Thursday, November 10, 2011

Today's Headlines

  • ECB's Policy Makers Say They Can't Do Much More to Stem Financial Crisis. European Central Bank policy makers said the bank can’t do much more to stem the region’s sovereign debt crisis, suggesting they are reluctant to significantly ramp up bond purchases to lower Italy’s borrowing costs. “Not much more can be expected from us, it’s up to the governments,” Governing Council member Klaas Knot, who heads the Dutch central bank, told lawmakers in The Hague today. Three other policy makers have also publicly rejected calls for more ECB intervention and two further officials, who spoke on condition of anonymity, said the central bank has no plans to make its purchase program unlimited. Bond yields in Italy, the third-largest economy in the 17- nation euro region, have surged above the 7 percent level that led Greece, Portugal and Ireland to seek bailouts from the European Union and International Monetary Fund. With politicians still unable to find a solution to the debt crisis that has raged for two years, the ECB is being asked to step into the breach to hold Europe’s monetary union together. The central bank, which cut interest rates last week, lends banks as much cash as they need and has announced a second round of covered-bond purchases. That 40 billion-euro ($55 billion) program started yesterday, said two people familiar with the matter.
  • French Bond Risk Rises to Record as Crisis Spreads Beyond Italy. The cost of insuring against default on French government debt rose to a record on concern Europe’s leaders are failing to contain the region’s deficit crisis. Credit-default swaps on France rose eight basis points to 204, according to CMA prices at 12 p.m. in London, surpassing the record closing price of 202 set Sept. 22. The Markit iTraxx SovX Western Europe Index increased for a fifth day, climbing four basis points to a five-week high of 345. The European Union predicted that the French economy will grow more slowly next year than President Nicolas Sarkozy projects and called for “close vigilance” on the nation’s budget deficit. European Central Bank Governing Council member Klaas Knot said the bank, which was said to purchase Italian and Spanish bonds today after a rout of the securities yesterday, can’t do “much more” to stem the debt crisis. “France is starting to become more like a credit than a government bond,” said Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London. “As Italy goes, so will the rest of the EU. It totally depends on Italy.” Swaps on Italy fell eight basis points to 563 and Spain declined 11 to 420, after earlier rising to records, CMA prices show. Italy sold one-year bills at an average yield of 6.087 percent today after 10-year note yields surged past the 7 percent level at which Greece, Ireland and Portugal sought international bailouts. The additional yield investors receive for holding 10-year French, Spanish, Austrian and Belgian bonds instead of benchmark German bunds rose to euro-era records earlier. The European Commission predicts that France’s debt burden will climb to almost 92 percent of GDP in 2013, including the support it’s giving to other European countries and to its banks. Contracts on the Markit iTraxx Crossover Index of credit- default swaps on 50 companies with mostly high-yield credit ratings increased 4 basis points to 755.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 1.25 basis points to 183.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 7.5 basis points to 282.5 and the subordinated index was 13 higher at 518.
  • Recession Risk Grows for Euro Region as Commission Reduces 2012 Forecast. The European Commission cut its euro-region growth forecast for next year by more than half and said it sees the risk of a recession as leaders struggle to contain the fiscal crisis. Gross domestic product may grow 1.5 percent this year and 0.5 percent in 2012, the Brussels-based commission said today. It had earlier projected the 17-nation region to expand 1.6 percent and 1.8 percent this year and next, respectively. In 2013, the economy may expand 1.3 percent, the commission said. The euro-area economy is edging toward recession as governments are seeking ways to end the turmoil that has rattled global equity markets. In Italy, Prime Minister Silvio Berlusconi failed to convince investors that his country can slash the region’s second-largest debt burden. The commission said the risk of an economic contraction is “not negligible” and identified the fiscal crisis among the main threats. “The outlook is unfortunately gloomy,” Olli Rehn, the EU economic and monetary affairs commissioner, told reporters in Brussels today. “The forecast is in fact the last wake-up call. The recovery has now come to a standstill and there’s the risk of a new recession unless determined action is taken.”
  • Derivatives Erase October Optimism on Stresses: Credit Markets. October's optimism that Europe would solve its sovereign debt crisis has evaporated in the bond market. Credit-default swaps tied to an index of European banks from Italy's UniCredit SpA to London-based HSBC Holdings Plc are at the highest level since Oct. 5. In the U.S., a benchmark index of the cost to protect corporate debentures from losses rose yesterday the most in almost seven weeks. Interest-rate swap spreads, a gauge of stress in credit markets, are the widest in 17 months. Waning confidence threatens to make it more expensive for companies to raise financing, after bond returns soared last month by the most in more than two years as European leaders cobbled together a rescue package for Greece. Bondholders are demanding euro-era record yields to hold notes from Italy, the third-most indebted nation, with $2.15 trillion of debt. That compares with $469 billion for Greece. "People were kidding themselves to think that we were out of the danger zone," said David Nowakowski, credit strategist at Roubini Global Economics LLC in London. "The spillovers to the rest of Europe, through the economies, contagion effects in international markets, the damage to banks holding Italian bonds, would be much more severe for Italy than for Greece." Credit-default swaps, which typically rise as investor confidence deteriorates and fall as it improves, climbed yesterday for the biggest U.S. banks. Contracts linked to the debt of Morgan Stanley and Goldman Sachs Group Inc., both of New York, reached the highest levels in at least three weeks.
  • Crude Oil Increase to Three-Month High. Crude for December delivery climbed $2.02, or 2.1 percent, to $97.76 a barrel at 1:44 p.m. on the New York Mercantile Exchange. Earlier, it touched $98.18, the highest intraday level since Aug. 1. Prices have risen 7 percent this year. Futures dropped for the first time in six sessions yesterday. Brent oil for December settlement gained $1.09, or 1 percent, to $113.40 a barrel on the London-based ICE Futures Europe exchange.
  • Copper Drops to Two-Week Low as European Union Cuts Forecasts for Growth. Copper fell to the lowest price in more than two weeks as the European Union cut its growth forecast for next year by more than half amid the struggle to contain the debt crisis. Gross domestic product may expand 1.5 percent this year and 0.5 percent in 2012, the European Commission, the EU’s executive arm, said today. That’s down from projected expansion at 1.6 percent and 1.8 percent, respectively. Copper also dropped as China’s exports climbed at the slowest pace in almost two years, signaling cooling growth.
  • U.S. Wind Market May 'Fall Off a Cliff' in 2013, Vestas CEO Says. The U.S. wind turbine sales may dry up in 2013 unless lawmakers extend tax credits supporting the market beyond the end of next year, said Vestas Wind Systems A/S Chief Executive Officer Ditlev Engel. The so-called production tax credit, or PTC, provides an incentive of 2.2 cents a kilowatt-hour for electricity from wind applied to operators' tax bills. In the past, the termination of such policies has shown markets can "disappear," Engel said today by phone interview. "Our concern is that if the PTC is not extended, history has shown us that these markets tend to fall off a cliff," Engel from the company's headquarters in Aarhus, Denmark. "We should prepare ourselves for it."
  • U.S. Budget Deficit Narrowed to $98.5 Billion in October. The U.S. government’s budget deficit narrowed in October, the first month of the new fiscal year, reflecting a calendar-related reduction in spending and an increase in tax receipts. The $98.5 billion shortfall is smaller than the $140.4 billion deficit posted in the same month last fiscal year, according to Treasury Department data issued today in Washington. Economists projected a $102.5 billion gap, according to the median estimate in a Bloomberg News survey. The narrowing comes as a 12-member congressional supercommittee of Democrats and Republicans tries to find $1.5 trillion in savings over the next decade before an approaching deadline triggers spending cuts. America’s budget deficit was 8.7 percent of gross domestic product in fiscal 2011, the third- highest since 1945. “There is precious little progress being made on cutting back the mountain of red ink,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “If the supercommittee is going to be the bust that everyone is talking about, the U.S. could be saddled with increasingly hard-to-finance deficits from now on.” Today’s report showed federal spending dropped 8.7 percent in October from a year earlier to $261.5 billion. Some $31 billion in recurring benefit payments that would have been made in October were instead shifted to September because Oct. 1 fell on a Saturday, Treasury said. Without this shift in payments to the previous month, the October deficit would have been $129 billion.
Wall Street Journal:
  • SEC Probes Nabors's Executive Perks, Jets. Nabors Industries Ltd., the oil-drilling contractor whose chairman is set to receive $100 million for relinquishing his chief-executive title, said Wednesday that the Securities and Exchange Commission has opened an investigation into perks received by its executives, including personal flights on company jets.
  • Debt Crisis: Live Blog.
  • Employers 'Scared' of Taking on Permanent Staff. Employers burnt by the cost of laying off workers in the last crisis are uneasy about taking on permanent staff amid faltering economic growth putting pressure on the current workforce, a staffing industry executive said on Thursday.
Business Insider:
Zero Hedge:
Bespoke Investment Group:
LA Times:
  • Prospect of Online Sales Tax Grows. Momentum builds after Amazon's deal with California. A bipartisan group of U.S. senators introduces the Marketplace Fairness Act to let states collect sales taxes from most Internet retailers.
  • Italian Banks Risk Becoming Dependent on ECB. The latest hike in how much it costs banks to raise funds using Italian bonds as collateral may be the last straw on the back of Italian lenders, pushing them to the point where they become dependent on loans from the European Central Bank. If Italy fails to pursue reforms that boost growth and cut debt and euro zone policymakers don't take measures that win Italy time to implement them, bond yields are likely to rise further prompting another increase in repo margins. That will again lead to a rise in bond yields and result in a spiral similar to what happened in Greece and Ireland, countries whose banks are now dependent on ECB support via its unlimited euro liquidity tenders. "If there is no improvement in the secondary (bond) market it is inevitable that you see more damage from further increases in (repo margins)," said Nikolaos Panigirtzoglou, global market strategist at JPMorgan. "Italian banks are shut out of unsecured markets. The big question right now is are the political changes that are being engineered at the moment enough to reverse the damage? My guess is that the damage to a large extent is not reversible." It may not be long before the snowball starts to roll.
  • Jobless Claims Fall 10,000 in Latest Week. New U.S. claims for unemployment benefits declined for the second straight week, to the lowest level since the first week of April, the Labor Department said on Thursday. Initial claims for state unemployment benefits fell 10,000 to a seasonally adjusted 390,000 in the week ended November 5, slightly below the 400,000 that analysts polled by Reuters had expected. The four-week moving average of claims, considered a better measure of labor market trends, fell to 400,000 from 405,250 the prior week, which was revised up from the previously reported 404,500.
Financial Times:
  • Italian CDS Curve Inverts (and who made money?) It’s not every day the second-biggest name in the CDS market goes from a healthy shape to a distressed one. But Wednesday was that day, thanks to Italy.

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