Evening Headlines
Bloomberg:
- Moody's Cuts Italy Rating Following S&P. Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern that Prime Minister Silvio Berlusconi’s government will struggle to reduce the region’s second-largest debt amid chronically weak growth. Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement yesterday. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993. Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion. “The fragile market sentiment that continues to surround euro area sovereigns with high levels of debt implies materially increased financing costs and funding risks for Italy,” Moody’s said in the statement. “Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding markets, the opposite is also increasingly possible.” Moody’s decision “was expected,” Berlusconi’s office said in an e-mail yesterday. “The Italian government is working with the utmost commitment to meet its budget targets.” The yield on Italy’s 10-year notes was at 5.49 percent yesterday, pushing the difference investors to hold Italian bonds instead of benchmark German bunds to 376 basis points. The cost of insuring Italian debt against default has more than double the level at the start of the year. “All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings,” Moody’s said. “Consequently, Moody’s expects fewer countries below Aaa to retain high ratings.” The reasons for the downgrade include “increased funding risks for euro area sovereigns in general, such as Italy, with high levels of public debt,” Alexander Kockerbeck, a Frankfurt- based sovereign debt analyst with Moody’s, said in an interview yesterday. He also cited the risk of slower growth “due to macroeconomic structural weaknesses, and on top of that, a weakening global growth outlook.” The downgrade may aggravate a volatile political situation. Berlusconi, battling to keep his ruling coalition together, faces four trials and calls from Italian employers, his long- time backers, to step down after a decade of virtually no economic growth undermined debt reduction. Italy’s debt of about 120 percent of gross domestic product is second in the region only to Greece.
- Merkel Says Those Demanding Endgame to Europe's Debt Crisis Have 'No Clue'. German Chancellor Angela Merkel stiffened her resistance to joint euro-area bond sales, saying that investors yearning for a single gesture that can end Europe’s sovereign debt crisis now will be disappointed. The euro area has to resolve “that the time of living above our means is over once and for all” and pursue debt reduction that will stretch over “many years,” Merkel said in a speech to members of her Christian Democratic Union late yesterday in Magdeburg, eastern Germany. While stepping up her rejection of a Greek default, she said that issuance of shared debt by euro countries isn’t the solution to the problem spilling from Greece, even though some may long for the “big bang” to end the debt crisis. “Whoever believes that has no clue about the economy,” she said. Merkel stuck to her positions as she prepares for talks in Brussels today with European Commission President Jose Barroso before hosting French President Nicolas Sarkozy in Berlin on Oct. 9. The leaders of Europe’s two biggest economies will get together after the region’s finance ministers failed to quell market jitters that a second aid package for Greece aimed at stemming the crisis might unravel. A Greek default would have unpredictable consequences, lead to speculative attacks on other highly indebted euro countries and risk sending German economic growth into reverse, Merkel said. Letting Greece default would trigger “a gigantic loss of confidence” in euro-area sovereign bonds.
- Greeks Strike Against Job Cuts as Aid Delayed. Hundreds of thousands of Greeks are walking off their jobs at airports, schools, hospitals and even the Acropolis to protest Prime Minister George Papandreou’s 6.6 billion-euro ($8.7 billion) austerity plan, challenging a government seeking European bailout funds to stave off default. Today’s 24-hour strike, the first this year that will shut the Athens International Airport for a full day, takes place after European Union ministers signaled they may renegotiate terms of Greece’s latest rescue, sending the nation’s stocks down the most in 17 months. The country’s largest public-sector union, known as ADEDY and representing at least 400,000 state workers, called the walkout and a march on parliament to protest plans to put 30,000 public workers on reduced pay, raise property taxes and cut pensions and wages. The demonstration defies calls by the government to show unity in the struggle to avert a default. “We are at the worst circumstances under the worst conditions,” Finance Minister Evangelos Venizelos said at a news conference in Athens yesterday. “We are dependent on the aid and loans of our institutional partners. That is the situation of the country. And we must make superhuman efforts to win this wager of history.”
- Dexia Rescue Moves Bank Crisis From Europe's Periphery to Core. Less than three months after Dexia SA (DEXB) got a clean bill of health in European Union stress tests, France and Belgium are considering a second bailout, moving the banking crisis from the continent’s periphery to its heartland. “We’re seeing a practical example of contagion playing out,” said Jean-Pierre Lambert, an analyst at Keefe Bruyette & Woods in London, referring to Dexia’s “material exposure” to the debt of countries on the EU’s rim. “Investors aren’t quite sure what the sovereign debt losses will be, nor where the share price should be. They are concerned about the risks and reduce their funding.” Dexia shares fell 22 percent yesterday, the most of any company in the 46-member Bloomberg Europe 500 Banks and Financial Services Index, even as the French and Belgian governments pledged to support the bank. The two countries, which bailed out Dexia in 2008, will take “all necessary measures” to protect clients and will guarantee all of Dexia’s loans, French Finance Minister Francois Baroin and Belgian Finance Minister Didier Reynders said in a statement yesterday. Yves Leterme, Belgium’s prime minister, said yesterday that a “bad bank” to hold Dexia’s troubled assets will be set up. The board of the Paris- and Brussels-based municipal lender met Oct. 3 to discuss a breakup of the bank after the sovereign debt crisis reduced its ability to obtain funding, said three people with knowledge of the talks.
- BofA's(BAC) Countrywide May Face Fraud Claim After Housing Audit. Bank of America Corp., the biggest U.S. lender by assets, should face fraud claims after the firm’s Countrywide unit submitted incorrect data on borrowers for government-insured loans, a federal watchdog said. Half of 14 loans reviewed had “material underwriting deficiencies” that resulted in more than $720,000 in losses, according to a Sept. 30 report from the Office of the Inspector General for the Department of Housing and Urban Development. A regional inspector general for HUD, Kelly Anderson, recommended that the agency’s lawyers pursue legal remedies against Charlotte, North Carolina-based Bank of America. “Countrywide did not properly verify, analyze, or support borrowers’ employment and income, source of funds to close, liabilities and credit information,” Kelly wrote in the audit. “This noncompliance occurred because Countrywide’s underwriters did not exercise due diligence in underwriting the loans.”
- U.S. Lawmakers Question Overseas Reach of Dodd-Frank Swap Rules. U.S. regulators’ proposed Dodd-Frank Act rules for the $601 trillion swaps market may clash with the intent of Congress because of their reach to foreign subsidiaries of U.S. financial firms, according to the top two Democratic lawmakers on financial issues. “Given the global nature of this market, U.S. regulators should avoid creating opportunities for international regulatory arbitrage that could increase systemic risk and reduce the competitiveness of U.S. firms abroad,” Senator Tim Johnson, chairman of the Senate Banking Committee, and Representative Barney Frank, the top Democrat on the House Financial Services Committee, wrote in a letter today. The letter was sent to the Commodity Futures Trading Commission, Federal Reserve, Securities and Exchange Commission and Federal Deposit Insurance Corp. “We are concerned that the proposed imposition of margin requirements, in addition to provisions related to clearing, trading, registration, and the treatment of foreign subsidiaries of U.S. institutions, all raise questions about consistency with congressional intent,” Johnson, of South Dakota, and Frank, of Massachusetts, said in the letter. Proposed regulations imposing margin requirements to reduce trading risks will “damage the competitiveness” of foreign- based businesses of U.S. banks compared with their overseas rivals, lawyers for six banks including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley told regulators in a June 29 letter.
- Manhattan Office Leasing Slides 36% From 'Phenomenal' Second Quarter Pace. Manhattan office leasing fell 36 percent in the third quarter from a 12-year high in the previous three months as demand retreated from what had been a “phenomenal” pace, Cushman & Wakefield said.
- Saudi Arabia Vows 'Iron First' Following Attack In Oil Province. Saudi Arabia vowed to use "an iron fist" after 11 members of the security forces were injured by attackers during unrest in a Shiite Muslim town in the east, the official Saudi Press Agency said. The government accused an unnamed "foreign country" of seeking to undermine the stability of the kingdom as a result of the violence in Awwamiya, in which the assailants, some on motorcycles, used machine guns and Molotov cocktails, the Riyadh-based news service reported late yesterday. A man and two women were also injured, the news service said.
- Lawmakers Urge BofA(BAC) Customers to Quit. Congressional Democrats are pushing customers to quit doing business with Bank of America Corp. (BAC) and one lawmaker is aiming to make it easier for them to stop after the biggest U.S. lender announced plans for new debit-card fees. Representative Brad Miller, a member of the Financial Services Committee, introduced a bill today that would bar banks from imposing fees on people who close accounts, calling the proposal a response to the Charlotte, North Carolina-based company’s plan to charge some debit customers an additional $5 a month for using the cards.
- The Case Against Commodities. They've been hot in recent years, but history suggests they're a losing bet over time. For much of the past decade, investing in raw materials has looked like a slam-dunk, as rising prices held out the prospect of big gains and the proliferation of exchange-traded funds made placing bets easier. The trend of rising commodity prices in recent years helped fuel a belief that is now common among financial advisers and pension managers: that ordinary investors should have some slice of their long-term money parked in commodities. But there's a case against commodities, too: the human tendency to feed our appetites ever more efficiently, which periodically undercuts commodity prices and in extreme cases has even wiped out entire markets. That's a danger for long-term investors, particularly those inclined to sock commodity investments away untouched in retirement accounts for years, as many do with stock funds.
- Hedge Funds Hit Resistance on European-Bank Trades. In another sign of market participants exercising caution amid fragile market conditions, a number of hedge funds late last month tried to reduce their exposure to European banks with Credit Suisse Group using derivatives, but the Swiss dealer declined to take some of their trades, according to a person familiar with the matter. Market making in derivatives and other financial instruments is one of a dealer bank's primary functions. But in volatile markets, dealers' risk-management controls may make them reluctant to assume too much exposure on one side of a trade.
- Canada Concerned Over EU Measures To "Stigmatize" Oil Sands. Canadian Resources Minister Joe Oliver said Tuesday he's concerned about moves by the European Union to "stigmatize" the Alberta oil sands, adding the Conservative government would move to defend the country's energy interests.
- "Occupy Wall Street" Protests Coming to NJ. The "Occupy Wall Street" movement is coming to Wall Street West. Demonstrators are planning to gather Thursday afternoon in front of the Goldman Sachs offices in Jersey City, in the heart of the city's financial district.
- Real Estate Executives Turn More Bearish. Real estate executives have downgraded their outlooks through mid-2012 as volatile global financial markets, sluggish job growth and political gridlock conspire to limit recovery, according to a survey released on Tuesday. Seven out of 10 executives polled by DLA Piper, which calls itself the world’s largest real estate law firm, in September described themselves as “bearish” for the next 12 months, up from 60% in 2010, the report said. The 291 executives surveyed said that political turmoil around the world and the potential for another financial crisis are key reasons for their shift, beyond the lack of job growth, the survey said. They also pointed at disarray in the financial markets and condition of the banking sector that is key for their funding.
- EPA to Ease Rule on Power Plants. The Environmental Protection Agency, under pressure from some states, industry and Congress, is expected to ease an air quality rule that would require power plants in 27 states to slash emissions, said people familiar with the matter.
- Russia, China Veto U.N.'s Syria Move. Russia and China vetoed a U.N. Security Council resolution on Tuesday that would have condemned Syria's bloody crackdown of an uprising seeking to overthrow the regime in Damascus. The Western-backed resolution received nine votes in favor and four abstentions, from South Africa, India, Brazil and Lebanon. The European draft was watered down from targeted financial sanctions against President Bashar al-Assad and an arms embargo on Syria first proposed in August. The latest European draft merely called for the council to "consider" unspecified "measures" after a 30-day period. But it wasn't enough to persuade Russia and China to support it. "This is a not a matter of wording, it is a political veto," said French Ambasador Gérard Araud. "It is disdain for the Syrian people," he said, "who have fought since March against the Assad regime."
- Acme Packet(APKT) Projects Weak 3Q After Client Delay. Acme Packet Inc. (APKT) forecast a weak third quarter after an unidentified client delayed a major expected order. Shares of the networking company, which also affirmed its full-year guidance, sank 15% to $36.45 after hours. The stock was off 19% this year through the close of regular trading Tuesday.
- At S&P, a Crusader for Tough Ratings. Mark Adelson is known in the financial world as the rating industry's bad cop. In the past three years, the chief credit officer of Standard & Poor's has helped revamp the firm's grading process after the industry's giants were lambasted for assigning overly optimistic ratings to securities that cratered, exacerbating the 2008 financial crisis. Under Mr. Adelson's guidance, S&P has made it more difficult for many issuers to receive Triple-A ratings, its coveted highest score. The top rating should be "sacrosanct," Mr. Adelson has told colleagues, adding it should be tested as rigorously "as jet engines on an airplane."
Zero Hedge:
- Zero Hedge Kindly Requests The Immediate Resignation of Mary Schapiro For Gross Breach Of Professional Responsibilities.
- US Starts New Fiscal Year With $14.837 Trillion In Debt, $142 Billion Increase In Two Days.
- Anonymous Threatens to 'Erase' the NYSE. (video) Anonymous has declared "war" on the New York Stock Exchange. In a video posted to TheAnonPress YouTube account October 3rd, Anonymous said it would "erase" the NYSE from the Internet on October 10th. "On Oct. 10, NYSE shall be erased from the Internet. On October 10, expect a day that will never, ever be forgotten," the creepy digital voice says. It's not clear if this would just be an attack on the NYSE website or on the electronic communications of the exchange itself.
- Euro to Fall to 1.25 vs USD Says Morgan Stanley(MS). (video)
- Yum(YUM) Hits Earnings Target but China Worries Persist. Closely watched sales at Yum's established restaurants in China jumped 19 percent in the third quarter. That increase came as higher wage and commodity costs caused the company's China restaurant margins to fall by 3.9 basis points to 21.3 percent. Yum said on Tuesday it raised menu prices after the quarter ended to help offset higher costs.
- New York Sues BNY Mellon(BK) Over Forex Claims. Over a 10-year period, Bank of New York Mellon defrauded thousands of clients in foreign currency exchange transactions, earning it $2 billion, according to a lawsuit filed Tuesday by New York Attorney General Eric Schneiderman.
- Japan's Economic Outlook Very Severe: BOJ. Bank of Japan Governor Masaaki Shirakawa on Wednesday offered a bleak assessment on the country's economic outlook but said the central bank was already taking bold steps to support growth.
- Bernanke Attacks China Over Currency Policy. The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery through its deliberate intervention in the currency market to hold down the value of the renminbi.
- In Europe, Signs of 2nd Recession With Wide Reach. The European debt problems that have roiled global financial markets for the last 18 months are showing signs of turning into a far deeper challenge: Europe’s second in three years.
- Banks in Europe Face Huge Losses From Greece. Europe’s biggest banks may finally be forced to own up to their losses. While bank executives and government leaders have been reluctant to acknowledge that the hundreds of billions of euros of Greek debt held by financial institutions is worth far less than its face value, they are slowly accepting the grim reality, as investors, clients and lenders grow increasingly wary.
- Reid Considers Surtax on Millionaires. Senate Majority Leader Harry Reid is eyeing a tax on the nation’s highest earners as a way to defray some of the $447 billion price tag for the White House-written jobs package-a move that would shift attention away from its underlying policies and more towards party politics. Sources on and off Capitol Hill said Reid wants to swap out the bill’s current rack of “pay-fors,” and replace them with a package including a surtax, perhaps as high as 5 percent, on millionaires.
Reuters:
- U.S. Says Mulling Further Taiwan Arms Sales. The Obama administration is weighing fresh arms sales to Taiwan as part of a sweeping effort to deter any Chinese attack on the self-ruled island that Beijing claims as its own, administration officials told Congress on Tuesday. Such supplies would be on top of plans sent to Congress on Sept. 21 to sell Taiwan $5.85 billion in new hardware and defense services, including upgrades for Taiwan's 145 F-16 A/B fighter aircraft. Beijing deems Taiwan arms sales a grave interference in its domestic affairs and the biggest obstacle to improved relations between the world's two largest economies.
- Brazilian Economy Set For A Slowdown. Brazil’s economy is set for a slowdown, with industrial production contracting in August as domestic manufacturers struggle with rising interest rates, a strong currency and a weakening global economy.
- Private Lending Loses Lustre for China's Rich. In the words of the People’s Daily, the usually sober newspaper of the Communist party, it is a “Chinese-style subprime crisis”. Businesses in once-booming coastal cities have shut up shop, leaving a trail of bad loans in their wake. The twist in the tale is that those holding the uncollectable debts are not banks but entrepreneurs themselves, wealthy people who had tried to put their money to work by lending it at high rates to businesses.
- About 49,000 Vietnamese companies ceased operation in the January to September period due to a shortage of funds, citing Minister of Planning & Investment Bui Quang Vinh. The number of companies that have stopped operations or have dissolved rose 22% compared to a year earlier, the report said. Vietnamese companies have been hurt by high borrowing costs exceeding 20% this year, Nong Thon said.
Oppenheimer:
- Rated (FLDM) Outperform, target $19.
- Asian equity indices are -1.75% to +.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 274.0 +9.0 basis points.
- Asia Pacific Sovereign CDS Index 173.50 +1.0 basis point.
- FTSE-100 futures +1.44%.
- S&P 500 futures -.04%.
- NASDAQ 100 futures +.06%.
Earnings of Note
Company/Estimate
- (COST)/1.09
- (MON)/-.27
- (AYI)/.79
- (MAR)/.27
- (RT)/.05
- (CBK)/-.36
8:15 am EST
- The ADP Employment change for September is estimated to fall to 73K versus 91K in August.
- ISM Non-Manufacturing for September is estimated to fall to 52.8 versus a reading of 53.3 in August.
- Bloomberg consensus estimates call for a weekly crude oil inventory build of +1,500,000 barrels versus a +1,915,000 barrel gain the prior week. Distillate supplies are estimated to fall by -300,000 barrels versus a +72,000 barrel gain the prior week. Gasoline inventories are estimated to rise by +1,500,000 barrels versus a +791,000 barrel gain the prior week. Finally, Refinery Utilization is estimated to fall by -.5% versus a -.5% decline the prior week
- None of note
- The Challenger Job Cuts report for September, weekly MBA mortgage applications report, (CBOE) investor day, (BXP) investor conference and the MBI/BAC Court ruling could also impact trading today.
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