Saturday, November 8, 2014

11/11/2011 The Friday Perspective and the Wednesday Perspective *

So, shall our analysis focus on how things appeared Friday or Wednesday? From the Friday Perspective, there are a few hopeful stability green shoots emerging in Europe. For the week, Italian 10-year yields were only up 8 bps. The euro was down only slightly, while European, U.S. and global equities recovered much of steep early-week losses. There is a new “technocratic” government in Greece and one in the works in Italy, giving a twinge of hope on the policy front after virtual political paralysis. The Germans and French have strongly reaffirmed their unflinching commitment to the euro and further European fiscal integration. One with an optimistic bent could look to Wednesday’s market tumult as an (another) inflection point in dealing with the crisis.

What about the Wednesday Perspective? The financial world seemed altogether different only two short trading sessions ago. Wednesday saw Italian 2-year yields surge a stunning 81 bps to 7.11%, up 150 bps in three sessions and 240 bps in two weeks. Alarmingly, two-year Italian notes were being priced with a 44 bps bid/ask spread, as liquidity all but evaporated in the third-largest sovereign debt market in the world. Demand for French debt was faltering as well, as the spread to German bunds widened 18 bps to 147 bps (2-wk widening of 45bps). The euro was hit for more than 2.25% at one point, while many developing currencies (Eastern Europe and Asia) suffered greater losses. Global equities were under intense selling pressure as contagion risk, again, was gaining the upper hand.

A Wednesday afternoon article from Reuters (Julien Toyer and Annika Breidthardt) weighed further on fragile market confidence: “French and Germans explore idea of a small euro zone. German and French officials have discussed plans for a radical overhaul of the European Union that would involve setting up a more integrated and potentially smaller euro zone, EU sources say… One senior German government official said it was a case of pruning the euro zone to make it stronger. ‘You'll still call it the euro, but it will be fewer countries… We won’t be able to speak with one voice and make the tough decisions in the euro zone as it is today. You can’t have one country, one vote…’ While the two-speed Europe referred to by Sarkozy is already reality in many respects… the officials interviewed by Reuters spoke of a more formal process to create a two-tier structure and allow the smaller group to push on.”

From the Wednesday Perspective, rapidly deteriorating Italian debt markets were placing European monetary integration (and the European banking system) in clear and present danger. The Reuters story resonated, as it only made sense that discussions between German and French leaders would be moving rapidly toward the type of radical measures necessary to preserve the euro, even if this required excluding the likes of Greece, Portugal, Ireland, Spain and Italy. With the European debt crisis now spiraling out of control, it appeared that it had finally reached the point where the “core” must commence a process of desperate measures required to isolate itself from the “periphery’s” cancerous debt contagion.

With $2.6 TN of outstanding sovereign debt (and a large financial sector), the market appreciates that Italy is too big to bail. A great amount of energy has been expended attempting to fashion creative mechanisms to “ring-fence” the Italian debt market. It’s now too late for what was always high-stakes poker. All the same, talk continues of leveraging the EFSF, of IMF Credit lines, of more aggressive support from the ECB and other measures to bolster confidence in Italian Credit. But the reality is that China and other non-Europeans have, understandably, no interest in assuming Italian Credit risk; the IMF has limited resources; and that France’s increasingly vulnerable Credit standing leaves little room for a transfer of resources to Italy. The spread between French and German 10-year yields ended the week 26 bps wider to 148 bps, with two-week widening of 50 bps.

The bottom line is that European monetary integration now rests capriciously on the markets’ view of Italian solvency. Is it an issue of illiquidity or insolvency? When Italian debt markets seize up as they did Wednesday, it is reasonable for the marketplace to think “tipping point” – and position accordingly. The euro region would be a more stable place today had Greece exited the euro 18 months ago. And a strong case can be made that forcing out the weak players remains the best hope for salvaging European monetary integration. Yet policymakers are determined to treat the crisis as a liquidity issue, while the markets are increasingly sensitive to the age-old dilemma of “throwing good money after bad.”

An even stronger case can be made that European officials will move down the harrowing path to a “leaner and meaner” euro path only as a last resort. From this perspective, it is absolutely imperative that they voice unqualified support for the current euro arrangement – even if contingency planning is in the works to deal with an Italian breakdown. Officials have gone from buying time in preparation of a Greek default to an extremely pricy Italian escapade.

National Public Radio (David Kestenbaum) enlightened listeners with a timely segment Wednesday evening, “Leaving the Euro is Hard to Do.” “You might think leaving the euro would be easy. Greece, for instance, could just reverse everything it did when it joined. Replace the euros inside its borders with new Greek money. Bring back the drachma. It turns out to be very difficult. There's a famous historical example here. Ok, it's not that famous. But it's worth looking at: The break-up of the Austro-Hungarian currency union in 1918. Just as the countries of Europe today share the euro, the Austrian empire and the Kingdom of Hungary had created a shared currency: the Austro-Hungarian crown. After World War I, the region broke up. All of a sudden there were lots of countries wanting to switch to their own currencies. At the beginning, they used a simple system: Countries simply stamped existing Austro-Hungarian currency with particular markings to turn it into new, domestic currency. Some countries used ornate stamps; Romania's stamp was just a cross. This quickly led to chaos. Everyone wanted to get their money stamped in the country they thought would have the strongest currency. Countries sealed their borders, but it was no use. ‘You had boxcar loads of currency’ moving across borders, says Michael Spencer, an economist who has written about this period. Imagine what would happen now, when people can move money with the click of a mouse. If some official in Greece even breathes a word about maybe, possibly, theoretically considering leaving the euro, money could fly out of the country before anyone had time to even think about sealing the borders."

Well, I’ll assume the affluent Greeks some time ago transferred their savings out of Greece’s financial institutions. I worry much more about Italy, especially from the Wednesday Perspective. With euro disintegration no longer an impossibility, why would the more financially sophisticated Italians and others leave their euro-denominated funds in their home country banks instead of shifting them to, say, Germany? A Bloomberg article (John Glover and Elisa Martinuzzi) from this morning was headlined “Invisible Bank Run Becomes Conversation with 7% Italy Yield.” “Italy’s highest bond yields since the birth of the euro are reverberating through the financial system of Europe’s biggest debt issuer, driving lenders to seek record amounts of central bank financing. Italian banks borrowed 111.3 billion euros ($152bn) from the European Central Bank at the end of October, up from 104.7 billion euros in September and 41.3 billion euros in June...” What will these numbers look like by the end of the month?

Increasingly, the backdrop is reminiscent of previous financial collapses, with the not too distant fiascos in South East Asia, Russia and Argentina coming to mind. In all cases, policymakers for months fought resolutely to thwart the forces of Credit Bubble collapse. And, in the end, policy measures contributed greatly to the severity of the eventual financial crashes. Without exception, central banks used valuable reserve resources (and credibility) to finance capital flight, while supporting their currencies and general marketplace liquidity. Later, the atrophied status of central bank balance sheets proved critical to the implosion of financial and economic systems. And, importantly, policymakers’ headstrong battle to delay the day of reckoning ensured only greater financial and economic imbalances and contagion risks. Market intervention fomented destabilizing speculation, which tended to incite volatility while subverting the marketplaces’ capacity to effectively discount deteriorating financial and economic conditions. In the end, policies ensured catastrophic “non-linear” breakdowns.

It’s my view that derivative markets have played an instrumental if less than fully appreciated role in the series of crises over the past two decades. I would further posit that policymaker determination to thwart market forces works to increase, likely dramatically, the scope of derivative positions; position both to hedge against market and systemic risks as well as to seek profits from faltering markets (certainly including currencies). And when policymakers inevitably lose their battle against Credit and market breakdown, the marketplace is left with an unsupportable financial structure: in particular, massive derivative positions that were supposedly to protect investors (and potentially reward speculators) from myriad Credit, currency, equities and market risks. A large portion of outstanding derivative exposures required trend-following (“dynamic hedging”) selling into collapsing markets by financial institution counterparties themselves jeopardized by rapidly escalating financial and economic crisis. It is in the end an untenable situation, although it appears to work until it doesn’t work at all.

Obviously, Europe is no South East Asia. And unlike the nineties, global policymakers are not oblivious to financial crisis dynamics and won’t just sit simply sit back and watch the euro region implode. But there are uncomfortable parallels, as policymakers act with increasing desperation to thwart the Downside of Credit Bubble Dynamics. I see an increasingly vulnerable central bank, working both to stabilize an escalating debt crisis and to finance capital flight. The breakdowns of currency “pegs” were instrumental in previous dislocations, perhaps providing unappreciated omens of the cataclysm associated with the unraveling of a historic currency integration regime/experiment.

Continuing with uncomfortable parallels, there is today’s highly speculative marketplace for now content to bet on the necessity of unrelenting aggressive policy measures. At the same time, I’ll assume that already astronomical outstanding derivative exposures grow only more briskly, as market participants seek protection against escalating Credit and currency risk throughout the region (and beyond). Moreover, much of this derivative protection has been written (sold) by financial institutions and market operators that won’t fare all so well in the event of a market breakdown. In the meantime, the backdrop sure creates virtual mayhem as increasingly high-strung bulls, bears, hedge fund speculators, derivatives operators, “high frequency traders” and performance chasers all engage in bloody trench warfare.

And it’s worth noting that, at $93bn, October Chinese bank lending was stronger-than-expected, supporting the view that easing measures have already commenced. Bank loans growth is on pace for another Trillion-plus year. In Brazil, the government is said to be contemplating the removal of Credit controls, while the market positions for imminent rate cuts. One is left to ponder to what extent Brazil’s Credit growth will accelerate from the recent 2.1% monthly – and 19.6% y-o-y – rate of expansion. With the “developed” world ready to respond to heightened global financial stress with another round of quantitative easing and the “developing” poised to further accommodate overheated Credit systems, today’s almost $100 crude and near $1,800 gold are reminders of percolating inflationary pressures (which, thus far, have little impact on bond yields while working to keep the speculative juices flowing generally). Of late, it seems as if “Risk On vs. Risk Off” has morphed into “Italy Risks Breakdown of Euro as Catalyst for Global Crisis vs. Synchronized Global Policy Response to Grave Systemic Fragility Ensures Ongoing Liquidity and Speculative Excess.” Way too much “money” chasing too few real investment opportunities, one could aptly argue.

Perhaps we’re still some distance from a major financial crisis. From the Friday Perspective, my analysis seems more than Chicken Littlish. The Dow closed up 260 points today, and markets would like to believe that Italy may just have turned the corner. The thought that the marketplace could ever turn on Treasuries, as it’s done with Italian and, increasingly, with French debt, is simply ludicrous. Clearly, the world won’t tolerate euro disintegration. The euro currency is within striking distance of 140, having so far held its ground through a tumultuous 2011. Commodities look good and “developing” currencies not that bad. U.S. data? Well, "better-than-expected". Thank God it’s Friday! And in reading numerous accounts from the long litany of past financial fiascos, I am invariably struck by market participants’ voracity for continuing to play despite what should have been rather obvious indications that time was running short.

For the Week:

For another unsettled week in the markets, the S&P500 increased 0.8% (up 0.5% y-t-d), and the Dow jumped 1.4% (up 5.0% y-t-d). The Morgan Stanley Cyclicals were little changed (down 12.2%), while the Transports rose 1.3% (down 2.5%). The Morgan Stanley Consumer index gained 1.1% (down 1.8%), and the Utilities added 0.7% (up 11.4%). The Banks were little changed (down 24.3%), while the Broker/Dealers dropped 3.5% (down 29.5%). The S&P 400 Mid-Caps declined 0.8% (down 1.7%), and the small cap Russell 2000 slipped 0.2% (down 5.0%). The Nasdaq100 was unchanged (up 6.2%), and the Morgan Stanley High Tech index slipped 0.2% (down 3.8%). The Semiconductors were slightly positive (down 4.9%). The InteractiveWeek Internet index rallied 0.2% (down 2.8%). The Biotechs declined 2.1% (down 16.6%). With bullion jumping $34, the HUI gold index gained 2.2% (up 3.0%).

One and three-month Treasury bill rates ended the week at zero. Two-year government yields were up a basis point to 0.23%. Five-year T-note yields ended the week up 4 bps to 0.91%. Ten-year yields rose 2 bps to 2.06%. Long bond yields increased one basis point to 3.10%. Benchmark Fannie MBS yields were little changed at 3.08%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 3 bps to 102 bps. Agency 10-yr debt spreads increased 4 basis points to about zero. The implied yield on December 2012 eurodollar futures jumped 18 bps to 0.755%. The 10-year dollar swap spread increased 2 to 17.5 bps. The 30-year swap spread was little changed at negative 23 bps. Corporate bond spreads widened. An index of investment grade bond risk rose 6 to 129 bps. An index of junk bond risk jumped 58 bps to 728 bps.

It was another strong week of debt issuance. Investment-grade issuance this week included Amgen $6.0bn, International Paper $1.5bn, UnitedHealth Group $1.5bn, Philip Morris $1.5bn, Simon Properties $1.2bn, Halliburton $1.0bn, Southern Power $575 million, Prudential $725 million, Zimmer $550 million, Dr Pepper Snapple $500 million, AmerisourceBergen $500 million, Baltimore Gas & Electric $300 million, and Hershey $250 million.

Junk bond funds saw inflows of $1.1bn (from Lipper). Junk issuance included Peabody Energy $3.1bn, WPX Energy $1.5bn, Health Management Associates $875 million, Windstream $500 million, Amerigroup $400 million, and Petroleum Geo-Services $300 million.

Convertible debt issuers included Take-Two Interactive $220 million.

International dollar bond issuers included Teva Pharmaceutical $4.5bn, Brazil $2.9bn, Bank Nederlandse $1.75bn, Lithuania $1.5bn, Dominican Republic $1.5bn, Newcrest Finance $1.0bn, Canadian Natural Resources $1.0bn, Encana $1.0bn, Korea Finance $750 million, Canadian National Railway and Intercorp Retail $300 million.

Italian 10-yr yields rose 8 bps to 6.43% (up 162bps), and Spain's 10-year yields jumped 26 bps to 5.82% (up 38bps). Greek two-year yields ended the week up 865 bps to 99.43% (up 8,720bps y-t-d). Greek 10-year yields rose 136 bps to 26.88% (up 1,442bps). German bund yields rose 6 bps to 1.89% (down 107bps), while French yields surged 32 bps to 3.37% (spread to bunds widened 26 bps to 148bps). U.K. 10-year gilt yields dipped 2 bps this week to 2.29% (down 122bps). Ten-year Portuguese yields fell 31 bps to 11.25% (up 467bps). Irish yields fell 9 bps to 7.91% (down 114bps). The German DAX equities index rose 1.5% (down 12.4% y-t-d). Japanese 10-year "JGB" yields declined 2 bps to 0.97 (down 15bps). Japan's Nikkei dropped 3.3% (down 16.8%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index dipped 0.2% (down 15.5%), while Mexico's Bolsa rose 2.4% (down 2.6%). South Korea's Kospi index fell 3.4% (down 9.1%). India’s Sensex equities index declined 2.2% (down 16.2%). China’s Shanghai Exchange dropped 1.9% (down 11.6%). Brazil’s benchmark dollar bond yields added a basis point to 3.39%, and Mexico's benchmark bond yields rose 2 bps to 3.35%.

Freddie Mac 30-year fixed mortgage rates dipped one basis point to 3.99% (down 18bps y-o-y). Fifteen-year fixed rates declined a basis point to 3.30% (down 57bps y-o-y). One-year ARMs jumped 7 bps to 2.95% (down 31bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed rates down 2 bps to 4.74% (down 40bps y-o-y).

Federal Reserve Credit declined $6.0bn to $2.812 TN. Fed Credit was up $404bn y-t-d and $522bn from a year ago, or 23%. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 11/9) jumped $47.2bn to $3.443 TN (8-wk decline of $32.5bn). "Custody holdings" were up $92.3bn y-t-d and $107bn from a year ago, or 3.2%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $990bn y-o-y, or 15% to $10.012 TN. Over two years, reserves were $2.524 TN higher, for 34% growth.

M2 (narrow) "money" supply increased $5.9bn to $9.598 TN. "Narrow money" has expanded at a 10.3% pace y-t-d and 9.4% over the past year. For the week, Currency added $1.2bn. Demand and Checkable Deposits jumped $22.0bn, while Savings Deposits fell $10.1bn. Small Denominated Deposits declined $3.1bn. Retail Money Funds were down $4.1bn.

Total Money Fund assets rose $16.4bn last week at $2.639 TN. Money Fund assets were down $171bn y-t-d and $163bn over the past year, or 7.0%.

Total Commercial Paper outstanding fell $12bn (17-wk decline of $269bn) to $968bn. CP was down $3.8bn y-t-d, with a one-year decline of $166bn.

Global Credit Market Watch:

November 10 – Bloomberg (Mark Gilbert and Jesse Westbrook): “Italy is leading Europe to choose between increased bond buying by the European Central Bank or a possible breakup of the euro. Italian 10-year yields this week breached the 7% level that locked Greece, Portugal and Ireland out of the capital markets and forced them to seek aid. With debt of 1.9 trillion euros ($2.6 trillion), more than those three countries combined, Italy has to refinance about 200 billion euros of maturing bonds next year and more than 100 billion euros of bills. The future of the European monetary union is at stake after bond vigilantes claimed their fifth political scalp by driving Italy’s borrowing costs to records, prompting Prime Minister Silvio Berlusconi to offer his resignation… ‘There is now a full-scale run on the world’s third- largest bond market,’ said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London. ‘If Italy fails, the euro zone fails. The worse things get in Italy, the greater the pressure on the ECB to intervene on a massive scale.’”

November 9 – Bloomberg (Simon Kennedy): “The euro-region’s defenses are being breached. Investors today propelled Italy’s 10-year bond yield to close at a euro-era high of 7.25%... The biggest signal yet that the single currency’s third-largest economy is falling prey to its two-year debt crisis forces German Chancellor Angela Merkel, European Central Bank President Mario Draghi and their peers to decide just how far they’re willing to go to defend the euro. ‘The market is testing the commitment of the euro zone’s stewards,’ said Eric Chaney, Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry. ‘Italy is the real crisis battleground.’”

November 9 – Market News International (Jack Duffy): “Italian bond yields rose to new euro-era highs on Wednesday as political turmoil in Italy and Greece pushed the two-year old Eurozone debt crisis into a more dangerous phase. Yields on 10-year Italian government bonds soared to close to 7 1/2 at one stage before easing to 7.31% by midday -54 bps higher on the session. The 5- 10-year yield curve inverted for the first time ever and the 2- 10-year curve also inverted earlier in the day. Five year bonds are now yielding 7.5%, up 63bps. Seven percent is regarded as the key trigger level which forced Greece, Portugal and Ireland to seek bailouts in the recent past… ‘The funding market for Italy has effectively closed,’ said Gianluca Ziglio, an interest-rate strategist at UBS in London. Ziglio said that while domestic Italian investors would continue to absorb a large amount of new government debt issues, international investors had lost faith and were exiting the market. With E1.9 trillion in outstanding debt, Italy is the world's third largest bond market. It is expected to sell about E220 billion of bonds over the next year, according to UBS.”

November 10 – Bloomberg (Jurjen van de Pol and Jana Randow): “European Central Bank Governing Council member Klaas Knot said the ECB can’t do ‘much more’ to stem the euro region’s debt crisis. ‘Not much more can be expected from us, it’s up to the governments,’ Knot, who also heads the Dutch central bank, told lawmakers… ‘Interventions can only have a temporary and very limited effect.’ Knot also said ‘the effect of interest-rate cuts in the current situation is limited.’”

November 7 – Bloomberg (Stephanie Bodoni): “Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the success of the region’s rescue fund doesn’t depend on outside funding. ‘We have two options’ for leveraging the capacity of the European Financial Stability Facility ‘and only one of them foresees the participation of others,’ Juncker said… ‘We think we can also manage without the help of third countries.’”

November 9 – Bloomberg (Fabio Benedetti-Valentini): “BNP Paribas SA and Credit Agricole SA, France’s largest banks by assets, are finding that their pursuit of growth in neighboring Italy in the past decade has a downside: political risk. As the world’s biggest foreign holders of Italian public and private borrowings -- with $416.4 billion of such debt at the end of June -- French lenders face collateral damage from the political turmoil that sent Italy’s bond yields to euro-era records. Austerity measures to balance Italy’s budget are also threatening growth in an economy that has lagged behind the European average for more than a decade… ‘Italy was a dream investment for French banks,’ said Christophe Nijdam, a bank analyst at AlphaValue in Paris. ‘Nobody could have imagined a sovereign crisis touching a G-7 economy at that time. But the political deadlock is turning the dream into a nightmare.’”

November 8 – Bloomberg (Aaron Kirchfeld and Fabio Benedetti-Valentini): “BNP Paribas SA and Commerzbank AG are unloading sovereign bonds at a loss, leading European lenders in a government-debt flight that threatens to exacerbate the region’s crisis. BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22% to 13 billion euros this year. Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses.”

November 9 – Bloomberg (Liam Vaughan): “Banks in Europe are undercutting regulators’ demands that they boost capital by declaring assets they hold less risky today than they were yesterday. Banco Santander SA, Spain’s largest lender, and Banco Bilbao Vizcaya Argentaria SA, the second-biggest, say they can go halfway to adding 13.6 billion euros ($18.8bn) of capital by changing how they calculate risk-weightings, the probability of default lenders assign to loans, mortgages and derivatives. The practice, known as ‘risk-weighted asset optimization,’ allows banks to boost capital ratios without cutting lending, selling assets or tapping shareholders… ‘By allowing sophisticated banks to do their own modeling, we are allowing the poacher to participate in being the game- keeper,’ said Adrian Blundell-Wignall, deputy director of the Organization for Economic Cooperation and Development’s financial and enterprise affairs division in Paris. ‘That risks making core capital ratios useless.’”

November 8 – Bloomberg (Kati Pohjanpalo): “Europe is unlikely to have the capacity to rescue Italy should the euro area’s third-largest economy sink into a deeper crisis, Finnish Prime Minister Jyrki Katainen said. ‘It’s hard to see that Europe would have the resources to take a country the size of Italy into the bailout program,’ Katainen told lawmakers… ‘For Italy to refinance its debt, it must transparently show it is able to implement its balancing program exactly.’”

November 11 – Financial Times (Peter Spiegel): “This week’s market upheaval in Europe has made it difficult to increase the firepower of the the eurozone’s €440bn rescue fundto the €1,000bn that the bloc’s leaders had hoped for, the fund’s chief executive said… Investors have fled from bonds issued by highly indebted countries. Luring them back by offering insurance on losses – the centrepiece of a plan agreed in Brussels on October 26 – would now probably use up more of the fund’s resources, Klaus Regling, head of the European financial stability facility, said.”

November 10 – Bloomberg (James G. Neuger): “European efforts to speed the setup of a permanent rescue fund have lost momentum amid a clash between Germany and France over provisions to force bondholders to share losses, three people involved in the negotiations said. Finance ministers this week failed to bridge divisions over the European Stability Mechanism, lessening the chances of activating its 500 billion-euro ($680bn) war chest next July… Officials had hoped to bring the ESM’s start date forward to mid-2012 from its ultimate deadline of July 2013… Germany and the Netherlands are resisting pleas by France, Spain, Portugal and Ireland for the bondholder-loss provisions to be stripped from the ESM treaty…”

November 7 – Bloomberg (Ben Martin and Esteban Duarte): “The European Financial Stability Facility revived the 3 billion-euro ($4.1bn) bond sale it pulled last week even as the region’s sovereign crisis deepened. The bailout fund priced the bonds due February 2022 to yield 104 bps more than the benchmark swap rate… That compares to the facility’s existing 3.375% bonds due in 2021 that were priced to yield 17 bps… more than swaps when they were sold on June 15…”

November 10 – Bloomberg (Mary Childs): “October’s optimism that Europe would solve its sovereign debt crisis has evaporated in the bond market. Credit-default swaps tied to an index of European banks from Italy’s UniCredit SpA to… HSBC Holdings Plc are at the highest level since Oct. 5. In the U.S., a benchmark index of the cost to protect corporate debentures from losses rose the most in almost seven weeks. Interest-rate swap spreads, a gauge of stress in credit markets, are the widest in 17 months.”

November 11 – Bloomberg (Andrew Reierson): “The cost for European banks to fund in dollars kept within one basis point of a three-year high, according to money-market indicators.”

November 7 – Bloomberg (Jason Webb): “Investors are charging record yield premiums to buy bonds from Poland rather than lower-rated Latin American and Asian nations on concern the European Union’s debt crisis will infect the bloc’s largest eastern member. Polish dollar bond yields jumped to 283 bps above U.S. Treasuries, an all-time high relative to the 227 basis-point spread for Brazil, and a record 123 bps above Malaysia’s last week, JPMorgan… indexes showed.”

November 9 – Bloomberg (Lisa Abramowicz): “Investors bought high-yield bonds in the smallest increments in at least 20 months as they sought to limit risk-taking while Europe’s sovereign-debt crisis worsened. The one-month rolling average size of junk-debt trades shrank to $4.36 million as of Nov. 4 from $6 million at the start of the year…”

Global Bubble Watch:

November 8 – Financial Times (Henny Sender and Robert Cookson): “Stuart Gulliver, chief executive of HSBC, warned… that Asia is facing the threat of a potential slowdown in the flow of credit to the region, especially from beleaguered European banks. Many Asian nations depend on foreign banks for a large chunk of their funding, raising the prospect of a credit crunch as cash-starved foreign banks either retrench or raise the price of their loans. Continental European banks were responsible for 21% of the $2,520bn of international bank loans outstanding in Asia excluding Japan as of the second quarter of 2011… ‘The strong increases in credit availability in Asia that has supported demand growth cannot continue indefinitely,’ said Mr Gulliver…”

November 10 – Bloomberg (Esteban Duarte): “The European Central Bank has started buying covered bonds under its new 40 billion-euro ($54bn) program to support the bank funding market, according to two people familiar with the matter. ECB purchases of the securities typically backed by mortgages and public-sector loans started yesterday…”

November 9 – Bloomberg (Arnaldo Galvao): “Brazil’s government is debating whether to remove credit restrictions imposed in the last 11 months as President Dilma Rousseff seeks to shore up economic growth… Rousseff’s administration is concerned that Brazil may slip into technical recession… and is considering ways to avoid slower growth, said the official… ‘The government is very concerned with the contractionary impact of slower global growth,’ Newton Rosa, chief economist at SulAmerica Investimentos, said… ‘If it sees demand cooling too fast, removing credit restrictions a bit could be in its plans.’ …Credit expanded in September at its fastest pace this year, led by loans from state-controlled banks… Outstanding credit rose 2.1% to 1.93 trillion reais ($1.1 trillion) last month, after a 1.8% increase in August… Credit expanded 19.6% from a year earlier, above the bank’s preferred 17% pace.”

Currency Watch:

The U.S. dollar index was unchanged this week at 76.95 (down 2.6% y-t-d). For the week on the upside, the Japanese yen increased 1.4%, the Canadian dollar 0.8%, the Brazilian real 0.5% and the British pound 0.2%. On the downside, the Swiss franc declined 1.7%, the South Korean won 1.4%, the Singapore dollar 1.1%, the New Zealand dollar 1.1%, the Australian dollar 1.0%, the Swedish krona 0.6%, the Taiwanese dollar 0.5%, the Norwegian krone 0.5%, the South African rand 0.4%, the Mexican peso 0.4%, the euro 0.3%, and the Danish krone 0.3%.

Commodities and Food Watch:

The CRB index was little changed this week (down 3.8% y-t-d). The Goldman Sachs Commodities Index jumped 1.9% (up 5.4%). Spot Gold rose 1.9% to $1,789 (up 26%). Silver gained 1.8% to $34.68 (up 12%). December Crude surged $4.73 to $98.99 (up 8%). December Gasoline declined 2.2% (up 6%), and December Natural Gas fell 5.3% (down 19%). March Copper dropped 2.8% (down 22%). December Wheat fell 3.1% (down 22%), and December Corn lost 2.6% (up 2%).

China Bubble Watch:

November 1 – Bloomberg: “China’s lending jumped by more than analysts forecast in October, signaling that the government may be loosening loan quotas to support growth in the world’s second-biggest economy. Local-currency lending was 586.8 billion yuan ($92.5bn)… That was the highest since June… M2… rose 12.9%. Chinese officials aim to sustain the nation’s expansion as the property market cools and Europe’s debt crisis hits exports.”

November 9 – Bloomberg: “China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production and the property market cool and Europe’s crisis threatens exports. Consumer prices rose 5.5% in October from a year earlier…”

November 7 – Bloomberg: “Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands. They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors. ‘If you like, you can cut off one of my fingers instead,’ Zhong, 42, says… Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He’d borrowed 30 million yuan ($4.7 million) at interest rates as high as 7% a month to expand the business. Many of the lenders were elderly neighbors who’d mortgaged their homes.”

November 8 – Bloomberg: “China’s Wenzhou city plans to open 120 lending companies in the next three years to ease financial difficulties facing small firms, Xinhua News Agency reported… Wenzhou, a city in eastern China’s Zhejiang province that’s a hub for small exporters, will develop its financial industry and channel private funds, Xinhua reported. The local government will also increase the number of rural financial institutions to 30 and introduce strategic investors to the Bank of Wenzhou to boost its capital. The measures are being taken after a credit crisis broke out in August, hurting small businesses and private lending, Xinhua said.”

November 8 – Bloomberg: “China’s home prices will fall as much as 30% in the next year, driven by the government’s housing curbs, according to Barclays Capital Research. The correction in the property market will have an impact on the country’s economic growth, though is unlikely to lead to a financial meltdown, Hong Kong-based economists led by Huang Yiping said… ‘Prices are likely to correct more in large cities,’ they said. ‘But it is also important to remember that the government’s purpose is not to crash the housing market, since that would cause devastating consequences for the economy.’”

Japan Watch:

November 8 – Bloomberg (Monami Yui and Yumi Ikeda): “The Bank of Japan should boost monetary easing 10 fold to weaken the yen and preserve an export-led economic recovery, said an ex-board member who predicted the central bank’s first move to zero interest rates more than a decade ago. ‘The Japanese economy will collapse unless the yen weakens to 100 per dollar,’ Nobuyuki Nakahara, who served as a policy board member between 1998 and 2002 under then BOJ Governor Masaru Hayami, said… ‘It’s never too early to hammer out further stimulus.’”

India Watch:

November 11 – Bloomberg (Tushar Dhara and Swansy Afonso): “Investors in India are withdrawing from government bonds and national-savings schemes to pour record amounts into gold. Funds that invest in sovereign debt shrank 4% from a month earlier… and those that buy gold rose 8% to an all-time high… according to the Association of Mutual Funds in India… Individual investors withdrew 78.7 billion rupees between April and September from small-savings deposit plans such as those run by post offices, the most since at least 2000…”

November 9 – Bloomberg (Tushar Dhara): “India’s trade deficit widened the most in October in at least 17 years, pressuring the rupee, Asia’s worst performer this year, to extend declines. Merchandise exports rose 10.8% to $19.9 billion last month from a year earlier… Imports gained 21.7% to $39.5 billion, causing a trade deficit of $19.6 billion.”

Latin America Watch:

November 11 – Bloomberg (Andre Soliani and Josue Leonel): “Traders are betting [Brazil] central bank President Alexandre Tombini will step up the pace of interest-rate cuts as growth in Latin America’s biggest economy slows and Europe’s debt crisis spreads. Policy makers may lower the benchmark Selic rate by as much as 75 bps to 10.75% after reducing it by 50 bps in each of their past two meetings, futures trading shows.”

Unbalanced Global Economy Watch:

November 10 – Bloomberg (Simone Meier): “The European Commission cut its euro-region growth forecast for next year by more than half and said it sees the risk of a recession as leaders struggle to contain the fiscal crisis. Gross domestic product may grow 1.5% this year and 0.5% in 2012…”

November 7 – Bloomberg (Jeff Black): “German industrial production fell three times more than economists forecast in September as Europe’s debt crisis damped confidence and growth… Output dropped 2.7% from August, when it fell 0.4%...”

November 11 – Dow Jones: “Portugal's statistics agency said Friday inflation in the euro zone's poorest country soared in October as local energy prices continued their recent climb… Portugal's consumer price index rose to 4.2% in October from 3.6% in September…”

U.S Bubble Economy Watch:

November 7 – Bloomberg (Esmé E. Deprez): “The U.S. poverty rate was 16% in 2010 measured under an alternative method, up from the official rate of 15.2% released earlier, according to the Census Bureau.”

November 9 – Bloomberg (Kathleen M. Howley): “Home values fell in almost three-fourths of U.S. cities in the third quarter as a slowing economy deterred buyers. The median price of a single-family home decreased from a year earlier in 111 metropolitan areas out of the 150 measured… The biggest declines were in Allentown, Pennsylvania; Mobile, Alabama; and Phoenix, where the median price tumbled 18%. Prices in Salt Lake City dropped 15%. Americans are becoming more pessimistic about property values after economic growth weakened in the first half of 2011 to the slowest since the end of the recession.

Central Bank Watch:

November 8 – Bloomberg (Jeff Black and Gabi Thesing): “European Central Bank council member Jens Weidmann said the ECB cannot bail out governments by printing money. ‘One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,’ Weidmann, who heads Germany’s Bundesbank, said in a speech… The prohibition of monetary financing in the euro area ‘is one of the most important achievements in central banking’ and ‘specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,’ he said… Such a course ‘undermines the incentives for sound public finances, creates appetite for ever more of that sweet poison and harms the credibility of the central bank in its quest for price stability,’ Weidmann said. The ECB has so far bought 183 billion euros ($253bn) worth of distressed nations’ assets… Weidmann welcomed the German government’s opposition to using the central bank’s gold and currency reserves to bolster Europe’s 440 billion euro rescue fund, the European Financial Stability Facility. ‘I am glad that also the German government echoed our resistance to the use of German currency or gold reserves in funding financial assistance to other’ euro-area members, he said. ‘Proposals to involve the Eurosystem in leveraging the EFSF -- be it through a refinancing of the EFSF by the central bank or most recently via the use of currency reserves as collateral for a special purpose vehicle buying government bonds -- would be a clear violation of this prohibition’ on monetary financing.”

November 7 – Bloomberg (Tony Czuczka and Gabi Thesing): “Germany won’t let its central bank’s gold reserves be used to bolster the power of the rescue fund for indebted euro-area countries, Economy Minister Philipp Roesler said. ‘The German gold reserve must be untouchable,’ Roesler said… echoing Chancellor Angela Merkel’s chief spokesman, Steffen Seibert.”

November 10 – Dow Jones (Todd Buell): “Germany's central bank warned Thursday of rising risks to the country's financial system as the euro zone's debt crisis drags on. In a press release… the Deutsche Bundesbank said that risks to the German financial system have ‘clearly increased this year.’ It added that high levels of public debt are the largest burden for German and European financial stability ‘for the foreseeable future.’ Bundesbank board member Andreas Dombret said that it is therefore ‘especially important to pursue a sustainable fiscal policy and at the same time implement accompanying structural reforms.’”

November 10 – Bloomberg (Matthew Brockett): “Portugal’s Prime Minister Pedro Passos Coelho said the European Central Bank shouldn’t pay for some countries’ ‘indiscipline and irresponsibility’ and that there isn’t sufficient consensus in Europe to change the central bank’s mandate.”

Fiscal Watch:

November 9 – Bloomberg (Lorraine Woellert): “For most of their existence, the government-sponsored mortgage companies Fannie Mae and Freddie Mac have been the nation’s largest backers of residential home loans. Now a distant cousin is challenging their reign. So far this year, Ginnie Mae, a corporation wholly owned by the government that packages mortgages backed by the Federal Housing Administration and other agencies, has issued more mortgage bonds than Freddie Mac, making it the second-biggest funder of home loans… Ginnie Mae said it financed nearly 60% of all U.S. home purchases during the year, reflecting the increasing role FHA has been playing in the market. ‘We’ve done a really incredible job supporting the housing market,’ Ginnie Mae President Ted Tozer said… ‘And the taxpayer makes a ton of money on it.’ In the last two years, Ginnie Mae has issued more than $750 billion in securities, compared with $167 billion in 2005 and 2006… This year, through October, Ginnie Mae issued $263.3 billion in single-family mortgage securities, compared to Freddie Mac’s $251.5 billion. Fannie Mae… sold $418 billion.”

November 11 – Wall Street Journal (Nick Timiraos): “Concerns are rising that the Federal Housing Administration could run out money if the economy doesn't recover soon, raising the risk the agency would seek a taxpayer bailout for the first time in its 77-year history. Since the mortgage crisis erupted five years ago, the FHA has played a critical role in housing finance as private lenders retreated. It backs about a third of all new mortgages originated for home purchases, up from around 5% in 2006. But… a forthcoming study by Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania's Wharton School, estimates that the FHA faces around $50 billion in losses in the coming years.”

Muni Watch:

November 10 – Bloomberg (William Selway, Margaret Newkirk and Steven Church): “Jefferson County, Alabama, declared the largest municipal bankruptcy in U.S. history, capping a more than three-year saga that turned it into one of the biggest casualties of Wall Street’s credit crisis. The move yesterday by Alabama’s most-populous county came after state lawmakers failed to back a September agreement with creditors led by JPMorgan… that would have reduced its sewer-system debt of more than $3 billion.”

Speculation Watch:

November 9 – Bloomberg (Christine Harper): “Goldman Sachs Group Inc., which relied on trading for 62% of revenue so far this year, recorded losses from that business on 21 days in the third quarter, the most since the fourth quarter of 2008.”