Today's Headlines

Bloomberg:

• Italy Bond Attack Breaches Euro Defenses, Contagion Worsens. The euro-region’s defenses are being breached. Investors today propelled Italy’s 10-year bond yield to close at a euro-era high of 7.25 percent after the promised exit of Prime Minister Silvio Berlusconi failed to convince them that his country can slash Europe’s second-largest debt burden. The biggest signal yet that the single currency’s third- largest economy is falling prey to its two-year debt crisis forces German Chancellor Angela Merkel, European Central Bank President Mario Draghi and their peers to decide just how far they’re willing to go to defend the euro. “The market is testing the commitment of the euro zone’s stewards,” said Eric Chaney, Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry. “Italy is the real crisis battleground.” At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece, Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and eighth-biggest economy. Berlusconi’s offer to quit has still left his nation struggling to produce a government stable enough to deliver austerity after LCH Clearnet SA raised the deposit it demands for trading Italian securities.
• Trading Italy Comes With Financial Penalty as Bond Yields Surge Above 7%. Europe’s biggest clearinghouse said that customers must put down bigger deposits to trade Italian bonds as concern rises the government will struggle to reduce the world’s third-largest debt burden. The margin needed for Italian bonds due in 7 to 10 years will be raised to 11.65 percent, LCH Clearnet said in a document on its website dated yesterday. That compares with a charge of 6.65 percent announced on Oct. 7. The added costs will be applied at the close of trading today for all bonds, with the amount based on maturity. The deposit for French bonds due in seven to 10 years is 4.60 percent, according to the document. Bond yields across the euro region rose relative to benchmark German bunds following the change by LCH Clearnet.
• Italy May Struggle to Attract Treasury Buyers. Italy may struggle to sell 5 billion euros ($6.8 billion) of Treasury bills tomorrow, after bond yields surged to euro-era records on Prime Minister Silvio Berlusconi’s resignation offer and LCH Clearnet SA demanded more collateral on the country’s bonds. Italy auctions one-year bills tomorrow at 11:00 a.m. in Rome, followed by a sale of five-year bonds on Nov. 14. The auction comes after the country’s 10-year bond yield jumped 57 basis points to 7.33 percent, crossing the 7 percent threshold that led Greece, Portugal and Ireland to seek bailouts. Italy paid 3.57 percent the last time it sold one-year bills on Oct. 11. Similar maturity debt currently yields about 8.41 percent.
• Bank Stress Veers From Stocks as Italy Yields: Credit Markets. Measures of bank stress are diverging from the stock market, showing that credit markets remain concerned that Europe's debt crisis will engulf Italy and threaten the global financial system. A gauge of bank reluctance to lend in dollars, known as the Libor-OIS spread, reached the highest level since July 2009, according to data compiled by Bloomberg.
• Italy's Political Woes Spell 'Nightmare' for BNP, Agricole. BNP Paribas SA and Credit Agricole SA, France's largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk. As the world's biggest foreign holders of Italian public and private borrowings -- with $416.4 billion of such debt at the end of June -- French lenders face collateral damage from the political turmoil that sent Italy's bond yields to euro-era records. Austerity measures to balance Italy's budget are also threatening growth in an economy that has lagged behind the European average for more than a decade, and may hurt the French banks' consumer businesses. “Italy was a dream investment for French banks,” said Christophe Nijdam, a bank analyst at AlphaValue in Paris. “Nobody could have imagined a sovereign crisis touching a G-7 economy at that time. But the political deadlock is turning the dream into a nightmare.”
• Morgan Stanley(MS), Goldman Sachs(GS) Credit Swaps Rise on Italy Contagion Concern. Credit-default swaps on the biggest U.S. banks climbed as yields for Italy, the world’s third biggest sovereign borrower, rose to euro era records and stoked concern that Europe’s fiscal crisis is accelerating. Contracts linked to the debt of Morgan Stanley (MS) jumped 21.1 basis points to 413.8 basis points and those tied to Goldman Sachs Group Inc. surged 17.7 basis points to 330.6 as of 8:52 a.m. in New York, according to data provider CMA. A benchmark gauge of U.S. corporate credit risk jumped by the most in a week. “There is a risk of contagion that sits there in the financial sector,” Scott MacDonald, head of credit and economic research at Aladdin Capital Management LLC in Stamford, Connecticut, said in a telephone interview. “If we have a big tumble here with Italy, it’s going to cause a very steep recession in Europe and it will have ripples through interbank markets.” Swaps on Bank of America Corp. increased 16.4 basis points to 363.4 basis points, and those on Citigroup Inc. added 15.5 basis points to 245.5, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps tied to JPMorgan Chase & Co.’s debt increased 8.5 basis points to 148.7, and those on Wells Fargo & Co. added 8.3 to 153.8, the data show. The average of contracts of the six biggest U.S. banks has eased to 275.9 basis points from 360 on Oct. 4, CMA data show. LCH raising margin requirements “really is not a good sign,” according to MacDonald. “This is something that’s done when people feel that the country or the other party at the other end of the line cannot fund itself, so you’re beginning to raise issues of liquidity,” he said. The drying up of liquidity in international markets is “what gets dangerous,” MacDonald said. “That’s a real problem. That impacts Main Street, and that’s what you had in 2008.” The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 4.8 basis points to a mid-price of 126.1 basis points as of 11:19 a.m. in New York, according to index administrator Markit Group Ltd. The credit swaps index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from 113.4 basis points on Oct. 27, the lowest level in more than two months, on concern that Europe’s debt crisis is spreading.
• Oil Drops on Concern Italy's Turmoil May Derail European Economy. Oil declined for the first time in six days in New York after political turmoil in Italy revived concern that Europe’s debt crisis may continue to spread. Futures fell as much as 1.9 percent after reaching their highest price in more than three months. European equities declined and the euro sank against the dollar as the cost of insuring against Italian default rose to a record. The Energy Department may say today gasoline supplies rose by 1 million barrels, analysts indicated in a Bloomberg News survey. “Further deterioration of the euro-zone crisis has shifted its focus from Greece to Italy, an economy too big to be bailed out,” said James Zhang, a strategist at Standard Bank Plc in London. “It has spurred a general ‘risk off’ in the market.” Crude for December delivery dropped as much as $1.79 to $95.01 a barrel in electronic trading on the New York Mercantile Exchange and was at $95.59 at 1:15 p.m. London time. The contract earlier rose to $97.32, the highest since Aug. 1. Brent oil for December settlement on the ICE Futures Europe exchange in London was down 1.4 percent at $113.40 a barrel, reversing a gain of 0.7 percent to $115.75.
• Computer Sciences(CSC) Drops After Cutting Full-Year Profit Forecast. Computer Sciences Corp., a contractor for U.S. government agencies and companies, fell the most in almost three months after reducing its fiscal 2012 profit forecast amid “federal budget uncertainty.” The shares declined 12 percent to $28.89 at 10:24 a.m. in New York, after dropping 13 percent for the biggest intraday slide since Aug. 10.

Wall Street Journal:

• Goldman(GS) Seeks $1.54 Billion From ICBC Sale. Goldman Sachs Group Inc. is trimming its stake in Industrial & Commercial Bank of China Ltd. through a share sale that could raise up to US$1.54 billion, according to a sales document to institutional investors seen by Dow Jones Newswires Wednesday. The sale, the third by the Wall Street firm in the Beijing-based bank, will cut Goldman's stake to 2.2%, from 2.9%. Goldman at one point had owned as much as 4.9% of China's biggest lender. Goldman's investment has been very profitable on paper, and the planned share sale would be at a price well above the price Goldman paid. But the recent volatility in those shares has contributed to sharp mark-to-market losses at the U.S. bank, which reported a US$1 billion writedown in the value of its stake in ICBC for the third quarter. ICBC's Hong Kong-traded shares tumbled 35% during the period amid the global equities correction. "Goldman Sachs is likely facing mounting pressure from its shareholders to cut its stake in ICBC to avoid the significant mark-to-market volatility," said an analyst an international investment bank, who declined to be named. Analysts also said the share sale reflects increased concerns over the asset quality of Chinese banks, adding that major banks in the West are facing more pressure to shore up capital in the face the global downturn and tighter regulatory requirements.
• Live Blog: Stakes Rise in Italy.
  

MarketWatch:

• Macy's(M) Profit Surges, But Q4 Outlook Weakens.

CNBC.com:

• Occupy Movement Inspires Unions to Embrace Bold Tactics. Organized labor’s early flirtation with Occupy Wall Street is starting to get serious.
• GM(GM) Profit Beats But Outlook Disappoints. General Motors posted a third-quarter profit that fell 15 percent after a loss in Europe but beat expectations. The auto maker also forecast that operating profit in the current quarter would be flat from a weak fourth quarter in 2010. GM(GM 22.51 -10.1%) vowed to slash costs and complexity to shore up margins in a sputtering economy but its fourth-quarter outlook disappointed investors and sent shares tumbling 8 percent Wednesday morning on the New York Stock Exchange.
• Italy's Woes Signal 'Dangerous Phase' in EU Crisis: El-Erian.
  

Business Insider:

• A Look At All The Major Issues In Europe Right Now.
• China's Elite Are Privately Talking About A Revolution.
• Nightmare for MF Global(MF) Customers: They Really Might Not Get Their Money Back.
  

Zero Hedge:

• Did Merkel Just Usher In The Deutsche Mark?
• Fitch Says Italian Insurers Can Not Pass Sovereign Losses => The Time Of ASSGEN, ALZ CDS Has Come.
• Reuters Says Germany, France Exploring Idea Of Core Euro Zone, End Of Existing Structure.
• Some Things You Should Know About China.
  

Financial News:

• Hedge Fund Outflows Worsen. New figures published today suggest outflows from hedge funds were far worse than expected, topping $30bn in September as investors fled from volatile global markets.

Reuters:

• India October Car Sales Suffer Biggest Drop In A Decade. Car sales in India fell 23.8 percent in October, the biggest percentage drop since December 2000, an industry body said, on higher interest rates and vehicle costs and labour unrest at the country's dominant carmaker, where sales fell by half. Rising finance costs and increasing prices drove down demand in Asia's third-largest economy for a fourth consecutive month, hurting carmakers. "The macroeconomic scenario is very weak, and that's obviously impacting the numbers," said Joseph George, auto analyst at Mumbai-based brokerage India Infoline. Sales fell 1.8 percent in September, 10.1 percent in August and 15.8 percent in July, the first slide in three years. The market is driven by a swelling aspirational middle class that mostly relies on bank financing for purchases. The Reserve Bank of India's 25 basis point increase in interest rates last month was its 13th hike since March 2010. "People who have taken a loan to buy a car already have a home loan," said Vishnu Mathur, SIAM director general. "A rise in interest rates will discourage him to take that car loan."
• China October Car Sales Up 1.4%, Weak Sentiment Seen In November. Car sales in China climbed 1.42 percent in October from a year earlier but fell 7.5 percent from the previous month as Beijing raised the bar for vehicles eligible for fuel-saving subsidies. Weak market sentiment will likely spill over to November, a traditional sluggish auto-selling months, followed by a mild rebound in December thanks to year-end promotions that will hopeful attract some buyers back to the showrooms.
• KKR's Kravis Sees Europe as Biggest Concern. Kohlberg Kravis Roberts co-founder Henry Kravis said on Wednesday volatility and uncertainty in global markets have created enormous challenges and threats as financial firms, investors and governments face sovereign debt crisis and a slowdown in major economies. Speaking at a gala dinner at the AVCJ conference in Hong Kong, Kravis said Europe "remains our biggest concern." Kravis, one of the pioneers of the private equity industry, also said it expects high U.S. unemployment to persist for a long time, but he doesn't see the world's largest economy hitting a double-dip recession.
• 2-Year Swap Spread at Widest Since June 2010. The spread on two-year U.S. interest rate swaps over Treasuries moved on Wednesday to its widest since summer 2010 after clearing house LCH.Clearnet SA increased the margin on Italian government bonds at a time when their bonds yields are close to levels deemed unsustainable. The two-year swap spread, which grows with risk aversion, touched 40.50 basis points, a level not seen since June 2010.

Financial Times:

• Italy CDS vs. Bonds: CDS Win! (graphs) Remember a month or so ago when we told you there was evidence that CDS spreads may influence bond yields? “Influence” is a strong word. It was more about which one leads the other. In our previous post, we gave an overview of a study which presented evidence suggesting that when spreads reach distressed levels, the degree to which the CDS spreads lead bond yields increases. One way to examine this is look at the CDS bond basis — a calculation which takes the CDS spread and subtracts the asset swap spread of the bond (ASW). FT Alphaville’s more recent thoughts around this can be summarised by one word: bunga

Le Monde:

• Europe risks entering a "lost decade" because German reticence prevents the euro zone's rescue fund from becoming large enough to both guarantee government debt and refinance banks, investor George Soros said in an interview.

La Stampa:

• Silvio Berlusconi expects Italy to hold national elections in early February and he won't be a candidate for prime minister, citing an interview with the premier.

CCTV:

• China won't change macroeconomic policy control this year, citing Zhou Wangjun, deputy director at the price department of the National Development and Reform Commission.