Monday Watch

Weekend Headlines
Bloomberg:

• Italy Tests Appetite for Debt When ECB Is Absent: Euro Credit. Italy will attempt to raise money in the bond market this week without the safety net of buying by the European Central Bank, which has restrained the nation’s borrowing costs for three weeks by buying its debt. The euro’s founding treaty bars the central bank from buying bonds directly from governments, meaning it can only provide secondary market support. As well as 3.75 billion euros ($5.4 billion) of 10-year securities to create a new benchmark, Italy is marketing 4.25 billion euros of bonds maturing in 2014 and 2018, with Spain and France also planning sales. “This is where the litmus test comes, the test to see whether the ECB’s buying power can hold yields where they are,” said Shahid Ikram, head of sovereigns at London-based Aviva Investors, which has some of its $440 billion of assets invested in Italian bonds. “From a risk-return perspective, there’s a great deal of uncertainty. You are going to see more volatility in the Italian yield, some concession will be required and then it’s just a case of what real demand there is.” The ECB began buying Spanish and Italian government bonds on Aug. 8 to stop the debt crisis from spreading to the euro- region’s third- and fourth-biggest economies. The purchases brought the nations’ 10-year bond yields down to about 5 percent from euro-era records, even as Europe’s leaders disagreed over how to contain the turmoil. Both Aviva’s Ikram and Werner Fey, a fund manager at Frankfurt Trust Investment GmbH in Frankfurt, which oversees about 6.5 billion euros of fixed-income assets, said they won’t be buying at this Italian auction. “The problem for fund managers is that there is huge volatility and big event risk,” Fey said. “The politicians are not coming up with a solution. There’s a risk the ECB may end its program and there will be a massive hit on Italian paper. You cannot exclude that the market will test the Italian bond yield highs again.” At the most recent auction on July 28, the 10-year yield demanded by investors climbed to 5.77 percent from 4.94 percent a month earlier. That compares with 4.73 percent at a May 30 sale, while the average yield at three auctions prior to May was 4.83 percent, according to Bloomberg data.
  
• Central Bankers Urge Governments to Keep Global Economic Expansion Intact. Central bankers gathered at an annual retreat in Jackson Hole, Wyoming, this weekend had a message for political leaders: monetary policy alone can’t keep the global expansion going. Federal Reserve Chairman Ben S. Bernanke urged adoption of “good, proactive housing policies” to reverse the depressed U.S. real estate market and warned lawmakers to avoid steps that may hurt short-term growth. Ewald Nowotny of the European Central Bank Governing Council said euro-area governments should expand the powers of their regional bailout fund. “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” Bernanke said at the annual conference of policy makers and economists, sponsored by the Kansas City Fed.
• Greek Notes Slump on Concern Aid Deal Will Fail; Bunds Decline. Greek two-year notes slumped, pushing yields to a euro-era record of 45.91 percent this week, on concern Finland’s demands for loan collateral will endanger the nation’s second bailout package and trigger a default. German 10-year bonds fell for the first week in five as European equities posted a weekly gain, damping demand for the relative safety of government debt. Italian 10-year bonds completed their first weekly loss since the European Central Bank began buying the securities to stem contagion from the sovereign debt crisis. Italy, Spain and France are scheduled to auction debt next week. “With the demands for collateral deals in return for loans to Greece, the risk of the rescue package not being realized has increased quite significantly,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The market is now doubting that there will be a rescue package and Greek bonds have been punished.” Greece’s two-year yields rose 6.17 percentage points to 43.94 percent as of 5:27 p.m. in London yesterday, that’s the biggest ever weekly increase. Yields reached a euro-era record on Aug 25. The nation’s 10-year bonds climbed 1.21 percentage points to 17.86 percent. They reached 18.55 percent on Aug. 25, also the highest since the euro was introduced in 1999.
• German Lawmakers Can Set EFSF Role, Schaeuble Tells Tagesspiegel. German Finance Minister Wolfgang Schaeuble said parliament can decide the scope of its role in determining future euro-region rescue aid, Tagesspiegel reported. In an interview to be published tomorrow, Schaeuble said a law passed in May last year upholds lawmakers’ right to participate in aid decisions. Lawmakers can amend the law as they see fit, he is cited as saying. Germany is preparing legislation to expand the tool kit of the European Financial Stability Facility that has prompted concern that Schaeuble aims in the bill to curb parliament’s control over federal spending. “We need to find a sensible balance between the EFSF and parliament’s justifiable need to co-determine the concrete exercise of the EFSF’s work,” Schaeuble said. “I am with heart and soul a parliamentarian.” Schaeuble said he is “confident” of finding a majority in the ruling coalition to back the EFSF bill as well as gain an overall majority in a plenary vote in parliament at the end of September.
• German FDP Wants Veto Anchored in EFSF Operations, Bild Says. Germany’s Free Democratic Party, Chancellor Angela Merkel’s coalition partner, wants veto rights to be set in a national bill being drawn up to expand the scope of the euro region’s rescue fund, Bild Zeitung said. The German parliament must have the right to approve all aid petitions made to the rescue fund and the weight of its decisions to be reflected in the fund’s actions, the newspaper reported today, citing unidentified FDP officials. If a petition fails to gain a clear parliamentary majority Germany’s representative on the fund’s ruling board must be forced to reject the petition rather than abstain, Bild reported, citing the officials. The Germany government aims to have the bill to expand the toolbox of the European Financial Stability Facility on the statute books by the end of September.
• Wall Street Haunted By Loss Cuts Risk, Trading Costs Soar: Credit Markets. Wall Street traders are demanding the biggest premiums to buy and sell credit in almost two years as they seek protections from market swings driven by Europe’s debt crisis and a slowing global economy. A measure of the cost of trading credit-default swaps has tripled this month as prices gyrate the most in 13 months, according to data compiled by Bloomberg and CMA in London. Amid the volatility, the biggest bond dealers cut their holdings of corporate securities to $73.1 billion as of Aug. 17, the least since July 2009, Federal Reserve data show. The surge underscores the fragility of credit markets three years after the collapse of Lehman Brothers Holdings Inc. triggered the biggest corporate bond losses in at least 35 years. With junk-rated securities poised to lose the most this month since November 2008, banks and investors are bracing for broader declines on concern Europe’s fiscal imbalances will infect the banking system at a time when the economy may not be strong enough to withstand such headwinds. The difference between where dealers will buy and sell the 15 most-traded credit-default swaps on U.S. investment-grade companies has widened to 14 basis points from 4.6 basis points at the start of August, according to market prices compiled by CMA. That’s equivalent to $14,000 on a $10 million contract and up from $4,600. The so-called bid-ask spread has increased to 5.4 percent of the annual cost of the contracts, the most since December 2009 and up from 3 percent on Aug. 1. “The dealer community is not putting risk on,” said Jason Rosiak, the head of portfolio management at Newport Beach, California-based Pacific Asset Management, an affiliate of Pacific Life Insurance Co. “They’re not cushioning the blow as they once upon a time were, and this leads to more volatility.” Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds globally rather than government debentures rose to the highest level in two years last week. The cost of protecting U.S. company debt from default increased for the fifth week as global bond sales plummeted. Leveraged loan prices plunged to the lowest since 2009.
• Hurricane Irene's Estimated U.S. Cost for Insurers Declines to $3 Billion. Hurricane Irene’s estimated cost to insurers fell to $3 billion in the U.S. as the storm weakened on its path toward New England, according to Kinetic Analysis Corp., a firm that predicts the effects of disasters. That compares with a projection last week from the Silver Spring, Maryland-based company of as much as $14 billion. Total economic losses, including those that aren’t insured, may be about $7 billion.
• China Reserve-Ratio Move to Lock Up $140 Billion, Bank of America Says. China’s central bank broadened lenders’ reserve requirements to cover margin deposits, a move that may drain 900 billion yuan ($140 billion) from the banking system over six months, Bank of America Merrill Lynch said. The measure will be phased in from Sept. 5 and take full effect Feb. 15, economist Lu Ting said in an e-mailed note yesterday, without saying where he got the information. Reuters earlier reported such a move, citing unnamed banking officials. In Beijing, a central bank press official declined to comment. Reuters reported yesterday that reserve requirements will now cover margin deposits paid by banks’ clients to secure issuance of bankers’ acceptance, letters of guarantee and letters of credit. Such deposits were 4.4 trillion yuan ($689 billion) at the end of July, the news service reported. The new rules will start to take effect for the biggest banks from Sept. 5, according to Lu. The net effect of the reported rule change “if everything else was unchanged,” would be to tighten monetary policy, Capital Economics said in a note yesterday. “But in fact, we think any such move would be designed as an alternative to further reserve-requirement increases over the rest of the year.” Lu calculated that the latest move may have an effect equivalent to a 130 basis-point increase in reserve requirements. Capital Economics’ estimate was “roughly 125 basis points.”
• Hedge Funds Boost Bullish Agriculture Bets as Corn, Soy Yields May Slump. Speculators increased bullish bets on agricultural commodities to the highest level since early May after adverse weather eroded yield prospects for corn and soybean crops in the U.S., the world’s top grower and exporter. Hedge funds and other speculators raised their net-long positions across 11 agricultural futures and options by 15 percent to 776,774 contracts in the week through Aug. 23, government data compiled by Bloomberg show. That’s the highest since May 6. Funds became bullish on wheat for the first time since June and wagers that soybeans will gain rose 64 percent. “It’s really all on the supply side,” Chris Nagel, a market analyst at Northstar Commodity Investment Co. in Minneapolis, said in a telephone interview. “Investors will keep piling money into corn and beans until they see better certainty what the crop size will be.” A broader measure showed that funds also raised their net- long positions in 18 commodities by 9 percent to 1.11 million futures and options contracts, data from U.S. Commodity Futures Trading Commission show. Speculators reduced positions in gold by 7.8 percent to 201,294 contracts, the third straight decline, government data show. Holdings fell as price rose to a record $1,917.90 an ounce on Aug. 23.
• Congress Deficit Panel Should 'Go Big, Go Bold' on Savings, Warner Says. Democratic Senator Mark Warner, one of the “gang of six” that sought a bipartisan deal on U.S. debt reduction, urged members of both parties on a deficit supercommittee to “go big, go bold” with their savings. “Even if the supercommittee knocks another $1.5 trillion off our debt, that’s still not going to be enough,” Warner said on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “Unless we can also take on the issue of entitlement reform and tax reform to generate revenue, I don’t think we’re going to get there,” he said. Warner of Virginia said the government has exhausted traditional tools for boosting the economy and creating jobs, such as lowering interest rates and injecting stimulus spending.
• Banks Decry Surcharges as Basel Plans Capital 'Punishment' for Size, Risk. Global banks are launching a counterattack against new capital guidelines, warning that they could reduce lending and harm growth as well as alter competition in the financial system. The Clearing House Association and the Institute of International Bankers, whose members include JPMorgan Chase & Co (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Citigroup Inc. (C), Deutsche Bank AG (DBK) and ING Groep NV (INGA), said in a letter that capital surcharges agreed to by the Federal Reserve and international regulators are “deeply flawed” and “reflexively based on the notion that size alone creates prudential concerns.” “There is a real tension between the regulators and the largest global systemically important institutions,” said Margaret Tahyar, a partner in the financial institutions practice at law firm Davis Polk & Wardwell in New York. “Capital is almost being used as a punishment.”
• Nobel Economists Back Austerity Amid Budgets Cuts. Nobel-prize winning economists including Robert Mundell, Reinhard Selten and Myron Scholes favor tough austerity measures to tackle deficits in Europe and the U.S. amid debt crises that shook the euro and saw the world’s largest economy lose a triple-A rating. The Nobel winners, meeting in Lindau, Germany and St. Gallen, Switzerland at a four-day symposium, said “draconian” measures were needed in economies from the U.S. to Greece, to tame debt levels even as global growth cools.
• Eurobank, Alpha Said to Merge Forming Biggest Greek Bank. EFG Eurobank Ergasias SA (EUROB) and Alpha Bank SA, Greece’s second and third-biggest banks, plan to merge in a bid to bolster their assets and ride out a deepening recession and the country’s sovereign debt crisis.
• Dollar Undervalued in Purchasing Power as Investors See Shelter. The dollar is poised for its biggest monthly gain since May, reclaiming its status as a haven while Switzerland and Japan boost efforts to weaken their currencies. The U.S. currency has appreciated 1.2 percent in August against a basket of the developed world’s nine most-traded exchange rates, according to data compiled by Bloomberg. “The dollar is a buy through the end of the third quarter,” Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co., the third-most accurate forecaster in the last six quarters as measured by Bloomberg, said in an Aug. 23 telephone interview. “The yen and the Swiss franc are very expensive and the dollar is very cheap and it’s the only major central bank that is not standing in the way of a currency advance.”
• Rice May Rally 22% on Thai Buying. Rice may rally 22 percent by yearend as Thailand, the world’s largest exporter, buys the grain from farmers at above-market rates, pushing up costs for importers and fanning global inflation even as economic growth slows. The price of 100 percent grade-B Thai rice, the regional benchmark, may rally to $750 per metric ton by Dec. 31, according to the median estimate in a Bloomberg News survey of seven exporters, traders and millers conducted last week. That target is $50 higher than the median estimate in a separate Bloomberg survey undertaken in the first half of this month. The surge may complicate matters for central bankers and policy makers around Asia who are already struggling to cool rising prices. Rice was the only grain separating the world from a food crisis, Abdolreza Abbassian, senior economist at the United Nations Food & Agriculture Organization, or FAO, said in February when worldwide food costs rallied to a record. World food prices, as tracked by the World Bank, surged 33 percent in July from a year earlier, boosted by higher costs of rice, corn, wheat, sugar and soybean oil.
• World economic growth will remain subdued until 2015, according to the Centre for Economics and Business Research, which cut its 2011 forecast. Global economic expansion will now slow from 4.2% in 2010 to 3% this year, compared with a prediction in May for 3.5% growth. "The sluggish growth that we forecast is likely to mean persistent high unemployment in the developed economies," CEBR CEO Douglas McWilliams said. "The silver lining to this could is that the prices of oil and other commodities are likely to be relatively weak for the next five years, putting less downward pressure on living standards than in the past two years."
• Johnson: Euro's Appeal Masks the Gathering Storm. Is the economic and financial situation in Western Europe largely under control, as many prominent Europeans contend? Or is it poised to move into a new and more difficult phase? The crisis feels unreal to some people in the same way that war felt phony to some Britons from September 1939 through spring 1940. In contrast to previous crises in emerging markets, Europe hasn’t moved precipitously toward collapse. But the main element that lets the European crisis unfold in slow motion -- the existence and appeal of the euro -- also explains why a great deal of volatility lies ahead. The storm is gathering.

Wall Street Journal:

• Weakened Irene Rakes Coast. Hurricane Irene menaced the Eastern seaboard, pounding tens of millions of Americans with wind, rain and floods—but largely sparing New York after an unprecedented shutdown of the largest U.S. city ahead of the massive storm.
• U.S., Israel Monitor Suspected Syrian WMD. Intelligence Services Allege Significant Stockpiles of Gases, Missiles at Military Bases Could Be Targets Amid Unrest. The U.S. and Israel are closely monitoring Syria's suspected cache of weapons of mass destruction, fearing that terror groups could take advantage of the revolt against President Bashar al-Assad to obtain blistering agents, nerve gas and long-range missiles, according to officials from both countries.
• Robust Profits Face Hurdles. Corporate America racked up big profits in the first half of the year even as economic growth slowed to a crawl. Now companies are facing the biggest test of the recovery in trying to maintain that momentum amid a dimming economic outlook. Among the potential land mines ahead: slowing global growth, a worrisome fiscal picture as Washington battles over the debt and plunging sentiment among U.S. consumers and businesses, raising risks of a pullback in spending.
• An EPA Moratorium. Obama has the power to delay new rules that will shut down 8% of all U.S. power generation. Since everyone has a suggestion or three about what President Obama can do to get the economy cooking again, here's one of ours: Immediately suspend the Environmental Protection Agency's bid to reorganize the U.S. electricity industry, and impose a moratorium on EPA rules at least until hiring and investment rebound for an extended period. The EPA is currently pushing an unprecedented rewrite of air-pollution rules in an attempt to shut down a large portion of the coal-fired power fleet. Though these regulations are among the most expensive in the agency's history, none were demanded by the late Pelosi Congress. They're all the result of purely bureaucratic discretion under the Clean Air Act, last revised in 1990.
• A Short Primer on the National Debt. With a return to 1990s growth rates, the debt-to-GDP ratio could drop to 56.7%, about where it was in 2000, in just one decade.

Marketwatch.com:

• Fed's Bullard Sees No Need for Easing. Economic conditions are not at the point now where the Federal Reserve should ease monetary policy further, James Bullard, the president of the St. Louis Fed, told MarketWatch in an interview on Saturday. Bullard said he was not convinced that the economy would suffer in coming quarters, as many leading economists are predicting. “I think there are good reasons to be optimistic even though when you look around these days there is a lot of gloom and doom,” Bullard said.

CNBC:

• Trichet Gives Master Class in Saying Nothing. On Sunday, the Sunday Times in the UK reported that policy makers in Brussels are drawing up radical plans to offer central guarantees over certain types of debt issued by banks. The move is reported to be a direct response to the sharp fall in U.S. funding for Europe’s banks. If true, this is clearly something the boss of the ECB can't be discussing in public. So as Trichet prepared for his speech, he turned to the history books and gave a master class on how to say something while actually saying nothing at all.
• Sino-Forest CEO Resigns Amid Allegations of Fraud. Sino-Forest, a Chinese forestry company accused of fraud, said Sunday Allen Chan had resigned as chairman and CEO and that it placed three senior employees on administrative leave, due to information uncovered in an ongoing internal review.

Business Insider:

• 13 Ways The Recession Has Completely Changed How Young People View Work.
• Obama Seeks The Ultimate Free Lunch For Housing, And It's A Bank Bailout In Disguise.
• San Francisco Is Building A Net Around The Golden Gate Bridge To Stop People From Killing Themselves. 24 people have killed themselves by jumping off the Golden Gate Bridge so far this year, putting 2011 on a pace to have the most such suicides ever (the previous high is 1977, which had 39), reports Scott James for the New York Times.
• Another Sign That The Huge Aussie Housing Bubble Is Popping.
  

Zero Hedge:

• Paul Wooley: "The Market Has Become Dangerous For Humanity... It Isn't Reaching Equilibrium, It Is Falling Into Chaos".
• As Stock and Sector Correlation Hits Fresh 20 Year Highs, Here Is Who Is Benefiting. (graphs)
• Wikileaks Reveals Early Chinese Warning of Domestic Asset Bubbles, Overcapacity, Bashing Of "Copy and Paste" Educational System.
  

IBD:

• Monro Muffler(MNRO) Brake Offers TLC For Old Cars.

NY Times:

• As Trade Volumes Soar, Exchanges Cash In. The latest financial market convulsions have been tough for almost everyone, including traders caught on the wrong side of another big swing and pained everyday investors watching their dwindling holdings go down and up — and down again. But there is a silver lining to even this latest market horror show, at least for the exchanges where the financial instruments change hands.
• As Fortunes Dim, Banks Confront a Leaner Future. Battered by a weak economy, the nation’s biggest banks are cutting jobs, consolidating businesses and scrambling for new sources of income in anticipation of a fundamentally altered financial landscape requiring leaner operations. Bank executives and analysts had expected a temporary drop in profits in the aftermath of the 2008 financial crisis. But a deeper jolt did not materialize as trillions of dollars in federal aid helped prop up the banks and revive the industry. Now, however, as government lifelines fade and a second recession seems increasingly possible, banks are finding growth constrained. They are bracing for a slowdown in lending and trading, with higher fees for consumers as well as lower investment returns amid tighter regulations. Profits and revenues are slipping to the levels of 2004 and 2005, before the housing bubble.

Gallup:

• Obama Job Approval: Approve 38%, Disapprove 55%. (graph)

Politico:

• Buffett BofA(BAC) Buy No Seal of Approval.

Reuters:

• Iraq al-Qaeda Regroups, Shi'ite Militias. Al Qaeda has resurfaced in former Iraqi strongholds, adding to the threat from more powerful and organised Shi'ite militias just as U.S. troops prepare to leave, Iraqi officials say. Despite the deaths of leaders and pressure from U.S. and Iraqi forces, al Qaeda's Sunni insurgents have been carrying out bolder attacks, seeking to rattle local security forces, officials said.
• LG Display Cuts 2012 Capex by at Least 25% From 2011. LG Display , the world's No.2 flat-screen maker, plans to cut next year's investment by at least a quarter and will hold off building new production lines, as global demand for flat-screen panels remains weak.
• Italy Readies Austerity Changes, Tremonti Under Fire. Italy's ruling coalition is preparing significant changes to its austerity plan presented in mid-August and Economy Minister Giulio Tremonti, who put together the original plan, appears increasingly isolated. The 45.5 billion euro ($65.3 million) austerity package, drawn up at the insistence of the European Central Bank, is currently being examined by the Senate, where any amendments must be presented by 1800 GMT Monday. Ahead of this deadline, tensions have been running high in Silvio Berlusconi's centre-right coalition, with Tremonti widely blamed for what are seen as failings of the original package and also for resisting the changes that are now being proposed. Italian newspapers report Berlusconi himself is exasperated by Tremonti's inflexibility and politicians and media close to the prime minister now regularly attack him in a way that would have been unthinkable a few months ago.

Financial Times:

• US Coal-Fired Power Stations Under Threat. The US power industry is facing its biggest shake-up since the Three Mile Island accident of 1979. That incident killed off investment in new nuclear plants for a generation. This time, it is coal-fired power stations that are under threat. New regulations governing pollution from coal plants that have been proposed by the US government’s Environmental Protection Agency could force up to 20 per cent of those plants to shut down, according to analysts and industry executives. The American Legislative Exchange Council, a free market campaign group, has described the impending upheaval as a “train wreck” that will cost jobs, send power prices soaring and lead to blackouts.
• Push For Permits in Gulf of Mexico. Sixty per cent of rigs contracted in the Gulf of Mexico are not working almost a year and a half after the Macondo disaster. Of 115 rigs in the gulf, 51 have no contracts, said Cinnamon Odell, senior rig market reporter at ODS-Petrodata, which provides data on the energy sector. Of the 64 with contracts, she said, only 48, or 41.5 per cent of the fleet, are working.

Telegraph:

• Euro Bail-Out In Doubt as "Hysteria" Sweeps Germany. German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a consitutional crisis in Germany and a fresh eruption of the euro debt saga. If the court rules that the €440bn rescue fund (EFSF) breaches Treaty law or undermines German fiscal sovereignty, it risks setting off an instant brushfire across monetary union. The seething discontent in Germany over Europe's debt crisis has spread to all the key institutions of the state. "Hysteria is sweeping Germany " said Klaus Regling, the EFSF's director. German media reported that the latest tally of votes in the Bundestag shows that 23 members from Mrs Merkel's own coalition plan to vote against the package, including twelve of the 44 members of Bavaria's Social Christians (CSU). This may force the Chancellor to rely on opposition votes, risking a government collapse. A CSU document to be released on Monday flatly rebuts the latest accord between Chancellor Merkel and French president Nicholas Sarkozy, saying plans for an "economic government for eurozone states" are unacceptable. It demands treaty changes to let EMU states go bankrupt, and to eject them from the euro altogether for serial abuses. "An unlimited transfer union and pooling of debts for any length of time would imply a shared financial government and decisively change the character of a European confederation of states," said the draft, obtained by Der Spiegel. Mrs Merkel faces mutiny even within her own Christian Democrat (CDU) family. Wolfgang Bossbach, the spokesman for internal affairs, said he would oppose the package. "I can't vote against my own conviction," he said. The Bundestag is expected to decide late next month on the package, which empowers the EFSF to buy bonds pre-emptively and recapitalize banks. While the bill is likely to pass, the furious debate leaves no doubt that Germany will resist moves to boost the EFSF's firepower yet further. Mrs Merkel's aides say she is facing "war on every front". The next month will decide her future, Germany's destiny, and the fate of monetary union.
• Ben Bernanke Realized Printing Yet More Money Would Look Desperate. Why didn't Ben Bernanke signal a third round of quantitative easing on Friday at the long-anticipated Jackson Hole summit? The real motivation behind QE, of course, has been to allow essentially insolvent but politically connected financial institutions to recapitalise themselves. Many QE proceeds have been used to rebuild bank balance sheets rather than stimulate the broader economy. By propping up US Treasury and UK gilt prices, QE has also allowed weak governments, for now, to keep on spending, rather than genuinely tackling our fiscal predicament. In addition, QE is part of a deliberate but still largely unspoken ploy to gradually weaken the dollar (and pound), so debasing the enormous debts of the US (and UK) governments.
• European Banks Set Cash Test by IMF Chief. European banks face ordeal by fire this week after the International Monetary Fund called for “urgent” action to shore up their defences, if necessary with state money and under legal compulsion. Christine Lagarde, the IMF’s new chief, set off tremors at the Jackson Hole summit over the weekend with warnings that the global financial system is on very thin ice and vulnerable to the slightest shock. “We are in a dangerous new phase. The stakes are clear: we risk seeing the fragile recovery derailed, so we must act now,” she said. “Banks need urgent recapitalisation. If it is not addressed we could easily see the further spread of economic weakness to core countries, even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalisation,” she said.

Sunday Times:

• European policy markers are considering providing central guarantees over some types of debt sold by banks to prevent a new credit crunch in the region. The debt guarantee would allow cash from the $635 billion European Financial Stability Fund to be used temporarily to insure banks' bonds.

The Independent on Sunday:

• Rebels Settle Scores in Libyan Capital. UN urges restraint as the rebels wreak their revenge on 'loyalists'.

Der Spiegel:

• Germany's CSU party, which is in a governing coalition with German Chancellor Angela Merkel's party, wants to ban European countries from the euro region that don't comply with criteria. There should be the possibility that a member country that "notoriously" fails to fulfill debt criteria is banned, citing a policy paper written by CSU General Secretary Alexander Dobrindt and Reinhold Bocklet, the vice president of the Bavarian state parliament.

Wirtschaftswoche:

• Euro region states that tap aid in the debt crisis should sell gold reserves and buy back their sovereign debt, Michael Fuchs, a lawmaker from German Chancellor Angela Merkel's Christian Democrats, was cited as saying. In an interview to be published tomorrow by the business weekly, Fuchs said such a step is preferable to the bond buying program of the ECB. Such as step would also be suitable for Italy, which controls large gold reserves though has not tapped aid, he said.

Frankfurter Allgemeine Zeitung:

• The euro region should consider amending the Maastricht Treaty to further limit permissible annual budget deficits, said Philipp Roesler, chairman of Germany's co-ruling Free Democratic Party, in an interview to be published tomorrow. Cutting the current permitted deficit limit of three percent of a member country's gross domestic product would foster greater budget discipline, Roesler said.

Frankfurter Rundschau:

• Germany will have to make sacrifices in order to save the euro and solve the debt crisis, Han-Peter Keitel, head of the BDI federation of German industry, was cited as saying.

Die Welt:

• German Foreign Minister Guido Westerwelle said the EU should respond to the debt crisis by fostering integration around a core even if this means creating a union of "two speeds". In an interview published tomorrow, Westerwelle said all 27 states should be invited to speed up integration of economic and budget policy as well as of defense policy. Those states who are unable to participate "shouldn't hold up the others," he said.
• DZ Bank AG wrote down the value of its Greece portfolio by $352 million in the first six months of the year
  

Bild am Sonntag:

• German Chancellor Angela Merkel is optimistic that the increased euro-region bailout will get majority approval in the Bundestag, citing an interview. Merkel rejected euro bonds as a means to tackle the crisis, saying that won't solve the root of the problem, namely the massive debts.

Focus:

• Germany's Christian Social Union party, an affiliate of Chancellor Angela Merkel's Christian Democrats, wants the country to uphold the European Union's no-bailout rule. The CSU has drawn up a position paper for an Aug. 29 meeting that will focus on revamping its strategy in the euro debt crisis, said the magazine. "Turning away from the precept of no-bailouts amounts to turning away from the conditions on which the currency union rests," said Focus, citing the CSU paper directly. "That's the same as turning away from self-responsibility and national sovereignty to create a transfer union."

Il Sole 24 Ore:

• Italy needs to adopt a growth stimulus package as fiscal measures aren't enough to tame its debt, Pier Carlo Padoan, chief economist of the OECD, said. Italy has to address "the causes of its high public debt, it can't live forever with a debt of that dimension," Padoan said. On the purchase by the ECB of bonds of countries including Italy, Padoan said that it's a "temporary" measure that has to be followed by a long-term strategy.

The Globe and Mail:

• Rally in Equities Defies Credit Gloom. Financial markets have been gripped by a striking dichotomy for much of the past week: while credit markets have continued to rumble and are arguably pricing in a global recession, many equity markets have managed to claw back some of their losses. Debt markets have been roiled by heightened concerns over stresses in bank funding and worries that Greece’s second bail-out package could be delayed or even unravel due to Athens’ agreement to supply Finland with collateral for its share of the rescue. This has led to several other eurozone countries seeking similar bilateral deals, potentially endangering the painstakingly negotiated bail-out agreement just months after it was struck. High-yield debt in the U.S. is on track for its worst monthly return since November 2008, down 5 per cent so far this month, with junk credits yielding nearly 10 per cent. But the Greek imbroglio and bank funding concerns have had a markedly negative effect on Europe’s bond markets in particular. Markit’s Crossover index of European high-yield bond credit default swaps, a gauge of default risk, spiked to 724 basis points on Friday, the highest since July 2009. Similar indices for European investment grade debt, bank bonds and western government bonds have also risen markedly this week. “Credit markets are pricing in a global recession, whatever way you look at it. The only question is whether it is a shallow or deep recession,” Mr Spajic says. “The bank spreads are at deep stress levels for the financial system.” On the other hand, equity markets are still pricing in some growth – albeit more modest than at the start of the summer. “The fixed income market is telling us different things than the equity market, and only one of them is right,” says Ajay Rajadhyaksha, head of U.S. fixed income strategy at Barclays Capital. “The question is which one.” “The divergence between credit and equity can only go on for so long,” warns Chris Whitman, global co-head of equity capital markets at Deutsche Bank. Ronan Carr, European equity strategist at Morgan Stanley, estimates that European equities are pricing in a 6 per cent decline in company earnings as a result of the slowdown in growth, but warns that the risks are skewed to the downside: “We don’t think equities are pricing in a recession, so if one materializes, stock markets probably have further to fall.” A note from Suki Mann, a credit strategist at Société Générale, seemed to sum up the mood: “We remain fearful of political event risk as it continues to cast a pall over all risk asset markets. “We know that many are itching to get involved, but unfortunately, we fear we’re in for a fairly tumultuous period for a while still.”

People's Daily:

• China must improve people's livelihoods amid many unfavorable factors that may affect economic stability in the second half, the People's Daily said in a front-page commentary today. The country's social management is facing "brand-new challenges," the commentary said.
• Jia Kang, head of China's Ministry of Finance's research institute for fiscal science, said a property tax could curb bubbles in the real estate market and support the industry's sustainable development in the long-term, citing Jia. The country should accelerate systemic reform while implementing current property control measures, the report said.
• Beijing will reduce property agent commissions for home purchases by .5 percentage points from Aug. 31, the Beijing Municipal Commission of Development and Reform said in a statement on its website today. Agent commissions for home purchases of no more than 5 million yuan will be cut to 2 percent, the statement said.
  

Caijing:

• Some Southern European countries with heavy liabilities may be forced to implement debt restructuring or "partially default" as the European sovereign debt turmoil develops, citing Li Daokui, an adviser to the People's Bank of China. S&P did the right thing in recognizing the fact that the U.S.'s sovereign credit has declined, Li said. The U.S. started to fall off its economic and global pedestal this year, Li said.

China Securities Journal:

• Taizhou city in China's eastern province of Zhejiang has imposed limits on the purchases of homes by families, citing the local government. The measure, which takes effect on Sept. 1, will far families that own two homes in the city from buying new homes. More second- and third-tier cities will likely introduce similar limits.

Weekend Recommendations
Barron's:

• Made positive comments on (JNY).
• Made negative comments on (DNKN).
  

Night Trading

• Asian indices are -.75% to +2.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 158.0 -2.0 basis points.
• Asia Pacific Sovereign CDS Index 153.0 +.25 basis point.
• FTSE-100 futures n/a.
  
• S&P 500 futures +.84%.
• NASDAQ 100 futures +.53%.

Morning Preview Links

Earnings of Note
Company/Estimate

• (DCI)/.79

Economic Releases
8:30 am EST

• Personal Income for July is estimated to rise +.3% versus a +.1% gain in June.
• Personal Spending for July is estimated to rise +.5% versus a -.2% decline in June.
• The PCE Core for July is estimated to rise +.2% versus a +.1% gain in June.

10:00 am EST

• Pending Home Sales for July are estimated to fall -.9% versus a +2.4% gain in June.

10:30 am EST

• Dallas Fed Manufacturing Activity for August is estimated to fall to -8.5 versus -2.0 in July.

Upcoming Splits

• (HFC) 2-for-1
• (VRUS) 2-for-1
• (RGCO) 2-for-1
  

Other Potential Market Movers

• The 3 & 6-Month Treasury Bill Auctions could also impact trading today.
  

BOTTOM LINE: Asian indices are mostly higher, boosted by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 75% net long heading into the week.