Evening Headlines
Bloomberg:
- Commerzbank Cut as Moody’s Downgrades German, Austrian Banks. Commerzbank AG (CBK), Germany’s second- largest bank, had its credit rating cut one level as Europe’s deepening debt crisis prompted Moody’s Investors Service to downgrade seven lenders in the nation and three in Austria. Commerzbank, based in Frankfurt, was reduced to A3 from A2, Moody’s said in a statement today. A review of Deutsche Bank AG (DBK), the nation’s largest lender, will be concluded later, Moody’s said. The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and damped European demand for foreign goods. Policy makers at the European Central Bank meeting today face increasing pressure to lower rates and introduce more liquidity support for banks. “Today’s rating actions are driven by the increased risk of further shocks emanating from the euro area debt crisis, in combination with the banks’ limited loss-absorption capacity,” Moody’s said of the German lenders. In addition to Commerzbank, five other lenders based in Germany were reduced, as was the local subsidiary of a company located outside the country. In Austria, UniCredit Bank Austria AG and Raiffeisen Bank International AG (RBI), Eastern Europe’s third-biggest lender, were lowered one level to A3 and A2 respectively, Moody’s said in a separate statement. Erste Group Bank AG (EBS), the region’s second- biggest lender after UniCredit’s Milan-based parent, was cut two grades to A3. The downgrades “reflect their vulnerability to the adverse operating conditions in some of their core markets,” Moody’s said. The Austrian lenders also face “increased risk of further shocks from the ongoing euro area debt crisis,” it said.
- Draghi May Move Toward Rate Cut as Debt Crisis Worsens. The European Central Bank may edge closer to cutting interest rates to a historic low as the debt crisis tightens its grip on the euro economy and threatens to hurt global growth. While ECB officials meeting in Frankfurt will leave the benchmark rate at 1 percent today, according to 32 of 44 economists surveyed by Bloomberg News, 11 predict a quarter- point reduction and one forecasts a half-point cut. With European governments struggling to fix a crisis that’s engulfing Spain and could force Greece out of the euro, pressure is mounting on the ECB to lower rates and introduce more liquidity support for banks.
- U.S. Risks Fiscal Crisis Without Budget Changes, CBO Says. The U.S. government risks a fiscal crisis unless it makes significant changes in tax and spending policies, the Congressional Budget Office said. The nonpartisan agency said today that without policy changes, the national debt within 15 years will top the historical peak set after World War II. In 1946, government debt amounted to 109 percent of the economy. This year, it's projected to reach 70 percent of the gross domestic product, up from 40 percent in 2008, according to CBO.
- Bankinter CEO Says Bailout Rigor Would Be Good for Spanish Banks. Bankinter (BKT) SA Chief Executive Officer Maria Dolores Dancausa said the rigor that comes with being rescued with European bailout money would teach a lesson to the Spanish banks that need the funds. Submitting to the conditions that would come with European money “is going to be a good school for those that need to join this club,” Dancausa said in e-mailed responses to questions. She said it would be cheaper for Spain to take funds for its banks from Europe than to raise the money in the markets.
- U.S. Chamber Urges Action to Avert 2013 Fiscal Cliff. Congress should extend expiring tax cuts and find alternatives to automatic spending cuts scheduled to take effect in 2013, the U.S. Chamber of Commerce said in a letter to lawmakers. The threat of inaction on the so-called fiscal cliff has already begun to slow consumer spending and business investment, the country’s largest business trade association said today. “The threat of further harm to the American economy is real, and the American people and business community should not be forced to wait,” Bruce Josten, the chamber’s chief lobbyist, wrote in the letter. “The chamber believes Congress and the president should act now; the voters will act in November.” If Congress doesn’t act, tax rates on income, capital gains, dividends and estates will increase Jan. 1. Automatic spending cuts targeting the Defense Department also will kick in. In the letter, Josten called for extending all the expiring tax cuts. He didn’t give details on what kind of spending cuts should be made to replace the automatic cuts, known as sequestration. The Congressional Budget Office said May 22 that inaction on the fiscal cliff would probably cause a recession in early 2013. Over the long run, Josten wrote, Congress should overhaul the tax system and reduce “excessive spending,” particularly for entitlement programs.
- Fed’s Bullard Says Job Slump Hasn’t Changed Outlook. Federal Reserve Bank of St. Louis President James Bullard said disappointing job creation hasn’t changed the U.S. economic outlook and the Fed should be careful not to prompt borrowing by consumers with excessive debt. “Monetary policy has been ultra-easy during this period, but cannot reasonably encourage additional borrowing by households with too much debt,” Bullard said in remarks today to the Bipartisan Policy Center in St. Louis. “The recent nonfarm payrolls report was disappointing, but not enough to substantially alter the contours of the U.S. outlook.” “One possible FOMC strategy is to simply pocket the lower yields and continue to wait-and-see on the U.S. economic outlook,” Bullard said. While Europe’s turmoil is driving global problems, “a change in U.S. monetary policy at this juncture will not alter the situation in Europe.” The European debt crisis doesn’t warrant Fed action even though “the situation in Europe is grave,” Bullard said to reporters after his speech. U.S. banks would be better able to weather a financial “meltdown” in Europe than they were a few years ago, he said. “This is a problem for Europe and it has to be solved by Europeans, so I don’t think the Fed should get involved,” he said.
- Gold Bugs Defy Bear-Market Threat With Soros Buying. Gold is stuck in the longest slump in a decade as investors shun bullion for the dollar and bonds, just seven months after Bank of America Corp. said Europe’s debt crisis would send prices to a record $2,000 an ounce. The bank was joined by Goldman Sachs Group Inc., Morgan Stanley and Barclays Plc in urging investors to buy in December and January. Now, after gold fell 10 percent in a four-month slide through May, they say prices will rebound this year or next as the Federal Reserve shores up the world’s biggest economy by easing monetary policy and devaluing the dollar.
- Container Lines Set to Repeat Mistakes in Supply Glut: Freight. Container lines are thwarting their own efforts to push through higher freight rates. The Shanghai Containerized Freight Index, a measure of prices for cargo leaving the world’s busiest port, has dropped 7.6 percent since May 4.
- JPMorgan(JPM) Loss Raises Risk-Management Questions, Curry Says. JPMorgan Chase & Co. (JPM)’s trading loss of more than $2 billion raises “questions about the adequacy and rigor” of the bank’s risk-management practices, according to U.S. Comptroller of the Currency Thomas J. Curry. The OCC, JPMorgan’s prudential regulator, is “actively examining” the New York-based bank, which disclosed the losses from its chief investment office on May 10, Curry said in remarks prepared for a Senate Banking Committee hearing tomorrow. The agency has learned that the bank’s position “deteriorated rapidly” at the end of April and during the first days of May, he said. “Since that time, the OCC has been meeting daily with bank management with respect to the bank’s response to this situation, to re-evaluate the risk-management activities and controls of the bank and how they applied to its CIO function, and to determine what additional action is necessary,” Curry said in his statement.
- House Adopts Measure to Halt Light-Bulb Efficiency Law. Republicans in the U.S. House adopted a provision tonight designed to save traditional incandescent light bulbs by blocking what one lawmaker called the “energy police” from enforcing an efficiency standard. Even if the House language survives in the Democratic-led Senate, the impact for consumers probably will be limited because manufacturers such as Royal Philips Electronics NV (PHIA) and General Electric Co. (GE) have revamped manufacturing to comply with the law, making bulbs that use less electricity to generate the same amount of light.
- China Labor Shortages in Guangdong Show Stimulus Limits: Economy. Guangdong's job market is showing signs of withstanding China's slowdown as factory owners report that shortages of workers persist in the southern export hub. "Before, most of the factories were short about 20 percent to 30 percent of workers or technicians," said Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, whose members have garment, watch, toy and footwear factories in the province. "Now, it's getting better, but still about 5 percent to 10 percent." Strength in the job market may encourage the ruling Communist Party to limit the scale of the stimulus that's being rolled out to support the world's second-biggest economy.
- Australian GDP Expands at More Than Twice Pace Forecast. Australia’s economy expanded at more than twice the pace economists forecast, sending the local currency, bond yields and stocks higher and prompting traders to pare bets on the size of interest-rate reductions. First-quarter gross domestic product advanced 1.3 percent from the previous three months, when it rose a revised 0.6 percent, a Bureau of Statistics report released in Sydney today showed.
- China Calls on Foreign Embassies to Halt Pollution Data. China called on foreign embassies to stop publishing data on air pollution levels in the country, saying that the Chinese government has the sole authority to release such information. Foreign embassies that release such data are interfering in China’s internal affairs, Wu Xiaoqing, a vice minister of environmental protection, told reporters yesterday, according to a transcript posted on the State Council Information Office’s website. Wu didn’t specifically identify the U.S., which publishes hourly pollution readings for the cities of Beijing, Shanghai and Guangzhou on Twitter.
- Putin Vows to Deepen China Trade Ties After Skipping G-8 Summit. Russian President Vladimir Putin vowed to boost trade and cooperation with China after meeting his counterpart Hu Jintao as both sides push against Western calls for stronger action in Syria and Iran.
- Could India Be Headed for Its Own Lost Decade? The search for lost economic decades has brought us from Japan to the U.S. and Europe in recent years. It’s time to take it to India.
Wall Street Journal:- Recall Bid Fails in Wisconsin Gov. Scott Walker's Win Caps Fiery Battle, Deals Public-Sector Unions a Blow. Wisconsin Gov. Scott Walker won a recall election Tuesday, dealing a blow to organized labor, unsettling President Barack Obama's re-election strategy and signaling to Republican lawmakers across the nation that challenging government unions could pay political and fiscal dividends. Mr. Walker had 54% of the vote to 45% for his opponent, Tom Barrett, the Democratic mayor of Milwaukee, with 89% of the state's precincts reporting. Turnout was heavy across the state.
- Germany Grapples With Role In Rescue. As Europe careens deeper into political and economic crisis, the immediate survival of the euro turns more than ever on a single question: Will Germany act? For nearly three years, Chancellor Angela Merkel has resisted pressure from European neighbors to provide a stronger financial backstop for the euro zone. Germany, the only euro-zone nation with the economic heft to do so, has done the minimum necessary to keep vulnerable countries afloat—and demanded crushing public-spending cuts in return.
- Fed Considers More Action Amid New Recovery Doubts. Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery. Such action seemed highly unlikely at the central bank's April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches.
- German Real Estate Funds Are Liquidating. German real-estate funds facing redemption demands from investors are planning to liquidate about €20 billion ($25 billion) in assets, a move that could put pressure on property values in markets throughout Europe. In recent weeks, Credit Suisse and Kan Am Group announced they would liquidate funds with €5.6 billion and €3.6 billion in assets, respectively, including office buildings, shopping centers and other properties in France and Germany. Also this spring, Skandinaviska Enskilda Banken AB said it would liquidate a €5 billion fund whose properties include the landmark €1.5 billion Potsdamer Platz office-and-retail complex in the center of Berlin.
- ECB's Fix-It Kit Is Running Out of Tools. Cut, buy, lend. That pretty much sums up the European Central Bank's response to the euro-zone debt crisis.
- Clinton's Tax-Cut Position Undercuts Obama Stance. Former Democratic President Bill Clinton suggested Tuesday that Congress temporarily extend all the Bush-era tax cuts, undercutting President Barack Obama's position that the rates on upper-income Americans should rise at year's end. It was the second example in recent days of Mr. Clinton taking a position at odds with that of Mr. Obama, underscoring that the former president, still one of the Democratic Party's most popular figures, also remains one of its most unpredictable.
- Solar Firm's Big Push for U.S. Loan. BrightSource Energy Hired Former Biden Chief of Staff, Worked Other Democratic Contacts as Financing Deadline Neared. The recipient of the Obama administration's biggest loan guarantee for solar energy won federal money after an intense push in early 2011 that included hiring a former chief of staff to Vice President Joe Biden to lobby the administration, according to federal records and people involved in the approval process. The lobbying blitz came as the $1.6 billion loan to BrightSource Energy Inc.—a centerpiece of the administration's program to promote nascent green-energy projects—faced a do-or-die moment, and the company called on its Democratic connections to help push the deal forward, according to emails, records and those familiar with the loan.
- Kroszner, Former Fed Governor, To Join Hedge Fund EQA. A former Federal Reserve governor, Randall Kroszner, will join hedge fund EQA Partners to advise on currency and macroeconomic investments, the Stamford, Conn., fund said Tuesday. Dr. Kroszner joins the $56 million currency and macro hedge fund as a partner and in the newly created position of chief economist, EQA said.
- Obama's Debt Boom. The most predictable crisis in history.
MarketWatch:
Business Insider:Zero Hedge:
CNBC:
- Wall Street's (Other) Great Deleveraging. Wall Street has good reason to be rattled by the news that Goldman Sachs laid off senior personnel, including managing directors, last week. It is likely the beginning of a new kind of deleveraging that will occur at every major Wall Street firm.
- Morgan Stanley(MS) Now Lending Out Facebook(FB) Shares To Short Sellers. Morgan Stanley, the lead underwriter for Facebook's initial public offering, has started lending out shares of the social network to short sellers, according to sources who spoke with CNBC. Morgan Stanley now joins the two other top underwriters, JP Morgan Chase and Goldman Sachs, as a lender of the stock.
Chicago Tribune:
- Exclusive: Astenbeck Hedge Fund Down 14% in "Mensis Horribilis". Andrew Hall's $3.1 billion commodity hedge fund lost 14.4 percent in May, as crude prices tumbled a month after the legendary energy trader told investors he was bullish on oil because of tightening global supplies, according to sources familiar with the fund's performance. The poor showing in May for Hall's Astenbeck fund - the second-largest monthly loss in its history - means it was down 6.4 percent for the year through May 31, fund data given to Reuters shows.
Reuters:- MF Global payouts could take 6 years - CMC exec. The complex pursuit of the missing $1.6 billion (1.04 billion pounds) in segregated customer funds lost by bankrupt broker MF Global could take up to six years to sort out, with full payback to customers unlikely, a top futures industry official said on Tuesday.
Telegraph:
- UK banks sitting on £40bn of undeclared losses. Britain's banks are sitting on a £40bn black hole of undeclared losses that are preventing them from making vital loans to businesses and households.
- Nein! Nein! Nein! Again. No, Germany has not agreed to a "banking union". It has not agreed to mutualise the costs of bank bail-outs, knowing perfectly well that this means 'Eurobonds lite' and the start of a slippery slope towards debt pooling. It has not cleared the way for use of the EU rescue machinery (EFSF and ESM) for direct recapitalisation of banks – which is what Spain wants to avoid having to bear the contingent liabilities of its crumbling lenders on sovereign shoulders. Germany has not moved one inch towards fiscal union of any kind. It may do so (I make no prediction). It has not done so yet. Europe faces exactly the same problem it has had since the start of the crisis.
- Spain makes plea for EU aid for troubled banks. Spain has admitted for the first time that it can no longer raise money on the global markets or roll over its sovereign bonds, threatening to set off a dangerous escalation of Europe's debt crisis.
AsianInvestor:
- Banks, not sovereign debt, plague Europe: Odey. Hedge-fund manager Crispin Odey is short European banks, saying they are the real cause of the bloc's bleak outlook. Crispin Odey, founder of London-based Odey Asset Management, says there is no economic reason for investors to own European banks, including those in Britain. It is a broken banking system that is at the heart of Europe's financial crisis, not sovereign debt, he says on a recent visit to Hong Kong.
Oriental Morning Post:
- Land sales in Beijing, Shanghai and eight other Chinese cities fell to a three-year low of 13b yuan last month, citing E-House China Holdings. Land sales in the 10 cities fell 58% y/y in the first five months of the year to 92b yuan.
Evening Recommendations
Night Trading- Asian equity indices are unch. to +1.25% on average.
- Asia Ex-Japan Investment Grade CDS Index 202.0 -4.0 basis points.
- Asia Pacific Sovereign CDS Index 169.75 -3.5 basis points.
- FTSE-100 futures +.93%.
- S&P 500 futures +.65%.
- NASDAQ 100 futures +.64%.
Morning Preview Links
Earnings of NoteCompany/Estimate
- (CYBX)/.35
- (HOV)/-.32
- (BF/B)/.75
- (MW)/.55
- (PLL)/.76
- (UHAL)/.30
- (JDAS)/.57
Economic Releases
8:30 am EST
- Final 1Q Non-Farm Productivity is estimated to fall -.8% versus a prior estimate of a -.5% decline.
- Final 1Q Unit Labor Costs are estimated to rise +2.1% versus a prior estimate of a +2.0% gain.
10:30 am EST
- Bloomberg consensus estimates call for a weekly crude oil inventory decline of -500,000 barrels versus a +2,213,000 barrel gain the prior week. Distillate supplies are estimated to fall by -250,000 barrels versus a -1,709,000 barrel decline the prior week. Gasoline supplies are estimated to rise by +950,000 barrels versus a -833,000 barrel decline the prior week. Finally, Refinery Utilization is estimated to rise by +.5% versus a +1.0% gain the prior week.
2:00 pm EST
Upcoming Splits
Other Potential Market Movers
- The ECB rate decision, Fed's Lockhart speaking, ECB's Draghi speaking, Fed's Tarullo speaking, Fed's Williams speaking, Fed's Yellen speaking, weekly MBA mortgage applications report, BofA Merrill Smid-Cap Conference, Keefe Bruyette Woods Asset Management Conference, Needham Software/Services Conference, (HD) analyst conference and the (AAWW) analyst day could also impact trading today.
BOTTOM LINE: Asian indices are mostly higher, boosted by technology and financial shares in the region. I expect US stocks to open modestly higher and to maintain gains into the afternoon. The Portfolio is 50% net long heading into the day.
