Evening Headlines
Bloomberg:
- Rajoy Holds Bank Talks With EU Leaders as Fitch Downgrades Spain. Spanish Prime Minister Mariano Rajoy said he's talking to his European peers about how to shore up the country's banks as Fitch Ratings cut Spain's credit grade to within two steps of junk. Rajoy said he's spoken to colleagues in the European Union and that, once he has estimates from international consultants on banks' capital needs, the government will find "the formula for the financing of the capitalization of the banking sector." He will take the decision that "best defends the interests of Spaniards," the premier told reporters in Madrid yesterday. Rajoy spoke minutes before Fitch downgraded Spain by three levels to BBB, within two steps of non-investment grade. Fitch said the cost to the state of shoring up banks may amount to as much as 100 billion euros ($126 billion) in the worst case, compared with its previous estimate of 30 billion euros, as Spain will remain in recession next year. Spain is trying to overcome German opposition to allowing the euro region's bailout funds to sidestep governments and recapitalize lenders directly. The Treasury's access to capital markets is narrowing as it increasingly depends on domestic banks to buy its bonds, reducing the government's ability to backstop struggling lenders.
- Full-Force Bank Aid Is Spain’s Only Hope, Industry Warns. Spain’s banks need urgent aid plugged directly into their balance sheets and Europe can no longer allow itself to deploy half measures, according to the leaders of some of the world’s biggest banking and finance groups. “It must be done with full magnitude,” Christian Clausen, the president of the European Banking Federation and chief executive officer of Nordea Bank AB (NDA), said in an interview in Copenhagen yesterday. Recapitalizing Spain’s banks has become the key hurdle that European policy makers need to overcome, and fixing the turmoil in the nation’s financial system would calm markets, he said. Bankers are stepping up their pleas for action as Spain’s financial crisis risks engulfing the euro area’s fourth-largest economy and policy makers remain divided on how best to tackle the issue. The European Commission last month lent its support to proposals to provide a direct capital infusion to Spain’s banks, a model Germany opposes in favor of aid with fiscal austerity strings attached. Spain’s banks are buckling under the weight of 184 billion euros ($231 billion) in real estate loans that the Economy Ministry has characterized as “problematic.” The country’s lenders may need as much as 100 billion euros in support, Antonio Lopez Isturiz, a leader of the European People’s Party, said yesterday in an interview with broadcaster TVE.
- Euro Breakup Precedent Seen When 15 State-Ruble Zone Fell Apart. It was a currency union of 15 states in 1992. Two years later, as budget deficits spiraled out of control, hyperinflation reigned and economies shriveled, just two members of the Soviet Union’s ruble zone were left. As Greek politicians threaten to break terms of the country’s bailout with international lenders, Spain calls for financial help, and northern European nations balk at funding the south, historians are asking whether the euro region is about to face a similar exodus. They take a longer view of the European Union’s crisis than economists, and it’s much bleaker.
- Europe Crisis Key Risk to U.S. Lies in Emerging Markets Impact. Porcelli believes Europe’s troubles may hit U.S. exports in a more roundabout way. Emerging markets such as Brazil, Mexico, and China have accounted for the bulk of U.S. export growth over the last few years. Since the recession began in 2007, exports to Brazil have increased by more than 70 percent. Emerging market countries get the majority of their lending from European banks. So if Europe continues to deteriorate and its financial system tightens, some emerging markets could lose a key source of financing, which in turn could squeeze their ability to keep buying U.S. goods. “That’s a very important aspect that can’t be overlooked,” says Porcelli. Europe’s mess also poses significant supply-chain risk to U.S. manufacturers. According to Kris Bledowski, a senior economist at the Manufacturers Alliance for Productivity and Innovation, even if American companies are not shipping a lot of goods to Europe, it’s an important source of components, such as car engines and plastic parts, to many U.S. manufacturers.
- China Bank Shares Fall on Concern New Rate Rules May Cut Profit. China's interest-rate cut and the relaxation of lending and deposit rules will reduce 2012 profit at the country's four largest banks by about 4%, Nomura Holdings Inc. estimated.
- China’s Ship Yards Fail to Win Orders as Greek Owners Shun Loans. Chinese ship yards are failing to find new work 20 months after Premier Wen Jiabao sought to encourage ordering by pledging $5 billion of loans to Greek vessel owners, who control the world’s biggest merchant fleet. Almost 90 percent of China’s ship yards received no orders this year and about 28 percent have secured none since the end of 2009, Clarkson Plc (CKN), the world’s largest shipbroker, said May 16. Shares of China Rongsheng Heavy Industries Group (1101), China’s largest non-state builder, fell 55 percent in the past year, valuing the company at HK$13.6 billion ($1.8 billion). Owners are refraining from new orders after rates plunged and the combined capacity of oil tankers, container ships and commodity carriers reached a record. Earnings from the industry averaged the lowest since 1999 so far this year, according to the ClarkSea Index, a measure of freight rates for different vessel types published by Clarkson.
- China Near Recession Amid Rate-Cut 'Panic,' Asianomics Says. China's first interest rate cut since 2008 and loosed controls on lending and deposit rates are a "sign of panic" and will not do anything to boost the economy, Jim Walker, chief economist at Asianomics Ltd. said. "The timing is a surprise but I suspect it demonstrates just how weak the Chinese economy really is," Walker said today. "We believe that it is pretty close to recession." The central bank's move may backfire if it "further dissuades people from putting money into savings and time deposits," Walker said. "If anything, banks will need to raise their lending rates because their cost of funds is going up."
- Commodities Tumble Most in a Week as Slowdown to Reduce Demand. Commodities slumped the most in a week on concern a slowdown in China and the U.S., the world’s two biggest economies, will cut demand. The Standard & Poor’s GSCI Spot Index dropped as much as 1.7 percent to 581.73 and was at 584.19 by 11:34 a.m. Singapore time.
- Syria Could Unite Russia and China Against the U.S. The massacre of more than 100 men, women and children at Houla has buried the peace plan for Syria promoted by former United Nations Secretary General Kofi Annan. Soon, the regime and its opponents will get to fight out their civil war unobstructed. When that happens, Syria will present the U.S. and Russia with choices that have implications far beyond the fate of a single Middle Eastern dictator, including stronger Russia-China cooperation to counter U.S. foreign policies.
- Capital Rule Is One Size Fits All. The Federal Reserve shocked bankers Thursday by approving a proposal that would force even the smallest lenders to comply with the elaborate international bank-capital standards known as Basel III. The draft requirements would apply to all 7,307 U.S. banks, according to a proposal circulated by the Fed. Many bankers had expected regulators to exempt some small lenders from the new rules, which are aimed at shoring up the biggest global banks whose troubles fueled the financial crisis.
- Dish(DISH) Chief: TV Needs to Change. Dish Network Corp. Chairman Charlie Ergen said a new ad-skipping feature that has infuriated major broadcast TV networks is a "competitively necessary" response to the explosion of cheap Internet video.
- Backdoor Macau Deal Was Proposed to Sands(LVS). Toward the end of 2009, casino operator Las Vegas Sands Corp., struggling under $11 billion of debt and strapped for cash as the weak economy ravaged its business, received a surprising offer that could have relieved some of its woes. The offer came in emails from an outside legal adviser with political connections in China and Macau, the world's biggest gambling market, where the company's local unit was going public.
- Europe's vulnerable East Braces for Possible Greek Exit. Authorities in Europe's emerging economies are girding for the possibility of serious market turmoil in the event of a Greek exit from the euro zone, which could drive down currencies, tighten credit and slam the brakes on export-driven growth.
- Bernanke's Cliffhanger. The 2013 fiscal danger is a tax increase, not spending cuts.
- It Is Clear Now That China Is Headed For A Hard Landing.
- Apple(AAPL) Just Got A Patent That Will Help It Crush The Ultrabook Competition.
- This Is The Worst Job Market For Law Grads In Two Decades.
- Your Complete Guide To The Crisis Going On In Spain.
- China Just Made A Massive Play For Afghanistan's Resources.
CNBC:
- China Faces Stimulus Dilemma. With growth slowing much more than expected and an array of indicators pointing south, Beijing has been forced to act to prop up activity in the world’s second-largest economy. But many economists and analysts from inside and outside the government are warning of the dangers involved in a fresh round of stimulus and easy credit that could reinflate a property bubble and exacerbate the stark structural imbalances already present in the Chinese economy.
- Zell: You Can't Make Business The Bad Guy. (video)
- China's Sovereign Wealth Fund Cuts Europe Exposure. China's $410 billion sovereign wealth fund China Investment Corp has cut its stock and bond investments in Europe as it sees rising risks of a euro zone breakup, the fund's chairman was quoted as saying in an interview published on Thursday.
IBD:
NY Times:
- Making Sense of Morgan Stanley's(MS) Derivatives Moves. As regulators and lawmakers take a closer look at derivatives, Morgan Stanley is trying to figure out what to do with $50 trillion of such financial instruments. Some of the biggest players in derivatives, including JPMorgan Chase and Citigroup, have long warehoused nearly all of their derivatives in bank subsidiaries that rely on federally insured deposits to fund themselves. Morgan Stanley does not — and it could weigh on profits in an already lackluster environment.
- Madrid Leans on Its Troubled Banks to Buy Its Bonds. While the Spanish government was able to sell all the bonds it wanted to on Thursday, it mostly sold to the usual buyers: Spain’s increasingly fragile banks.
LA Times:
- Netflix(NFLX) Joins Redbox to Defy Disney's(DIS) New DVD Policy. Netflix is joining Redbox in defying Walt Disney Studios' attempt to stop DVD rentals for four weeks after the discs go on sale. Disney recently decided not to provide its discs to the nation's largest rental companies until 28 days after they hit store shelves, adopting a policy similar to those of 20th Century Fox, Universal Pictures and Warner Bros. (Warner's so-called "window" is even longer: 56 days).
- Ed Rendell: Obama ‘hurt by being a legislator only’ before presidency. Former Pennsylvania governor Ed Rendell, who has been on something of a tear when it comes to playing the role of the Obama administration’s chief Democratic antagonist, made his latest swipe at the president Thursday morning in an interview on CBS’s “This Morning.”
- JPMorgan(JPM) trading loss shows danger in bank size -Volcker. Former Federal Reserve Chairman Paul Volcker said JPMorgan Chase's recent multibillion-dollar trading loss may show that the nation's largest banks are too big to manage. JPMorgan revealed last month that its London office had executed a failed hedging strategy that has so far produced at least $2 billion in trading losses. The news has rattled Wall Street and Washington and raised questions about whether banks are still taking too many risks following the 2007-2009 financial crisis. "Maybe this JPMorgan thing is an illustration that these(banks) are really too big to manage," Volcker said on Thursday at an American Bar Association event at Columbia University in New York.
- Stock and bond funds see outflows -Lipper.
- China's Biggest Banks Raise Deposit Rates. China's top five banks said on Friday they have raised deposit rates to 3.5 percent, above the benchmark level, less than a day after China took a step towards liberalising its interest rate market. The websites of all five banks showed they were offering 3.5 percent deposit rates, higher than the benchmark 3.25 percent level. Under China's new banking rules that came into effect on Friday, banks can offer deposit rates of up to 110 percent of benchmark rates.
- Is China embracing CDOs? Readers of The Big Short will recognise this once-fashionable trick of financial engineering: 1) Take some debt rated BBB, BB+, and A-. 2) Bundle it together. 3) Get it rated AAA 4) Flog it to investors. Recent reports from China suggest that this technique is beginning to catch on among the most cash-strapped of businesses: SMEs. The South China Morning Post reports:
- US banks face $60bn capital shortfall. The 19 largest US banks are at least $50bn short of meeting new capital requirements under the Basel III accords, according to rules proposed by the Federal Reserve. The biggest among them would probably need billions of dollars more by the 2019 deadline to comply fully with the rules. Smaller US lenders are about $10bn short of the requirements, the Fed said on Thursday.
- Spain too big for EU rescue fund as China recoils. As Spain edges closer to a full sovereign rescue, economists have begun to doubt whether the EU bail-out machinery can raise such large sums funds at viable cost on global capital markets.
- British banks among the most unprofitable in the world. The British banking industry was the second most unprofitable in the world in 2011, according to an analysis of lenders in major economies.
- Debt crisis: Fitch downgrades Spain by three notches and blames European leaders for 'absence of a credible vision' for euro. A serious mishandling of the debt crisis by European leaders led Fitch to axe Spain’s credit rating by three notches and issue a warnings on the stability of country’s banks, debt levels and economy.
- Debt crisis webchat: put questions to Ambrose Evans-Pritchard.
- Don't Expect Any Help From Us, Bernanke Tells Eurozone Leaders. Ben Bernanke, the chairman of the Federal Reserve, sent a message of "you're on your own" to European leaders yesterday, telling them there were no policy tools or technical steps the US central bank could take to help ease the pressures in the eurozone. Instead, in testimony to domestic lawmakers on Capitol Hill, he said the Fed would monitor American banks to make sure any sudden worsening of the euro crisis did not infect the US financial system. And he promised the Fed stood ready to prop up demand in the US if Europe pushes the wider global economy into recession. "The risks have waxed and waned. The crisis has been going on for more than two years and there have been periods of greater and lesser intensity," he said. "Certainly it is at a point where it is important for European leaders to take additional steps to contain the problem."
- Larry Summers: Europe Crisis Hit By 'realism failure'. "There are also very large psychological effects," he said, "and the sense that a large part of the world economy could encounter really grave financial problems is a source of uncertainty. "When people are uncertain, they wait, and that means they don't spend, and in a demand-short economy, that can be a serious problem. "Europe is a threat not only to itself but to the global economy." Mr Summers tells me he can understand that European leaders want to maintain confidence, but adds: "Sometimes there's nothing more demoralising than being told that the emperor's well-clothed when you can see for yourself that the emperor is naked. "They are errors that tended, in the name of maintaining confidence, to seek to perpetuate illusion."
- Prime Minister Yoshihiko Noda will hold a press conference Friday evening to make a public appeal for the restart of nuclear reactors at a Kansai Electric plant in Fukui prefecture.
Jefferies:
- Rated (JACK) Buy, target $31.
- Asian equity indices are -1.50% to -.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 194.5 +.5 basis point.
- Asia Pacific Sovereign CDS Index 157.25 -6.0 basis points.
- FTSE-100 futures -.60%.
- S&P 500 futures -.57%.
- NASDAQ 100 futures -.40%.
Earnings of Note
Company/Estimate
- (FGP)/.21
8:30 am EST
- The Trade Deficit for April is estimated at -49.5B versus -$51.8B in March.
10:00 am EST
- Wholesale Inventories for April are estimated to rise +.4% versus a +.3% gain in March.
Upcoming Splits
- None of note
Other Potential Market Movers
- The ECB's Nowotny speaking and the (CHK) shareholder meeting could also impact trading today.
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