- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Made positive comments on (JNY).
- Made negative comments on (DNKN).
- 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%.
Earnings of Note
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.
- Pending Home Sales for July are estimated to fall -.9% versus a +2.4% gain in June.
- Dallas Fed Manufacturing Activity for August is estimated to fall to -8.5 versus -2.0 in July.
- (HFC) 2-for-1
- (VRUS) 2-for-1
- (RGCO) 2-for-1
- The 3 & 6-Month Treasury Bill Auctions could also impact trading today.