Financial Market Report for August 25, 2011
1) … Stocks fall on fears of Federal Reserve impotence and fears that the European Sovereign Debt and Banking Crisis cannot be managed.
Germany, EWG, and European Financials, EUFN, turned the European Shares, VGK, sharply lower. The Washington Post asks Is a downgrade of Germany’s credit rating next? Calculated Risk reports Greek bond yields surge. Business Insider reports Greece quietly activates emergency liquidity measures.
EconomicPolicy Journal reports Credit default swaps soaring on European Banks and Wall Street Journal reports Greek Default Fears Rise. Euro-zone policy makers appeared nowhere near settling a dispute Thursday over Finland’s collateral demands in exchange for participating in a €109 billion ($157.1 million) bailout for Greece, raising concerns the Mediterranean nation may default. Markets have grown more worried about the potential for a Greek debt default amid a lack of progress in resolving the collateral issue this week, according to a person familiar with the situation. Finland, meanwhile, shows no sign of backing down. Yields on Greek two-year bonds rocketed to a record of over 43% Thursday, according to Tradeweb, and the cost of insuring Greek government bonds against default also rose sharply. Greek five-year sovereign credit-default swaps were 1.37 percentage points wider at 22.75 percentage points, according to Markit. Euro-zone governments are looking into alternative forms of collateral after a cash deal reached earlier between Greece and Finland was rejected by key member countries, including Germany and the Netherlands. The collateral dispute, if not resolved soon, could derail a second bailout package for Greece agreed by euro-zone leaders on July 21. Without support from all 17 euro-zone countries, no funds can be released, while changes to the European Financial Stability Facility, the currency bloc’s bailout fund, can’t go forward either. “It seems that a possible outcome is either collateral for all member states or no country will get it,” said another person, who remains hopeful a solution can be found by the end of Friday. Finland said Thursday that it continues discussions with Greece and other euro-zone countries to find a solution. Officials refrained from further comment. “The issue has become so politicized that no one here at the Finance Ministry wants to talk about it at the moment,” said Anita Sihvola, spokeswoman for the Finnish finance ministry. On Wednesday, Finance Minister Jutta Urpilainen reiterated that Finland won’t take part in the Greek bailout unless it obtains collateral.
Small Cap Energy, PSCE, Small Cap Technology, PSCT, Small Cap Discretionary, PSCD, Semiconductors, XSD, Russell 2000 Growth, IWO, Biotechnology, XBI, Uranium Producers, URA, Retailers, XRT, Wood Producers, WOOD, Insurance, KIE, Mortgage REITS, REM, and Steel, SLX, led the stock market lower today. Bloomberg reports Bernanke Signaling No QE Backed by Data. Federal Reserve Chairman Ben S. Bernanke tomorrow may disappoint stock investors betting on a commitment to step up stimulus. He has little choice, given rising consumer prices and a U.S. economy that is still growing. Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago at the annual Fed symposium in Jackson Hole, Wyoming. While the U.S. expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production. Policy makers, who said Aug. 9 they’ll use additional tools “as appropriate,” probably don’t expect a recession or rapid disinflation, making a signal of bond buying premature, said Roberto Perli, managing director at International Strategy & Investment Group in Washington. Instead, Bernanke will probably detail options for further stimulus and clarify how much the Fed’s reduction in its outlook this month stems from long-term obstacles to growth, said Keith Hembre, a former Fed researcher. “Conditions are substantially different today” compared with last year, especially inflation, said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $212 billion. “First and foremost, that would be the reason I think that any sort of major asset purchase announcement is unlikely,” he said.
World Stocks, ACWI, and World Small Cap Stocks, VSS fell lower. The Russell 2000, IWM, led the US Shares, VTI, lower. Malaysia, EWM, Thailand, THD, and Indonesia, IDX, South Korea Small Cap, SKOR, Taiwan, EWT, South Korea, EWY, Taiwan Small Caps, TWOn, The UK, EWU, Sweden, EWD, Europe, VGK, Israel, EIS, Norway, EWN, Egypt, EGPT, India, INDY, India Small Cap, SCIN, Russia, RSX, and Russia Small Cap, RSXJ, suffered heavy losses.
2) … Open Europe reports
Also Handelsblatt reports German Finance Minister Wolfgang Schäuble said at a CDU/CSU parliamentary group meeting that the Greco-Finnish collateral deal “is no longer on the table.” Greek borrowing costs of two year debt reached record highs of 44% yesterday over fears that the second Greek bailout could be delayed due to the collateral dispute.
German Chancellor Angela Merkel’s CDU party and junior coalition partner FDP criticised the German government’s draft framework agreement for the EFSF, the eurozone’s bailout fund, arguing that it leaves national parliaments on the side lines. FT Deutschland quotes Deputy FDP Chairman Florian Toncar, saying, “The planned changes by heads of government to the EFSF cannot pass without parliamentary control.”
3) … Euro Intelligence reports
The German presidency is a largely ceremonial office, but he has two functions that can be important in the euro crisis. His words carry weight, and influence public opinion. And he constitutes an important link between the parliament, who legislation he has to approve, and the Constitutional Court. Yesterday, Christian Wulff said he considered the ECB’s bond purchases as legally questionable. The direct purchase of bonds was explicitly ruled out. It is wrong to circumvent this rule through secondary market purchases, according to Frankfurter Allgemeine.
Angela Merkel has proposed that the stability and growth pact should be monitored by the European Court of Justice, which could declare offending national budgets as null and void. Since this also applied to Germany, would this not contradict the German constitution, which insists on full budgetary sovereignty?
A report criticises Greek tax collector for poor performance. The performance of Greek tax offices is becoming a problem, as Finance Ministry data made public on Wednesday showed that tax inspectors are doing a particularly poor job to follow up on tax evasion, Kathimerini reports. Official figures for June revealed that out of the country’s 34 major tax offices, 12 had not performed a single audit on taxpayers, while 31 clocked an average of less than one check per employee. This year the country’s 288 tax offices had only inspected 152,822 cases, with another 358,503 cases still pending. This means that the authorities have only checked three out of every 10 cases in their hands. The data also showed that there are several tax offices with over 10% of registered taxpayers not paying their dues, most of them major companies.
4) … Wall Street Journal reports A Rush Out of ‘Junk’.
The market for “junk” bonds is enduring its worst rout since the depths of the financial crisis. Demand for high-yield bonds sold by the riskiest U.S. companies has nearly dried up, an ominous sign for low-rated companies hoping to tap the bond markets and private-equity firms trying to finance leveraged buyouts. New junk-bond offerings in August were at their lowest level since December 2008. Retail investors have been withdrawing record amounts from high-yield mutual funds, forcing those funds to dump bonds in order to raise cash, driving prices even lower. Returns on junk bonds—those rated below investment grade, which offer a high yield due to a high risk of default—dropped to negative 5.1% in August, the worst monthly performance since November 2008, according to the Barclays Capital U.S. High Yield Index.
5) … CNBC reports Applied Materials(AMAT) Beats Street; Outlook Dismal.
Applied Materials posted quarterly results that beat market estimates, but the chip-gear maker forecast dismal fourth-quarter results on weak macro-economic conditions and a glut in the solar cell market
6) …. Time reports What Italy tells us about Europe’s debt crisis
7) … Reuters reports Banks face $340bn state-backed bond refi hole
8) … Douglas French writes in Daily Reckoning article First in line for new money about the seigniorage, that is the moneyness, that came via US Federal Reserve QE And ZIRP.
9) … Angela Merkel has spoken with the Authoritarian Imperative and out of the 1974 Clarion Call of The Club of Rome, for regional economic government.
I believe Helmut Kohl has always been a European Federalist with a commitment to a political union. I believe that he has always seen a common currency as the means to achieve a European Super Government. In interview with Internationale Politik he stated “Of course I would have wished many a time, a further decision, especially in the early nineties with a view to the euro and political union.”
President Sarkozy and Chancellor Merkel have heard and heeded the 1974 Club of Rome’s Clarion Call by communicating the need for “true European Economic Government”, which is part of regional economic government to be established in the world’s ten regions. This Call is establishing the Ten Toed Kingdom of Regional Economic Government, which serves as the foundation of the Beast Regime of Neoauthoritarianism, which replaces Neoliberalism. Mrs Merkel spoke with the Club of Rome’s Authoritarian Imperative as Bloomberg reports Merkel rejects euro region breakup. And Handelsblatt reports Angela Merkel, saying, “All times have their own specific demands.” The Chancellor is keenly attuned to the fact that the global political and economic teutonic plates shifted, as the Milton Friedman Free To Choose Floating Currency regime, which began in 1974 when the US went off the gold standard ended, when world stocks turned lower in May 2011, and when investors became aware that a debt union has formed in Europe, and fled the stock market on Black Thursday.
The soon coming Europe Super Government will feature a sacrifice of national fiscal authority and a forfeiture of institutional holdings, such as infrastructure, banking, and utilities from the European periphery to its core, that is from the PIIIGS to Brussels, Paris and Berlin. And according to the Sarkozy and Merkel vision, the One Europe Government will have a leader. This Sovereign will be accompanied by the Seignior, meaning top dog banker who takes a cut. Neoliberalism featured wildcat finance, a Doug Noland term But Neoauthoritarianism will feature wildcat governance, where leaders bite, tear and rip one another, as the most fierce rise to the top as governments created under Neolilberalism fail. Satzman WSWS reports Slovenia government on verge of collapse. The Slovenian government led by Premier Borut Pahor faces collapse following unpopular austerity measures and allegations of corruption. Diktat will be replacing freedom, choice, and liberty. The word will and way of the Sovereign and the Seignior will be the basis of the world’s seigniorage, that is moneyness.