20121024 0957 Global Markets Related News.

Asia FX By Cornelius Luca - Tue 23 Oct 2012 17:10:54 CT (Source:CME/www.lucafxta.com)
The appetite for risk averse imploded for the second day in the past three days amid mixed corporate earnings and a credit rating downgrade of five Spanish regional governments. The European and commodity currencies succumbed and the yen ended marginally near a 3 1/2-month low. The US stock markets cratered, so the Asian markets should follow. Gold, oil and silver plunged as well. The short-term outlook for the European and commodity currencies is sideways with downside risk. The medium-term outlook for most of the foreign currencies is still slightly bullish. The LGR short-term model is short on yen, sterling and Canadian dollar, and long euro, franc and Australian dollar. Good luck!

Overnight
Canada: Retail sales rose 0.3% in August, down from +0.7% in July.
Canada: The BoC left interest rates unchanged at 1%.

Today's economic calendar
Australia: Consumer Price Index  for the third quarter
China: HSBC manufacturing PMI for October

Asian Stocks Decline as Global Slowdown Erodes Earnings (Bloomberg)
Asian stocks dropped, with the regional benchmark index heading for its fourth straight loss, as the global economic slowdown crimps corporate earnings and after commodities erased this year’s gains. BHP Billiton Ltd. (BHP), the world’s biggest mining company, declined 1.6 percent in Sydney. Daiki Aluminium Industry Co. sank 3.9 percent in Osaka after the Japanese supplier of the light metal used in the automobile industry lowered its full- year profit forecast. SK Hynix Inc. gained 2 percent in Seoul after the world’s second-largest maker of computer memory chips reported its first profit in four quarters on lower costs and currency gains.
The MSCI Asia Pacific Index (MXAP) slid 0.4 percent to 122.98 as of 9:29 a.m. in Tokyo, with almost four stocks falling for each that rose, before markets in China and Hong Kong open. The gauge rebounded 13 percent from this year’s low on June 4 through yesterday as stimulus measures in the U.S., Japan and China boosted market sentiment amid a global economic slowdown and Europe’s debt crisis. Spain’s borrowing costs rose yesterday after the Bank of Spain said the natiion’s recession will worsen in coming months. “Weaker earnings from some of America’s biggest companies, along with a sense that Europe isn’t making good progress on the debt crisis, has shaken investor confidence,” said Hiroichi Nishi, an equities manager in Tokyo at SMBC Nikko Securities Inc. “After the run-up in markets we’ve seen, technical indicators are pointing to some overheating.”

Japan Stocks Decline as Global Slowdown Erodes Earnings (Bloomberg)
Japanese stocks fell, retreating from the Nikkei 225 (NKY) Stock Average’s longest winning streak since July 2011, on concern a global economic slowdown is crimping earnings and as commodities erased this year’s gains. Canon Inc., camera maker that gets 80 percent of its revenue overseas, lost 1.3 percent. Kawasaki Heavy Industries Ltd. sank 5.1 percent after the gas-turbine maker said in a preliminary statement first-half earnings missed its forecasts on the economic slowdown in China and Europe. Inpex Corp., Japan’s top oil explorer by market value, slid 1.4 percent after crude prices dropped. The Nikkei 225 slid 0.7 percent to 8,956.65 as of 9:24 a.m. in Tokyo, falling for the first time in eight days. The broader Topix Index lost 0.5 percent to 745.77, with four shares dropping for each that rose.
“Investor sentiments are being swayed” as major U.S. companies cut earnings forecasts in addition to the global economic slowdown, said Hiroichi Nishi, an equities manager in Tokyo at SMBC Nikko Securities Inc. “More investors are likely to sell shares as the markets are kind of overheated.” Volume on the Nikkei 225 was 4.3 percent higher than the 30-day average.

Cnooc Drives Drop as Economy Cuts Rally: China Overnight (Bloomberg)
Chinese stocks tumbled from a five- month high in New York, spurred by declines in energy and commodities producers, on speculation the past month’s rally was overdone given lingering concerns over the global economy. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese companies in the U.S. sank 1.3 percent to 95.41 yesterday, the biggest drop in a month. PetroChina Co. slipped as crude declined to a three-month low. Cnooc Ltd. (883) slumped to widen the discount to its Hong Kong shares to the most in four months, on concern the Beijing-based oil producer’s bid for Nexen Inc. (NXY) may not get Canadian approval.
Chinese equities in the U.S. rallied over the past month to trade at their highest valuation since August last week, as data showing rising industrial production and retail sales sparked optimism the slowdown in Asia’s largest economy was bottoming. The basis for economic stabilization isn’t “firm” enough and China will remain proactive on fiscal policy, the Finance Ministry said yesterday, according to a Xinhua News Agency report posted on the government’s website. “Markets had gotten very high and there has been too much complacency, yet there are a whole host of global economic issues that have yet to be resolved,” Kevin Pollack, a managing director at Paragon Capital in New York, said by phone yesterday. “Investors should be cautious going into the end of the year and early next year as there remains significant downside risk.”

Dow Drops Most Since June Amid Disappointing Earnings (Bloomberg)
U.S. stocks retreated, giving the Dow Jones Industrial Average its biggest decline since June, amid disappointing results at companies from 3M Co. to DuPont (DD) Co. and as commodities erased their gain for the year. 3M, the maker of products ranging from Scotch tapes to dental braces, and DuPont, the most valuable U.S. chemical maker, slumped at least 4.1 percent. Freeport-McMoRan Copper & Gold Inc. (FCX) and Halliburton Co. (HAL) dropped more than 3.1 percent as commodities sank amid concern about a global economic slowdown. Facebook Inc. (FB) surged 9.5 percent at 4:39 p.m. New York time after posting sales that topped analysts’ projections. The Standard & Poor’s 500 Index decreased 1.4 percent to 1,413.11 at 4 p.m. New York time, the lowest level since Sept. 5. The Dow slumped 243.36 points, or 1.8 percent, to 13,102.53. Volume for exchange-listed stocks in the U.S. was 6.6 billion shares, or 9.1 percent above the three-month average.
“That’s the reality of the situation that investors are facing,” said Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $85 billion. He spoke in a phone interview. “There’s not much growth in the economy. There’s lack of demand. How can revenues grow?” Thirty-three companies in the S&P 500 were scheduled to release results today. Third-quarter sales missed forecasts at 60 percent of companies, according to data compiled by Bloomberg. Earnings at about 70 percent of the index’s companies beat analysts’ estimates, the data showed.

Recap Stock Index Market Report (CME)
The December S&P 500 traded sharply lower on the session, falling to its lowest level since September 6th. The primary source of weakness in the market came from a round of corporate earnings that showed disappointment, with concerns over upcoming business conditions and slowing economic growth. Disappointing earnings from DuPont and plans to slash 2% of their workforce seemed to underscore concerns over slowing economic growth. The December S&P 500 managed to bounce from its morning lows in early afternoon trade, helped by a rebound in the shares of Apple following the debut of their new iPad mini. All of the major S&P sector indices were in negative territory, led by declines in material and energy-related firms. The market will get more corporate earnings after the close from Amgen, Facebook and Netflix.

European Stocks Decline to Seven-Week Low on Results (Bloomberg)
European stocks declined for a third day, with the Stoxx Europe 600 Index (SXXP) sliding to its lowest level in almost seven weeks as results from companies including Alfa Laval AB and D.E Master Blenders (DE) 1753 NV disappointed investors. Alfa Laval and D.E Master Blenders fell at least 5 percent each. Mulberry Group Plc (MUL) plunged 24 percent after unexpectedly saying profit will fall. Chemical makers including Arkema SA (AKE) tumbled after DuPont Co.’s earnings lagged forecasts. The Stoxx Europe 600 Index lost 1.7 percent to 268.40 at the close of trading, its lowest level since Sept. 5. The gauge has erased most of the gains since European Central Bank officials agreed on an unlimited bond-purchase program. “An ugly session for equity markets has unfolded today as sellers drove stocks lower on the back of some disappointing corporate earnings,” said Angus Campbell, head of market analysis at Capital Spreads in London.
“With a lack of macro-economic data releases, the focus has been very much on companies and there were some car-crash type profit warnings and well-below-expectation results which sent investors into risk aversion mode.” European stocks fell yesterday as investors speculated that Spain will face less pressure to seek a bailout after a victory in regional elections for Prime Minister Mariano Rajoy. Moody’s Investors Service lowered its credit rating on Catalonia and four other Spanish regions. The decision was “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs,” the ratings company said.

Emerging ETF Sinks Most Since July on Declining Earnings (Bloomberg)
The exchange-traded fund tracking emerging-market shares slipped the most since July in New York and stocks slumped on concern the global slowdown is crimping company earnings and as commodities erased this year’s gains. The iShares MSCI Emerging Markets Index ETF, which tracks companies including Korea’s Posco and Moscow-based OAO Gazprom, sank 2.1 percent to $41.04 at the close of trading in New York, the biggest one-day slide since July 23. The MSCI Emerging Markets Index (MXEF) lost 1 percent to 996.82, the steepest drop since Oct. 8. About 63 percent of companies in the MSCI gauge that reported quarterly earnings have trailed analyst estimates, according to data compiled by Bloomberg. Posco, the third- biggest Asian steelmaker by output, fell to the lowest level since March 2009 after reporting earnings for the third quarter that missed estimates and cutting its 2012 sales forecast for the third time this year.
Itau Unibanco Holding SA (ITUB4), Latin America’s largest bank by market value, slipped to the lowest since July as profit dropped in the third quarter. “Concerns about weaker earnings keep the markets down today,” Maarten-Jan Bakkum, an emerging-market strategist at ING Investment Management in The Hague, said by e-mail. There are questions about “the longer-term growth outlook for China, the earnings momentum and a deteriorated macro policy mix in several key emerging economies,” he said. The Standard & Poor’s GSCI Index tracking prices for 24 commodities sank for a third day, losing 1.4 percent to 639.30, while crude oil for December delivery declined $1.98 to $86.67 a barrel in New York, the lowest settlement since July 12. Russia is the world’s largest energy exporter, while metals and other commodities account for 45 percent of South Africa’s exports.

U.S. Home Prices Rose 0.7% in August From July, FHFA Says (Bloomberg)
U.S. house prices rose 0.7 percent in August from July as buyers competed for a dwindling supply of property listings, the Federal Housing Finance Agency said. The average estimate of 15 economists in a Bloomberg survey was for a 0.4 percent gain. Prices climbed 4.7 percent from a year earlier, according to the FHFA. The previously reported 0.2 percent increase in July was revised downward to a 0.1 percent gain. The agency posted the data on its website a day before its regularly scheduled release date. The FHFA’s index has climbed as improving employment, a tight inventory of available homes and record-low borrowing costs help strengthen a real estate recovery. A home value index by Zillow Inc. jumped 1.3 percent in the third quarter from the previous three months, the biggest gain since 2006, the Seattle- based property-data company reported today.
The FHFA report, which is based on single-family houses with mortgages backed by Fannie Mae or Freddie Mac, doesn’t provide a specific price. The median price of an existing single-family home, as measured by the National Association of Realtors, was $188,700 in August, up 10 percent from a year earlier.

Euro Stays Lower Before PMI; Yen Trades Near 3-Month Low (Bloomberg)
The euro maintained losses against most of its major peers before data that may add to evidence Europe’s debt turmoil continues to weigh on economic growth. The 17-nation currency traded 0.2 percent from a one-week low against the U.S. dollar amid investor uncertainty whether Spain will seek a bailout. Reports today are forecast to show manufacturing and services industries in the euro area contracted for a ninth month and German business confidence hovered close to the lowest since February 2010. The yen was near the weakest level in more than three months on speculation the Bank of Japan (8301) will expand stimulus at a meeting next week. “We would see a bit more downside in the near term for the euro,” said Imre Speizer, a strategist in Auckland at Westpac Banking Corp. (WBC), Australia’s second-largest lender. “Economic numbers are hurting the euro and the lack of a Spanish bailout is also hurting.”
The euro traded at $1.2983 as of 10:09 a.m. in Tokyo from $1.2987 yesterday, when it touched $1.2952, the lowest since Oct. 16. The common currency was little changed at 103.68 yen, after it dropped 0.7 percent in New York. The yen was at 79.86 per dollar from 79.85 yesterday, when it slipped to 80.01, the weakest since July 6.

Bernanke QE3 Stocks Miss Greenspan Irrational Exuberance (Bloomberg)
Federal Reserve Chairman Ben S. Bernanke is trying to inject a little of the exuberance his predecessor Alan Greenspan called “irrational” into markets for everything from stocks to housing. Bernanke, who is seeking to spur the economy with a third round of so-called quantitative easing, has said his stimulus works by lowering borrowing costs and encouraging investors to seek higher-yielding assets. Boosting home and equity prices through bond buying will encourage consumers and businesses to spend more, according to Bernanke. Since these are the same assets that plummeted during the financial crisis after reaching record highs, “is there some risk you could start a new bubble and repeat the whole cycle? I suppose there is,” said Robert Shiller, the Yale University professor who forecast the end of the Internet boom in his book, “Irrational Exuberance,” which was published in March 2000, the month the Nasdaq Composite Index peaked before crashing 78 percent. (CCMP)
Bernanke’s approach risks “distorting” decisions, and “it might be economically inefficient to try to push prices up so much,” Shiller, who also predicted the bursting of the subprime-mortgage bubble, said in a New York interview Oct. 15.

Despite Romney Resurgence, Obama Still the Man Election Day (CME)
By The Economist Intelligence Unit - Mon Oct 22 10:10:00 CDT 2012 CT
GOP Candidate Has Struggled to Persuade Voters
Despite Mitt Romney's recent resurgence in polls, the Republican presidential candidate still faces an uphill battle and probably won't unseat Barack Obama from the White House in the November 6 election, according to the Economist Intelligence Unit. "Our forecast for the U.S. presidential election is that Barack Obama will be re-elected," the Economist Intelligence Unit said in a recent report. While Romney had a strong performance in the first debate early this month, "we do not believe he has enough time to overcome the president's lead" in many polls, the group said. Sluggish job growth and unemployment near 8% should be a boon to Romney, allowing him to plausibly argue Obama has been a poor steward of the economy and the country should consider a change of political leadership. Still, Romney has not converted his advantages into a lead.
Romney has "struggled to persuade voters," who seem to be giving Obama the benefit of the doubt over the slow economic recovery, the group said. Romney has suffered from "poor campaigning decisions" and failed to criticize "consistently and forcefully the president's performance."


Hong Kong Intervenes to Defend Peg as Upper Limit Tested (Bloomberg)
The Hong Kong Monetary Authority sold its own currency for a second time in a week to stem appreciation after it traded near the upper limit of a 29-year- old peg to the U.S. dollar. The central bank bought a combined $1.25 billion at a rate of HK$7.75 per U.S. dollar in Hong Kong and New York yesterday, the authority said in an e-mailed statement. That followed a $603 million intervention on Oct. 19, when it stepped into the market for the first time since 2009. The Hong Kong dollar was at HK$7.7501 as of 6 a.m. Hong Kong time today, according to data compiled by Bloomberg. Local financial markets were closed yesterday for a public holiday. “They will have no choice but to keep intervening,” said Irene Cheung, a currency strategist in Singapore at Australia & New Zealand Banking Group. “The Hong Kong dollar’s strength reflects the capital flows we see into most Asian currencies.”
The central bank fixed the currency in 1983 and in 2005 committed to keep the exchange rate between HK$7.85 and HK$7.75. The link has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the U.S., where borrowing costs are being held down to spur hiring and prop up the housing market. Hong Kong’s jobless rate is near a four-year low and home prices are at all-time highs.  Policy makers from around the world have bemoaned the economic threat of stronger exchange rates as asset purchases by the Federal Reserve boost the supply of dollars. At International Monetary Fund meetings in Tokyo this month, Philippine central bank Governor Amando Tetangco said the Fed was causing “challenges to monetary policy in emerging markets.” The HKMA first intervened during Hong Kong hours yesterday by buying $505 million and bought a further $350 million later, it said in e-mailed statements. It then purchased $395 million in New York, according to a later e-mail.

Priciest Malaysian Phone Stocks Attract Top Fund: Southeast Asia (Bloomberg)
Investor demand for bigger dividends and smaller stock swings has pushed Malaysian telecommunications shares to record valuations and convinced at least one of the nation’s top-ranked fund managers the rally isn’t over. The MSCI Malaysia Telecommunication Services Index (MXMY0TC) has climbed to 24 times estimated earnings, the highest level since Bloomberg began tracking the data in 2006 and the most expensive among peers in emerging and advanced nations. Telecommunications shares pay the biggest dividends of nine industries in Malaysia, where stock volatility is lower than any major market worldwide.
While Samsung Asset Management Co. is avoiding the companies after valuations surged, Hwang Investment Management Bhd.’s David Ng says he’s hanging on to shares of Axiata Group Bhd. (AXIATA) and DiGi.Com Bhd. (DIGI) that rallied at least 29 percent this year and helped his Hwang Select Dividend Fund (HWDBDIV) beat 97 percent of peers. The companies, which benefit from growing demand for smartphones in Southeast Asia’s third-biggest economy, pay dividend yields that exceed returns on Malaysian bonds. “Dividend stocks have done well because a lot of these businesses are more stable,” Ng, who oversees the equivalent of $5.6 billion as the chief investment officer of Hwang Investment in Kuala Lumpur, said in a phone interview on Oct. 16. “Investors just want income and certainty.”

Carney Strengthens Rate-Increase Bias on Debt Concern: Economy (Bloomberg)
The Bank of Canada signaled it may seek to curb record household debt levels by raising interest rates for the first time in more than two years, sharpening the divide with other Group of Seven nations focused on easing policy to combat a cooling global economy. Governor Mark Carney said in Ottawa today that “some modest withdrawal of monetary policy stimulus will likely be required,” even as it kept the benchmark rate at 1 percent, and that “imbalances in the household sector” will influence the timing of any move. Strategists such as Jimmy Jean at Desjardins Capital Markets in Montreal predicted the central bank would drop or weaken its tightening bias. Canada’s banking system and housing market were unscathed by the global financial crisis, allowing the world’s 11th largest economy to recover ahead of other G-7 countries. The bank said in July that the expansion is threatened by consumer debt that’s climbed to 165.8 percent of disposable income, higher than the U.S. peak before its property bubble burst.
Canadian house prices have risen 56 percent since June 2005. “They kept the hawkish bias as a warning to consumers and to curb the real-estate market,” said Denis Senecal, vice president and head of fixed income and cash for State Street Global Advisors, Canada, which manages C$1.4 trillion ($1.41 trillion) of assets. Carney also said that household debts, already at record levels, will rise further. His concern has intensified since April, when he said monetary policy should be the “last line of defense” against high debt. Canadian Finance Minister Jim Flaherty told CBC Radio Oct. 20 that he isn’t planning further measures to restrain the housing market because steps to tighten mortgage regulations have already slowed gains in some of the country’s major cities.

N.Z.’s Wheeler May Resist Rate-Cut Calls in First Policy Meeting (Bloomberg)
New Zealand central bank Governor Graeme Wheeler will probably resist pressure from unions and exporters to counter a rising currency by cutting interest rates in his first policy decision. All 17 economists surveyed by Bloomberg News predict Wheeler will leave the official cash rate at 2.5 percent tomorrow in Wellington, prolonging a period of record-low borrowing costs that began in March 2011. There is a 92 percent chance of no change, according to swaps data compiled by Bloomberg, and the New Zealand Institute of Economic Research Inc.’s shadow board also sees Wheeler extending the pause. The Council of Trade Unions wants the new governor, a former World Bank official who started on the job a month ago, to respond to the slowest inflation in more than a decade by reducing the benchmark rate, saying that will curb demand for New Zealand’s currency and make exports more affordable.
Weakening the argument for a cut are signs of a stronger housing market and prospects for inflation to rise even as the economy struggles to accelerate. “A good case for an easing can be made,” said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland and a former Treasury and Reserve Bank of New Zealand economist. Still, “the economic case for easing policy further is not watertight at this stage, especially as he will likely be concerned not to further stoke price pressures in the housing market.”

ESM Fund Plans ‘Prudent’ Investments, May Buy Bank Debt (Bloomberg)
The head of Europe’s permanent rescue fund said the countries bailed out by the region’s governments should be in a position to finance themselves by the end of 2014. “That should be well underway in two years,” Klaus Regling, head of the European Stability Mechanism, said in a Bloomberg Television interview in Luxembourg yesterday. He didn’t name specific countries. While “there will not be a feeling that the crisis is over” as workers adjust to wage and pension cuts, measures taken by governments may be sufficient by then to help them pass “the ultimate test” and return to the bond market, he said. European policy makers are working to draw a line under a crisis that is now in its fourth year. While market turmoil has eased since the European Central Bank pledged to buy unlimited quantities of government bonds to stop the euro from falling apart, economists and investors say they still expect Spain to apply for aid from the bailout fund in coming months.
Regling, who didn’t mention Spain, said that the ESM can give a precautionary credit line to distressed nations more quickly than the two or three weeks it takes to put together a full sovereign bailout. “If a country asks for a precautionary arrangement, we can act relatively fast,” he said. “Secondary market intervention” could be done in two days, he said. The ESM was declared operational on Oct. 8 and will rely on paid-in capital by European governments to underpin its full firepower of 500 billion euros ($649 billion.) By 2014, governments will have paid in 80 billion euros in capital. Regling said that the 32 billion euros currently paid in will be invested by the end of November. The ESM has so far invested 4 billion euros in “highly rated” government bonds and the bonds of international institutions. The securities are “mainly in euro,” he said. “We do it in small amounts of money, otherwise we would move the market, which we don’t want to do,” he said.

King Says BOE Is Ready to Add to Stimulus If U.K. Recovery Fades (Bloomberg)
Bank of England Governor Mervyn King said the Monetary Policy Committee is ready to add to stimulus again as it assesses the strength of the domestic recovery amid signs that global economic weakness is spreading. “At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said in a speech late yesterday in Cardiff, Wales. “Should those signs fade, the MPC does stand ready to inject more money into the economy.” King said gross domestic product data tomorrow may confirm a “zig-zag” pattern of recovery in the U.K. that is likely to continue. His comments come two weeks before officials must decide whether to increase bond purchases and at a time when the economies that have driven global growth through the crisis have shown signs of faltering. “The storm clouds coming from the euro area have not yet lifted, and in other parts of the sky new clouds have drifted over,” he said. “China, India and Brazil, the three largest emerging market economies, are all slowing.” The Bank of England is in the final weeks of the 50 billion-pound ($80 billion) round of quantitative easing it put in place in July. The MPC will announce its next policy decision on Nov. 8, and King said it will think “long and hard” about expanding the program from the current target of 375 billion pounds. King also said he doesn’t have concerns about the bank’s scope to add to bond purchases. On the question of the effectiveness of QE, he said that while its direct impact on gilt yields may be reduced as sovereign borrowing costs decline, raising the price on other assets is an “equally important” objective.

Rajoy Sees Case for Slowing Spain’s Austerity as Economy Shrinks (Bloomberg)
Spanish Prime Minister Mariano Rajoy said there is a case for easing budget-deficit targets set by the European Union as the recession undermines tax revenue. “I think what a lot of other people think,” Rajoy told the Spanish senate yesterday. “Things could be done more calmly, taking into account especially that we are in a recession, but in any case I can’t give up on Spain’s commitments.” Rajoy’s comments undercut Budget Minister Cristobal Montoro’s insistence that Spain can stick to the path of budget consolidation demanded by the EU even after the Bank of Spain said the euro area’s fourth-largest economy contracted for a fifth quarter between July and October. “In 2012, we definitively will comply with our target,” Montoro said as he presented the 2013 budget to the Parliament in Madrid. The EU has set Spain a goal of 6.3 percent of gross domestic product this year, after overspending amounted to 9.4 percent last year, as much as Greece and the second-highest shortfall behind Ireland.
Spain’s borrowing costs rose 12 basis points to 5.6 percent yesterday after the Bank of Spain said the recession will worsen in coming months and called on the government to take further measures to fulfill its commitments. Rajoy didn’t mention seeking aid even as he praised the European Central Bank’s offer to help lower countries’ borrowing costs. “The ECB has set up a mechanism to purchase a country’s bonds in the secondary market if it requests it, that’s an important step forward,” he said. Economy Minister Luis de Guindos meanwhile told lawmakers that Spain’s access to funding has improved. “We are starting to see foreign investors coming back to back Spanish debt purchases,” he said. “That is fundamentally due to two reasons: because the government is doing what it has to do, and because we are all acting to dissipate doubts on the euro’s future.”

Euro-Area Bailout Fund Faces Challenge at Highest Court (Bloomberg)
The euro area’s 500 billion-euro ($652 billion) bailout fund faces another test as the European Union’s highest court weighs claims that the firewall violates EU law and should be banned in its current form. A complaint by Thomas Pringle, an independent member of the Irish parliament, today reached the EU Court of Justice, which has the power to topple the European Stability Mechanism, or ESM. A ruling is possible as soon as the end of the year under a fast-track procedure. “Developed in haste, the ESM treaty is at odds with and undermines the EU legal order,” John Rogers, a lawyer for Pringle, told the court in Luxembourg today. “In trying to defend the compatibility of the ESM with the EU treaties, the intervening member states and institutions have had to engage in mischaracterization and distortion in the confusion of form and substance and in legal and conceptual contradictions.”
The EU court case follows a separate decision last month by Germany’s Federal Constitutional Court in Karlsruhe not to block the ESM. The German ruling handed a victory to Chancellor Angela Merkel, who championed the bailout facility as vital to save the euro area from a fiscal meltdown as it lurches between crises. The EU court has engaged all 27 judges for the first time in a case referred by a national tribunal.

ECB Would Gain Power Over Banker Bonuses in Oversight Plan (Bloomberg)
The European Central Bank would get power to oversee bankers’ compensation under draft legislative proposals to establish the ECB as a bank supervisor. The Frankfurt-based institution would get the power to monitor risk management, capital standards and “remuneration policies and practices,” according to the draft dated today. The blueprint also says the ECB would be able to carry out stress tests and “where appropriate publish the results.” EU banking supervisors would send decisions to the ECB’s Governing Council for an up-or-down vote under the new draft, which builds on previous efforts to clarify how participating non-euro nations could take part in bank oversight decision. The draft says supervisory board leaders would not have to be Governing Council members and it lays out conditions in which the central bank’s top panel could exercise an oversight veto.
European Union officials will discuss the proposal this week as they push to design a framework by the end of the year for a euro-area bank supervisor. Leaders last week renewed their commitment to give the ECB oversight powers over all banks in the 17-nation currency union as well as in other nations that choose to participate.

EU Said to Loosen Female Board Rule in Bid For Support (Bloomberg)
European Union plans to set a 40 percent quota for women on company supervisory boards by 2020 stalled after EU commissioners failed to agree on the measures at a meeting today. The European Commission’s legal service warned that a binding quota for women may be illegal ahead of the meeting, according to a person familiar with the talks. Lawyers said EU regulators don’t have the right to mandate binding targets for results obtained by companies, said the person who asked not to be identified because the process is private. EU rules can require companies to make efforts toward a target. EU commissioners postponed discussion of EU Justice Commissioner Viviane Reding’s plan until Nov. 14. Reding said she has “strong support” from other commissioners and drafted a compromise in line with lawyers’ guidelines to win consensus from her colleagues. She declined to give details, beyond saying she would retain the 40 percent target.
“It took centuries to get gender equality on the map,” Reding told reporters. “Therefore, boardrooms can wait for three more weeks. I will not give up.” U.K. business secretary Vince Cable and ministers from nine other countries wrote the European Commission last month seeking more time for national efforts aimed at encouraging female appointments to take effect. The lack of female candidates for a seat on the European Central Bank’s Executive Board saw a European Parliament committee yesterday oppose the appointment of Luxembourg’s Yves Mersch. Reding’s proposal had the support of eight of the 27 European commissioners, including economy commissioner Olli Rehn and antitrust chief Joaquin Almunia, ahead of today’s meeting, according to another person familiar with the situation. Seven others are opposed, said the person yesterday, who declined to be identified because the matter is private.

Spain Output Shrinks Fifth Quarter Amid Bailout Talk: Economy (Bloomberg)
Spain’s economy contracted for a fifth quarter, adding pressure on Premier Mariano Rajoy to seek more European aid even as the euro area’s fourth-largest economy met a bill-sales target. Gross domestic product fell 0.4 percent in the three months through September from the previous quarter, matching the contraction of the second quarter, the Bank of Spain said in an estimate in its monthly bulletin released in Madrid today. That compares with a median forecast for a 0.7 percent contraction in a Bloomberg News survey of 10 economists. Spain’s bonds have declined since European Union leaders last week failed to discuss further aid for the nation at a Brussels summit. Rajoy has struggled to trim a 2011 budget deficit that was more than three times the EU limit, after the country’s deepening recession pushed the jobless rate over 25 percent, sapping demand and tax revenue.
“Progress isn’t conclusive, there is a huge amount of uncertainty in Spain right now,” said Ebrahim Rhbari, a London- based economist at Citigroup Inc. “There are question marks about the banking sector and public finances and economic fundamentals suggest we will see a bailout sooner than later.” Spain’s economy probably contracted 1.7 percent in the third quarter from a year ago, as job losses continued, households ate into their savings and low disposable income reduced their ability to pay down debt, the Bank of Spain said. The euro weakened 0.7 percent against the dollar and was at $1.2972 as of 6:03 p.m. in Brussels. The Stoxx Europe 600 Index dropped for a third day, falling 1.7 percent.

Draghi Takes Pitch Into Lion’s Den as German Faith in ECB Wavers (Bloomberg)
Mario Draghi is taking his sales pitch into the lion’s den. By appearing before a joint session of three committees of the German parliament in Berlin tomorrow, the European Central Bank president is seeking popular support in Europe’s largest economy for his plan to purchase government bonds to stem the debt crisis. While Draghi says his so-called Open Market Transactions are required for price stability, some German policy makers say they are an affront to the monetary orthodoxy upon which the ECB was founded. “Draghi is on a mission to smooth concern that OMT won’t send inflation skyrocketing or lumber German taxpayers with liabilities they can’t pay,” said Frank Schaeffler, finance spokesman for the Free Democrats, who are in coalition with Chancellor Angela Merkel’s Christian Democrats. “Many lawmakers -- even if they don’t admit it -- have grown suspicious of the ECB and its head, once dubbed the most German of non-German central bankers.”
While the announcement of Draghi’s yet-to-be-deployed bond- buying program has calmed financial markets, Germany’s revered Bundesbank has openly opposed the plan, fanning concerns among politicians and the public. Some 42 percent of respondents to a Stern survey published Sept. 6 said they had little or no trust in the ECB president, compared with just 18 percent who judged him favorably.

Banks Awarded Higher Credit Ratings for Business, ECB Study Says (Bloomberg)
Big banks are awarded higher grades from ratings firms because the lenders provide them with business including evaluating securitized debt, according to a European Central Bank study. Larger financial institutions were more likely to receive better grades, according to the research report, which reviewed about 39,000 quarterly bank ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings from 1990 to 2011. Inflated grades on bonds backed by subprime mortgages during the housing boom helped ignite the worst financial crisis since the Great Depression when their values plummeted five years ago. Analysts at the three firms were pressured to give their stamp of approval to complex investments to win lucrative business from Wall Street banks, the Senate Permanent Subcommittee on Investigations said last year in a report.
The “bias mostly reflects credit rating agencies’ conflicting incentives with respect to large banks,” authors Harald Hau, Sam Langfield and David Marques-Ibanez wrote in the report posted on the European Central Bank’s website, whose findings don’t represent that of the ECB. “We strongly disagree with the methodology and conclusions of the study,” Michael Adler, a spokesman for Moody’s, said in a telephone interview, declining to give more details. “To suggest that large bank ratings are conflicted simply because those banks might also be in a ’stronger client position’ is in our view a cynical leap -- or what the ECB report calls a ’hypothesis’,” Dan Noonan, a spokesman for Fitch, wrote in an e-mail. “No business model is completely free from potential conflicts of interest -- what matters is how well they are managed and communicated to the market.”

German Business Confidence May Rise on ECB Bond-Buy Plan (Bloomberg)
German business confidence probably climbed for the first time in seven months in October as the European Central Bank’s plan to buy government bonds eased concern about the region’s debt crisis. The Ifo institute’s business climate index, based on a survey of 7,000 executives, will rise to 101.6 from 101.4 in September, according to the median forecast of 39 economists in a Bloomberg News survey. Ifo releases the report at 10 a.m. in Munich today. Financial markets have rallied since ECB President Mario Draghi pledged to do whatever is needed to preserve the euro and unveiled a plan to buy government bonds. German investor confidence gained for a second month in October. Still, Europe’s largest economy may shrink in the fourth quarter as euro-area and global demand for its exports wanes, the Bundesbank said on Oct. 22.
“Business confidence in Germany and in Europe is supported by the ECB,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “Even if there is some uncertainty at the moment, Germany’s economy should be back to growth in the first half of next year.” Ifo’s measure of executives’ expectations probably rose to 93.6 from 93.2 in September, while a gauge of the current situation may have slipped to 110 from 110.3, the survey shows.