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Cost of insuring Japanese government debt jumps

It now costs $122,000 to insure $10m of Japanese debt against default, and borrowing costs could rise at a time when it must spend billions on rebuilding

This article titled “Cost of insuring Japanese government debt jumps” was written by Graeme Wearden, for guardian.co.uk on Tuesday 15th March 2011 11.13 UTC The cost of insuring Japanese government debt against default spiked on Tuesday as world stock markets tumbled. Investors have calculated that the chance of a Japanese default has risen significantly since Friday’s earthquake. As Japan battled to prevent a major nuclear crisis, the country’s five-year credit default swap rose 28 basis points to 122bp. That means it would cost $122,000 to insure $10m of Japanese debt against default. “Risk aversion is dominant this morning as the disaster in Japan has taken on a whole new dimension,” said Gavan Nolan of Markit, which provided the CDS data. “Further explosions at the Fukushima nuclear plant have raised the real prospect of widespread radioactive contamination.” Last Thursday, the Japanese CDS was trading at 79bp. The markets are now placing the world’s third-largest economy on a similar risk level as Saudi Arabia (132bp), and not much safer than Belgium (147bp) – seen a potential casualty if the eurozone debt crisis spreads. In comparison, the CDS contracts for Germany, the US and the UK are all around 50bp, while Greece was trading at 980bp and Ireland at 610bp. “Japan is now trading significantly wider than the other major economies,” said Nolan. Japan currently has a national debt around 200% of its GDP, and only the fourth-highest credit rating with Standard & Poor’s following a downgrade in late January. However, analysts point out that most of Japan’s debt is owned by its own banks and corporations, rather than foreign investors. This leaves the country less vulnerable to the vagaries of the international markets. On Monday, ratings agency Moody’s said that Japan’s economy could absorb the impact of the shock, but warned that it might reach a “tipping point” if the financial markets demand a risk premium on its government debt. That would push up the cost of Japan’s borrowing, at a time when it must spend huge amounts of money rebuilding its infrastructure. Earlier on Tuesday Japan’s Nikkei 225 fell by 10.6% after panic selling, taking total losses so far this week to more than 16%. The FTSE 100 fell sharply in London, extending its loss to more than 180 points at one stage mid-morning, at 5,592, down more than 3%. “It would not be a surprise if the significant price moves of the last couple of days led to problems elsewhere in the financial system,” warned Gary Jenkins, head of fixed income research at Evolution Securities.

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March 15 2011, 6:28am | Comments »

Insurers fall after Japan quake, as FTSE suffers worst weekly drop for eight months

Insurance and share prices are affected by the earthquake and tsunami in Japan.

This article titled “Insurers fall after Japan quake, as FTSE suffers worst weekly drop for eight months” was written by Nick Fletcher, for guardian.co.uk on Friday 11th March 2011 17.25 UTC As leading shares suffered their worst week for more than eight months, insurers were among the biggest fallers on concerns about their exposure to the Japanese earthquake and tsunami. Analysts estimated the damage from the disaster could cost the sector at least $10bn, and that prompted investors to cash in some of their gains from recent share price rises. So RSA Insurance lost 3.5p to 133p, Prudential fell 14p to 721p, Lloyd’s of London company Amlin dropped 20.3p to 385.2p and rival Catlin closed 16.3p down at 349.8p. But analyst Christopher Hitchings at KBW said: Share price falls on major claim events often prove buying opportunities and we would pick Catlin and Amlin as the most likely short-run beneficiaries. Overall the FTSE 100 finished 16.62 points lower at 5828.67. Over the week it has lost 2.7%, marking its worst weekly performance since July 2010 when it fell 4.13%. As well as Japan, investors also had to contend with the continuing turmoil in Libya and the Middle East and growing concerns about Europe’s debt problems, following downgrades of Greek and Spanish debt. There were also mixed signals from the US economy, with consumer confidence at a five month low after the recent rise in oil prices, but reasonable retail sales figures for February and an upward revision to the January numbers. Angus Campbell, Head of Sales at Capital Spreads, said: Stock markets across the globe saw selling and Nikkei futures continued to fall even after the close of their cash market. The last major earthquake to hit Japan in 1995 wiped twenty percent off the Nikkei in three months and so there’s plenty of reason to be nervous. Crucially the FTSE has not closed below 5800 which is seen as a major support level and clients have been buying into the FTSE at these levels. We need a week end of calm and stability to give the markets a respite, otherwise it’s back to the battle field come Monday morning. Miners were among the main gainers, both on the prospect of demand for raw materials as Japan begins to rebuild and hopes that China would not hike interest rates following in line inflation figures. Antofagasta added 22p to £13.39 and Rio Tinto rose 32p to 3963.5p. Elsewhere Arm edged higher after recent losses, up 0.5p to 523p after analysts at RBS said the falls had been overdone: Arm shares have come down by around 20% in the past months on concerns of an oversupply situation in the tablet market after it became clear that iPad competitors would be priced at a premium. We recommend buying Arm shares on weakness as we see no change to long-term fundamentals. But Carnival dropped 72p to £26 after the cruise company cut its earnings forecasts for 2011 due to rising fuel costs and disruption to its Middle Eastern and North African routes. FirstGroup fell 12.8p to 347.4p after the transport group reported a disappointing performance from its American school bus business. The division has been hit by schools cutting their transport costs because of pressure on their budgets, as well as the severe winter weather. In a sell note Charles Stanley said: Things are deteriorating in US school bus, and the statement gives no grounds for believing that the slow pace of debt reduction can be quickened. Dixons Retail dipped 0.4p to 17.16p as joint broker Citigroup reduced its recommendation on the electrical goods retailer from buy to hold and cut its price target from 35p to 18p. The bank’s analyst Richard Edwards also reduced his earnings estimates in the wake of this week’s figures from Argos owner Home Retail Group and the latest British Retail Consortium numbers. He said the Argos numbers showed a 4.6% decline in sales of electrical products, while the BRC highlighted the sector as one of the weakest categories. He said: We have reduced our second half 2010 and full year 2011 UK like for like sales forecasts by 200 basis points, to -5% and -3%, respectively. Given that Dixons is the most operationally geared UK general retailer, the recent step-down in high-ticket consumer demand patterns has driven a sharp reduction in both our April 2011 and 2012 earnings per share forecasts. These still leave Dixons clear of its banking covenant test ratios, on our estimates. However, given that the bulk of the renewal roll-out plans are complete, and the deteriorating near-term consumer outlook, we argue that upside [from here] is unlikely. There have been recent suggestions of a possible link up with Comet owner Kesa Electricals, down 0.8p at 130p. According to analysts at RBS, Kesa commented on the possibility during a recent roadshow in the Nordic region. RBS said: Management spoke of a potential fit between Dixons and Kesa. We think that this could have potential given the market leading positions of each respective business in different parts of continental Europe and the Nordic regions. We believe that one of the key issues would be with the UK Competition Commission. Comet (Kesa) and Currys/PC World (Dixons) have a combined UK market share of around 30%. Housebuilders were undermined by Council of Mortgage Lenders’ figures showing a 29% fall in house sales in January, with Redrow down 5.9p at 119.7p, Taylor Wimpey 1.45p lower at 39.41p and Persimmon losing 14.5p to 440.6p.

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March 11 2011, 12:09pm | Comments »

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Cost of insuring Japanese government debt jumps

Insurers fall after Japan quake, as FTSE suffers worst weekly drop for eight months

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