Asia FX By Cornelius Luca - Mon 22 Oct 2012 16:59:41 CT (Cource:CME/www.lucafxta.com)
The appetite for risk recovered on Monday, as a win for Spanish Prime Minister Mariano Rajoy in elections in his home region of Galicia was seen as removing one obstacle to Madrid seeking international aid. The foreign currencies European and commodity currencies advanced after falling for two days amid concern about earnings and the stubborn Eurozone debt crisis. Conversely, the yen extended losses to a 3 1/2-month low on rising speculation of more monetary easing by the Bank of Japan following an over 10% contraction of Japanese exports in September. The US stock markets edged up on Monday after plunging on Friday, the 25th anniversary of Black Monday. Gold, and silver advanced as well, but oil fell. The short-term outlook for the European and commodity currencies is sideways. 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!
Asian Stocks Swing Between Gains, Losses on Earnings (Bloomberg)
Asian stocks swung between gains and losses amid concern over slowing corporate earnings growth and as Europe struggles to contain its debt crisis. Acer Inc. slid 3.3 percent in Taipei after Asia’s second- largest computer maker posted third-quarter profit that missed estimates. Kansai Electric Power Co. (9503) sank 7 percent after the Nikkei newspaper reported the Japanese utility won’t pay a dividend. LG Display Co., the world’s No. 2 maker of liquid- crystal displays, climbed 2.2 percent in Seoul after a U.S. court ruled that it didn’t violate a patent owned by Industrial Technology Research Institute.
The MSCI Asia Pacific Index (MXAP) lost 0.1 percent to 123.03 as of 10:18 a.m. in Tokyo, erasing gains of as much as 0.3 percent. About five shares dropped for every three that rose on the measure. 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. Moody’s Investors Service lowered it credit ratings on Catalonia and four other Spanish regions. “External factors such as the European debt crisis and the U.S. elections are still the biggest risks for the market,” said Angus Gluskie, managing director at White Funds Management in Sydney, which manages more than $350 million. “Earnings are hostage to these macroeconomic factors.”
Japan Stocks Head for Longest Win Streak Since July 2011 (Bloomberg)
Japanese stocks rose, with the Nikkei 225 (NKY) Stock Average heading for the longest winning streak since July 2011, as exporters climbed after the yen touched the weakest level in more than three months. Sony Corp. (6758), Japan’s biggest consumer-electronics exporter, gained 0.8 percent. Komatsu Ltd. advanced 1.2 percent after the construction machinery maker said it will acquire Swedish harvester maker Log Max AB. GS Yuasa Corp. slumped 11 percent, the biggest drop on the Nikkei 225, after the battery maker cut its earnings forecast. Kansai Electric Power Co., Japan’s second-biggest generation company by revenue, lost 6.2 percent on a report the utility won’t pay a year-end dividend for the first time in 61 years.
The Nikkei 225 rose 0.1 percent to 9,015.42 as of 10:12 a.m. in Tokyo, with volume more than 10 percent above the 30-day average. The broader Topix (TPX) Index, which includes smaller companies less affected by currency fluctuations, slid 0.2 percent to 752.06, after rising as much as 0.5 percent earlier today. “The yen is getting weaker, supporting stock markets,” said Goya Nakao, a senior investment manager at Sompo Japan Nipponkoa Asset Management Co., which oversees about 5 trillion yen ($63 billion). “The risk to companies earnings are being eased by the currency as many assumed about 80 yen per dollar for their earnings estimates. The markets’ views toward the Bank of Japan are changing that the central bank may take action to weaken the yen.”
U.S. Stocks Erase Losses as Apple Offsets Earnings (Bloomberg)
U.S. stocks erased earlier losses, sending the benchmark Standard & Poor’s 500 Index higher for the first time in three days, as an advance in Apple (AAPL) Inc. shares overshadowed disappointing corporate results. Apple, the world’s most valuable company, jumped 4 percent and paced gains in technology companies. Peabody Energy Corp. (BTU), the largest U.S. coal producer by volume, surged 12 percent after earnings beat projections. Freeport-McMoRan Copper & Gold Inc. (FCX), the world’s biggest publicly traded copper producer, and SunTrust Banks Inc. (STI) retreated at least 1.4 percent after reporting earnings that missed analysts’ estimates. The S&P 500 rose less than 0.1 percent to 1,433.81 at 4 p.m. New York time, after falling 0.8 percent earlier. The Dow Jones Industrial Average added 2.38 points, or less than 0.1 percent, to 13,345.89. The Nasdaq-100 Index rose 0.6 percent to 2,694.56. Volume for exchange-listed stocks in the U.S. was 5.8 billion shares, or 3.4 percent below the three-month average.
“It really comes down to earnings at this point,” said Peter Jankovskis, co-chief investment officer for Oakbrook Investments in Lisle, Illinois, which manages more than $3 billion. He spoke in a telephone interview. “We’ve seen many companies beating earnings estimates. Yet investors are keeping an eye on their ability to grow revenue.” Third-quarter results at about 69 percent of S&P 500 companies beat analysts’ estimates, according to data compiled by Bloomberg. Sales missed forecasts at 59 percent of companies, the data showed.
U.S. Stocks Top All Other Assets for First Time Since ’95 (Bloomberg)
U.S. stocks are beating every major asset class for the first time in 17 years even as economic growth weakens and profits rise at the slowest rate since 2009. The Standard & Poor’s 500 Index has rallied 14 percent in 2012, beating Treasuries, corporate bonds, commodities, the dollar and equities in Asia and Europe, data compiled by Bloomberg show. The last time that happened, in 1995, the S&P 500 was posting the biggest annual advance of the last five decades. With a price-earnings ratio close to today’s level, the index gained another 93 percent in the next 2 1/2 years. For all the concern about unemployment and manufacturing growth, the best assets this year remain American companies after unprecedented steps by the Federal Reserve to support growth. Forecasts for a rebound in the U.S. economy and the central bank’s pledge to keep interest rates near zero for years convinced bulls the S&P 500 will extend gains. Bears say political gridlock will drag down prices after monetary stimulus wears off.
“We see good earnings growth and improving economic outlook, we see good equity valuations and easy monetary policy, we see skeptical investors and low positioning in equity assets,” said Max King, a multi-asset strategist at Investec Asset Management in London, which oversees $100 billion. “This is a major green light for equities and the fact that people don’t see it, is great.”
European Stocks Drop for Second Day; Veolia, Nexans Fall (Bloomberg)
European stocks fell for a second day as Japanese exports tumbled and investors speculated that victory in regional elections for Spain’s Prime Minister Mariano Rajoy reduces pressure for him to seek a bailout. Veolia Environnement SA retreated 5 percent after denying it’s working on a merger with Suez Environnement. Nexans SA (NEX) slid 6.6 percent after cutting its forecasts. Royal Philips Electronics NV climbed the most in more than a year after the world’s largest lighting company reported profit that beat estimates. Scania AB advanced 3.2 percent as the truckmaker’s orders declined at a slower pace. The Stoxx Europe 600 Index (SXXP) slipped 0.4 percent to 272.95 at the close, having earlier risen as much as 0.3 percent. The measure lost 0.8 percent on Oct. 19 as European Union leaders failed to discuss additional assistance for Spain at a summit in Brussels. The gauge has still rallied 17 percent from the June 4 low as the European Central Bank unveiled a bond-purchase program to support the economy.
“There remains plenty of uncertainty surrounding Spain and its next move, together with the fact that we still don’t have a firm date for when Greece will be injected with the second round of bailout funds,” Ishaq Siddiqi, a market strategist at ETX Capital in London, wrote in an e-mail. “Both issues will surely come back to haunt investors in the sessions ahead.”
Most Emerging Stocks Fall as Slowdown Weighs on Earnings (Bloomberg)
Most emerging-market stocks fell after the benchmark index delivered the biggest weekly gain in a month on concern the global economic slowdown is eroding corporate earnings. The MSCI Emerging Markets Index (MXEF) gained 0.1 percent to 1,007.31 at the close of trading in New York as 393 of the 818 shares in the measure declined. Brazil’s Bovespa Index retreated for a third day and South Korea’s Kospi gauge dropped to the lowest in a week. The Shanghai Composite Index (SHCOMP) advanced to the highest level in a month as shipbuilder China Rongsheng Heavy Industries Group Holdings Ltd. (1101) jumped the most in a year in Hong Kong.
Banco Bradesco SA (BBDC4), Latin America’s second-largest bank, fell the most in more than a week after its profit missed estimates. South Korea’s Kumho Petro Chemical Co. (011780) slid the most in two weeks, leading materials stocks lower, after saying that third-quarter operating profit dropped 76 percent. A report showed Japan’s exports slid 10.3 percent in September from a year earlier, the biggest drop since the aftermath of last year’s earthquake. “We’re seeing volatile trades as some corporate earnings and economic data disappoint,” Chu Moon Sung, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $30 billion, said by phone. The 21 nations in MSCI’s developing-nations gauge send about 13 percent of their exports to the U.S. and 30 percent to the European Union on average, according to data compiled by the World Trade Organization.
Brazil’s Bovespa index fell 0.4 percent, while Mexico’s IPC benchmark lost 0.6 percent. Russia’s Micex Index increased 1 percent and India’s BSE India Sensitive Index gained 0.6 percent. The Kospi Index retreated 0.1 percent.
Australian, New Zealand Dollars Touch One-Month Highs Versus Yen (Bloomberg)
The Australian and New Zealand dollars touched one-month highs against the yen on speculation the Bank of Japan (8301) will ease monetary policy as early as this month, boosting demand for higher-yielding currencies. Australia’s dollar gained versus most peers as Asian shares opened higher. The so-called kiwi held gains against the greenback before the Reserve Bank of New Zealand holds a policy meeting on Oct. 25. Australia’s currency remained lower versus the kiwi ahead of data tomorrow that may show inflation held near the slowest since 1999 in the larger country, providing scope for its central bank to cut interest rates. “Because of higher yields, Australia’s dollar is still preferred over the yen,” said Takuya Kawabata, a researcher at Gaitame.com Research Institute Ltd. in Tokyo, a unit of Japan’s largest currency margin company. Gains in the Australian and New Zealand currencies can be largely attributed to “speculation about additional monetary easing by the BOJ.”
The Australian dollar rose 0.2 percent to 82.63 yen, the strongest since Sept. 19, as of 11:08 a.m. in Sydney. The kiwi reached 65.47 yen, also the highest since Sept. 19, before trading at 65.39. The so-called Aussie rose 0.1 percent to $1.0335, while the New Zealand dollar was little changed at 81.77 U.S. cents after gaining 0.3 percent yesterday. Australia’s currency traded at NZ$1.2636 following a 0.3 percent decline to NZ$1.2621 yesterday. Government data due Oct. 26 will probably show that Japan’s consumer prices excluding fresh food declined in September for a fifth-straight month, according the median estimate of economists in a Bloomberg News survey. That’s far short of the central bank’s goal for inflation of 1 percent. The BOJ will hold a policy meeting on Oct. 30.
Yen Weakens Past 80 Per Dollar on Bets BOJ to Ease More (Bloomberg)
The yen weakened past 80 against the dollar as signs that the world’s third-largest economy is moving closer to contraction fanned speculation that the Bank of Japan (8301) will add further stimulus. The greenback maintained an eight-day gain versus the yen, the longest winning streak in seven years, after yields on U.S. two-year notes rose to the most since June versus their Japanese peers, attracting money to dollar-based assets. The Australian dollar held onto three days of losses before data forecast to show inflation held near the slowest in 13 years, providing scope for the Reserve Bank to cut borrowing costs. Lawmakers are “applying pressure to the BOJ to further loosen monetary policy,” said Derek Mumford, a Sydney-based director at Rochford Capital, a currency risk-management company. “It can only result in more monetization of debt which will weaken the yen. A widening of U.S.-Japan yield gaps won’t help the yen.”
The yen touched 80.01 per dollar, the weakest since July 6, before trading little changed at 79.97 as of 8:55 a.m. in Tokyo from the close yesterday. The Japanese currency fetched 104.54 per euro from 104.41, after reaching 104.59, the least since May 4. The euro was little changed at $1.3070 after adding 0.3 percent yesterday. Australia’s currency added 0.2 percent to $1.0337, after falling 0.6 percent over the previous three days. A government report on Oct. 26 will probably show that so- called core consumer prices in Japan declined in September for a fifth-straight month, according the economists surveyed by Bloomberg News. That compares with the central bank’s goal for inflation of 1 percent.
Won Undervalued 20%, Korean Bonds Appeal, Eaton Vance Say (Bloomberg)
Eaton Vance Management, which oversees $198 billion, estimates South Korea’s won is 15 to 20 percent undervalued, making the nation’s bonds attractive on prospects the currency will appreciate. The won has strengthened 4.4 percent this year, the third- best performance among Asia’s 11 most-used currencies, and reached an 11-month high of 1,102.50 per dollar last week. South Korea’s improving trade surplus and better economic growth prospects than developed countries suggest the currency is weaker than it should be, according to Eric Stein, a portfolio manager for Boston-based Eaton Vance. The central bank this month raised its 2012 projection for the excess on the current account to $34 billion, having forecast $20 billion in July.
“The Korean won is so structurally undervalued considering the strong current-account surplus, and that keeps me wanting to invest,” Stein said in an Oct. 18 phone interview. “Officials still seem to be somewhat concerned about inflation. For a country that imports so much oil, the central bank may let the currency appreciate to keep imported inflation in check.” Won-denominated assets accounted for 3.99 percent of the $6.5 billion Eaton Vance Global Macro Absolute Return Fund as of Sept. 30, according to a statement on its website. The fund returned 4.8 percent this year, outperforming 62 percent of its peers, data compiled by Bloomberg show. India’s rupee had the largest share at 7.69 percent. The firm’s Korean investments mainly consist of short-term central bank notes, Stein said. He declined to say whether he is adding to those holdings.
South Korea’s one-year central bank bonds yield 2.82 percent, compared with 0.12 percent for similar-maturity government debt in Japan and 0.18 percent for U.S. Treasuries, according to data compiled by Bloomberg. India’s notes due in a year yield 7.97 percent.
Hong Kong Dollar Forwards Rise Most Since March After Peg Tested (Bloomberg)
Traders increased bets Hong Kong will end a 29-year-old peg to the dollar after the currency reached the upper limit of its permitted range and triggered intervention by the city’s monetary authority. Two-year forwards strengthened 0.11 percent to HK$7.74 per dollar as of 4:46 p.m. local time, the biggest gain since March 9, according to data compiled by Bloomberg. The Hong Kong dollar’s value is kept at HK$7.75 to HK$7.85. Hedge-fund investor William Ackman, the founder of New York-based Pershing Square Capital Management LP, said Oct. 20 he is keeping a wager that would profit if Hong Kong allows its currency to appreciate.
Even with today’s advance, the forwards are only near their average level of the past three years and analysts surveyed by Bloomberg predict an end-2013 exchange rate of HK$7.76. The linked exchange rate 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. “Any change in the peg would have certain costs but highly uncertain benefits,” Robert Minikin, senior foreign-exchange strategist at Standard Chartered Plc in Hong Kong, said yesterday. A shift “is likely to be long-delayed and perhaps come in the context of full yuan convertibility,” he said, adding that China’s currency is unlikely to trade freely for another 10 years or more.
Obama-Romney U.S. Auto Spat Turns on Saving U.S. Economy (Bloomberg)
President Barack Obama and Mitt Romney’s debate exchange over auto bailouts reignited a long- running dispute over whether the government’s financial-crisis rescue plan was a good deal for taxpayers. The answer: It depends. There’s little doubt the government won’t recoup the full $417 billion spent on the program. Proponents reply that whatever the loss, it was worth it to pull the world’s largest economy back from the brink of collapse and prevent the disappearance of whole sectors, like domestic carmakers. “We saved an auto industry that was on the brink of collapse,” Obama said in the Oct. 16 presidential debate at Hofstra University in Hempstead, New York. Republican challenger Romney wanted to put General Motors Co. (GM) and Chrysler Group LLC into bankruptcy “without providing them any way to stay open. And we would have lost a million jobs,” Obama said. Romney countered that bankruptcy was necessary “to get those companies back on their feet,” though at the time he opposed using taxpayer dollars.
Obama’s Treasury Department is seeking to wind down the Troubled Asset Relief Program that includes the auto bailouts, rescues for banks and insurer American International Group Inc. (AIG), and programs to stem home foreclosures. How much money the rescues end up costing taxpayers will depend largely on the government’s ability to sell its 32 percent stake in GM and 74 percent ownership of auto lender Ally Financial Inc. (ALLY)
Caterpillar Sees Sales Growth Slowing Next Year on Economy (Bloomberg)
Caterpillar Inc. (CAT), the world’s largest maker of construction and mining equipment, forecast sales growth for 2013 that would be slower than in the previous three years as the global economy decelerates. Sales next year will be from 5 percent below to 5 percent more than 2012 results, the Peoria, Illinois-based company said today in a statement. That compared with an average projection for an increase of 5.1 percent based on 17 analysts’ estimates compiled by Bloomberg. Revenue year-over-year grew 31 percent in 2010, 41 percent in 2011, and was estimated to increase 13 percent this year.
“The biggest concern is the declining backlog, which would imply a more challenging year next year, especially for mining, and whether or not North American construction will re- accelerate,” Larry De Maria, a New York-based analyst for William Blair & Co. who has a buy rating on the shares, said today by phone. “Caterpillar’s business is very economically sensitive. Due to the softening of the global economy and increasing uncertainty, order rates have declined.” The order backlog fell 18 percent to $23.1 billion at the end of the third quarter from three months earlier with the most significant decrease in the resource-industries segment, the company said. Production across much of the company has been reduced with temporary shutdowns and layoffs as it works through excess inventory, Caterpillar said in the statement.
POLL-China economy in feeble Q4 recovery, 25 bps RRR cut eyed (Reuters)
China could stage a tepid economic rebound in the fourth quarter as higher public infrastructure spending nudges the world's growth engine out of seven consecutive quarters of cooldown, but growth will remain lethargic through 2013 a Reuters poll showed.
China’s Factories Losing Pricing Power in Earnings Threat (Bloomberg)
Chinese factories are losing pricing power in the worst wholesale-cost deflation since 2009, signaling corporate earnings may deteriorate further and putting a damper on global inflation pressures. Steelmaker China Oriental Group Co. (581) says falling prices are wiping out profits, while Yunnan Copper Industry Co. (000878) cited the declines for a third-quarter loss. The producer price index (SHCOMP) fell 3.6 percent in September from a year earlier and may stay negative until the second half of 2013 without large stimulus, according to Mizuho Securities Asia Ltd. With the U.S. reporting the longest stretch in three years that Chinese imports have gone without a price increase, the trend also gives policy makers around the world more room for easing to support faltering global growth. Sluggish earnings growth may prompt the government to reduce corporate taxes to aid earnings and help boost spending after China’s expansion slowed for a seventh quarter.
“Reduced inflation pressure should expand the space for policy makers to take pro-growth actions in their countries,” said Shen Jianguang, chief Asia economist at Mizuho in Hong Kong. Chinese officials are likely to reduce banks’ reserve requirements ahead of a Communist Party congress next month, said Shen, who formerly worked at the International Monetary Fund and European Central Bank.
Japan Exports Tumble 10% as Maehara Presses BOJ to Ease: Economy (Bloomberg)
Japan’s exports fell the most since the aftermath of last year’s earthquake as a global slowdown, the yen’s strength and a dispute with China increase the odds of a contraction in the world’s third-largest economy. Shipments slid 10.3 percent in September from a year earlier, leaving a trade deficit of 558.6 billion yen ($7 billion), the Finance Ministry said in Tokyo today. The median forecast in a Bloomberg News survey of analysts was for a 9.9 percent export decline. Imports rose 4.1 percent. Economy Minister Seiji Maehara pressed the Bank of Japan for more action yesterday, saying the nation is “falling behind” in monetary stimulus and is at risk of another credit- rating downgrade. The BOJ today cut its view of eight out of nine regional economies while Taiwanese unemployment rose to a one-year high, underscoring weakness across Asia after China’s third-quarter growth was the slowest since 2009.
“There’s a high chance that Japan’s economy will have two consecutive quarters of contraction through December,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “The slump in advanced nations is spreading to emerging economies.” The yen weakened 0.6 percent to 79.78 per dollar as of 5:57 p.m. in Tokyo on speculation that the central bank will expand monetary stimulus. The currency’s decline pushed the Nikkei 225 Stock Average to a 0.1 percent gain, reversing losses of as much as 1.5 percent, by improving the outlook for exporters.
Indonesia Investments Rose Last Quarter on Mining, Transport (Bloomberg)
Indonesian investment rose last quarter as mining, transportation and food companies started new operations or expanded existing ones. Investment climbed 25.1 percent to 81.8 trillion rupiah ($8.5 billion) in the three months ended Sept. 30 from a year earlier, M. Chatib Basri, chairman of the Investment Coordinating Board, said in Jakarta today. In the first nine months of 2012, investments rose 27 percent to 229.9 trillion rupiah from a year earlier, the board said. President Susilo Bambang Yudhoyono is increasing spending and wooing overseas funds to spur growth in Southeast Asia’s largest economy and create new jobs as more people enter the labor force. Companies such as Toyota Motor Corp. (7203) and Taiwan’s Foxconn (2038) Technology Group are mulling investment opportunities in Indonesia, and L’Oreal (OR) SA will expand a cosmetics factory this month, Basri said in September.
“Strong foreign direct investment will offset a slowdown in exports,” Basri said today. The agency forecasts total investments may be more than 300 trillion rupiah this year, exceeding its previous target of 290 trillion rupiah, he said. Foreign direct investment climbed 22 percent to 56.6 trillion rupiah last quarter from a year earlier, mainly supported by companies in mining, chemical, pharmaceutical, transportation and telecommunication industries, the board said. Domestic investments during the July-to-September period rose 32.6 percent to 25.2 trillion rupiah, supported by mineral non- metals, food and textile industries, the agency said. Singapore was the biggest contributor to third-quarter foreign investment, accounting for $1.5 billion. Indonesia is targeting foreign and local investment of about 500 trillion rupiah in 2014.
Australia to Tighten Spending to Meet Budget Surplus Pledge (Bloomberg)
Australia’s government will tighten health-care spending and scale back family support payments to help deliver an election-year budget surplus, giving the central bank scope to further reduce interest rates. The underlying cash surplus will be A$1.08 billion ($1.11 billion) in the 12 months ending June 30, compared with a A$1.54 billion surplus seen in May, the government said in a midyear review released in Canberra today. Spending is forecast to be A$363.2 billion compared with a May projection of A$364.2 billion, while the revenue estimate was cut to A$367 billion from $A368.8 billion. “While global headwinds, a high dollar and changing consumer behavior are weighing on some sectors, the Australian economy is expected to outperform every major advanced economy this year and next, with growth underpinned by strong investment, strong growth in export volumes and solid growth in consumption,” Treasurer Wayne Swan said in a statement in Canberra today.
Prime Minister Julia Gillard is bidding to end four years of deficits heading into an election year with polls showing she will lose to the opposition Liberal-National coalition. As the government reins in spending, she’s putting the onus on the central bank to further reduce the highest benchmark rate among major developed nations to bolster a slowing economy.
Moody’s Cuts Ratings on Catalonia, Four Other Spanish Regions (Bloomberg)
Moody’s Investors Service, a week after deciding against cutting Spain’s credit-rating to below investment grade, lowered Catalonia and four other Spanish regions. Catalonia, which will hold an early election on Nov. 25 focused on whether to seek independence for the region that accounts for a fifth of Spain’s economy, was reduced two steps to Ba3 from Ba1, the ratings firm said in a statement dated yesterday. Extremadura was lowered to Ba1 from Baa3, Andalucia was slashed to Ba2 from Baa3, and Castilla-La Mancha was cut to Ba3 from Ba2 and Murcia dropped to Ba3 from Ba1. Moody’s decision to cut the regions 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 firm said. Moody’s also said that Catalonia, Andalucia and Murcia “face large debt redemptions” this quarter when retail bonds issued in 2011 are due to mature.
The ratings of Basque Country, Diputacion Foral de Bizkaia, Madrid, Castilla y Leon, Galicia, Valencia and four government-related entities in Valencia were all left unchanged. A week ago, Moody’s kept Spain’s sovereign rating at Baa3, the lowest level of investment grade, citing a reduction in the risk of losing market access because of the European Central Bank’s willingness to buy the nation’s debt. Spain avoided joining euro-region peers Cyprus, Portugal, Ireland and Greece as below investment grade. Standard and Poor’s has a negative outlook on its BBB- rating, one step above junk, and Fitch Ratings has Spain at BBB, two levels higher. Creditworthiness concerns have grown since Prime Minister Mariano Rajoy requested as much as 100 billion euros ($130 billion) in European Union aid to shore up Spanish lenders amid signals the nation may miss its budget deficit goals. S&P downgraded Spain on Oct. 10, saying it doubted the loans will be mutualized among euro-region nations.
EU Parliament Panel Opposes Mersch Move to ECB Executive Board (Bloomberg)
A European Parliament committee opposed the appointment of Luxembourg’s Yves Mersch to the European Central Bank’s Executive Board because of unhappiness about a lack of female candidates for the job. The non-binding opinion by the European Union assembly’s economic and monetary affairs committee today in Strasbourg, France, is a political appeal to euro-area government leaders to put forward women for top ECB posts. The recommendation on Mersch, Luxembourg’s central bank governor, now goes to the full EU Parliament for a vote on Oct. 25. Two women, Sirkka Haemaelaeinen of Finland and Gertrude Tumpel-Gugerell of Austria, previously sat on the ECB’s six- member Executive Board. If the five men currently there serve their full terms, another position won’t become available until June 2018 when Vice President Vitor Constancio retires.
“We are objecting to the EU’s most powerful institution being run by only men for the next six years,” Sharon Bowles, who chairs the 27-nation Parliament’s economic and monetary affairs committee, said in an e-mailed statement. “At a time when we are doing all that we can to change the culture of financial services and to avoid a repeat of the financial crisis, it is baffling that member states are not pushing for more women in key finance positions.” The ECB seat has been vacant since Jose Manuel Gonzalez- Paramo of Spain ended his eight-year term on May 31. Euro-region finance ministers then wrangled over his replacement until July. As Luxembourg’s representative on the ECB’s wider policy-setting Governing Council, Mersch is the 17-nation euro area’s longest serving central bank chief and has earned a reputation as an inflation hawk.
Bowles praised Mersch’s qualifications and held out the possibility that she would urge the full 754-seat Parliament to ignore the committee’s recommendation and endorse his candidacy should EU President Herman Van Rompuy pledge action to promote women in top European jobs. Van Rompuy is due to speak to the Parliament tomorrow about an EU summit last week. “Van Rompuy now has the last opportunity tomorrow, when he addresses the plenary, to show us that member states are ready to commit seriously to encouraging women into top positions,’ Bowles said. ECB President Mario Draghi has said that, while the gender imbalance calls for action, Mersch’s appointment to the Executive Board should go through to help the central bank tackle Europe’s three-year-old sovereign-debt crisis. The workload of the Frankfurt-based ECB has multiplied as it embarks on unprecedented unconventional monetary policy measures and takes on additional supervisory roles.
Greece Austerity Diet Risks 1930s-Style Depression: Euro Credit (Bloomberg)
Greece is spiraling into the kind of decline the U.S. and Germany endured during the Great Depression, showing the scale of the challenge involved in attempting to regain competitiveness through austerity. The economy shrank 18.4 percent in the past four years and the International Monetary Fund forecasts it will contract another 4 percent in 2013 as Greece struggles to reduce debt in exchange for its $300 billion rescue programs. That’s the biggest cumulative loss of output of a developed-country economy in at least three decades, coming within spitting distance of the 27 percent drop in the U.S. economy between 1929 and 1933, according to the Bureau of Economic Analysis in Washington. “Austerity has been destroying tax revenue and therefore thwarting the intended effect,” said Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm. “There’s no avoiding austerity, though, because these people have no borrowing power. The deficits are there.”
Greece’s restructured bonds have benefited amid speculation that creditors are poised to release more bailout funds. Greek bonds maturing in 2023, which yielded more than 30 percent at the end of May, now yield about 16.4 percent. The next block of aid is slated to total 31 billion euros ($40.5 billion), mostly to recapitalize the nation’s banks.
