- Junk Sales Halt as Morgan Stanley(MS) Recommends Hedge: China Credit. The risk of a hard landing in China's economy has caused the longest drought in dollar-denominated junk bond sales in a year and encouraged Morgan Stanley to recommend buying credit-default protection. Amid the nation's worst cash crunch on record, no Chinese speculative-grade companies have marketed dollar notes since Central China Real Estate Ltd. raised $400 million selling five-year securities on May 22, according to Bloomberg. That is the longest stretch since the market went quiet for 95 days through July 24 last year amid economic concerns, according to Bloomberg. "The export data is another sign of a slowdown in domestic demand," Nishant Sood, a Hong-Kong-based credit strategist at Morgan Stanley said in a phone interview. Slowing orders and falling producer prices "increase the risk of a bear-case outcome in China and makes the case for a less optimistic view on Chinese credit."
- China Seen Widening Car-Purchase Limit to Fight Pollution. China, the biggest emitter of greenhouse gases, plans to widen the number of cities curbing auto purchases to fight pollution and congestion, threatening vehicle sales, the government-backed car association said. Eight cities -- Chengdu, Chongqing, Hangzhou, Qingdao, Shenzhen, Shijiazhuang, Tianjin and Wuhan -- will probably introduce measures limiting auto purchases, Shi Jianhua, deputy secretary general of the China Association of Automobile Manufacturers, said in a briefing in Beijing today, without being more specific about the timing.
- Italy’s Industrial Output Rises Less Than Forecast in May. Italian industrial output rose less than expected in May, indicating the country is struggling to emerge from its longest recession in more than two decades. Production rose 0.1 percent from April, when it fell 0.3 percent, national statistics office Istat said in Rome today. Economists had forecast output to rise 0.3 percent, according to the median of 11 estimates in a Bloomberg News survey.
- Italian, Spanish Bonds Fall After S&P Cuts Italy’s Credit Rating. Italian government bonds declined for a second day after Standard & Poor’s cut the nation’s credit rating, citing a weakening of the country’s economic prospects. The nation’s 10-year yield climbed the most in a week as the New York-based rating company also referred to the nation’s impaired financial system in its assessment released late yesterday. Spanish 10-year bonds dropped for a fourth day, the longest run of declines in almost two months. Italy’s cost of borrowing for one year rose as it sold 9.5 billion euros ($12.2 billion) of bills due in 367 and 160 days. Germany auctioned two-year notes. “It’s quite normal that when you get news like that it puts immediate pressure on the market,” said Allan von Mehren, chief analyst at Danske Bank A/S (DANSKE) in Copenhagen. “The rating action reflects an overall picture, that things are still looking weak.”
- Italy’s Baretta Says Budget Crunch May Require More From Rich. Italian Finance Undersecretary Pier Paolo Baretta said the government is considering shifting the tax burden to the wealthy in order to satisfy demands for broad-based fiscal easing and meet its 2013 deficit target. “The truth is we’ve got a real bottleneck of issues to deal with” this year, Baretta said yesterday in an interview in his office in Rome. In order to raise funds, Italy is seeking spending cuts and may limit the tax deductions higher-income households take on medical visits and other expenses, he said.
- OPEC Sees U.S. Shale Boom Eroding Demand for 2014 Crude. The Organization of Petroleum Exporting Countries forecast the world will need less of its crude next year, even as global oil demand growth rebounds to its strongest pace since 2010, amid competing supply sources. Demand for OPEC’s crude will slip by 300,000 barrels a day next year to 29.6 million a day next year, or about 2.6 percent less than the 12-member group is pumping now, the organization said in its first set of forecasts for 2014. The need for OPEC’s crude will diminish even as global oil demand growth recovers to 1 million barrels a day in 2014, from 800,000 a day this year, amid rising output in the U.S. (DOETCRUD) and Canada. “The strong growth trend seen in 2013 is expected to continue in 2014” for production from outside OPEC, the organization’s Vienna-based secretariat said in its monthly market report today.
- WTI Oil Surges to 15-Month High on U.S. Supply Decline. West Texas Intermediate crude rose to a 15-month high after U.S. supplies tumbled for a second week as refinery operating rates gained, boosting speculation that a glut in the central part of the country is dissipating. Futures climbed as much as 3 percent after the Energy Information Administration said inventories dropped 9.87 million barrels to 373.9 million, three times more than was forecast by analysts surveyed by Bloomberg. Stockpiles at Cushing, Oklahoma, the delivery point for WTI, fell the most since 2009 as refinery utilization increased to the highest level this year. WTI has moved into backwardation, with futures closest to expiration becoming more expensive than those for later delivery.
- Gold Heads for Longest Rally in Two Months on Physical Purchases. Gold climbed for the third session, heading for the longest rally since late April, as physical purchases rose and the dollar’s decline increased demand for the metal as an alternative investment. The dollar fell as much as 0.4 percent against a basket of six major currencies, after reaching the highest since July 2010 yesterday.
- U.S. Banks Seen Freezing Payouts as Harsher Rules Loom. The biggest U.S. banks, after years of building equity, may continue hoarding profits instead of boosting dividends as they face stricter capital rules than foreign competitors. The eight largest firms, including JPMorgan Chase & Co. (JPM:US) and Morgan Stanley (MS:US), would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent. The banks have until 2018 to fully comply. The U.S. plan goes beyond rules approved by the Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis, which almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money. Bankers say this could trigger asset sales and hurt their ability to lend, hamstringing the nation’s economic recovery.
- Key Passages From Fed Minutes. A number of Fed officials wanted to end the central bank’s $85 billion per month bond-buying program late this year ….
- China’s Very Real Slowdown, Out in the Open. China’s economy is slowing down. China reported that both exports and imports fell in June, something that hadn’t happened since October 2009 during the depths of the global recession.
- Egypt orders arrest of Muslim Brotherhood leader as group rejects cabinet offer. Egypt ordered the arrest of the Muslim Brotherhood's spiritual leader and nine others for allegedly instigating violent clashes with the military this week that left more than 50 Brotherhood supporters dead, hours after the group rejected a plan to be part of the government's new cabinet. The general prosecutor's office said in a statement Wednesday that it issued arrest warrants for the general guide of the Muslim Brotherhood, Mohammed Badie, as well as his deputy and strongman, Mahmoud Ezzat. Eight other leading Islamists also were ordered to be taken into custody. The prosecutor's office says the Islamist leaders are suspected of inciting the violence outside the Republican Guard building in Cairo on Monday that left 54 people dead.
- Fed Minutes: Some Participants Felt Fed Will Need to Explain QE Exit Relatively Soon. Federal Reserve officials expressed concern about how well the central bank was conveying its policy intentions to a jittery investing public, according to minutes from the most recent meeting. The June FOMC session was significant in that Chairman Ben Bernanke followed it by telling the media that the Fed was prepared to start winding down its bond-buying program by the end of 2013. The minutes indicated a clear concern from committee members, who gave marching orders to Bernanke about what to say at the media gathering. "At the conclusion of the discussion, most participants thought that the Chairman, during his postmeeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee's expectations," the minutes said. "In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee's ongoing assessment of the economic outlook." "A few stated their view that a prolonged period of low interest rates would encourage investors to take on excessive credit or interest rate risk and would distort some asset prices," the minutes said. "However, others suggested that the recent rise in rates might have reduced such incentives."
- Dire Predictions For Housing Recovery. (video) The housing recovery is in for a major pause due to higher mortgage rates. It is not in the numbers now, and it won't be for a few months, but it is coming, according to one noted analyst. The market has seen rising rates before, but never so far so fast; there is no precedent for a 45 percent spike in just six weeks. The spike is causing a sense of urgency now, a rush to buy before rates go higher, but that will be short term. Home sales and home prices will both come down if rates don't return to their lows, and the expectation is that they will not. Where is the proof of this? We only need look to the $8,000 home buyer tax credit that expired in 2010. The falloff was dramatic.
Business Insider:
New York Times:
- Greek Unions Call Strike to Protest Cuts. Greek unions stepped up their opposition Wednesday to a new round of austerity measures promised to the country’s foreign creditors, calling a 24-hour general strike for Tuesday while local government employees occupied city buildings to protest plans for wage cuts and layoffs.
- S&P vs. Inflation Expectations. (graph)
- China Export Growth vs. GDP Growth. (graph)
- Brazil's real hits weakest level since April 2009. The Brazilian real added to losses on Wednesday afternoon, hitting its weakest level in over four years, as investors feared the U.S. Federal Reserve could signal later in the day that it is about to cut back on its stimulus program. The real lost 0.7 percent to 2.2781 per dollar, its weakest level since the beginning of April, 2009. Investors fear that the withdrawal of U.S. stimulus may reduce the flow of dollars to emerging-market countries such as Brazil.
- U.S. wholesale inventories fall, likely drag on GDP growth. U.S. wholesale inventories fell in May by the most in a year and a half, the second straight monthly decline and a sign that restocking by businesses could weigh against economic growth in the second quarter. The Commerce Department said on Wednesday wholesale inventories dropped 0.5 percent during the month, confounding the expectations of analysts polled by Reuters, who expected an increase.
- Brazil set for another steep interest rate rise to tame prices. Brazil is expected to raise its benchmark interest rate by another 50 basis points on Wednesday, maintaining the pace of monetary tightening to prevent high inflation from hampering a slow-moving economic recovery. The Brazilian central bank, one of the first in the world to tighten monetary policy, has raised its Selic rate twice since April to 8 percent to battle high inflation that has curbed consumption and industrial output.
- Euro vulnerable as Asian FX reserve accumulation slows. Euro weakness could accelerate in coming months because Asian central banks, amongst the biggest buyers of the currency in recent years, will have smaller foreign exchange reserves with which to diversify.
- Car dealers no longer fear bruised credit. Lenders more willing to back subprime loans.
- Hedge funds can now advertise. What it really means. The Securities and Exchange Commission today voted 4-1 to end a decades-old ban on "general solicitation" by many private issuers, including hedge funds, private equity funds and start-up companies. The recommendation to do so first appeared in the JOBS Act, a piece of bi-partisan capital markets legislation that became law in March 2012. In short, this means that all sorts of private issuers soon will be able to publicly discuss and advertise investment opportunities. They also can do things like publicize past performance, which previously had been prohibited.
- Portugal’s political turmoil risks debt restructure. Portugal’s government almost disintegrated last week but has now managed to shore up its support, bringing some calm to the country’s bond market. But the political chaos could still have far-reaching implications. Its chances of regaining full market access now look much slimmer. That means the country will need more money from its troika of international lenders. But that could lead to a debt restructuring – potentially upsetting the tentative peace that the European Central Bank has brought to the continent’s bond markets.
- Brussels faces off against Berlin with plan for failing banks. The European Commission has faced off against Germany by tabling proposals to give itself the power to overrule national financial supervisors and shut down failing banks in the eurozone.
Echoing fears that
European policymakers remain in a state of cognitive dissonance –
recognizing the need for root-and-branch overhaul of peripheral banks,
but backtracking on joint liability plans – Christopher Flowers, the
legendary FIG investor who now runs the £2.3 billion ($3.5 billion)
private equity group JC Flowers, sounded the alarm over the negative
sovereign-bank feedback loop.
In a shot across the bows of market bulls, who cite the return of
capital flows to weaker eurozone states, Flowers issued a stark warning:
"There is a scenario where we have a Lehman-type event: we wake up some
Thursday and a big country is in trouble.
"And the ECB will have to decide to support banks x, y, z. And then the
ECB will, in fact, decide to own bank x, y, z.
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- China Premier Says 2H Economic Situation Complicated. China Premier Li Keqiang made comment on 2H economic situation after hearing feedback from small companies during visit to the southern Chinese province of Guangxi.
- China Sets Timetable for Local Govt to Disclose Spending. China's State Council issued timetable today for local governments to disclose information on receptions, vehicles and overseas trips spending, citing a State Council plan. Provincial governments should disclose their spending on receptions, vehicles and overseas trips starting from 2013, citing the plan. The municipal- and county-level governments should strive to disclose similar information by 2015, according to the report. State Council also identified nine categories of information that should be disclosed to improve government transparency, including subsidized housing, food and drug safety, environmental protection, land appropriation and demolition, the report said.
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