- House Passes $2.1 Trillion U.S. Debt Ceiling Plan. The House of Representatives approved legislation to raise the U.S. debt limit by at least $2.1 trillion and cut federal spending by $2.4 trillion or more, one day before a threatened default. The House voted 269-161 for the plan negotiated by leaders and President Barack Obama over the weekend. Ninety-five Democrats voted in favor and 66 Republicans in opposition. The measure goes to the Senate for a final vote planned tomorrow. “We’re coming up to a deadline we all must recognize: default,” said Representative Paul Ryan, a Wisconsin Republican and chairman of the Budget Committee. “Both parties got us in this mess; both parties are going to have to work together to get us out.” Ryan called the spending cuts connected to the debt-ceiling increase “a huge cultural change” for Congress.
- Italy, Spain Stuck in No-Go Debt Zone for Merrill, DWS Funds: Euro Credit. Merrill Lynch Global Wealth Management, unconvinced that the second Greek bailout has stemmed the debt crisis, won’t put any of its $1.5 trillion of assets into Italian or Spanish bonds.The unit of Bank of America Corp. (BAC) has spurned bonds from Greece, Portugal, Ireland, Spain and Italy since deciding to avoid them in April of last year, according to Johannes Jooste, a senior Merrill portfolio strategist in London. Merrill isn’t alone: Frankfurt-based DWS Investment, which oversees $390 billion for clients, and Legal & Investment Management say they are “underweight” Spanish debt. The lack of enthusiasm from bond buyers threatens the latest rescue deal for Greece, which was struck two weeks ago to reassure investors as contagion from the debt crisis sent Italian and Spanish bond yields soaring. “We are not convinced that this is the finality of the haircuts,” Jooste said in an interview, referring to losses absorbed by those private investors through the debt-exchange program. “There is still a question mark of whether there will be haircuts for countries apart from Greece.” The extra yield investors demand to hold 10-year Italian bonds instead of benchmark German bunds rose to 355 basis points yesterday, a euro-era record. Spanish 10-year yields have jumped almost 50 basis points to 6.2 percent since the summit. “The recent solution for Greece has not changed our perception about the peripheral market, and we are not quite sure if the problem is contained,” said Ralf Schreyer, head of European fixed income at DWS. The additional yield investors demand to hold 10-year Spanish debt over bunds reached 375 basis points yesterday, compared with the average of 44 basis points in the past decade. Yields on 10-year Spanish and Italian bonds are only about a percentage point away from the 7 percent mark that prompted Greece, Portugal and Ireland to seek bailouts. Rising borrowing costs and a poor growth outlook are two reasons Jonathan Cloke, a portfolio manager at Legal & General, cited for holding off on purchasing of Italian and Spanish government securities. In addition to being underweight Spanish bonds, Legal & General no longer owns Greek, Irish and Portuguese debt. “I don’t think Italy and Spain can carry on financing at the current yield levels,” said Cloke. “There will have to be some ways of reducing their interest rates, although I’m not quite sure how. And with the European Central bank expected to keep raising interest rates, I’m worried these countries are not going to get growth they need to reduce debt.”
- Democrats Renew Push for Business Tax Increases After Deal. The private equity managers, oil companies and high-income earners that have been the Obama administration’s prime targets for tax increases will be in Democrats’ crosshairs again in the next phase of deficit- reduction efforts. The debt-limit bill being considered in Congress today would empower a 12-member joint committee of lawmakers to seek $1.5 trillion in deficit cuts, with a Dec. 23 deadline for the House and Senate to act. Democrats, who didn’t get any specific revenue increases in the debt ceiling compromise Congress is considering today, are likely to return to their previous proposals, said Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee. “The joint committee would be tasked to look at ways to reduce the deficit, and it has to be done in a balanced fashion,” Van Hollen told reporters. “It has to include closing these corporate tax loopholes for special interests and looking at other revenue sources from the very top income earners.” President Barack Obama in his budget recommended taxing the profit share -- or carried interest -- earned by private equity managers, venture capitalists and others at ordinary income tax rates and not the more lightly taxed capital gains rate. He called for ending tax benefits for oil and gas companies and for capping the itemized deductions of upper-income Americans.
- China's Stocks Decline to 6-Week Low on Manufacturing Slowdown, Inflation. China’s stocks fell, driving down the benchmark index to a six-week low, after manufacturing growth slowed in the world’s two largest economies and an official Chinese newspaper said inflation pressure is still high. Industrial & Commercial Bank of China Ltd. led declines for lenders on concern the government will intensify measures to curb inflation. Jiangxi Copper Co., China’s biggest producer of the metal, lost 2.4 percent on speculation a slowing global economy will curb demand for metals. “Economic data from around the world seem to suggest that global growth is slowing and that’ll sour sentiment especially when there’s still uncertainty over the debt crisis in Europe,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Inflation is still the biggest domestic problem for China and no one knows how soon it will peak.” The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, lost 34.17 points, or 1.3 percent, to 2,669.61 as of 9:46 a.m. local time, the lowest since June 22.
- Auto Sales Stall as Unemployment Curbs Chance of Return to U.S. Peak: Cars. U.S. auto sales have stalled, casting doubt on a rebound this year as persistent unemployment and tighter lending deter buyers. Light-vehicle deliveries in July, to be released tomorrow, may have run at an 11.8 million seasonally adjusted annual rate, the average estimate of 12 analysts surveyed by Bloomberg. That would trail the 12.5 million rate in the first half. The auto industry may lose 1.5 million in projected sales in 2011, according to consultant AlixPartners LLP. The economy isn’t picking up as fast as anticipated, and the drag may continue beyond this year, AlixPartners said. That may put a return to average annual sales of 16.8 million vehicles from 2000 to 2007 out of reach. Unemployment reached the highest level this year in June. “This curve of unemployment looks like it’s got a lot of legs,” Mark Wakefield, an AlixPartners director in Southfield, Michigan, said in a telephone interview. “This is one of the first recent cycles where demand is not going to go back above its prior peak, because there are just so many structural things that are different this time around.”
- Minnesota Has Outlook Revised to Negative by Moody's. Minnesota had the outlook on its debt revised to negative from stable by Moody's Investors Service, which cited "political intractability" resulting in one-time budget moves to end a 20-day government shutdown last month. "Sooner or later, we need to fix the state's budget so that it does not rely on one-time solutions," said Jim Schowalter, the state's Management & Budget commissioner, in a statement.
- Tanker Demolitions Slowing Creates Worst Glut in 29 Years: Freight Markets. Demolitions of supertankers, which carry about 20 percent of the world’s oil, are slowing as ship owners accept unprofitable rates rather than write off assets, creating the industry’s biggest glut in 29 years. Scrapping vessels, each the size of the Chrysler Building, will drop 19 percent to 2.8 million deadweight tons of carrying capacity this year, according to London-based Clarkson Plc, the world’s largest shipbroker. The fleet will expand 7.5 percent to 176.7 million deadweight tons, the most since 1982, as demand for seaborne crude advances 2.8 percent, the broker estimates. Owners are effectively paying clients $1,037 a day to charter vessels on the industry’s benchmark route in the single- voyage market, the first negative rate since at least 2008. Frontline Ltd., the biggest operator of the ships, needs $29,700 to break even. Unprofitable voyages may still be preferable to the $22.5 million that BW Maritime Pte Ltd. estimates owners would lose by scrapping tankers five years earlier than the standard lifetime of about 25 years. “Hope springs eternal,” said Andreas Sohmen-Pao, chief executive officer of Singapore-based BW Maritime, which has 15 supertankers in its fleet of 105 ships. “Faced with a choice of crystallizing a loss which could have knock-on consequences for financing arrangements and bank loans and so on, people say, well, better to sweat it out and see if something changes.”
- China's Expanding Naval Reach Worries Japan Over Routine Warship Presence. Japan expressed mounting concern over China’s expanding naval reach, saying in the government’s annual defense report that it expects the rising maritime power’s ships to become commonplace near its waters. “China plans to expand its sphere of maritime activities, carrying out operations and training as an ordinary routine practice in waters surrounding Japan,” said the report, which was released today in Tokyo. The areas Japan believes it will encounter China’s navy include the “East China Sea and the Pacific Ocean, as well as the South China Sea.”
- European Stocks Slide 10% From 2011 High as Debt Crisis Spreads. European stocks dropped 10 percent from this year’s high, becoming the first major region to enter a so-called correction, as falling Spanish and Italian bonds showed the debt crisis is spreading and U.S. manufacturing trailed forecasts. Banks, insurers and technology companies led the decline in the benchmark Stoxx Europe 600 Index from a 2 1/2-year high on Feb. 17, driving the measure to a 2011 loss of 5 percent. Every industry decreased more than 17 percent, according to data compiled by Bloomberg. UniCredit SpA, Italy’s largest bank, plunged 40 percent in the period and Commerzbank AG, Germany’s second-largest lender, tumbled 47 percent.
- Uneasy House OK's Debt Deal. Both Parties Find Fault With Bill; Senate to Vote Tuesday. The House passed a $2.4 trillion debt-ceiling increase Monday night with the Senate planning to follow on Tuesday, after one of the most ferocious fights ever over government spending.
- Giffords Returns to House to Cast a ''Yes' Vote. In a surprise, Rep. Gabrielle Giffords (D., Ariz.) on Monday returned to Congress for the first time since being shot in the head nearly seven months ago, putting aside the effects of a grave injury to vote in favor of the debt package.
- Live Blog: The U.S. Debt Battle.
- Left for Extinct, a Steel Plant Rises in Ohio. On the edge of the Mahoning River, where once stood dozens of blast furnaces, more than 400 workers are constructing what long has been considered unthinkable: a new $650 million steel plant. When complete, it will stand 10 stories tall, occupy one million square feet and make a half million tons of seamless steel tubes used in "fracking" or drilling for natural gas in shale basins.
- Egyptians Turn Against Liberal Protesters. Mobs of ordinary Egyptians joined with soldiers to drive pro-democracy protesters from their encampment in Tahrir Square here Monday, showing how far the uprising's early heroes have fallen in the eyes of the public. Six months after young, liberal activists helped lead the popular movement that ousted President Hosni Mubarak, the hard core of these protesters was forcibly dispersed by the troops. Some Egyptians lined the street to applaud the army. Others ganged up on the activists as they retreated from the square that has come to symbolize the Arab Spring. Squeezed between an assertive military and the country's resurgent Islamist movement, many Internet-savvy, pro-democracy activists are finding it increasingly hard to remain relevant in a post-revolutionary Egypt that is struggling to overcome an economic crisis and restore law and order.
- China Must Psych Out Inflation by Andy Xie. A cost-price spiral psychology has become a powerful multiplier influencing China’s inflation dynamic. Will it spiral out of control? This cost-price spiral could be broken with an interest rate overshoot. But since policy makers are currently reluctant to raise rates, inflation psychology is strengthening its grip on the economy. Some analysts and government officials point to price trends for one or two consumer items, and then use these patterns to reach conclusions about inflation. This is erroneous and dangerous.
- Will Cyprus Be The Straw That Breaks The EU? I’m always amazed when relatively minor events somehow conspire to change the course of history. In this example a lousy brush fire may be the catalyst for an unwinding of the EU.
- China Also Fakes These Stores: Disney, Nike, D&G, McDonald's, Starbucks and More.
- India's Widening Iron Ore Scandal Hurts Stocks. India’s wave of corruption scandals has hit yet another industry, iron ore mining, implicating companies that include the flagship of one of this nation’s richest men.
- Chinese Police Shoot Dead 2 Suspects in Attack Blamed on Militants Trained in Pakistan. Police in far western China shot dead two suspects sought for their alleged involvement in a deadly attack blamed on Muslim extremists trained in Pakistan, the government said. The pair, identified as 29-year-old Memtieli Tiliwaldi and 34-year-old Turson Hasan, were discovered late Monday hiding in corn fields in a suburb of the Silk Road city of Kashgar, where a pair of weekend attacks killed a total of 20 people, according to a notice posted on the Xinjiang regional government website.
- The Impact of Mergers on Pharmaceutical R&D. Mergers and acquisitions in the pharmaceutical industry have substantially reduced the number of major companies over the past 15 years. The short-term business rationale for this extensive consolidation might have been reasonable, but at what cost to research and development productivity?
- Sources: Joe Biden Likens Tea Partiers to Terrorists. Vice President Joe Biden joined House Democrats in lashing tea party Republicans Monday.
- Putin Says U.S. Is a "Parasite" on Global Economy. Russian Prime Minister Vladimir Putin accused the United States Monday of living beyond its means "like a parasite" on the global economy and said dollar dominance was a threat to the financial markets. "They are living beyond their means and shifting a part of the weight of their problems to the world economy," Putin told a Kremlin youth group while touring its summer camp north of Moscow. "They are living like parasites off the global economy and their monopoly of the dollar." "Countries like Russia and China hold a significant part of their reserves in American securities ... There should be other reserve currencies." U.S.-Russian relations soured during Vladimir Putin's 2000-2008 presidency but have warmed significantly under President Barack Obama, who took office in 2009 promising a "reset" in bilateral ties.
- Euro Area 'Fiscal Federalism' Won't Happen, Buiter Writes. Recent developments in the euro area sovereign debt and banking sector crises have shown that "fiscal federalism is not going to happen," Citigroup Inc. Chief Economist Willem Buiter wrote. The euro area is left with two alternatives, he said. "The first is to disband" and the second is for the bloc to move to a "you break it you own it" policy, where insolvency of a nation is settled between its taxpayers and its creditors, without any permanent financial support from any other members' taxpayers. Before the end of the Greek bailout program, there will be "deep coercive debt restructurings for Greece and other periphery sovereigns," Buiter wrote.
- Italy in Eye of the Storm as Cash Runs Low. Fears of a double-dip downturn on both sides of the Atlantic have set off fresh mayhem in Southern European bond markets, dashing hopes that Europe's summit deal in late July would contain the escalating crisis. "The markets know that the EU's bail-out find (EFSF) won't be able to buy Italian and Spanish bonds on the secondary market for another three or four months because the deal has to be ratified by national parliaments," said David Owen from Jefferies Fixed Income. The summit accord did not increase the EFSF's firepower above €440bn (£380bn), leaving it unclear how EU leaders expect to cope as contagion engulfs the eurozone's bigger players. "The longer this paralysis goes on, the more investors fear a break-up scenario where the core countries pull out and leave the rest with the euro," Mr Owen said. JP Morgan warned clients that Italy has a thin margin of safety and risks running out of cash to cover spending as soon as September. "Italy and Spain will run out of cash in September and February respectively, if they lose access to funding markets," said the bank's fixed income team of Pavan Wadhwa and Gianluca Salford. Worries about Italy's immediate cash level risks leading to "a self-fulfilling negative spiral." While Italy has low private debt and avoided much of the credit bubble, it suffers from economic stagnation and a steady loss of competitiveness. Monetary tightening by the European Central Bank has compounded the problem, triggering a collapse of all key measures of the Italian money supply. The warning came as the eurozone's PMI manufacturing data for July dropped to a 21-month low, with clear signs of a slowdown spreading to Germany, Austria and Holland. "It makes pretty dismal reading," said Howard Archer from IHS Global Insight. "It points to a marked loss of momentum in the previously healthily expanding core northern eurozone economies, as well as deepening growth problems in the struggling southern periphery."
- China may raise interest rates around Aug. 10, Xinhua08.com, Xinhua News Agency's financial serives website, said yesterday, citing its own research. China's consumer price index growth in July may hit 6.3%, according to the report.
- China Minmetals Non-Ferrous Metals Co. has proposed that all domestic producers of rare earths voluntarily halt output from early August because the national output quotas for 2011 have been reached, citing the company. Halting output of the minerals would also help ensure the stability of the rare earths market, citing a company official.
- China's inflation pressure is still high and the rising prices are the most prominent problem facing its economy, the Financial News said in a front-page commentary today. China's economic growth faces a complex environment as the world economy continues to recover slowly with many uncertainties still existing, according to the commentary. The nation needs to study the possible impact the persistent sovereign debt crisis in Europe, the U.S. debt issues and the rising fiscal deficit in Japan may have on the country.
- Rated (TA) Buy, target $8.
- Asian equity indices are -1.75% to -.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 116.50 +3.0 basis points.
- Asia Pacific Sovereign CDS Index 117.0 -1.0 basis point.
- S&P 500 futures -.35%.
- NASDAQ 100 futures -.30%.
Earnings of Note
8:30 am EST
- Personal Income for June is estimated to rise +.2% versus a +.3% gain in May.
- Personal Spending for June is estimated to rise +.1% versus unch. in May.
- The PCE Core for June is estimated to rise +.2% versus a +.3% gain in May.
- Total Vehicle Sales for July are estimated to rise to 11.8M versus 11.41M in June.
- None of note
- The weekly retail sales reports, Keefe Bruyette Woods Community Bank Conference, Goldman Sachs Small-cap Healthcare Day and the Deutsche Bank Small Cap Value Conference could also impact trading today.