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Quest Means Business
Stock Market Selloff
Aired May 25, 2010 - 14:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Good evening. We're in the thick of a fierce stock market sell off, which is wiping billions of dollars from the value of companies around the world.
The euro is close to its lowest level against the U.S. dollar in some four years, as confidence in the European economy has crumbled. It is all to do with debt. In Asia, Europe, and now the U.S. traders are running scared there is just two hours to go before the close of Wall Street. And triple digit losses, a loss of nearly 2 percent, 9,800, well under 10,000, for the Dow Jones, off 190 points.
Interestingly over the past month there have been 22 trading days, including today, where we are on track for losses of 100 points or more. Of the 22 days, 11 of them have seen triple digit losses so far. European markets are bearing scars as well. It has been ugly session. Almost every share on the benchmark indices fell. London FTSE is at an eight-month low. The Swiss market and the Paris CAC currant is at the lowest level since July of 2009. Banks bore the brunt and I will explain for you in just a moment why that should be. Lloyds down nearly 9 percent. In Paris, Credit Agricola off my more than 6.5 percent.
You are getting the idea of what is an ugly situation around the world. The markets, we know, we were expecting volatility, but what we are seeing is really quite something else. And when confidence disappears, as it has done, the experts will point to a variety of reasons. Let's go through some of them. Come and join me in the library.
This is one of the first reasons that we heard about; the four Spanish banks, the four Cajas, regional unlisted banks. Now following the government take over of CajaSur, four of the other ones all joined together. They will hopefully have a tier one capital ratio of around 9 percent. So, on the lowish side, but still stronger then they were. The fear of insolvency, I mean, you saw it with Santander in the Paris market, where that share fell more than 4 percent at one point. So, what's happening in Spain, and we'll talk about it in a second, is very much of major concern.
This also can't be ignored. The threat of North Korea that war could be on the agenda. The promises by the South Korea to ratchet up the sanctions and the tensions against the North, over the alleged sinking of one of the South's ships, war ships, by an alleged North's submarine and torpedo; so that is what took and absolute (inaudible) attack, if you like, on the markets of Asia. Particularly, particularly, on the South Korean currency the won.
Italy now joins France, Germany, the U.K., Greece, (UNINTELLIGIBLE) and all, in joining what was to happen is known as the austerity club. Italy is to announce some quite severe cuts over the next few weeks, but it is all designed to bring down that budget deficit.
Now, when we put this into context, you can see the anxiety of what is in the markets when you look at these crucial trading rates. Let's start with LIBOR, the London interbank offered rate. Now three-months LIBOR dollar, or dollar/LIBOR, three month, is now trading 0.536 percent. You might not think that is terribly exciting, but let me tell you it is the highest level since July of last year. And LIBOR, which is the rate at which banks lend between themselves, has now risen for 11 of the last 11 sessions it has risen.
It is a sign the banks were having growing doubts as to what they will be able to repay and this is the other one, the 10-month high. The cost of buying insurance between banks to each other, the so-called CDS, credit default swaps. That is also been seen as rising pretty sharply over the last few weeks. That tells us that when it comes to sovereign debt that there are some serous worries. CDS rates are also at a 10-month high.
Let's go to New York and talk to Felicia Taylor, who is at the New York Stock Exchange, to put this in perspective.
Felicia, you are on the floor of the exchange. You have just heard me go through the reasons why. What do the people there think?
FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT: Absolutely. Right now Richard I'm joined by Ken Polcari from ICap Corporates. And obviously he saw the market go down 250 points at the open. But pretty much things have steadied right after that. After that first five to 10 minutes, what happened?
KEN POLCARI, ICAP CORPORATES, LLC: They absolutely did. The opened down strong, just like everyone expected them to do. We hit 10,044, 10,042ish, on the S&P, which is where most people thought we should hold. And in fact, we held there. And I think people are just sitting back and watching. I think there is a lot of money on the sidelines, but I think on a day like today you've got a lot of money that is just sitting there thinking, "I'm not sure prices are going to be cheaper a couple of days from now or next week, so I'm going to sit and watch and see how the market acts", which is exactly what it has done.
We have rallied back, maybe almost 100 points, we are still down 180 points, almost down 2 percent. Kind of in line, Europe was down 3 percent, 3.5 percent. I would expect, it feels right now, that I would expect it would stay here through the end of the day. And if we do that probably would be a good sign because we'll close above that 10,044 level.
TAYLOR: So, basically what you are saying, I mean, it sounds somewhat simplistic, but the buyers just really have not jumped back into the marketplace. What do you need to see for the buyers to come back to the marketplace?
POLCARI: I think the buyers are waiting to see another break. That is what I think they are; it is not so much that there are no buyers, I think it is the buyers are just taking a break. They are sitting back saying, you know, I've got this cash, I'm just not ready yet. And I think that people expect the market to break a little bit more. I think people are talking about 9,600, 9,500 on the Dow. And I think they are happy to sit and wait.
TAYLOR: There is an old adage, sell in May and go away. Pretty much this is the summer months, we are beginning to see that. There isn't as much buying, literally, in the consumer sector as well.
POLCARI: Right.
TAYLOR: What do you think is going to happen? Are we going to see that adage come true, or is the volatility going to continue to rise toe the levels that we have seen in the last eight or 10 days, or so?
POLCARI: I think the volatility-I think there are two answers to that question. I think if Europe does not calm down at all and the problems in Europe continue to get worse and worse. I think you are going to see the volatility spike. Then I think you are going to have a very interesting summer. If Europe tends to calm down and it looks like they are getting under control, I think it will be a very boring summer, the market will drift. I think the market will drift lower. I think a lot of asset managers are expecting the market to drift lower. So, I think, you know, you could end up having kind of a boring summer. That sell in May and go away adage may in fact be true.
TAYLOR: Ken, very quickly, do we look like the safest of the global economies right now?
(LAUGHTER)
POLCARI: That is a very interesting question because we do at the moment, a year ago maybe we wouldn't have. But today I think we do look like we are pretty safe considering what is going on in the rest of the world.
TAYLOR: Ken Polcari of ICap Corporates.
See, so Richard, basically everything is left in your hands.
QUEST: Hang on, Felicia, a quick question for Ken. Pass this question on.
TAYLOR: Yes.
QUEST: Ask Ken for me.
TAYLOR: You bet.
QUEST: Is it a case of crisis coming, or buy on the dips, if we are going to throw all the cliches in, which does he prefer at the moment?
TAYLOR: OK, a couple more cliches for you. Richard wants to know, is it crisis coming or buy on the dips?
POLCARI: I think you have to buy on the dips, but I think the dips are coming at the 9,600, 9,500 level. I think the crisis really, in this country, I think the crisis is over. I think the crisis coming in Europe, like I said, if they don't calm it down, then in fact you'll see much bigger crisis in Europe, which is going to cause to correct even faster. But for the most part, I think it is going to be buy on the dips, as we approach 9,500, 9,600, 9,500.
TAYLOR: So the buying is still to come, Richard. Like I said, things are pretty much in your hands, in Europe. Back to you.
QUEST: In which case we're all in very deep trouble completely. All right. Felicia Taylor at the New York Stock Exchange.
Look, we've just been talking there, buy on the dips. Some believe it looks like a small catastrophe, as you just heard, others believe it is an opportunity. Ken in New York isn't the only one who subscribes to that view. Virginie Maisonneuve is the head of global and international equities at Schroders, an asset management company. I asked her, were we on the cusp of a second financial crisis?
(BEGIN VIDEOTAPE)
VIRGINIE MAISONNEUVE, HEAD OF GLOBAL EQUITIES, SCHRODERS: I don't think so. I think we have a package that has been put in place. What we want to see is the ECB, you know, coming basically giving the green light for QE. I think we will have, but because of the difficult decision making process within Europe, it is taking more time. I think we also have to realize that we are at a stage now in the economic background, on a global basis, that is very different than we were 18 months ago. The U.S. is in a stronger position. China, India, Brazil, Korea, Taiwan, are in much stronger positions. So, I think what we need is for Europe to basically get its act together and I think it will do so. This is why I see this weakness as a buying opportunity.
QUEST: Right, now you say, buying opportunity, and I read your notes saying that, but you have to have nerves of steel, don't you, to buy into this market? Because is now the time, or is it best just to wait a little bit longer?
MAISONNEUVE: Well, I think you know, as a global stock picker what we do is you never take a very drastic action. What you do is that you do marginal trades. So, you sell a little bit of your winners and you buy either stocks that have underperformed, or you buy your bit of cyclicality. And I think that is what you should be doing in this market.
So, there are a lot of, for example, industrial exporters, or companies in Europe who are very strongly benefiting from the weak euro and I would accumulate those on a very slow and disciplined way. When you find quality names, strong balance sheets, and strong expected medium-term growth, earnings growth; stocks like Schneider, Siemens, Gaya (ph), are for example are all very strong examples of that.
QUEST: Let's just talk, though, about the flight to quality. It is understandable in this scenario. I mean, short of putting it in cash in a sock under the bed, the flight to bonds, which we saw and we saw today, is quite reasonable.
MAISONNEUVE: Yes, I think it is reasonable. But here again on must look at the overall allocation policy. What I'm talking about is within equities, you know, what we should do within the portfolio.
QUEST: Right, but let me interrupt you on that. Where would you balance your portfolio, a general portfolio, between equities, cash, gold and exotics, and bonds, do you think?
MAISONNEUVE: As the head of global equities at Schroders, our products are mostly institutional and are generally fully invested. And we currently have about 3 percent cash.
(END VIDEOTAPE)
QUEST: Schroders there. And what do you think? As we are at the moment are we in a position of buy on the dips, or is it a crisis about to come. We're going to follow this with your views over the next few days; @RichardQuest, or Quest@cnn.com. The Twitter address is @RichardQuest, Quest@cnn.com for the e-mail.
Someone showed Spanish traders a red flag on this session. Any bulls that might have been loitering stampeded for the exit. We'll be live in Madrid to explain the bulls and the bears.
(COMMERCIAL BREAK)
QUEST: The epicenter of this latest market tremor was seen in Spain where the main stock index in Madrid suffered a mini-landslide this session. Hefty 3 percent was-3.05, if you want to be pedantic, was knocked off the IBEX 35. The banks were the worst performers. Banco Popular lost 5.3 percent. Bilbao shed 4.5 percent. Santander gave up the best part of 4 percent. I told you earlier about the Cajas that are joined together.
In the past decade Spain's banking sector appeared as healthy as any in Europe. I guess the old assumptions are going out the window. Our Correspondent Al Goodman is in Madrid.
Al, let us dissect this. The fear that the banking sector is not robust enough to withstand the sort of issues. Is that a justified fear, what people are saying there?
AL GOODMAN, CNN INT'L. CORRESPONDENT: You were seeing that, Richard, on the stock market this day. And banks make up 30 percent of that main index, the IBEX 35. You mentioned the banks that were falling and that is whey that whole index fell. But there may not be as much concern about the Banco Santander and the BBVA, the big banks, as these savings banks where there is a lot of doubt.
They are locally run banks with local politicians on the boards of them. And that is what has upset many here and also the IMF. And they are holding a lot of bad debt from the real estate bubble that has burst. And that is where the fears are among the other many fears that were affecting the stock market this day. That was a key one, because of this failed bank, savings bank, over the weekend, Richard.
QUEST: But if we look at the IMF which warned only yesterday that Spain had to get its fiscal house in order and we know that Greece and Portugal have introduced their austerity measures. Spain has its 20 percent unemployment, so when is the government of Zapatero going to bring fiscal consolidation?
GOODMAN: Well, he has already started that, Richard, with this 15 billion euro austerity plan that is being put into place. That is about $18, $19 billion. Now the IMF in their latest report said that is good, Mr. Zapatero, but we want more. And what they want, and this is another reason that there were more fears and a new wave of fears in Spain. They want labor market reform. They want it urgently.
What that means is they want to lower the firing or the layoff costs of workers. Among the very highest in Europe, 45 days pay, per year worked, is what a Spanish salaried worker gets now if he gets laid off. The people are trying to take that down to 20 days. And the IMF has a series of other reforms, including for these troubled savings banks. So all of that came to play and that means an even bigger task for the prime minister who is getting more and more isolated. The other party is taking a big step back, letting him take the brunt, Richard.
QUEST: Al Goodman, joining us from Madrid, with the Spanish side of this latest crisis. Thank you.
Now, with oil still leaking into the Gulf of Mexico, the U.S. authorities have declared a fishery disaster area and are preparing now for new efforts to stop the flow. The top kill method will begin possibly in the next 24 hours. We'll explain what it does and what it all means in a moment. This is QUEST MEANS BUSINESS. Good evening.
(COMMERCIAL BREAK)
QUEST: Welcome back. BP engineers are beginning a series of diagnostic tests leading up to its top kill operation that is scheduled to begin early on Wednesday, if everything goes according to plan. It is the fist effort to stop the flow of oil outright, by pumping this thick heavy mud-like liquid into the well at high pressure. If it works then the well will be sealed with cement. The procedure has never been tested 5,000 feet beneath the water. And BP itself gives it a 60 to 70 percent chance of success.
Patience in the Gulf is wearing thin. The U.S. government is under considerable pressure to take charge of the spill. President Obama's energy advisor says the government is relying on BP's technology.
(BEGIN VIDEO CLIP)
CAROL BROWNER, WHITE HOUSE ENERGY ADVISOR: We all want this to work and we are going to do everything in our power to make sure it works. Obviously, we need the BP technology. You know they are the ones who know how to operate the little robots that have to move everything around down there, how to operate the vessels. But you know, we're not relaying on them. We also have our own people in there asking sharp questions, making suggestions, analyzing how are we going to go about getting this down. We want this thing shut down.
(END VIDEO CLIP)
QUEST: On Saturday President Obama blamed the spill on a breakdown of responsibility at BP. And one U.S. senator has already said BP doesn't stand for British Petroleum, but Beyond Patience.
Let's look at the plight facing BP. This is what happened over the last few days. In the library, I'll show you.
The shareholders of the company, itself, are now suing BP's board for failure to monitor safety and exposing the shareholders to liability. The market value of BP the shares are down by around 25 percent. The market value of BP has dropped by some $50 billion. So, you start to see that BP's position is at least under threat from a variety of sources. From the company itself, 20 odd, 30 odd days, it has cost $760 million to stop the spill so far. That includes not only the aborted container, the two of them, in fact, but also now this one. And the grants being paid to local governments, to fisherman, to tourists, to states to clean up operation; $760 million and that figure is believe to be rising faster than was first thought. Not surprising, 2.7 percent for Inland and BP shares were off on the latest session. BP, funnily enough, the shares have fallen 10 times over the last 13 sessions. That is the seriousness.
Let's talk about this with Barbara Shook , how joins me. She covers the oil industry for Energy Intelligence and Barbara is with me from Houston.
Good afternoon to you, Barbara.
When we spoke recently, you said that you didn't believe this would endanger or jeopardize BP as an entity. Is that still you view?
BARBARA SHOOK, ENERGY INTELLIGENCE GROUP: No, I don't think it will jeopardize BP as an entity but I think the resulting company is going to be under a lot of pressure to maintain its ranking among the top oil companies for a couple of years. By my estimate, the clean up costs will still be in the $10 billion range. And if you use the Exxon Valdez as a model, BP could be subject to another $10 billion in various settlement claims, in litigation costs and in fines. So the total bill could run upwards of $20 billion.
And, Richard, if I could correct some of your numbers. BP's market capitalization is down almost $70 billion since the spill began on April 20th. And while all the oil companies are down, by a percentage basis that is 36.5 percent compared to less than 15 percent for Exxon Mobile.
QUEST: OK, thank you.
SHOOK: So, it has really hit BP hard.
QUEST: You see, this-thank you for putting that out, because it makes the point, I think, doesn't it. The fear is, particularly when you've got the shareholders now suing their own company. You've got the U.S. government basically saying this. It raises the question of how much any company can withstand by way of pressure. Before they have to seek some sort of protection.
SHOOK: BP is going to have to divert money that was going to go into exploration, drilling and development projects all over the world, to the clean up and to paying fines to the U.S. government, into settling claims from fisherman, shrimpers, farmers. This is going to spread far inland because of tidal movements. If we have a hurricane and the water spreads inland, it is going to affect farming.
QUEST: Barbara-
SHOOK: The-what?
QUEST: I just want to interrupt you because time is a little on the tight side. And the one thing I'm not clear on, and with your expertise, you can help us understand. How valid are the criticisms, generally, against the way BP have handled this crisis?
SHOOK: When I hear U.S. lawmakers basically talking and bashing away at BP, I'm tempted to say, what would you have had the company do that they didn't do differently once the spill took place.
SHOOK: I don't know what they could have done differently once the spill took place, because the industry as a whole moved in to assist BP. The biggest criticism is that BP did not operate in a safe manner before everything happened. Consequently the industry is going to be prepared for much more stringent rules and regulations, which is going to raise the cost of operating in the Gulf of Mexico and across the U.S. for everyone. What could happen to BP that could be the most costly is that it will lose its opportunity to drill in the Gulf of Mexico in the future.
QUEST: Barbara, thank you so much for putting that into perspective for us and the BP question. Many thanks. Barbara Shook joining us there from Houston.
The people who live in the path of the oil slick say practical measures to preserve their coastline could be taken right now. The problem is, they say, nothing is happening. Our Correspondent Rob Marciano is in Venice, Louisiana. He's met local residents who are angry and sent this report.
(BEGIN VIDEOTAPE)
BRANDON BALLAY, CHARTER FISHING BOAT CAPTAIN: Everything down here lives and starts their whole lifecycle inside of these canes. Once their dead, they're gone. You know, they're not going to grow back.
ROB MARCIANO, CNN METEOROLOGIST (voice over): Wetland reed grass, now covered in oil, makes running a fishing charter boat tough business here in Venice, Louisiana. Brandon Ballay is worried about his livelihood. But also across the Mississippi Delta, it is a way of life.
B. BALLAY: Now we're mad at BP because basically, you know, I guess they're dropping the ball. You know? They were supposed to catch it, and they were supposed to plug it. Forget about giving me some money. You know, save my estuary, save my home.
MARCIANO: This environmental disaster has already affected generations.
DAVE BALLAY, FOUNDER, VENICE MARINE: But here is another example, this man catches bait for the recreational fisherman. He's out of business.
MARCIANO: Brandon's father, Dave Ballay, worked in oil rigs in the Gulf as a young man, then later built this marina in 1985. All the people here somehow depend on the oil business.
(On camera): Those oil rigs out there, I mean, that his the hand that feeds this community, how frustrating is it that they have killed part of this community?
D. BALLAY: It is very frustrating because almost everyone of us, almost every family, in Louisiana has a cousin, an uncle, a brother, or a wife that works in the oil industry. There are so many things that are related to the oil industry. So, we're mad. We're mad that it happened. We're not mad at the oil industry, we're made at that one individual, or that one company, that made that mistake.
MARCIANO (voice over): Over two weeks ago Plaquemines Parish proposed a plan to build sand barriers across 80 miles of sensitive shoreline. Meanwhile, oil has already hit some of those wetlands. And still, that plan goes unapproved.
BILLY NUNGESSER, PRESIDENT, PLAQUEMINES PARISH: We will start laying the groundwork and protecting the coastline. If they have a better plan, tell me one.
MARCIANO: Plaquemines Parish President Billy Nungesser believes the Coast Guard commander is holding up approval of his plan.
NUNGESSER: Now, let me tell you something, one man, in Washington, can say, you can't do it in six months. That is cheap talk, show me some proof. I'll stand toe-to-toe with him any day and prove him wrong. But you know what, he worked his way up through the Coast Guard, and he has the floor and the decision making. Shame on him. They ought to be prosecuted. And I don't care if they are in the Coast Guard, the Corps of Engineers, or BP, they let this coastline be destroyed.
MARCIANO (on camera): Coast Guard Admiral Thad Allan has told CNN that he is working with the Corps of Engineers and they have a six to 12 month timeline for this project which may be a little less efficient than they'd like it to be. Nonetheless the decision for that permit should be coming down, hopefully soon. But for the residents who live here, certainly not soon enough.
Rob Marciano, CNN, Venice, Louisiana.
(END VIDEO TAPE)
QUEST: In a moment, wouldn't you love to be a fly on the wall here at the US-China talks?
The yuan is getting a lot of attention.
We'll update you in just a moment.
(COMMERCIAL BREAK)
QUEST: Hello.
I'm Richard Quest, QUEST MEANS BUSINESS.
This is CNN, where the news always comes first.
The crisis between the Koreas escalating dramatically today. North Korea's official news agency says Pyongyang is now severing all ties with Seoul, outraged by what it's calling a smear campaign over the sinking of a South Korean warship.
Pyongyang says it will also expel all South Korean officials from a joint industrial park in Kaesong. Seoul blames North Korea for the attack on the ship, a charge that the North has, as you heard, vehemently denied.
The death toll is rising in Jamaica as police and soldiers intensify their assault on one of Kingston's most violent areas. At least 27 people have now been killed in attempts to capture Christopher "Dudus" Coke at his compound. He's an alleged drug lord who's wanted in the United States.
In India, investigators have recovered the flight data recorders from the record of an airplane that crashed last weekend. They hope to use information on the recorder to piece together the final minutes of the flight. The plane overshot a runway at Mangalore, killing 158 people. Eight passengers survived the crash.
An internationally renowned filmmaker released from prison in Iran after two months behind bars. Iranian state TV is reporting that Jafar Panahi was freed on bail today and still could face further charges. He'd been on a hunger strike for about two weeks. When he was arrested, Panahi was making a film about the disputed reelection of President Ahmadinejad last year.
So, as you heard, the problems of North and South Korea have created tensions and they are high on the trading floors around the world. It's not all about what's happening in Europe. Come over here back to the library and you'll see what I mean.
Asia-Pacific stock markets absolutely took a drubbing. Now we can -- we can perm any one of a variety of reasons for a 3, 3, 1, 3 percent fall in markets -- obviously, the banking crisis, the euro debt worries and the sovereign issues.
But what was happening between South and North Korea certainly took its toll, particularly, of course, on the South Korean market, the KOSBE, and the yuan, which fell very sharply. Into that interesting maelstrom we had China with a visit by Tim Geithner, the U.S. Treasury secretary, along with Secretary of State Hillary Clinton, and talks there on the appreciation or the allowed -- letting the yuan, the renminbi, whatever you want to call it, rise on the foreign exchanges.
China now very concerned about the devalued euro and the feeling being that China is much less likely to allow a rapid appreciation of its currency as a result of that. So no -- no time scale or certainly any question of free float is involved, let alone a release of the peg on the currency board or the quasi currency board that Beijing, because, of course, of the what it believes is now the very difficult situation.
Well, we need to talk more about this.
Joining me is Linda Yueh, a fellow in economics at the University of Oxford.
Linda, good of you to come and help us understand this very complicated situation.
Let's start with North and South Korea and what that effect has on the market.
LINDA YUEH, FELLOW IN ECONOMICS, OXFORD UNIVERSITY: It has had a pretty dramatic effort. This is the first time in 20 years that relations have now been severed between North and South Korea. So I think that certainly made markets very jittery given how important South Korea is. And, of course, North Korea determines the stability of the region, to a large part.
QUEST: But it's the way that those fears transmitted themselves through all the markets of Southeast Asia and right the way up through toward Japan and beyond.
YUEH: Yes, I think you can see the reaction throughout global markets. And it really couldn't have come at a worse time, because also today, we heard the euro crisis...
QUEST: Right.
YUEH: -- now has a global impact. The U.S. has said it's going to affect its growth prospects, the euro debt crisis. So it's just not a good day for markets for all this to come together.
QUEST: So is -- is Tim Geithner on a hide into nothing, trying to jawbone the Chinese to raise the renminbi?
YUEH: I think he's actually given up that tact. If you listen to what he said, he said the Chinese will do it on their own time scale. He's doing something different, which I think is much more promising. The reason why they have a big bilateral deficit with China is not just because the renminbi is cheap, it's because the Chinese don't let them sell anything to China...
QUEST: So he's going the other way...
YUEH: So that's right...
QUEST: He's going for open access...
YUEH: Yes.
QUEST: -- a market access.
YUEH: Exactly. And that is a much better way to do it, because ultimately, the cheap renminbi does make U.S. exports more expensive, but frankly, the Chinese restrict their vast domestic market to Chinese companies.
QUEST: That's -- you know, he -- he's going to discover -- you're -- you're an expert in this. He's going to discover, surely, it's just as difficult to break down that wall as it is to deal with the currency.
YUEH: It is. But...
QUEST: But?
YUEH: -- you hit one wall, you try another. You say if the Chinese...
QUEST: There's no evidence that the Chinese are prepared to open up the market, are they, even with a growing middle class?
YUEH: Not necessarily. But there's a couple of things which are promising. The very first one is the Chinese have very restrictive, non- bariff tarrier -- barriers...
QUEST: Yes.
YUEH: -- meaning they have things which are not related to terrorists, like you can only sell to the Chinese government if you have indigenous Chinese innovation in your product. So he's trying to tear those things down. And he's actually getting some positive response.
But this is what the U.S. can offer. The U.S. can offer selling into its own market things the Chinese want to buy, like technologies the U.S. has to offer.
QUEST: Ultimately, this bilateral relationship is very -- they -- they are in the same leaky boat together, aren't they, if only because China is stuffed to the gills. You know the number of how many trillion dollars of U.S. Treasuries that the Chinese now have. So they have to have an accommodation here.
YUEH: Well, yes. It's very clear that the two of them are, in a sense, the two engines of global growth. And unless they can rebalance their growth a bit more, China is going to suffer from liquidity buildup and the U.S. is going to struggle to recover.
And, by the way, they talked about Europe, as well, because if those two legs don't look too good, that third leg of Europe in the global economy looks even worse.
QUEST: You just -- thank you very much for joining us.
You were just saying there was no respite, was there, in markets today?
It was a dreadful day.
YUEH: No. No. It's not been a good day, I'm afraid.
QUEST: It -- it was not. And, indeed, thank you, Linda, for coming in and putting that side to the story.
But wherever you looked, investors were unable to run for cover. The stock markets, for example, in the Middle East were clobbered just like Europe, the U.S., Asia.
But let's turn our attention to Abu Dhabi, where our correspondent, Leone Lakhani, has sent this report.
(BEGIN VIDEOTAPE)
LEONE LAKHANI, CNN INTERNATIONAL CORRESPONDENT: Gulf stocks took a battering on Tuesday and that's because investors are concerned that the European debt crisis could filter through into this region and affect demand here.
Now, if you take a look at the numbers, Dubai lost about 4.5 percent at the close today. Saudi Arabia lost nearly 7 percent. And it's the largest drop since April, 2009. Qatar was down over 4 percent and Kuwait was down over 2.5 percent.
Now, investors are just generally uneasy about the global situation and that's leading them to liquidate a lot of their stocks.
Now, in this region, they're also concerned about the falling oil prices. Oil prices have fallen about 20 percent in this month alone and that would obviously affect the revenues of some of the major oil exporters in this region.
Now, it comes as the International Monetary Fund lowered its growth prospects for Middle East oil producers. The IMF says the region's oil producers will grow at a rate of 4.3 percent in 2010.
Now, that's pretty strong, but it's slightly lower than a previous estimate of 4.5 percent.
Leone Lakhani, CNN, Abu Dhabi.
(END VIDEO TAPE)
QUEST: If you are by now feeling a little depressed at the way the markets are trading, there is always the possibility that you could go for a bit of entrepreneurship.
If you do, Microsoft is looking for innovation in Europe. The company's European chairman will be on the program next.
(COMMERCIAL BREAK)
QUEST: Microsoft wants to unleash the potential of European entrepreneurs. And in doing so, today it hosted the Bizspark Conference in Paris.
Now, the stars of this show are the entrepreneurs themselves -- 18 of them pitched directly to Microsoft for investment in their startups.
Well, these upstart software entrepreneurs say that they are hoping to make a killing. And Microsoft itself believes such innovation is the lifeblood of future growth.
I was joined a moment or two ago by the chairman of Microsoft's European business, Jan Muehlfeit.
And I asked him why take entrepreneurs with good ideas?
If you have a good idea, why would you turn to Microsoft for investment?
(BEGIN VIDEOTAPE)
JAN MUEHLFEIT, EUROPEAN CHAIRMAN, MICROSOFT: Well, Richard, we are the platform company, right?
And we have a lot of partners building their own applications. In fact, if we do one euro in Europe, our partners, which we call Ecosystem, they are making 80 euros. So it's a great win-win relationship, if you will.
QUEST: The -- the whole concept of risk and reward is so very important at the moment, isn't it, because as we come out of recession, we're looking for innovators, but capital is still very difficult to find a home?
MUEHLFEIT: It is. And that's why we are doing this matchmaking even -- in fact, we've got like 18 different companies from the Bizspark program. Twelve of them were, in fact, you know, showing the proud computing solutions and, you know, the VCs -- venture capital -- and angel guys (ph), were, you know, watching. And that's what -- what we are doing. Because they need, indeed, the seeding money, how to start a company.
QUEST: The -- the end -- the restructuring of the entertainment division is going to be announced.
Why do you think it was necessary to restructure?
Is it the -- what was behind the restructuring?
MUEHLFEIT: Well, as you know, we are very much committed to bring, you know, super technology to the consumers. And this is the reason why we are splitting consumer and mobile divisions, to get really closer to our customers, to our consumers.
QUEST: That mobile division, which is really, frankly, the future in so many ways, Microsoft has had goes at tablets, it's had goes at -- it's very successful with mobile -- Windows Mobile 7 and beyond.
But I'm wondering, the killer device and ap has eluded you so far.
Do you see that as being a problem?
MUEHLFEIT: Well, as you said, I think we are very excited and the market is very excited about the new mobile platform which we are launching in the autumn. And then, you know, the things like Xbox and Xbox life (ph), if you talk about, you know, cloud computing, it's a very successful concept.
I think this restructuring is really getting us closer to the market, getting us closer to the consumers.
QUEST: Does it -- finally, does it annoy you, Jan, does it annoy you when people like myself bang on about the iPhone or the iPad and question Android and question, you know, the -- they do seem to have captured, rightly or wrongly, for better or worse, the public relations war. They seem to be winning on that front.
MUEHLFEIT: Look, we are investing in innovation. Our R&D budget is $9.6 billion, you know, this year. It's a huge, you know, budget for innovation. And I think the future will -- there's always tomorrow in business. I think we -- for the cloud computing era, we are very well positioned. And today, we are, in fact, delivering our experience through the PC, mobile phone and the browser. This is what we are doing.
(END VIDEO TAPE)
QUEST: The chairman of Microsoft Europe talking to me about restructuring.
Guillermo tonight is at the CNN World Weather Center for us.
There is so much on your bailiwick.
Where are you starting?
GUILLERMO ARDUINO, CNN METEOROLOGIST: I'm going to tell you that. You may have felt that temperatures are a little bit cooler, but the weather is nice in London. We see high pressure here taking over. And I want talk a little bit about Scotland, not only because we see some rain bands going down and more so is coming down into Scotland in the next 48 hours, but, Richard, remember that volcano in Iceland?
It's stopped erupting. So experts now are thinking -- and I'm going to do -- give you the connection with Scotland in a second -- but experts say that it may be one of several pauses and they are hoping -- because this is normal behavior for volcanoes -- that a three month pause will mean back to interactivity. And we are really looking forward to it, because we had forecast last weekend that the winds were going to come down here and because the eruption was taking place back then. It was OK because of the winds. But now the ash cloud would come into (INAUDIBLE)...
QUEST: Guillermo...
ARDUINO: -- we don't have any.
Yes?
QUEST: Guillermo, hang on a second. That's all very good to perhaps suggest that it might be a pause.
But what about the other theory that says the volcano next door to it, that big one, might be about to join in the eruption?
ARDUINO: Yes. We can't forecast that. We don't know. All we know is based on past experience. And past experience is saying that after this one -- and you may try to pronounce it -- is acting, the second one next door may start erupting, as well.
But so far, there are no signs. So what we do know is that now there's a period of inactivity. And we're hoping that it will be one of several processes to finally go dormant. And the truth is that even though the winds are going down right now, we are not going to see any problems in the next days in Europe concerning the ash cloud, because there's no ash cloud anymore. And I'm happy to report on that.
At the same time, temperatures went down in the west. Some rain bands are moving northward into the Low Countries and winds in Copenhagen will continue, but it will be a little bit better.
There are some areas, though, associated with these areas of instability that will see some unstable weather. And that is when we may see some action up here for some delays because of bad weather, but not because of that volcano.
QUEST: Well, yes. We'll leave it there.
Many thanks.
ARDUINO: Thank you.
QUEST: But the one thing that -- the one thing I know is one of us will be proven right before long. Maybe we should have a bet on it. Whatever, there's too much seriousness to have a bet on that one.
All right, Guillermo, many thanks.
ARDUINO: Thank you.
QUEST: In a moment, a courtroom battle over London's most expensive piece of land. The man who paid $2 billion for Chelsea Barracks and left it empty and undeveloped. And they're blaming Britain's Prince Charles.
(COMMERCIAL BREAK)
QUEST: While Britain's Queen Elizabeth was busy opening parliament in London, in a courtroom about a mile away, they were arguing about what her son and the heir to the throne, Prince Charles, may have said to the emir of Qatar.
And as Atika Shubert explains -- and it is a complicated story -- the prince's opinions are at the heart of a legal tussle. And it all concerns one of London's biggest building projects. Oh, yes, and it's just down the road from where his mom lives.
(BEGIN VIDEOTAPE)
ATIKA SHUBERT, CNN CORRESPONDENT (voice-over): In one corner, Nick and Christian Candy, British billionaires, property developers to the stratospherically wealthy -- regular features in magazines like "Haute Living," known for creating luxury homes like this.
In the other, Qatari Diar, the luxury real estate company backed by the Qatari royal family, owner of London property icons from the venerable Harrods's to the planned Shard of Glass Tower.
And then there's Prince Charles, heir to the British throne, classic architecture enthusiast, not a fan of modernist buildings.
(on camera): This is what the court case is all about, Chelsea Barracks, or what used to be Chelsea Barracks. Formerly owned by the Ministry of Defense, this is prime London real estate.
Now, this was bought by Qatar Diar and the Candy brothers for almost $2 billion. That's the most expensive land purchase in British history. But as you can see through this gate, there's no building going on.
(voice-over): This is what they plan to build on it -- a massive glass and steel project designed by the award-winning architectural firm of Richard Rogers. Hundreds of luxury apartments selling for as much as $15 million.
But local residents objected when they found a champion for their cause in Prince Charles. He wrote to the emir of Qatar, appealing for him to scrap what he called the, quote, "brutalist architectural plan," offering instead a design, also by a famous architect, for a more traditional brick and mortar development. Months later, Qatari Diar withdrew the Rogers' plan.
The royal household has refused to comment, but royal watchers say the prince was well within his rights.
RICHARD FITZPATRICK, ROYAL ANALYST: The prince has very forcibly been known for his desire for harmonious developments. There's no question that the prince, so long as he steers clear of party politics, should give his views if he feels strongly.
SHUBERT: Now, the Candy brothers want more than $120 million from Qatari Diar for breach of contract, specifically blaming Prince Charles for spiking the project. The lawyers say they won't be calling him as a witness.
Qatari Diar says it did not withdraw the plan because of the prince's letter. Instead, it said, London's mayor was going to reject the plan anyway and that is why they withdrew.
The opulent One Hyde Park, to be completed this year, is also a Candy Brothers and Qatari Diar project. Half of its luxury apartments have been sold, including one for more than $150 million, sold to Sheikh Hamad of the Qatari royal family. It features bullet-proof windows and eye-screening security, in addition to marble work tops. But even the super rich were hit by the global recession and attempts to sell the remaining apartments have faltered. In the meantime, Chelsea Barracks languishes, waiting, it seems, for a plan fit for a prince, an emir and the Candy brothers.
Atika Shubert, CNN, London.
(END VIDEO TAPE)
QUEST: So there we have a fascinating case that will run and, indeed, pictures Prince Charles, the Candy brothers and the wealth of Qatar all together.
It has been a pretty shocking day on the market this week, not necessarily just because of the one day losses, but the totality of the effect. Now we're off just -- well, things have recovered quite a bit. We were up over 200 points at one point. Now we're down 99, just about 1 percent, for the Dow Jones Industrials.
But if you look at the European markets, you see that the losses there were really very severe and they were quite deep and across the board. It was the banking crisis in Spain, it was sovereign debt in Europe, it was North and South Korea and tensions between those two countries and it was the failure of the European Union to get to grips with euro economies.
If that wasn't enough for you, when I come back, I'll have a Profitable Moment.
(COMMERCIAL BREAK)
QUEST: Tonight's Profitable Moment.
The numbers for BP are starting to get serious. BP's share price has fallen more than 25 percent since the spill. Up to $70 billion has been wiped off of the value of the company.
BP has pledged to pay every penny of the cleanup and the legitimate compensation. So far, $760 million has been spent and the cleanup's surface hasn't been scratched.
If that weren't bad enough, the lawsuits are appearing. Some of the company's own shareholders are now suing, claiming the company is badly managed in allowing incidents like this to happen, which ultimately has cost them dear.
BP has the money. Pre-tax operating profits last year were $25 billion. The company has $8 billion in cash reserves. But at this rate, a lot of that cash will soon start to be eaten up. If the anger level translates to large jury judgments, then more money will flow out.
Oh, yes, BP can weather this storm, but it won't be pretty.
And that's QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, I hope it's profitable.
WORLD ONE starts now.
END
