Monday, November 07, 2011

Today's Headlines

  • Italian 10-Year Yield Surges to Record on Debt, Growth Concern; Bunds Rise. Italian benchmark yields climbed to a euro-era record amid concern the region’s third-largest economy is struggling to manage its debt loads, while growth in Europe is faltering. German two-year note yields were within seven basis points of an all-time low as European finance chiefs meet to discuss the region’s bailout fund. Greek politicians agreed to form a national unity government to win international aid payments. The extra yield investors receive for holding 10-year Italian debt over similar-maturity bunds fell from a euro-era record after Il Foglio said Prime Minister Silvio Berlusconi may step down within “hours.” The rumor was denied. “Ultimately, Italy is a lot bigger issue than Greece for the future of the euro zone, given the size of the bond market,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “You’ve got very high bond yields and they can’t live at this level forever.” Italy’s 10-year bond yield climbed 30 basis points, or 0.30 percentage point, to 6.67 percent at 4:26 p.m. London time, after rising to a record 6.68 percent. That pushed the difference in yield, or spread, over German securities to as wide as 491 basis points. The 4.75 percent security maturing Sept. 2021 dropped 1.92, or 19.20 euros per 1,000-euro ($1,376) face amount to 87.045. The Italian two-year note yield surged 55 basis points to 6.01 percent, after narrowing the spread over 10-year yields to 58 basis points, the least since September 2008. “The ongoing self-fulfilling pessimistic dynamics may ultimately restrict the sovereign’s ability to roll over its liabilities and thus bring its sustainability into question,” wrote Huw Pill, London-based chief European economist at Goldman Sachs Group Inc. “While yields are elevated and confidence is at a low ebb, these conditions weigh on the real economy, which appears to be entering a deep recession.”
  • Italy Leads Surge in European Sovereign Default Risk Amid Berlusconi Concern. Italy led an increase in the cost of insuring European sovereign debt on concern Prime Minister Silvio Berlusconi’s government is collapsing as he faces a parliamentary budget vote tomorrow. Credit-default swaps on Italy climbed 13 basis points to 506 at 1 p.m. in London, approaching the record 534 set Sept. 22, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose five basis points to 328. “With Greece temporarily off the market agenda, we fully expect Italy to fill that void this week,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “The turning point required may be for Berlusconi to do the decent thing and step down.” Credit-default swaps on Belgium climbed six basis points to 286, France rose three to 181, Germany increased one to 87 and Portugal was 10 higher at 1,047 CMA prices show. Italian companies also led an increase in the cost of insuring corporate debt. Swaps on energy company ENI SpA jumped 39 basis points to 189, Compagnie Industriale Riunite SpA, which owns daily la Repubblica, soared 93 to 868 and Finmeccanica SpA rose 37 to 430, CMA prices show. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 11 basis points to 725.5, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.5 basis points to 175 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased six basis points to 251.5 and the subordinated index climbed 10 to 470.
  • EFSF Rescue Fund Said to Revive Bond Sales as Crisis Deepens. The European Financial Stability Facility revived the 3 billion-euro ($4.1 billion) bond sale it pulled last week even as the region's sovereign crisis deepened. The bailout fund will price the bonds due February 2022 to yield 104 basis points more than the benchmark swap rate, according to two people with knowledge of the transaction. The proceeds will be used to help finance the rescue of Ireland.
  • EU Seeks Time on Fund Boost, Demands Cuts in Greece, Italy. European finance ministers pleaded for more time to work out how to boost the region’s rescue fund and counted on budget cuts in Greece and Italy to allay doubts about the response to the debt crisis. Finance chiefs won’t decide tonight how to scale up the 440 billion-euro ($606 billion) bailout fund or approve the next 8 billion-euro installment of Greece’s aid package, Luxembourg Prime Minister Jean-Claude Juncker said. “I don’t expect we’ll come to any decisions today,” Juncker told reporters as he arrived to lead the Brussels meeting. He called talks on using financial engineering to bulk up the rescue fund “insanely complicated.”
  • European Service Sector PMI's are Collapsing. (graph)
  • Gold Rises to Six-Week High on Mounting European Sovereign-Debt Concerns. Gold futures rose to a six-week high as Europe’s escalating sovereign-debt crisis spurred demand for a haven. Italian Prime Minister Silvio Berlusconi’s allies pressured him to step aside after contagion from the region’s fiscal woes pushed the nation’s borrowing costs to euro-era records. Gold jumped to a record $1,923.70 an ounce on Sept. 6 on demand for an alternative to equities and some currencies. “The problems in Europe are not disappearing in a hurry, and there is so much confusion,” Thorsten Proettel of Landesbank Baden-Wuerttemberg in Stuttgart, Germany, said in a telephone interview. “There is a basis for gold to continue to rise.” Gold futures for December delivery gained 1.5 percent to $1,781.70 at 9:53 a.m. on the Comex in New York. Earlier, the metal reached $1,784.20, the highest for a most-active contract since Sept. 22. Before today, the commodity climbed 24 percent this year.
  • Oil Rises to Three-Month High Before Greek Talks. Crude oil increased to a three-month high in New York on the prospect of new leadership in Italy and Greece, two countries that are in the forefront of Europe’s sovereign debt crisis. Crude oil for December delivery rose 78 cents, or 0.8 percent, to $95.04 a barrel at 11:56 a.m. on the New York Mercantile Exchange. The contract reached $95.66, the highest intraday price since Aug. 2. Brent oil for December settlement climbed $1.94, or 1.7 percent, to $113.91 on the London-based ICE Futures Europe exchange. The European benchmark reached $114.88, the highest level since Sept. 15. Oil traders are also awaiting the release of a United Nations report this week that may trigger action against Iran, the second-biggest oil producer in the Organization of Petroleum Exporting Countries after Saudi Arabia. The International Atomic Energy Agency is scheduled to publish its quarterly report on Iran’s nuclear work this week, and inspectors are expected to conclude for the first time that Iran is working toward nuclear weapons. Iran is moving closer to developing a nuclear weapon after a Russian scientist showed Iranians techniques that could make smaller atomic weapons capable of bigger explosions, according to three officials with knowledge of the document who have been briefed on the UN atomic agency’s eight-year probe.
  • Berkshire Hathawy(BRK/A) On Cusp of Oversight by Fed Under Risk Council Criteria. Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) may be on the cusp of getting Federal Reserve oversight under a proposal by regulators that also increases the chances that American International Group Inc. (AIG) and MetLife Inc. (MET) will receive heightened scrutiny. Berkshire had $29.7 billion in credit-default swaps linked to its debt as of Oct. 28, putting it just under a $30 billion threshold proposed last month by the Financial Stability Oversight Council. AIG, now majority-owned by the U.S., had $45.3 billion in swaps written against it, and MetLife, the New York-based insurer, had $32.9 billion. The council, responsible for deciding which non-bank financial firms are systemically important and require Fed oversight, plans to evaluate those that have $50 billion or more in assets and meet any one of five other criteria, including the credit-default swap threshold. Berkshire, AIG and MetLife all meet the asset minimum.
  • Citigroup(C), JPMorgan(JPM), BNP Paribas May Face Top Basel Surcharges. Citigroup Inc., JPMorgan Chase & Co., BNP Paribas SA, Royal Bank of Scotland Group Plc, and HSBC Holdings Plc may face top capital surcharges of 2.5 percentage points, according to a provisional list prepared by global regulators and obtained by Bloomberg News. The list was drawn up as part of plans by the Group of 20 nations to force banks whose failure could damage the global economy to boost their reserves by 1 to 2.5 percentage points above minimum levels agreed by international regulators. Bank of America Corp., Barclays Plc and Germany’s biggest bank Deutsche Bank AG may face surcharges of 2 percentage points, according to the list. “You’re saying by virtue of being a bigger bank, you’re going to have to pay for that,” Joseph R. Mason, a finance professor at Louisiana State University in Baton Rouge, said in a telephone interview. “You’re creating an incentive for big banks to hide even more risk, to get the surcharge reduced.”
  • Lagarde Warns of East Europe Liquidity Squeeze. International Monetary Fund Managing Director Christine Lagarde warned that eastern Europe may face a credit squeeze as western European banks mired in the euro-area debt crisis withdraw liquidity from the region. “Big fault lines” remain in the former communist bloc’s financial systems, adding to its high dependence on exports to western Europe, Lagarde said today in speech at Moscow’s State University of the Ministry of Finance after meeting President Dmitry Medvedev. The risks include a high share of external debt and loans in foreign currencies, both funded by western banks, she said. “If the storm strengthens further in the euro area, emerging Europe as its closest neighbor would be severely hit,” Lagarde said. “This time around, western parent banks, which have been instrumental in keeping those economies afloat, would no longer necessarily be here to sustain growth and the health of those countries.”
  • Banks Cool Move to Easier Loan Terms: Fed. The recent trend of U.S. banks easing restrictions on loan terms cooled in the third quarter, according to a survey of banks' senior loan officers released Monday by the Federal Reserve. Fewer banks eased standards and terms over the past three months, particularly on loans to large and middle-market firms. Many foreign banks actually tightened their requirements for business loans. U.S. banks have also tightened standards on their loans to European banks, according to the Fed survey of 51 domestic banks and 22 foreign banks. Business demand for the third quarter also weakened in the third quarter. On the consumer side, there was a pickup in demand for home loans although this may have been tied to the major rise in refinancing activity.
  • China's Wen: Beijing Wants Real Estate to Correct.
  • Jefferies Dumps Europe. Jefferies Group dramatically reduced its gross exposure to Europe over the weekend. The firm sold off $1.1 billion of both long and short positions on the sovereign debt of Italy, Ireland, Greece, Portugal, and Spain. The firm says that is 49.5 percent reduction in its gross holdings since the close of business Friday.
  • UPS(UPS) Plans 55,000 Holiday Hires, Sees Solid Demand. United Parcel Service said on Monday it plans to hire 55,000 seasonal workers during the holiday shipping season, up from 50,000 a year ago, due to "solid" shopping activity and an increase in global volume.
  • Next Crisis? Why Markets Are Worried About Italy Now. The markets are making it clear they think Italy will be better off financially if the country’s Prime Minister, Silvio Berlusconi, steps down. There’s a reason for that: his repeated failure to deliver on promises to reform the Italian economy.
Business Insider:
Zero Hedge:
New York Times:
Washington Post:
  • IAEA Says Foreign Expertise Has Brought Iran to Threshold of Nuclear Capability. Intelligence provided to U.N. nuclear officials shows that Iran’s government has mastered the critical steps needed to build a nuclear weapon, receiving assistance from foreign scientists to overcome key technical hurdles, according to Western diplomats and nuclear experts briefed on the findings. Documents and other records provide new details on the role played by a former Soviet weapons scientist who allegedly tutored Iranians over several years on building high-precision detonators of the kind used to trigger a nuclear chain reaction, the officials and experts said. Crucial technology linked to experts in Pakistan and North Korea also helped propel Iran to the threshold of nuclear capability, they added.
Investment News:
  • France Unveils New Budget Savings as Growth Slows. France will announce about 8 billion euros of budget cuts and tax hikes for 2012 on Monday, imposing more pain on voters to protect its credit rating and curb its deficit in a gamble for President Nicolas Sarkozy six months from an election. Sarkozy's center-right government says extra savings are urgently needed to keep France's finances from going off the rails, since it cut its growth forecast for next year to 1 percent from 1.75 percent last week.
  • China Fund Official Slams 'Indolence' in Europe. A top official of China's $400 billion sovereign wealth fund has accused Europe of "indolence" and said any Chinese investment in the debt-laden region would be based on financial returns. Jin Liqun, chairman of the board of supervisors of China Investment Corp, slammed the welfare systems of European countries and said the continent must address its own problems to attract outside investment. "If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society," Jin told Al-Jazeera television in an interview broadcast at the weekend. "The labour laws induce sloth, indolence, rather than hardworking." Jin, a former vice finance minister, said Beijing would consider investing in Europe but any decision would be based on likely investment returns. A move to help developed European countries would be a hard sell for Communist Party leaders in a country where millions of people live in poverty and inflation and soaring housing costs are straining household budgets.
Financial Times:
  • IMF Director Christine Lagarde said financial strains have increased sharply and global risks are at a dangerously high level, according to an interview.
Sydney Morning Herald:
  • Booming Echoes of Global Crisis in China. Back in 2008, when the crisis broke, industrial production collapsed around the world. Chinese factories were mothballed and the workers laid off. China’s communist leaders well understood the potential for serious social unrest so they ordered Chinese banks to keep the economy moving by expanding credit. At one stage, the annualised increase in credit growth in China hit 170 per cent, almost certainly the biggest such surge there has ever been. The result was over-investment on a colossal scale: not just in industrial capacity but in property. China is now awash with factories that will struggle to make a profit and with a glut of overpriced housing. Historically, an uncontrollable rise in credit has been the best indicator of a financial crisis, as the west knows from recent experience. Can China buck this trend? Well, it is interesting that many of the arguments along the ‘‘this time it’s different’’ line propounded in the US in the mid-2000s are being trotted out again. The fundamentals justify elevated property prices, just as they did in the US. There is exaggerated confidence in the ability of the People’s Bank of China to finesse a soft landing, just as there was in the ability of the ‘‘maestro’’ Alan Greenspan to prevent the American bubble popping a decade ago. There are booming echoes of the sub-prime crisis: too much leverage, property sold at distressed prices, and evidence of wrongdoing.

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