Friday Watch

Evening Headlines
Bloomberg:

• Mursi Risks Rift With U.S. or Voters as Islamists Rally. Anti-American protests in Cairo are pushing President Mohamed Mursi into a balancing act where a misstep risks the loss of his core Islamic constituency or a rift with the U.S., Egypt’s longtime ally and financier. In Cairo, where protesters scaled the embassy walls that day and tore down the U.S. flag, Mursi’s Muslim Brotherhood has called for a mass rally today to denounce the movie. More violence or anti-U.S. sentiment would strain ties at a time when Mursi is seeking a $4.8 billion International Monetary Fund loan to revive an economy stalled since last year’s uprising. The U.S. is the IMF’s biggest shareholder. A breach with Washington could hurt Egypt’s push for influence on issues such as the conflict in Syria, even if it might win him some regional support. Yet turning against the Islamist protesters risks alienating the voters who made Mursi Egypt’s first democratically elected leader. “This is the first real test for Mursi,” said Khalil al- Anani, a political analyst at Durham University in the U.K. Anything other than a strong reaction against the Muhammad film “would absolutely damage his public image in Egypt. At the same time, he cannot go so far against the U.S.,” al-Anani said. “At some point, he will have to sacrifice one of these, and I don’t think he’ll sacrifice his internal image.”
• Schaeuble Cautions Spain Against Aid Bid as Cyprus Talks Begin. German Finance Minister Wolfgang Schaeuble discouraged Spain from seeking a full international bailout, saying another request for outside aid risked a new round of financial-market turmoil. “I’m not in the camp that says ‘take the money,’” Schaeuble, 69, said in an interview in Berlin when asked about moves to press Prime Minister Mariano Rajoy’s government to seek more aid. Spain “would be daft” to ask for a bailout on top of the 100 billion euros ($130 billion) for its banks if it didn’t need it, he said. European finance ministers gathering for a two-day meeting beginning in Cyprus today are at odds over Spain, as Rajoy stalls on whether to request more aid from euro-area rescue funds and win European Central Bank help to lower government borrowing costs. France is pressing Spain to seek more help to contain the euro-area crisis three years after it emerged in Greece, three people familiar with the negotiations said this week.
• QE3 Adds to Hong Kong Asset Bubble Risks, HKMA’s Chan Says. Hong Kong’s central bank head said a third round of quantitative easing by the U.S. Federal Reserve risks pushing up property prices that have already surpassed their 1997 peak, and may prompt the city to adopt more cooling measures. “The launch of QE3 and the short-term improvement of the European debt crisis will increase the risk of overheating in Hong Kong’s asset market,” Norman Chan, chief executive of the Hong Kong Monetary Authority, told reporters at a briefing today. “We will further introduce more counter-cyclical measures when appropriate.”
• Investor Worry: Bank Failure in Europe or China. (video) Philadelphia Trust's Michael Crofton and ICAP Corporates' Ken Polcari speak with Bloomberg's Matt Miller about the concerns that keep them up at night as investors.
• Oil Rises to Four-Month High on Stimulus, Middle East. Oil rose to the highest price in four months on speculation economic stimulus measures by the U.S. will boost fuel demand and concern unrest in the Middle East and North Africa will disrupt supplies. Oil for October delivery gained as much as 76 cents to $99.07 a barrel in electronic trading on the New York Mercantile Exchange and was at $98.96 at 11:10 a.m. Sydney time. Brent oil for November settlement rose 49 cents, or 0.4 percent, to $116.37 a barrel on the London-based ICE Futures Europe exchange.
• Gold Near Highest in More Than Six Months as Fed Announces QE3. Gold for December delivery on the Comex in New York traded little changed at $1,771.30 an ounce at 6:04 a.m. in Singapore time, after topping $1,770 yesterday for the first time since February as the Federal Reserve announced a third round of so-called quantitative easing.
• Steel Drop Prompts Most Short-Term Debt Since 2009: China Credit. China's largest steel mills are resorting to the most short-term funding in at least three years as slumping profits make it harder to repay debt. Listed steelmakers had 35% more outstanding loans maturing within 12 months on June 30 than a year earlier, according to a Sept. 4 report from China International Capital Corp. The number reporting net negative cash flow rose to 21 from 10, the Beijing-based investment bank said. This is a bad sign for the steelmakers, as they may be forced to tap short-term loans to pay off longer-term debt," said Luo Wei, an analyst at CICC.
• Japan Sees a 20% Drop in China Tourists as Islands Spat Heats Up. Chinese visitor numbers to Japan may decline as much as 20 percent because of a dispute over uninhabited islands in the East China Sea, according to the Japan National Tourism Organization. “We are very worried,” Mamoru Kobori, the tourism agency’s overseas marketing manager, said by phone yesterday. “There will surely be an impact on the numbers and the only question is how much -- 10 percent or 20 percent is possible.”
• Chinese Ships Enter Waters Near Islands Disputed With Japan. Six Chinese government ships entered what Japan sees as its territorial waters close to islands disputed by the two nations, heightening nationalist sentiment in a standoff that damping trade and tourism. Two ships have since left the area and the other four are being urged to do so, Japan’s coast guard said in a statement. Another two vessels were seen in nearby waters, Japanese broadcaster NHK reported. China’s official Xinhua News Agency said two Chinese surveillance fleets are patrolling around the islands, which are in areas rich in gas and fishing grounds. “The fact that there has been an incursion into our territorial waters is extremely regrettable,” said Chief Cabinet Secretary Osamu Fujimura. “We are strongly urging the Chinese side to withdraw immediately.”

Wall Street Journal:

• Mideast Turmoil Spreads. The Libyan government arrested four people Thursday in connection with the deadly attack on the American consulate Tuesday night as Libyan and U.S. officials mounted a manhunt for others believed to be involved. Protests spread across the region, breaking out in Yemen and Iran and once again in Cairo, where Egyptian police in riot gear beat back crowds of young men in a street filled with tear gas outside the U.S. Embassy. In Yemen's capital, San'a, hundreds of young men breached the outer security rings of the fortified U.S. Embassy. Evidently inflamed by a video mocking the Prophet Muhammad, one young man in Yemen shouted, "Troops will not stand in our way in defending the honor of our Prophet.'' Still, there were indications some demonstrators were using the protests to put pressure on their countries' governments as much as to assail the video.
• Doctor, Hospital Deals Probed.
• Home Depot(HD) to Shut Seven China Stores, Take $160 Mln Charge.
• Trades After 2008 Paulson Meeting Probed.

CNBC:

• Vote Now: Did the Fed Get It Right?
• Japan Cuts Economic View Again on Weak Global Demand. Japan's government cut its assessment of the economy for the second straight month and warned that growth is pausing, signaling growing concern over the pain from the global slowdown and keeping the central bank under pressure to provide further monetary stimulus.
• Foreign Central Banks' US Debt Holdings Rise. The Fed said its holdings of U.S. securities kept for overseas central banks rose by $1.777 billion in the week ended Sept. 12, to stand at $3.575 trillion. The breakdown of custody holdings showed overseas central banks' holdings of Treasury debt rose by $1.826 billion to stand at $2.875 trillion. Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years and own more than a quarter of marketable Treasuries. China and Japan are the biggest two foreign holders of Treasurys.

Business Insider:

• Central Banks Helped Contribute To The Financial Crisis.
• Michael Lewis' Profile Of Obama Reveals Worrisome Details Of His Decision-Making In Libya.

Zero Hedge:

• The Punchline In His Own Words: Bernanke Advocates Blowing Asset Bubbles As The Antidote To Depression.
• The Fed's Balance At The End Of 2013: $4 Trillion. (graphs)
  
• What Does A $4 Trillion Fed Balance Sheet Mean For Gold And Oil. (graphs)

Nasdaq.com:

• Werner(WERN) Q3 Outlook Misses View - Quick Facts. Werner Enterprises, Inc. (WERN) Thursday forecast third-quarter earnings in a range of $0.33 to $0.36 per share. On average, 25 analysts polled by Thomson Reuters currently expect the company to earn $0.44 per share for the third quarter. Analysts' estimates typically exclude special items. The company said the third-quarter earnings are being affecting by several factors including rising fuel prices and higher operating expenses.

Rasmussen Reports:

• Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Thursday shows Mitt Romney attracting support from 47% of voters nationwide, while President Obama earns 46% of the vote. Three percent (3%) prefer some other candidate, and five percent (5%) are undecided.

Reuters:

• S&P: China's Top Corporates Have Significant Financial Risks. Standard & Poor's Ratings Services cautions that the financial risks of the top 107 companies in China could deteriorate as economic growth slows.
• ETFs fuel best equity fund inflows in a year -Lipper.
• Moody's cites negative credit factors in Chicago teachers strike. A teachers strike against the Chicago Public Schools is a negative credit factor for the district, which may have to offer budget-busting salary increases to reopen schools, Moody's Investors Service said on T hur sday. "The magnitude of the union's demands and the disruption caused by the walk-out of 29,000 employees are credit negatives for CPS," the credit rating agency said in a report.

Telegraph:

• The Arab Spring turns sour for America. The murder of the US ambassador to Libya is a shocking reminder to Barack Obama that helping to overthrow dictators does not guarantee stability in the region.

Bild:

• Georg Fahrenshon, president of German DSGV savings banks association, tells Bild he rejects European Commission plans for a banking union with cross-border deposit guarantees because it may threaten German savings. Fahrenschon said "it must not be possible that distressed banks from abroad are saved with money we hold ready to protect the deposits of our clients."

Financial Post:

• Quantitative easing last thing U.S. needs. Why inflate asset prices right after a bubble? The Fed pursued two previous rounds of QE in which it purchased various long-term bonds. It is also continuing a second round of a related exercise called Operation Twist, under which it sells short-term assets to buy long-term assets. The net effect on the economy has been imperceptible, but the net effect on the Fed is quite pronounced, as its balance sheet has ballooned to US$2.814-trillion today from US$924-billion in mid-September 2009. It is hard to see how another round of QE would help the economy. Long-term interest rates are already at historic lows. For example, the 10-year treasury bond rate has wandered between 1.4% and 1.8% over the past three months, and the conventional 30-year mortgage rate remains below 3.5%. For comparison, the average rate on the 10-year treasury bond during the 2000s was 4.3%, and the average mortgage rate was 6.1%. The immediate harm is the added noise in market signals and the added uncertainty about future Fed actions and consequences. Also, if the Fed is able to depress long-term interest rates artificially — as the policy implies — one ill consequence would be widespread distortions of various asset prices, most obviously of long-term debt obligations, but also equity values and commodity prices. Immediately after a housing bubble, a policy of intentionally distorting asset prices is a tough sell. Further, consider what is at the heart of QE: a central bank buying vast quantities of government debt. Historically, governments have forced central banks to buy debt because the government has proven so irresponsible that financial markets will not buy the bonds necessary to fund government spending. Despite President Obama’s fourth consecutive trillion-dollar budget deficit, the U.S. Treasury has no problem finding buyers for its notes and bonds. The intent today is not to monetize debt in the old-fashioned way. Motivations differ, but are the consequences? Not entirely. The Fed still ends up with boatloads of government bonds. The real problem with QE — beyond increased near-term uncertainty — is that the Fed must at some point unload all these bonds it has bought. The Fed will buy bonds in soft markets and sell them when interest rates are already rising, pushing interest rates up further, faster. The problem, in short, is that the Fed will have failed to prop up the economy when it was weak only to risk killing the recovery once it really takes off.

China Securities Journal:

• China's trade growth may further slow as the global economy may remain sluggish in the future, Liu Jianying, a researcher with the Chinese Ministry of Commerce, wrote in a commentary. China is facing a "very severe" situation in realizing this year's trade growth target of 10%, Liu wrote.
• Fed's QE3 Brings More Risk Than Return. The Federal Reserve's new round of quantitative easing may bring "more risk than return," according to a commentary published on the front page today. Global capital markets shouldn't have overly high expectations for any boost from the policy, according to the commentary.
  

Evening Recommendations

• None of note

Night Trading

• Asian equity indices are +.50% to +2.0% on average.
• Asia Ex-Japan Investment Grade CDS Index 115.50 -8.0 basis points.
• Asia Pacific Sovereign CDS Index 102.0 -.75 basis point.
  
• FTSE-100 futures +1.09%.
  
• S&P 500 futures +.28%.
  
• NASDAQ 100 futures +.34%.

Morning Preview Links

Earnings of Note
Company/Estimate

• None of note
  

Economic Releases
8:30 am EST

• The Consumer Price Index for August is estimated to rise +.6% versus unch. in July.
• The CPI Ex Food & Energy for August is estimated to rise +.2% versus a +.1% gain in July.
• Advance Retail Sales for August are estimated to rise +.8% versus a +.8% gain in July.
• Retail Sales Less Autos for August are estimated to rise +.7% versus a +.8% gain in July.
• Retail Sales Ex Autos & Gas for August are estimated to rise +.4% versus a +.9% gain in July.

9:15 am EST

• Industrial Production for August is estimated unch. versus a +.6% gain in July.
• Capacity Utilization for August is estimated to fall to 79.2% versus 79.3% in July.
• Manufacturing Production for August is estimated to fall -.3% versus a +.5% gain in July.
  

9:55 am EST

• Preliminary Univ. of Mich. Consumer Confidence for September is estimated to fall to 74.0 versus 74.3 in August.

10:00 am EST

• Business Inventories for July are estimated to rise +.3% versus a +.1% gain in June.
  

Upcoming Splits

• None of note
  

Other Potential Market Movers

• The Fed's Lockhart speaking, Eurozone CPI data, Eurozone Finance Ministers Meeting and the (OSK) analyst day could also impact trading today.
  

BOTTOM LINE: Asian indices are higher, boosted by commodity and industrial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.