Thursday, August 11, 2011
Mounting concerns over the potential fallout of Europe’s debt crisis and the prospect of squeezed profits from low interest rates are slamming the shares of the world’s banks.
Not only are there fears of the potential impact of the debt troubles, but also the new reality of at least two more years of low rates in the United States, which will further pressure thinning lending margins. Investors are looking ahead to 2012, when a slowing economy is expected to take a deep toll on profits in the financial sector.
As the debt woes in the 17-member euro zone spread beyond just the smaller countries, some of the world’s major banks have tried to calm concerns about contagion by emphasizing how much better capitalized they are today as compared with the crisis of three years ago. But investors have instead focused on weak economic readings in the United States and Europe.
“The markets are responding the way the are because of legitimate concerns over the profit outlook for the [sector], which to begin with wasn’t that stellar,” Canadian Imperial Bank of Commerce analyst Robert Sedran said Wednesday as banks stocks in Europe, the United States and Canada fell.
“The European debt crisis isn’t particularly new. The U.S. debt crisis isn’t particularly new. But if it’s against a backdrop of soft economic growth, it becomes a lot more concerning.”
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Mr Sarkozy returned from the Riviera to chair an emergency meeting in Paris with his inner cabinet and the central bank chief, Christian Noyer, breaking the sacrosanct August holiday.
The key ministries were given one week to draw up radical austerity measures.
"Whatever the impact of global uncertainty, or the S&P's downgrade of America's debt, or the turbulence of the markets, we will take the necessary steps, " said finance minister François Baroin.
The political drama came as swirling rumours set off a collapse of French bank shares.
Société Générale fell 21pc before recovering partially, plagued by fears that it may be heavily exposed to tumbling global stockmarkets through its role in the equity derivatives market. Credit Agricole closed down 13pc, and BNP Paribas fell 10pc.
French banks have €410bn (£360bn) of exposure to Italy alone according to the Bank for International Settlements. The twin crises in France and Italy are now intimately linked and appear to be feeding on each other.
The MIB index on the Milan bourse fell 6.7pc as the euphoria following the European Central Bank's intervention in the Italian bond markets gave way to angst that the EU bailout machinery may not be large enough to back stop the whole of southern Europe.
France's CAC 40 closed down 5.5pc.
Morgan Stanley said the flight from French bank equities was "overdone".
BNP Paribas does not need to tap the capital markets this year, while SocGen is 93pc funded. The European Central Bank has kept its lending window open and offered a 6-month tender.
Julian Callow from Barclays Capital said the credibility of the €440bn rescue fund (EFSF) depends on France retaining its AAA rating.
That is now highly questionable despite assurances from all three rating agencies on Wednesday that nothing had changed.
"The debt ratios of the US and France are very similar. France also suffers from economic rigidities and now has this extra burden of the EFSF. People are asking themselves whether S&P can downgrade US without downgrading France," he said.
Mr Callow said France has a current account deficit of 3pc of GDP, unlike other members of the eurozone core. This is a sign of slipping competitiveness and a warning that France may struggle to carry the burden of escalating bail-outs.
French industrial output fell by 1.6pc in June and economic growth ground to a halt in the second quarter, further eroding budget finances.
The fiscal deficit was running at 7pc of GDP in the first half. It will take draconian cuts at this point to meet the 5.7pc target agreed with the EU.
With Spain, Britain, and even Italy now forcing the pace on austerity, France cannot appear nonchalant. Italy's premier Silvio Berlusconi met union leaders on Wednesay to forge a deal on €20bn of anti-deficit measures and labour reforms demanded by the ECB.
He has recalled parliament to vote on a balanced budget amendment to the constitution.
The ratings agencies are under intense pressure in Europe and may no longer be able to carry out their work effectively. Italian prosecutors have raided the offices of S&P and Moody's in Milan, accusing them of issuing "false and unfounded judgements" on the Italian financial system.
S&P said the accusations are "without any merit"
The Procura di Trani said the agencies had jumped the gun by issuing a report in early July on draft budget proposals.
Three analysts from S&P are accused of "market manipulation" and "abuse of privileged information" by issuing "inaccurate" reports over a period of several months.
This sort of judicial action against rating agencies is highly unusual. If it is shown in any way that the charges are politically motivated, the episode may inflict damage to Italy's reputation as a safe place to conduct business.
Marchel Alexandrivich from Jefferies Fixed Income said investors are worried that the latest contagion to France could bring the eurozone's bubbling problems to a head in a dramatic fashion.
"If France is dragged into the problem, then we will hit crisis point. They will either have to move to a full-blown eurobond -- and German politicians are set against that -- or face a break-up. There is a significant chance that the euro will no longer exist in its current form within twelve months," he said.
President Sarkozy said France would include a "golden rule" in its constitution to restore fiscal probity, adding that the fiscal targets for 2011 and 2012 were "untouchable".
The new budget measures will be introduced on August 24 and are expected to include the closure of 500 tax loopholes, .
The IMF said France has the highest debt ratio of any AAA state this year at 85pc of GDP and may have to tighten further next year. Like the US, France has also built up huge pension debt and contingent liabilities.The Telegraph
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Gold climbed to a third record in a row on Wednesday, extending its best rally since 2008 as a dive in French bank stocks sent new shudders through anxious financial markets, sending U.S. stocks skidding.
Bullion rose as much as 3 percent, setting a new high over $1,800 an ounce, as the locus of traders’ euro zone debt fears shifted from Spain and Italy to France, where President Nicolas Sarkozy called for new fiscal restraint as markets fretted over the possibility that it may be next for a debt downgrade.
The latest jitters appeared to overshadow the Federal Reserve’s unprecedented decision to promise near-zero interest rates for the next two years, a double-edged sword for gold, which had been pulled back by Tuesday’s late Wall Street rally but would also benefit from a prolonged low-yield environment.
Spot gold rose near 3 percent to hit a high of $1,796.86 an ounce; it was up 2.3 percent at $1,784 by 12:00 p.m. EDT (1600 GMT). It also hit record highs in euro and sterling terms. U.S. COMEX gold futures for August delivery briefly topped $1,800 before pulling back.
It has rallied nearly 7 percent this week, and 20 percent since June, after a downgrade to the U.S. credit rating on Friday battered assets seen as higher risk, helped by simmering worries over euro zone debt and an increasingly grim-looking U.S. economic outlook.
France joined that list of woes on Wednesday as shares in its banks — among the most exposed to Italian and other peripheral euro zone government debt — slumped as much as 20 percent in afternoon trade as fears about the currency bloc’s debt crisis moved back to the forefront.
With governments and central banks running out of tools to combat the financial and economic distress, some analysts are now looking for gold to keep running toward $2,500, which would just top the inflation-adjusted peak of three decades ago.
“The skies would appear to be clear for these safe havens like gold,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group, Greenwich, Conn. With the debt woes spilling over into the world’s biggest economics, “we don’t know where this thing is going to stop anymore.”
Gold’s latest winning streak has broken it clear of the ascending trend channel that has contained it since late 2008 — coincidentally the last time it staged an 8 percent gain over the span of four days.
But the Relative Strength Index was flashing overbought status at 84, far above the 70 percent mark that often signals a correction may be in store. Gold has pulled back both times the index topped topped in the past 12 months.
“When you have a metal that has three or four distinct reasons why it has headed higher, it is very difficult not to be bullish in that environment,” said Mitsui Precious Metals analyst David Jolliet. But he added: “Given how far and how quickly we’ve run up, the move seems somewhat overextended.”
The Fed on Tuesday promised to keep interest rates near zero for at least two more years and said it would consider further steps to help growth.
The comments support the view that the opportunity cost of holding nonyielding gold would remain depressed. They also trigged what has proved to be a fleeting rally in stocks, one that briefly triggered a flurry of profit-taking in gold.
Global holdings of gold-backed exchange-traded funds, calculated by Reuters, fell 7.2 tonnes on Tuesday in their first daily decline in thirteen sessions.
The world’s biggest gold-backed ETF, New York’s SPDR Gold Trust, reported its biggest one-day outflow since Jan. 25 on Tuesday, of just over 13 tonnes. A day before it had seen its largest daily inflow since May last year.
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How far does the stock market have to go down before we officially call it a crash? The Dow is now downmore than 2,000 points in just the last 14 trading days. So can we now call this "The Stock Market Crash of 2011"? Today the Dow was down 519 points. Yesterday, an announcement by the Federal Reserve indicating that the Fed would keep interest rates near zero until mid-2013 helped the Dow surge more than 400 points, but all of those gains were wiped out today. It turns out that the Federal Reserve was only able to stabilize the financial markets for a single day. Fears about the European sovereign debt crisis and the crumbling U.S. economy continue to dominate the marketplace. With each passing day, things are looking more and more like 2008 all over again. So what is going to happen if "The Stock Market Crash of 2011" pushes the U.S. economy into "The Recession of 2012"?
Just like in 2008, bank stocks are being hit the hardest. That was true once again today. Bank of America was down more than 10 percent, Citigroup was down more than 10 percent, Morgan Stanley was down more than 9 percent and JPMorgan Chase was down more than 5 percent.
Bank of America stock is down almost 50 percent so far this year. Overall, the S&P financial sector is down more than 23 percent in 2011 so far.
How soon will it be before we start hearing of the need for more bailouts? After all, the "too big to fail" banks are even bigger now than they were in 2008.
All of this panic is causing the price of gold to reach unprecedented heights. Today, gold was over $1800 at one point. If the current panic continues for an extended period of time, there is no telling how high the price of gold may go.
In the United States, much of the focus has been on the fact that the U.S. government has lost its AAA credit rating, but the truth is that the European sovereign debt crisis is probably the biggest cause of the instability in world financial markets right now.
The European Central Bank has decided to start purchasing Italian and Spanish debt, and there have been rumors that French debt could be hit with a downgrade. Europe is a total financial basket case right now and unless dramatic action is taken things are going to get progressively worse.
Of course the U.S. is also certainly contributing greatly to this crisis. The federal government is on track to have a budget deficit that is over a trillion dollars for the third year in a row. The U.S national debt is a horrific nightmare, but our politicians keep putting off budget cuts.
The debt ceiling deal that was just reached basically does next to nothing to cut the budget before the next election. Unless the "Super Congress" does something dramatic, the only "budget cuts" we will see before the 2012 election will be 25 billion dollars in "savings" from spending increases that will be cancelled.
The modest spending cuts scheduled to go into effect beginning in 2013 will probably never materialize. Whenever the time comes to actually significantly cut the budget, our politicians always want to put it off for another time.
But in the end, debt is always going to have its day. Our politicians can try to kick the can down the road all they want, but eventually a day of reckoning is going to come.
In fact, if the U.S. and Europe had not piled up so much debt, we would not be facing all of the problems we are dealing with now.
Things could have been so much different.
But here we are.
The truth is that this debt crisis is just beginning. There is no magic potion that is going to make all of this debt suddenly disappear.
Most Americans have no idea how much financial pain is coming. We have been living way beyond our means for decades, and now we are going to start paying for it.
Now that long-term U.S. government debt has been downgraded, huge numbers of other securities are also going to be affected. In fact, according toa recent Bloomberg article, S&P has already been very busy slashing the ratings on hordes of municipal bonds....
Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.
That is the thing about financial markets - once the dominoes start to fall, the ripple effects can be felt for a long, long time.
So if this stock market crash gets even worse, will the Federal Reserve respond with even stronger measures?
They have already basically promised to keep interest rates near zero for the next two years. So what else can the Fed do?
Well, many now believe that there is a very good chance that we could see another round of quantitative easing.
Not that more quantitative easing is going to help much of anything. Rather than helping the economy, the last round of quantitative easing just pushed commodity prices through the roof. But the Fed is unlikely to just sit there and do nothing while financial markets struggle.
But it is not just the financial markets that are having a difficult time right now. Bad news is coming in from all over the economy. The possibility that we could soon slip into another major recession is growing by the day.
Unfortunately, our economy is so weak already that a new recession would probably hurt even more than the last recession did.
Mark Zandi, the chief economist at Moody's Analytics, says that if we have another recession it "won't feel like a new recession. It would likely feel like a depression."
But the American people are in no mood for more economic pain. Every recent poll shows that Americans are already fed up.
For example, a brand new Reuters/Ipsos poll found that 73 percent of the American people believe that the country is "on the wrong track".
So let's certainly hope that the current stock market crash does not set off another major global recession. We certainly do not need things to get significantly worse than they are right now.
But whether it hits now or later, the truth is that a whole lot of economic pain is on the way. The U.S. and Europe have been making really, really bad decisions for decades, and we are not going to be able to escape the consequences of those decisions.
The global financial system is one huge mountain of leverage, risk and debt. A collapse is inevitable.
When you build a house of cards on a foundation of sand, you should not be surprised when it comes crashing down.
The next wave of the economic collapse is coming, and those that are wise will get prepared.
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Governments all over the world are debasing currency; Yesterday, the US Federal Reserve said it will continue to debase their currency. The more the governments will debase paper currency, people will take refuge in real assets and gold is one of them.
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Could Gold reach $2500 by the end of the year? A look at gold as it continues to rise and uncertainty in the markets sends investors to safe haven plays, with Colin Fenton, JPMorgan chief commodities strategist. JP Morgan Joins Goldman Sachs In Upping Gold Forecasts to at least $2,500 a troy ounce by the end of the year. JP Morganhas become the latest bank to up its forecast for spot gold prices, hiking its estimates by a whopping 39%
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French ministers attempted yesterday to head off speculation that Paris might be the next big country to lose its AAA credit rating.
Both the finance and budget ministers gave lengthy radio interviews which seemed to be aimed more at the "bond vigilantes" on international markets than their domestic audience. Valérie Pécresse, the budget minister, said France would "not deviate one iota" from its promise to reduce its budget deficit from 7.1 per cent last year to 4.6 per cent of gross domestic product next year and 3 per cent by 2013.
If "more efforts" – ie spending cuts or tax rises – were needed, Ms Pécresse said, "then we will make more efforts". Her boss, the finance minister François Baroin, gave a similar pledge and spelled out the reasons why international investors should have no fear for France's economic stability.
"France has a diversified economy, a skilled workforce, a strong banking system and one of the highest savings rates in the world," he added.
Earlier this week, the Berlin-based economics institute, the DIW, warned that France could be the next target, after the US, for a downgrading by one of the international rating agencies of its AAA rating for sovereign, or government, debt. The DIW said such a move could be the straw that broke the back of the euro.
The Standard & Poor's rating agency, which was widely vilified for downgrading US sovereign debt last week, said this week that it saw no reason to take similar action against France. It said the French, unlike the Americans, had a clear policy to reduce the budget deficit.
Nonetheless, there has been pressure on French debt on the financial markets. The cost of credit default swaps – insurance policies against a default – on French debt have reached record levels in recent days.
Paris has, so far, done less than Britain or even relatively prosperous Germany to cut back government spending.
France is one of the few large countries to still have a "primary" budget deficit, in other words a deficit even after repayments on old debt have been excluded.
Painful decisions face the French government when it puts forward next year's budget this autumn, just before next spring's presidential election. France pays €50bn a year interest on its old debts.
Its remaining "deficit" is €60bn a year, all of which has to be dissolved by spending cuts or tax rises if Paris is to meet its target of a deficit of 3 per cent of GDP by 2013.