Tuesday, December 20, 2011

Today's Headlines

  • Merkel Takes Vacation as Debt Crisis, Domestic Woes Fester. Chancellor Angela Merkel presided over her final Cabinet meeting of 2011 before she takes a winter break, leaving behind the simmering debt crisis and a political ally whose job as German president is on the line. Merkel discussed minimum wages, changes to a stocks law and a bill on energy-efficiency labeling with ministers in Berlin today, her last publicly scheduled meeting before she goes on vacation tomorrow. Her spokesman declined to say where she is going, saying only that her next official appearance is not until Jan. 5. As she takes time out, the German leader leaves the threat of a credit-rating downgrade hanging over Europe’s biggest economy and the wider euro area, as rating companies join investors in questioning the impact of Merkel’s Dec. 9 European summit push for closer fiscal ties to combat the crisis. The euro fell to an 11-month low against the dollar on Dec. 14. “They haven’t solved the crisis,” Christian Schulz, an economist at Joh. Berenberg Gossler & Co in London, said by phone. “If the whole thing blows up, it’s going to cost Merkel a lot. Her future rests on the future of the euro.”
  • Spain, Italy Lead Drop in Government Default Swaps in Europe. Spain and Italy led a decline in the cost of insuring against default on government debt before the European Central Bank starts offering three-year loans tomorrow. Credit-default swaps on Spain dropped 21 basis points to 387 and Italy tumbled 31 to 504, according to CMA prices at 4 p.m. in London. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 11 basis points to 359. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 31.5 basis points to 772.5, according to JPMorgan Chase & Co. A decline signals improvement in perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 7.5 basis points to 179.25 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers decreased 17 basis points to 298 and the subordinated index dropped 15 to 540.
  • IMF Urges European Firewall Around Ireland as Prospects Fragile. Ireland's European benefactors should take steps to create a firewall around the nation, as its prospects remain “fragile” amid the escalating euro-region debt crisis, the International Monetary Fund said. The crisis may hamper Irish economic growth, increase the cost of re-entering bond markets and make it harder for the country's banks to sell off assets, the Washington-based fund said today in its fourth review of Ireland's bailout program.
  • Europe Dragging Down U.S. in Record Correlation: Credit Markets. For all the evidence that the U.S. economy is expanding, the nation's credit markets are unable to decouple from Europe as everything from junk bonds to interest- rate swaps move increasingly in lockstep with the euro region. Correlation between the 17-nation currency and prices of a credit-default swaps index tied to U.S. junk bonds is at about the highest on record, Bloomberg and London-based Markit data show. Interest-rate swap spreads in the U.S., a gauge of fear in credit markets, are trading the most in tandem with European corporate credit since 2007. "You're living in fairyland if you think the U.S. won't be impacted by Europe," MacDonald, head of research at Aladdin, a Stamford, Connecticut-based investment firm, said yesterday in a telephone interview. Investors are speculating "Europe is going to get worse before it gets better," he said, and they "don't feel the U.S. can easily sidestep it." Correlation between the euro-dollar exchange rate and the price of the Markit CDX North America High Yield Index reached a record 0.76 on Dec. 2, when measured over 60-day periods, and held at 0.74 yesterday, data compiled by Bloomberg and London- based Markit show. The measure has climbed from 0.1 on April 7.
  • U.S. Housing Starts Jump 9.3%, to Highest in Year. Builders broke ground in November on more houses than at any time in the past 19 months, led by a surge in multifamily units, signaling the market is stabilizing heading into 2012. Starts increased 9.3 percent to a 685,000 annual rate, exceeding the highest estimate of economists surveyed by Bloomberg News and the most since April 2010, Commerce Department figures showed today in Washington. Building permits, a proxy for future construction, also climbed to a more than one-year high. Work on multifamily units like apartments and townhouses is growing as the rental market improves. Applications for the construction of single- family homes climbed 1.6 percent, and those for multifamily units jumped 14 percent. New construction of single-family houses rose 2.3 percent from the prior month to a 447,000 annual rate, the most since June. The category is heading for a record low this year at around 423,000, about 10 percent less than in 2010, according to Bloomberg News calculations. Three of four regions had a November increase in starts, led by a 54 percent jump in the Northeast and a 23 percent gain in the West. Starts fell 18 percent in the Midwest.
  • Canada Is 'Very Serious' About Selling Oil to Asian Markets, Harper Says. Canadian Prime Minister Stephen Harper said he is ‘very serious’ about the idea of selling the country’s oil to markets in Asia, and that Canada no longer wants to export its energy only to the United States. “I am very serious about selling our oil off this continent, selling our energy products off to Asia,” Harper said in an interview with CTV National News broadcast last night. He said that when “senior Americans” told him U.S. lawmakers would approve TransCanada Corp. (TRP)’s Keystone XL pipeline, allowing Canada to sell all its oil to the U.S., he replied, “We’d love to, but I think the problem is now that we’re on a different track.”
  • Paulson-Backed Lender Grows by Buying Failed Banks. (video)
  • Gold Climbs Most This Month as IMF Pledge Boosts Euro Against U.S. Dollar. Gold rose, heading for the biggest gain this month, as the weakening dollar boosted demand for the metal as an alternative asset. The euro rose against the U.S. currency after Europe pledged 150 billion euros ($196 billion) to the International Monetary Fund to help stem the region’s debt crisis, and as the European Central Bank widened its support for bond markets.
Wall Street Journal:
  • US Demands Airlines CO2 Emissions Data As Spat With EU Drags On. The U.S. government has demanded aviation-emissions data from nine European airlines two weeks before the European Union's emissions trading system is set to include air-travel despite strong opposition from the U.S. and many other countries. The U.S. Department of Transportation on Friday told seven U.S. carriers and the EU airlines to provide data about how the EU plan affects them. The DoT letters, reviewed by The Wall Street Journal, said the department "will now seek certain information related to ETS."
  • Egyptian Women March Against Abuse by Military. Thousands of Egyptian women have taken to the streets of Cairo in a mass demonstration against the military's brutality against women during a crackdown on protesters that shocked many in the largely conservative society. Ringed by a protective chain of male protesters, women from different social classes and religious background gathered in Tahrir Square Tuesday and marched through the streets of Cairo. Many carried signs with images of soldiers dragging protesters by the hair and kicking and stomping on them on the ground. One image was particularly shocking.
  • Fitch Puts European Banks on Watch. Fitch Ratings placed banks in multiple European nations on watch for possible downgrade following the placement of the their home country's sovereign ratings under a similar review recently. The watch status applied to banking groups in France, Spain, Italy, Belgium, Ireland and Cyprus.
  • Fitch Warns on Bailout Fund's Rating. The triple-A debt rating of Europe's temporary bailout fund largely depends on France and Germany retaining their triple-A status, ratings agency Fitch warned Tuesday, adding that the agency's revision last week of its outlook on France to negative implies that the fund is at a greater risk of a downgrade. "We affirmed France's triple-A status but warned that there is a slightly greater than 50% chance of a downgrade within the next year or two.
  • Goldman(GS) Sees More Cuts in China Aluminum Output. The decline in aluminum prices has already led to production cutbacks in China and will likely lead to more, providing a mildly bullish boost to the metal, Goldman Sachs said. The bank on Tuesday lowered its 12-month aluminum price forecast by 9.4% to $2,400 a metric ton from $2,650/ton previously, and kept its three-month outlook unchanged at $2,300/ton. The price of aluminum, used in the automotive, aerospace and construction industries, has tumbled along with other commodity prices in recent weeks and is trading at 2011 lows.
  • NJ Recycling Company Told to Pay $570,000 for Dumping Asbestos-Contaminated Debris. A New Jersey recycling company has been sentenced to pay a $500,000 criminal fine and more than $70,000 in restitution and cleanup costs for its role in dumping thousands of tons of asbestos-contaminated construction debris on farmland near the Mohawk River in central New York in 2006.
  • Portrait of New North Korea Leader Takes Shape. U.S. Officials Describe Kim Jong Eun, Elusive Inheritor of the Kim Family's Dictatorship, as Sadistic and Unpredictable.
  • Long-Short Equities Fund Managers Roiled By Market Volatility. Hedge funds that try to beat the market through buying and selling individual stocks have had such a rough go of things this year that a number of them are cutting back on their allocations. Long/short equity managers recorded the heaviest withdrawal among various hedge fund strategies so far this year, accounting for $5 billion of the $9.4 billion outflows through November, according to Eurekhedge. On a return basis, these funds lost 7.10% for the first 11 months of the year--a steeper decline than the 4.37% drop for the industry as a whole, or the flat S&P 500 index.
  • Hopes For Crisis Relief Ride on ECB Loans to Banks. Demand for the European Central Bank's first ever offer of three-year loans to banks on Wednesday is likely to go a long way to determining whether countries embroiled in the debt crisis receive some relief or have to endure yet more pain. The ECB hopes the limit-free, ultra-cheap and ultra-long funding will have a range of beneficial effects, including bolstering trust in banks, easing the threat of a credit crunch and most of all, tempting banks to buy Italian and Spanish debt.
  • Subprime Buyers Pushing Late Auto Sales. As auto sales have surged in recent months, I’m hearing from more and more dealers about the renewed strength of the subprime and deep subprime buyer. You know the folks I’m talking about. Those who have a checkered (avg. score 550-620) credit record. The same folks who were either shut out or chose not to buy a new or used car when the economy tanked three years ago. The return of the subprime auto buyer is confirmed with the latest data from CNW Research and Experian.
Business Insider:
Zero Hedge:
  • EFSF at 5-Day Low Despite Sovereign Strength. (graph)
  • Deus Ex LTRO. I think we have already seen the initial impact. Now we will wait to see rates do well, but will be disappointed. The big banks with risk management departments will decide to decline. The risk/reward just won’t be attractive to them. We will find out that places like DB don’t participate and that small weak banks do. That will actually start another spiral on those weak banks, as people will sell the shares and they won’t find lenders outside of the ECB as no one will trust their discipline. In the end, this won’t do much for the sovereign debt market, but will shine a spotlight on which banks should be shorted and will possibly expedite their default.
  • Fed Issues Update On Dodd-Frank Framework, Director Responsibility and Annual Stress Tests.


National Terror Alert Response Center:
  • Alarm as Dutch Lab Creates Highly Contagious Killer Flu. The UK’s Independent reports that a deadly strain of bird flu with the potential to infect and kill millions of people has been created in a laboratory by European scientists – who now want to publish full details of how they did it. The discovery has prompted fears within the US Government that the knowledge will fall into the hands of terrorists wanting to use it as a bio-weapon of mass destruction.
  • Hedge Fund Walks Out On Greek Debt Swap Talks -Sources. Vega Asset Management has resigned from a group of private creditors leading talks with Greece and its international lenders over a restructuring of its debt, two sources said, amid differences over how to proceed with the voluntary bond swap.
Financial Times:
  • US Oil Boom Town Prompts Fears Of Crude Glut. The boom in North American oil production has triggered a race to expand the US’s main oil storage centre, raising concerns among some industry executives of potential glut in capacity. By next year, the capacity of tanks around Cushing, an Oklahoma town that calls itself the pipeline crossroads of the world, will equal to nearly a day’s of global oil production as refineries, trading houses, Wall Street banks and pipeline companies build or lease hundreds of thousands of barrels of new tanks.


  • Don't Ask The ECB to Intervene. Is it possible that the European Central Bank (ECB) doesn't want to intervene to end the debt crisis is because, whisper it quietly - it can’t afford to?
  • Britain, the IMF, and the World's Richest Beggar. Euro rage is reaching new heights over Britain's latest outrage. Our refusal to pony up a further €31bn we cannot afford, to prop up a monetary union that was created against our wishes and better judgment, and launched with the malevolent purpose of accelerating the great leap forward to a European state that is inherently undemocratic. It is being presented as treachery, Anglo-Saxon perfidy, and the naked pursuit of national self-interest. Let me just point out:
  • Debt Crisis: Live. Moody's warns that UK could face a downgrade as "formidable and rising challenges" such as the deficit increase since 2008 have eroded ability to absorb further fiscal shocks.

Die Welt:

  • Germany's Bundesbank doesn't think the conditions for providing aid to the IMF have been fulfilled until the Bundestag, Germany's lower house, explicitly backs the measure, citing people close to the central bank.
Finanz und Wirtschaft:
  • Clariant AG sees demand weakening in various areas of the chemicals market, CEO Hariolf Kottmann said in an interview.
The Moscow Times:
  • Clashes in Oil Region Threaten Kazakhstan Leader. Riots by oil workers in western Kazakhstan suggest that pressure is mounting for President Nursultan Nazarbayev to relax the rigid authoritarian system he has built in a nation that is fast losing its veneer of stability. Officials say 14 people were killed in Friday’s clashes following the dismissal of oil workers in Zhanaozen in western Kazakhstan and another person was killed when violence spread to a nearby village on Saturday. It was a local crisis that had long been simmering and local authorities had failed to master. “People want to be heard, but there are no mechanisms that would allow people to be heard. … This results in such brutal methods,” Kazakh political analyst Aidos Sarym said. “Zhanaozen actually threatened the unity of our nation. “In general, there is a need to slacken the reins. Public mechanisms are needed. There are things that should be discussed in parliament,” he said. “There must be modernization of society, of the political system.”
Globe and Mail:
  • Merrill: 'Classic Bubble' Signs in Canadian Housing Market. Canada’s housing market shows the “classic signs of over valuation, speculation and over supply,” but Bank of America Merrill Lynch says that’s no reason to think that there will be an epic crash of American proportions. In a report issued Monday, the bank’s Canadian analysts said record Canadian household debt and increased joblessness are cause for concern over the next year. There will likely be fewer sales, and prices could slip as much as 5 per cent in the next year. “Canadian home prices set new highs in 2011 and are now showing many of the signs of a classic bubble,” they wrote. “We estimate the housing market nationwide is about 10 per cent over valued. Even so, the only way these valuations can be explained is by the record low mortgage rates. Under more normalized interest rates, home prices would actually look 25 per cent overvalued based on current prices.”

Financial Chronicle:

  • India's Sensex, Nifty Plunge to 28-Month Low. FAST spreading negative sentiment on Indian equities pulled the benchmark indices Sensex and Nifty to a new 28-month low taking the market capitalisation of shares listed on the Bombay Stock Exchange to below the psychological $1 trillion mark. Most of Tuesday's 204-point fall in the Sensex to 15,175 came in the last hour of trading led by aggressive selling in the large cap stocks. Sensex closed just above the August 20, 2009 low of 15,035, making India the worst-performing stock market worldwide.
  • Property Sales See Declines in East China. Commercial property sales in booming Zhejiang province has seen further declines as the property sector continues to cool off with no signs of immediate loosening of tightening measures. The total area sold slumped 22.9 percent year-on-year to 30.7 million square meters in the January-November period, the provincial statistics bureau said in a statement. The sales declined 20 percent in the first 10 months and 15.3 percent in the first nine months, according to the statement. Meanwhile, sales revenue hit 308.8 billion yuan, down 16.4 percent from the same period a year ago. The decline was 12.6 percent in the first 10 months. China will unswervingly maintain its regulation policies on the property market next year intended to return housing prices to a reasonable level, according decisions made at the country's central economic work conference this month. With gloomy prospects for the next year, many cash-strapped property developers rolled out big discounts to promote sales, as they struggle to pay back debts at the year-end, the bureau said. Earlier several local developers were reported to be in liquidity crisis or unable to pay back debts, and many real estate agencies have closed stores due to the declines in existing home sales.
Shanghai Daily:
  • Shanghai Keeping Curbs on Property Market. SHANGHAI is to further strengthen efforts to rein in housing speculation next year and continue to enforce home-purchase restrictions, the local government said yesterday. It is the latest in a number of Chinese cities to vow to stick to property tightening measures and extend restrictions on buyers which are due to expire at the end of the year. During last week's annual Central Economic Work Conference, China's top leaders vowed to maintain tightening in the property sector, including home purchase restrictions, curbs on onshore and offshore fundraising options for developers and higher downpayments for multiple home buyers. China will stick to property tightening policies, push home prices back to a reasonable level, and speed up construction of ordinary houses to increase supply, the conference concluded as it laid out its 2012 blueprint for the country. "The central government has repeatedly made it very clear over the past weeks that rein-in measures to curb housing speculation should be continuously implemented so the latest announcement by the Shanghai government came as no surprise," said Sky Xue, an analyst with China Real Estate Information Corporation. "In the short term, home prices will for sure continue to go through a downward trend."

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