Thursday, May 06, 2010

Today's Headlines

  • 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.
  • 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.
Yonhap News:

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