Today's Headlines

Bloomberg:

• Italian, Spanish Yields Soar to Records; German Bunds Climb on Safety Bids. Italian and Spanish 10-year bond yields surged to euro-era records while German bunds rallied as contagion from the sovereign-debt crisis spread, piling pressure on Europe’s leaders to find measures to contain the turmoil. Yields on two-year Greek, Irish and Portuguese debt also reached the highest since the introduction of the 17-nation shared currency, while benchmark bund yields sank to within 12 basis points of an eight-month low. European Central Bank President Jean-Claude Trichet reiterated his opposition to Greek debt restructuring as euro-area leaders prepared to meet in Brussels on July 21. Stocks fell on concern European banks may need to raise as much as 80 billion euros ($113 billion) of capital following stress tests on the lenders last week. “It does not seem as if we are going to see an immediate solution to the debt crisis, so investors prefer to stay on the cautious side, and this is being reflected in German bunds,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “There is no genuine reason to price Italy and Spain down. It’s general contagion. It’s an alarming signal to European leaders to come up with a solution that doesn’t create more contagion.”
• Core Europe Infected by Crisis as France CDS Surge to Record. The cost of insuring European sovereign debt rose to records on concern the region’s crisis is spreading to its core. Credit-default swaps on France surged 9 basis points to a record 123 and Germany climbed 4 to 64, the highest since March 2009, according to CMA prices at 4:30 p.m. in London. Greece, Ireland, Italy, Portugal and Spain also rose to records, helping push the Markit iTraxx SovX Western Europe Index of swaps on 15 governments up 7.5 basis points to an all-time high of 305.5. Contagion to France and Germany “reflects the reality that the euro zone is in complete crisis,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “If we get anywhere close to looking at France, it’s game over.” European leaders are holding a special summit this week as they seek to contain the debt crisis, after stress tests published July 15 failed to reassure investors the region’s banks could withstand a sovereign default. European Central Bank President Jean-Claude Trichet reiterated the ECB won’t accept bonds from a defaulting nation as collateral, putting it at odds with politicians pushing for private investors to share the burden of rescuing Greece. Contracts on Greece jumped 92 basis points to 2,507, signaling an 88 percent probability of default within five years. Ireland climbed 47 basis points to 1,181, Italy increased 20 to 326 and Portugal rose 54 to 1,200, while Spain jumped 26 to 375 and Belgium was 8 higher at 213. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 3.5 basis points to 192.5 and the subordinated index climbed 7 to 336.5, both the highest since Jan. 11, according to JPMorgan Chase & Co. As many as 20 banks may need to bolster capital after eight lenders failed the stress tests, JPMorgan analysts said after the results were published. Swaps on peripheral banks led the rise in financial debt risk, with Banco Popular Espanol SA (POP) soaring 73 basis points to a record 652, according to CMA. The region’s phone companies also rose to all-time highs, with Hellenic Telecommunications Organization SA (HTO) in Athens surging 430 basis points to 1,142 and Madrid-based Telefonica SA (TEF) jumping 22 to 273. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 9 basis points to 469, the highest since Dec. 2, JPMorgan prices show. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 2.75 basis points to 125.5 basis points, the highest in more than a year.
  
• Forint Drops to Record Low Against Franc on Debt; Polish Zloty Depreciates. The forint and zloty slid to record lows against the Swiss franc and Hungarian stocks lost the most in three months on concern the euro-area’s debt crisis may cause emerging European economies to slow and lenders to pull out. The Hungarian and Polish currencies both sank as much as 1.7 percent to their weakest levels against the franc since Bloomberg started tracking the data more than 13 years ago. The BUX equity gauge slumped 3.7 percent in Budapest, the most since April 18. The euro-region’s debt crisis threatens to hurt the export- led economic recovery in the European Union’s east, according to Morgan Stanley and Royal Bank of Scotland Group Plc. The risk that western lenders will reduce their presence in the region is another spillover from the debt crisis, they said. “Risks of contagion from the euro area are rising,” Pasquale Diana, a Morgan Stanley economist in London, wrote in a report today. “The central and eastern European currencies will depreciate aggressively versus the dollar, Swiss franc and yen in the event that we see more serious contagion.”
• EU Leaders Will Consider Bank Levy to Aid Greece, Welt Says. Euro region leaders meeting this week in Brussels will consider combining a special bank levy with a bond buyback program in a second aid package for Greece, Die Welt reported today, without saying where it got the information. The fee would have to be paid not only by banks doing business with Greece, the newspaper said in its print edition. Investors would be asked to sell their bonds back to the Greek government and accept losses of as much as 40 percent, depending on maturities, the newspaper said, citing calculations by the Berlin-based Finance Ministry that estimate a debt cut by 20 billion euros ($28.1 billion) from bond buybacks. Germany’s proposal to ask investors to roll over Greek debt is seen as too risky as it may involve a temporary default and is unlikely to be considered, the newspaper said. The July 21 meeting in Brussels is to take basic decisions on the shape of the second aid package for Greece, it said. Chancellor Angela Merkel is resisting calls by Finance Minister Wolfgang Schaeuble -- made behind closed doors -- to cut Greece’s debt in a way that wouldn’t necessarily be voluntary for bondholders as she’s worried about the debt crisis spreading to other countries, Die Welt said.
• BofA(BAC) Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms. Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds. Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan’s ability to raise dividends and repurchase shares. “They are likely to be in capital-building mode for longer than previously anticipated,” Jason Goldberg, a Barclays Capital analyst, said in an interview. For now, he said, “I’m hard-pressed to see meaningful capital redeployment.”
• General Mills CEO Says Ethanol Subsidies Fuel Inflation, FT Says. General Mills(GIS) CEO Ken Powell said U.S. ethanol fuel subsidies were causing higher food prices, in turn increasing inflation, citing an interview with him. General Mills is the world's sixth-largest food producer by revenue, and Powell said if corn prices rise, wheat would follow, and "it's all linked."
• 21 Banks Would Fail Stress Test Based on CDS Spreads: ABN Amro. Capital shortfall would be EU17.5B versus EU2.5B if haircuts increased on debt of Greece, Ireland, Italy, Portugal, Spain based on CDS spreads, ABN Amro says in note. With haircuts of Greece 70%, Ireland and Portugal 30%, Spain 15%, Italy 10%, failures rise to 31 vs 8 in Friday's EU tests; capital shortfall would be EU40B.
  
• Gold Rallies to Record in Best Run Since 1980. Gold rose to a record $1,607.70 an ounce, heading for the longest rally in 31 years, as debt concerns in Europe and the U.S. boosted demand for the metal as a haven.
• Oil Drops in NY on European Debt Crisis as Euro Tumbles Most in Week. Oil fell as investors bet that Europe’s worsening debt crisis may slow the economy and crimp fuel demand, and as the euro tumbled the most in a week against the dollar. Futures dropped as much as 2.5 percent on speculation that European leaders won’t agree on a way to contain the region’s debt crisis at a summit this week. Crude for August delivery dropped $2.15, or 2.2 percent, to $95.09 a barrel at 10:47 a.m. on the New York Mercantile Exchange. Earlier, it touched $94.85. Futures have risen 25 percent in the past year.
• Singapore Exports Rise Less Than Estimated on Electronics Shipment Slump. Singapore’s exports climbed in June at less than a third the pace estimated by economists as manufacturers shipped fewer electronics goods and sales of pharmaceuticals eased. Non-oil domestic exports rose 1.1 percent from a year earlier, after a revised 7.6 percent gain in May, the island’s trade promotion agency said in a statement today. The median estimate of 16 economists surveyed by Bloomberg News was for an increase of 3.8 percent. Electronics shipments by companies such as contract manufacturer Venture Corp. dropped 17.2 percent in June from a year earlier, after declining 15.2 percent the previous month.
• Misery Index at 28-Year High on Jobless Rise: Chart of the Day. The Misery Index stands at 12.8, the highest in 28 years. The Misery Index is the highest since May 1983 when unemployment was 10.1%, inflation was 3.5% and the economy was recovering from the 1981-82 recession.
• U.S. Farmers Boost Borrowing as Input Costs Rise, Fed Says. U.S. farmers and feedlot operators increased borrowing during the second quarter as costs rose for feed, fertilizer and fuel, according to the Federal Reserve. Non-real estate loans jumped 14 percent from a year earlier, and the average size of operating loans increased 36 percent, the Federal Reserve Bank of Kansas City said in a report on its website. Capital-spending loans fell 36 percent, as farmers reduced purchases of heavy machinery and interest rates rose for the first time in a year, the bank said.

Wall Street Journal:

• More Cattle Linked to Contaminated Feed. Local officials in Fukushima prefecture said Monday that 411 more cattle potentially contaminated with radioactive cesium have been shipped around Japan, a development sure to fuel food-safety fears.
• Apple(AAPL) Seeks to Broaden iPhone in China. Apple Inc. is getting closer to offering the iPhone through China's largest mobile carrier, state-owned China Mobile Ltd., further opening a vast market that could be the next growth catalyst for the technology giant. Apple's acting day-to-day head and chief operating officer Tim Cook last month visited China Mobile's offices in Beijing. Both companies declined to comment on Mr. Cook's rare visit, but the carrier confirmed the two companies are in talks about the iPhone.
• China Newspaper Disbands Investigative Team. A prominent Chinese government newspaper disbanded its investigative reporting team, which had won plaudits for its aggressive muckraking, amid a sweeping clampdown on the media and human-rights activists. Reporters at China Economic Times said the decision to eliminate the roughly two-year-old investigative team, whose hard-hitting exposes helped win legitimacy for the newspaper as a public watchdog, was announced at a meeting Monday morning. The move, which was disclosed at a meeting convened by the newspaper's Communist Party Committee, comes as Beijing has been tightening its grip amid concerns over growing internal unrest that have grown sharper following the popular uprisings.
• Italian Bank Shares Nosedive Led by Intesa Sanpaolo. Italian banks, which late Friday passed Europe’s stress tests and were pronounced solid by the Bank of Italy, resumed their sharp downward slide Monday, falling more than lenders elsewhere and making Milan the worst-performing stock market. Adding to the sense of doom was that the slide was led by Intesa Sanpaolo SpA, the country’s largest lender, which recently raised €5 billion in fresh equity and boasted a core Tier 1 ratio of 8.9% in the stress test’s adverse scenario, one of the highest numbers in Europe. Intesa Sanpaolo’s shares were down 4.2% in midday trading and had fallen even more in the morning. Unicredit, Banco Popolare and Banca Monte dei Paschi di Siena were all in hot pursuit. “If the country’s best bank is hit that bad, it means the problem is the country,” said Daniele Tolusso, who manages private accounts at a Milan bank. “Markets don’t think much of the government’s budget and something much more drastic needs to be done,” he said.

CNBC.com:

• More Shoppers to Delay Their Back-To-School Spending. Retailers will be biting their nails this back-to-school shopping season as consumers are expected to put off purchases until nearly the last minute, according to a new report.

Business Insider:

• Venezuela Officially Has More Oil Than Saudi Arabia. (graph)
• Obama Would Veto Republican Debt Ceiling Plan.
• A Full Tally of Today's Bank Stock Carnage.
• If Geithner Doesn't Have a Debt Ceiling Plan B, He Needs To Be Fired Immediately.
  

Zero Hedge:

• Ron Paul on "Debt Ceiling Drama" "We Need to Stop Allowing Secretive Banking Cartels to Endlessly Enslave Us".
• Cantor Announces House to Vote on "Cut, Cap and Balance Act" Tomorrow.
  

The New Yorker:

• Mastering The Machine. How Ray Dalio built the world’s richest and strangest hedge fund. Ray Dalio, the sixty-one-year-old founder of Bridgewater Associates, the world’s biggest hedge fund, is tall and somewhat gaunt, with an expressive, lined face, gray-blue eyes, and longish gray hair that he parts on the left side. When I met him earlier this year at his office, on the outskirts of Westport, Connecticut, he was wearing an open-necked blue shirt, gray corduroy pants, and black leather boots.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Monday shows that 24% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty-two percent (42%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -18 (see trends).

Reuters:

• China's consumer price may increase by about 6.5% in July, citing Chen Dongqi, deputy head of the National Development and Reform Commission's macroeconomic research institute. Expectations for interest rate increases in the second half still exist, Chen said.
• Europe Rating Agency Would Cost 300 Million Euros: Report. A European credit rating agency that would lower companies' dependence on big rating agencies Standard & Poor's (MHP.N), Moody's (MCO.N) and Fitch (LBCP.PA) would cost about 300 million euros ($424 million) to set up, monthly magazine Capital reported. "By the end of 2011, we will have formed a consortium of up to 25 participants, each of whom will invest 10 million euros," the magazine cited Krall as saying in an excerpt of an article to be published on Thursday. The Family Offices that manage wealthy families' assets would be willing to invest several hundred million euros in a new rating agency, one of the people said, but that would not be sufficient to keep the project going in the long run. Another sticking point is how to ensure that the new agency is independent from politics.

Telegraph:

• Four Dead in Attack on Chinese Police Station. The violence was the worst Xinjiang has experienced in about a year. Last August, seven Chinese military police were killed when a member of the Uighur minority rammed them with an explosives-laden vehicle in the Xinjiang border region. State television said the latest incident happened in the desert city of Hotan when a mob attacked a police station, taking hostages and setting it on fire. Two hostages, a paramilitary policeman and a guard died in the violence, as well as several of the attackers, it reported. Six hostages were freed. Dilxat Raxit of the Germany-based World Uyghur Congress said residents in Hotan had told his group that police opened fire on a peaceful protest, leading to fighting between the two sides."The people cannot stand the government's repression any longer," he said by telephone. In July 2009, Xinjiang's capital Urumqi was rocked by violence between majority Han Chinese and minority Uighurs that killed nearly 200 people. Since then, China has executed nine people it blamed for instigating the riots, detained and prosecuted hundreds of others and ramped up spending on security, according to state media and overseas rights groups.
• Unsold UK Properties on Estate Agents' Books Hit Record High.
  

The Straits Times:

• More US Quantitative Easing Will Be Unconscionable. It is ineffective and dangerous, especially to social fabric of Asia. By pushing up food, fuel, clothing and shelter prices, QE acts as a transfer of wealth from the poor to the rich. Mr. Bernanke may not care, but in developing Asia, QE3 will be a threat to the social fabric. How likely is QE3? "At this point, we are not proposing to undertake that option," Mr. Bernanke said to the Senate Banking Committee in Washington, a day after signalling QE to the House Financial Services Committee. "We just want to make sure that we have the options when they become necessary." Necessary? Why should something so utterly useless and lethal ever become necessary? Just because it is a bold thing to do? "Conscience," Hamlet said, "does make cowards of us all." Another round of QE will be unconscionable.
  

Caijing:

• China should raise interest rates once or twice more this year as rates are "relatively low," Wang Jun and Liu Xiangdong, two researchers at the China Center For International Economic Exchanges, wrote in a commentary today.