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World shares sink as bond yields, commodities surge

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World shares sink as bond yields, commodities surge 1

By Ritvik Carvalho

LONDON (Reuters) – World shares sank on Monday as expectations for faster economic growth and inflation battered bonds and boosted commodities, while rising real yields made equity valuations look more stretched in comparison.

MSCI’s All Country World Index, which tracks shares across 49 countries, was down 0.4% after the start of European trade.

The pan-European STOXX 600 index was down 1%, at its lowest in 10 days. Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 index fell 1% each, Britain’s FTSE 100 lost 0.85% and Italy’s FTSE MIB index fell 0.9%. [.EU]

S&P 500 futures fell to their lowest since Feb. 4, down 1% on the day. [.N]

Bonds have been bruised by the prospect of a stronger economic recovery and greater borrowing as President Joe Biden’s $1.9 trillion stimulus package progresses.

Federal Reserve Chair Jerome Powell delivers his semi-annual testimony before Congress this week and is likely to reiterate a commitment to keeping policy super easy for as long as needed to drive inflation higher.

“The coming week is relatively thin on the international data agenda, but after the recent rise in long bond yields, Fed Chairman Powell’s hearings in both chambers of Congress (Tuesday / Wednesday) will be attracting great interest,” said Elisabet Kopelman, U.S. economist at SEB.

“The fact that the most recent rise in long bond yields has been driven by higher real interest rates and not just inflation expectations increases the probability of a dovish message.”

European Central Bank President Christine Lagarde is also expected to sound dovish in a speech later Monday.

Yields on 10-year Treasury notes have already reached 1.38%, breaking the psychological 1.30% level and bringing the rise for the year so far to a steep 43 basis points.

Analysts at BofA noted 30-year bonds had returned -9.4% in the year to date, the worst start since 2013.

“Real assets are outperforming financial assets big in ’21 as cyclical, political, secular trends say higher inflation,” the analysts said in a note. “Surging commodities, energy laggards in vogue, materials in secular breakouts.”

Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan went flat, after slipping from a record top last week as the jump in U.S. bond yields unsettled investors.

Japan’s Nikkei recouped 0.8% and South Korea 0.1%, but Chinese blue chips lost 1.4%.

A COPPER-PLATED RECOVERY

One of the stars has been copper, a key component of renewable technology, which shot up 7.7% last week to a nine-year peak. The broader LMEX base metal index climbed 5.5% on the week.

Oil prices have gone along for the ride, aided by tightening supplies and freezing weather, giving Brent gains of 22% for the year so far. [O/R]

On Monday, Brent crude futures were up 0.7% at $63.33 a barrel. U.S. crude added 0.7% to $59.65.

All of that has been a boon for commodity-linked currencies, with the Canadian, Australian and New Zealand dollars all higher for the year so far.

Sterling reached a three-year top at $1.4050, aided by one of the fastest vaccine rollouts in the world. British Prime Minister Boris Johnson is due to outline a path from COVID-19 lockdowns on Monday.

The U.S. dollar index has been relatively range-bound, with downward pressure from the country’s expanding twin deficits balanced by higher bond yields. The index was last at 90.342, not far from where it started the year at 90.260.

Rising Treasury yields has helped the dollar gain against the yen to 105.60, given the Bank of Japan is actively restraining yields at home.

The euro was steady at $1.2104, corralled between support at $1.2021 and resistance around $1.2169.

One commodity not doing so well is gold, partly due to rising bond yields and partly as investors question if crypto currencies might be a better hedge against inflation. [GOL/]

Gold stood at $1,793 an ounce, having started the year at $1,896. Bitcoin was off 3.3% on Monday at $55,535, but started the year at $32,216.

(Reporting by Ritvik Carvalho; additional reporting by Wayne Cole in Sydney; editing by Larry King)

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Exclusive: An ‘industry custom’: Little-known fees help Japan trust banks dominate profitable niche market

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Exclusive: An 'industry custom': Little-known fees help Japan trust banks dominate profitable niche market 2

By Makiko Yamazaki and Maki Shiraki

TOKYO (Reuters) – When Japan’s Honda Motor Co Ltd stopped using Sumitomo Mitsui Trust Bank Ltd as its stock transfer agent last year, the lender slapped it with a roughly $4 million termination fee, according to two people familiar with the matter.

The break fee – 2,000 yen ($19) per shareholder – is a little-known practice among Japan’s biggest trust banks when they lose a client in the shareholder record-keeping business, multiple insiders say.

The bank that takes the new client typically pays the fee. Insiders say this arrangement keeps a profitable business in the hands of a few big trust banks because newcomers balk at the cost. One departing client was told the charge was an “industry custom”.

Japan’s three largest trust banks, Sumitomo Mitsui Trust, Mitsubishi UFJ Trust and Banking Corp and Mizuho Trust & Banking Co Ltd, control at least 97% of the market, according to an internal bank document.

Details of the fees, including the amount and the expectation that the new bank pay, as well as Honda’s experience, are reported here for the first time.

Some executives at listed companies privately express frustration over the practice, which they say illustrates banks’ abuse of their considerable power in corporate Japan.

It’s not clear why banks’ break fee amounts are identical. The fees varied until the late 1990s, when weakened lenders were consolidating, one of the people familiar with the matter said.

“It’s not right to charge 2,000 yen for doing nothing. Any way you look at it, it’s a barrier to entry and in violation of anti-trust laws,” said one executive at a major manufacturer. He and other sources declined to be identified because the information isn’t public.

Transfer agents keep records of a company’s shareholders, process dividend payments and count votes at annual general meetings. Mitsubishi UFJ Trust shouldered Honda’s fee when it took over records of the automaker’s roughly 210,000 shareholders, according to the two people familiar with the matter.

Honda said it couldn’t comment on the content of contracts.

Sumitomo Mitsui Trust, Mitsubishi UFJ Trust and Mizuho Trust said they charge administrative fees when a client leaves. All declined to comment on the amount of the fees or on specific transactions.

Mizuho Trust said that contracts differed from client to client, and that there are cases in which it discusses the break fee from a former transfer agent when negotiating a contract. It said that the fees were appropriate and that its business complied with the law.

Mitsubishi UFJ Trust said there was no legal issue with the fees because the trust banks had not agreed on them together.

A spokesman for the Japan Fair Trade Commission declined to comment.

A representative for the regulatory Financial Services Agency (FSA) said: “Contracts in the private sector are at the discretion of each company”.

‘INDUSTRY CUSTOM’

Trust banks came under scrutiny last year after Sumitomo Mitsui Trust and Mizuho Trust separately revealed widespread failure to count all valid votes at annual general meetings over the last two decades. Both have apologised and pledged to revise practices.

Banks don’t always make break fees explicit in contracts, one of the people familiar with the matter said.

Mitsubishi UFJ Trust said that in general, administrative fees are determined after discussions with the client. Mizuho Trust said there are cases where it spelled out the fees in contracts.

Another executive, at a midsize listed firm, said his company refused to pay when switching transfer agents years ago.

“There was no clause for specific break fees in our contract but the bank demanded it, saying it was an industry custom,” the executive said. “I told them it doesn’t make sense.”

His company never paid the fee and the bank gave up trying to collect it, he said.

For decades, the transfer agent business was labour intensive because stock certificates and other records were handled manually. But digitalisation has helped streamline it, making it more profitable, industry insiders say.

Sumitomo Mitsui Trust’s transfer agent business, which includes two small subsidiaries, had a 49% profit margin in the last financial year, compared with 39% for the bank overall, according to regulatory filings.

At Mitsubishi UFJ Trust, it was 60% for the business, nearly double the bank’s overall margin of 31%. Mizuho Trust doesn’t give a breakdown for the business.

ANTI-MONOPOLY LAWS

When a client moves, the banks just need to retrieve and forward their database records, according to the two executives, one of the people familiar with the matter and another industry insider.

Although the volume of data depends on the number of shareholders a company has – some of Japan’s biggest firms have 700,000 or more – the records are supplied electronically by the Japan Securities Depository Center, a common platform for stock transfers.

Mitsubishi UFJ Trust said other data needed to be prepared and transferred, including dividend payment records.

“If the break fees cannot be rationally explained and serve as an obstacle to newcomers, the practice could be against anti-monopoly laws,” said Yasuo Daito, a lawyer specialising in antitrust issues at Nozomi Sogo Attorneys at Law.

But if larger banks’ services are simply better than those of potential challengers, then a violation of anti-monopoly laws would be less likely, Daito said. Investor-relations firm IR Japan Holdings in 2012 became the first new market entrant in four decades. It now has a 1% share.

IR Japan said it doesn’t charge break fees. It declined to comment on the practice.

($1 = 104.8600 yen)

(Reporting by Makiko Yamazaki and Maki Shiraki; Additional reporting by Takashi Umekawa, Noriyuki Hirata and Yuki Nitta; Editing by David Dolan and Gerry Doyle)

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Asian stocks rally, battered bond market tries for stability

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Asian stocks rally, battered bond market tries for stability 3

By Wayne Cole

SYDNEY (Reuters) – Asian shares rallied on Monday as some semblance of calm returned to bond markets after last week’s wild ride, while progress in the huge U.S. stimulus package underpinned optimism about the global economy and sent oil prices higher.

China’s official manufacturing PMI out over the weekend missed forecasts, but Japanese figures showed the fastest growth in two years. Investors are also counting on upbeat news from a raft of U.S. data due this week including the February payrolls report.

Helping sentiment was news deliveries of the newly approved Johnson & Johnson COVID-19 vaccine should start on Tuesday.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 1%, after shedding 3.7% last Friday.

Japan’s Nikkei rallied 2.1%, while Chinese blue chips added 0.8%.

NASDAQ futures bounced 1.2% and S&P 500 futures 0.8%. EUROSTOXX 50 futures and FTSE futures both rose 1.0%.

Yields on U.S. 10-year notes held at 1.40%, from last week’s peak of 1.61%. They climbed 11 basis points last week to be up 50 basis points on the year so far.

“The bond moves on Friday still feel like a pause for air, rather than the catalyst for a move towards calmer waters,” said Rodrigo Catril, a senior strategist at NAB.

“Market participants remain nervous over the prospect of higher inflation as economies look to reopen aided by vaccine roll outs, high levels of savings along with solid fiscal and monetary support.”

Analysts at BofA noted the bond bear market was now one of the most severe on record with the annualised price return from 10-year U.S. govt bonds down 29% since last August, with Australia off 19%, the UK 16% and Canada 10%.

The rout owed much to expectations of faster U.S. growth as the House passed President Joe Biden’s $1.9 trillion coronavirus relief package, sending it to Senate.

BofA’s U.S. Economist Michelle Meyer lifted her forecast for economic growth to 6.5% for this year and 5% next, due to the likelihood of the larger stimulus package, better news on the virus front and encouraging data.

U.S. virus cases were also down 72% since a Jan. 12 peak and hospitalisations are following closely behind, BofA added.

Higher U.S. yields combined with the general shift to safety helped the dollar index rebound to 90.787 from a seven-week low of 89.677.

On Monday, the euro was steady at $1.2083, compared to last week’s peak of $1.2242, while the dollar held near a six-month top on the yen at 106.60.

“Riskier” currencies and those exposed to commodities bounced a little after taking a beating late last week, with the Australian and Canadian dollars up and emerging market currencies from Brazil to Turkey looking steadier.

Non-yielding gold was still nursing losses after hitting an eight-month low on Friday en route to its worst month since November 2016. It was last at $1,750 an ounce, just above a trough around $1,716.

Oil prices extended their gains ahead of an OPEC meeting this week where supply could be increased. Brent gained 4.8% last week and WTI 3.8%, while both were about 20% higher over February as a whole. [O/R]

Brent was last up $1.11 at $65.53, while U.S. crude rose $1.04 to $62.54 per barrel.

(Editing by Shri Navaratnam and Lincoln Feast.)

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Buffett upbeat on U.S. and Berkshire, buys back stock even as pandemic hits results

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Buffett upbeat on U.S. and Berkshire, buys back stock even as pandemic hits results 4

By Jonathan Stempel

(Reuters) – Warren Buffett’s enthusiasm for the future of America and his company Berkshire Hathaway Inc has not been dimmed by the coronavirus pandemic.

Buffett used his annual letter to investors to assure he and his successors would be careful stewards of their money at Berkshire, where “the passage of time” and “an inner calm” would help serve them well.

Despite the disappearance last year of more than 31,000 jobs from Berkshire’s workforce, Buffett retained his trademark optimism, buying back a record $24.7 billion of its stock in 2020 in a sign he considers it undervalued.

He also hailed the economy’s capacity to endure “severe interruptions” and enjoy “breathtaking” progress.

“Our unwavering conclusion: Never bet against America,” he said. ((https://www.berkshirehathaway.com/letters/2020ltr.pdf))

Tom Russo, a partner at Gardner, Russo & Gardner in Lancaster, Pennsylvania and longtime Berkshire investor, said: “He’s a deep believer in his company and the country.”

The letter breaks an uncharacteristic silence for the 90-year-old Buffett, who has been almost completely invisible to the public since Berkshire’s annual meeting last May.

But while touching on familiar themes, including Wall Street bankers’ avarice for dealmaking fees that benefit them more than companies they represent, Buffett did not dwell on the pandemic, a prime factor behind Berkshire’s job losses.

He also did not address recent social upheavals or the divisive political environment that some companies now address more directly.

“The letter highlighted the innovation and values that have become the backbone of America, and that’s perfectly acceptable,” said Cathy Seifert, an analyst at CFRA Research with a “hold” rating on Berkshire.

“Given the reverence that investors have for him, the letter was striking for what it omitted,” she added. “A new generation of investors demands a degree of social awareness, and that companies like Berkshire set out their beliefs, standards and goals.”

Buffett also signaled a long-term commitment to Apple Inc, where Berkshire ended 2020 with $120.4 billion of stock despite recently selling several billion dollars more.

He called Apple and the BNSF railroad Berkshire’s most valuable assets – “it’s pretty much a toss-up” – other than its insurance operations, and ahead of Berkshire Hathaway Energy. “The family jewels,” he called those four investments.

PROFIT RISES EVEN AS JOBS ARE LOST

Berkshire on Saturday also reported net income of $35.84 billion in the fourth quarter, and $42.52 billion for the year, both reflecting large gains from its stocks.

Operating income, which Buffett considers a more accurate measure of performance, fell 9% for the year to $21.92 billion.

The stock buybacks have continued in 2021, with Berkshire repurchasing more than $4 billion of its own stock. It ended 2020 with $138.3 billion of cash.

However, Buffett bemoaned fixed income as an investment, saying that “bonds are not the place to be these days.” The income from a 10-year U.S. Treasury bond fell 94% from a 15.8% yield in September 1981 to 0.93% at the end of 2020. Benchmark Treasury yields have jumped since but are still low by historic measures.

“Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” the letter said.

Berkshire, based in Omaha, Nebraska, has more than 90 operating units including the BNSF railroad, Geico car insurer, Dairy Queen ice cream and See’s candies.

Its workforce declined 8% from a year earlier to about 360,000 employees. Bigger drops were reported at BNSF, which shed 5,600 jobs, and See’s, where employment fell 16%.

The pandemic hit no Berkshire business harder than Precision Castparts Corp, which shed 13,473, or 40%, of its jobs.

Berkshire bought the aircraft and industrial parts maker in 2016 for $32.1 billion, Buffett’s largest acquisition, and took a $9.8 billion writedown as the pandemic decimated travel and punished Precision’s aerospace customers.

“I paid too much for the company,” Buffett wrote. “I was simply too optimistic about PCC’s normalized profit potential.

“PCC is far from my first error of that sort,” he said. “But it’s a big one.”

Berkshire said some businesses are beginning to recover form the pandemic.

“Certainly 2021 is going to be a much stronger year, dependent upon the speed of vaccinations and the opening of the U.S. economy,” said Jim Shanahan, an analyst at Edward Jones & Co with a “buy” rating on Berkshire.

Buffett also said Berkshire’s annual meeting will be held in Los Angeles rather than Omaha, allowing 97-year-old Vice Chairman Charlie Munger, a Californian, to rejoin him and answering about 3-1/2 hours of shareholder questions.

Vice Chairmen Greg Abel, 58, and Ajit Jain, 69, who are widely considered frontrunners to succeed Buffett as chief executive, will also be available to answer questions.

Buffett said he hopes Berkshire will in 2022 resume its annual shareholder weekend in Omaha, which normally draws around 40,000 people – an “honest-to-God annual meeting, Berkshire-style,” he wrote.

(Reporting by Jonathan Stempel in New York; editing by Megan Davies, Alden Bentley, Marguerita Choy and Cynthia Osterman)

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