This week, even so-called “core” sovereign debt markets succumbed to marketplace illiquidity. Yet an even more desperate situation was unfolding in the banking system funding markets. UniCredit, the largest Italian bank with nearly a trillion euros of assets, found itself in the spotlight. A Bloomberg article noted that the bank has $51bn of bonds to refinance, while the market yield on the bank’s bonds has surged above 10%. The head of UniCredit was said to have met with officials at the ECB, seeking additional funding for the troubled Italian banking sector.
In today’s Financial Times (Tracy Alloway) – “European Bank Funding Slows to a Trickle” – it was noted that European banks have about $660 billion of debt maturing next year. The article highlighted the rising cost of attracting both retail deposits and professional investors, while touching on the issue of capital flight. "And, as far as ‘peripheral’ eurozone countries are concerned, market participants are already on the look-out for a deposit flight – one of the more serious signs of bank funding nervousness – that would add to banks’ problems.” The article noted that Greek deposits had fallen by a fifth since the start of 2010, while funding from the ECB had jumped to $120bn. The market is now on watch for what would be a very problematic run on Italian and Spanish deposits.
With a crisis of confidence impairing the markets for both sovereign and banking finance, it was seemingly yet another “inflection point” week in the marketplace. Increasingly, the markets are viewing the situation as unsustainable. With Italian debt in a downward spiral, the soundness of the entire European banking system is in serious jeopardy. Troublingly, there was heightened focus on counterparty and derivative issues, including U.S. bank exposure to European debt, the sovereign Credit default swap marketplace and other counterparty exposures. Fear that EU governments will be forced to recapitalize their faltering banking systems has weighed heavily on already depleted confidence in the creditworthiness of sovereign Credit. Increasingly, the Credit standing of France, residing near the epicenter of Europe’s “core,” is imperiled by the possibility of a massive bank recapitalization program.
So, the powerful force of contagion effects has the marketplace convinced that something has to give. The EU is running out of options, as market confidence deteriorates by the week. European monetary union is at heightened risk. This has set in motion “capital flight” dynamics that risk strangling individual banks and banking systems, especially in Spain and Italy. The ECB has stepped up support for Spanish and Italian sovereign debt. The market takes little comfort in these operations, appreciating that this is seemingly the only bid in an essentially frozen marketplace. As the situation turns dire, market participants assume that the Germans and ECB will have no option other than to back down and assume the role of “buyer and guarantor of last resort.”
Markets were buoyed this morning by the Dow Jones headline, “ECB Lending to IMF Proposal Gains Traction.” Reader enthusiasm was doused with rather chilly water in just the second paragraph: “Germany and the ECB are still opposed to the idea but with no other viable alternatives talks could start soon. ‘There is urgency in this as something must be in place if Italy needs a bailout,’ a senior euro-zone government official said.” There was likely some comfort taken by market participants that have been waiting for the Germans to start to burn from the heat of political isolation.
There remains a viewpoint that the Germans are behind the scenes performing an ongoing cost vs. benefit analysis when it comes to eurobonds, ECB “buyer of last resort” quantitative easing, and more open-ended German bailout participation. As the thinking goes, German policymakers will eventually arrive at the conclusion that the cost to bail out troubled euro borrowers is less than the huge and unknowable risks associated with euro disintegration. There is even a line of reasoning that the Germans are already prepared to support unlimited ECB monetization to stabilize debt markets, and that public protest of such a policy course is chiefly for domestic political consumption.
I, for one, don’t believe ECB President Jens Weidmann (or other German statesmen) is bluffing or posturing. I thought it might be useful to highlight from an insightful exchange from a November 13, 2011 Financial Times (Ralph Atkins and Martin Sandbu) interview. Mr. Weidmann’s comments are relevant to the unfolding European debt crisis as well as to central banking more generally.
Financial Times: “Can you explain why the ECB cannot be lender of last resort?”
Bundesbank President Jens Weidmann: “The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions. I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence.”
Financial Times: “The impression is that the Bundesbank will stick by principles until the whole house burns down…”
Weidmann: “Right now we’re talking about the EU treaty and I don’t see how you can build trust in a system that violates laws.”
Financial Times: “Are you a pragmatist?”
Weidmann: “I am president of an institution which is bound by a legal framework. We should respect the division of labour in a democracy. This has nothing to do with pragmatism or dogmatism.”
Financial Times: “What if there is a conflict between Article 123 and the risk of a refinancing crisis for Italian debt?
Weidmann: “That assumes that you can address the issues in Italy with liquidity and that’s not the case. This whole debate completely blurs responsibilities. Furthermore, monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the cedibility and trust in institutions. You won’t solve the crisis by reducing incentives for the Italian government to act. It’s really an absurd debate in which we are telling institutions: don’t care about the law.”
Financial Times: “Why shouldn’t Germany, which has total credibility in financial markets, loosen its fiscal stance?”
Weidmann: “Germany has that credibility because it followed a specific fiscal path in the past, and it should not lose that track record and credibility by abandoning that path. It’s very important that Germany remains the stability anchor within the monetary union.”
And today from a speech given by Mr. Weidmann in Frankfurt: “The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis. The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way.”
It would not appear that the Bundesbank is about to succumb to intense political and market pressures - and promote the ECB into the role as open-ended “buyer of last resort.” For the Germans, it is a fundamental issue of core principles. The costs of “monetary financing” – or monetization – outweigh the benefits “so clearly.” And especially here in the U.S., there is a complete lack of appreciation for the myriad costs involved in central bank market interventions. For too long, policymakers and pundits alike have tried to paint “inflation” as the only real cost of “loose money” (i.e. low rates, market interventions and ballooning Fed holdings), a price too easily dismissed in a crisis environment. Yet Mr. Weidmann focuses not on inflation but on “credibility,” “independence,” “incentives,” “trust,” the rule of law and the critical importance of a “stability anchor.” It is my view that the control by contemporary central banking over inflation is overplayed, especially when contrasted to a central bank’s profound role in nurturing a monetary backdrop conducive to a level playing field in markets and economies, to fostering a sound financial and economic backdrop, and to ensuring systemic stability.
Truth be told, “Monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions. You won’t solve the crisis by reducing incentives…” This applies to the eurozone and it certainly applies to the U.S. I was struck by a comment Warren Buffett made earlier in the week on CNBC. Mr. Buffett noted that “the U.S. had the ability to do what was necessary” back in 2008, and Europe must find the will to do the same today. Many continue to miss the critical distinction between 2008's “private sector” debt crisis and today’s “sovereign” debt crisis. After years (decades?) of accommodation, markets are now much belatedly disciplining governments throughout Europe - and it’s proving an incredibly more challenging dynamic than 2008. That markets are not today disciplining Washington is no cause for overconfidence or hubris.
Part of my thesis has been that the more the Germans saw of the European and, increasingly, global financial crisis the more determined they would be to safeguard their institutions, economy and credibility. The markets, of course, want the ECB to be more like the Fed, while I suspect the Bundesbank stares across the Atlantic and sees disaster in the making. To anyone willing to see, our central bank’s credibility has been badly damaged, market incentives have been terribly damaged, and trust in institutions and the markets has been severely damaged. When it comes to rules and legalities, the Federal Reserve is making things up on the fly, with monetary policy becoming an anchor of instability.
All the same, as the markets see it, the U.S. is fine for now but something really has to give in Europe. Systemic stress again this week reached the point where the markets began anticipating yet another dramatic policy prescription. The ECB, or the IMF, or the ECB financing the IMF perhaps financing the EFSF that could finance Italy that could finance their banks that could finance the rapidly faltering European economy? What a mess.
It is the conventional view that European policy incompetence and lack of leadership have created a situation where policymaking simply cannot keep pace with a rapidly escalating crisis. Most believe this crisis didn’t have to happen and that it can still be resolved with sufficient policy resolve.
I tend to look at the situation much differently. After disregarding the issue of monetary instability, associated price distortions, and Credit and speculative excess for many years - and kicking the can down the road for too long - policymakers have hit the proverbial wall. They have suddenly lost the wherewithal to connect foot to can. It’s not that sovereign yields are unreasonably high, only that they’ve surged to not unreasonable levels so abruptly. A long-distorted market pricing structure has unraveled rather dramatically, leaving dangerously leveraged financial institutions and over-indebted governments (along with a bloated Credit structure) in a dire predicament. It’s not so much that recent policies have caused the crisis as much as it is a case where an incredibly challenging political and policy backdrop created an opening for The Day of Reckoning to burst right on through.
I’ll assume that European (and global) policymakers are prepared to approach this crisis with only greater resolve. Markets are counting on it. But it also makes sense to me that the Europeans must now be working diligently behind the scenes on backup plans in case the whole thing continues to unravel. Quietly, do they focus on saving the sovereign “periphery,” the banks, or a group of “core” nations that might be able to salvage monetary union? It is increasingly apparent that resources are insufficient to sustain everyone. I’ll presume the sophisticated “money” is maneuvering for the exits. There were times this week when I had a really bad feeling about how things were unfolding.
For the Week:
The S&P500 dropped 3.8% (down 3.3% y-t-d), and the Dow fell 2.9% (up 1.9% y-t-d). The Morgan Stanley Cyclicals sank 4.5% (down 16.1%), and the Transports declined 2.8% (down 5.2%). The Morgan Stanley Consumer index fell 2.6% (down 4.4%), and the Utilities dropped 2.4% (up 8.8%). The Banks were hit for 5.1% (down 28.1%), and the Broker/Dealers were smacked for 7.0% (down 34.4%). The S&P 400 Mid-Caps declined 3.5% (down 5.1%), and the small cap Russell 2000 fell 3.4% (down 8.2%). The Nasdaq100 was down 4.3% (up 1.6%), and the Morgan Stanley High Tech index fell 5.5% (down 9.1%). The Semiconductors sank 5.2% (down 9.9%). The InteractiveWeek Internet index fell 4.7% (down 7.3%). The Biotechs dropped 4.4% (down 20.3%). With bullion down $65, the HUI gold index was hit for 8.3% (down 3.4%).
One and three-month Treasury bill rates ended the week at zero. Two-year government yields were up 5 bps to 0.28%. Five-year T-note yields ended the week up a basis point to 0.90%. Ten-year yields declined 5 bps to 2.01%. Long bond yields dropped 13 bps to 2.97%. Benchmark Fannie MBS yields were up 8 bps to 3.16%. The spread between 10-year Treasury yields and benchmark MBS yields widened a notable 13 bps to a two-month high 115 bps. Agency 10-yr debt spreads widened 3 to 4 bps. The implied yield on December 2012 eurodollar futures rose 5.5 bps to 0.81%. The two-year dollar swap spread rose 4 bps to a two-year high 49 bps. The 10-year dollar swap spread was little changed at 17.5 bps. Corporate bond spreads widened. An index of investment grade bond risk rose 7 to 136 bps. An index of junk bond risk jumped 31 bps to 759 bps.
November 16 – Bloomberg (Lisa Abramowicz): “Corporate bond trading volume is plummeting in the U.S. to the lowest level in almost three years as concern deepens that Europe’s sovereign-debt crisis will slow the global economy. The average daily volume of publicly traded investment- grade and junk bonds has declined to $12.4 billion this month, a 37% drop from January…”
It was another strong week of debt issuance. Investment-grade issuance this week included Aristotle Holdings $4.1bn, American Express $2.3bn, General Mills $1.0bn, Norfolk Southern $1.0bn, Lowes $1.0bn, L-3 Communications $500 million, Williams Partners LP $500 million, Nisource $500 million, Kellogg $500 million, Stanley Black & Decker $400 million, FMC Corp $300 million, Clorox $300 million, Puget Sound Energy $250 million, Southern Cal Edison $250 million, Rockwell Collins $250 million, Pacific Gas & Electric $250 million and Indianapolis P&L $140 million.
Junk bond funds saw inflows slow to $153 million (from Lipper). Junk issuance included Plains Exploration $1.0bn, Community Health Systems $1.0bn, Jaguar Holidngs $575 million, Host Hotels & Resorts LP $500 million, Duke Energy $500 million, Swift Energy $250 million, San Diego G&E $250 million, American Greetings $225 million, Carrizo Oil & Gas $200 million, Pioneer Drilling $175 million, and Atlas Pipeline $150 million.
Convertible debt issuers included Air Lease Corp $200 million.
International dollar bond issuers included Canadian Housing Trust $3.75bn, International Finance Corp $3.0bn, Gazprom $1.6bn, BHP Billiton $3.0bn, Bank Nederlandse $2.0bn, HSBC $1.65bn, Australian New Zealand Bank $1.25bn, Toyota Motor Credit $1.0bn, WestPac Banking $1.0bn, Statoil $1.75bn, Perusahaan Listrik $1.0bn, Kodiak Oil $650 million, and Banco do Brasil $500 million.
Italian 10-yr yields ended the week up 20 bps to 6.63% (up 182bps), and Spain's 10-year yields surged 52 bps to 6.35% (up 90bps). Greek two-year yields ended the week up 152 bps to 100.95% (up 8,871bps y-t-d). Greek 10-year yields declined 27 bps to 26.61% (up 1,415bps). German bund yields rose 8 bps to 1.96% (down 100bps), and French yields rose 9 bps to 3.46% (by week's end, the spread to bunds had widened one to 149bps). U.K. 10-year gilt yields declined 4 bps this week to 2.25% (down 126bps). Ten-year Portuguese yields fell 32 bps to 10.93% (up 435bps). Irish yields gained 11 bps to 8.02% (down 104bps). The German DAX equities index slumped 4.2% (down 16.1% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.94 (down 18bps). Japan's Nikkei declined 1.6% (down 18.1%). Emerging markets were lower. For the week, Brazil's Bovespa equities index declined 1.0% (down 18.1%), and Mexico's Bolsa dropped 3.4% (down 5.9%). South Korea's Kospi index fell 1.3% (down 10.3%). India’s Sensex equities index sank 4.8% (down 20.2%). China’s Shanghai Exchange dropped 2.6% (down 13.9%). Brazil’s benchmark dollar bond yields jumped 15 bps to 3.54%, while Mexico's benchmark bond yields dropped 10 bps to 3.26%.
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.00% (down 39bps y-o-y). Fifteen-year fixed rates increased one basis point to 3.31% (down 45bps y-o-y). One-year ARMs rose 3 bps to 2.98% (down 28bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 5 bps to 4.69% (down 64bps y-o-y).
Federal Reserve Credit jumped $8.4bn to $2.820 TN. Fed Credit was up $412bn y-t-d and $527bn from a year ago, or 23.0%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/16) rose $11.1bn to $3.454 TN (8-wk decline of $21.4bn). "Custody holdings" were up $103.4bn y-t-d and $112.8bn from a year ago, or 3.4%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.235 TN y-o-y, or 18.7% to $10.235 TN. Over two years, reserves were $2.745 TN higher, for 37% growth.
M2 (narrow) "money" supply jumped $47.9bn to a record $9.649 TN. "Narrow money" has expanded at a 10.7% pace y-t-d and 10.2% over the past year. For the week, Currency was little changed. Demand and Checkable Deposits added $2.9bn, and Savings Deposits surged $49.1bn. Small Denominated Deposits declined $4.0bn. Retail Money Funds were little changed.
Total Money Fund assets rose $6.4bn last week at $2.645 TN. Money Fund assets were down $165bn y-t-d and $153bn over the past year, or 5.5%.
Total Commercial Paper outstanding jumped $31.9bn (18-wk decline of $237bn) to $1.00 TN. CP was down $28bn y-t-d, with a one-year decline of $86bn.
Global Credit Market Watch:
November 18 – Bloomberg (Kati Pohjanpalo): “Europe is running out of options to fix its debt crisis and it is now up to Italy and Greece to convince markets they can deliver the necessary austerity measures, Finnish Prime Minister Jyrki Katainen said. ‘The European Union cannot restore confidence in Greece and Italy if they don’t do it themselves,’ Katainen said… ‘We can’t do anything to boost confidence in them. If there are doubts about these countries’ abilities to take sensible and correct decisions on economic policy, no one else can repair that.’”
November 17 – Bloomberg (Abigail Moses): “The cost of insuring against default on Spanish and French sovereign debt rose to records after the nations’ borrowing costs increased at bond auctions today. Credit-default swaps on Spain soared 26 bps to 496 and France climbed 9.5 to 236.5… An increase signals worsening perceptions of credit quality. Government bond yields are rising even as the European Central Bank buys the securities, signaling investors are losing confidence officials can stem the region’s debt crisis. Swaps on Spanish and Italian lenders also rose to records as European banks become more reluctant to lend to one another”
November 14 – International Herald Tribune (Jack Ewing): “Euro area banks and their governments are locked in a potentially fatal embrace. Banks usually own huge quantities of their domestic government bonds. As a result, any doubts about a country’s solvency quickly infect its banks, making other banks reluctant to lend to them… The amount that banks have been drawing from the E.C.B. has been rising, an indication that many institutions are having trouble raising money on open markets. Last week, banks took out €195 billion, or $268 billion, in one-week loans.”
November 17 – Bloomberg (Ben Martin): “Bonds of UniCredit SpA, the Italian bank that posted a surprise 10.6 billion-euro ($14.3bn) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year… UniCredit’s bonds yield 10.3% on average…”
November 18 – Wall Street Journal (David Enrich): “European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank. The banks' maneuvers, which include behind-the-scenes swapping of assets among financial institutions, could heighten risk across Europe's already fragile financial system, say some senior industry officials and regulators. They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB.”
November 16 – Bloomberg (David Goodman): “The cost for European banks to fund in dollars rose to a three-year high, according money-market indicators.”
November 18 – Dow Jones (Jeff Black and Jana Randow): “European Central Bank President Mario Draghi pushed back against politicians and investors asking him to do more to end the sovereign debt crisis, expressing impatience with leaders’ failure to act. The ECB would quickly lose credibility if it departed from its primary role of keeping prices stable, Draghi said… ‘Where is the implementation’ of government pledges to bolster the region’s rescue fund, he asked. ‘We should not be waiting any longer.’”
November 17 – Bloomberg (Tony Czuczka and Mark Deen): “German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil. As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a ‘snappy debt cut’ as proposals that won’t work. ‘I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,’ Merkel said… ‘If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.’”
November 18 – Dow Jones (Min Zeng, Anusha Shrivastava and Cynthia Lin): “The euro zone's worsening sovereign debt crisis is fueling growing stress in the international short-term money markets that banks use to fund their operations, a situation alarmingly reminiscent of the dark days surrounding the collapse of Lehman Brothers three years ago. The price European banks pay to swap euros into dollars jumped Thursday to levels last seen in 2008, at the height of the recent global financial crisis. Sharply higher funding costs were also registered in markets for commercial paper, interbank lending, and securities repurchase -- all key sources of short-term finance for banks and corporations.”
November 18 – Dow Jones (Katy Burne): “Investors and policy makers scrambling to determine how banks may be hurt by losses on risky European sovereign debt are looking beyond the hedges those banks have on and are trying to determine how reliable the banks' trading partners are. Banks have tried to reduce their exposures to sovereign debt by entering into credit-default swaps… But some market participants said that, if risk aversion from Europe spirals out of control and credit markets freeze, a large firm could fail to meet its obligations in a credit-default swap, setting off a chain reaction that threatens to destabilize the global banking system. They are urging closer scrutiny of banks' gross sovereign CDS positions and of the interconnectedness of the banking system. ‘When there is a high degree of correlation between the underlying risk and that of the hedge counterparty [in this case, the sovereign and a bank selling CDS], can you rely on a payment from your protection seller?’ asked Joyce Frost, partner at Riverside Risk Advisors LLC, a derivatives consultancy.”
November 16 – Bloomberg (Christine Harper and Michael J. Moore): “JPMorgan… and Goldman Sachs…, among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS. As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default.”
November 17 – Wall Street Journal (Dan Fitzpatrick and Jonathan Cheng): “In the latest sign of jittery markets racked by hair-trigger selling, investors on Wednesday took fright at a credit-firm report that contained little new information but warned of escalating risks facing U.S. banks in the European debt crisis. Fitch Ratings, in a paper issued Wednesday afternoon, said U.S. lenders ‘could be greatly affected if contagion continues to spread beyond the stressed European markets’ of Greece, Ireland, Italy, Portugal and Spain. The No. 3 U.S. rating company didn't change its ratings… but said ‘the risks of a negative shock are rising.’”
November 14 – Bloomberg (Emma Ross-Thomas): “Spain risks seeing its borrowing costs rise closer to those of Italy as European Central Bank buying fails to cap yields and slowing growth threatens to make its deficit-reduction targets unachievable… ‘There’s a high probability of Spain following Italy,’ said Phyllis Reed, head of fixed-income research at Kleinwort Benson Bank… ‘In the very short term, the trigger is just the fact that we’re getting close to the edge of the abyss with the euro.’”
November 16 – Bloomberg (Charles Penty and Emma Ross-Thomas): “Spanish banks face deeper losses on 176 billion euros ($243bn) of soured real-estate assets as Mariano Rajoy, the favorite to win national elections on Nov. 20, pledges to enforce a cleanup. ‘You have to remove any kind of shadow of doubt over the valuation that you have of these assets in your balance sheet,’ Luis de Guindos, named by newspapers as a contender for finance minister in a new People’s Party…”
November 18 – DPA: “The German Foreign Ministry on Friday confirmed that Germany was considering the possibility of more eurozone ‘orderly defaults’ beyond that of Greece, as suggested by a paper leaked by the British press. The Daily Telegraph published a six-page document, attributed to the Foreign Ministry, suggesting that partial bankruptcy must be made possible for all euro members ‘unable to achieve debt sustainability.’”
November 17 – Bloomberg (Craig Trudell): “Europe’s debt crisis is a ‘more serious’ situation than the housing bubble three years ago that preceded a global recession, General Motors Co. Chief Executive Officer Dan Akerson said… ‘The ’08 recession, which was a credit bubble that manifested itself through primarily the real estate market, that was a serious stress,’ Akerson told the Detroit Economic Club… ‘The government took some insightful actions. This is much more serious.’”
November 17 – Bloomberg (Joao Lima): “With an economy struggling in a recession, Portuguese Prime Minister Pedro Passos Coelho is fighting to avoid the market mayhem that toppled the Italian government last week. Coelho, whose Social Democratic Party ousted the Socialist government in June elections, is meeting targets set by the European Union and International Monetary Fund… He’s slashing state workers’ salaries and avoiding further one-off income-tax surcharges to fill a financing hole.”
November 14 – Bloomberg (Adam Ewing): “Europe’s banks need to keep dumping Italian bonds and other assets tainted by the region’s debt woes to avoid being sucked into the epicenter of the crisis, said Christian Clausen, president of the European Banking Federation. ‘The banks are doing exactly what they should be doing: they are reducing their risk toward this event. We can see that clearly as now Italian bonds are being sold off,’ Clausen, who is also the chief executive officer of Nordea Bank AB, said…”
Global Bubble Watch:
November 18 – Dow Jones (Costas Paris): “A proposal that the International Monetary Fund could call on the European Central Bank to lend it money so it can finance bailouts for euro-zone governments threatened with insolvency is gaining traction and if all parties agree, a deal could be announced at the Dec. 9 European Union summit, two people with direct knowledge of the matter said. ‘Germany and the ECB are still opposed to the idea but with no other viable alternatives talks could start soon. There is urgency in this as something must be in place if Italy needs a bailout,’ a senior euro-zone government official said. An IMF official said the only other proposal on the table is the ECB financing the euro-zone's bailout mechanism--the European Financial Stability Facility--but Berlin has made clear that won't happen. ‘It's the French proposal to turn the EFSF into a bank so it can lend to countries in trouble. But it's going nowhere,’ this official said.”
November 17 – Bloomberg (Patrick Donahue): “European Central Bank governing council members have agreed on a 20 billion-euro ($27bn) weekly upper limit for sovereign debt purchases as resistance among members grows, the German newspaper Frankfurter Allgemeine Zeitung reported. The ECB council meets every other week to decide on an upper limit for bond purchases used to stem rising yields as the European debt crisis widens… Members met again late yesterday to discuss lowering the level, FAZ said.”
November 14 – Bloomberg (Adam Haigh and Whitney Kisling): “U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15% cheaper than when the credit crisis began. Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third-highest annual total behind 2006 and 2007…”
Currency Watch:
The U.S. dollar index rallied 1.4% to 78.02 (down 1.3% y-t-d). For the week on the upside, the Japanese yen increased 0.4%. On the downside, the New Zealand dollar declined 3.7%, the South African rand 3.2%, the Norwegian krone 2.7%, the Australian dollar 2.6%, the Swedish krona 2.5%, the Brazilian real 2.4%, the Swiss franc 1.9%, the Canadian dollar 1.7%, the Danish krone 1.7%, the euro 1.6%, the British pound 1.6%, the Singapore dollar 1.5%, the Mexican peso 1.4%, the South Korean won 1.1%, and the Taiwanese dollar 0.2%.
Commodities and Food Watch:
The CRB index dropped 2.5% this week (down 6.2% y-t-d). The Goldman Sachs Commodities Index fell 2.6% (up 2.6%). Spot Gold retreated 3.6% to $1,724 (up 21.3%). Silver sank 6.5% to $32.49 (up 5.1%). December Crude declined $1.32 to $97.67 (up 7%). December Gasoline sank 4.8% (up 1%), and December Natural Gas dropped 7.5% (down 25%). March Copper declined 1.8% (down 23%). December Wheat fell 3.0% (down 25%), and December Corn sank 4.4% (down 3%).
China Bubble Watch:
November 16 – Bloomberg (Wendy Mock): “China Development Bank Corp. has delayed signing a $500 million offshore loan due to market volatility, according to three people familiar with the matter. The state-owned policy bank may pursue the loan again early next year…”
November 17 – Bloomberg (Marco Lui): “Zoomlion Heavy Industry Science & Technology Co. said China’s demand for cranes and excavators will continue to slow next year because of waning economic growth and cutbacks in railway building. ‘Demand for construction machinery has shrunk drastically and growth will no doubt continue to slow next year,’ Chairman and Chief Executive Officer Zhan Chunxin said…”
India Watch:
November 16 – Bloomberg (V. Ramakrishnan and Jeanette Rodrigues): “India’s central bank will buy government bonds this month for the first time since January to boost cash in the banking system… The move comes after four of the last five debt sales this quarter failed to attract adequate investor demand.”
November 14 – Bloomberg (Anurag Joshi): “Indian companies’ international bond sales have dried up this quarter, after the European debt crisis pushed borrowing costs to the most in more than two years. Sales dropped to their lowest since the second quarter of 2009…”
Asia Watch:
November 16 – Bloomberg (Taejin Park and Seonjin Cha): “South Korean companies, which raised a record from domestic bond sales this year, may keep up the pace in 2012 on demand from Japanese investors… Debt sales have risen 20% from last year’s total to 51.3 trillion won ($45bn), surpassing the previous peak of 48 trillion won in 2009… Overseas investors increased holdings of Korean bonds by 91% in the first 10 months…”
Latin America Watch:
November 14 – Bloomberg (Drew Benson and Camila Russo): “Argentine reserves are falling at the fastest pace since 2008 this month after President Cristina Fernandez de Kirchner’s moves to stem capital flight prompted savers to withdraw dollars from their bank accounts… As inflation estimated by some economists at 24% helped fuel capital flight of $3 billion per month, Fernandez last month ordered energy and mining companies to repatriate export revenue and tightened oversight of the foreign exchange market…”
November 17 – Bloomberg (Ben Bain): “Yields on Mexican benchmark bonds rose for a fifth straight day and the peso declined as investors shunned higher-yielding assets amid concern European leaders may come up short in solving the region’s debt crisis.
Unbalanced Global Economy Watch:
November 16 – Bloomberg (Ambereen Choudhury, Donal Griffin and Alexis Xydias): “Job losses in the global financial services industry this year are close to surpassing 200,000… The reductions add to the 195,000 banks, insurers and asset managers announced this year, and surpass the 174,000 losses in 2009…”
November 17 – Bloomberg (Andrew Mayeda): “The amount of mortgage and credit-line debt held by Canadians is continuing to set records even as policy makers keep warning consumers not to take on debts they won’t be able to afford when interest rates eventually rise. Canadians held C$791 billion ($772bn) of debt in mortgages and personal lines of credit in September, up 8.8% so far this year and a record 62% of the economy…”
November 16 – Bloomberg (Simone Meier): “European inflation held at the highest rate in three years in October, complicating the European Central Bank’s task of shoring up the economy as it fights the sovereign-debt crisis. Consumer prices in the 17 nations using the euro increased 3% from a year earlier…”
November 14 – Bloomberg (Simone Meier): “European industrial production declined the most in 2 1/2 years in September… Production in the 17-nation euro area dropped 2% from August, when it rose 1.4%... France reported a decline of 1.9%, while Italian output fell 4.8%.”
November 16 – Bloomberg (Svenja O’Donnell): “U.K. unemployment jumped in the third quarter as the number of young people looking for work climbed above 1 million for the first time in at least 19 years… The jobless rate climbed to a 15-year high of 8.3%.”
November 15 – Bloomberg (Matthew Brown): “The pound stayed higher against the euro after a report showed U.K. inflation slowed to 5% in October.”
U.S Bubble Economy Watch:
November 17 – Bloomberg (Carol Eisenberg): “U.S. workers’ health insurance premiums rose 63% from 2003 to 2010 as employers shifted more of the burden of rising medical costs to individuals and families, a study showed. The total cost of insuring a family through employer-sponsored health plans rose 50% over the same period, reaching an average of $13,871 a year by 2010…”
November 17 – Bloomberg (Kathleen M. Howley): “U.S. lenders started foreclosures on more properties in the third quarter, the first increase in a year, as a backlog stemming from claims of faulty home seizures began to ease.”
November 18 – Bloomberg (Janet Freund): “UPS Ground packages, UPS Air services, U.S.-origin intl shipments to see net increase of 4.9% in 2012. UPS Next Day Air Freight, 2nd Day Air Freight rates for shipments within, between U.S., Canada, Puerto Rico to increase 5.9%...”
Central Bank Watch:
November 16 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Jeffrey Lacker said the Fed’s current purchases of mortgage bonds and financing of private sector assets during the credit crisis has fueled some of the antagonism aimed today at the central bank. Central bank credit allocation is ‘bound to be controversial,’ Lacker said… ‘We need to recognize the extent to which some measure of antagonism is an understandable consequence of the Fed’s own credit policy initiatives.’ …Lacker warned that credit allocation policies can ‘entangle’ the Fed in political conflicts that undermine independence, adding that the executive and legislative branches in times of crisis may try to channel credit to particular constituents.”
November 16 – Dow Jones (Luca Di Leo): “Federal Reserve Bank of Richmond President Jeffrey Lacker Wednesday called into question the unorthodox steps taken by the U.S. central bank during and in the aftermath of the financial crisis, suggesting it may be better to restrict the Fed. The Fed's unconventional measures, including the purchase of mortgage-backed securities which some officials would like to resume, have politicized the central bank, threatening its ability to keep inflation under control. ‘While it is easy to deplore politically motivated attempts to influence Fed policy, we need to recognize the extent to which some measure of antagonism is an understandable consequence of the Fed’s own credit policy initiatives,’ Lacker said… Contentious disputes about which markets receive support, and which do not, ‘can entangle the central bank in political conflicts that threaten the independence of monetary policymaking.’”
November 16 – Bloomberg (Scott Lanman): “Federal Reserve officials aired divisions over whether the central bank should wait to see if the economy deteriorates before taking further steps to reduce borrowing costs and lower unemployment. More action ‘may be needed’ to reduce ‘persistently high unemployment,’ San Francisco Fed President John Williams said… St. Louis Fed President James Bullard said the central bank’s policy is ‘appropriately calibrated’ and should only be loosened if the economy deteriorates. The split illustrates the challenges Chairman Ben S. Bernanke… may face in generating broad support among policy makers for measures such as a third round of asset purchases.”
November 15 – Bloomberg (Jennifer Ryan): “Bank of England Governor Mervyn King said Britain faces a ‘markedly weaker’ outlook for economic growth and persistent danger from Europe’s debt crisis… ‘There is no meaningful way to quantify the most extreme outcomes associated with developments in the euro area.’”
Fiscal Watch:
November 17 – Bloomberg (George Anders): “Get ready for the prospect of another federal housing agency needing to raise billions of dollars, most likely through extra taxpayer support. The Federal Housing Administration, in its annual report to Congress… said independent actuaries give the agency 50-50 odds of having to raise money in the next few years because its net worth is close to zero… Until a few years ago, the FHA was a minor part of the housing market. Now, it guarantees more than $1 trillion in home loans. Its willingness to stay busy during the current housing slump has been a boon to homebuyers and builders, but all those guarantees aren't adding up to anyone's idea of a strong portfolio… Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania’s Wharton School, estimates that the FHA will need a $50 billion to $100 billion infusion of taxpayer money to shore up its finances.”
November 15 - Washington Post (Michael A. Fletcher): “The federal agency that guarantees private-sector pensions saw its deficit swell to $26 billion in the past year — the largest in its 37-year history. The agency guarantees the pensions of 44 million workers. The Pension Benefit Guaranty Corp. reported the growing deficit in its latest annual report… The disclosure adds new urgency to the agency’s efforts to persuade Congress to change its premium structure… Without a new round of fee increases, the PBGC… could eventually require a taxpayer bailout, according to its director, Joshua Gotbaum.”
November 15 – Bloomberg (Angela Greiling Keane): “The U.S. Postal Service may post a record $14.1 billion loss for the 2012 fiscal year as mail volumes continue to drop and Congress forces it to make a payment for future retirees’ health benefits…”
Muni Watch:
November 17 – Bloomberg (Tim Jones): “Illinois will owe $1 billion more than expected to its pension funds next year because of reforms designed to cut the long-term retirement costs of its employees, according to projections… The 19% increase in obligations to the five retirement plans wasn’t anticipated by budget officials when they presented the current-year budget in February.”
California Watch:
November 16 – Bloomberg (Greg Chang): “A revenue forecast from California’s Legislative Analyst’s Office may trigger mid-year state spending cuts of $2 billion, the Sacramento Bee reported. The revenue forecast is one of two indicators the state Department of Finance will rely upon before deciding whether to make the cuts, according to the report. The state will lag its forecast of $4 billion in additional revenue by $3.7 billion…”
Real Estate Watch:
November 16 – Bloomberg (Dan Levy): “San Francisco Bay Area home prices fell 8.6% last month from a year earlier as limits on mortgages backed by the federal government were reduced, DataQuick said… “
Financial Times: “The impression is that the Bundesbank will stick by principles until the whole house burns down…”
Weidmann: “Right now we’re talking about the EU treaty and I don’t see how you can build trust in a system that violates laws.”
Financial Times: “Are you a pragmatist?”
Weidmann: “I am president of an institution which is bound by a legal framework. We should respect the division of labour in a democracy. This has nothing to do with pragmatism or dogmatism.”
Financial Times: “What if there is a conflict between Article 123 and the risk of a refinancing crisis for Italian debt?
Weidmann: “That assumes that you can address the issues in Italy with liquidity and that’s not the case. This whole debate completely blurs responsibilities. Furthermore, monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the cedibility and trust in institutions. You won’t solve the crisis by reducing incentives for the Italian government to act. It’s really an absurd debate in which we are telling institutions: don’t care about the law.”
Financial Times: “Why shouldn’t Germany, which has total credibility in financial markets, loosen its fiscal stance?”
Weidmann: “Germany has that credibility because it followed a specific fiscal path in the past, and it should not lose that track record and credibility by abandoning that path. It’s very important that Germany remains the stability anchor within the monetary union.”
And today from a speech given by Mr. Weidmann in Frankfurt: “The lack of success in containing the crisis does not justify overstretching the mandate of the central bank and making it responsible for solving the crisis. The economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation in any sustainable way.”
It would not appear that the Bundesbank is about to succumb to intense political and market pressures - and promote the ECB into the role as open-ended “buyer of last resort.” For the Germans, it is a fundamental issue of core principles. The costs of “monetary financing” – or monetization – outweigh the benefits “so clearly.” And especially here in the U.S., there is a complete lack of appreciation for the myriad costs involved in central bank market interventions. For too long, policymakers and pundits alike have tried to paint “inflation” as the only real cost of “loose money” (i.e. low rates, market interventions and ballooning Fed holdings), a price too easily dismissed in a crisis environment. Yet Mr. Weidmann focuses not on inflation but on “credibility,” “independence,” “incentives,” “trust,” the rule of law and the critical importance of a “stability anchor.” It is my view that the control by contemporary central banking over inflation is overplayed, especially when contrasted to a central bank’s profound role in nurturing a monetary backdrop conducive to a level playing field in markets and economies, to fostering a sound financial and economic backdrop, and to ensuring systemic stability.
Truth be told, “Monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions. You won’t solve the crisis by reducing incentives…” This applies to the eurozone and it certainly applies to the U.S. I was struck by a comment Warren Buffett made earlier in the week on CNBC. Mr. Buffett noted that “the U.S. had the ability to do what was necessary” back in 2008, and Europe must find the will to do the same today. Many continue to miss the critical distinction between 2008's “private sector” debt crisis and today’s “sovereign” debt crisis. After years (decades?) of accommodation, markets are now much belatedly disciplining governments throughout Europe - and it’s proving an incredibly more challenging dynamic than 2008. That markets are not today disciplining Washington is no cause for overconfidence or hubris.
Part of my thesis has been that the more the Germans saw of the European and, increasingly, global financial crisis the more determined they would be to safeguard their institutions, economy and credibility. The markets, of course, want the ECB to be more like the Fed, while I suspect the Bundesbank stares across the Atlantic and sees disaster in the making. To anyone willing to see, our central bank’s credibility has been badly damaged, market incentives have been terribly damaged, and trust in institutions and the markets has been severely damaged. When it comes to rules and legalities, the Federal Reserve is making things up on the fly, with monetary policy becoming an anchor of instability.
All the same, as the markets see it, the U.S. is fine for now but something really has to give in Europe. Systemic stress again this week reached the point where the markets began anticipating yet another dramatic policy prescription. The ECB, or the IMF, or the ECB financing the IMF perhaps financing the EFSF that could finance Italy that could finance their banks that could finance the rapidly faltering European economy? What a mess.
It is the conventional view that European policy incompetence and lack of leadership have created a situation where policymaking simply cannot keep pace with a rapidly escalating crisis. Most believe this crisis didn’t have to happen and that it can still be resolved with sufficient policy resolve.
I tend to look at the situation much differently. After disregarding the issue of monetary instability, associated price distortions, and Credit and speculative excess for many years - and kicking the can down the road for too long - policymakers have hit the proverbial wall. They have suddenly lost the wherewithal to connect foot to can. It’s not that sovereign yields are unreasonably high, only that they’ve surged to not unreasonable levels so abruptly. A long-distorted market pricing structure has unraveled rather dramatically, leaving dangerously leveraged financial institutions and over-indebted governments (along with a bloated Credit structure) in a dire predicament. It’s not so much that recent policies have caused the crisis as much as it is a case where an incredibly challenging political and policy backdrop created an opening for The Day of Reckoning to burst right on through.
I’ll assume that European (and global) policymakers are prepared to approach this crisis with only greater resolve. Markets are counting on it. But it also makes sense to me that the Europeans must now be working diligently behind the scenes on backup plans in case the whole thing continues to unravel. Quietly, do they focus on saving the sovereign “periphery,” the banks, or a group of “core” nations that might be able to salvage monetary union? It is increasingly apparent that resources are insufficient to sustain everyone. I’ll presume the sophisticated “money” is maneuvering for the exits. There were times this week when I had a really bad feeling about how things were unfolding.
For the Week:
The S&P500 dropped 3.8% (down 3.3% y-t-d), and the Dow fell 2.9% (up 1.9% y-t-d). The Morgan Stanley Cyclicals sank 4.5% (down 16.1%), and the Transports declined 2.8% (down 5.2%). The Morgan Stanley Consumer index fell 2.6% (down 4.4%), and the Utilities dropped 2.4% (up 8.8%). The Banks were hit for 5.1% (down 28.1%), and the Broker/Dealers were smacked for 7.0% (down 34.4%). The S&P 400 Mid-Caps declined 3.5% (down 5.1%), and the small cap Russell 2000 fell 3.4% (down 8.2%). The Nasdaq100 was down 4.3% (up 1.6%), and the Morgan Stanley High Tech index fell 5.5% (down 9.1%). The Semiconductors sank 5.2% (down 9.9%). The InteractiveWeek Internet index fell 4.7% (down 7.3%). The Biotechs dropped 4.4% (down 20.3%). With bullion down $65, the HUI gold index was hit for 8.3% (down 3.4%).
One and three-month Treasury bill rates ended the week at zero. Two-year government yields were up 5 bps to 0.28%. Five-year T-note yields ended the week up a basis point to 0.90%. Ten-year yields declined 5 bps to 2.01%. Long bond yields dropped 13 bps to 2.97%. Benchmark Fannie MBS yields were up 8 bps to 3.16%. The spread between 10-year Treasury yields and benchmark MBS yields widened a notable 13 bps to a two-month high 115 bps. Agency 10-yr debt spreads widened 3 to 4 bps. The implied yield on December 2012 eurodollar futures rose 5.5 bps to 0.81%. The two-year dollar swap spread rose 4 bps to a two-year high 49 bps. The 10-year dollar swap spread was little changed at 17.5 bps. Corporate bond spreads widened. An index of investment grade bond risk rose 7 to 136 bps. An index of junk bond risk jumped 31 bps to 759 bps.
November 16 – Bloomberg (Lisa Abramowicz): “Corporate bond trading volume is plummeting in the U.S. to the lowest level in almost three years as concern deepens that Europe’s sovereign-debt crisis will slow the global economy. The average daily volume of publicly traded investment- grade and junk bonds has declined to $12.4 billion this month, a 37% drop from January…”
It was another strong week of debt issuance. Investment-grade issuance this week included Aristotle Holdings $4.1bn, American Express $2.3bn, General Mills $1.0bn, Norfolk Southern $1.0bn, Lowes $1.0bn, L-3 Communications $500 million, Williams Partners LP $500 million, Nisource $500 million, Kellogg $500 million, Stanley Black & Decker $400 million, FMC Corp $300 million, Clorox $300 million, Puget Sound Energy $250 million, Southern Cal Edison $250 million, Rockwell Collins $250 million, Pacific Gas & Electric $250 million and Indianapolis P&L $140 million.
Junk bond funds saw inflows slow to $153 million (from Lipper). Junk issuance included Plains Exploration $1.0bn, Community Health Systems $1.0bn, Jaguar Holidngs $575 million, Host Hotels & Resorts LP $500 million, Duke Energy $500 million, Swift Energy $250 million, San Diego G&E $250 million, American Greetings $225 million, Carrizo Oil & Gas $200 million, Pioneer Drilling $175 million, and Atlas Pipeline $150 million.
Convertible debt issuers included Air Lease Corp $200 million.
International dollar bond issuers included Canadian Housing Trust $3.75bn, International Finance Corp $3.0bn, Gazprom $1.6bn, BHP Billiton $3.0bn, Bank Nederlandse $2.0bn, HSBC $1.65bn, Australian New Zealand Bank $1.25bn, Toyota Motor Credit $1.0bn, WestPac Banking $1.0bn, Statoil $1.75bn, Perusahaan Listrik $1.0bn, Kodiak Oil $650 million, and Banco do Brasil $500 million.
Italian 10-yr yields ended the week up 20 bps to 6.63% (up 182bps), and Spain's 10-year yields surged 52 bps to 6.35% (up 90bps). Greek two-year yields ended the week up 152 bps to 100.95% (up 8,871bps y-t-d). Greek 10-year yields declined 27 bps to 26.61% (up 1,415bps). German bund yields rose 8 bps to 1.96% (down 100bps), and French yields rose 9 bps to 3.46% (by week's end, the spread to bunds had widened one to 149bps). U.K. 10-year gilt yields declined 4 bps this week to 2.25% (down 126bps). Ten-year Portuguese yields fell 32 bps to 10.93% (up 435bps). Irish yields gained 11 bps to 8.02% (down 104bps). The German DAX equities index slumped 4.2% (down 16.1% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.94 (down 18bps). Japan's Nikkei declined 1.6% (down 18.1%). Emerging markets were lower. For the week, Brazil's Bovespa equities index declined 1.0% (down 18.1%), and Mexico's Bolsa dropped 3.4% (down 5.9%). South Korea's Kospi index fell 1.3% (down 10.3%). India’s Sensex equities index sank 4.8% (down 20.2%). China’s Shanghai Exchange dropped 2.6% (down 13.9%). Brazil’s benchmark dollar bond yields jumped 15 bps to 3.54%, while Mexico's benchmark bond yields dropped 10 bps to 3.26%.
Freddie Mac 30-year fixed mortgage rates added a basis point to 4.00% (down 39bps y-o-y). Fifteen-year fixed rates increased one basis point to 3.31% (down 45bps y-o-y). One-year ARMs rose 3 bps to 2.98% (down 28bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 5 bps to 4.69% (down 64bps y-o-y).
Federal Reserve Credit jumped $8.4bn to $2.820 TN. Fed Credit was up $412bn y-t-d and $527bn from a year ago, or 23.0%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/16) rose $11.1bn to $3.454 TN (8-wk decline of $21.4bn). "Custody holdings" were up $103.4bn y-t-d and $112.8bn from a year ago, or 3.4%.
Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.235 TN y-o-y, or 18.7% to $10.235 TN. Over two years, reserves were $2.745 TN higher, for 37% growth.
M2 (narrow) "money" supply jumped $47.9bn to a record $9.649 TN. "Narrow money" has expanded at a 10.7% pace y-t-d and 10.2% over the past year. For the week, Currency was little changed. Demand and Checkable Deposits added $2.9bn, and Savings Deposits surged $49.1bn. Small Denominated Deposits declined $4.0bn. Retail Money Funds were little changed.
Total Money Fund assets rose $6.4bn last week at $2.645 TN. Money Fund assets were down $165bn y-t-d and $153bn over the past year, or 5.5%.
Total Commercial Paper outstanding jumped $31.9bn (18-wk decline of $237bn) to $1.00 TN. CP was down $28bn y-t-d, with a one-year decline of $86bn.
Global Credit Market Watch:
November 18 – Bloomberg (Kati Pohjanpalo): “Europe is running out of options to fix its debt crisis and it is now up to Italy and Greece to convince markets they can deliver the necessary austerity measures, Finnish Prime Minister Jyrki Katainen said. ‘The European Union cannot restore confidence in Greece and Italy if they don’t do it themselves,’ Katainen said… ‘We can’t do anything to boost confidence in them. If there are doubts about these countries’ abilities to take sensible and correct decisions on economic policy, no one else can repair that.’”
November 17 – Bloomberg (Abigail Moses): “The cost of insuring against default on Spanish and French sovereign debt rose to records after the nations’ borrowing costs increased at bond auctions today. Credit-default swaps on Spain soared 26 bps to 496 and France climbed 9.5 to 236.5… An increase signals worsening perceptions of credit quality. Government bond yields are rising even as the European Central Bank buys the securities, signaling investors are losing confidence officials can stem the region’s debt crisis. Swaps on Spanish and Italian lenders also rose to records as European banks become more reluctant to lend to one another”
November 14 – International Herald Tribune (Jack Ewing): “Euro area banks and their governments are locked in a potentially fatal embrace. Banks usually own huge quantities of their domestic government bonds. As a result, any doubts about a country’s solvency quickly infect its banks, making other banks reluctant to lend to them… The amount that banks have been drawing from the E.C.B. has been rising, an indication that many institutions are having trouble raising money on open markets. Last week, banks took out €195 billion, or $268 billion, in one-week loans.”
November 17 – Bloomberg (Ben Martin): “Bonds of UniCredit SpA, the Italian bank that posted a surprise 10.6 billion-euro ($14.3bn) third-quarter loss this week, are trading as junk as the lender prepares to refinance $51 billion of debt coming due next year… UniCredit’s bonds yield 10.3% on average…”
November 18 – Wall Street Journal (David Enrich): “European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank. The banks' maneuvers, which include behind-the-scenes swapping of assets among financial institutions, could heighten risk across Europe's already fragile financial system, say some senior industry officials and regulators. They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB.”
November 16 – Bloomberg (David Goodman): “The cost for European banks to fund in dollars rose to a three-year high, according money-market indicators.”
November 18 – Dow Jones (Jeff Black and Jana Randow): “European Central Bank President Mario Draghi pushed back against politicians and investors asking him to do more to end the sovereign debt crisis, expressing impatience with leaders’ failure to act. The ECB would quickly lose credibility if it departed from its primary role of keeping prices stable, Draghi said… ‘Where is the implementation’ of government pledges to bolster the region’s rescue fund, he asked. ‘We should not be waiting any longer.’”
November 17 – Bloomberg (Tony Czuczka and Mark Deen): “German Chancellor Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil. As the crisis sent borrowing costs in core economies outside Germany to euro-era records, Merkel listed using the ECB as lender of last resort alongside joint euro-area bonds and a ‘snappy debt cut’ as proposals that won’t work. ‘I’m convinced that none of these approaches, if applied right now, would bring about a solution of this crisis,’ Merkel said… ‘If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen.’”
November 18 – Dow Jones (Min Zeng, Anusha Shrivastava and Cynthia Lin): “The euro zone's worsening sovereign debt crisis is fueling growing stress in the international short-term money markets that banks use to fund their operations, a situation alarmingly reminiscent of the dark days surrounding the collapse of Lehman Brothers three years ago. The price European banks pay to swap euros into dollars jumped Thursday to levels last seen in 2008, at the height of the recent global financial crisis. Sharply higher funding costs were also registered in markets for commercial paper, interbank lending, and securities repurchase -- all key sources of short-term finance for banks and corporations.”
November 18 – Dow Jones (Katy Burne): “Investors and policy makers scrambling to determine how banks may be hurt by losses on risky European sovereign debt are looking beyond the hedges those banks have on and are trying to determine how reliable the banks' trading partners are. Banks have tried to reduce their exposures to sovereign debt by entering into credit-default swaps… But some market participants said that, if risk aversion from Europe spirals out of control and credit markets freeze, a large firm could fail to meet its obligations in a credit-default swap, setting off a chain reaction that threatens to destabilize the global banking system. They are urging closer scrutiny of banks' gross sovereign CDS positions and of the interconnectedness of the banking system. ‘When there is a high degree of correlation between the underlying risk and that of the hedge counterparty [in this case, the sovereign and a bank selling CDS], can you rely on a payment from your protection seller?’ asked Joyce Frost, partner at Riverside Risk Advisors LLC, a derivatives consultancy.”
November 16 – Bloomberg (Christine Harper and Michael J. Moore): “JPMorgan… and Goldman Sachs…, among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally. Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS. As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default.”
November 17 – Wall Street Journal (Dan Fitzpatrick and Jonathan Cheng): “In the latest sign of jittery markets racked by hair-trigger selling, investors on Wednesday took fright at a credit-firm report that contained little new information but warned of escalating risks facing U.S. banks in the European debt crisis. Fitch Ratings, in a paper issued Wednesday afternoon, said U.S. lenders ‘could be greatly affected if contagion continues to spread beyond the stressed European markets’ of Greece, Ireland, Italy, Portugal and Spain. The No. 3 U.S. rating company didn't change its ratings… but said ‘the risks of a negative shock are rising.’”
November 14 – Bloomberg (Emma Ross-Thomas): “Spain risks seeing its borrowing costs rise closer to those of Italy as European Central Bank buying fails to cap yields and slowing growth threatens to make its deficit-reduction targets unachievable… ‘There’s a high probability of Spain following Italy,’ said Phyllis Reed, head of fixed-income research at Kleinwort Benson Bank… ‘In the very short term, the trigger is just the fact that we’re getting close to the edge of the abyss with the euro.’”
November 16 – Bloomberg (Charles Penty and Emma Ross-Thomas): “Spanish banks face deeper losses on 176 billion euros ($243bn) of soured real-estate assets as Mariano Rajoy, the favorite to win national elections on Nov. 20, pledges to enforce a cleanup. ‘You have to remove any kind of shadow of doubt over the valuation that you have of these assets in your balance sheet,’ Luis de Guindos, named by newspapers as a contender for finance minister in a new People’s Party…”
November 18 – DPA: “The German Foreign Ministry on Friday confirmed that Germany was considering the possibility of more eurozone ‘orderly defaults’ beyond that of Greece, as suggested by a paper leaked by the British press. The Daily Telegraph published a six-page document, attributed to the Foreign Ministry, suggesting that partial bankruptcy must be made possible for all euro members ‘unable to achieve debt sustainability.’”
November 17 – Bloomberg (Craig Trudell): “Europe’s debt crisis is a ‘more serious’ situation than the housing bubble three years ago that preceded a global recession, General Motors Co. Chief Executive Officer Dan Akerson said… ‘The ’08 recession, which was a credit bubble that manifested itself through primarily the real estate market, that was a serious stress,’ Akerson told the Detroit Economic Club… ‘The government took some insightful actions. This is much more serious.’”
November 17 – Bloomberg (Joao Lima): “With an economy struggling in a recession, Portuguese Prime Minister Pedro Passos Coelho is fighting to avoid the market mayhem that toppled the Italian government last week. Coelho, whose Social Democratic Party ousted the Socialist government in June elections, is meeting targets set by the European Union and International Monetary Fund… He’s slashing state workers’ salaries and avoiding further one-off income-tax surcharges to fill a financing hole.”
November 14 – Bloomberg (Adam Ewing): “Europe’s banks need to keep dumping Italian bonds and other assets tainted by the region’s debt woes to avoid being sucked into the epicenter of the crisis, said Christian Clausen, president of the European Banking Federation. ‘The banks are doing exactly what they should be doing: they are reducing their risk toward this event. We can see that clearly as now Italian bonds are being sold off,’ Clausen, who is also the chief executive officer of Nordea Bank AB, said…”
Global Bubble Watch:
November 18 – Dow Jones (Costas Paris): “A proposal that the International Monetary Fund could call on the European Central Bank to lend it money so it can finance bailouts for euro-zone governments threatened with insolvency is gaining traction and if all parties agree, a deal could be announced at the Dec. 9 European Union summit, two people with direct knowledge of the matter said. ‘Germany and the ECB are still opposed to the idea but with no other viable alternatives talks could start soon. There is urgency in this as something must be in place if Italy needs a bailout,’ a senior euro-zone government official said. An IMF official said the only other proposal on the table is the ECB financing the euro-zone's bailout mechanism--the European Financial Stability Facility--but Berlin has made clear that won't happen. ‘It's the French proposal to turn the EFSF into a bank so it can lend to countries in trouble. But it's going nowhere,’ this official said.”
November 17 – Bloomberg (Patrick Donahue): “European Central Bank governing council members have agreed on a 20 billion-euro ($27bn) weekly upper limit for sovereign debt purchases as resistance among members grows, the German newspaper Frankfurter Allgemeine Zeitung reported. The ECB council meets every other week to decide on an upper limit for bond purchases used to stem rising yields as the European debt crisis widens… Members met again late yesterday to discuss lowering the level, FAZ said.”
November 14 – Bloomberg (Adam Haigh and Whitney Kisling): “U.S. companies are buying back the most stock in four years, taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15% cheaper than when the credit crisis began. Corporations have authorized more than $453 billion in repurchases this year, putting 2011 on track for the third-highest annual total behind 2006 and 2007…”
Currency Watch:
The U.S. dollar index rallied 1.4% to 78.02 (down 1.3% y-t-d). For the week on the upside, the Japanese yen increased 0.4%. On the downside, the New Zealand dollar declined 3.7%, the South African rand 3.2%, the Norwegian krone 2.7%, the Australian dollar 2.6%, the Swedish krona 2.5%, the Brazilian real 2.4%, the Swiss franc 1.9%, the Canadian dollar 1.7%, the Danish krone 1.7%, the euro 1.6%, the British pound 1.6%, the Singapore dollar 1.5%, the Mexican peso 1.4%, the South Korean won 1.1%, and the Taiwanese dollar 0.2%.
Commodities and Food Watch:
The CRB index dropped 2.5% this week (down 6.2% y-t-d). The Goldman Sachs Commodities Index fell 2.6% (up 2.6%). Spot Gold retreated 3.6% to $1,724 (up 21.3%). Silver sank 6.5% to $32.49 (up 5.1%). December Crude declined $1.32 to $97.67 (up 7%). December Gasoline sank 4.8% (up 1%), and December Natural Gas dropped 7.5% (down 25%). March Copper declined 1.8% (down 23%). December Wheat fell 3.0% (down 25%), and December Corn sank 4.4% (down 3%).
China Bubble Watch:
November 16 – Bloomberg (Wendy Mock): “China Development Bank Corp. has delayed signing a $500 million offshore loan due to market volatility, according to three people familiar with the matter. The state-owned policy bank may pursue the loan again early next year…”
November 17 – Bloomberg (Marco Lui): “Zoomlion Heavy Industry Science & Technology Co. said China’s demand for cranes and excavators will continue to slow next year because of waning economic growth and cutbacks in railway building. ‘Demand for construction machinery has shrunk drastically and growth will no doubt continue to slow next year,’ Chairman and Chief Executive Officer Zhan Chunxin said…”
India Watch:
November 16 – Bloomberg (V. Ramakrishnan and Jeanette Rodrigues): “India’s central bank will buy government bonds this month for the first time since January to boost cash in the banking system… The move comes after four of the last five debt sales this quarter failed to attract adequate investor demand.”
November 14 – Bloomberg (Anurag Joshi): “Indian companies’ international bond sales have dried up this quarter, after the European debt crisis pushed borrowing costs to the most in more than two years. Sales dropped to their lowest since the second quarter of 2009…”
Asia Watch:
November 16 – Bloomberg (Taejin Park and Seonjin Cha): “South Korean companies, which raised a record from domestic bond sales this year, may keep up the pace in 2012 on demand from Japanese investors… Debt sales have risen 20% from last year’s total to 51.3 trillion won ($45bn), surpassing the previous peak of 48 trillion won in 2009… Overseas investors increased holdings of Korean bonds by 91% in the first 10 months…”
Latin America Watch:
November 14 – Bloomberg (Drew Benson and Camila Russo): “Argentine reserves are falling at the fastest pace since 2008 this month after President Cristina Fernandez de Kirchner’s moves to stem capital flight prompted savers to withdraw dollars from their bank accounts… As inflation estimated by some economists at 24% helped fuel capital flight of $3 billion per month, Fernandez last month ordered energy and mining companies to repatriate export revenue and tightened oversight of the foreign exchange market…”
November 17 – Bloomberg (Ben Bain): “Yields on Mexican benchmark bonds rose for a fifth straight day and the peso declined as investors shunned higher-yielding assets amid concern European leaders may come up short in solving the region’s debt crisis.
Unbalanced Global Economy Watch:
November 16 – Bloomberg (Ambereen Choudhury, Donal Griffin and Alexis Xydias): “Job losses in the global financial services industry this year are close to surpassing 200,000… The reductions add to the 195,000 banks, insurers and asset managers announced this year, and surpass the 174,000 losses in 2009…”
November 17 – Bloomberg (Andrew Mayeda): “The amount of mortgage and credit-line debt held by Canadians is continuing to set records even as policy makers keep warning consumers not to take on debts they won’t be able to afford when interest rates eventually rise. Canadians held C$791 billion ($772bn) of debt in mortgages and personal lines of credit in September, up 8.8% so far this year and a record 62% of the economy…”
November 16 – Bloomberg (Simone Meier): “European inflation held at the highest rate in three years in October, complicating the European Central Bank’s task of shoring up the economy as it fights the sovereign-debt crisis. Consumer prices in the 17 nations using the euro increased 3% from a year earlier…”
November 14 – Bloomberg (Simone Meier): “European industrial production declined the most in 2 1/2 years in September… Production in the 17-nation euro area dropped 2% from August, when it rose 1.4%... France reported a decline of 1.9%, while Italian output fell 4.8%.”
November 16 – Bloomberg (Svenja O’Donnell): “U.K. unemployment jumped in the third quarter as the number of young people looking for work climbed above 1 million for the first time in at least 19 years… The jobless rate climbed to a 15-year high of 8.3%.”
November 15 – Bloomberg (Matthew Brown): “The pound stayed higher against the euro after a report showed U.K. inflation slowed to 5% in October.”
U.S Bubble Economy Watch:
November 17 – Bloomberg (Carol Eisenberg): “U.S. workers’ health insurance premiums rose 63% from 2003 to 2010 as employers shifted more of the burden of rising medical costs to individuals and families, a study showed. The total cost of insuring a family through employer-sponsored health plans rose 50% over the same period, reaching an average of $13,871 a year by 2010…”
November 17 – Bloomberg (Kathleen M. Howley): “U.S. lenders started foreclosures on more properties in the third quarter, the first increase in a year, as a backlog stemming from claims of faulty home seizures began to ease.”
November 18 – Bloomberg (Janet Freund): “UPS Ground packages, UPS Air services, U.S.-origin intl shipments to see net increase of 4.9% in 2012. UPS Next Day Air Freight, 2nd Day Air Freight rates for shipments within, between U.S., Canada, Puerto Rico to increase 5.9%...”
Central Bank Watch:
November 16 – Bloomberg (Craig Torres): “Federal Reserve Bank of Richmond President Jeffrey Lacker said the Fed’s current purchases of mortgage bonds and financing of private sector assets during the credit crisis has fueled some of the antagonism aimed today at the central bank. Central bank credit allocation is ‘bound to be controversial,’ Lacker said… ‘We need to recognize the extent to which some measure of antagonism is an understandable consequence of the Fed’s own credit policy initiatives.’ …Lacker warned that credit allocation policies can ‘entangle’ the Fed in political conflicts that undermine independence, adding that the executive and legislative branches in times of crisis may try to channel credit to particular constituents.”
November 16 – Dow Jones (Luca Di Leo): “Federal Reserve Bank of Richmond President Jeffrey Lacker Wednesday called into question the unorthodox steps taken by the U.S. central bank during and in the aftermath of the financial crisis, suggesting it may be better to restrict the Fed. The Fed's unconventional measures, including the purchase of mortgage-backed securities which some officials would like to resume, have politicized the central bank, threatening its ability to keep inflation under control. ‘While it is easy to deplore politically motivated attempts to influence Fed policy, we need to recognize the extent to which some measure of antagonism is an understandable consequence of the Fed’s own credit policy initiatives,’ Lacker said… Contentious disputes about which markets receive support, and which do not, ‘can entangle the central bank in political conflicts that threaten the independence of monetary policymaking.’”
November 16 – Bloomberg (Scott Lanman): “Federal Reserve officials aired divisions over whether the central bank should wait to see if the economy deteriorates before taking further steps to reduce borrowing costs and lower unemployment. More action ‘may be needed’ to reduce ‘persistently high unemployment,’ San Francisco Fed President John Williams said… St. Louis Fed President James Bullard said the central bank’s policy is ‘appropriately calibrated’ and should only be loosened if the economy deteriorates. The split illustrates the challenges Chairman Ben S. Bernanke… may face in generating broad support among policy makers for measures such as a third round of asset purchases.”
November 15 – Bloomberg (Jennifer Ryan): “Bank of England Governor Mervyn King said Britain faces a ‘markedly weaker’ outlook for economic growth and persistent danger from Europe’s debt crisis… ‘There is no meaningful way to quantify the most extreme outcomes associated with developments in the euro area.’”
Fiscal Watch:
November 17 – Bloomberg (George Anders): “Get ready for the prospect of another federal housing agency needing to raise billions of dollars, most likely through extra taxpayer support. The Federal Housing Administration, in its annual report to Congress… said independent actuaries give the agency 50-50 odds of having to raise money in the next few years because its net worth is close to zero… Until a few years ago, the FHA was a minor part of the housing market. Now, it guarantees more than $1 trillion in home loans. Its willingness to stay busy during the current housing slump has been a boon to homebuyers and builders, but all those guarantees aren't adding up to anyone's idea of a strong portfolio… Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania’s Wharton School, estimates that the FHA will need a $50 billion to $100 billion infusion of taxpayer money to shore up its finances.”
November 15 - Washington Post (Michael A. Fletcher): “The federal agency that guarantees private-sector pensions saw its deficit swell to $26 billion in the past year — the largest in its 37-year history. The agency guarantees the pensions of 44 million workers. The Pension Benefit Guaranty Corp. reported the growing deficit in its latest annual report… The disclosure adds new urgency to the agency’s efforts to persuade Congress to change its premium structure… Without a new round of fee increases, the PBGC… could eventually require a taxpayer bailout, according to its director, Joshua Gotbaum.”
November 15 – Bloomberg (Angela Greiling Keane): “The U.S. Postal Service may post a record $14.1 billion loss for the 2012 fiscal year as mail volumes continue to drop and Congress forces it to make a payment for future retirees’ health benefits…”
Muni Watch:
November 17 – Bloomberg (Tim Jones): “Illinois will owe $1 billion more than expected to its pension funds next year because of reforms designed to cut the long-term retirement costs of its employees, according to projections… The 19% increase in obligations to the five retirement plans wasn’t anticipated by budget officials when they presented the current-year budget in February.”
California Watch:
November 16 – Bloomberg (Greg Chang): “A revenue forecast from California’s Legislative Analyst’s Office may trigger mid-year state spending cuts of $2 billion, the Sacramento Bee reported. The revenue forecast is one of two indicators the state Department of Finance will rely upon before deciding whether to make the cuts, according to the report. The state will lag its forecast of $4 billion in additional revenue by $3.7 billion…”
Real Estate Watch:
November 16 – Bloomberg (Dan Levy): “San Francisco Bay Area home prices fell 8.6% last month from a year earlier as limits on mortgages backed by the federal government were reduced, DataQuick said… “