Has German Finance Minister Peer Steinbrueck finally said what many world leaders think but are afraid to say? That the British government won't sign up to meaningful reform of financial markets because it is too worried about what it would mean for the country’s most famous cash cow, the City of London.

The City, which accounts for around 35 percent of global foreign exchange turnover, has been a popular target for critics of capitalism for years. But it has rarely been singled out so bluntly as a problem by one of Britain’s close allies.

Even for a man not known for holding his tongue, Steinbrueck’s remark on Wednesday that Downing Street was impeding reform because it had “practically aligned” its interests with the City, was unusually undiplomatic. Just days before global leaders meet at a Group of Eight summit in Italy, Steinbrueck suggested the British government was plotting a “restoration” of the pre-crisis order to protect its own interests. The United States, by contrast, was now open to reform, he said.

Rather than attempting to smooth ruffled feathers when she addressed parliament on Thursday, Chancellor Angela Merkel picked up the thread, saying she would not tolerate efforts to stall reform at the G8 summit, though she did not name Britain.

Steinbrueck’s comments generated a strong response on German websites. Though he belongs to the centre-left Social Democrats, many readers of conservative daily Die Welt wrote in to praise him. “Finally the truth”, “genius” and “backbone” were some of the remarks his stance provoked. Across the channel, the most popular reader’s comment posted online in an article by Eurosceptic British newspaper the Daily Mail also backed the 62-year-old. “I’m with the German finance minister,” it begins.

Whether one agrees with his approach or not, Steinbrueck knows he is not talking into a vacuum. Large swathes of the commentariat believe not enough has been done to stabilise financial markets over the long term. Martin Wolf, chief economics commentator of the Financial Times, wrote on Wednesday that without radical changes, another banking crisis is inevitable.

PHOTO: German Finance Minister Peer Steinbrueck addresses a news conference in Berlin, May 13, 2009. Steinbrueck said on Wednesday Germany's interbank lending sector was still suffering from weak confidence. REUTERS/Fabrizio Bensch

By any standard the second quarter of 2009 was remarkable. Here are some numbers to chew over as the third quarter gets under way:   

— World stocks as measured by the MSCI All-Country World Index had their best quarter since the benchmark was first compiled in 1988.

    — The world index gained 21.2 percent for the second quarter. Its nearest “competitor” was the fourth quarter of 1998 when it rose 20.66 percent.

    — Much of the index’s gain this quarter came in the first two months. The index was essentially flat in June as investors began trading in a tight range.

    — Emerging markets were the main driver. MSCI’s sub-index for the sector gained 34.3 percent for the quarter, also a record high. Asian shares have been among the stars, with the MSCI Asia-Pacific ex-Japan index rising 33.7 percent. This was more than twice the gain on the U.S. Standard & Poor’s 500 index.

    — A big decliner was volatility. The Chicago Board Options Exchange Volatility Index, often called Wall Street’s fear gauge, fell below 30 percent at the end of the quarter to its lowest level since before the collapse of Lehman Brothers.

    — Over the quarter the VIX has lost 40.3 percent, reflecting growing confidence among investors that equities have ended the tumble of the past year or so.

    — One of the biggest percentage gainers was oil. New York crude gained around 42.2 percent on expected demand from a recovering world economy. Other commodities also made strong gains, with copper up 23.4 percent.

    — Hopes for a global recovery and rising concerns about future inflation — linked to the oil price surge and super-easy credit policy — pushed government bond yields and mortgage rates higher. Ten-year U.S. Treasury yields jumped 87 basis points over the quarter to 3.54 percent, having topped 4 percent at one point in early June. Ten-year euro zone government yields ended the quarter 39 basis points higher at 3.38 percent.

    — A growing appetite for higher-yields boosted demand for emerging market debt. Emerging sovereign debt spreads narrowed 212 basis over U.S Treasuries according to JPMorgan.

    — Investors ended the quarter clearly committed to future gains in higher-yielding assets. Reuters asset allocation polls for June showed cash reserves at a 23-month low, a sign that money was being put to work. EPFR Gobal data showed that about $130 billion has exited safe-haven money market funds in the year to date, but that is still less than a third of the $455 billion of cash that flocked to those funds in 2008 as a whole.

(Reuters photo: Gary Hershorn)

Berlin is slowly but surely establishing itself as one of the top global catwalks for the bold and the beautiful of the world of high fashion – and the global financial crisis seems to be doing nothing to slow it down.

For the fifth time, up-and-coming fashion designers are meeting in the German capital to present selections from their latest collections at the Berlin Fashion Week, which is attracting increasing interest from the international fashion scene.

Maia Guarnaccia, vice president at IMG Fashion Europe, which organises the fashion week in Berlin as well as similar events in New York, Miami and Amsterdam, said last year marked a turning point for Berlin.

“Since July (last year) people are now calling us to be here,” he said, adding that it used to be the other way around.

“Berlin still is an oasis,” Guarnaccia said. “Because it is more accessible” than other fashion capitals like Paris, London or Milan, where the cost of living as well as production and rents are a lot higher, he said. This, he said, attracts young designers especially in a time of global economic recession.

“People get more creative in times of a crisis,” he said, having also worked for British fashion designer Vivienne Westwood in the past.

One of the fast-rising stars is designer Pablo Ramirez. Born in Buenos Aires in 1971, Berlin marks one of his first international shows.

“Berlin is another important door to Europe,” Ramirez said after the show. He was invited to come to Berlin after winning top fashion awards in Argentina. “I’m very nervous and excited,” he said.

His summer 2010 collection featured mainly elegant black dresses and suits and was accompanied by almost melancholy sounding strings.

It was followed by a bright, colourful and upbeat show by South African designers Jacques van der Watt and Danica Lepen with their Black Coffee label — which featured red, blue and red silky smooth wrap-around dresses adorned with golden laces.

A few minutes walk away from the main venue, another show launched in a big white tent set up at the heart of the city, next to the opera house. The German natural clothing brand Hessnatur show is the latest collection with other ecological designers in several rooms of Berlin’s famous Adlon Hotel. 

Hessnatur was founded more than 30 years ago by environmentalist Heinz Hess and won over designer Miquel Adrover as creative director in 2007. Hessnatur decided to show in Berlin after his gig at last year’s the New York Fashion Week triggered a wave of media interest. “Requests have risen brutally,” said Chief Executive Wolf Luedge.

Why so busy? Well, actress Julia Roberts recently ordered some clothes for her next movie and Vogue just did a photo shooting with Cameron Diaz wearing Hessnatur’s frocks.

While the future looks bright for the company, there is still a great deal of uncertainty. Hessnatur is part of German retail and tourism group Arcandor which filed for insolvency last month.

Luedge could not say what would happen to his company now, but said: “Hessnatur will come out of this one unharmed. I am not worried. Not at all.”

IMG’s Guarnaccia added more optimism. Berlin would make its way, he said: ”The success will be a blend of German brands, established designers and newcomers.”

Got a company to set up? Better go for a simpler name.

That is what psychologists at Princeton University found in a  survey when they studied data from two major U.S. stock exchanges on initial public offerings.

They found that people are more likely to purchase newly offered stocks that have easily pronounced names than those that do not. After the IPO, investing $1,000 in companies that have easy-to-pronounce names generated $333 more than investing in the 10 hardest to pronounce companies.

In one case, an initial investment of $1,000 yielded a profit of $112 more after one day of trading for a basket of fluently named shares than for a basket of “disfluently” named shares.

“These results imply that simple, cognitive approaches to modeling human behavior sometimes outperform more typical, complex alternatives,” the survey said.

The survey said the effect extends to the ease with which the stock’s ticker code, generally a few letters long, can be pronounced — indicating that, all else being equal, a stock with the symbol BAL should outperform one with the symbol BDL in the first few days of trading.

U.S. investors have started to go shopping abroad for assets for the first time year.

According to UBS, the proportion of mutual funds’ portfolios held in foreign assets rose to 24.5 percent in May from the 23 percent level they kept until then.

From 2002-2008 U.S. mutual funds sharply increased their exposure to  overseas assets, going as high as 26 percent in mid-2008 from 12.5 percent. After the collapse of Lehman Brothers they have cut back to 23 percent.

“U.S. investors have begun to return to overseas markets as risk assets recovered in Q2 2009. This has undermined the dollar. But if market sentiment becomes risk averse again in H2 2009 then US investors are likely to curb their dollar diversification once more,” the Swiss bank says in a note.

By Barani Krishnan

A decade ago, Malaysia's former deputy prime minister Anwar Ibrahim was on trial for sodomy and corruption in a trial that exposed the seamy side of Malaysian justice and the anxieties of a young country grappling with a crushing financial crisis and civil unrest.

Anwar is Malaysia's best known political figure, courted in the U.S. and Europe and probably the only man who can topple the government that has led this Southeast Asian country for the past 51 years.

Photo: Anwar Ibrahim, with a bruised eye, at court on Sept 30, 1998 during his his first trial. REUTERS/David Loh

Now the leader of the opposition, will go on trial next week again charged with sodomising a 23-year old male aide. The trial once again looks likely to provide gory evidence and bringing some unwanted attention from the world's media on this Southeast Asian country of 27 million people. It could also embarrass the government and draw international criticism.

Anwar vowed in a recent interview to fight what he says are trumped up charges.

The 14 months I spent covering the 1998 trials saw Anwar accused of sodomy with three men and having sex with a woman over a period of years. This case is simpler, there is just one accuser. All homosexual acts are illegal in this mainly Muslim country and sex outside marriage is illegal for Muslims.

The first trial was gruelling. Lines began as early as four in the morning as people tried to get into the court that could seat less than 200. Most of the spectators were ordinary people, but there was a sprinkling of dignitaries and businessmen who had known Anwar when he was in office.

There was a separate media queue and again a fight to get in line as dozens of reporters from local and international outlets jockeyed for space. Ringing the court were hundreds of riot police, backed by watercannon, waiting for trouble in a country where there were daily protests at the time, often involving tens of thousands of people.

Once inside the courtroom, things were equally unpredictable. Judge Augustine Paul, plucked from obscurity to oversee Malaysia's most important criminal trial, won national fame for his oft-repeated response of "not relevant" to evidence introduced by the defence team.

The evidence itself was often contradictory and often bizarre. Ummi Hafilda Ali, a star witness for the prosecution called Anwar a "dog" and prayed that he would contract AIDS. At one stage the prosecution paraded a mattress in and out of the courtroom, saying that semen stains showed Anwar had had sex with a man on it.

One day outside the court, a witch doctor cast a spell, for no apparent reason.

Anwar showed up sporting a black eye that he said had been inflicted on him in prison by the country's police chief. This time round he says that he was forced to strip and his sexual organs measured in a hospital.

The evidence to be presented by the prosecution this time looks likely to be just as sensational. The malaysianmirror web portal, backed by one of the government parties, said there will be 30 witnesses, a carpet and a video recording, as well as a DNA evidence brought into court.

Anwar's team, citing two medical reports, says there is no evidence that Saiful Bukhari Azlan was sodomised. Saiful meanwhile has sworn on the Koran that he was and wasn't best pleased when the charge against Anwar was changed to consensual sex.

One key actor in the whole drama is missing this time round. Former prime minister Mahathir Mohamad, who critics say used the 1998 trial to drive Anwar from office and to humiliate him, is no longer in power. That removes some of the sting.

Even so, incumbent premier Najib Razak attracts plenty of ire from the opposition. He has been forced to deny allegations from the opposition and opposition-supporting websites that he was involved in the lurid murder of a Mongolian model.

The country remains tense in the wake of the 2008 general election in which the government lost its customary two-thirds majority.

Can Anwar survive another trial? Without him, can the opposition prosper and have a real chance of winning at the ballot box  in elections due to be held by 2013. Can Najib survive as prime minister if Anwar remains free and can he implement economic reforms?

Short-sellers have come under pressure especially after the collapse of Lehman Brothers as regulators and politicians blamed them for wrecking the financial markets.

Mark Lyttleton, fund manager at BlackRock, says short selling is essential in bringing returns, especially in absolute return strategy.

“Unless you have the ability to short, it is very difficult to make money in absolute terms. It is easy to say it but it’s a bit harder to do it,” he told a briefing.

In Lyttleton’s words, his fund — UK Absolute Alpha Fund — is run in the following way. “Day to day I’m walking in the forest. There are some trees that are big. In the wrong part of the forest, there are trees that have got rot, not getting enough water… They are the trees you want to short.”

But short sellers have come across hard challenges. “When we launched the fund, we wanted the fund to be bullet-proof. But we didn’t think how many bullets (would be fired at us). But the fund withstood that,” he says.

Click here to see a video of Lyttleton giving his views.

Greedy bankers are routinely blamed for the credit crisis but one British-based poll of -- well, financiers -- spreads the blame more widely.

Gary Jenkins, head of fixed income research at Evolution Securities, wanted a more specific scapegoat and ran a poll of about 200 mostly fund managers and investors asking them to pick their credit crisis culprit. Former U.S. Federal Reserve Chairman Alan Greenspan was the clear winner, picking up 35
percent of the votes. He has been widely criticised over the past year for low interest rate policies that helped fuel the credit boom.

Former U.S. president Bill Clinton also figured quite prominently with about 10 percent of  votes, and British prime minister Gordon Brown got quite a few.

Some bankers were singled out, including Fred Goodwin, former chief executive of Royal Bank of Scotland and Richard Fuld, the head of collapsed Lehman Brothers.

In a related article in Euroweek, Jenkins also had a unique culprit -- Bill Gates of Microsoft. None of the maths behind structured credit could be done without spreadsheets like Excel, Jenkins reckons.

So who do you think is to blame?

(Reuters photo: Kevin Lamarque)

Five things to think about this week:

WHAT Q3 HOLDS 
-  Global stocks are on track for their best quarterly performance in the 20-year history of the MSCI world index in Q2. But it will take better economic data than in recent weeks and positive earnings surprises to give the rally new impetus as Q3 kicks off, especially since volatility and liquidity remain preoccupations.

FINANCIALS 
- The Q2 reporting season looks set to highlight the gulf between financial institutions which are emerging in robust shape from the crisis and those still plagued by credit losses. Mark-to-market accounting changes and other factors may have distorted Q1 earnings but quarter-on-quarter comparisons could prove less flattering for those which have not been lucky enough to rack up high earnings, enjoy high margins and healthy trading revenues and pick up market share from defunct or weaker rivals. Recommendations in the next few days and weeks from a clutch of national and European authorities on the future landscape of regulation could throw some curveballs but will also offer a clearer picture of what banks will look like in the future. 

JOBLESS SPOTLIGHT 
Jobless data is lagging but some key unemployment numbers next week, including from the United States, will offer clues on how deep the domestic demand downturn will be and how much of a shadow labour market woes will cast over consumer sentiment and household purchases — vital indicators for firms looking for signals as they take decisions on inventory rebuilding. 

CENTRAL BANKS 
- The ECB will be next after the Fed to perform the balancing act that central banks are engaged in as they try to manage markets’ inflation and rate outlook expectations. Breakevens on French inflation-linked bonds have eased from May peaks but those fretting about the QE exit strategy still want reassurance. Some central bankers are flagging the need to turn off the fiscal taps at the right time but the sharpness of these warnings will be tempered by a reluctance to trigger a sharp back up in yields while the market-imposed need for fiscal discipline is being blunted by these central banks’ bond buying. 

ISSUANCE
- Huge borrowing and debt issuance from major countries around the world ensure that long-term inflation is still a concern for some people in financial markets, despite soft economic data and huge capacity utilisation slack pointing to extremely subdued price pressures. Front-loading by some sovereign issuers still leaves plenty of supply to come onto market in H2. Question marks remain over how such supply will be absorbed, and whether shifts in household savings rates will help.

The European private equity industry today published its response to the proposed Alternative Investment Fund Managers directive that seeks to place controls on the industry.

In what it must hope will be seen as a carefully considered and constructed response to the European Commission’s hastily drafted and ill-thought-out proposed directive, the European Private Equity and Venture Capital Association — the voice for private equity in Europe — calls for the threshold for reporting on its companies’ activities to be lifted to 1 billion euros assets under management from 500 million.

It argues that private equity firms smaller than that specialise in managing small and medium-sized companies and should be subject to national legislation.

EVCA also wants a grandfathering clause introduced so firms existing funds that use no leverage and have no redemption rights (the vast majority of all unlisted private equity funds) would be exempt from the directive. It argues that failing to do this could result in termination of these funds “with disastrous consequences for the industry and its portfolio companies”.

The big question is who in Europe is listening?

Having already gained a surprise concession in the published draft, which lifted the reporting threshold to 500 million euros from an expected level of 250 million euros, private equity may be seen as pushing its luck by asking for further leeway.

While the Socialists lost ground to the Conservative right in the recent European Parliament elections, it would be a mistake to think that the left wing coalition leader Poul Nyrup Rasmussen will be any less strident in his call for stringent legislation on private equity and hedge funds alike. The right wing Governments in France and Germany have been just as loud in their demands for legislating of the industries.

Private equity might have been hoping for support from the UK, home to most of Europe’s largest funds, but the decision of the British Conservative party to step outside of the main right wing coalition in Europe will weaken the voice in its favour. A feeble British Labour Government and a UK Treasury with bigger fish to fry does not leave private equity with many influential friends.

EVCA’s response to the proposed directive is its opening shot in the whole legislative process which is likely to take at least one year, but it must have hoped for a warmer reception for its counter-proposals.