Today's Headlines

Bloomberg:

• Asian Currencies Tumble Most in 21 Months. India’s rupee touched a record low and Malaysia’s ringgit had its worst week in three years after Bernanke said June 19 that $85 billion a month of debt purchases, known as quantitative easing, may be trimmed this year and ended in 2014 as long as the U.S. economy performs in line with Fed estimates. The Bloomberg-JPMorgan Asia Dollar Index (ADXY), which tracks the region’s 10 most-active currencies, dropped 1.1 percent since June 14 to 115.51 as of 5 p.m. in Hong Kong, the biggest decline since Sept. 23, 2011. The rupee retreated 3.1 percent to 59.3600 per dollar, the ringgit fell 2.7 percent to 3.2 and the Philippine peso lost 2.1 percent to 43.735. 

• Japan Government Pension Fund Says Holdings Close to Target. Fund President Takahiro Mitani spoke in a Tokyo interview. "Very difficult" for Japan to reach 2% inflation target. Doesn't plan to change allocation of foreign currencies. No further discussions this year on allocations, MItani said. 

• Minsky Moment Alarm Sounded in China: Cutting Research. China may be approaching a “Minsky moment” -- a sudden fall in asset values bloated by credit. Credit growth in the world’s most populous country has outstripped economic expansion for five quarters, raising the question of where the money has gone, Societe Generale SA (GLE) economist Yao Wei wrote in two recent reports. In the first quarter, for example, bank loans, shadow banking credit and corporate bonds together accelerated more than 20 percent year-over-year, while gross domestic product grew less than half that much. The gap has been widening since early 2012. Yao says the answer to where the money is going is a growing “debt snowball” which doesn’t contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses.

• Stress Test for Banks Inflicting Collateral Damage: China Credit. China’s decision to tolerate the worst cash crunch on record is evolving from a stress test of banks into a threat to the ability of companies to raise funds. As their overnight borrowing costs neared 13 percent, banks switched focus toward shoring up their own finances and slashed investments in the bond market they dominate. The one-year yield on AAA corporate debt jumped a record 121 basis points this month to 5.15 percent, ChinaBond indexes show. Bond sales slumped to 157.9 billion yuan ($26 billion) in June, the least in 17 months and down 57 percent from May, data compiled by Bloomberg show. 

• EU Battles Over Rules on Investor Losses When Banks Fail. European Union finance ministers are battling in Luxembourg over how they’ll set rules for assigning losses when banks fail. The new rules will set standards for how to prop up or shut down failing banks, along with requirements for the kind of backstops each country must have in place. During staff-level talks this afternoon, nations were considering requiring a certain level of losses on bank creditors before they could shield specific investors from writedowns, according to two EU officials.

• Credit Risk Rises for Fifth Week in Europe. The cost of insuring European company bonds against losses headed for a fifth weekly increase as the Federal Reserve confirmed it will slow asset purchases if the economy continues to strengthen. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings climbed 13 basis points to 123, the longest rising streak since the week ending Aug. 26, 2011, according to data compiled by Bloomberg. The average yield investors demand to hold European corporate bonds rose 15 basis points to a four-month high of 2.19 percent, Bank of America Merrill Lynch index data show. “The market has been addicted to liquidity injections through quantitative easing,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London which oversees $55 billion. “Just the mere thought of reducing the dose makes people feel a bit sick. We are seeing withdrawal symptoms.” The Markit iTraxx Crossover Index of default swaps on 50 high-yield companies also rose for a fifth week, climbing 45 basis points to 496, the biggest weekly increase since March 22. An increase signals deterioration in perceptions of credit quality. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 20 basis points to 179, while the subordinated index climbed 35 basis points to 271. 

• Brazilian Revolt Claims Second Life as Violence Erupts. (video) Brazil’s swelling street rebellion claimed its second fatality in the largest and most violent protests yet, as 1 million demonstrators rallied for better public services and an end to corruption. Marches took place in hundreds of cities across Brazil last night in what began as a peaceful protest. Violence later erupted with police battling mobs trying to storm the Foreign Relations Ministry in Brasilia and Rio de Janeiro’s city hall.

• Emerging Stocks Set for Biggest Weekly Loss in 13 Months. Emerging-market stocks were poised for the steepest weekly tumble in 13 months, bonds retreated and South Korea’s won led declines in currencies amid speculation the Federal Reserve will pare economic stimulus. The MSCI Emerging Markets Index fell 0.9 percent to 900.06 at 1:25 p.m. in New York, extending its weekly drop to 5.6 percent. It’s down 17 percent from its Jan. 3 high. Poland’s WIG20 index sank to the lowest since Aug. 30, while Brazil’s Ibovespa (IBOV) was set for a four-year low. The won posted the biggest weekly slump in 21 months. The extra yield investors demand to own emerging-market debt over U.S. Treasuries rose 0.3 percentage point this week to 347 basis points, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index.

• Singaporeans Leave City as Worst Fire Haze Sparks Health Worries.

• Crude Falls for Third Day as Dollar Rises on Fed. West Texas Intermediate crude fell to a two-week low as the dollar rose on expectations the Federal Reserve will trim its monthly bond purchases in September and on concern that China’s cash squeeze may curb its economic growth. “The dollar strength is definitely weighing on prices,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “Crude oil is coming down because the Fed is reducing its support. There is a lot of concern over the situation in China and this potential disruption within China’s banking system.” WTI for August delivery dropped $1.91, or 2 percent, to $93.

CNBC: 

• What's Really Behind China's Cash Crunch. When it comes to the economy, China's policy makers have often been criticized for a heavy-handed approach, stepping in at the first signs of trouble. That makes the reluctance by the central bank to pump in cash and alleviate a credit squeeze for local lenders highly significant, analysts say. "There is a sea change taking place in China," said David Mann, the head of regional research for Asia at Standard Chartered Bank in Singapore. "The reluctance to intervene in the money markets, the tolerance of a lower rate of growth, it's all part of the same story of China trying to secure a better long-term outlook for the economy."

Zero Hedge:

• Bridgewater "Pure Alpha" Global FX Exposure Summary.

• "ETF Losses Today Were Far Beyond What The Most Sophisticated Risk Models Could Have Predicted".

• Greek Bonds Plunge As Ruling Coalition Partner Pulls Out, Withdraws Ministers. (graph)

• The Party Is Over. The Fed came out and said as clearly as any Fed has ever said; "We are going to unwind the trade." 

• Why Spain And Italy Are Like Cyprus, Slovenia, And Greece. (graph)

• European Stocks Plunge To Worst Week In 13 Months. (graphs)

Business Insider:

• Another Brutal Day In Brazil: Stocks Down After A Million Protestors Take To The Streets.

• The ETF Market Kind Of Broke Yesterday. Kauffman said that the problem with ETFs was that they end up driving the price of the underlying assets that make them up. The actual value of the asset ceases to matter as the activity of the ETF takes it over. That, Kauffman said, could cause what we saw yesterday — "failure to settle" (market participants freaking completely out because they can't get their money). Investors are starting to talk about this too.

ValueWalk: 

• CTAs Suffer one of The Worst Months in Recorded History. Directional strategies are found at the bottom of the ranking. The massive underperformance of CTAs (-5%, i.e. one of the 10 worst months recorded since 1999) suggests that the trend reversal in Japan, especially in the bond market, took these managers by surprise. Global Macro suffered as a result of their long exposure to US Treasuries and posted a very slightly negative performance (-0.05%).

Real Clear Politics:

• Krauthammer: "I Would Oppose The Bill" If Border Security Is Just A Goal And Not A Requirement. (video)

Reuters:

• Rupee weakness affects India credit profile: Moody's. The rupee's weakness reflects domestic economic challenges, primarily a high current account deficit and lower capital flows, but does not significantly impact India's foreign debt repayment capacity, Moody's told Reuters on Friday. "Given the very low level of foreign currency debt owed by the Indian government, rupee depreciation does not significantly affect sovereign debt repayment capacity," said Atsi Sheth, vice-president of the sovereign risk group at Moody's Investors Service, in an e-mailed response. "However, it is a reflection of macro-economic challenges, which do affect the country's credit profile."

• Investors poured $4.5 bln into stock funds ahead of Fed -BofA. Investors worldwide poured $4.5 billion into stock funds in the latest week, reversing the prior week's outflows on expectations that the U.S. Federal Reserve would keep its bond-buying steady, data from Bank of America Merrill Lynch showed on Friday. 

• Losses loom for investors enmeshed in U.S. mortgage chaos. Since the financial crash, banks have been accused of wrongfully foreclosing on homeowners because they failed to create and maintain proper mortgage paperwork. Now, there are signs that chaotic document management is harming investors in mortgage bonds, too. 

• EMERGING MARKETS-Brazil stocks fall as Fed continues to weigh.

MNI:

• China PBOC Tells Banks It Won't Help With Liquidity: Press. The People's Bank of China met with lenders earlier this week to tell them it won't help ease liquidity conditions, the official Shanghai Securities News reported Friday. The report, which cited sources from leading brokerage Shenyin Wanguo Securities, said 18 big banks were told at a meeting Tuesday to reduce their leverage ratios and not expect the PBOC to step in with liquidity. Money market rates have shot up to record levels in recent days amid a cash squeeze that's being engineered by the PBOC to force banks to lend responsibly. Analysts believe the central bank will have to step in before long or risk generating the kind of financial crisis that regulators say they are committed to avoiding. Notes of the meeting, which was reported by MNI on Thursday, said lenders must cut their leverage ratios, curb bill financing activities and reduce their loans to industries facing overcapacity. "Banks shouldn't hope that the PBOC will ease liquidity," the notes said. The newspaper also said the current interbank liquidity shortage is temporary and structural and that a recent State Council meeting, as well as the PBOC, underlined the government's resolve not to ease liquidity.

Telegraph:

• European Markets Fall on Greece in Fresh Turmoil as Coalition Breaks Up. Greece has been thrown into fresh uncertainty after a junior coalition partner confirmed its withdrawal from government.

Xinhua:

• China Vice Premier Warns Against Intl Liquidity Overflow. Countries should improve co-ordination of macro-economic policies to avoid global overflow of liquidity, inflation, citing Zhang Gaoli's address to forum in St. Petersburg, Russia.