Weekend Headlines
Bloomberg:
- Euro Falls Versus Yen After S&P Says Greece May Be In 'Selective Default'. The euro weakened versus the yen after Standard & Poor’s said a debt-rollover plan for Greece may prompt a “selective default” rating for the country. “Sentiment was undermined with those S&P comments,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “Markets are reluctant to aggressively sell the euro, though. We need to see what the other rating agencies are going to suggest.” The shared currency fell as much as 0.3 percent to 117.03 yen, before trading little changed at 117.45 yen as of 4:20 p.m. in New York.
- Sovereign, Corporate Credit-Default Swap Indexes Rise in Europe. The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 3 basis points to 221 at 12 p.m. in London. An increase signals deteriorating perceptions of credit quality. Swaps on Greece climbed 14 basis points to 1,875, according to CMA. Contracts on Spain jumped 6 basis points to 263, Portugal increased 5 to 755 and Ireland rose 4.5 to 732.5, while Italy was 4 higher at 182 and Belgium was up 3 at 146. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings rose from a four week low, increasing 3 basis points to 387, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1 basis point to 104.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 4.5 basis points to 155 and the subordinated index climbed 7.5 to 279.5.
- China Bank Outlook May Be Souring on Local Government Loans, Moody's Says. Chinese banks’ loans to local governments may be 3.5 trillion yuan ($540 billion) more than estimated and the outlook for the industry is potentially turning negative, Moody’s Investors Service said. An assessment of new data from agencies including China’s national audit office indicates “that the banks’ exposure to local government borrowers is greater than we anticipated,” Yvonne Zhang, a vice president at Moody’s, said in the report. The credit outlook for lenders is souring in the “apparent absence of a clear master plan to deal with this issue.” The report may stoke concerns that as much as 30 percent of the local government financing vehicles’ loans may sour and become the biggest contributor to banks’ bad debts. China’s audit office last week reported that local governments had 10.7 trillion yuan in liabilities at the end of last year with 79 percent being bank loans. China’s first assessment of such debt showed that 8 billion yuan is overdue, and companies are too often relying on government land sales to meet repayments, Auditor General Liu Jiayi said on June 27. Non-performing loans may reach as much as 12 percent of total credit, higher than its “base case” estimate of 5 percent to 8 percent, Moody’s estimates. Fitch Ratings lowered its outlook on China’s AA- long-term, local-currency rating to negative from stable on April 12 because of the risk the government would have to bail out banks. As much as 30 percent of loans to local government entities may go bad, accounting for the biggest source of banks’ non- performing assets, Standard & Poor’s said that month.
- Greece's First Bailout Faces Scrutiny From Germany's Constitutional Court. Days after Greece passed a 78 billion-euro ($113 billion) austerity plan clearing the way for a second international rescue, Germany’s top judges are set to discuss the legality of the first bailout. Germany’s highest constitutional court will hear oral arguments tomorrow in three cases challenging the country’s role in the Greek bailout and the euro-area rescue fund last year. The cases were filed by academics and a lawmaker who have unsuccessfully turned to the court before to try to block Germany’s participation in European Union treaties. “The court has always been very critical on the European integration in its language -- only to be rather conciliatory when it comes to the practical results,” said Axel Kaemmerer, a professor at Bucerius Law School in Hamburg. “The judges may lift their fingers to admonish the government about red lines that cannot be crossed, but in the end it won’t rain on its parade.”
- China Still Faces Inflationary Pressure, Central Bank Says. China still faces “large” inflationary pressure and the central bank will maintain a “prudent” monetary policy, the People’s Bank of China said today. “We must pay close attention to the latest international and domestic economic and financial trends and influences, and implement a prudent monetary policy,” the central bank said in a statement after a meeting of its monetary policy committee. Surging vegetable and pork prices, and higher wages and raw-material costs may have pushed consumer-price gains to an almost three year high in June. Inflation likely accelerated to 6.4 percent last month, a figure likely to prompt the fifth increase in interest rates since October, according to UBS AG China economist Wang Tao. China International Capital Corp. economists estimate prices may have jumped 6.2 percent in June compared with 5.5 percent in May that was the fastest in 34 months. In an article published today, central bank Governor Zhou Xiaochuan indicated that tackling inflation remains the government’s priority. He reiterated government pledges to improve the nation’s exchange-rate mechanism.
- BlackRock's(BLK) Miller is Avoiding Buying Aussie Dollar as China Growth Cools. Australia’s dollar isn’t attractive after the currency climbed more against the greenback than any major counterpart in the past year, BlackRock Inc. said. The so-called Aussie has surged as the Reserve Bank of Australia raised interest rates to the highest in the developed world to curb price pressures amid demand from China for the country’s commodities. Chinese reports this month showed manufacturing growth slowed to the lowest level since February 2009 and services industries expanded at the slowest pace in four months in the Asian nation, Australia’s largest trading partner. Retail sales in Australia dropped in May, a report today showed. “You need to have a very strong bullish view of the global economy to want to stay in Aussie longs,” Stephen Miller, a managing director in Sydney at BlackRock, which oversees $3.7 trillion globally, said in a July 1 interview. “My view isn’t optimistic enough for me to want to get involved in the Aussie dollar.”
- Funds Slash Bullish Commodity Bets to One-Year Low on Slow Growth Outlook. Funds reduced bullish bets on commodity prices to the lowest level in almost a year on speculation that slowing global growth will curb demand for metals, energy and grains. Speculators cut their net-long positions in 18 U.S. commodities by 15 percent to 958,309 futures and options contracts in the week ended June 28, government data compiled by Bloomberg show. That’s the lowest since the week ended July 13 last year. Declines were led by a 67 percent drop in holdings of soybean meal. Investors trimmed bets on silver by 26 percent, the most since May 2010. The Standard & Poor’s GSCI Index of 24 raw materials slumped 7.8 percent last quarter, the biggest such loss since 2008. China’s non-manufacturing industries expanded at the slowest pace in four months in June, adding to concerns that efforts to tame inflation are curbing growth in the world’s second-biggest economy and largest consumer of commodities. “You have slower imports and economic growth from China and other regions of the world, and then you have the threat of rising interest rates,” said Luis Rangel, a vice president at ICAP Futures LLC in Jersey City, New Jersey, who cited the end of the second round of quantitative easing, or QE2. “Those are the underlying factors that are slowing the commodity trend.”
- Rice May Rally 56% as Pro-Thaksin Party Sweeps to Power in Thai Elections. Rice prices in Thailand, the biggest exporter, may rally 56 percent by yearend as the party that won parliamentary elections implements a policy to buy the crop from farmers above current rates, according to a survey. The export price may climb to $810 per metric ton by Dec. 31, according to a median forecast of six millers, exporters and traders today and yesterday, who commented after Pheu Thai won a majority in yesterday’s contest. Costlier rice from Thailand, which accounts for about 30 percent of worldwide shipments, may increase global food costs while making supplies from rival Vietnam more competitive. A Bloomberg survey last month, conducted during the campaign, suggested a gain to $750 per ton if Pheu Thai were to win. “It isn’t only Thai prices that will go up, the rest of the world will have to follow,” Mamadou Ciss, chief executive officer of Hermes Investments Pte, said from Geneva. The price may jump $100 within two months and peak at $700, said Ciss, who correctly predicted in 2006 that prices would double. Thai export prices are a benchmark for the industry. “Export prices will probably rise 10 percent in a month,” Wichai Srinawakul, vice president of the Thai Rice Mills Association, said from Nakhon Ratchasima province. “When its price-pledging scheme is implemented, it will boost the price further, probably to $830 per ton by the end of this year.”
- St. Joe(JOE), Chairman Bruce Berkowitz Are Subject of Formal Probe by U.S. SEC. The U.S. Securities and Exchange Commission has started a formal investigation of St. Joe Co., Northern Florida’s largest landowner, and Chairman Bruce Berkowitz, its biggest shareholder, the company said. The probe “covers a variety of matters” including securities-law anti-fraud provisions for corporate officers and board members, internal controls and financial reports, the Watersound, Florida-based company said in a filing with the SEC made after the close of regular U.S. trading yesterday. “The order designates officers of the SEC to take the testimony of the company and third parties with respect to any or all of these matters,” according to the filing. St. Joe said it’s cooperating with the agency.
- Komatsu Japan Sales Gain on Rebuilding as China Demand Falls. Komatsu Ltd. (6301), the world’s second- largest construction machinery maker, said Japan’s bid to rebuild the nation from its worst postwar disaster is spurring demand at home amid slumping sales in China, its biggest market. Japanese orders increased more than 30 percent in April- June from a year earlier, Chief Executive Officer Kunio Noji said in an interview at the company’s Tokyo headquarters. Sales in China, which declined about 40 percent in the past two months, may not revive until the Lunar New Year in January, the beginning of the nation’s peak demand season, he said.
- Could Italy Be Next European Domino to Fall?: Simon Johnson. In recent days, Greece’s parliament adopted new austerity measures and Europe’s finance ministers approved another round of Greek loans. So the European debt crisis is under control, right? Probably not. One obvious reason is Standard & Poor’s July 4 threat to declare a default if banks roll over Greek government bonds coming due over the next year. That could force everyone back to the drawing board. Less obvious, but no less worrisome, is Italy. With a precarious fiscal picture, it could be the next to come under pressure. And this time, U.S. banks are in the line of fire, with about $35 billion in loans to Italy and potentially more exposure to risk through derivatives markets.
- Tepco Resumes Cooling Plan at Fukushima Plant. The operator of the crippled Fukushima Daiichi nuclear-power plant said on Sunday that it has resumed the use of contaminated water to cool the reactor cores, a week after its first attempt was suspended due to leaks. If successful, the use of recycled water to cool the reactors will solve one of the major complications as workers struggle to bring the complex under control. Until now, they have been using fresh water from an outside source to cool the reactors, creating even more irradiated water, which then requires storage or disposal.
- Hedge Funds Fall Again In June, Led by Stock, Macro Strategies. Returns at most hedge funds fell again in June, bringing average losses for the first half to around 2%, with systematic macro funds and stock-focused funds turning in the worst performance. Hedge Fund Research Inc.'s HFRX Global Hedge Fund Index ended the month down 1.59%, for a 2.12% year-to-date fall, marking a second losing month after May's 1.39% decline. The fall came as investors fretted over the health of the U.S. and Chinese economies and amid the latest round of the euro-zone's debt crisis, making for choppy stock markets and declines in most commodities. Though stocks rallied strongly last week as a potential default by Greece was averted, the HFRX Equity Hedge Index comprising funds that take long and short bets on stocks dropped 2.36% in the month, for an 8.32% six-month loss. That sharp decline in the year will likely concern investors who typically expect these kinds of hedge funds to outperform stock indexes. While the monthly decline was on par with losses in broader stock indexes such as the S&P 500, down 1.8% in June, U.S. stock market indexes are up by around 5% to 7% for the year. The MSCI All-Country World Index of shares in 45 countries fell 1.5% in June, and is up around 3% this year. It was also a volatile month for systematic trading funds, which aim to latch onto trends in the direction of interest rates, currencies and commodities, as well as stocks. The HFRX Systematic Diversified Index lost 3.49% in June and is off 6.4% this year. Oil slid about 8% in June, gold fell and commodity indexes generally posted losses, while the euro defied bears by rising against the dollar.
- Sharp to Further Localize Solar Panel Production Overseas. The president of the Japanese electronics maker Sharp Corp. (6753.TO) said Monday it will localize more of its solar panel production outside the country, as the strong yen makes exports too expensive while fast-growing Chinese makers create a global inventory glut.
- Subprime Mortgage Index Soars as N.Y. Fed Halts Auction. A bellwether index of subprime mortgage bonds posted its sharpest weekly gain since September 2009 after the Federal Reserve Bank of New York suspended auctions from its Maiden Lane II portfolio of mortgage securities acquired in the American International Group Inc. bailout. A slice of the ABX derivatives index that tracks highly rated subprime mortgages rose 2.38 cents on the dollar to 52.73 cents, the highest since May 27 and up 14% from a week ago, according to data provider Markit.
- Credit Swaps on Spain, Italy Are Leading Contagion Indicators - Markit. Default swaps on Spain and Italy have become a key barometer of the European debt crisis and potential contagion stemming from the region, according to a summary of swaps-market activity released in London on Monday by data provider Markit. Italy occupied the top spot in a ranking of liquidity--or depth of trading--in the sovereign credit default swaps market over the most recent quarter, with a net $23.7 billion (EUR16.3 billion) of CDS outstanding.
- Cisco(CSCO) Poised to Help China Keep an Eye on Its Citizens. Western companies including Cisco Systems Inc. are poised to help build an ambitious new surveillance project in China—a citywide network of as many as 500,000 cameras that officials say will prevent crime but that human-rights advocates warn could target political dissent.
- Inside the Disappointing Recovery. Two years ago, officials said, the worst recession since the Great Depression ended. The stumbling recovery has also proven to be the worst since the economic disaster of the 1930s.
- Commodities Beckon Banks. About 600 miles from Wall Street, Goldman Sachs Group Inc.(GS) employees are busy doing deals. But instead of a sleek office tower, they work in a rundown warehouse deep in an industrial section of Detroit. And rather than trading in stocks or bonds, they move metal—lots of metal. Goldman's warehouse on the banks of the Detroit River is one of more than 100 storage facilities controlled by the giant securities firm around the world. The warehouses are part of Wall Street's effort to forge a new frontier in the commodities markets: warehousing metal.
- America's Troubling Investment Gap by David Malpass and Stephen Moore. For the first time in decades, America is on net losing, not attracting, growth capital.
- U.S. Expands Its Drone War Into Somalia. The clandestine American military campaign to combat ’s franchise in is expanding to fight the Islamist militancy in , as new evidence indicates that insurgents in the two countries are forging closer ties and possibly plotting attacks against the United States, American officials say.
- Big Banks Easing Terms on Loans Deemed as Risks. As millions of Americans struggle in foreclosure with little hope of relief, big are going to borrowers who are not even in default and cutting their debt or easing the terms, sometimes with no questions asked. Two of the nation’s biggest lenders, and , are quietly modifying for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.
- Taking Lead, Iraqis Hope U.S. Special Operations Commandos Stay. Americans say the Iraqi special operations force, which was deliberately balanced with the country’s main sects and ethnicities, is more capable than the Iraqi Army and may be critical in preventing a resilient insurgency from exploding into a sectarian civil war. Even as few Iraqi politicians are willing to admit publicly that they need American help, Iraqi soldiers say that American troops must stay longer to continue training and advising. “The Americans need to stay because we don’t have control over our borders,” said Maj. Gen. Fadhel al-Barwari, commander of the Special Operations Force.
- World Bank Is Opening Its Treasure Chest of Data.
- Hedge Funds Seeking Gains in Greek Crisis. As Greece’s fiscal turmoil has rattled global equity, bond and currency markets, hedge funds have scrambled to figure out how to make the big score. Last week, financial markets rebounded sharply on news that the Greek Parliament had approved a tough austerity package, a move that staved off a default and was a condition for further international assistance. Over the weekend, European ministers agreed to finance Greece through the summer but deferred crucial decisions on a second bailout.
- 'FarmVille' Bet Brings Pincus Billions. Zynga CEO Mark Pincus once lamented he was not on Silicon Valley's A-list -- and he just may be right. After Zynga moved yesterday to go public, it is clear he is definitely on the B-list, as in Billionaires List. The social gaming company will trade shares publicly within months, and when it does, Pincus could be worth about $3.6 billion.
- Data Confirms: Banks Hoard Cash & Securities, While Loans Contract. (graph)
- French Writer Tristane Banon to File Sexual Assault Charges Against Dominique Strauss-Kahn.
- Gary Shilling: Commodities "Show Every Sign" of Being a Bursting Bubble.
- Inventory Glut of Ultra Luxury Homes Hits Greenwich, Over 4 Years of Supply.
- As ECB Finds Rating Agencies Have Suddenly Found Religion, It Prepares to Flip Flop on Accepting Greek Bond Collateral.
- More Employers Are Offering On-Site Medical Clinics. The cost-cutting strategy has been embraced by dozens of companies — typically large employers that are self-insured and pay their own medical claims.
- Kings and Queens of Shale: Who's Benefiting from Marcellus Shale Drilling? The effects of Marcellus Shale drilling on local communities aren't always easy to pin down, but some business owners say they don't need spreadsheets or financial statements to gauge the impact. They are the kings and queens of Marcellus Shale: the people who have benefited most either through property deals, business opportunities, or just plain hard work.
- Feds, Massachusetts Bank New Solar Firm Despite Evergreen Solar(ESLR) Debacle. Months after Evergreen Solar closed its Bay State plant and moved manufacturing to China — taking with it roughly $45 million in Massachusetts taxpayer subsidies — federal and state officials are preparing to gamble on the promise of another pioneer of photovoltaic technology, to the tune of $123.4 million. Like Evergreen, Lexington-based 1366 Technologies produces a key component of solar panels — wafers made from a purified form of silicon. Despite the embarrassing failure of the state’s investment in Evergreen, Gov. Deval Patrick is not backing off his support of emerging solar companies, including 1366.
- Sea Holds Treasure Trove of Rare-Earth Elements. Survey reveals wealth of important metals in ocean floor mud.
Politico:
- Bill Clinton Calls for Corporate Tax Cut. President Bill Clinton says the nation’s corporate tax rate is “uncompetitive,” and called for a lower rate as part of a “mega-deal” to raise the debt ceiling. “When I was president, we raised the corporate income-tax rates on corporations that made over $10 million [a year],” the former president told the Aspen Ideas Festival on Saturday evening. “It made sense when I did it. It doesn’t make sense anymore – we’ve got an uncompetitive rate. We tax at 35 percent of income, although we only take about 23 percent. So, we SHOULD cut the rate to 25 percent, or whatever’s competitive, and eliminate a lot of the deductions so that we still get a FAIR amount, and there’s not so much variance in what the corporations pay.
- New Home Sales Decline .4% in City. NEW home sales stood above 200,000 square meters in Shanghai for the second week with buying sentiment for top-end houses remaining strong. Sales of new residential properties, excluding those built under the city's affordable housing programs, dipped 0.4 percent to 230,400 square meters last week, Shanghai Deovolente Realty Co said yesterday. The average price for new homes, meanwhile, climbed 5.9 percent to 22,500 yuan (US$3,477) per square meter last week. "It was the first time since February that the weekly transaction volume of new homes stayed above 200,000 square meters for two consecutive weeks," said Lu Qilin, a researcher at Deovolente Realty
- China's State Council will hold a meeting this month to discuss economic policies for the second half of this year.
- China should control fiscal spending to help curb inflation, Zhang Yuanjun, a deputy head of the central bank's Harbin branch, wrote in a commentary. The country should stop construction projects that have high costs and low investment returns, Zhang wrote.
- Beijing's average existing home prices rose 23% to 24,100 yuan per square meter in the first half of the year from a year earlier, citing property agent B.A. Consulting. Sales of existing homes in the city fell 34.5% in the first half from the same period a year earlier to 67,962 units, with June sales dropping to the lowest level in almost 29 months.
- China central bank adviser Li Daokui said the country should consider raising interest rates, especially the deposit rate, to curb inflation, according to a Faren magazine report. High-speed railways may lead to rising real estate prices in second- and third-tier cities, he said.
Barron's:
- Made negative comments on (UA) and (S).
- Asian indices are -.25% to +.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 107.5 -1.5 basis points.
- Asia Pacific Sovereign CDS Index 114.75 -4.0 basis points.
- S&P 500 futures -.16%.
- NASDAQ 100 futures +.22%.
Earnings of Note
Company/Estimate
- None of note
10:00 am
- Factory Orders for May are estimated to rise +1.0% versus a -1.2% decline in April.
- (TMK) 3-for-2
- (PLCM) 2-for1
- (CPL) 3-for-1
- The 3-Month/6-Month T-Bill Auctions could also impact trading today.
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