Most Asian Stocks Fall as Investors Wait for European Decision (Source: Bloomberg)
Most Asian stocks fell, erasing earlier gains, as investors waited to see how European policymakers will hammer out details to enhance the region’s bailout fund. Toyota Motor Corp. (7203), the world’s biggest carmaker, fell 1.3 percent. Komatsu Ltd. (6301), Japan’s largest construction machinery maker, rose 2.6 percent after Caterpillar Inc.’s earnings beat estimates. National Australia Bank Ltd. (NAB), Australia’s fourth- biggest lender by market value, lost 1.1 percent. The MSCI Asia Pacific Index fell 0.1 percent to 119.00 as of 9:55 a.m. in Tokyo after rising as much as 0.3 percent. About three stocks fell for each that rose on the index.
“Clearly, the dominant factor is what’s happening in Europe,” said Angus Gluskie, who manages more than $350 million at White Funds Management in Sydney. “At this stage, I think there are some superficial optimism that some sort of deal might be reached. Underneath the surface, though, I think investors still have a lot of questions in the back of their minds and they are alert to risks. Most investors want to get their minds around details tomorrow.”
U.S. Stocks Rise Amid Takeovers as Caterpillar Beats Estimates (Source: Bloomberg)
U.S. stocks rallied, almost wiping out this year’s decline in the Standard & Poor’s 500 Index, amid takeover deals, higher-than-estimated earnings at Caterpillar Inc. (CAT) and progress in talks to tame Europe’s debt crisis. Gauges of commodity, financial and technology shares had the biggest gains in the S&P 500 among 10 groups, rising at least 1.9 percent. Caterpillar, the largest construction and mining-equipment maker, climbed 5 percent. RightNow Technologies Inc. (RNOW) surged 19 percent, while Healthspring Inc. (HS) soared 34 percent, on acquisitions. Alcoa Inc. (AA) added 3.4 percent as metals advanced on signs of growth in China and Japan. The S&P 500 increased 1.3 percent to 1,254.19 as of 4 p.m. New York time, paring its 2011 retreat to 0.3 percent. The Dow Jones Industrial Average climbed 104.83 points, or 0.9 percent, to 11,913.62 today. The Nasdaq Composite Index gained 2.4 percent, erasing its year-to-date decline. The Russell 2000 Index of small companies advanced 3.3 percent.
Fed Wants to Ensure Housing Affordability, Dudley Says (Source: Bloomberg)
Federal Reserve Bank of New York President William C. Dudley said the central bank wants to keep mortgage interest rates from rising too much and may do more to hold down borrowing costs. The Fed’s decision last month to reinvest proceeds from maturing housing debt into mortgage-backed securities was a “signal that we do have concern about the level of mortgage spreads,” Dudley said today. “Clearly we’ve indicated our interest in supporting the housing market” and keeping yields from “getting too elevated.” Policy makers approved the action as part of an effort to spur the economy with lower borrowing costs by replacing $400 billion of short-term Treasuries in the Fed’s portfolio with longer-term bonds. The decision prompted dissents from three regional Fed presidents: Richard Fisher of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis.
Fed’s Sack Says Reinvestment in Mortgage Bonds Is Proceeding ‘Smoothly’ (Source: Bloomberg)
Brian Sack, the Federal Reserve Bank of New York’s markets group chief, said the central bank’s program of reinvesting proceeds from maturing housing debt into mortgage-backed securities isn’t disrupting markets. “The purchases have gone smoothly and market liquidity seems to be quite good,” Sack said today in the text of remarks given at the New York Fed’s annual meeting with primary dealers. The policy-setting Federal Open Market Committee last month said it would swap $400 billion of short-term debt in its portfolio for longer-term securities in order to bring down interest rates, a strategy dubbed Operation Twist. The central bank also said it will switch to reinvesting housing debt proceeds to mortgage bonds from Treasuries. This reinvestment change “came as a surprise to the markets, in part because the FOMC had communicated that it seeks to return to a Treasury-only portfolio over time,” Sack said.
BlackRock Sees Slowdown of China GDP Growth (Source: Bloomberg)
A near doubling in the Chinese economy’s reliance on credit over the past decade will prompt slower growth in coming years, risking diminished returns for investors, according to research by BlackRock Inc. China’s gross domestic product will rise at a 7 percent to 8 percent pace in the next few years, said analysts at the BlackRock Investment Institute, a London-based unit of the world’s biggest money manager, down from 10.5 percent in the past decade. One yuan of GDP now needs about 0.30 yuan of credit, compared with 0.17 yuan in 2002, a shift BlackRock describes as like a car getting less mileage per gallon of gas.
Premier Wen Jiabao’s decision to loosen some lending curbs this month amid weakening prospects for U.S. and European demand for exports underscores the reliance of the world’s second- largest economy on credit. The country’s banking regulator said yesterday it will allow a higher bad-loan ratio for small companies that have been hardest hit by a slowdown in borrowing engineered to rein in inflation.
Caterpillar Earnings Top Estimates as Economy Recovers (Source: Bloomberg)
Caterpillar Inc. (CAT), the world’s largest construction and mining-equipment maker, posted higher- than-expected third-quarter profit and sales and said 2012 revenue will gain as the U.S. and global economies improve. Net income climbed 44 percent to $1.14 billion, or $1.71 a share, from $792 million, or $1.22, a year earlier, the Peoria, Illinois-based company said in a statement today. The average of 15 analysts’ estimates compiled by Bloomberg was for $1.57. Sales increased 41 percent to $15.7 billion, beating the $14.9 billion average of analysts’ estimates. The shares advanced as much as 6.3 percent. While the European debt crisis and the level of U.S. growth are concerns, they don’t “signal the onset of recession,” Caterpillar said. The world economy will grow at 3 percent in 2011 and 3.5 percent in 2012, with the U.S. and Japanese post- earthquake reconstruction accounting for much of the improvement, it said.
Inflation Peaking in U.S. With Prices Tumbling in Bear Market: Commodities (Source: Bloomberg)
The biggest rout in commodities since the global recession may be a sign that the fastest U.S. inflation in three years is peaking. The Standard & Poor’s GSCI Index of 24 commodities entered a bear market last month after sliding more than 20 percent from a two-year high in April, on concern that slower growth will cut demand. A slump in the gauge from a 2008 record preceded a drop in inflation, while a 2009 rebound caused the consumer price index to climb. Raw materials fell 12 percent in September as the CPI rose 3.9 percent from the same month a year earlier, the most since 2008. “There is a sense that headline inflation is receding,” said Stephen Stanley, the chief economist at Pierpont Securities LLC, a government-bond broker in Stamford, Connecticut. “Things have been a little more tame the last few months than they were earlier in the year, when you had this relentless push higher, in energy prices especially.”
Treasury 10-Year Bonds Halt 3-Day Decline Before European Leaders Summit (Source: Bloomberg)
Treasury 10-year bonds snapped three days of declines as European leaders prepare to meet for the second time in four days tomorrow in a bid to solve the euro area’s sovereign debt crisis. The yield on benchmark 10-year notes retreated from near the highest level in a week as a European Union document showed that boosting the effectiveness of the region’s bailout fund will require further talks with investors. The Federal Reserve is scheduled to purchase as much as $5 billion of Treasuries today as part of its plan to stimulate U.S. economic growth through lower borrowing costs. “Our bias remains negative with some of the European policy responses still looking clearly inadequate,” said Skye Masters, a rates strategist at Royal Bank of Scotland Group Plc in Sydney. “Technicals and market positioning look supportive for Treasuries and for yields to go lower. We would still be looking for opportunities to add to longs rather than go short.” A long position is a bet an asset will rise in value.
Japanese Stocks Swing Between Gains, Losses; NGK Plunges on Fire Report (Source: Bloomberg)
Japan’s Nikkei 225 (NKY) Stock Average swung between gains and losses as commodity producers and manufacturers of construction equipment gained, while steelmakers fell amid concern prices of the material will drop. Komatsu Ltd. (6301), the world’s second-largest maker of building machinery, rose 3.6 percent after bigger rival Caterpillar Inc. posted earnings that beat estimates. Tokyo Steel Manufacturing Co. led steel producers lower after Bank of America Merrill Lynch cut ratings in the sector. NGK Insulators Ltd. (5333) plunged 27 percent after a report the maker of electrical parts and industrial ceramics asked customers not to use its some its batteries following a fire. The Nikkei 225 slid 0.3 percent to 8,819.28 as of 9:54 a.m. in Tokyo, after rising as much as 0.3 percent. The broader Topix index fell 0.4 percent to 752.13, with more than twice as many stocks declining as gaining.
European Stocks Gain on China Growth; BHP Billiton Rises, Greek Banks Drop (Source: Bloomberg)
European stocks climbed to their highest level in 11 weeks as signs of stronger growth in China and Japan outweighed a selloff in Greek lenders after a meeting of euro-area leaders discussed the region’s debt crisis. BHP Billiton Ltd. (BHP) and Rio Tinto Group led a rally in mining companies as metal prices surged in London. TomTom NV (TOM2) soared 19 percent after posting earnings that topped analysts’ estimates. National Bank of Greece SA (ETE) tumbled 21 percent amid reports that creditors may have to write down as much as 60 percent of their holdings in Greek debt.
The benchmark Stoxx Europe 600 Index rose 1.3 percent to 242.03 at the close in London, climbing for a second day to its highest level since Aug. 4. The gauge has rallied for four straight weeks, its longest stretch of weekly gains since December, amid speculation the euro area’s political leaders will find a solution to the crisis that has Greece on the edge of a default. The measure has still plunged 17 percent from this year’s high on Feb. 17.
EU Signals Fund Leverage Needs More Talks (Source: Bloomberg)
Boosting the effectiveness of Europe’s bailout fund will require further talks with investors as German lawmakers prepare to vote on its new powers tomorrow, a European Union document showed. While the European Financial Stability Facility can be bolstered under two models that may be combined and implemented “quickly,” the extent to which the fund is leveraged can only be ascertained after discussions with investors and rating companies, the document provided to German lawmakers said. The draft underscores the gaps remaining in European Union efforts to address the debt crisis as Chancellor Angela Merkel and fellow leaders prepare to return to Brussels tomorrow for a second summit in four days. Leaders are still jousting with banks over the size of losses they take on Greek bonds while deliberating over leveraging the fund after ruling out tapping the European Central Bank’s balance sheet.
JPMorgan’s Kasman Sees ‘Drags’ Weighing on U.S. Growth in 2012: Tom Keene (Source: Bloomberg)
The European debt crisis and government belt-tightening may cause the U.S. economy to slow in early 2012 even as the risk of it faltering this year has waned, said JPMorgan Chase & Co. chief economist Bruce Kasman. “As we are picking up some steam, we’re now obviously facing a new set of drags, mostly emanating from Europe,” Kasman said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “We also have this uncertainty about where U.S. fiscal policy is heading.” Economic growth may slow to 1 percent early next year “on the back of Europe going into recession and on the back of fiscal tightening” in the U.S., New York-based Kasman said. The slowdown may lead to a rise in the unemployment rate, which was at 9.1 percent in September for a third month.
Italy, Spain May Be Biggest Losers in European Bank Capital Plan (Source: Bloomberg)
Italian, Portuguese and Spanish lenders will bear the brunt of a 100 billion-euro ($139 billion) plan to recapitalize European banks, while their counterparts in the U.K., Germany and France may avoid raising additional funds. European policy makers, trying to reach agreement before a meeting in Brussels tomorrow on how to tackle the euro zone crisis, may force banks to boost core Tier 1 capital to 9 percent of risk-weighted assets by the end of June, two people with knowledge of the talks said. UniCredit SpA (UCG), Italy’s largest bank, Banco Comercial Portugues SA (BCP), Portugal’s second-biggest, and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s No. 2, are among companies analysts say may have to raise the most capital.
Lenders may be able to mark up the value of bonds that are trading above face value, allowing them to mitigate the cost of writing down their southern European sovereign debt, the people said. That may benefit U.K. and German lenders such as Royal Bank of Scotland Group Plc (RBS) and Deutsche Bank AG (DBK), whose biggest holdings of bonds are those issued by their own governments. It may also allow French banks to avoid further fundraisings.
Hungary May Hold Interest Rates as Europe’s Debt Crisis Raises Risk Costs (Source: Bloomberg)
Hungary will probably leave interest rates unchanged for a ninth month as the European debt crisis raises the country’s borrowing and risk costs and the forint weakens, eliminating room to ease policy. The Magyar Nemzeti Bank will keep the benchmark two-week deposit rate at 6 percent today, according to all 20 economists surveyed by Bloomberg. The decision will be announced at 2 p.m. in Budapest, with central bank President Andras Simor to comment at 3 p.m. As European leaders grapple to contain the euro area’s credit crisis, investors are demanding higher yields on riskier debt. The forint weakened 2.8 percent against the euro since the last rate-setting meeting, Hungary’s credit-default swaps rose to the highest in 2 1/2 years and the five-year bond yield this month reached the highest since January. That may outweigh the central bank cutting its 2012 growth forecast last week.
Spain Slipping on Deficit Means Chances of Contagion Increase: Euro Credit (Source: Bloomberg)
Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall. “They will never make it,” said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. “Our September forecast sees Spain’s deficit at 7 percent” of gross domestic product this year, he said, adding that the prediction was made before the nation’s credit rating was cut this month. Spain’s benchmark 10-year bond climbed seven basis points to 5.54 percent yesterday after European leaders ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund. The government has aimed for a deficit equal to 6 percent of GDP this year, down from 9.2 percent in 2010. Data on the deficit for the first nine months of 2011 will be published sometime this week.
Euro Strategists Draw Line in Sand at $1.34 as Merkel Seeks to Save Union (Source: Bloomberg)
Foreign-exchange strategists have ceased cutting forecasts for the euro as European government officials intensify efforts to end the region’s crisis and traders pare bets for a collapse in the currency. Between Sept. 12 and Oct. 6 the median year-end estimate of more than 40 analysts surveyed by Bloomberg tumbled to $1.35 from $1.43. It has ranged between $1.34 and $1.35 since then. The 17-nation currency, which closed at $1.3896 on Oct. 21, has strengthened 2.5 percent from last month’s low on Sept. 12 against a basket of developed-nation peers measured by Bloomberg Correlation-Weighted Indexes. For all the concern that European officials led by German Chancellor Angela Merkel and French President Nicolas Sarkozy may not be able to fix the region’s sovereign debt crisis, the $4 trillion-a-day currency market is signaling that the worst may be over for the euro. Leaders meeting yesterday outlined plans to aid banks and ruled out tapping the European Central Bank’s balance sheet to boost its rescue fund.
Merkel Plans to Seek German Parliamentary Approval for EU Summit Measures (Source: Bloomberg)
Chancellor Angela Merkel will seek backing from German lawmakers to bolster the euro bailout fund on the same day she heads to a European summit, as banks joust with leaders over the size of losses they take on Greek bonds. Leveraging the European Financial Stability Facility rescue fund to more than 1 trillion euros ($1.4 trillion) and how far to cut Greece’s debt load emerged as two main hurdles in the way of a deal to stop the debt crisis at the Oct. 26 European Union summit, the second in four days. The euro weakened as Merkel’s party proposed a full vote in parliament, also on Oct. 26. “We are still missing some important parts of the complex puzzle that is how to solve Europe’s debt crisis,” Kathleen Brooks, research director at Forex.com in London, said today. “The biggest challenge for the German Chancellor over the next 48 hours is to persuade the German Bundestag to agree to the changes to the EFSF.”
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