20121010 0958 Global Market Related News.

Asia FX By Cornelius Luca - Tue 09 Oct 2012 16:27:11 CT (Source:CME/www.lucafxta.com)
The financial markets remained adverse to risk because of expectations for weak third quarter earnings in the US. The foreign currencies ended divergently again, with the European currencies and yen down and the commodity currencies mixed. The US stock indexes sank. Gold fell and oil advanced. The short-term outlook for the major foreign currencies is sideways. The medium-term outlook for most of the foreign currencies is slightly bullish. The LGR short-term model is short on all foreign currencies. Good luck!

Overnight
Canada: Housing starts fell to 220.2K in September from 225.3K in August.

Today's economic calendar
UK: NIESR GDP estimate for September
Australia: Westpac consumer confidence for October
Japan: Machine tool orders for September

Asian Stocks Drop as China Slowdown Weighs on Earnings (Bloomberg)
Asian stocks fell, with the regional benchmark index heading for a one-month low, on concern China’s economic slowdown and its territorial dispute with Japan are weighing on corporate earnings. Komatsu Ltd. (6301), a maker of construction equipment that gets about 14 of sales from China, slid 2.9 percent in Tokyo. Toyota Motor Corp. slipped 1.9 percent, pacing declines among Japanese carmakers that reported their biggest drop in China sales since at least 2008. Korea Electric Power Corp. sank 3 percent in Seoul after shareholder KR&C offered to sell shares in the utility company. The MSCI Asia Pacific Index (MXAP) dropped 0.7 percent to 120.80 as of 9:25 a.m. in Tokyo, heading for its lowest close since Sept. 12. Markets in China and Hong Kong have yet to open. Alcoa Inc., the largest U.S. aluminum producer, cut its forecast for global consumption of the metal as the Chinese economy slows.
“We are clearly seeing the impact of a Chinese slowdown globally and it’s indicated in Alcoa’s numbers,” said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages almost $100 billion. “Equity markets have had a very strong run. So, it won’t be surprising if they go through some correction. In a sense, actually a correction will be healthy.”

Japan Stocks Decline on China Slowdown, Earnings Concern (Bloomberg)
Oct. 10 (Bloomberg) --　Japanese stocks fell, with the Nikkei 225 (NKY) Stock Average headed for its lowest close in two months, on concern China’s economic slowdown and its territorial dispute with Japan are weighing on corporate earnings. Furukawa-Sky Aluminum Corp. (5741) lost as much as 1.7 percent after industry bellwether Alcoa Inc. cut its forecast for global consumption of aluminum as China’s economy slows. Nissan Motor Co. (7201), Japan’s third-largest carmaker by market value, slid 1.6 percent after reporting its biggest drop in China sales since at least 2008. The Nikkei 225 dropped 1.3 percent to 8,653.17 as of 9:10 a.m. in Tokyo, headed for the lowest close since Aug. 3. Trading volume was 25 percent above the 30-day average. The broader Topix Index retreated 1.2 percent to 718.65, with more than five stocks falling for each that rose.
“We are clearly seeing the impact of a Chinese slowdown globally and it’s indicated in Alcoa’s numbers,” said Nader Naeimi, Sydney-based head of dynamic asset allocation at AMP Capital Investors Ltd., which manages almost $100 billion. “Equity markets have had a very strong run, so it won’t be surprising if they go through some correction. In a sense, actually a correction will be healthy.”

S&P 500 Futures Advance After Alcoa’s Earnings Exceed Estimates (Bloomberg)
Standard & Poor’s 500 Index futures gained after Alcoa Inc. started the U.S. third-quarter earnings season by reporting profit and sales that beat analysts’ estimates. Alcoa, the first company in the Dow Jones Industrial Average to release quarterly results, was unchanged at $9.13 after the market close. DuPont Co., the most valuable U.S. chemicals producer, climbed 0.6 percent to $49.78. Home Depot Inc. (HD), the largest U.S. home improvement retailer, gained 0.1 percent to $61. Bank of America Corp. (BAC), the second-largest U.S. bank by assets, rose 0.3 percent to $9.24. Futures contracts on the S&P 500 (SPX) added 0.1 percent to 1,436.8 at 7:11 a.m. in Tokyo. The benchmark gauge for U.S. stocks declined 1 percent yesterday. Dow futures lost 4 points, or less than 0.1 percent, to 13,408.
“Investors are bracing for expectations going forward to be revised down for many companies,” Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4.5 billion in Raleigh, North Carolina, said in a telephone interview. “It is a good early indicator that Alcoa (AA) has been able to deliver some positive news.” Third-quarter profits and sales for the S&P 500 probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show. Alcoa’s net loss in the third quarter was $143 million, or 13 cents a share, the New York-based company said. Excluding legal and environmental remediation costs, it had per-share profit of 3 cents. The average of 18 estimates compiled by Bloomberg was for break-even earnings per share. Sales fell to $5.83 billion from $6.42 billion, beating the $5.56 billion average of 10 estimates. The S&P 500 has fallen for the past three days as the International Monetary Fund cut estimates for global growth. Nine out of 10 groups in the S&P 500 retreated yesterday as consumer discretionary and technology companies led declines.

U.S. Stocks Drop Before Alcoa Report as IMF Cuts Forecast (Bloomberg)
U.S. stocks dropped, sending the Standard & Poor’s 500 Index lower for a third day, after the International Monetary Fund cut estimates for global growth and investors awaited quarterly results from Alcoa Inc. (AA) Nine out of 10 groups in the S&P 500 retreated as consumer discretionary and technology companies led declines. Intel (INTC) Corp. slipped 2.7 percent as Sanford C. Bernstein & Co. downgraded the shares. Alcoa rose 0.6 percent at 4:25 p.m. New York time as the largest U.S. aluminum producer posted third-quarter earnings and sales that exceeded estimates. The S&P 500 declined 1 percent to 1,441.48 as of 4 p.m. in New York. The Dow Jones Industrial Average fell 110.12 points, or 0.8 percent, to 13,473.53. Volume for exchange-listed stocks in the U.S. was 5.8 billion shares, or about in line with the three-month average. “Everybody’s in a wait-and-see mode,” Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio, said in a telephone interview. His firm oversees $14.7 billion. “We’re starting the earnings season and we’ll get a clear cut idea as to what’s going to unfold.” Third-quarter profits and sales for the S&P 500 (SPX) probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show.

European Stocks Retreat as EU Finance Ministers Meet (Bloomberg)
European stocks declined for a second day as the region’s finance ministers gathered in Luxembourg to discuss the sovereign-debt crisis. Bankia SA (BKIA) led the decline, falling to a two-month low. Alcatel-Lucent (ALU) SA dropped to the lowest in at least 23 years as Credit Suisse Group AG said weakness should continue into the third quarter. Vedanta Resources Plc led mining companies higher, limiting losses in Europe. European Central Bank President Mario Draghi said that the central bank’s prospective Outright Monetary Transactions are unlimited without being unconditional. The Stoxx Europe 600 Index slipped 0.5 percent to 270.20 in London. The gauge yesterday dropped 1 percent as the World Bank cut its East Asian growth forecast and has trimmed its advance this year to 10 percent.
“There is a real tug of war going on,” said Stewart Richardson, chief investment officer of RMG Wealth Management on Bloomberg Television in London. “On the one hand, fundamentals have been deteriorating. On the other hand you have money- printing that has been enough to send market higher. We are very cautious in the medium term and are waiting for a signal from the market.” National benchmark indexes fell in all but two of the 18 western European (SXXP) markets. The U.K.’s FTSE 100 slipped 0.5 percent, Germany’s DAX lost 0.8 percent, while France’s CAC 40 retreated 0.7 percent. The euro dropped to $1.2882, the lowest since Oct. 3, as of 4:26 p.m. in London.

Emerging Stocks Fall to Lowest in Two Weeks on IMF, Spain (Bloomberg)
Emerging-market stocks retreated to the lowest level in two weeks on concern Spain’s failure to respond to a bailout package will worsen Europe’s credit crisis, crimping demand for developing-nation exports. The MSCI Emerging Markets Index (MXEF) slid 0.1 percent to 996.59, the lowest level since Sept. 26. Brazil’s Bovespa index (MXBR0FN) declined for the first time in three days as Itau Unibanco Holding SA (ITUB4), Latin America’s biggest bank by market value, dropped to the lowest since July. Equity gauges in South Korea, Hungary and South Africa fell. Industrial & Commercial Bank of China Ltd. rallied after state-run Central Huijin Investment Ltd. raised its ownership in the lender.
The International Monetary Fund cut its global growth forecast this year to 3.3 percent, the slowest since 2009. Spain has yet to respond to the European Central Bank’s offer to buy its debt to lower unsustainable borrowing costs. The decision to apply for ECB intervention is “important and sensitive,” Economy Minister Luis de Guindos told reporters in Luxembourg today. The European Union accounts for a third of the exports from companies on the developing nations’ gauge. “The big medium-term question is global growth,” Phillipe Langham, who helps oversee about $1.4 billion at RBC Global Asset Management, said by telephone from London. “I don’t think that anyone believes that the issues facing Europe are over.”
The iShares MSCI Emerging Markets Index (VXEEM) exchange-traded fund, the ETF (EEM) tracking developing-nation shares, slid 0.7 percent. The Chicago Board Options Exchange Emerging Markets ETF Volatility Index, a measure of options prices on the fund and expectations of price swings, jumped 6.5 percent.

Aussie Dollar Falls, Ends 2-Day Gain Before Unemployment (Bloomberg)
Australia’s dollar fell, reversing a two-day gain, before data tomorrow that may show the unemployment rate climbed to the highest in three months. The so-called Aussie slid versus the yen on speculation the Reserve Bank of Australia will lower interest rates next month to help spur growth in the labor market. Demand for the South Pacific nation’s currency was supported after prices for iron ore, Australia’s biggest export, surged to a two-month high. “The basic outlook is that employment growth remains weak,” said Greg Gibbs, a senior currency strategist at Royal Bank of Scotland Group Plc in Singapore. “There are reasons to be more downbeat on the Aussie in the near term.” The Australian dollar lost 0.2 percent to $1.0187 at 11:21 a.m. in Sydney after rising 0.2 percent in the previous two days. It fell 0.2 percent to 79.69 yen. New Zealand’s currency, nicknamed the kiwi, dropped 0.3 percent to 81.52 U.S. cents. It bought 63.76 yen, 0.4 percent lower than the close in New York.
Australia’s 10-year yield was little changed at 3.06 percent. New Zealand’s swap rate, a fixed payment made to receive floating rates, fell two basis points to 2.61 percent. The jobless rate in Australia probably rose to 5.3 percent in September from 5.1 percent in the previous month, according to the median estimate of economists surveyed by Bloomberg News before the statistics bureau releases the report tomorrow. If confirmed, that would be the highest since June. Interest-rate swaps data compiled by Bloomberg show traders see an 81 percent chance the RBA will lower its overnight cash rate target by 25 basis points to 3 percent at a meeting on Nov. 6, up from 79 percent odds seen on Oct. 3, the day after the central bank’s last policy meeting. Physical iron ore with 62 percent content at the Chinese port of Tianjin jumped 6.2 percent yesterday to $117.20 a ton, the highest close since Aug. 1, according to The Steel Index Ltd. China is Australia’s biggest trading partner.

Euro Declines for Third Day Before French, Italian Data (Bloomberg)
The euro fell for a third day amid signs Europe’s debt crisis is hampering growth in the currency bloc’s major economies. The 17-nation euro slid to its weakest level in one week against the yen before data today that may show French and Italian industrial production decreased in August. Japan’s currency gained against peers as global losses in stocks boosted demand for safer assets. Europe’s shared currency was supported before Spain’s Prime Minister Mariano Rajoy meets French President Francois Hollande today in Paris as investors weigh whether the Iberian nation will ask for a bailout. “From the perspective of fundamentals, the euro is the least desirable currency,” said Marito Ueda, senior managing director in Tokyo at FX Prime Corp. (8711), a currency-margin company. “Europe’s economy remains in a worse state than the U.S. and Japan.”
The euro weakened 0.2 percent to $1.2859 as of 9:11 a.m. in Tokyo from the close yesterday in New York, after earlier touching $1.2850, the lowest since Oct. 1. It declined to 100.47 yen, also the least since Oct. 1, before trading at 100.60, 0.2 percent lower than yesterday’s close. The yen was little changed at 78.23 per dollar. The common currency may fall below $1.20 by March, Ueda forecast. The MSCI Asia Pacific Index of regional shares headed for a third day of declines, losing 0.1 percent. The Standard & Poor’s 500 Index dropped 1 percent yesterday.

IMF Sees ‘Alarmingly High’ Risk of Deeper Global Slump (Bloomberg)
The International Monetary Fund cut its global growth forecasts as the euro area’s debt crisis intensifies and warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies. The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said today, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender now sees “alarmingly high” risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent. “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said in its World Economic Outlook report. “The answer depends on whether European and U.S. policy makers deal proactively with their major short-term economic challenges.”
The IMF’s 188 member countries convene in Tokyo this week as low growth damped by fiscal consolidation in the richest economies hurts developing counterparts from China to Brazil. As the IMF urged measures to boost confidence, uncertainties out of Europe show no sign of abating, with leaders still divided over a banking union and Spain resisting a bailout.

Fed Search for Policy Thresholds Hindered by Volatility (Bloomberg)
An unexpected drop in the jobless rate last month illustrates the hurdles faced by Federal Reserve officials seeking to link monetary policy to specific economic indicators. Unemployment fell to 7.8 percent in September, the lowest since January 2009, from 8.1 percent in August, according to a Labor Department report released last week in Washington. The rate was lower than the most optimistic forecast in a Bloomberg News survey of economists. At the same time, monthly payrolls growth slowed to 114,000 from 142,000. That report “gives you an indication of how potentially dangerous it could be” to tie policy to an indicator such as the jobless rate, said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York who formerly worked for the Fed board. “You had a big fall in the unemployment rate, but you had pretty modest growth in payrolls. This is a very volatile series.”
Since August 2011, the Federal Open Market Committee has said it was likely to keep interest rates low for a specified period of time, currently mid-2015. At last month’s meeting, “many participants” said it would be better to replace the date with language describing the “economic factors” that would prompt them to raise rates, according to minutes of the gathering released last week. The minutes didn’t specify how many policy makers supported that approach. Officials said such an approach would provide “greater clarity” about their intentions, and would allow market expectations to “adjust automatically” as fresh data on the economy becomes available.

U.S. Downgrade Seen as Upgrade as U.S. Debt Dissolved (Bloomberg)
U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing, undermining rating companies’ downgrading of the nation’s credit rating. Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private- sector borrowing is down by $4 trillion to $40.2 trillion. Reduced borrowing means there is less competition for the U.S. Treasury Department as it sells debt to fund spending programs to help the nation recover from the worst financial crisis since the Great Depression. Credit-rating firms are discounting the improvement even as debt, equity and currency markets suggest the U.S. is more creditworthy than before Standard & Poor’s stripped the nation of its AAA grade in 2011.
“Most people don’t pay much attention to ratings when it comes to Treasuries, as they are still considered to be risk- free assets,” Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said Oct. 5 in a telephone interview. “Until that perception changes Treasuries will continue to be” in demand, he said.

Best Bond Firms Split on Year-End Storm: Credit Markets (Bloomberg)
Debt strategists at top-ranked Wall Street firms can’t agree on what investors should do as yields on everything from government to corporate and asset-backed bonds plunge to record lows. While JPMorgan Chase & Co. (JPM) forecasts a “year-end storm in the market for U.S. Treasuries,” Barclays Plc (BARC) advises buying government bonds and cutting investment-grade company debt. Bank of America Corp. (BAC) recommends high-grade bonds over both junk- rated and U.S. government notes. The three firms are rated the best at fixed-income research by Institutional Investor magazine. The stakes are mounting, with the four-year-old rally in U.S. corporates leaving little room for further gains, as the Federal Reserve suppresses benchmark borrowing costs to ignite an economy still recovering from the worst financial crisis since the Great Depression. Investors who shifted toward riskier assets in response to the central-bank stimulus are reassessing their holdings as credit quality shows signs of deteriorating.
“Right now we have a delicate situation,” Hans Mikkelsen, a credit strategist at Bank of America in New York, said in a telephone interview on Oct. 4. Longer term, “Treasuries are the riskiest fixed-income asset class,” he said.

Confidence Among Small U.S. Businesses Cooled in September (Bloomberg)
Confidence among U.S. small businesses cooled in September as fewer companies said they planned to hire or invest in new equipment, a survey found. The National Federation of Independent Business’s optimism index fell to 92.8 from an August reading of 92.9. Four of the 10 components that make up the gauge decreased, the Washington- based group said. The fourth decline in the past five months for the measure showed business leaders may be putting off some of their hiring and investment decisions because of a lack of clarity on tax and regulatory policy. At the same time, more companies expected better economic conditions in six months, signaling a pickup in sales and employment may take time to develop. Small-business “owners are in maintenance mode; spending only where necessary and not hiring,” William Dunkelberg, the group’s chief economist, said in a statement. “Owners are unwilling to put their own capital on the line until the future path of the economy and economic policy becomes clear.”
A measure of whether business owners plan to add more workers fell by six percentage points to a net 4 percent. The number of respondents who said they planned to invest in equipment dropped three points to a net 21 percent in September. The world’s largest economy added 114,000 workers last month, the fewest since June, according to a Labor Department report on Oct. 5. The jobless rate dropped to 7.8 percent after exceeding 8 percent for 43 straight months.

Bahk Eschews Stimulus as South Korea’s Slowdown Abates (Bloomberg)
South Korea’s finance minister said his nation’s economic growth will improve this quarter and policy makers should limit the scale of stimulus measures. “Mobilizing all available fiscal, monetary and financial policy means in a bold move with a large size may have harmful effects” including a wider budget deficit, Bahk Jae Wan said in an interview at the Bloomberg News office in Seoul yesterday. Bahk, 57, instead advocated “less costly and more salient policies,” such as cutting business regulation -- a stance that contrasts with calls from presidential candidates for tighter oversight of chaebols, the conglomerates that drive exports. The finance chief said “bold or harsh” moves against chaebols are unlikely to be enacted and “no more than a ploy to woo voters.”
Reluctance to endorse “all-out measures” to stoke growth reflects Bahk’s concern that “this will be a long economic crisis.” Speaking before he flies to Tokyo for this week’s International Monetary Fund and World Bank annual meetings, he urged European nations to set a timetable for implementing steps to resolve their debt woes. The Group of 20 should also maintain its “standstill” on protectionist trade measures, he said. The central bank of Asia’s fourth-largest economy meets tomorrow to consider a second interest-rate cut for the year, with 13 of 16 analysts surveyed by Bloomberg News predicting a quarter-point move. While Bahk said that growth “could be weak” in the final three months of the year, “the third quarter will be a bottom.”

Singapore May Ease Currency Gain as Growth Slows: Southeast Asia (Bloomberg)
The Monetary Authority of Singapore will probably slow the pace of appreciation in the local dollar as moderating price pressures provide scope for measures to support economic growth, according to a survey of analysts. Officials will curb gains in Singapore’s currency when they meet Oct. 12 by decreasing the slope of its trading band, according to 17 of 23 financial companies surveyed by Bloomberg News. Two said there’s a chance the MAS will widen the band in addition to reducing its slope. Five predict no change, while one projected a shift to a zero slope, the poll showed. Recent data have shown bigger-than-forecast declines in manufacturing and exports, leading economists and investors to flag the risk of a technical recession. Singapore cut its 2012 growth forecast in August, and a report last month indicated the slowest pace of inflation in almost two years. That means the MAS has room to spur the economy by stemming gains in the exchange rate, its main policy tool, according to analysts.
“The Singaporean economy has largely underperformed the MAS’s expectations,” Frances Cheung, a Hong-Kong based strategist at Credit Agricole CIB, wrote in an e-mail Oct. 3. “The balance of risk has clearly shifted from inflation to growth.” Cheung predicted the MAS will announce a reduction to the Singapore dollar’s trading band slope. Singapore’s central bank uses the exchange rate rather than borrowing costs to conduct monetary policy, adjusting the pace of appreciation or depreciation against an undisclosed trade- weighted band of currencies by changing the slope, width and center of the band. A flatter slope allows slower appreciation or depreciation over time.

Banks Chasing Asian Millionaires Create Singapore’s Canary Wharf (Bloomberg)
Singapore’s Marina Bay area is emerging as the city’s new financial hub, with banks including Standard Chartered Plc (STAN) and Barclays (BARC) Plc taking bigger offices as they pursue Asia’s expanding ranks of millionaires. As new construction pushes rents in the area lower, financial-services companies are consolidating operations from the central business district about a 10-minute walk away that was first built almost two centuries ago. Standard Chartered last year relocated from 11 buildings across the city to one tower in the new office area, while Barclays moved from six to two in the district. “Our growth in Singapore has been incredibly quick over the past few years,” Tony Padgett, head of corporate real estate services at Barclays in Singapore, said in an interview. “Banks tend to go for the prime locations in cities, they gravitate towards the same area like they’ve done in Canary Wharf in London or Wall Street in New York.”
Singapore’s emergence as Asia’s center of wealth management prompted the government in 2005 to start expanding the business district around Raffles Place, building on reclaimed land from the Singapore Strait to accommodate demand from the likes of Citigroup Inc. and UBS AG. (UBSN) The island-country had $512 billion of private-banking assets in 2010, the largest such pool of money in Asia, according to the latest available figures from the Boston Consulting Group. Singapore’s millionaire households expanded by 14 percent last year, according to a Boston Consulting study published May 31. The proportion of millionaire homes in the city of 5.3 million people was 17 percent, the highest in the world, followed by Qatar and Kuwait.

Inflation Bonds May Ease Singapore Price Pinch (Bloomberg)
Singapore may consider issuing bonds that protect against inflation after price gains sent the cost of a public-housing apartment to a record S$1 million ($813,000) last month and made cars as expensive as U.S. homes. Singapore’s consumer price index rose 3.9 percent in August from the year before, more than double the 1.7 percent rate in the U.S., the world’s biggest economy. Inflation in the island state averaged 5 percent for the past year. With the nation home to world’s highest proportion of millionaire households, the central bank said in July it was studying the feasibility of securities to help savers protect their funds from rising costs. Assets in inflation-protected bond funds worldwide climbed to a record $183.8 billion as of Aug. 31, according to EPFR Global in Cambridge, Massachusetts. In the U.S., the largest market for the debt at $729.8 billion, bond payments are based on a principal amount that increases or decreases in line with the consumer price index.
Japan, South Korea, Australia and Hong Kong are Asia-Pacific economies that already sell inflation- linked debt, according to data compiled by Bloomberg. “For whoever is looking at managing inflation risks, it would be a handy tool which has been developed in many other markets already, particularly those that consider themselves financial centers,” said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank Ltd., part of Japan’s third- biggest lender by market value. “I think we see a need to go ahead and say, ‘let’s get this done.’” Inflation will be within the government’s forecast of 4 percent to 4.5 percent this year, Varathan said.

IMF Says European Banks May Sell $4.5 Trillion in Assets (Bloomberg)
The International Monetary Fund said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the fiscal crisis, up 18 percent from its April estimate. Failure to implement fiscal tightening or set up a single supervisory system in the timing agreed could force 58 European Union banks from UniCredit SpA (UCG) to Deutsche Bank AG (DBK) to shrink assets, the IMF said. That would hurt credit and crimp growth by 4 percentage points next year in Greece, Cyprus, Ireland, Italy, Portugal and Spain, Europe’s periphery. “Intensification of the crisis has manifested itself in capital outflows from the periphery to the core at a pace typically associated with currency crises or sudden stops,” the IMF wrote in its Global Financial Stability Report released today. “Restoring confidence among private investors is paramount for the stabilization of the euro area.”
The Washington-based IMF cut its global growth forecasts yesterday and warned of even slower expansion if European officials don’t address threats to their economies. While the European Central Bank’s plan to purchase bonds of debt-burdened countries bought governments time to act, divisions over a banking union and Spain’s reluctance to ask for a bailout threaten to boost borrowing costs. The European rescue mechanism and the ECB bond program “must be regarded by markets as real, not ‘virtual’ and should be coupled with credible conditionality,” Jose Vinals, the director of the IMF’s monetary and capital markets department, said in prepared remarks for a press conference in Tokyo today.

Samaras Bolstered as Greece Aims to Wrap Up Troika Talks (Bloomberg)
Antonis Samaras won a round in his fight to stay in the euro. The Greek prime minister got endorsements from German Chancellor Angela Merkel and European finance chiefs as well as signals that the country’s next aid payment was in the offing. International inspectors known as the troika are due back in Athens this week after a pause that provided Samaras’s three- party with backing to continue efforts to carve out 13.5 billion euros ($17.4 billion) of new budget cuts. Merkel’s visit to Greece yesterday “proves that we are breaking an international isolation,” Samaras said at their joint press conference. “And this was due to our mistakes as well. The political power and image of a country corresponds to its credibility.” Merkel, Europe’s most powerful politician, made her first trip to the country since 2007 almost a year after she initially raised the prospect of Greece exiting the euro and four months after Samaras defeated an electoral challenge by parties that advocated breaking the bailout deal.
“The key message to Greece was, ‘do your part and we’ll support you,’” said Riccardo Barbieri, chief European economist at Mizuho International in London. “This would have been unthinkable only two months ago. I think that the implication is that if Greece moves closer to the demands of the troika, Germany will support the new financing package.”

Spain Foreclosures Spread to Once Wealthy: Mortgages (Bloomberg)
Home foreclosures in Spain, which disproportionately affected lower-income immigrants after the real estate bubble burst, are spreading to formerly well-to-do families and businessmen as they run out of ways to pay mortgages in a deepening recession. Spanish business people, upper middle class families and their loan guarantors, typically parents of first-time buyers, now account for 60 percent of foreclosures in Madrid, according to AFES, an association that advises homeowners facing repossession. Three years ago, 80 percent of foreclosures were on the homes of immigrants, usually the first to lose jobs and fall behind on loan payments in a souring economy. They now comprise 40 percent of the total, according to AFES.
“Repossessions are encroaching further into the city centers, like an overflowing river,” said Emilio Miravet, head of real estate finance at the Spanish property unit of advisory and investment firm Catella AB. “At the beginning of the crisis, it was homes in the periphery areas belonging to the less affluent that were being foreclosed upon.” Loan guarantors, often parents who used their houses as collateral to help their children become homeowners when real estate was booming, now represent a fifth of foreclosures, AFES data show. Bloated prices had forced thousands of first-time homebuyers to seek parental help to get a foot on the property ladder, according to Jose Luis Ruiz Bartolome, author of “Adios Ladrillo Adios,” which means “Goodbye, Real Estate, Goodbye,” a 2010 book on the rise and fall of Spain’s property market.

Rajoy’s Deepening Budget Black Hole Outpaces Spain’s Cuts (Bloomberg)
The black hole in Spain’s budget has expanded faster than Prime Minister Mariano Rajoy’s attempt to shrink it, portending the same unrest roiling Greece. The harshest austerity since the return to democracy in 1978 has failed to contain the deficit as the economy sinks deeper into recession. The shortfall increased in the first half of the year, as it did in the previous 12 months. Even after a sales-tax increase and health-care cuts kick in this quarter, it may still approach last year’s 9.4 percent of gross domestic product, said Ignacio Conde-Ruiz, an economist at the independent Applied Economic Research Foundation in Madrid. The fiscal and political consequences of demanding austerity in a shrinking economy highlight the dilemma facing Rajoy. To trigger a European financial lifeline, he may have to impose yet more cuts, repeating the pattern seen in Greece, Portugal and Ireland.
“There is no chance that Spain will hit its targets,” Megan Greene, director of European economics at Roubini Global Economics LLC, said in a telephone interview. “The deficit targets are economic suicide.’ Spanish bonds fell today, with the yield on the 5.85 percent January 2022 security rising 6 basis points to 5.77 percent at 2:40 p.m. in Madrid.