Weekend Headlines
Bloomberg:
- Asia, Europe to 'Stick It Out' With Treasuries. For all the angst, policy makers across Asia are lured to Treasuries as a result of efforts to stem gains in their currencies against the dollar, which would impair export competitiveness. China has accumulated $1.16 trillion of the debt and is the largest individual foreign holder. Japan’s efforts to weaken the yen boost that country’s demand, and Vice Finance Minister Fumihiko Igarashi said today that the government is ready to intervene again after selling the currency on Aug. 4. “They won’t be happy about it, but Asian central banks will just have to hold on and stick it out,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. (WBC) in Sydney. “There is pressure on them to hold on to liquid assets and there is nothing more liquid than the Treasury market. At least Treasuries have been doing well and they aren’t holding on to distressed assets.”
- Trichet Draws ECB 'Bazooka' to Stem Contagion. European Central Bank President Jean- Claude Trichet signaled he’s ready to start buying Italian and Spanish bonds in his riskiest attempt yet to tame the sovereign debt crisis. In a statement issued in the name of the ECB president after an emergency Governing Council conference call last night, the Frankfurt-based central bank welcomed the two nations’ efforts to reduce their budget deficits and said it will “actively implement” its bond-purchase program. It also called on all euro-area governments to follow through on the steps they agreed to July 21, including allowing the European Financial Stability Facility to purchase bonds on the secondary market. With governments failing to act swiftly enough to stop contagion, it has fallen to the ECB to battle a crisis that’s threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro zone’s founding treaty. Germany’s Bundesbank opposes the move. “The ECB is once again intervening as the last line of defense,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The intervention will put a halt to the bond-market crash that some member states faced. It will in our view bring an immediate tightening in Spanish and Italian bond spreads of the order of 100 to 150 basis points.”
- Bank Bonds Hurt as Sovereign Crisis Threatens More Writedowns: Euro Credit. Bank bonds in Europe are the riskiest ever as soaring yields on Spanish and Italian government debt prompt renewed European Central Bank buying and signal more pain for lenders already nursing Greek writedowns. “Banks that were perceived to have heavy exposure to Greece were penalized,” said John Stopford, the London-based head of fixed income at Investec Asset Management Ltd., which manages more than $90 billion. “Now, maybe people will be more worried about exposure to other parts of Europe.” A benchmark index of credit-default swaps on European banks and insurers climbed as much as 23 percent last week to a record 218.5 basis points on Aug. 5, according to JPMorgan Chase & Co. Bondholders are assigning a higher perceived risk to bank debt on concern that last month’s second Greek bailout won’t prevent the sovereign crisis from engulfing Spain and Italy, deepening lenders’ losses on government securities.
- France's AAA Rating May Be Vulnerable. The decision by Standard & Poor’s to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say. France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the State of Texas and the U.S. “France is not, in my view, a AAA country,” said Paul Donovan, London-based deputy head of global economics at UBS AG. “France can’t print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets.” While all three major credit-rating companies have confirmed France’s top level in recent months, market measures indicate increasing investor skittishness over the country’s vulnerability to the European debt crisis. Euro-region central bank governors will hold emergency talks today over how to protect Spain and Italy and limit fallout from the U.S. cut. “If Italy and Spain have difficulties, are we sure that, for instance, France can still be considered a ‘core’ country?” said Marco Valli, chief euro-area economist at UniCredit Global ‘Core’ is becoming a narrower group of countries.” While France’s debt of 84.7 percent of gross domestic product is less than Italy’s 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy’s since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy's was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France. France is the most costly AAA country to protect against default. Credit default swaps on France trade at 143.8 basis points, almost triple the U.S.
- S&P-Induced U.S. Bonds Selloff May Be Short-Lived, Dealers Say. Any selloff in Treasuries and the dollar following Standard & Poor’s first ever downgrade of the U.S. from AAA is likely to be short-lived amid slowing economic growth and Europe’s debt crisis, according to Wall Street banks.
- Muni Market Prepares for Lost AAA Ratings. The $2.9 trillion municipal bond market is preparing for “hundreds and hundreds” of downgrades after Standard & Poor’s lowered the U.S. one level to AA+, the first-ever reduction for the country. S&P is likely to cut its ratings on municipal debt secured by the federal government, such as pre-refunded bonds, tax- exempts backed by U.S. agencies, and credits that are most dependent on federal spending, Peter DeGroot, head of municipal research at JPMorgan Chase & Co. (JPM), wrote in an Aug. 5 report distributed after the federal downgrade. The New York-based ratings company said it would release a statement on state and local issuers today. “There will be hundreds and hundreds of municipal downgrades, which will not do well to bolster investor confidence,” Matt Fabian, a managing director of Concord, Massachusetts-based Municipal Market Advisors, said in a telephone interview. “Treasuries may be able to shake off a real impact from the downgrade. Munis I’m less sure about.” Municipal issuance has fallen amid the U.S. debt-ceiling impasse. The slump and signs of a slowing economy helped drive tax-exempt yields to the lowest this year. Scheduled debt sales total about $2.8 billion this week, the slowest August week since 2003, according to data compiled by Bloomberg.
- NATO Helicopter Shot Down in Afghanistan, Killing 30 U.S. Special Forces. A North Atlantic Treaty Organization CH-47 Chinook helicopter was shot down in an eastern province of Afghanistan, killing 30 U.S. special operations forces, seven Afghan commandos and a civilian interpreter. Twenty-two of the Americans killed were members of the U.S. Navy SEAL commando force, some from the elite unit once known as SEAL Team Six that carried out the May raid that killed al-Qaeda leader Osama bin Laden in Abbottabad, Pakistan, said two U.S. officials today on condition of anonymity. None of those killed were from the specific SEAL Team Six squadron involved in the raid, they said. The SEAL team today is formally known as the Naval Special Warfare Development Group. The loss marks the most U.S. troops killed at one time since the 2001 start of the war to oust the Taliban, who harbored al-Qaeda before the Sept. 11 terrorist attacks in the U.S.
- China Stocks Tumble, Dragging Shanghai Index Down 20% From High. China’s stocks fell, dragging the benchmark index down as much as 20 percent from a November high, as the loss of America’s top credit rating fueled concern global economic growth will slow. Jiangxi Copper Co. and PetroChina Co., the nation’s biggest producers of copper and oil, dropped at least 2.4 percent after metals and crude prices slumped. China Cosco Holdings Co. fell to a record low, pacing losses by shipping lines, on concern trade will falter. The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, slumped 96.5 points, or 3.7 percent, to 2,529.88 at the 11:30 a.m. break, set for the biggest drop since Nov. 16 and the lowest level since July 20, 2010. A decline of 20 percent or more signals a so-called bear market to some investors. The CSI 300 Index fell 3.5 percent to 2,795.64.
- Investors Reduce Bullish Commodity Bets. Funds trimmed bets on rising commodity prices for the first time in four weeks amid mounting concern that the global economy is faltering. Speculators cut their net-long positions in 18 commodities by 3.6 percent to 1.23 million futures and options contracts in the week ended Aug. 2, government data compiled by Bloomberg show. Bullish gold holdings climbed to the highest since at least June 2006 amid surging demand for an investment haven. Last week, investors dumped equities and most raw materials for the perceived safety of Treasuries, the Swiss franc and gold amid escalating debt concerns in the U.S. and Europe. The Standard & Poor’s GSCI Spot Index of 24 raw materials dropped 5.9 percent, the most since May.
- Crude Oil Tumbles in New York and London After S&P Downgrade. Oil plunged in New York, extending its biggest weekly decline since May, after Standard & Poor’s lowered the U.S. credit rating by one level, the first-ever reduction for the world’s biggest crude consuming nation. Crude for September delivery fell as much as $3.04 to $83.84 a barrel in electronic trading on the New York Mercantile Exchange and was at $84.05 at 8:26 a.m. Sydney time. Prices dropped 9.2 percent last week and are up 3 percent the past year.
- Syrian Troops Attack Towns as Arab States Condemn Violence. Syrian forces launched raids on the eastern city of Deir al-Zour and the central town of Houla, killing at least 50 people, as Gulf states and the head of the Arab League condemned the violence. Arab League Secretary-General Nabil El-Arabi urged Syrian authorities to immediately end their crackdown to spare the lives of civilians and military personnel, Egypt’s state-run Middle East News Agency reported today. He also called on President Bashar al-Assad to meet his people’s demands for political change, and said the government should set up a judicial committee to investigate reports of human rights abuses, MENA reported.
- Gold Futures Surge to Record on Haven Demand. Gold futures surged to a record $1,697.70 an ounce on demand for an investment haven as the dollar slumped following Standard & Poor’s downgrade of the U.S. long-term credit rating from AAA. Gold futures for December delivery rose $36, or 2.2 percent, to $1,687.80 an ounce at 7:40 a.m. Tokyo time in electronic trading on the Comex in New York after reaching the all-time high. “Gold will most likely be a sharp recipient of safe- haven flows” following the U.S. rating cut, Edel Tully, a London- based analyst at UBS AG, said in a report. “Our previous one- month forecast of $1,725 is likely to be easily met in the short term.”
- Japan Revives Rice-Futures Trading as Radiation may Threaten Harvests. When the Tokyo Grain Exchange, the operator of Japan’s largest agricultural bourse, bet its future on rice trading, it didn’t expect radiation fallout would be part of investor decisions and volatility. The exchange will list rice contracts today for the first time since the start of World War II to boost flagging volumes and profit. The resumption comes amid concern that fallout from the stricken Fukushima Dai-Ichi power plant may spread to crops after it was found cattle had been fed cesium-tainted rice straw. “The nuclear disaster adds to factors that could influence prices,” said Takaki Shigemoto, a commodity analyst at research company JSC Corp. in Tokyo. “Rice futures may attract speculative money.”
- Greek Bailout May Be Costly for German Taxpayer, WiWo Reports. Greece’s new rescue package forged by euro region leaders last month could be costly for German taxpayers even if the Greek government repays all the aid, Wirtschaftswoche business weekly reported, citing a study. German taxpayers faced a 38.6 billion-euro ($55.1 billion) bill if Greece returned all aid by 2020, said the magazine in a pre-released report citing the Berlin-based DIW economic institute. If Greece pays off just a third of the aid the bill would rise to 65.5 billion euros ($93.5 billion), the magazine said. The DIW based its findings mainly on potential costs linked to European Financial Stability Facility and potential losses on Greek debt held by the European Central Bank.
- Geithner Tells Obama He'll Remain at Treasury. Treasury Secretary Timothy F. Geithner, a central figure in the U.S. government’s bailouts of Wall Street banks and efforts to raise the debt limit, told President Barack Obama that he intends to remain in his job. Geithner, 49, will stay on at least through the 2012 election, according to an administration official who was not authorized to comment publicly.
- Germany's Social Democrats, the country's main opposition party, called on euro-region leaders to adopt euro bonds to steam the debt crisis. Joachim Poss, the SPD's parliamentary finance spokesman and deputy caucus chairman, said the securities should be sold "soon" and backed by restraints on budget spending and better ec0onomic cooperation in the region.
- London Police Work to Restore Calm After Riot. Police in London are in the process of “restoring calm” to an area of the U.K. capital after rioting led to 26 officers being injured and 48 arrests. Metropolitan Police officers faced “extreme violence” during the disturbances in Tottenham, in the north of the city, late yesterday in which vehicles and buildings were set on fire, Commander Adrian Hanstock said in a televised press conference today. London Fire Brigade said it received 264 emergency calls from the area during the riots.
- Greenspan Sees Stocks Falling After S&P Cut. Former Federal Reserve Chairman Alan Greenspan said he expects stocks to continue their decline after Standard & Poor's downgraded the nation’s credit rating, even as an S&P official predicted little market impact. “Considering the momentum in which the market went down over the last week, it is very unlikely, if history is any guide, that this isn’t going to take a while to bottom out,” Greenspan said on NBC’s “Meet the Press” program. “So the initial reaction in my judgment is going to be negative.”
- Israeli Stock Index Tumbles Most Since 2000. Israel’s benchmark stock index plunged the most in almost 11 years after Standard & Poor’s lowered the U.S. credit rating and amid concern the widening sovereign debt crisis in Europe will stall global growth. Israel Discount Bank Ltd. (DSCT), the country’s third-largest lender, skidded 10 percent. Nice Systems Ltd. (NICE) slumped the most since November 2008. All 25 shares in the TA-25 Index tumbled, pushing the gauge down 7 percent, the biggest decline since October 2000, to 1,074.27 at the 4:30 p.m. close in Tel Aviv. The index is near the so-called bear-market territory after retreating 19.9 percent from a record high of 1,341.89 on April 21.
- Record Cash Shows S&P 500 Finances Beat U.S. to PNCE as AAA Lost. The combination of the past two weeks’ $1.94 trillion equity wipeout, record cash levels and rising dividends means the Standard & Poor’s 500 Index is offering comparable values to Treasuries. The plunge since July 22 has erased 11 percent from the benchmark gauge for American equities as Congress and President Barack Obama battled over the deficit and borrowing limits that prompted S&P to downgrade the U.S. government’s AAA credit rating for the first time. At the same time, 10-year Treasuries have returned 3.6 percent as investors sought the refuge of government bonds, pushing yields down 40 basis points to 2.56 percent, according to data compiled by Bloomberg. While the U.S. government is running record deficits, chief executive officers have more money than ever after boosting cash for 10 straight quarters to $963.3 billion, 58 percent more than in December 2007 near the start of the credit crisis, S&P data show.
- Markets Brace for Downgrade's Toll. Stocks Slip in Early Asian Trading; White House Reaches Out to Investors as S&P Defends Its Move Against Criticism.
- Obama and S&P Vie for Credibility. The Obama administration and ratings firm Standard & Poor's have embarked on a battle for credibility that could shape the ultimate impact of the U.S. debt downgrade—as well as their own reputations. Within minutes of Friday's bombshell announcement, both sides launched public fusillades against the other, which continued through the weekend.
- OPEC Members Need About $100 Oil To Balance Budget - Gulf Source. Members of the Organization of Petroleum Exporting Countries need international oil prices at about $100 a barrel to balance their budgets, a Gulf oil official said Saturday. With U.K. Brent prices still averaging $110 a barrel annually, the breakeven number suggests the group still has room to maneuver before it would be forced to act.
- Some Life Insurers Likely to See Downgrade. A handful of elite life insurers sporting triple-A credit ratings are expected to suffer a downgrade from Standard & Poor's in line with the rater's downgrade of the U.S. government Friday. More broadly, the rating firm's move means insurers that hold Treasurys in their investment portfolios may well end up required to set aside capital to back up those holdings.
- Subpoenas Go Out to High-Speed Trade Firms. U.S. regulators, intensifying their probe of last year's "flash crash" and other market swings, have sent subpoenas to firms that do high-frequency trading, according to people familiar with the matter. High-frequency traders use computer models to identify price discrepancies and directions of securities trading, aiming to profit through rapid-fire trades often measured in milliseconds. Regulators' interest in these traders has ramped up in recent years, as their influence on markets has expanded amid advances and investments in trading technology.
- Senators Press Obama on Iran's Central Bank. More than 90 U.S. senators signed a letter to President Barack Obama pressing him to sanction Iran's central bank, with some threatening legislation to force the move, an outcome that would represent a stark escalation in tensions between the two countries. Such a measure, if effectively implemented, could potentially freeze Iran out of the global financial system and make it nearly impossible for Tehran to clear billions of dollars in oil sales every month, said current and former U.S. officials.
- Unions Walk Out at Verizon(VZ). A strike Sunday by some 45,000 workers at Verizon Communications Inc. marked a surprise move from diminished unions in a shrinking industry. "This may be the last big strike we see in the land-line business," said Paul Secunda, a Marquette University associate law professor who advised Verizon during its previous strike, in 2000. "It's a contracting business, and the membership has to realize that they're fighting for the life of the union." Verizon's union membership has dropped nearly in half since the 2000 walkout.
- The Fed's Uninspiring Options. QE3. "Operation Twist." Lowering the IOER. These may sound like a type of code, but they actually are some of the last-ditch steps the Federal Reserve could take to try to inject further life into the economy, or counter any market upheaval caused by the late-Friday downgrade of the U.S.'s top-notch credit rating. Trouble is, there's little evidence they would do any good.
- America Gets Downgraded. A spend and tax policy mix always leads to economic decline.
- China's Debt Problem Worse Than Portugal. Government officials in China, the largest foreign holder of U.S. debt, have been chastising the U.S. over Standard & Poor’s downgrade to AA+. Guan Jianzhong, chairman of Dagong Global Credit Rating, has said the U.S. dollar is “gradually [being] discarded by the world,” and the “process will be irreversible.” But China’s debt-to-GDP ratio is worse than the United States’ ratio. It is worse than insolvent Portugal, which is now relying heavily on the European Central Bank for help, and had to go to the International Monetary Fund to get a financial bailout. The U.S.’s new AA+ rating from Standard & Poor’s is still higher than the one assigned to the Middle Kingdom. S&P has China’s debt rating stuck at AA-, the fourth highest level, due to its “sizable” contingent liabilities in its banking system. China’s own system is jammed with rotten debt held in off-balance sheet state enterprises. Its countryside is littered with eerie, empty ghost towns. And Moody’s Investors Service says last month that China’s local debt was understated by hundreds of billions of dollars. Despite that, the People's Daily said S&P’s downgrade of the U.S.'s credit rating "sounded the alarm bell for the dollar-denominated global monetary system.” China owns an estimated $1.16 trillion in U.S. debt. China prints yuan to hold down its value so as to keep its exports dirt-cheap. It then uses that extra printed currency to buy U.S. debt.
- Federal Probes of Mortgage Lenders Fizzle: Report. Federal criminal investigations into failed mortgage lenders IndyMac Bancorp and New Century Financial Corp have stalled, the Wall Street Journal reported on Saturday. A third probe, into Washington Mutual Inc (WaMu), has ended with no charges being filed, the Department of Justice said.
- G7: Committed to Ensure Liquidity, Support Markets. The Group of Seven nations is committed to taking coordinated action to ensure liquidity and to support financial market functioning, financial stability and economic growth, G7 finance ministers and central bank governors said in a statement.
- Europe needs to boost its bailout fund in order to reassure markets, U.S. Treasury Secretary Timothy Geithner said.
- A Thorough Look At The Downgrade, And What It Means For Markets And The Economy. Naufal Sanaullah at Shadow Capitalism has put together a great presentation on how it came about, and what impact it's likely to have on the economy and financial markets. It's very thorough, and a very useful read before markets open Monday.
- U.S. Sends CIA Operatives to Mexico to Escalate War Against Drug Cartels. The U.S. is sending new CIA operatives and retired military personnel to Mexico as part of a push to expand it's role in fighting the country's powerful drug trafficking organizations, according to a New York Times report published today.
- Complete Slide Deck From Ongoing Citi "US Downgrade" Conference Call.
- Why The ECB's Monetization Is Doomed In One Simple Chart.
NY Times:
- China Tells U.S. It Must 'Cure Its Addiction to Debt'. , the largest foreign holder of United States debt, said Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt. The harshly worded commentary, released by China’s official Xinhua news agency, was Beijing’s latest effort to express its displeasure with Washington. Beijing’s reaction to the downgrade was the harshest among foreign leaders. “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers. Beijing, which did not release any other official statement on the downgrade, called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs. The commentary serves as a sharp illustration of how the United States’ standing in the world is sliding and how China now views itself as ascendant.
- A.I.G.(AIG) to Sue Bank of America(BAC) Over Mortgage Bonds. The is planning to sue over hundreds of mortgage-backed securities, adding to the surge of investors seeking compensation for the troubled mortgages that led to the financial crisis. The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.
- 'Brave Warrior': Hear A Heartbroken Grandmother Tell CNN Why Her Fallen Navy Seal Did Not Fear Death. (video)
Gallup:
Rasmussen Reports:
AP:
Market News International:
- China has to continue purchases of U.S. Treasury bonds, citing a Chinese central bank adviser.
Citigroup:
- Reiterated Buy on (BAC), target $14.
- Asian indices are -4.50% to -2.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 136.0 +.5 basis point.
- Asia Pacific Sovereign CDS Index 130.50 +1.5 basis points.
- S&P 500 futures -2.20%.
- NASDAQ 100 futures -2.117%.
Earnings of Note
Company/Estimate
- (SMG)/2.19
- (DYN)/-.57
- (KWK)/.05
- (DTG)/1.33
- (MGM)/-.13
- (TSN)/.40
- None of note
- None of note
- The 3 & 6-Month T-Bill Auctions, (GXP) Analyst Day, Jefferies Industrial/Aerospace/Defense Conference, Morgan Keegan Security/Defense Conference and the Morgan Keegan Tech Conference could also impact trading today.
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