on the job in the summer of 2004, according to Standard & Poor's/Case-Shiller index data. In Las Vegas, they jumped 50 percent in the previous year alone. And in San Francisco, prices had risen nearly 40 percent since the dot-com crash of 2000-2001.
GROCERY CART
The 54 banks under the San Francisco Fed's supervision were leveraging too much of their capital in real estate, Yellen later observed.
The San Francisco Fed kept thick case files on the banks it supervised; she described reviewing a grocery cart full of records when she first came on the job. But regulatory policy was set by the central bank's board in Washington, and the role of the regional Fed banks was to enforce it.
Yellen later told the financial crisis panel that in dealing with the Fed's board, she privately urged clear guidance.
"As worried as we were, we never simply went into banks and said, 'We insist you've got to have a higher capital requirement.' Did we have the power to do that? I think we felt we did not," she told the commission.
Stephen Hoffman, the officer in charge of bank supervision at the San Francisco Fed during Yellen's tenure and now a managing director at consulting firm Promontory Financial Group, corroborated Yellen's account.
"Was she going in and pounding on the table somewhere? No. But she was clearly making people aware that things were building and that there was a risk there, that if things went wrong there could have been significant challenges," he said.
The Fed did not issue an advisory to banks about commercial loans until January 2007 and it stopped short of a full-fledged order.
By then, recalled Bruce Norris, president of California real estate investment firm The Norris Group, some experts were questioning if regulators were asleep on the job.
"Yellen had a lot of company," he told Reuters. "I just could never figure out why they weren't more concerned until it was too late."
THE BUBBLE
If a crisis was looming, Yellen gave little hint of it as she traveled around her district speaking to banking and business groups. She reassured audiences that there were nuanced but optimistic signs even as recession closed in.
In 2004, the new president told risk managers in San Francisco that closer supervision had "made our financial system far more resilient to shocks." In Phoenix that year, she reported "more positive signs in the economy."
She flagged real estate as a concern in March 2005, telling a banking group in Hawaii that her staff was examining commercial lending and was concerned about the "easing of credit standards and terms on loans" for home mortgages.
But Yellen ended optimistically, concluding that "we don't think widespread problems are likely" and that "industry conditions in many respects are stronger now than they've ever been."
By October 2005, real estate experts debated whether the Fed needed to intervene to control the surging "bubble" in home prices by raising interest rates.
Yellen said her staff had begun to realize by then that "there might well be a bubble." But as she concluded in an October 2005 speech, "the arguments against trying to deflate a bubble outweigh those in favor of it."
"My bottom line is that monetary policy should react to rising prices for houses or other assets only insofar as they affect the central bank's goal variables - output, employment, and inflation," she said.
Yellen's views have not changed dramatically. Earlier this year, she expressed a "strong preference" to use regulation as the main defense against bubbles. But she no longer unequivocally rules out the use of monetary policy.
THE CRASH
U.S. home prices peaked in July 2006.
In California, the median price of a previously owned home reached $556,430 in 2006, about nine times the annual median income; the national median price was just $221,900, or about four times median income.
Yellen, however, still saw cause for optimism.
In March 2006, she spoke via satellite to Australian economists and noted that "overall the economy has shown considerable resilience."
At that point, the economy was buoyant. After a hit from Hurricane Katrina in late 2005, growth spiked to a 4.9 percent annual rate in the first quarter, though it slipped back to 1.3 percent over the next three months. The unemployment rate in March stood at a low 4.7 percent, with muted price pressures.
Yellen emphasized that a housing boom reversal "could have a very restrictive impact." But she concluded optimistically: "While we face a great deal of uncertainty, the economy appears to be approaching a highly desirable glide path."
A month later, Yellen noted that Bay area home prices were six times higher than they were in 1982. She urged monitoring of what she termed "highlights and shadows" in forecasts.
In a 2006 speech to bankers in California's agricultural belt, she encouraged banks to reach out to immigrants and other underserved populations, touting programs like one that encouraged home ownership for low-income families. A few years later, the farming area would be particularly hard hit by mortgage foreclosures.
But it wasn't until early 2007 that the national housing market began crashing. That March, prices and sales recorded their steepest drops since the savings and loan scandal in 1989.
Mark Zandi, chief economist of Moody's Analytics, later pinpointed the beginning of California's recession as May 2007. The entire nation would tip into recession in December that year.
Home price declines were not the only warning signs.
In February 2007, HSBC Group, one of the world's largest banks, said it would book a bad debt charge of $10.6 billion because of a big spike in delinquencies on subprime loans. Four months later, two hedge funds operated by Bear Stearns warned of major losses, and both collapsed within weeks.
When France's largest bank, BNP-Paribas, froze assets on three funds with big exposure to the U.S. mortgage market in August 2007, global central bankers realized markets were at risk of freezing up.
THE RESPONSE
But when the Fed's monetary policy panel met in June 2007, officials generally felt the economy was weathering the storm despite Yellen's concerns about housing.
"In terms of risks to the outlook for growth, I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector," she said, according to the transcript of that meeting, adding: "The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst."
At the time, Fed Chairman Ben Bernanke was playing down the systemic risk of weakening real estate prices. Worried about inflation risks, Fed officials stood pat at the meeting, unanimously voting to hold interest rates steady, and they did the same at the August 7 meeting. Yellen was a non-voting participant at the two meetings.
Within three days, however, as the BNP-Paribas events roiled financial markets, officials held an emergency conference call to discuss strains building in credit markets and announced they were ready to provide liquidity to banks.
At their next scheduled meeting in September, they slashed overnight rates by a steep half of a percentage point, the first move in a dramatic series that took them to near zero by the end of 2008.
In an October 2008 speech, Yellen tackled head-on the question of how the Fed missed the warning signs. She described a miscalculation in the interplay of "key features of the financial system."
A RE-EXAMINATION
Under questioning by Republicans in 2010, after Obama nominated her to be Fed vice chair, Yellen said she and other regulators failed to "connect the dots" between loose lending practices and a overpriced housing market.
Senator Richard Shelby of Alabama asked about her region's "breakdown of regulatory oversight."
When Yellen at first defended the San Francisco Fed's supervision as "careful and appropriate," Shelby shot back, calling it "lax and inappropriate."
She ended by citing lessons learned. "What we have learned in hindsight is it was very hard for all of the regulators involved to take away the punch bowl in a timely way." (Reporting by Marilyn W. Thompson and Alister Bull in Washington with Ann Saphir in San Francisco; Additional reporting by Jonathan Spicer; Editing by Tim Ahmann, Dan Burns and Tim Dobbyn)
