Friday, August 19, 2011

Weekend links


1--EU banks’ summer funding lull may bring autumn woe, Reuters

Excerpt: European banks have had a nervy summer. Indicators of stress in bank funding markets are flashing red, raising fears of another 2008-style crisis. Those concerns look misplaced for now. But if markets don’t improve, the autumn could bring fresh problems.

Banks fund part of their balance sheets in the wholesale markets by issuing cheap debt less than twelve months in maturity and pricier longer-dated “term” funding. In 2008, wholesale creditors were so worried many only lent overnight, or not at all. Banks that depended heavily on wholesale funding went bust, or had to seek state support....

Europe’s biggest lenders have on average completed 90 percent of their term funding needs for 2011, according to Morgan Stanley. Second, any bank that runs into short-term trouble can access the European Central Bank’s weekly liquidity facilities, which are unlimited providing the lender has sufficient collateral.

As a result, European banks should be able to get through a stormy summer....

However, if politicians do not come up with a solution to the euro zone’s sovereign problems by September, there is a chance that banks will struggle to complete the 80 billion euros of term funding they still need this year. Then there’s the 1.7 trillion euros of funding required by 2014.

And even if markets do reopen, banks will still have to pay up: the cost of insuring the debt of the average European lender has almost doubled to 215 basis points since the spring. If average funding costs rise by a similar amount, profit margins will be squeezed. The earnings of smaller Italian lenders would be hit badly: UBI Banca’s would fall by a third, Morgan Stanley reckons. Banks would respond by shrinking their balance sheets, starving the economy of credit. The true impact of the current bank funding woes may not be a bank collapse, but an even more remote prospect of economic recovery.

2--Mr Market had a really bad day, naked capitalism

Excerpt: ...even though investors got ahead of themselves in the US, the real trouble spot is Europe. The latest EU attempt at confidence building by Sarkozky and Merkel on Tuesday wasn’t even kick the can down the road, it was pure smoke and mirrors. With a lack of any political consensus on moving to a fiscal union, the job of holding the Euromess at bay falls to the ECB. And as we’ve indicated, its Bundesbank mentality guarantees it won’t do a Bernanke and balloon its balance sheet to the €2-3 trillion level needed to do the job. It has already done roughly €96 billion of bond purchases to support periphery debt. Italy has €68 billion of debt maturing by the end of September, and market participants estimate the ECB would need to buy €100 billion of Italian debt to keep its borrowing rate at 5%. That would push the ECB’s purchases above the level than many think the bank is comfortable with. This is not a trivial issue. The ECB is already divided on further interventions; we are told by colleagues who speak to staffers that board meetings have devolved into screaming fights.

The assumption has been that if we have a Eurocrisis, the authorities will do what the markets think is the right thing and bail out the banks and provide generous liquidity. But any TARP-type facilities will have to be on a national level, and with austerity the order of the day, that would seem to be a non-starter. It also seems unlikely that the ECB would change stripes and create a raft of Bernanke-style emergency lending and asset-purchase facilities, or at least not quickly enough to halt an unraveling.

The other wild card is that the policy paralysis in the Eurozone means an eventual breakup, with some countries exiting and the rest remaining as a rump Euro area, seems more and more likely. Europe otherwise needs a vastly lower euro (Wolfgang Munchau has estimated .60 or .80 to the dollar) to alleviate the internal imbalances and give periphery countries a boost via increased exports. That does not seem likely, plus that magnitude of a currency move would have its own knock-on effects. A dissolution could take the form of a German bloc exiting, but given the denial among politicians, it would probably happen as a result of banking-related stresses becoming more acute, rather than as part of a program to remedy them.

I’d rather be proven wrong on this one, but days like today are likely to look tame relative to what is in store.

3--Defending the dollar, Uneasy Money

Excerpt: David Glasner:

....let’s take a look at Mr. Bernanke’s record of currency debasement. The Bureau of Labor Statistics announced the latest reading (for July 2011) of the consumer price index (CPI); it stood at 225.922. Thirty-six months ago, in July 2008, the index stood at 219.133. So over that entire three-year period, the CPI rose by a whopping 3.1%. That is not an annual rate, that it the total increase over three years, so the average annual inflation rate over the whole period was less than 1%. The last time that the CPI rose by as little as 3% over any 36-month period was 1958-61. It is noteworthy that during the administration of Ronald Reagan — a kind of golden age, in the Journal‘s view, of free-market capitalism, low taxes, and sound money — there was no 36-month period in which the CPI increased by less than 8.97%, or about 3 times as fast as the CPI has risen during the quantitative-easing, money-printing, dollar-debasing orgy just presided over by Chairman Bernanke. Here is a graph showing the moving 36-month change in the CPI from 1950 to 2011. If you can identify which planet the editorial writers for The Wall Street Journal are living on, you deserve a prize. ...

“Mr. Perry,” the Journal continues, “seems to appreciate that the Federal Reserve can’t conjure prosperity from the monetary printing presses.” A huge insight to be sure. But the Journal is oblivious to the possibility that there are circumstances in which monetary stimulus in the form of rising prices and the expectation of rising prices could be necessary to overcome persistent and debilitating entrepreneurial pessimism about future demand. How else can one explain the steady decline in real (inflation-adjusted) interest rates over the past six months? On February 10 the yield on the 10-year TIPS bond was 1.39%; today the yield has dropped below zero. For the Journal to attribute the growing pessimism to the regulatory burden and high taxes, as it reflexively does, is simply laughable now that Congressional Republicans have succeeded in preserving the Bush tax cuts, preventing any new revenue-raising measures, and blocking any new regulations that were not already in place 6 months ago. ...

4--Americans' Satisfaction With National Conditions Dips to 11%, Gallup

Excerpt: Americans' satisfaction with the way things are going in the United States has fallen back to 11%, the lowest level since December 2008 and just four percentage points above the all-time low recorded in October 2008.,

The Aug. 11-14 Gallup poll finds satisfaction down five points from July (16%) and nine points since June (20%). The dip is likely a response to the recent negotiations to raise the federal debt ceiling and continued concern about the national economy amid a volatile stock market. The recent downing of a U.S. military helicopter in Afghanistan resulting in the deaths of 30 U.S. servicemen could also be contributing to Americans' glum mood.

Gallup began measuring Americans' satisfaction with national conditions in 1979. Since then, satisfaction has been lower than the current 11% in only a few measurements in the final months of 2008. The all-time low of 7% came in an Oct. 10-12, 2008, poll, conducted shortly after stock values plummeted following Congress' passage of the TARP legislation in response to the September 2008 financial crisis....

Economic Concerns Paramount in Americans' Minds

In all, 76% of Americans mention some economic issue as the most important problem facing the country, the highest percentage since April 2009.

The most commonly mentioned specific problems are all economic in nature, including the economy in general (31%), unemployment or jobs (29%), and the federal budget deficit and federal debt (17%). The top non-economic problem is dissatisfaction with government and political leaders, mentioned by 14% of Americans.

5--Bond markets signal 'Japanese' slump for US and Europe, The Telegraph

Excerpt: The global credit markets are braced for deflation and perhaps depression.

Panic flight to safety has pushed the yield on 10-year US Treasuries below 2pc for the first time in American history, exceeding the extremes of the Lehman crisis and the banking crash of the 1930s.

Investors scrambled to buy the bonds of strongest industrial states on Thursday on fears of a double-dip recession on both sides of the Atlantic and a European banking crash, driving down their returns to investors. German yields fell to 2.08pc and Switzerland's 3-month rates have turned deeply negative.

Markets were stunned by a plunge in the manufacturing index of the Philadelphia Federal Reserve to minus 30.7 in August from plus 3.2 in July, one of the most violent falls ever recorded.

"It is a catastrophic collapse," said Rob Carnell from ING. "Markets are in a fearful state right now, and data like this gives them plenty of excuses to panic."

Andrew Roberts, credit strategist at RBS, said investors are haunted by fears that European banks may have lost full access to America's $7 trillion markets, leaving them at imminent risk of a dollar squeeze....

"Open our eyes: the euro and Europe are on the brink of the abyss. From the start of the crisis Europe's leaders have refused to face reality," he told Belgium's Le Soir, saying it was staggering European leaders had gone on holiday after the EU's July summit without activating the emergency measures agreed.

6--US STOCKS-Wall St set to slide on renewed bank worries, Reuters

Excerpt: - U.S. stock index futures pointed to a sharply lower open on Thursday as a report that regulators were intensifying their review of European banks' U.S. units shook up investors.

Concerned the European debt crisis might spread to the U.S. banking sector, the Federal Reserve Bank of New York has asked for more information about whether the banks have reliable access to funds needed to operate, the Wall Street Journal reported. For details, see [ID:nL5E7JI0Q]

Investors continued to worry that European policymakers were not doing enough to tackle the euro zone's debt crisis. European blue chips .FTEU3 were down 3.1 percent, with banks .SX7P among the biggest losers.

The select sector SPDR financial ETF (XLF.P), an exchange-traded fund made up of U.S. bank stocks, dropped 2.8 percent.

"The slide in futures is rooted in the European banking system," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

"It reflects continued concern that sovereign debt issues indicate we're going to have to bail out all those banks again. And if there's stress in major European banks, it will affect U.S. banks too."

7--Philly Fed at Recessionary Level, Wall Street Journal

Excerpt: The Philly Fed index has never been as low as it was in August without the economy being in recession.

There’s not much of a history here, going back to encompass only two prior recessions, but you can see the data.

The internals of the report were horrendous, too.

The “prices received” index came in at -9, down from 1.1 in July. That’s not inflationary, though “prices paid,” at 12.8, suggests pressure on profit margins.

The “new orders” index was -26.8, the worst since March 2009. Employment was -5.2, the worst since October 2009.

8--Merkel Says Joint Euro Bonds Are Wrong Answer to Debt Crisis, Bloomberg

Excerpt: Chancellor Angela Merkel said joint European bonds are “not the right answer” to the euro area’s debt crisis and that Germany’s deficit-cutting steps are a model for other countries.

Merkel sounded the theme at a rally of her Christian Democratic Union party today as she hit the campaign trail in her home state of Mecklenburg-Western Pomerania, which holds elections on Sept. 4. Her remark drew applause from a crowd of several hundred in the main square in the town of Parchim.

Each euro country “must set its own savings program,” a step that is a precondition for “solidarity” with nations struggling under debt loads, Merkel said. She cited Germany’s decision to enshrine step-by-step reductions in government deficits in the constitution.

“It’s a policy of not living on borrowing money and that works for a balanced budget as soon as possible,” Merkel said.

Investors are questioning whether Europe’s highly indebted countries can repay their creditors, leading some people to call for joint European debt, she said. “No, that is not the right answer.”

9--Treasury yields tumble to 70-year low, Financial Times

Excerpt: US 10-year Treasury yields fell below 2 per cent for the first time in at least 70 years as markets took fright on Thursday over the prospects for global economic growth.

The benchmark borrowing costs of Germany and the UK also fell to multi-decade or even record lows while stock markets plunged globally on weak US data.

US 10-year yields fell as much as 19 basis points to 1.97 per cent, German Bund yields were down 18 bps at 2.04 per cent and UK gilts were off 20 bps at 2.25 per cent.

Equities fell heavily, mirroring the turmoil in markets of last week. Germany’s Dax-30 was down 6.9 per cent, the FTSE 100 in London 5.2 per cent and the Dow Jones Industrial Average 4.5 per cent.

US manufacturing was at its weakest since March 2009, according to worse than expected data from the Philadelphia Fed, while jobless claims and inflation were both higher than forecast.

Gold hit a nominal record of $1,825 a troy ounce and the dollar rose 1 per cent against the euro as investors rushed into perceived haven assets.

“There is a serious concern that you are going to get recession sooner or later,” said Jim Reid, credit strategist at Deutsche Bank. “It is a phenomenal period in history.”

10--U.S. Stocks Sink as Treasury Yields Fall, Bloomberg

Excerpt: Stocks plunged while Treasuries rallied, pushing yields to record lows, amid growing signs the economy is slowing and speculation that European banks lack sufficient capital. Gold climbed to a record, while oil led commodities lower.

The Standard & Poor’s 500 Index tumbled 4.5 percent to 1,140.74 at 4 p.m. in New York. The Stoxx Europe 600 Index lost 4.8 percent in its worst plunge since March 2009 and Germany’s DAX Index slid 5.8 percent, the most since 2008. Ten-year Treasury yields fell as much as 19 basis points to 1.97 percent as rates on similar-maturity Canadian and British debt also reached all-time lows. The dollar gained versus 15 of 16 major peers, strengthening 0.6 percent to $1.4336 per euro. Gold futures rallied as much as 2.1 percent to $1,832 an ounce, while oil slid 5.9 percent.

Banks led losses a day after the European Central Bank said a lender will borrow dollars for the first time in six months. Lars Frisell, chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze and the Wall Street Journal reported regulators were scrutinizing the U.S. operations of Europe’s largest lenders to assess their vulnerability. U.S. jobless claims rose and Philadelphia-area manufacturing shrank by the most since 2009, while hopes for more stimulus from the Federal Reserve receded.

‘Massive Exodus’

“The massive exodus from risk markets reflects heightened concerns with a possible recession and the accelerated loss of trust in policy makers,” Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., the world’s biggest manager of bond funds, wrote in an e-mail today. “Importantly, such worries will now be compounded by concerns about technical damage to key markets. The risk is of a rapidly deteriorating negative feedback loop of weakening fundamentals, inadequate policies and bad technicals.” ...

‘Ugly Out There’

“It’s ugly out there,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview today. His firm oversees $550 billion. “It’s a combination of concern of a potential recession and the lack of policy tools to fight it. Until people see a bottom, they are not going to buy stocks. There will be pressure on the equity market until we see a solid policy response.”

U.S. stocks may slip to new lows in the next few weeks, setting the stage for a rally of more than 20 percent in the S&P 500, Tom DeMark, the creator of indicators meant to identify turning points in markets, said in an Aug. 16 interview. The S&P 500, which closed at 1,193.89 yesterday, will probably drop below the 11-month low of 1,119.46 set on Aug. 8 before surging above 1,363.61, its peak on April 29, according to DeMark....

ECB Loans

The ECB said yesterday it will lend dollars for the first time in six months after one bank took up its weekly offer. The ECB said a euro-area bank will borrow $500 million in its 7-day liquidity-providing operation at a fixed rate of 1.1 percent. It’s the first time the ECB received bids in the operation since Feb. 22.

The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, was at 20.4 basis points, the highest level since August last year. It was 12 basis points at the start of the year.

“It won’t take much for the interbank market to collapse,” Sweden’s Frisell said yesterday in an interview in Stockholm. “It’s not that serious at the moment but it feels like it could very easily become that way and that everything will freeze.”

11--Key Measures of Inflation in July, CalculatedRisk

Excerpt: The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning:
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.9% annualized rate) in July. The 16% trimmed-mean Consumer Price Index increased 0.3% (3.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Over the last 12 months, the median CPI rose 1.8%, the trimmed-mean CPI rose 2.1%, the CPI rose 3.6%, and the CPI less food and energy rose 1.8%....

With the slack in the system - and falling gasoline prices, the year-over-year measures will probably stay near or be below 2% by the end of this year.

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