Thursday, November 03, 2011

Today's Headlines

  • Papandreou Seeks Accord to Secure Aid Without Referendum. Greek Prime Minister George Papandreou reached out to the opposition about setting up a transitional government, indicating an accord would secure aid and remove the need for a referendum on euro membership. Just hours after saying Greeks need to decide on whether their future is in the euro, Papandreou said the country belongs in the currency bloc. He welcomed support shown by the main opposition New Democracy party for last week’s rescue pact agreed with European Union leaders in Brussels. Finance Minister Evangelos Venizelos said Greece won’t hold a referendum. “We had a dilemma: either real consensus or referendum,” Papandreou told ministers, according to an e-mailed transcript of his statements. “As I said yesterday, coming out of the meeting, if there were consensus we wouldn’t need a referendum. I said if the opposition comes to the table to agree on the loan, there’s no need for a referendum.” Papandreou’s decision to call a referendum divided his ruling party and spurred the EU to halt aid, pushing Greece toward a potential default. The European Central Bank unexpectedly cut interest rates today after fallout from Greece pushed up borrowing costs and forced Europe’s rescue fund to cancel a bond issue for the first time.
  • ECB Unexpectedly Lowers Rate to 1.25% as Draghi Signals No Debt Backstops. The European Central Bank unexpectedly cut interest rates at Mario Draghi’s first meeting in charge even as the new president signaled no plans to backstop the region’s most vulnerable nations as the escalating debt crisis threatens to splinter the euro region. “What makes you think that becoming the lender of last resort for governments is what you need to keep the euro region together?” Draghi asked reporters in Frankfurt today. “That is not really in the remit of the ECB. The remit of the ECB is maintaining price stability in the medium term.” ECB officials unanimously lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey.
  • Euribor-OIS Spread Increases to 2 1/2-Year High After Rate Cut. A measure of banks’ reluctance to lend to one another in Europe rose to the highest in more than 2 1/2 years after the European Central Bank unexpectedly cut its benchmark interest rate. The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight index swaps, was at 95 basis points as of 1 p.m. in London, from 87 yesterday. That’s the highest since March 2009. The ECB lowered its rate 25 basis points to 1.25 percent. The cost for European banks to fund in dollars rose. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 118 basis points below the euro interbank offered rate, from minus 105 yesterday, according to data compiled by Bloomberg. That’s the widest since December 2008, when the difference was minus 145. Lenders increased overnight deposits at the European Central Bank. Banks parked 253 billion euros ($349 billion) at the Frankfurt-based ECB yesterday, from 229 billion euros on Nov. 1. That compares with a year-to-date average of 68 billion euros.
  • ISM Services Index Falls Slightly. The Institute for Supply Management’s index of non-manufacturing businesses eased to 52.9 in October from 53 a month earlier. A reading above 50 signals expansion. The measure was projected to climb to 53.5, according to the median forecast in a Bloomberg News survey. Estimates from 77 economists surveyed ranged from 52 to 55. The Tempe, Arizona- based group’s index averaged 56.1 in the five years to December 2007, when the last recession began.
  • Economy Driving More Americans to Extreme Poverty. At least 2.2 million more Americans, a 33 percent jump since 2000, live in neighborhoods where the poverty rate is 40 percent or higher, according to a study released today by the Washington-based Brookings Institution.
  • Abu Dhabi's Economic Ambitions Held Back by Dubai-Style Real Estate Slump. Abu Dhabi, the emirate that bailed out Dubai in 2009, set out to avoid the pitfalls suffered by its Persian Gulf neighbor with a decades-long plan to replace oil revenue with industry and tourism as drivers of growth. Now those plans need to be scaled back as companies behind some of the sheikhdom’s biggest developments cut jobs and postpone projects, said Ghassan Chehayeb, associate director of research at Dubai-based Exotix Ltd. Delays include beach-front apartments, the first office building that makes more energy than it uses and branches of the Louvre and Guggenheim museums. “Abu Dhabi has to face the economic realities,” Chehayeb said. The emirate’s plan “was a little too ambitious and they’re realizing now that many of those projects might not make as much economic sense as they initially thought.”
  • India Food Inflation Quickens to Nine-Month High on Vegetables, Milk Costs. India’s food inflation accelerated to the highest level in nine months after prices of vegetables, milk and meat climbed. An index measuring wholesale prices of agricultural products gained 12.21 percent in the week ended Oct. 22 from a year earlier, the commerce ministry said in a statement in New Delhi today. It rose 11.43 percent the previous week. India faces a “very real threat” from food inflation, central bank Deputy Governor Subir Gokarn said yesterday. Still, the Reserve Bank of India has signaled a pause in its monetary tightening as Europe’s debt crisis threatens economic growth, saying past interest-rate increases will slow consumer demand.
  • Productivity in U.S. Climbed at a 3.1% Pace. The productivity of U.S. workers rose in the third quarter for the first time this year as companies tried to cut costs following a slowdown in growth. The measure of employee output per hour increased at a 3.1 percent annual rate, following declines in each of the previous two quarters, figures from the Labor Department showed today in Washington. Expenses per employee fell at a 2.4 percent rate after a 2.8 percent gain in the second quarter.
  • Limited Brands(LTD), Target(TGT) Sales Trail Oct. Estimates. U.S. retailers’ same-store sales trailed analysts’ estimates in October, the first miss this year, as flagging consumer confidence restrained shoppers at Limited Brands Inc., Target Corp. (TGT) and Saks Inc. (SKS). Sales at Limited, operator of the Victoria’s Secret chain, rose 6 percent, missing the average projection for a 6.7 percent gain from analysts surveyed by Retail Metrics Inc. Target posted a 3.3 percent increase in sales, trailing the 4.2 percent estimate. Abercrombie & Fitch Co. (ANF) shares plunged after reporting a slowdown in European flagship stores. The lowest consumer confidence since March 2009 restrained spending between the back-to-school and holiday shopping periods. Warm weather that reduced purchases of coats and sweaters also contributed to the 3.8 percent sales gain that was less than projections for a 4.4 percent increase.
  • Sarkozy Confers With Obama on Transaction Tax. French President Nicolas Sarkozy said that he and President Barack Obama shared a “common analysis’ on the financial transaction tax. Speaking after bilateral talks today at a Group of 20 summit in Cannes, France, Sarkozy said that the summit needs to be ‘‘hand in glove with the U.S.’’ ‘‘We need the leadership of Barack Obama,’’ Sarkozy said.
Wall Street Journal:
  • Three-Month Euro Dollar Cross Currency Basis Swap Widens. NEW YORK-(Dow Jones)- Swapping euros into dollars is becoming extremely expensive, according to a leading indicator that is at its widest level since December 2008. The three-month euro/dollar cross-currency basis swap is at minus 118 basis points versus minus 102 basis points on Wednesday. That's still shy of the minus-215 level it reached amid the financial turmoil of October 2008, but the indicator is now trading at levels where bankers say it is flashing warning signals about the functioning of money markets. The debt crisis in Europe has created stronger demand for dollars, making it more pricey to get access to such funding. Banks and other firms that operate globally and need dollars have had limited access to the greenback, as investors have been wary of lending to them, so they have been relying more heavily on the euro-dollar swap market to meet their financing needs. This route has become increasingly more costly for them. "The widening of the cross-currency basis swap has been driven by the rising risk of a Greek default and concerns about potential spillovers to the rest of the periphery," said Brian Smedley, interest rate strategist at Bank of America Merrill Lynch. "It is becoming more expensive to secure dollar funding versus euros through the FX swap market as the market prices in greater risks of a disaster scenario in Europe."
  • NY Governor Cuomo to Battle Democrats Against Tax Hike on the Rich. With next year's budget deficit predicted to grow, New York Gov. Andrew Cuomo and his allies are preparing for a turbulent fight with his own party and liberal groups over his opposition to raising state taxes on the wealthy. Emboldened by the Occupy Wall Street movement and President Barack Obama's embrace of a "millionaire's tax," organized labor and their Democratic allies in Albany are getting ready to square off with Mr. Cuomo, a popular Democrat who has so far been insulated from harsh criticism.
  • Jefferies(JEF) Moves to Allay Concern Over European Bet. Jefferies Group Inc., seeking to stem another steep drop in its share price, on Thursday provided details of its exposure to European debt, saying it had a net $38 million in short positions or no meaningful exposure. Shares of the midsize investment bank fell as much as 20% Thursday, adding to this week's declines, as investors' concerns about the company's European debt exposure were renewed by a credit rating downgrade of Jefferies by ratings firm Egan-Jones. Jefferies has been under fire this week since the collapse of broker-dealer MF Global Holdings Ltd. as a jittery market has focused on the possibility that other relatively small financial institutions could be brought down by bad sovereign bets and worries that those firms don't have the support of large balance sheets to absorb potential losses.
  • U.S. Report Cites 'Persistent' Chinese, Russian Spying for Economic Gain.
  • Groupon IPO Could Price as High as $21.
  • White House to Be Subpoenaed for Solydra Documents. A Republican-led House panel has agreed to subpoena White House documents related to Solyndra Inc., the failed California solar company that received a half-billion-dollar federal loan. By a 14-9 vote, a House Energy and Commerce subcommittee authorized Chairman Fred Upton to issue subpoenas to top White House officials. GOP lawmakers say the subpoenas are necessary because the White House has denied or delayed requests for thousands of documents related to Solyndra. The Fremont, Calif., company received a $528 million federal loan before filing for bankruptcy protection and laying off 1,100 workers.
Business Insider:
Zero Hedge:
  • More Lawsuits Likely In Hedge-Fund Linked CDO Cases. Merrill Lynch and Standard & Poor's may face civil charges over their sale of collateralized debt obligations allegedly structured on behalf of Magnetar Capital. The Securities and Exchange Commission hopes to file the lawsuits in the next few months, the Financial Times reports, ending a probe that has already ensnared Citigroup, Goldman Sachs and JPMorgan Chase. All three banks settled the allegations. But the SEC is still looking into a $1.5 billion CDO set up by Merrill Lynch, now part of Bank of America, for Magnetar, as well as another structured by Mizuho Financial Group and rated by S&P. The latter would be the first such case against a rating agency. "It's fair to say we're not at the end," Kenneth Lench, head of structured and new products enforcement at the SEC, told the FT. "There will be a handful of additional cases, I believe, over the next several months."
  • Islamist Jihad Ready for All-Out War With Israel. The Palestinian militant group Islamic Jihad, which traded deadly fire with Israel at the weekend in Gaza, does not expect a subsequent truce to last long and has at least 8,000 fighters ready for war, a spokesman said. Islamic Jihad is the second largest armed group in Gaza, after Hamas, which rules the tiny Mediterranean enclave. The two share a commitment to the destruction of Israel and both are classified as terrorist groups by most Western governments. However, while Hamas has recently spent much of its energy on the business of government, Islamic Jihad has kept its focus firmly on the conflict, gaining in prominence and enjoying significant backing from Muslim supporters, including Iran. "We are proud and honored to say that the Islamic Republic of Iran gives us support and help," Abu Ahmed, the spokesman for Islamic Jihad's armed wing, the Jerusalem Brigades, told Reuters in a rare, long interview. He denied widespread reports that Iran had provided his group with arms and smiled at suggestions it now receives more sophisticated weaponry from Tehran than Hamas. He also declined to comment on rumors that the Jihadists were trained by Iran.
  • Debt Crisis: Live. George Papandreou rejects calls from Greek opposition leader Antonis Samaras to resign, while his plans for a referendum over the bail-out package are scrapped.
  • Chinese Rare Earth Prices Collapse. The rare earth sector in China, which had seen the two biggest domestic rare earth producers, including Inner Mongolia Baotou Steel Rare Earth Hi-Tech (600111), halting production recently in a failed bid to fight falling prices, is now facing a huge selloff, reports Economic Information. With recent media reports that the government is planning to introduce specialized invoices for the rare earth sector in order to better control industry output, curb illegal sales and smuggling activities, small companies which possess rare earths from unidentified sources had begun to dump their inventory of rare earth minerals on the market. This led to the price of such rare earth minerals plunging to 100,000 yuan per ton, compared with the price of more than 300,000 yuan per ton for rare earth minerals from official sources. Market insiders said there were many companies and individuals conducting private mining and extraction of rare earth minerals in order to take advantage of the surge in prices earlier in the year. Due to the lack of proper surveillance and control measures, the rare earth minerals produced by these companies and individuals flooded the market, accelerating the formation of a bubble. The trend of rising rare earth prices began to reverse in July when orders from downstream customers shrunk by half from the second quarter, while two-thirds of the downstream companies either halted production, or were operating at reduced capacity.

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