Stocks, Commodities And Bonds All Manifest Bearishly As S&P Warns Of Pre-Default Downgrade … Tempers Flare As The Debt Ceiling Negotiations Fail … EuroIntelligence Warns Of A Big Accident In Europe ... Will President Obama Declare Martial Law And Rule By Decree During A Financial Emergency?
Financial Market Report For July 14, 2011
1) … Time Magazine reports Tempers flare as debt ceiling negotiations take a dramatic turn and CNN Money reports S&P warns of pre-default downgrade-
2) … A number of stocks manifested bearishly today as GoldSeek writes Sovereign debt blows big holes in big banks
VGK and EWI
EWD and NORW
IWM and IWO
ACWI and VT
AXP and COF and DFS and ECPG
NLY and WRLD
3) … Commodities, DJP, and Bonds, BND, traded lower, with BLV, falling more than LQD.
The longer out US Treasuries fell more than the shorter duration bonds. The 30 10 US Sovereign Debt Leverage Curve turned lower $TYX:$TNX. The 10 30 Yield Curve steepened as is seen in the Flattner ETF turning lower.
ZROZ, -2.3, EDV, -2.2, TLT, -1.4, IEF, -0.6 ...TMF, -4.1
Robert P. Murphy writes in 24HGold Defaulting On The Fed's Bonds
4) … Small Cap Value Shares Relative To Small Cap Growth Shares Daily, RZV:RZG Daily, manifested a dark cloud covering candlestick, suggesting that competitive currency devaluation, that is competitive currency devaluation is about to get underway again
5) … EurActiv reports that a research paper by the Romanian think tank Institute for Public Policies (IPP) has warned that Romania is much further behind than Bulgaria in the absorption of the structural funds allocated to it by the EU and warns that there is a significant "lack of transparency" within the Romania administration (Hat Tip to Open Europe)
6) … EuroIntelligence in its for fee daily news service relates: “This was the day when the German government said that it could see no reason for a European summit, and when a German bank pulled out of the stress tests on the grounds that it failed them. As the eurozone financial crisis is spreading to Spain and Italy, where spreads were rising again after a short reprieve, Germany’s demonstrative complacency suggests that the risk of a big accident in the next few days has increased.”
“The news that a planned summit cannot be held this weekend may also suggest that the technical preparations for an agreement on Greece have not yet succeeded. The Ecofin ended in gridlock on Tuesday, overwhelmed with complexity, and there may not be enough time to prepare the groundwork for an emergency summit. Reuters quotes diplomats as saying that a summit was now most likely to take place next week.”
“A German finance ministry spokesman pointed out that despite uncertainty about the second aid package for Greece the country is financed until mid September. The Berlin finance ministry also hinted that the partial debt buy back by Greece with money from the EFSF was an option Germany may consider.”
“The FT reports that French officials are angered by Germany’s complacency. The news report from Berlin said that Berlin was anxious that an over-hasty reaction to the threat of contagion in eurozone bond markets lacked credibility. The FT’s article said that Herman van Rompuy proposed the idea of a summit for Friday night, which had caught Berlin by surprise.”
“Italian and Spanish spreads came down from their peaks a couple of days ago, but at 2.887 and 3.230% respective they remain unsustainably high – and were rising again yesterday. With ten-year yields close to 6%, there are doubts about the two countries’ ability to fund themselves continuously or even about their long-term debt sustainability.”
“There seems to be at least one bank that has failed EBA’s stress test the results of which will be published this Friday. According to Handelsblatt Landesbank Hessen-Thüringen Helaba Bank apparently failed the test because EBA did not recognize the silent capital of the Land Hessen as part of the core tier 1 capital. As a result chances are bad for the Heleba to have a 5% core tier 1 capital ratio in case of a stress scenario as required by EBA. Helaba boss Hans-Dieter Brenner complained yesterday that EBA is singling out a very healthy bank without any reason. Also the Bundesbank says that Helaba was sufficiently well capitalized even according to the strict EBA rules – implying that a decision to see Helaba fail the test was taken on other considerations than the bank's capital position. There were suspicions from the very start in Germany that EBA would want to see at least one German bank fail in order to show its teeth. The FT reports in addition that Helaba has decided to pull out of the stress test as a result, a decision that may undermine confidence in the exercise. And the FT reports the Greek Prime Minister is quoted by FTD as saying that Greece would probably outsource the job of collecting around €36bn of outstanding taxes from roughly 14,000 wealthy Greeks to private firms. “Because we have the impression that our administrative body is not able to do that and it has not shown that it can be effective with this task”, Papandreou explained.“
“Greece is heading for selective default and its debt is likely to rise to 172% of GDP by next year if it opts for a rollover, the International Monetary Fund said in its latest report. The level of the Greek debt was revised from 153% of GDP to 166% this year, expecting a peak at 172% next year, up from March estimates for 159%. Kathimerini writes that the major increase is due to the capital injection that the Greek government are to grant the banks for their participation in the private sector’s participation in the new austerity package, €23.7bn by the end of 2012, of which €19.5bn are to be disbursed in the last quarter of 2011. The IMF said Greece would have to move faster with financial and structural reforms, or risk default.”
“The IMF forecasts Greek debt-to-GDP to rise to 172%.” … “Fitch downgraded Greece to CCC”.
“The ECB has threatened Ireland to withdraw liquidity if senior bondholders get a haircut; officials from the ECB have warned the Irish government that any efforts to force losses on senior bondholders at Anglo Irish Bank and Irish Nationwide could lead to the withdrawal of €50bn of central bank liquidity for the two institutions, the Irish Independent reports. The issue surfaced in recent days as part of the review mission by officials from the ECB, the European Commission and the IMF on Ireland's financial progress.”
7) … Between The Hedges relates Bloomberg reports Italy Braves Yield Surge With $7 Billion Bond Sale as Senate Votes on Cuts. Italy taps bond markets today as the Senate votes on budget cuts to tame a debt burden that is the second largest in Europe and has prompted investors to drive borrowing costs to a 14-year high. The treasury plans to sell as much as 5 billion euros ($7 billion) of four different bonds with maturities ranging from five to 15 years. It’s the first sale of longer-term debt since the country’s 10-year yield reached 6.02 percent on July 12, the highest since 1997.
The yield fell from that peak after Italy successfully sold treasury bills the same day. “The auctions will go well, in the sense that they must go well,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. “There will be a galvanizing of opinion in the domestic sector certainly.” The failure of European Union policy makers to complete a second aid package for Greece and contain the region’s debt crisis fueled concern about the sustainability of Italy’s 1.8 trillion-euro debt, which is larger than that of Greece, Ireland, Spain and Portugal combined.
Greece Gets World's Lowest Rating From Fitch in Catch-up Downgrade to CCC. Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.” The move to CCC from B+ “reflects the absence of a new, fully funded and credible” program by the International Monetary Fund and the European Union, the ratings company said yesterday in a statement in London. It also reflects “heightened uncertainty surrounding the role of private creditors in any future funding, as well as Greece’s weakening macroeconomic outlook.” Fitch is the third ratings company to cut Greece to the bottom tier of its rankings, reflecting concerns that a new aid package being negotiated for the nation will inflict losses on investors.
Default Inevitable as Every Greek $40,000 in Hock: Euro Credit. Greece has about a one in ten chance of sidestepping default, according to credit traders who are betting the country will be crippled by $490 billion of debt - more than $40,000 for every man, woman and child. Investors who bought 10-year Greek debt last year have lost almost half their money, with yields soaring to more than 16% as the budget deficit swelled by 28% since January. A $155 billion bailout hasn't stopped the nation's debt from becoming riskier than Venezuela, credit-default swap prices show, while Greek stocks lost 16% of their value this year and are down about 46% since the beginning of 2010.
Europe Is Said to Face IMF Doubts on Greek Financial Aid Without Debt Cut. European finance ministers are concerned that the International Monetary Fund will curb its share of a Greek rescue of as much as 115 billion euros ($163 billion) unless the plan includes deep cuts in Greece’s debt burden, two people with knowledge of the talks said. A program that fails to generate a sustainable reduction in Europe’s biggest debt load may require governments to finance a bigger share of the three-year lifeline, said the people, who declined to be named because the talks are in progress. The IMF has provided one third of the three previous euro bailouts, including Greece’s in 2010. Doubts over the IMF’s role represent an added obstacle in the effort by policy makers to stem a crisis that spread to Italy this week, increasing the urgency for a solution as yields soared to euro-era records in the most debt-laden nations. “European policy makers still misunderstand market dynamics,” Royal Bank of Scotland Group Plc (NYSE:RBS) economists led by London-based Jacques Cailloux said in a research note. “We expect the crisis to continue deteriorating and threaten the entire euro area.”
Italian Banks Face Higher Borrowing Costs as Debt Crisis Enters New Phase. Italian banks, saddled with the nation’s record borrowing costs, may struggle to reverse a drop in profitability that’s already turned UniCredit SpA (UCG) and Intesa Sanpaolo SpA (NYSE:ISP) into European laggards.
Italy’s two biggest lenders have about 55.4 billion euros ($78.4 billion) of debt maturing in 2012, according to the banks. Investor concern that the sovereign debt crisis is spilling over to Italy, which has the region’s largest debt, pushed the country’s 10-year bond yields to their highest relative to German bunds since the introduction of the euro, adding about 1 percentage point to funding costs this month. The crisis has entered a new phase and higher financing costs for some European nations are here to stay, Bank of Italy Governor Mario Draghi said yesterday. For the banks, that translates into pressure on earnings and may force cost cutting, greater competition for deposits and a contraction in lending, mirroring the challenges Spanish lenders are also facing. “The widening of sovereign spreads is so critical for southern European banks,” Morgan Stanley analyst Huw van Steenis wrote in a note to clients July 12. “Deleveraging remains the base case for those banks with high funding costs and impacts bank earnings and is a drag on economies.”
Sovereign, Corporate Bond Risk Rises, Credit-Default Swaps Show. The cost of insuring against default on European sovereign bonds rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 1 basis point to 284 at 1:30 p.m. in London. An increase signals deterioration in perceptions of credit quality. Swaps on Italy jumped 8 basis points to 291, according to CMA. Belgium increased 3 basis points to 188, Ireland climbed 9 to 1,073 and Portugal rose 10 to 1,096, while Spain was 12 higher at 326. Greece dropped from a record, falling 70 basis points to 2,280. The cost of insuring corporate debt rose. The Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings increased 2 basis points to 443, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 0.5 basis point to 118.5 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 2.5 basis points to 178.5 and the subordinated index rose 2 to 312.5.
China Bank Stocks Seen Extending Slump. Chinese banks, CHIX, the cheapest among major emerging markets’ lenders, may drop lower as overseas banks and funds trim stakes to meet capital rules and curb risks amid concerns that the nation’s record credit boom will unravel. The three biggest Chinese banks posted their worst quarterly stock performance in 2 ½ years on concern that local governments may default on loans. The lenders’ credit outlook may sour in the absence of a government plan to deal with the issue, Moody’s Investors Service said this month, while regulators globally are demanding banks increase buffers. “You will certainly see share sales by some of these cornerstone investors,” said Sandy Mehta, chief executive officer for Hong Kong-based Value Investment Principals Ltd. “The U.S. and European financial companies obviously need capital for themselves. And there are more distressed opportunities in financial sectors” elsewhere, he said.
And Napi Gazdasag reports the number of Hungarians with loans overdue more than 90 days rose to a record 806,000 in June, an 18% increase from a year earlier, citing BISZ Zrt. that manages the central loan information database.And El Mundo reports Four Spanish savings banks, or cajas, and one bank will fail the stress tests, citing people in the financial markets.
8) … The sovereign debt crisis in both Europe and the US is accelerating. A European Transfer Union is inevitable; it is the natural progression of the Federalist movement that began in the 1950s, as well as the call of the Club of Rome in 1974. A United States of Europe with power centered at the core, that is Germany, is steadily developing.
Out of Gotterdammerung, that is the clash between the rating agencies and world leaders, seigniorage, that is moneyness, coming from carry trade lending, securitization of sovereign, state, municipal debt, as well as mortgage backed bonds, junk debt, distressed securities, the world’s financial system comprised of banks, capital market providers, and insurance companies, will suffer a massive coronary, or perhaps better said, a massive head wound, that is a stroke.
A New Charlemagne will arise out of today’s sovereign debt crises, and establish a revived Roman Empire in Europe. And a European Continental Banker will emerge to provide seigniorage, that is moneyness, which will be more political than economic. The word, will and way of the Sovereign and the Seignior, will be confirmed by a Regional Framework Agreements, which will waive national sovereignty, and serve as the basis of regional economic governance. The seigniorage of Neoauthoritarianism will replace that of Neoliberalism, and will be based upon respect for and fear of the both the Sovereign and the Seignior.
An inquisitive mind asks will President Obama declare Martial Law, suspend Congress, and rule by decree during a financial emergency? If the President withholds US Treasury checks for Social Security, Disabled and Veteran beneficiaries, as he has threatened, will those who have taken out payday loans at pay day lenders such as World Acceptance, have grounds for not repaying their loans?