Friday, October 28, 2011

Today's Headlines

  • European Stocks Surge for Firth Week After Leaders Strike Debt-Crisis. European stocks climbed for a fifth week, the longest stretch of gains in 18 months, after the region’s leaders struck a deal to enact measures to contain the sovereign debt crisis following months of negotiations. An index of banks surged the most since July 2010 as Credit Agricole SA and Deutsche Bank AG jumped more than 19 percent. Kazakhmys Plc (KAZ), Kazakhstan’s biggest copper producer, and SSAB AB (SSABA), the Stockholm-based steelmaker, led basic-resources companies to the largest gain in more than two years. BP Plc, Merck KGaA and Renault SA rallied at least 6 percent after results topped analyst estimates. The Stoxx Europe 600 Index climbed 4.2 percent to 249 this week. The gauge has surged 10 percent in October, heading for its biggest monthly advance since April 2009, amid speculation the economy will evade another recession and Europe will avoid the worst effects of the region’s debt crisis. The measure has risen 16 percent from this year’s low on Sept. 22. “We got the right headlines on solving the euro crisis,” said Lars Rohde, chief executive officer of the Hilleroed, Denmark-based ATP pension fund, which manages about $105 billion. “Stocks are showing strong gains, but the devil still lies in the detail.” European leaders agreed to boost the firepower of the region’s rescue fund to 1 trillion euros ($1.4 trillion) and persuaded bondholders to take 50 percent losses on Greek debt, responding to pressure to come up with a credible plan before next week’s Group of 20 meeting in France.
  • Sovereign, Bank Bond Risk Rises in Europe, Reversing Declines. The cost of insuring against default on European sovereign and bank debt rose, reversing earlier declines, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose two basis points to 291 at 4:30 p.m. in London, signaling deterioration in perceptions of credit quality. The index had earlier dropped to the lowest since Aug. 16. Contracts on Germany rose five basis points to 76, according to CMA. Swaps on other countries’ debt pared earlier declines with Spain falling eight basis points to 314, France down two at 156 and Italy 10 basis points lower at 408, according to CMA. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 3.5 basis points to 207.5, according to JPMorgan Chase & Co. in London. The subordinated gauge was 13 lower at 392.5. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 15 basis points to 618 basis points. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was down 0.25 basis points at 149.75.
  • 50% Greek Bond Haircut Viewed as Default Event. European leaders’ agreement on a 50 percent haircut on Greek bonds may create an event of default if investors accept it, Fitch Ratings said in a statement today. “The 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria,” the statement said. While the accord is “a necessary step to put the Greek sovereign’s public finances on a more sustainable footing,” Greece will face “significant challenges” including ratios of government debt to gross domestic product at “well over 100 percent even in a positive scenario.” “It’s highly likely that all three rating agencies will classify this restructuring as a technical default,” said Padhraic Garvey, head of developed debt-market strategy at ING Groep NV in Amsterdam. “Even if it’s voluntary, investors are left with a product that’s lower in value to what they originally agreed.”
  • Spanish Unemployment Rises to Highest in 15 Years, Undermining Recovery. Spanish unemployment rose to a 15- year high of more than 21 percent, the most in the euro area, as government austerity measures undermine the recovery in the region’s fourth-largest economy. Joblessness increased to 21.5 percent in the third quarter, the National Statistics Institute said today in Madrid. Consumer prices gained 3 percent in October from a year earlier after increasing 3 percent in September, the INE said in a separate report. The last time unemployment rose to this level, in 1996, Spain’s Socialists lost to the opposition People’s Party, which polls indicate will win a general election on Nov. 20. “This forebodes a very negative macroeconomic scenario for the second half of the year,” said Jose Luis Martinez, a strategist for Spain at Citibank in Madrid. “The poor performance of jobs in the services sector and of part-time contracts is particularly striking given the tourist season.” Deputy Finance Minister Jose Manuel Campa blamed the increase on austerity measures taken by regional governments.
  • Consumer Spending in U.S. Rises .6%. Consumer spending in the U.S. accelerated in September, helping the world’s largest economy skirt a recession. Purchases increased 0.6 percent, matching the median estimate of 81 economists surveyed by Bloomberg News, after a 0.2 percent gain the prior month, Commerce Department figures showed today in Washington. Incomes rose less than projected, sending the savings rate down to the lowest level in almost four years. Incomes rose 0.1 percent last month after dropping 0.1 percent in August. Economists had forecast incomes would increase 0.3 percent, according to the Bloomberg survey. Wages and salaries climbed 0.3 in September after falling 0.1 percent a month earlier. A 1.4 percent plunge in interest income limited the overall gain. The savings rate fell to 3.6 percent in September, the lowest since December 2007, according to the release. The Fed’s preferred price gauge, which excludes food and fuel costs, was little changed in September from the prior month after rising 0.2 percent the prior month. It was projected to rise 0.1 percent, according to the median forecast of economists surveyed. It was up 1.6 percent over the past 12 months, down from a 1.7 percent gain in the year ended August. The 0.3 percent rise in the employment cost index from July through September was less than projected and followed a 0.7 percent gain in the prior three months, according to figures from the Labor Department. Wages climbed at the slowest pace in a year, while benefit costs were the tamest since 1999.
  • Agribank Chief Xiang Quits Amid Speculation of China Financial Reshuffle. Agricultural Bank of China Ltd. (1288) Chairman Xiang Junbo and China Construction Bank Corp. (939) Chairman Guo Shuqing resigned amid speculation that the government plans to appoint new financial regulators. Both resigned to do “state financial work,” the two government-owned banks said in separate statements to the Shanghai and Hong Kong stock exchanges yesterday, without giving details.
  • Americans 'Hooked' on Government Benefits. Political dysfunction is often blamed for Congress’s inability to curb the U.S. budget deficit. An even bigger obstacle may be the American public. A record 49 percent of Americans live in a household where someone receives at least one type of government benefit, according to the U.S. Census Bureau. And 63 percent of all federal spending this year will consist of checks written to individuals for which the government receives currently no services, the White House budget office estimates. That’s up from 46 percent in 1975 and 18 percent in 1940. Those figures will climb in coming years. The 75 million baby boomers have only begun their long march into retirement, while President Barack Obama’s health-care overhaul will extend insurance coverage to more than 30 million additional people. “The more households that are benefiting from the programs, the more difficult it is to rein in their costs,” said Bob Bixby, head of the Concord Coalition, an Arlington, Virginia- based group that promotes balanced budgets. “It’s a troubling phenomenon” and “it explains why it’s politically difficult to deal with these things.”
Wall Street Journal:
  • Next Act - The Plan Is Put to Test. Will it work? The deal euro-zone leaders hammered out in the early hours of Thursday sparked a world-wide stock rally. But the market moves belied widespread caution about the accord among economists and analysts—and even some of the decision-makers in the debt crisis.
  • Potential Suitors Emerge for MF Global(MF). Goldman Sachs, State Street and Macquarie are among the companies considering an acquisition of MF Global or parts of the struggling company, people familiar with the matter said. Some of the companies looking at MF Global have not yet approached the firm; rather, they are assessing internally whether to make a move, the people said. Also, they may not move forward in the end, the people said. There could be several other firms eyeing the company. Potential buyers for MF Global and its pieces are expected to decide on any move quickly, given MF Global’s loss of some customer assets and its declining stock price. On Friday the stock was trading down about 12%.
  • The Divider vs. the Thinker. While Obama readies an ugly campaign, Paul Ryan gives a serious account of what ails America.
  • Green Shoots? ECRI Leading Index Tick Up. (graph)
  • Euro Bailout Fund Chief Sees No Quick China Deal. The head of Europe's bailout fund said on Friday he does not expect to reach a conclusive deal with Chinese leaders during a visit to Beijing but expects the surplus-rich country to continue buying bonds issued by the fund. "I think the EFSF can offer a good product that is commercially interesting," Regling said, adding that China should be assured that the EFSF's triple-A rating is solid. Link
Business Insider:
Zero Hedge:
Washington Post:
  • Another Obama Fundraiser is Investor in Car Company That Won Federal $50 Million Loan. An investment firm whose vice chairman has been an adviser and fundraiser for President Obama saw one of its portfolio companies win approval this year for $50 million in loans from the administration’s clean-energy loan program. Washington-based Perseus says its affiliation with James A. Johnson, a major fundraiser for Obama’s campaign, played no role in persuading the Energy Department to award the loan to Vehicle Production Group, a Miami start-up that is manufacturing wheelchair-accessible cars and taxis. Johnson headed Obama’s vice presidential selection committee in 2008 and is the former chairman of housing mortgage giant Fannie Mae. He was listed as a campaign fundraising bundler for Obama in the 2008 race, according to the Center for Responsive Politics, and committed to raising $200,000 to $500,000 for the upcoming presidential race.
  • U.S. Launches Climate Change, Observation Satellite. NASA and NOAA officials congratulated each other this morning following the successful launch of the NPP spacecraft aboard a Delta II rocket from Vandenberg Air Force Base, Calif. Ken Schwer, NPP Project Manager, led off a news conference this morning about three hours after liftoff. He will be part of the team who will get the spacecraft checked out during the next several weeks so it can begin its Earth observing mission. "Now the future of NPP starts and we look forward to NPP touching the rest of the world," Schwer said.
Financial Times:
  • How Badly Do You Want EFSF First-Loss Protection? The EFSF has opened the kimono a little on how it would work as a sovereign bond insurer. Answers from an updated investor Q&A — especially interesting ones have been bolded by us:
  • Sovereign CDS Posterchildren. (graphs) Now that a debate is brewing over survival probability of the European sovereign CDS market itself, FT Alphaville thought it’d be a good idea to look at some more recent trends in order to try to discern where the demand for these financial products has come from.
Globe and Mail:
  • Italy at Heart of Crisis as Borrowing Costs Climb. Italy’s borrowing costs jumped to record levels on Friday, underlining its vulnerability at the heart of the euro zone debt crisis and skepticism about whether the struggling government of Prime Minister Silvio Berlusconi can deliver vital reforms. The 6.06-per-cent yield paid at an auction of 10-year bonds was the highest since the launch of the euro and not far from the level reached just before the European Central Bank intervened in August to cap Rome’s borrowing costs by buying Italian paper. Italy, the euro zone’s third largest economy, is once more at the centre of the debt crisis, with fears growing that its borrowing costs could rise to levels that overwhelm the capacity of the bloc to provide support amid chronic political instability in Rome.

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