Tuesday, October 18, 2011

Today's Headlines

  • French-German Yield Spread Widens to Most Since 1992 on Moody's. France’s 10-year bond yield climbed to the highest compared with Germany’s in almost 20 years after Moody’s Investors Service said the nation’s Aaa credit rating is under pressure due to the regional debt crisis. French securities also fell along with those from Greece and Spain after reports showed China’s economic growth slowed and German investor confidence worsened, fueling speculation the global recovery is losing momentum. France’s financial strength has waned because of the financial crisis, New York-based Moody’s said yesterday. The euro-area’s second-largest economy is a guarantor of the European Financial Stability Facility regional bailout fund. “If the EFSF is expanded, it would increase the contingent liabilities for Aaa guarantor states like France and Germany, which would be good for the periphery but not necessarily that good for stronger euro countries,” said Elwin de Groot, senior market economist at Rabobank Nederland in Utrecht, Netherlands. “You can see the market’s concern in the spreads.” France’s 10-year yield rose eight basis points, or 0.08 percentage point, to 3.14 percent at 4:51 p.m. London time. The 3.25 percent bond due October 2021 fell 0.705, or 7.05 euros per 1,000-euro ($1,367) face amount, to 100.960. The German bund rate dropped eight basis points to 2.01 percent. The difference between the two yields expanded by as much as 18 basis points to 114 basis points today, the widest since 1992 based on Bloomberg generic prices. Greek bonds led losses among the securities of Europe’s most indebted nations, with the yield on its 4 percent note due in August 2013 rising 161 basis points, or 1.61 percentage points, to 76.42 percent, leaving the price at 38.61. Two-year yields in Spain rose 13 basis points to 3.88 percent and in Italy they climbed seven basis points to 4.45 percent. Irish two-year rates increased by 15 basis points to 7.83 percent.
  • Merkel Said to Say Crisis Plan Moving by Millimeter. German Chancellor Angela Merkel told lawmakers that a European Union summit in five days will mark an important step, though not the final one, in solving the euro- area debt crisis, a participant at the meeting said. Officials from the 17-nation euro are moving millimeter by millimeter, the official told reporters in Berlin today on condition of anonymity because the talks were held in private. The comments by Merkel to a gathering of her Christian Democrat caucus marked the second time in two days that she sought to lower expectations that the European crisis-fighting effort would climax at the Oct. 23 meeting in Brussels, as international officials are advocating. “It is far from clear that the summit will deliver a package that is viewed as broad and deep enough,” David Mackie, chief European economist at JPMorgan Chase & Co (JPM), said in a note today. “Indeed, comments out of Germany appear to be trying to dampen expectations of what the summit will deliver.” Merkel said bank recapitalization will be discussed at the EU summit and permanent surveillance similar to the so-called troika of the International Monetary Fund, European Central Bank and European Commission is conceivable to oversee countries that tap the euro rescue fund, the official said. The euro declined 0.4 percent to $1.3689 at 5:25 p.m. in Frankfurt, reversing earlier gains of as much as 0.4 percent. France’s 10-year bond yield climbed to the highest compared with Germany’s in almost 20 years after Moody’s Investors Service said the nation’s Aaa credit rating is under pressure due to the region’s debt crisis.
  • Bank Bond Risk Rises in Europe Amid Crisis Resolution Concern. The cost of insuring against default on European bank bonds rose on concern politicians are struggling to agree to a solution to the region’s debt crisis as the economy slows. The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 banks and insurers rose four basis points to 249, the highest in more than a week, while a gauge of subordinated risk climbed 13 basis points to 483, according to JPMorgan Chase & Co. prices at 4 p.m. in London. “The issues at hand are substantial and the amount of resources around to fix them are limited,” Anke Richter, a strategist at Mizuho International in London, wrote in a note. “Either way you slice or dice the cake, it is unlikely it will come even close to a big bazooka.” The cost of innsuring sovereign bonds also increased. Credit-default swaps on Belgium climbed eight basis points to 305, France jumped 10 to 192 and Germany rose four to 97, while Ireland was up six basis points at 755, CMA prices show. Italy increased nine basis points to 453, Portugal was two higher at 1,112 and Spain was up four basis points at 384. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments increased 0.5 basis point to 334 basis points. An increase signals worsening perceptions of credit quality. Swaps on Hannover Re increased nine basis points to 122, Commerzbank AG jumped 27 to 232 and Deutsche Bank AG climbed 15 to 191, according to CMA. Legal & General Group Plc rose 13 basis points to 183. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 10 basis points to 750, JPMorgan prices show. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 3.75 at 178.5 basis points.
  • Euro Risks Break-Up if France AAA-Rating Lost, Handelsblatt Says. The euro risks breaking up if France should lose its triple-A rating, the Handelsblatt reported, citing the opinion of Berlin’s DIW institute’s chief macro- economic forecaster Ansgar Belke. Financial-market confidence in the ability of the euro- region to solve the debt crisis rests in part on the top rating of its biggest economies, Belke is cited as saying. France is the second biggest underwriter of the euro’s rescue fund’s guarantees, implying that a ratings downgrade would be transmitted to the fund, impairing the work of a key tool to tackle the crisis and raising the specter of a break-up of the currency in a worst-case scenario, Belke said.
  • Euribor-OIS Spread Widens for Second Day to Highest in 2 Weeks. Banks in Europe are the most reluctant in two weeks to lend to one another, according to a money markets indicator. The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight index swaps, was 76.5 basis points as of 12 p.m. in London, from 75.5 yesterday. That’s the biggest gap since Oct. 5 and compares with 89 basis points on Sept. 23, when the measure was its widest since March 2009. The cost for European banks to convert euro interest payments into dollars rose. The one-year basis swap was 66 basis points under the euro interbank offered rate, from 65 yesterday, according to data compiled by Bloomberg. The three-month cross-currency basis swap was 90.5 basis points below Euribor from 91. Overnight deposits at the European Central Bank rose. Banks parked 165 billion euros ($226 billion) at the Frankfurt-based ECB yesterday, up from 136 billion euros on Oct. 14. That compares with a year-to-date average of 60 billion euros. Three-month Euribor -- the rate banks say they pay for three-month loans in euros -- rose to 1.579 percent from 1.578 percent yesterday. One-week Euribor fell to 1.166 percent from 1.171 percent. The three-month dollar London interbank offered rate, or Libor, rose for the 28th day to 0.409 percent from 0.406 percent, according to the British Bankers’ Association. That’s the highest since Aug. 6, 2010. The TED spread, or the difference between what lenders and the U.S. government pay to borrow for three months, was little changed at 38.5 basis points.
  • Papandreou Presses Austerity as Strikes Hold Greece 'Hostage'. Greek Prime Minister George Papandreou vowed to push through a further round of austerity measures in the face of public anger, appealing to European leaders to help cut Greece’s debt burden at a weekend summit. Opening a parliament debate in Athens on the government’s latest tax increases and cuts to pensions and wages, Papandreou said that a planned 48-hour walkout by workers in schools, hospitals and on public transport “will not help Greece,” contrasting the strikers with his government’s efforts to help the country back to economic growth. “Greece is being held hostage by strikes and protests,” Papandreou told lawmakers today. “This government has been fighting for two years to save the country and still has much work ahead,” he said. “We will give battle and we will win."
  • Inflation in U.K. Accelerates More Than Forecast to Match 5.2% Record High. U.K. inflation accelerated to match a record high in September, a surge Bank of England policy makers set aside as they shifted their focus to combating the threat of another recession. Consumer prices rose 5.2 percent from a year earlier, compared with 4.5 percent in August, the Office for National Statistics said in London today. That matched the record high reached in September 2008, which was the highest since comparable records began in 1997. The median estimate of 35 economists in a Bloomberg News survey was 4.9 percent.
  • Copper Falls Most in Two Weeks As Slowing China Growth Signals Weak Demand. Copper fell the most in two weeks as economic growth slowed to a two-year low in China, the world’s largest metals consumer. Gross domestic product in China rose 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, figures from the statistics bureau showed. Prices also retreated as investor confidence in Germany, the third-biggest copper consumer, reached the lowest level in almost three years. “Investors sense that accelerating Chinese metal demand that was so prevalent in prior years may now give way to decelerating demand, something that may not support a scenario of higher metals prices over the medium-term,” Edward Meir, a senior commodity analyst at MF Global Holdings Ltd. in Darien, Connecticut, said in a report. Copper futures for December delivery slid 2.7 percent to $3.288 a pound at 10:08 a.m. on the Comex in New York. A close at that level would be the biggest loss since Sept. 30. Yesterday, the price dropped 0.9 percent after Germany said European Union leaders won’t provide a quick fix to the region’s debt crisis. The metal slumped 26 percent in the three months ended Sept. 30, the biggest quarterly loss since the end of 2008, as Europe’s debt crisis threatened global growth.
  • Wholesale Prices in U.S. Rise More Than Economists Estimated on Food, Fuel. Wholesale prices in the U.S. rose more than forecast in September, boosted by gasoline, food and trucks, indicating inflationary pressures continue to bubble up the production line. The producer price index climbed 0.8 percent, the most in five months, after no change in August, Labor Department figures showed today in Washington. Economists projected a 0.2 percent gain, according to the median of 71 estimates in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy, gained 0.2 percent, also more than predicted.
  • Rise in U.S. Homebuilder Sentiment Tops Forecast. Homebuilders in the U.S. were less pessimistic than forecast in October as near record-low borrowing costs and price decreases raised hopes the market will turn for the better over the next six months. The National Association of Home Builders/Wells Fargo sentiment index climbed to 18, the highest level since May 2010, from 14 in the prior month, data from the Washington-based group showed today. Economists surveyed by Bloomberg News projected the measure would rise to 15, according to the median forecast. Readings below 50 mean more respondents said conditions were poor.
  • Crude Oil Rises to One-Month High on Bank of America(BAC) Earnings Results. Crude oil rose to the highest level in one month as U.S. stocks rallied after Bank of America Corp. (BAC) reported better-than-estimated results, raising hopes that economic growth will stabilize. Oil climbed as much as 2.6 percent as the Standard & Poor’s 500 Index reversed losses after Bank of America, this year’s worst performer in the Dow Jones Industrial Average, reported a third-quarter profit versus a loss a year earlier. Crude fell as much as 1 percent earlier as data showed China’s economy grew at the slowest pace in two years.
  • Obama Finds Economy Makes Policies Hard Sell. Lisa Hensley was excited to meet President Barack Obama when he unexpectedly showed up yesterday at the Countryside Barbeque in Marion, North Carolina, a town of about 8,000 along the Blue Ridge Mountains. The accountant even echoed the president’s message: “We need to be for America, not just for Democrats or Republicans,” she said. Yet, Hensley, 50, a registered Democrat, said she won’t be voting for Obama next year. “Not unless something changes dramatically,” she said. “It would have to be something monumental.”
  • Los Angeles, Wooed by Occupy Protest, May Face Higher Debt Costs. Los Angeles faces tens of millions of dollars in additional borrowing costs after the City Council told anti-Wall Street protesters it intends to cut ties with banks involved in financial wrongdoing, Administrative Officer Miguel Santana said. The city may have to pay $27.8 million in termination fees and replacement costs if it's prohibited from doing business with banks providing letters of credit for just one infrastructure program, Santana said yesterday in a memo to Mayor Antonio Villaraigosa. Debt service would climb $14.9 million a year if it has to refinance commercial paper into long-term debt at higher rates, Santana said in a telephone interview.
  • Hatch Urges Obama to Drop Plan to Cap Charitable Deductions. Limiting tax deductions for charitable contributions would undermine churches and other nonprofit community groups, Utah Senator Orrin Hatch said at a Senate Finance Committee hearing today. Hatch urged the Obama administration to back away from a proposal to cap at 28 percent itemized deductions, including the one for charitable contributions, for individuals earning more than $200,000 a year and married couples earning more than $250,000. Such deductions now are capped at the top marginal tax rate of 35 percent. “I am deeply concerned that the current deduction for charitable giving is under quiet assault,” said Hatch, the panel’s top Republican, at a hearing examining possible changes to the tax treatment of charities. The proposal for the 28 percent cap on deductions for high earners was included in President Barack Obama’s $447 billion jobs package unveiled last month. Senator Max Baucus, a Montana Democrat and the Finance Committee’s chairman, said taxpayers at varying income levels tend to give to different types of charities. Higher-income households contribute more often to health causes, he said, while lower-income families tend to give more to religious or basic-needs charities.
Wall Street Journal:
  • Europe Could Reconsider Climate Approach. In what could herald a significant shift in policy for a region that has been in the forefront of advocating action to combat climate change, the European Union is for the first time clearly questioning whether it should press ahead with plans to cut greenhouse-gas emissions if other countries don't follow suit.
  • Hedge Fund Investor Jen Sees Broad Rally In USD; Euro to Tumble. U.S. dollar bears beware. Stephen Jen, a high-profile currency market investor, expects the U.S. currency to rally broadly in coming months against many of its rivals including the euro, the Australian dollar, the South Korean won and the Brazilian real. "My three favorite currencies to buy? dollar, dollar, dollar," said Jen, managing partner at hedge fund SLJ Macro Partners LLP and former currency research head at Morgan Stanley, in an interview Tuesday. "The support in the U.S. for large Keynesian stimulus is no longer there, and Europe is in full fiscal retrenchment mode," said Jen. "The policy stance in the U.S. and Europe is now very different from that a year or two years ago. Meanwhile, the euro zone's crisis is far from resolved even if policymakers thrash out a broad plan in coming weeks, said Jen. "The underlying problems remain the same," said Jen. "Greece is insolvent but the Eurocrats don't want to admit that it is insolvent. The European banks are over-leveraged and are vulnerable to all sorts of shocks. European growth will likely disappoint." Jen flagged one issue facing European banks--they have exceptionally high loan-to-deposit ratios of 1.2, which he terms as "excessive leverage," compared with a 0.7 ratio for American and Japanese banks. Should the bank recapitalization plan move forward, European banks will likely experience market and regulatory pressures to reduce their cross-border loans, which would lead to a credit squeeze in the euro zone and hurt the region's economic growth, said Jen. "If we assume European banks, over the course of several years, reduce their LTD ratio toward that of the U.S., some $7 trillion in loans will need to be curtailed, assuming deposits don't rise," said Jen.
  • US to Crack Down on Commodity Traders; Will It Stick? The United States is poised on Tuesday to push through the toughest measures yet to curtail speculation in commodity markets, likely shifting the focus of a fierce four-year debate from the regulators to the courts.
Business Insider:
Zero Hedge:
  • Debt Crisis Hobbles China's Factory Hub. "Do anything, but not manufacturing in China!" exclaimed Yang Guanghua, boss of a Wenzhou electroplating factory. Unable to collect from customers who themselves have no money, Yang said he stopped paying salaries two months ago. Wenzhou's private entrepreneurs, scrappy survivors in an economy ruled by state industries, once thrived on a formula of cheap back street loans and low-cost manufacturing.Now, they're at the center of what some have dubbed China's own subprime debt crisis, a festering mess of borrowings gone sour that has become one of the weakest links in the economy.
BNR Radio:
  • ABN Amro Group NV CEO Gerrit Zalm said making banks share the costs of rescuing Greece may not be sensible as lenders may shun investing in other countries' debt as a consequence. Additional writedowns by banks "raise doubt on whether states will meet their obligations," Zalm said in an interview.

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