Wednesday, June 15, 2011

Thursday Watch

Evening Headlines


  • Papandreou Calls Confidence Vote in Bid to Hang On. Greek Prime Minister George Papandreou will reshuffle his Cabinet and seek a confidence vote today, battling to control a shrinking majority and push through austerity measures demanded by international lenders. Papandreou sought to reassert his authority in a televised address last night hours after police used tear gas to break up protests in central Athens and media reported he was in talks to step down in favor of a unity government. Thousands remained outside Parliament late into the evening, with police estimating the crowd at 8,000 people at 10:20 p.m. The political turmoil came as European Union talks on forging a new bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bonds and the euro plunging yesterday. “If the no confidence motion fails, the market reaction is just the beginning,” Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London, wrote in a note. “Then Armageddon scenarios come into play, which include default and potentially the whole contagion scenario plays out.” The yield on two-year Greek notes exceeded 28 percent for the first time and rates on 10-year bonds gained 35 basis points to 17.73 percent. The cost of protecting Greece against default climbed 149 basis points to a record 1,754 in London, according to prices compiled by CMA.
  • Euro Trades Near Three-Week Low on Concern Over Greece's Political Turmoil. The euro traded 0.2 percent from a three-week low against the yen on concern a reshuffling of Greek Prime Minister George Papandreou’s Cabinet will lead to a negotiation of the terms of the country’s rescue package. The shared currency was 0.7 percent from a record low against the Swiss franc on speculation the Irish government will ask bondholders to share losses of some of the nation’s lenders. Demand for the yen as a refuge increased as Asian stocks extended a global slide in shares. “The market is still quite concerned about Greece,” said Matthew Brady, executive director for foreign exchange at JPMorgan Chase & Co. in Sydney. “It’s going to be a choppy ride for the euro, there’s no doubt about that. I’d prefer to still sell any rallies in euro.”
  • Interest Rate Swap Spreads Widen Most Since November on European Debt Woes. U.S. interest-rate swap spreads widened the most since November after Moody’s Investors Service said it may cut the credit ratings of three French banks with investments in Greece. The difference between the U.S. two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, widened 4.6 basis points to 24.75 basis points. “There is some worry that with what is going on in Greece there will be downgrades and this will cause a problem in funding and result in a rise in Libor,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG. “Swap spreads are widening as direct result of these concerns.”
  • Japan's Ad-Hoc Radiation Tests Raise Concerns. Kimie Nozaki, a mother of three children living 60 kilometers from the crippled Fukushima nuclear reactors, said she doesn’t trust the government’s testing program for radiation-contaminated food. “Information from the government lacks detail, which makes me even more nervous,” said Nozaki, who lives in Fukushima city about 35 miles from the plant that’s been emitting radiation since March 11 in the world’s worst nuclear disaster since Chernobyl. Three months after an earthquake and tsunami crippled the plant, Japan doesn’t appear to have a comprehensive food testing regime, said Peter Burns, the former chairman of the United Nations Scientific Committee on the Effects of Atomic Radiation. Prolonged exposure to radiation in the air, ground and food can cause leukemia and other cancers, according to the London-based World Nuclear Association. “My impression is the monitoring has been a bit piecemeal,” Burns said by phone from his home in Melbourne on June 14. “The Japanese are usually highly motivated and organized to implement such systems, so I would think they will get there, but certainly what I’ve seen to date hasn’t been awe- inspiring.” Products including spinach, mushrooms, bamboo shoots, tea, milk, plums and fish have been found to be contaminated with cesium and iodine as far as 360 kilometers from the station. Contamination was detected in 347 food samples from eight prefectures by June 9, according to the Ministry of Health, Labour and Welfare.
  • China Development Bank Cancels Bond Sale. China Development Bank Corp. canceled one-year floating-rate bonds sale today on “market conditions”, according to statement on the Chinese government’s bond clearing house website.
  • China's economy will likely grow at a slower pace than previously forecast in 2011 and 2012 amid inflationary pressures and continued monetary tightening, according to Credit Suisse Group AG. GDP may increase 8.7% this year, down from a previous estimate of 8.8%, and expand 8.5% in 2012, instead of 8.9%, Credit Suisse analyst Dong Tao wrote in a report.
  • Oil Rises After Slumping to Four-Month Low; US Distillate Demand Drops. Futures climbed as much as 0.7 percent after plunging the most since May 11 yesterday. Crude’s 14-day relative strength index, a measure of how rapidly prices are advancing or declining, dropped to 38 yesterday, the lowest in four weeks. U.S. consumption of distillate fuel, a category that includes diesel and heating oil, tumbled 5.2 percent last week to 3.6 million barrels a day, the lowest level since January, according to the Energy Department.
Wall Street Journal:
  • Regulators Set to Clash on Capital Rules for Banks. Two top U.S. regulators are set to clash over whether setting bank-capital requirements too high will restrict lending and hurt American companies trying to compete internationally. In remarks prepared for a hearing of the House Financial Services Committee on Thursday, Federal Deposit Insurance Corp. Chairman Sheila Bair and Acting Comptroller of the Currency John Walsh will offer starkly contrasting views of new requirements for banks’ capital cushions being imposed in the wake of the 2008 financial crisis. Their remarks, seen by Dow Jones Newswires, come as U.S. and international regulators are working on several efforts that will require the largest financial institutions to hold more and higher-quality capital. Walsh is particularly concerned with new surcharges proposed for the world’s biggest financial institutions, saying that he supports a capital surcharge for the largest banks, but believes the amount should be “moderate.” “We are concerned with how much more we can and should turn up the dial on our banks without having negative effects on lending,” Walsh said. Bair, however, will argue for robust standards. Bair said that European banks have implicit state support. That, she said, “is not the model we want for the U.S. banking system.” She added, “I am very concerned about the potential for the European banking system to become a future source of financial instability.”
  • WSJ/NBC News Poll: $4-a-Gallon Gasoline Contributed to Growing Pessimism on Economy. Pessimism over the economy has soared to levels not seen since the summer of 2008, fueled in part by high gas prices, the latest Wall Street Journal/NBC News poll shows. Amid jitters over squeezed pocketbooks and a possible second recession, the poll found that only 29% of Americans think the economy will improve over the next year, while 30% think it will worsen. The last time the poll found more pessimists than optimists on the economy was in July 2008. The economy "is going nowhere, and the public is unbelievably pessimistic about the future," said Peter Hart, a Democratic pollster who directs the Journal/NBC News poll with Republican Bill McInturff. "Everyone has been affected by everything, from gas to home values to unemployment." Nearly seven in 10 of those polled said they had been affected "a great deal" or "quite a bit" by increased gas prices since the start of the year. Just over half said the same about higher food prices, more than complained about unemployment or falling home values. More than a third of all respondents said their personal economic situation had gotten worse over the last year, while less than one fifth said their situation had improved.
  • CME Group Inc.(CME), the world's largest futures exchange, is talking with officials from other states about relocating because of Illinois' corporate tax rate increase to 7%, Executive Chairman Terry Duffy said.
Zero Hedge:
RTT News:
  • China Leading Index Rises in April. China's leading economic index rose at a slower pace in April, indicating a more moderate expansion of the economy in the coming months, the Conference Board said Thursday. The leading economic indicator rose 0.2 percent month-on-month to 154.5 in April, slower than a 0.9 percent increase in March.
  • Finisar(FNSR) Q1 Forecast Disappoints; Shares Sink. Network equipment maker Finisar Corp (FNSR.O) forecast a dismal first quarter, hurt by a continued slowdown in demand from Chinese telecom equipment makers, sending its shares down 16 percent in extended trading on Wednesday.
Financial Times:
  • Portugal's Coelho Warns of Two 'Terrible Years' Ahead. Portugal's incoming Social Democrat Prime Minister Pedro Passos Coelho said the country faces two "terrible years" of recession and joblessness, with a return to growth only possible if it follows "a very rigorous program of austerity and structural reforms," the FT said, citing an interview. The austerity and reform plan "cannot fail" as failure would mean Portugal is unable to return to the financial markets in 2013, Coelho said. Coelho plans to speed up the rate at which Portugal sells off state-owned companies.
  • Germany Eases Stance Over Greece Bondholder Proposal. Germany is easing its stance on the timeframe for participation of private bondholders in any new bailout plans for Greece after the IMF indicated it was ready to support the payment of the next $17 billion portion of Greece's current rescue package next month, citing German officials. The country still insists that bondholders must make a "substantial and quantifiable contribution."
  • The UK may have to contribute between 700 million euros and 1 billion euros to a second rescue fund for Greece if Germany succeeds in persuading other European Union nations to include an emergency fund of 6 billion euros to 8 billion euros in the new bailout, citing officials in Brussels.
Economic Information Daily:
  • An interest rate increase by China isn't "far away" as not doing so would do more harm to the economy, the Economic Information Daily said in a front-page editorial signed by the newspaper's Wang Yinghui. The increase in banks' reserve requirement ratios on June 14 can't replace an interest rate increase, which is the most "powerful weapon" to contain inflation, according to the newspaper, which is run by the government's Xinhua News Agency.
China Daily:
  • The China Banking Regulatory Commission will order banks to examine their guarantee businesses through July to prevent risks from guarantee companies, citing Zhu Yongyang, a deputy director at the regulator's financing guarantee department. The regulator also plans to inspect banks on the spot in the coming months to avoid such risks, citing Zhu.
Evening Recommendations
  • Reiterated Sell on (HSY), target $64.
Night Trading
  • Asian equity indices are -1.50% to -1.0% on average.
  • Asia Ex-Japan Investment Grade CDS Index 117.50 +4.0 basis points.
  • Asia Pacific Sovereign CDS Index 119.50 +2.5 basis points.
  • S&P 500 futures +.35%.
  • NASDAQ 100 futures +.31%.
Morning Preview Links

Earnings of Note
  • (KR)/.64
  • (PIR)/.11
  • (SFD)/.81
  • (WGO)/.13
  • (ATU)/.46
  • (JW/A)/.49
Economic Releases
8:30 am EST
  • Initial Jobless Claims for last week are estimated to fall to 420K versus 427K the prior week.
  • Continuing Claims are estimated to fall to 3670K versus 3676K prior.
  • The 1Q Current Account Deficit is estimated to widen to -$130.0B versus -$113.3B in 4Q.
  • Housing Starts for May are estimated to rise to 545K versus 523K in April.
  • Building Permits for May are estimated to rise to 557K versus 551K prior.
10:00 am EST
  • The Philly Fed for June is estimated to rise to 7.0 versus a reading of 3.9 in May.
Upcoming Splits
  • None of note
Other Potential Market Movers
  • The Fed's Fisher speaking, Bloomberg Economic Expectations Index for June, weekly EIA natural gas inventory report, weekly Bloomberg Consumer Comfort Index, (HRL) investor day, (MCK) investor day and the (AOL) investor day could also impact trading today.
BOTTOM LINE: Asian indices are mostly lower, weighed down by technology and commodity shares in the region. I expect US stocks to open modestly higher and to weaken into the afternoon, finishing mixed. The Portfolio is 50% net long heading into the day.

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