Bloomberg:
- Slovenia Shows Why the EU Shouldn’t Discard Austerity. The Slovenian government has been masterful at delaying difficult reform, particularly in the banking sector. If there is no real pressure to finally clean up the banking sector and push through the sale of state assets, the flow dynamics may keep worsening public debt, government deficits and bad bank loans. Now that the EU has loosened fiscal targets, it’s hard to see where the pressure will come from.
- Copper Ruse Busted Curbs Yuan, Cuts Cash Supplies: China Credit. China’s crackdown on financial deals disguised as copper trades is helping curb yuan appreciation and worsening the tightest money market in more than a year. Metal trades designed to facilitate borrowing of dollars to finance higher-yielding yuan investments swelled inventories in Shanghai’s bonded zone to a record 1 million tons earlier this year, about 5 percent of global annual production. Goldman Sachs Group Inc. said in a May 22 report that regulators may end the arbitrage. The benchmark seven-day repurchase rate averaged 3.57 percent in May, the highest in 13 months, while the yuan fell the most since February last week. “Commodity finance has been a fast-growing type of credit,” said Fu Peng, commodity strategist at Galaxy Futures Co., a brokerage controlled by the country’s sovereign wealth fund. “Now, strict rules limiting the trade will rein in this source of funding, which will have a material impact on money markets and currency exchange rates.”
- Beijing Caps Home Prices to Control Demand: Mortgages. Beijing, which already has China’s strictest real estate curbs, is being forced to take additional steps to contain surging home prices as demands for record-high down payments fail to deter buyers. The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high, according to developer Sunac China Holdings Ltd. (1918) and realtor Centaline Group. Local officials will need further tightening as they struggle to meet this year’s target of keeping prices unchanged from last year, said Bacic & 5i5j Group, the city’s second-biggest property broker.
- Canary in Coal Mine Gasps as Australia Resource Jobs Fall. “Companies won’t hire,” McGrath said by phone from the central coast, separated from his family who are packing up the Liverpool home. “They’ve a lot of contractors working in the pits up here,” he said, who are being let go first. A drop in hiring of support staff by resources companies is one of the first indicators of a broader downturn because each mining position creates four to five contract jobs in related services, said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “Mining service companies are the canary in the coal mine,” said Whetton. “We’re likely to see higher unemployment over the course of the year.”
- Gillard Slips Again in Poll as Australians Abandon Labor. Australian Prime Minister Julia Gillard’s Labor party slumped again behind Tony Abbott’s Liberal-National coalition in an opinion poll that indicates a change of government in the Sept. 14 election. Labor fell 2 percentage points to 42 percent on a two-party preferred basis, while the opposition gained 2 points to 58 percent, according to a Newspoll published in the Australian newspaper today. Gillard’s satisfaction rating dropped 3 points to 28 percent.
- Philippine Stock Swings Surge as Index Tumbles 10% From High. Philippine stock volatility is surging at the fastest pace in emerging markets as foreign investors sell the world’s most expensive equities on speculation the U.S. will reduce monetary stimulus. The Philippine Stock Exchange Index’s 10-day historical volatility increased to 33 yesterday from 12 two weeks ago, the highest level since October 2011 and the biggest jump among 21 developing-nation gauges tracked by Bloomberg.
- Won Gains as Fed Concern Eases; Most Asian Stocks, Oil Decline. South Korea’s won led gains among emerging-market currencies as concerns eased the Federal Reserve will reduce its monetary stimulus. Most Asian stocks fell and oil declined. The won advanced 0.6 percent to 1,121.26 per dollar as of 12:23 p.m. in Tokyo, the biggest gain since April 19. China’s Shanghai Composite Index dropped 1.2 percent as the MSCI Asia Pacific Index added 0.3 percent.
- China’s Stocks Fall for 4th Day, Led by Appliance Shares. China’s stocks fell for the fourth day, the longest losing streak in two months. Small-company shares and consumer-discretionary companies declined, while price-swings on the benchmark index dropped to a nine-month low. Gree Electric Appliance Inc. and TCL Corp. led a gauge of consumer companies to the second-biggest slump among industry groups as the government ended subsidies for purchases of energy-saving home appliances at the start of the month. Qingdao TGOOD Electric Co. and Tianjin Chase Sun Pharmaceutical Co. dropped more than 2 percent, pacing losses for small-company shares. Yanzhou Coal Mining Co. lost 1.4 percent after the Hong Kong-listed shares were cut at Bank of China Ltd.
- Rebar Declines on Concern Supply Will Outstrip Demand in China. Steel reinforcement-bar futures in Shanghai fell on concern that supply will continue to outstrip demand. Rebar for delivery in October on the Shanghai Futures Exchange fell as much as 0.5 percent to 3,467 yuan ($566) a metric ton and was at 3,474 at 10:13 a.m. local time. Futures gained 2 percent yesterday after falling for a fourth month in May. The steel industry’s purchasing manager’s index in May rose to 46.8 from 45.1 in April, the Beijing-based National Bureau of Statistics and Federation of Logistics and Purchasing said yesterday. The steel industry’s output index also expanded to 49 in May from 44.9 a month ago, it said. “There’s no sign the steel mills are cutting production, while previous expectations for stronger demand to help absorb this supply hasn’t really materialized,” Li Jinlu, an analyst at Yongan Futures Co., said by phone from Hangzhou today.
- Rising Junk-Debt Loads Erode Credit Quality, Morgan Stanley Says. The record pace of U.S. junk-bond sales is weakening the credit quality of speculative-grade companies as debt loads expand and cash piles erode, according to Morgan Stanley. U.S. junk companies increased borrowings by 10 percent in the first quarter from a year earlier while the ratio of cash to debt fell to 9.6 from almost 15 percent in 2010 and is approaching the long-term average of 8.7 percent, strategists led by Adam Richmond in New York wrote in a note to clients dated today. Even as earnings growth slows the economic expansion sputters, companies are “no longer feeling the need to hoard cash,” they wrote. “Low rates have served as both a positive and a negative driver of corporate fundamentals,” the analysts wrote. While “low rates have allowed companies to lower coupon payments, in some cases quite dramatically, and push out upcoming maturities in the process,” they wrote, “today’s record low cost of debt has given companies the incentive to issue debt and increase leverage.”
- Credit Traders Said to Win SEC Relief in Portfolio Margin Rules. Hedge funds and asset managers will win partial relief from Dodd-Frank Act collateral requirements for credit-default swaps under a policy shift to be announced this week, according to two people briefed on the matter. The U.S. Securities and Exchange Commission is revising a policy released in March that required some clients to put up double the collateral dealers post at Atlanta-based IntercontinentalExchange Inc. (ICE), according to the people, who requested anonymity because the decision isn’t public. The relief applies to portfolio accounts that hold credit swaps tied to single securities as well as indexes.
- AIG(AIG), Prudential(PRU) Named Systemically Important by Panel. American International Group Inc. (AIG), Prudential Financial Inc. (PRU) and a unit of General Electric Co. were identified by U.S. regulators as potential risks to the financial system in a step toward putting the firms under tighter government scrutiny. AIG and Prudential, in statements after a meeting today of the Financial Stability Oversight Council, said they were notified of the proposed designations. Russell Wilkerson, a spokesman for GE Capital, said in an e-mail that his company also received a notice.
- Senators Near Plan to Abolish Fannie Mae, Shrink U.S. Role. A bipartisan group of U.S. senators is putting the final touches on a plan to liquidate Fannie Mae and Freddie Mac (FMCC) and replace them with a government reinsurer of mortgage securities behind private capital. The proposed legislation, which could be introduced this month, would require private financiers to take a first-loss position adequate to cover price declines as steep as those seen during recessions over the past century, according to a draft obtained by Bloomberg News.
- Japan's Market Has Bulls Reeling. At a hedge-fund conference in Las Vegas last month, Michael Novogratz, a principal at New York's Fortress Investment Group, called Japan "the most exciting place to invest in the world." Now, following four stock-market routs in the span of less than two weeks, Japan has become one of the world's scariest places to invest, and foreign investors are caught in the middle. Hedge funds and other overseas buyers pumped more than $25 billion into Tokyo's stock market in the seven months before the Las Vegas conference, according to EPFR Global, which tracks such flows. They were lured by a new government's plans for radical action to boost Japan's economy after two decades of stagnant growth and falling prices known as deflation.
- Weak Signs For U.S. Output. Factories Suffer Worst Slump Since End of Recession. U.S. factories in May posted their worst month since the end of the recession, as weakness overseas overwhelmed a still-shaky manufacturing recovery at home.
- Supreme Court: Police Can Take DNA Samples in Arrests. A divided Supreme Court held Monday that police can take DNA samples from people under arrest in the hope of tying them to unrelated crimes, in a ruling that touched both on fast-changing technology and age-old issues of citizens' rights against state searches.
- ObamaCare Bait and Switch. The truth about those rate increases in Oregon and California.
- 'Something to hide?' Republicans reject DOJ explanation of Holder testimony. Republican leaders of the House Judiciary Committee on Monday accused Attorney General Eric Holder of having "something to hide," after the Justice Department issued a formal defense of his questionable testimony on reporter surveillance -- a defense Republicans rejected as inadequate. "This response is insulting and further proof that Attorney General Holder refuses to hold himself accountable," Rep. Jim Sensenbrenner, R-Wis., said. Holder was facing a Wednesday deadline, set by the committee, to explain his May 15 testimony.
- BRIC Powerhouses Risk 'Middle-Income Growth Trap'. Growth in the powerhouses of Brazil, Russia, India and China (BRIC) is slowing precipitously. Last week, India reported its slowest growth in a decade, while Brazil reported growth of just 1.9 percent for its first quarter, compared to a year-ago. "There is a growing risk that BRIC markets, along with other emerging economic, fall into the middle income trap. Cheap cash breeds complacency and record low interest rates and soaring capital inflows have pumped up growth in the emerging market world,while structural reforms have lagged behind," Frederic Neumann, co-head of Asian economic and global research at HSBC told CNBC. The "middle-income trap" is commonly reached when developing economies grow quickly but struggle to maintain that growth because of a lack of structural reforms, labor market development and industrial growth.
- Market Strife Puts Japan Policies in a Flux. Japan's radical plans to get the world's third largest economy back on track, which have created investor euphoria in recent months, seem to be losing momentum just as quickly as markets succumb to a triple whammy impact of plunging stocks, a strengthening yen and a volatile bond market.
- Why the Fed Can't Stop Fueling The Shadow Bank Kiting Machine. No one knows when the bubble will pop, but when it does a donnybrook is going to break out over that thin wedge of collateral whose ownership is spread across counterparties around the world, each looking for relief from their own judges, politicians, bureaucrats, and taxpayers.
New York Times:
- Behind the Rise in House Prices, Wall Street Buyers. Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.
Reuters:
- Fitch cuts Illinois rating over failure to fix pensions. Illinois' lowest-among-states credit rating took a new hit on Monday as Fitch Ratings downgraded the state just days after Illinois lawmakers left the state capitol last week without addressing a huge public pension funding crisis. "Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable," the rating agency said in a statement. It said the failure to achieve reform measures despite the substantial focus on the topic exacerbates concerns about management's willingness and ability to address the state's "numerous fiscal challenges."
- US packaged car loan deals slump. The securitisation of car loans to prime US borrowers has slumped by almost a quarter so far this year, in one of the few pockets of the credit markets where issuance is not booming. The data suggest that lenders, including big US banks and car manufacturers, are finding alternative sources of cheap funding, such as customer deposits or unsecured borrowing.
- French minister accuses Amazon(AMZN) of dumping. France’s culture minister has attacked Amazon, the online retailer, for deliberately undercutting traditional rivals to create a “quasi-monopoly”, in the latest assault by the socialist government on internet companies. “Today, everyone has had enough of Amazon which, through dumping practices, smashes prices to penetrate markets to then raise prices again once they are in a situation of quasi-monopoly,” said Aurélie Filippetti, the culture minister.
- Global shock as manufacturing contracts in US and China. Manufacturing has begun to contract in the US and China for the first time
since the Lehman crisis, raising fears of a synchronized downturn in the
world’s two largest economies. The closely-watched ISM index of US factories tumbled through the “boom-bust
line” of 50 to 49, far below expectations. It is the lowest since the depths
of the crisis in mid-2009 and a clear sign that US budget cuts are starting
to squeeze the economy. New orders plunged 3.5 to 48.8 on weak foreign
demand and reduced federal contracts.
The news came hours after HSBC said its index for China also fell below 50, a major inflexion point for the world’s industrial workshop.
- U.S. Institute Says North Korea Set to Restart Reactor. New commercial satellite imagery shows North Korea is making "important progress" in activating the 5mw reactor, citing U.S.-Korea Institute at the Johns Hopkins Schools of Advanced International Studies.
- U.S., Japan will hold a military drill in California on June 10 as scheduled, citing government officials. China asked for the drill to be canceled in light of Chinese President Xi Jinping's meetings with U.S. President Barack Obama in California starting June 7.
- China to Try New Investment Statistics Methods. China may change methods for compiling statistics on investment in a trial program in the cities of Jincheng, Xi'an and Wuxi and Guizhou province, citing a meeting arranged by Ma Jiantang, head of the National Bureau of Statistics. Guizhou, Gansu and Qinghai reported investments more than their gdp last year, prompting suspicions that the statistics were inflated, the report said.
- China Local Govts Should Stop Competing on Growth. China's local governments should stop competing over economic growth rates and focus on raising the "quality and efficiency" of their development, China's statistic bureau website posted a commentary by a reporter.
- None of note
- Asian equity indices are -1.0% to +.50% on average.
- Asia Ex-Japan Investment Grade CDS Index 120.0 +3.75 basis points.
- Asia Pacific Sovereign CDS Index 104.0 +3.75 basis points.
- FTSE-100 futures +.38%.
- S&P 500 futures -.14%.
- NASDAQ 100 futures -.06%.
Earnings of Note
Company/Estimate
- (DG)/.71
- (BOBE)/.64
- (MFRM)/.35
8:30 am EST
- The Trade Deficit for April is estimated to widen to -$41.1B versus -$38.8B in March.
- ISM New York for May is estimated to fall to 55.0 versus 58.3 in April.
- The IBD/TIPP Economic Optimism Index for June is estimated to rise to 50.0 versus 45.1 in May.
- None of note
- The Fed's Fisher speaking, Fed's George speaking, Fed's Sarah Bloom Raskin speaking, Spain Unemployment report, Austrian GDP report, RBA rate decision, weekly retail sales reports, JPMorgan Industries Conference, CSFB Energy Conference, BoA Merrill Telecom/Media Conference and the BoA Merrill Tech Conference could also impact trading today.
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