EU Bids to Defend Euro, Tighten Rules in Greek Crisis. European leaders sought to restore confidence in the euro as Greece’s escalating debt crisis threatened to engulf Portugal and Spain, testing the stability of the 11-year-old currency and rattling financial markets worldwide. Leaders of the 16 countries sharing the euro plan to endorse a 110 billion-euro ($140 billion) aid package for Greece and mull ways of capping budget deficits to strengthen the management of the $12 trillion economy at a summit in Brussels tonight. “We have to accelerate the regulation of the financial markets,” German Chancellor Angela Merkel told reporters before the summit. “We also have to take steps to secure the stability of the euro overall, that means a firm commitment by all that it is our common currency but also internally that we stiffen the Stability and Growth Pact including possible treaty changes.”
Market Fragmentation May Get Review After Stock Drop. Federal regulators reviewing yesterday’s stock plunge will try to determine if the fivefold increase in the number of American equity exchanges has left them unable to manage the biggest surges in volume. Almost 1.3 billion shares traded on U.S. markets in a 10- minute span starting at 2:40 p.m., six times the average, sending prices lower on platforms from New York to Kansas City. Nasdaq OMX Group Inc. said it canceled transactions in 286 stocks where swings grew too wide. Federal agencies began inquiries after more than $700 billion in value was erased in an eight-minute span. “Markets aren’t supposed to work this way,” said Jamie Selway, managing director of White Cap Trading LLC in New York and a former chief economist at NYSE Arca, a unit of NYSE Euronext. “There was a mad rush for the exits. We just don’t know whether it was accidental or intentional.”
South Korea Concludes That North Korea Sank Ship, Chosun Says. South Korea has concluded that North Korea sank one of its warships in March close to their disputed border with the loss of 46 lives, Chosun Ilbo newspaper reported. The finding may hamper a resumption of nuclear disarmament talks with Kim Jong Il’s regime as public ire builds in South Korea, said Kim Yong Hyun, a professor of North Korean studies at Seoul’s Dongguk University. Kim Jong Il reaffirmed his commitment to denuclearization in a meeting with Chinese President Hu Jintaothis week, Xinhua News reported today. Confirmation of a North Korean attack may pressure South Korean President Lee Myung Bak to coordinate an international response, shifting focus away from resuming nuclear negotiations.
German Role in Greek Aid Is Challenged at Top Court. German participation in the 110- billion euro ($140 billion) aid package for Greece was challenged in a lawsuit by five men who say the rescue violates their constitutional rights and European Union treaties. The group of economists and university professors are seeking an emergency ruling blocking German approval for the package as part of a complaint at the Federal Constitutional Court in Karlsruhe. The men argue the aid package violates the “no bailout-clause” in EU governing treaties. “The EU is on the way to a liability union which will turn into an inflation union,” economist Joachim Starbatty told reporters in front of the court today. “This isn’t a rescue for Greece, this is help for the banks, where the money will go immediately.”
U.S. Economy: Payrolls Jump by Most in Four Years. Payrolls in the U.S. surged by the most in four years in April, led by gains in private employment that indicate the economy is weaning itself from government support. The 290,000 increase in employment exceeded the median estimate of economists surveyed by Bloomberg News and followed a 230,000 gain in March that was larger than initially estimated. The jobless rate rose to 9.9 percent from 9.7 percent as thousands of jobseekers entered the workforce, a Labor Department report in Washington showed today. The April gain included 66,000 temporary workers hired by the government to help conduct the 2010 census and a 231,000 rise in private payrolls. A government boost to hiring is already under way at the Census Bureau. The agency said it will take on about 970,000 temporary workers from April through June to conduct the population count that occurs every 10 years. The government program may have the biggest impact on payroll figures in April and May, when the bulk of the hiring will take place, and will then subtract from the job count the following months as employees are dismissed after the work is done. While the economy added jobs, incomes were little changed. Average hourly earnings rose to $22.47 in April from $22.46 in March, today’s report showed. The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- increased to 17.1 percent from 16.9 percent. The report also showed an increase in long-term unemployed Americans. The number of people unemployed for 27 weeks or more rose as a percentage of all jobless, to a record 45.9 percent.
GE Asset Management Inc., a unit of General Electric(GE) overseeing $120 billion, started accepting money from external investors into its commodities fund. The $200 million Active Commodities Strategy fund was created in 2006 as a part of the U.S. GE Pension Fund. It trades listed metals, energy and agriculture, as well as exchange-traded funds.
Copper, Aluminum Slump, Crude Oil Set For Worst Week Since 2009. Copper fell, heading for its worst week since January, and aluminum declined to the lowest level since February on concern that Europe’s debt crisis may slow the global economic recovery. Copper for three-month delivery fell as much as 2.7 percent to $6,760 a metric ton in London and aluminum lost 2.5 percent to $2,050 a ton, the lowest since Feb. 15. Oil, rebounding from an 11-week low in New York yesterday, has lost 9.8 percent this week, the worst performance since July 2009. The S&P GSCI Commodity Index of 24 raw materials lost 7 percent this week, the most since July 2009. U.S. inventories of gasoline are 7.6 percent above their seasonal norm as the country’s peak driving season approaches, according to the Energy Department.
Libor Jumps Most in 16 Months on Greek 'Fear Trade'. The rate banks say they pay for three- month loans in dollars rose the most in almost 16 months as lending sputtered amid concern financial institutions are holding too many assets of Europe’s most indebted nations. The London interbank offered rate, or Libor, for three- month loans climbed 5.5 basis points to 0.428 percent today, the highest level since Aug. 17, according to data from the British Bankers’ Association. It was the biggest increase since Jan. 16, 2009, and the 13th straight gain. “There is clearly a fear trade starting to stalk the market,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Questions are being asked about certain counterparties. It’s a question of what people have on their books and whether they are vulnerable to big losses.” The spread between three-month Libor and the overnight indexed swap rate, a gauge of banks’ reluctance to lend, rose more than 6 basis points to 18.5 basis points, the most since Aug. 26. “Banks simply don’t trust each other, just like in the aftermath of Lehman Brothers,” said Jens-Oliver Niklasch, a fixed-income strategist at Landesbank Baden-Wuerttemberg in Stuttgart.
Bank Risk Soars to Record, Default Swaps Overtake Lehman Crisis. The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers Holdings Inc., as the sovereign debt crisis deepened. The Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers soared as much as 40 basis points to 223, according to JPMorgan Chase & Co. The index closed at 212 basis points March 9, 2009. “Financials are caught in a really bad place right now,” said Aziz Sunderji, a London-based credit strategist at Barclays Capital. “Investors are selling bonds, not just hedging with CDS. It shows investors are repositioning portfolios and there’s a more long-term repricing of peripheral risk.” Markit’s financial gauge was trading at 198 basis points at 2:30 p.m. in London, according to JPMorgan. Contracts on Spanish and Portuguese banks rose to records, according to CMA DataVision prices. Portugal’s Banco Comercial Portugues SA increased 53 basis points to 579 and Spain’s Banco Santander SA rose 12 basis points to 253. In the U.K., swaps on Royal Bank of Scotland Group Plc jumped 41 to 229 after Britain’s biggest government-owned bank posted the only first-quarter loss among British rivals. Swaps on Greece surged 75 basis points to 1,008 before the advance was pared to 950. before dropping to 227 and Spain increased 14 to 288 before trading at 246, CMA prices show. Portugal climbed 42 to 502 before falling to 430 and Italy rose 24 to 255.5Contracts on the U.K. rose 8 basis points to 99, according to CMA. The cost of insuring against losses on corporate bonds also rose. Contracts on the Markit iTraxx Crossover Index linked to 50 companies with mostly high-yield credit ratings increased as much as 74 basis points to 625, JPMorgan prices show, the highest since September. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed as much as 29.5 basis points to 152.5, JPMorgan prices show, the highest since April 2009.
Fed Officials Develop Plan to Shrink Central Bank's Mortgage Portfolio. Federal Reserve officials have agreed to sell some of the central bank's $1.1 trillion of mortgage-backed securities at some point, but have been unable to reach a firm consensus on how soon or how aggressively to do that, according to several people familiar with the matter. Many Fed officials want to wait until after the central bank has started to raise short-term interest rates and tighten financial conditions, which could be many months away, but a minority is eager to move sooner. The internal debate about the Fed's mortgage portfolio is important to households and investors because sales of mortgage securities could push down prices of the securities and push up mortgage borrowing costs.
Daily Presidential Tracking Poll. The Rasmussen Reports daily Presidential Tracking Poll for Friday shows that 27% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as president. Forty percent (40%) Strongly Disapprove, giving Obama a Presidential Approval Index rating of -13 (see trends).
Banks in Spain are seeing an increasing number of clients asking how to send money abroad because of the economic situation in Spain.
La Repubblica:
The Greek crisis may undermine the euro's survival, Nobel-prize winning economist Joseph Stiglitz wrote. Europe should implement structural reforms, including a common fiscal strategy to avoid a failure of the euro.
BOTTOM LINE: Asian indices are sharply lower, weighed down by commodity and financial shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing modestly lower. The Portfolio is 50% net long heading into the day. I am having technical problems with the publishing of this blog today. Sorry for the inconvenience.
Trichet Resists Call to Step Up Greek Crisis Fight. European Central Bank President Jean- Claude Trichet resisted pressure from investors to take new steps to fight the euro area’s spreading fiscal crisis. Trichet said the ECB’s 22-member Governing Council didn’t discuss buying government debt today and that Spain and Portugal don’t face the same challenges as Greece, which was granted an international bailout last week. Euro-area governments should instead intensify efforts to cut budget deficits, he said. “We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances,” Trichet said at a press conference in Lisbon after the ECB kept its benchmark interest rate at 1 percent, a record low. Spain and Portugal are “not Greece,” he said.
U.S. Corporate Credit Risk Rises to 2010 High on Europe Crisis. The cost to protect against defaults on U.S. corporate bonds rose to the highest this year on concern European leaders aren’t doing enough to avert a sovereign debt crisis. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 6.7 basis points to a mid-price of 111.7 basis points as of 11:24 a.m. in New York, according to Markit Group Ltd. The index, which typically rises as investor confidence deteriorates, has recorded the biggest three-day climb in more than a year, surging 21.2 points, according to CMA DataVision. “The concern is that the issue facing Europe is the end of a big levered play like what subprime was in the U.S., and if that’s the case, it’s going to have big repercussions,” said Scott MacDonald, head of credit and economics research at Stamford, Connecticut-based Aladdin Capital Holdings LLC, which oversees $12.5 billion. “The ECB seems more concerned about cracks to its credibility than cracks to monetary union,” said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “This approach can be considered consistent with the ECB’s principles. But it risks that the market will still force the ECB’s hand before long.”
Retailers Report Smallest Gain Since November. U.S. retailers reported the smallest increase in monthly sales since November, with teen-clothing retailers Abercrombie & Fitch Co. and Aeropostale Inc. dragging down results. April sales at 30 chains rose 0.8 percent, less than the 2 percent projected gain, researcher Retail Metrics Inc. said.
EU 'Peripherals' Will Struggle to Avoid Default, Rogoff Says. Some peripheral eurozone economies will find it difficult to avoid large-scale defaults on their private or public external debts, or on both, said Kenneth Rogoff, a professor of economics at Harvard. Writing in the Financial Times, he said not only Greece but also Spain, Portugal and Ireland have debt that’s “sky high,” judged by emerging-market standards. The Greek crisis shows that Europe’s leaders were over- hasty in admitting members that might have benefited from a much longer probation period, Rogoff said. It’s an irony, he said, that one of the main motivations for creating the common currency, namely the desire to challenge the U.S. dollar’s position as the global reserve currency, led to lower interest rates that fuelled borrowing and helped to cause the debt crisis the European Union is struggling to cope with today.
Greek Debt Crisis to Cut U.S. Economic Growth, Feroli Says. The Greek debt crisis will probably trim U.S. economic growth, prices and interest rates over the next couple of years, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. A 10 percent drop in the value of Europe’s single currency, the euro, will hurt U.S. exports and boost imports, reducing growth in the world’s largest economy by about 0.3 percentage point a year over the next two years, Feroli said in a note to clients yesterday. The euro has dropped about 15 percent since late November on mounting concern the crisis will spread to other European nations. “If things don’t spin too far out of control, the impact should be manageable for the U.S. economy,” he said in an interview from New York. The influence on the U.S. economy will be both direct and indirect, Feroli said. The direct effect will be on trade and incomes, while the crisis will indirectly prompt the Federal Reserve to hold interest rates down longer than they otherwise would as growth and inflation cool, he said. “With the economy operating well below capacity and deflation a serious risk, a crisis-induced rise in the dollar would not be a welcome development,” Feroli wrote. U.S. banks have $16 billion outstanding in credits to Greece, $5 billion to Portugal, $57 billion to Ireland and $58 billion to Spain, he wrote, citing data from the Bank for International Settlements. That doesn’t include indirect exposure through non-banking institutions and through European banks in the major euro countries such as Germany and France, he wrote. In a worst-case scenario, the debt crisis would cripple the European banking system, hurting the global economy.
Credit Markets Seize as Issuers 'Sit Tight' on Greek Contagion.Corporate bond sales have virtually halted in Europe as the market turmoil fueled by Greece’s escalating debt crisis forced investors to retreat from riskier assets. New issuance plummeted to 1.3 billion euros ($1.6 billion) this week, 92 percent less than the 16.3 billion-euro average for the past 12 months, according to data compiled by Bloomberg. The yield on corporate bonds relative to government debt jumped 13 basis points to 164, the biggest increase since March 2009, Bank of America Merrill Lynch index data show. Investors are shunning company debt amid concerns that a 110 billion-euro ($140 billion) rescue package for Greece won’t solve the country’s deficit crisis or prevent contagion that will slow the global recovery. The week’s on pace to be the slowest since Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, excluding worldwide holidays, Bloomberg data show. The yield spread on high-yield bonds widened 40 basis points this week, the biggest jump since June 2009, Merrill Lynch index data show. The Markit iTraxx Crossover Index of companies with mostly high-yield credit ratings climbed as much as 97 basis points to 523, the highest level since December 1, according to Markit Group Ltd. prices.
Iberia, Italy Banks May Face Contagion, Moody's Says. Europe’s fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the U.K. as the risk of contagion grows, presenting them with a “common threat,” Moody’s Investors Service said in a report. “Overall, Moody’s notes that each of these countries’ banking systems faces different challenges of different magnitudes, but warns that contagion risk could dilute these differences and impose very real, common threats on all of them,” Moody’s said in the report today. “Market sentiment can be sufficiently strong (and long lasting) to create its own reality and expose all these countries to a common threat.”The 52-member Bloomberg Europe Banks and Financial Services Index fell 4.7 percent. Banco Santander SA, Spain’s biggest lender, plunged 4.6 percent to 8.01 euros. HSBC Holdings Plc, Europe’s largest bank, declined 3.7 percent to 628.4 pence and Intesa Sanpaolo SpA, Italy’s second-biggest bank, fell as much as 14 percent to 1.94 euros. Even though each country faces different challenges, the “potential contagion” is also spreading to other countries, a team of Moody’s analysts including Ross Abercromby and Robert Thomas said in the report. Downgrades to the ratings of Greek banks have resulted from severe pressure on the sovereign rating for the country, they said. Portugal is now “at the forefront of investor concern,” and the market’s view of the EU and the IMF rescue for Greece will determine whether the risk of contagion continues, Moody’s said.
Crude Oil Tumbles to Nine-Week Low as Euro Drops Against Dollar. Crude oil declined to a nine-week low in New York as the euro dropped against the dollar on concern that Greece’s debt crisis will spread, curbing economic growth. Oil has lost 8.5 percent since May 3, the steepest three- day fall since July 2009, as the dollar surged versus the common currency, reducing the appeal of commodities as an alternative investment. “The oil market is being hit by a double whammy,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. “The rise in the dollar is pummeling crude. Also, there are global growth concerns which have increased because of the credit downgrades in Europe and the Greek debt crisis.” “You’re starting to see a mass exodus as people are expecting more problems from the European debt crisis,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. U.S. stockpiles of crude oil rose 2.76 million barrels last week to the highest level since June, an Energy Department report showed yesterday. It was the 13th gain in 14 weeks. Crude oil inventories at Cushing, Oklahoma, where the New York-traded West Texas Intermediate grade is stored, rose 4.9 percent to 36.2 million barrels, the highest level since the department began reporting on supplies at the hub in April 2004.
China Stocks Buyers Must Await Commodities Slump, JPMorgan(JPM) Says. China’s equity investors must wait for a 40 percent tumble in commodities prices as a signal to reenter Asia’s worst-performing market of the year, according to JPMorgan Chase & Co. A plunge in raw material prices will show that tightening measures by the government to avoid “the risk of developing an inflation problem” have worked, said Adrian Mowat, the chief Asian and emerging-market strategist at JPMorgan Chase, which has an “underweight” rating on China. “So what we will like to see in China is further tightening measures in order to reduce fixed asset investment growth,” curbing real estate and infrastructure construction and commodities, Mowat said in a Bloomberg Television interview today. “Once we see that slowdown, I think the Chinese equities market will be a buy again.”
Europe's debt-ridden nations have to raise almost $2.6 trillion within the next three years to refinance maturing bonds and fund deficits, according to Bank of America Merrill Lynch data. Italy faces the biggest bill, followed by Spain. "It seems a challenging amount in the current environment," said Raphael Gallardo, who helps manage 500 billion euros as chief economist at Axa Investment Managers in Paris. "The real risk is for economic growth in the euro area as governments are forced by markets to cut spending when household and corporate demand isn't read to support growth."
Wall Street Journal:
Blackstone(BX) in Talks on $10 Bill Deal. Blackstone Group LP and other investors are in talks to acquire financial-data-processing company Fidelity National Information Services Inc., according to people familiar with the situation.
Lagarde: Greek Situation Shows Stability Pact Insufficient. French Finance minister Christine Lagarde said Thursday the situation in Greece demonstrates that Europe's Growth and Stability Pact is insufficient. "Very clearly, the situation in Greece shows...that all the criteria--notably the deficit- and debt-to-GDP [gross domestic product] ratios--are not in themselves sufficient to foster economic convergence within the euro zone," Lagarde said. Under the rules of the growth and stability pact, a country's public-sector debt shouldn't exceed 60% of GDP and the budget deficit should be no more than 3% of GDP. Lagarde's comments echo a letter sent to the European Commission by French President Nicolas Sarkozy and German Chancellor Angela Merkel, in which the two heads of state call for greater economic governance of euro zone member states.
Huffington Post:
Reid Backs Breaking Up Banks, Auditing Fed. Harry Reid will make sure that an amendment to break up megabanks and cap their size comes up for a vote, the Senate majority leader said. He added that he was leaning heavily toward voting for the amendment, cosponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.). Reid will also support an amendment from Sen. Bernie Sanders (I-Vt.) that will authorize an audit of the Federal Reserve, he said.
Reuters:
U.S. Commercial Paper Market Shrinks in Week - Fed. The size of the U.S. commercial paper market shrank for the first time in three weeks, prompted by rising risk aversion tied to anxiety over Greece's fiscal woes, Federal Reserve data on Thursday showed. For the week ended May 5, the size of the U.S. commercial paper market, a vital source of short-term funding for companies' day-to-day operations, fell to $1.102 trillion outstanding, down $6.5 billion from the previous week.
Frankfurter Allgemeine Zeitung:
Finnish Finance Minister Jyrki Katainen said the message behind the bailout for debt-laden Greece is that it's "an absolute exception," he said in an interview.
WAZ Media Group:
German banks and insurance companies hold about $51.3 billion in Greek government bonds, Finance Minister Wolfgang Schaeuble was quoted as saying.
