Thursday, October 20, 2011

Today's Headlines

  • EU Leaders Said to Consider Combining Rescue Funds to Deploy $1.3 Trillion. European governments may unleash as much as 940 billion euros ($1.3 trillion) to fight the debt crisis by combining the temporary and planned permanent rescue funds, two people familiar with the discussions said. Negotiations over pairing the two funds accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked a clash between Germany and France, said the people, who declined to be identified because a decision rests with political leaders. The dual-use option is one way to break a deadlock that today prompted declines in weaker countries’ bonds, European stocks and the euro and led the European Union to announce that an Oct. 23 summit will have to be followed by another three days later. The 440 billion-euro European Financial Stability Facility has already spent or committed about 160 billion euros, including loans to Greece which will run for up to 30 years. It is slated to be replaced by the European Stability Mechanism, worth 500 billion euros, in mid-2013. A consensus is emerging to start the permanent fund in mid-2012, the people said. During the transition between the two funds, euro-area governments originally agreed to cap the overall lending capacity at 500 billion euros, a figure deemed sufficient when Greece, Ireland and Portugal were the primary victims of the debt crisis. Officials have discussed scrapping Article 34 of the ESM treaty, which sets the cap, the people said. A revised treaty is due to be signed by the end of November. Faster startup of the ESM would also save money. It would cut the extra debt of donor countries by 38.5 billion euros, saving Germany 11.5 billion euros and France 8.6 billion euros, according to staff estimates reported by Bloomberg News on Sept. 24.
  • Merkel Cancels EFSF Speech to Assembly. German Chancellor Angela Merkel has canceled a planned speech to parliament in Berlin tomorrow because of a deadlock over proposals to leverage the European Financial Stability Facility to give it more firepower, three German lawmakers said. “It’s a disappointing development but without any concrete proposal for increasing the efficiency of the fund the chancellor can’t present a complete set of proposals tomorrow,” Norbert Barthle the ranking member of Merkel’s Christian Democratic Union party on parliament’s budget committee, told reporters. Other lawmakers confirming cancelation of Merkel’s speech were opposition members Carsten Schneider and Priska Hinz. “The French want more money from Germany than we are prepared to shoulder,” Otto Fricke, the budget spokesman for Merkel’s Free Democratic Party ally in parliament, told reporters today.
  • EU Weighs Credit-Ratings Bans for Nations Getting Bailouts. The European Union may ban credit- ratings companies from making assessments of nations receiving European or international bailouts as part of plans for tougher regulation of the industry. “We are actively considering suspending or banning ratings” in cases where nations are making “full efforts” to implement assistance programs, Michel Barnier, the EU’s financial services chief, told reporters in Brussels today. The measure may be included in a draft law that Barnier will present in November. The EU may also force the companies to disclose the internal analyses they use when they decide to cut a government’s rating, according to Barnier, who said that he wanted to ensure “there is a clear method” behind such downgrades. EU governments have criticized decisions by ratings companies to downgrade Greek, Irish and Portuguese sovereign debt even though the countries are receiving international assistance, saying that the decisions are unjustified and exacerbate the region’s fiscal crisis. The European Commission said that a four-level cut of Portugal’s credit rating in July by Moody’s Investors Service added “an additional element of uncertainty” to the country’s situation.
  • Corporate Bond Risk Rises in Europe Amid Franco-German Divide. The cost of insuring against default on European corporate debt rose as a split emerged between France and Germany over how to end the region’s debt crisis. Contracts on the Markit iTraxx Crossover Index of credit- default swaps on 50 companies with mostly high-yield credit ratings increased 22.5 basis points to 756.5 basis points, according to JPMorgan Chase & Co. at 4 p.m. in London. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 7 at 182.75 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 8.5 basis points to 250.5 and the subordinated gauge was seven higher at 485. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased six basis points to 331 basis points. Credit-default swaps protecting French debt rose 5.5 basis points to 189.5, contracts on Germany rose three basis points to 90, Italy widened five basis points to 447, and Portugal was 33 basis points higher at 1099, according to CMA.
  • China's Stocks Fall to 31-Month Low on Economic Slowdown, Europe. China’s stocks fell, driving the benchmark index to the lowest since March 2009, on concern slowing economic growth and divisions among European leader over a rescue strategy threaten earnings outlooks. Jiangxi Copper Co., the biggest producer of the metal, slid to a 15-month low as copper futures tumbled 5.5 percent in Shanghai. China Southern Airlines Co. led losses for carriers after China Business News said the aviation regulator reduced its estimates for passenger volume growth. China Citic Bank Corp. and China Vanke Co. paced declines for financial companies after the banking regulator said risks stemming from private lending must be “strictly controlled.” “Investors are seeing a clearer picture of the economic slowdown at home and globally, which may lead to market fluctuations,” said Liu Jianwei, a fund manager at Bosera Asset Management Co., which oversees more than $29 billion. The central bank is unlikely to loosen its monetary policies as inflation remains high, Liu said. The Shanghai Composite Index lost 46.1 points, or 1.9 percent, to 2,331.37, a third day of declines and closing at the lowest level since March 25, 2009. The CSI 300 Index slid 2.4 percent to 2,520.53. The Shanghai index has plunged 17 percent this year. The Shanghai Composite has dropped 4.1 percent this week on reports showing the economy is slowing. A gauge of material companies in the CSI 300 plunged 3.3 percent, the most among the 10 industry groups. Jiangxi Copper slid 4.4 percent to 25.20 yuan, the lowest close since July 15, 2010. Yunnan Copper Industry Co. dropped 2.4 percent to 17.18 yuan. Copper for January-delivery on the Shanghai Futures Exchange tumbled 5.5 percent to 50,950 yuan a metric ton. Coal producers also slumped. China Shenhua Energy Co., the listed unit of the biggest producer, sank 2 percent to 24.73 yuan. Yanzhou Coal Mining Co. slid 4.2 percent to 26 yuan. China Southern, the biggest domestic carrier, dropped 4.2 percent to 6.11 yuan. China Eastern Airlines Corp., the second largest, lost 4.7 percent to 4.47 yuan. The nation’s aviation regulator cut its 2011 passenger number growth estimate to 8 percent from 13 percent, China Business News reported today, citing a report by the Civil Aviation Administration of China. International travel and cargo shipment demand is weak and domestic growth has slowed, the newspaper said. CAAC forecast this year’s cargo and mail volume may be unchanged from last year, compared with a previous growth estimate of about 12 percent, according to the newspaper. The Economic Observer reported yesterday an auto industry group cut its forecast for vehicle sales growth to as much as 3 percent this year, from 5 percent. China Citic Bank declined 2.1 percent to 4.25 yuan. China Construction Bank Corp., the nation’s second-largest lender, lost 1.7 percent to 4.56 yuan. China Vanke, the biggest developer, dropped 1.1 percent to 7.02 yuan. Gemdale Corp. slid 3.1 percent to 4.41 yuan. China’s central bank will start a second round of investigation into the nation’s private lending and may introduce a monitoring system in the future, the 21st Century Business Herald reported today, citing an unidentified person close to the People’s Bank of China. Risks stemming from China’s shadow banking system and private lending must be “strictly controlled,” and such loans will be curbed, the head of the nation’s banking regulator said.
  • Muammar el-Qaddafi Dies After Capture. Muammar Qaddafi, whose rule lasted 42 years, died after being captured in his hometown of Sirte, ending a search for the deposed leader that began when he fled Tripoli in August, Libyan officials said. “Years of tyranny and dictatorship have now been closed,” Abdel Hafiz Ghoga, National Transitional Council vice chairman, told reporters in Benghazi today. Libya’s liberation will be announced after the NTC makes sure there are no pockets of resistance left in Sirte, he said.
  • Iron Ore's Worst Rout in 15 Months Seen Deepening as China's Growth Slows. Iron ore’s biggest decline in 15 months may worsen as the economy slows in China, the largest importer, the European debt crisis persists and BHP Billiton Ltd. (BHP) and Rio Tinto Group increase production, analysts said. Ore for immediate delivery may drop to $140 a metric ton by year-end, according to Macquarie Group Ltd. analyst Bonnie Liu in Shanghai. That’s down 5.2 percent from $147.70 yesterday, data from The Steel Index Ltd. show. The price may fall to the mid to low $140s, said Australia & New Zealand Banking Group Ltd. China, the world’s biggest steelmaker, grew at the slowest pace since 2009 in the third quarter on weaker export demand and monetary tightening as steel prices dropped to a 10-month low and port ore inventories held near a record. Cheaper ore -- also sold through quarterly contracts -- may limit profit growth at Vale SA (VALE3), Rio Tinto and BHP Billiton, the largest producers. “I’m leaning toward lower prices than they are now for the rest of this year,” Daniel Hynes, a Sydney-based analyst at Citigroup Inc., said by phone, without giving a forecast. “The marginal buyers, who have been pretty active in the market this year, have pulled away.” Prices of fines with 62 percent iron content delivered to the port of Tianjin plunged 18 percent in the past six weeks after reaching $191.90 on Feb. 16, the highest since at least 2008, The Steel Index data show. The cash price hasn’t traded at less than $140 per ton since September 2010. Swaps for December are at $126.87 per ton, according to Singapore Exchange Ltd.
  • Philadelphia Economic Index Unexpectedly Rises. Manufacturing in the Philadelphia area unexpectedly expanded in October at the fastest pace in six months, signaling factories are helping support a U.S. economy weighed down by weakness in the housing and labor markets. The Federal Reserve Bank of Philadelphia’s general economic index increased to 8.7 from minus 17.5 last month, the biggest one-month rebound in 31 years. Readings greater than zero indicate expansion in the area covering eastern Pennsylvania, southern New Jersey and Delaware.
  • Consumers Most Negative Since Recession. Consumer confidence in the U.S. economic outlook slumped in October to the lowest level since the recession, highlighting the challenges facing the biggest part of the economy. The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 45, the worst reading since February 2009. The weekly measure of current conditions was minus 48.4 for the period ended Oct. 16, up from minus 50.8 the prior week that was close to a record low.
Business Insider:
Zero Hedge:
Credit Writedowns:
  • U.S. Commercial Paper Market Shrinks in Latest Week.
  • Union Pacific(UNP) Beats Estimates; Shares Rise. Union Pacific Corp reported record quarterly results that topped estimates because of pricing gains and fuel surcharges, and said re-pricing older contracts will boost profit next year. Shares rose as much as 5.5 percent after the No. 1 U.S. publicly held railroad operator said a core pricing increase of 4.5 percent and fuel surcharges helped offset higher fuel expenses and moderate volume.
Financial Times:
Frankfurter Allgemeine Zeitung:
  • Antonis Samaras, leader of Greece's biggest opposition party, said the austerity measures imposed on the country have failed, writing in an opinion column. "The Greek public is in despair, because their sacrifices they see no improvement," Samaras, who heads the New Democracy party, wrote.
  • The IMF will withhold payment of its share of a sixth loan tranche to Greece under last year's bailout without an end to the impasse over a new package. The IMF considers the country's debt to be unsustainable without the implementation of a second package. EU leaders are deadlocked over the scale of private bondholder losses that are part of the package, initially agreed on July 21, and will try to break the deadlock at a crisis summit on Oct. 23.

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