Today's Headlines

Bloomberg:

• Italian Borrowing Costs Jump at $8.8B Auction. Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations. The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times at the last sale. The Treasury, which fell short of its maximum target of 7 billion euros, also sold 2.6 billion euros of bonds maturing in 2018 and 2020. Investors have dumped Italian debt as divisions among European governments over how best to fight the region’s debt crisis sparked concern the contagion would spread to the bloc’s third-biggest economy. Bonds have dropped even after the government passed a 54 billion-euro austerity plan that failed to ease concerns that weak growth would lead to a credit rating downgrade and hurt efforts to cut Europe’s second-biggest debt. Amid “talks about a Greece default” and “a possible downgrade of the Italian debt in the next couple of months, today’s auction results are not too bad,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e- mailed note to investors. As the country’s bonds slumped, officials met in the past month with delegates from the China Investment Corp. to discus investments in Italy, according to an Italian government official familiar with the situation. Government bonds were not the focus of the talks. The yield on Italy’s benchmark 10-year bond rose 16 basis points to a five-week high of 5.731 percent. The difference over similar-maturity German bunds increased 16 basis points to 398 basis points after today’s sale, the most since before the European Central Bank started buying Italy’s debt on Aug. 8.
• Merkel Rejects Greek Default, Defends Euro-Area. German Chancellor Angela Merkel said Greece is taking the right steps to get its next bailout payment, warning against allowing a Greek default because of the risk of contagion for other euro-area countries. Merkel, in a German radio interview broadcast today, said that an “uncontrolled insolvency” would further roil markets spooked by the prospect of a Greek default. The euro region currently has no system for “orderly” insolvency until the permanent rescue fund is established in 2013, she said. “The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of other countries, is very big,” Merkel told Berlin-based broadcaster Inforadio. “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.” Merkel’s comments are a rebuff to calls by members of her ruling coalition to consider allowing Greece’s insolvency and exit from the currency union as it struggles to satisfy the terms of its aid package. They also belie government plans to support German banks in the event that Greece goes into default.
• Sovereign, Bank Bond Risk Reach Records on Greek Debt Concerns. The cost of insuring against default on European sovereign and bank debt rose to records on mounting concern a default by Greece will trigger losses for banks holding the government’s bonds. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed six basis points to 359 basis points, an all-time high based on closing prices. The Markit iTraxx Financial Index of swaps on 25 banks and insurers rose 12 basis points to 326, while the subordinated index was up 19 basis points at 569, according to JPMorgan Chase & Co. at 9:30 a.m. in London. Contracts on the Markit iTraxx Crossover Index of 40 companies with mostly high- yield credit ratings increased 13.5 basis points to 811. An increase signals deterioration in perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5.5 basis points to 204.
• Europe Close to Banking Crisis, El-Erian Says: Tom Keene. Pacific Investment Management Co.’s Mohamed A. El-Erian said organizations such as the International Monetary Fund need to act with European banks at risk of being engulfed in the region’s sovereign-debt crisis. “We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We are in a synchronized global slowdown. There’s very little confidence in economic policy making both in Europe and the U.S.”
• Apple(AAPL) Dividend or Buyback 'More Likely': Morgan Stanley. Apple Inc. (AAPL), the world’s most valuable company, is “more likely than ever” to return money to shareholders in the form of a stock buyback or dividend, according to Morgan Stanley. Apple is able to finance a $25 billion share repurchase program or a 2.4 percent dividend using its available cash, said Katy Huberty, an analyst for Morgan Stanley in New York. Apple has $76 billion in cash and investment holdings, equivalent to about $81 a share, which could be used to fund the effort. “We believe Apple is more likely than ever to return cash to shareholders,” Huberty said in a note to clients.
• U.S. Poverty Climbed to 17-Year High in 2010. Data released by the Census Bureau today showed the proportion of people living in poverty climbed to 15.1 percent last year from 14.3 percent in 2009, and median household income declined 2.3 percent. The number of Americans living in poverty was the highest in the 52 years since the U.S. Census Bureau began gathering that statistic. Those figures may have worsened in recent months as the economy weakened. “Families are struggling to put food on the table, and they don’t have the purchasing power to help the economy recover,” said Isabel Sawhill, a senior fellow at the Brookings Institution in Washington.
• Best Buy(BBY) Profit Trails Analysts' Estimates as Television Sales Decline. Best Buy Co., the world’s largest consumer electronics retailer, reported second-quarter profit that trailed analysts’ estimates and cut its full-year earnings forecast as sales of televisions and mobile phones declined. Net income in the quarter ended Aug. 27 fell 30 percent to $177 million, or 47 cents a share, from $254 million, or 60 cents, a year earlier, the Richfield, Minnesota-based company said today in a statement. Analysts projected 53 cents, the average of 21 estimates.
• Russia Sees Stalling Economy, Ruble Plunge at $60 Oil. Oil at $60 a barrel may halt Russia’s two-year economic expansion next year, triggering a “substantial” devaluation of the ruble, the Economy Ministry said, according to a document obtained by Bloomberg. Gross domestic product may shrink as much as 1.4 percent next year under a negative scenario that projects a “world recession” cutting the average price of Urals crude by almost a half from the current level, according to the report, submitted to the government for approval last week. The price of Urals, the nation’s chief export oil blend, has averaged $109.35 this year and was at $114.23 yesterday. A reliance on raw materials, which President Dmitry Medvedev called “humiliating” and “primitive,” has left the economy vulnerable to dropping global demand for its commodity exports.

Wall Street Journal:

• Italian Bond Auction Spells Trouble. Troubles increased for Italy after its closely watched auction of government bonds met with tepid demand and the country had to fork out higher yields to lure buyers, fueling concerns that a Spanish bond sale on Thursday may also prove to be a tough sell. Markets scrutinized the auction because Italy's funding costs have recently surged again and stabilized above 5% in the 10-year segment, despite steady buying by the European Central Bank, widely seen as the only major buyer of Italian bonds at present.

CNBC.com:

• Europe's 'Liquidity Jolt' to Asia Highly Underestimated: Strategist. Investors in Asia appear to be downplaying the risks posed by Europe’s debt crisis, and the potential outflow of funds from the region should major European banks collapse, warns Emil Wolter, Head of Regional Strategy, Asian Equities at RBS Global Banking & Markets. “The number one risk, which is still underestimated by the Asian investors that I speak to, is the potential for Europe to deliver a liquidity jolt to financial markets,” Wolter told CNBC on Tuesday. “(The) potential for one or more major financial institutions in Europe to basically put their hand up for emergency funding is going to be a real danger to fund flows to the region,” he said. “You’re talking about an event on the scale of Lehman, but possibly times several different institutions,” he added.
• U.S. Small Business Optimism Weakens Again in August. Small businesses in the U.S. became less confident in the economy's future for the sixth straight month in August, a survey showed on Tuesday. The National Federation of Independent Business (NFIB) said its Small Business Optimism Index fell 1.8 points to 88.1. The decline was largely due to weaker expectations for real sales gains and reduced hope for an improvement in business conditions in the next six months. "With such a dim outlook, owners are not going to do a lot of hiring or expanding," said William Dunkelberg, chief economist at the NFIB.
• Huge Surge in Bank of America(BAC) Foreclosures. Bank of America is ramping up its foreclosure processing, sending out far more notices of default to borrowers in August than in previous months, well over 200 percent more month-to-month.

Business Insider:

• Yet Another Top Hedge Fund Manager Bruce Kovner Is Retiring. The commodity fund Caxton's chairman and founder is retiring, according to Bloomberg. He's passing the reigns to the firm's CIO, Andrew Law.
• Obama Has No Intention of Getting His Jobs Plan Passed.
  

Zero Hedge:

• Import Prices Decline Less Than Expected, Export Prices Increase.
• Europe Facts, Not Fiction: Usage of ECB Deposit Facility Goes Parabolic, Sov CDS Wider Across The Board. (graph)
• Morgan Stanley Slashes EURUSD Target to 1.30, Says EUR Attraction as an Alternative Reserve Currency Ending.
  

Reuters:

• New al Qaeda Head Hails Arab Spring, Says U.S. Losing. New al Qaeda leader Ayman al-Zawahri voiced support in an Internet video for popular revolts shaking the Middle East, saying Arabs no longer feared the United States 10 years after the country was targeted by the militant network. Zawahri, an Egyptian who took up the reins of al Qaeda after the killing of Osama bin Laden in May, hailed popular uprisings that have toppled leaders in Egypt, Tunisia and Libya this year, and urged other Muslims to overthrow their rulers too. "The Arab people have been freed from the chains of fear and terror, so who is the winner and who is the loser?"
• International Alarm Over Euro Zone Crisis Grows. International alarm over Europe's debt crisis reached new heights on Tuesday, with U.S. President Barack Obama pressing the bloc's big countries to show leadership as talk of a Greek default escalated and markets heaped pressure on Italy. German Chancellor Angela Merkel sought to quash talk of an imminent Greek default or exit from the euro zone, but confusion over whether she would issue a joint statement on Greece with French President Sarkozy sent markets gyrating up and then down. Confidence in the 17-nation currency area was further dented when Italy was forced to pay the highest interest rates since joining the euro in 1999 to sell 5-year bonds. "I think there is a possibility, if the wrong steps are taken, that the system goes off the rails," Sergio Marchionne, the CEO of Italian carmaker Fiat, told reporters in Frankfurt when asked if the euro's survival was at risk.

Telegraph:

• Debt Crisis: Live.

Der Spiegel:

• Loose Talk on Greek Default Could 'Cost Billions'. Members of Angela Merkel's government have been openly discussing the possibility of a Greek bankruptcy, a debate the chancellor sought to quash on Tuesday. The statements made by her junior coalition partners have unsettled markets and could "cost billions," German commentators warn.

Focus-Money:

• Banks may face writedowns because of defaults on European commercial mortgage-backed securities. A S&P study showed that on average only one in three maturing commercial mortgage-backed securities in Europe has been paid back since January. 11% of the $14.6 billion in CMBS due since the beginning of the year has defaulted.

Le Echos:

• Societe Generale SA CEO Frederic Oudea said that nationalizing the bank is out of the question. "It seems totally premature and aside from the subject today to evoke such a hypothesis," French Industry Minister Eric Besson said