Euro Touches 2-Year Low Before Finance Ministers Meet

The euro fell to its lowest level in two years against the dollar before regional finance ministers gather in Brussels today to discuss crisis-fighting measures adopted by heads of government at a summit last month.

The 17-nation currency erased its intraday drop as the European Commission said future recapitalizations of banks by rescue funds wouldn’t require government guarantees. The yen reached a one-month high versus the euro as stock declines boosted demand for haven assets. Australia’s dollar weakened after Chinese Premier Wen Jiabao said downward pressure on the economy is still “relatively large” and Japanese machinery orders had their biggest drop since 2001.

“The euro group has to provide a lot of nuts and bolts to what had been decided at the European Union summit,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “If they decide something meaningful those who like it might buy euro-dollar up cautiously, but they will be disappointed as they had been last week by those who are more skeptical” pushing the currency lower.

The euro slid to $1.2251, the weakest since July 2010, and was at $1.2298 at 7:06 a.m. New York time, little changed from the close on July 6. The shared currency bought 97.82 yen after earlier touching 97.43, the lowest level since June 5. Japan’s currency strengthened 0.2 percent to 79.54 per dollar.

The Stoxx Europe 600 Index of shares lost 0.3 percent, while the MSCI Asia Pacific Index (MXAP) dropped 1.5 percent.
Bank Loans

Spanish and Italian bonds fell amid concern finance ministers will fail to agree on sufficient crisis-fighting measures to stem the euro area’s woes at today’s meeting.

Recapitalizations of banks by the European Stability Mechanism will have “no need for a sovereign guarantee,” commission spokesman Simon O’Connor told reporters in Brussels today. Details of how the future system will work remain to be negotiated, he said.

“We have to move quickly on banking supervision and we have to move quickly on the direct recapitalization of Spanish banks,” French Finance Minister Pierre Moscovici said yesterday.

European Central Bank President Mario Draghi is scheduled to speak in Brussels after the central bank cut the main refinancing rate to a record 0.75 percent and lowered the deposit rate to zero on July 5. He said after last week’s decision that the cut may have only a “muted” economic impact and growth in the euro area “continues to remain weak with heightened uncertainty.”
‘Easing Bias’

Deutsche Bank AG, the biggest foreign-exchange trader according to Euromoney Institutional Investor Plc (ERM), forecasts the euro will drop to $1.20 in the coming months.

Last week’s rate cut “implicitly signals a greater ECB easing bias and a desire for a lower euro,” George Saravelos, a currency strategist in London, wrote in an e-mailed report dated July 6. The deposit-rate cut will help “to push euro-dollar down toward 1.20 over the summer months,” he wrote.

The euro earlier slid to the lowest against the Australian and New Zealand dollars since the 17-nation currency was created in January 1999, dropping to A$1.20053 and NZ$1.5356. It fell to a two-year low versus the Canadian dollar of 1.24657 and the weakest level since November 2008 against the pound at 79.04 pence.
Machinery Orders

Europe’s shared currency reached $1.1877 on June 7, 2010, the weakest since 2006, according to data compiled by Bloomberg. The euro has fallen 3.3 percent in the past three months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was the biggest gainer in the period, rising 6.5 percent followed by a 3.7 percent increase in the dollar.

The yen tends to appreciate in periods of financial and economic turmoil because Japan’s current-account surplus makes it less reliant on foreign capital. Government data today showed the surplus was 215.1 billion yen in May, compared with the median estimate for an excess of 493.1 billion yen in a Bloomberg News survey of economists. Machinery orders, an indicator of capital spending, slumped 14.8 percent in May from April, the Cabinet Office said in a separate report.

Bank of Japan (8301) policy makers are set to meet on July 11-12. Governor Masaaki Shirakawa has said the central bank is fully committed to pursuing “powerful monetary easing” until a 1 percent inflation target set in February is in sight. The central bank has expanded its asset-purchase fund, its main policy tool, by 20 trillion yen this year, in a bid to stimulate growth.
Dollar Index

Citigroup Inc. expects the BOJ to leave policy unchanged, currency strategist Osamu Takashima wrote in a report today.

“Among Japanese economists, it’s expected that the BOJ will expand the size of its asset-purchase program,” Takashima wrote. “Should the BOJ surprise the market, it could be associated with a somewhat stronger yen.”

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, was little changed at 83.239, after a 2.1 percent advance last week.

“For the moment you’ve got to be in the dollar or the yen, and I’m not particularly positive on either of those currencies for the long run, but while the euro-zone crisis continues it’s very hard to avoid that,” said Adrian Schmidt, a foreign- exchange strategist at Lloyds Banking Group Plc in London. He spoke in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua.

Australia’s currency slid after the official Xinhua News Agency reported yesterday that Chinese Premier Wen said the government will intensify fine-tuning of policies in response to downside risks to growth. The comments came after the South Pacific nation’s biggest trading partner announced the second interest-rate cut in a month.

Consumer prices in China rose 2.2 percent in June from a year earlier, according to a report released today. That’s the slowest pace in 29 months and compares with the median forecast for a 2.3 percent inflation rate in a Bloomberg poll.

The Aussie declined 0.4 percent to $1.0177 and fell 0.5 percent to 80.961 yen.

U.S. Stock Futures Fall on Europe as Spanish Yields Climb

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will drop for a third day, after an advance in Spanish yields intensified concern about Europe’s debt crisis and as investors awaited Alcoa Inc.’s results.

Alcoa, which begins the second-quarter earnings season after the market close, slid 0.4 percent. Visa Inc. (V) and MasterCard Inc., the biggest payment networks, lost at least 2 percent after being downgraded at UBS AG. Boeing Co. (BA) increased 1.4 percent after a $7.2 billion order at the Farnborough air show. Amerigroup Corp. (AGP) surged 38 percent as WellPoint (WLP) Inc. agreed to buy the company for $4.9 billion in cash.

S&P 500 futures expiring in September fell 0.3 percent to 1,347.90 at 8:40 a.m. New York time. Dow Jones Industrial Average futures lost 35 points, or 0.3 percent, to 12,692.

Equity futures joined a global slump as Spain’s 10-year debt yield climbed above 7 percent and European finance ministers prepared to meet to hammer out a rescue plan for banks. Alcoa (AA), the largest U.S. aluminum producer, may report an 81 percent decline in second-quarter earnings as the eighth straight year of surplus global production drives down the price of the metal. The shares fell 0.4 percent to $8.69.

The latest quarter is the first since 2009 that analysts project earnings in the S&P 500 will contract after Europe’s debt crisis and slowing growth in China reduced overseas demand. Analyst estimates compiled by Bloomberg show a 1.8 percent decline in profit for S&P 500 companies in the second quarter. Revenue is projected to increase by 2.5 percent.

Stocks fell last week, after the benchmark gauge reached a two-month high, as jobs data heightened concern about a slowing economy and Europe’s efforts to tame its debt crisis disappointed investors.
Visa, MasterCard

Visa retreated 2.2 percent to $122.50, while MasterCard (MA) declined 2 percent to $433. The shares were cut to sell from neutral at UBS.

Boeing added 1.4 percent to $74.69. The company kicked off this year’s Farnborough air show with an order from Steven Udvar-Hazy’s Air Lease Corp. for single-aisle aircraft, as the manufacturer promotes its new, fuel-efficient 737 MAX.

Amerigroup surged 38 percent to $88.95. The stockholders will receive $92 a share. The price is 43 percent above the closing level of Amerigroup in New York Stock Exchange trading on July 6. The acquisition will make WellPoint the top private manager of Medicaid benefits in the U.S., with 4.5 million members in the government-sponsored programs. WellPoint, the second-biggest U.S. health plan, added 4.2 percent to $62.40.

The same securities analysts warning of the first decline in quarterly earnings since 2009 (SPX) are also more bullish than ever on U.S. stocks.
Bullish Bets

A total of 247 companies in the S&P 500 have more buy ratings than sells and holds, a record in Bloomberg data starting in 2000. Bullish recommendations have been expanding even as Wall Street firms cut their forecast for second-quarter net income in the U.S. to a decrease of 1.8 percent from a gain of 2 percent in April, more than 10,000 estimates compiled by Bloomberg show.

Bears say rising equity volatility, declining profits and the approaching U.S. presidential election mean the 4.5 percent drop in the S&P 500 since April will continue. Bulls say analysts are advising clients to buy because earnings are still on track to reach a record this year and the index is trading 16 percent below its average valuation since the 1950s.

“My picks aren’t based on one quarter,” Howard Rubel, a New York-based equity analyst at Jefferies & Co., said in a July 5 phone interview. “It’s not always captured in a headline how many pieces of judgment one needs to incorporate into a stock recommendation, and a quarterly earnings report is only one item. You have to look at things over a period of time.”

Ministers seek to untangle measures to help euro

Euro zone finance chiefs will try to flesh out plans to reinforce the single currency on Monday but their talks in Brussels may do little more than highlight the limitations of last month's deal to help indebted states and banks.

Decisions on banking supervision, how to use euro zone bailout money, aid to Spain and Cyprus and whether to grant concessions to Greece are likely to take months to finalize, while pressure for action is growing.

Spanish and Italian borrowing costs moved back up near unsustainable levels on Friday as hopes raised by the summit began to fade. Leaders of both countries issued pleas at the weekend for rapid moves to implement the agreement.

"This is where the credibility of the entire European project is at play," Spanish Prime Minister Mariano Rajoy said.

The deal reached by leaders from the 17 nations sharing the euro aims to give the European Central Bank greater oversight of the bloc's banks and to use the euro zone's rescue funds to reduce countries' borrowing costs.

But critical elements were left vague, time frames may already be slipping and ministers could end up meeting again later in July to take firm decisions.

"This is very much the follow on from the summit, but it doesn't mean all details can be set down," said one euro zone diplomat briefed on the Brussels meeting that is due to start at 1700 CET (1500 GMT).

"The issue of ECB supervision is a complex, longer-term issue and not one that can be decided in a few hours."

ECB President Mario Draghi will testify to the European Parliament on Monday before ministers meet, and after cutting rates last week could signal more dramatic measures such as buying government bonds or flooding banks with fresh liquidity.

Germany, the bloc's biggest economy, as well as wealthy Finland and the Netherlands, are wary of what was announced at the summit and German Chancellor Angela Merkel is reluctant help its partners without strict conditions.

Central to the euro zone leaders' plan is to give the ECB a central role in supervising banks, which would then allow the permanent rescue fund - the European Stability Mechanism (ESM)- to recapitalize banks directly instead of via governments.

That is seen as a concession to Spain, which has requested a bailout of up to 100 billion euros ($125 billion) for its banks, although it is not clear when Madrid will benefit.

Leaders want to break the link between banks and sovereigns by not lumbering governments with debts for rescuing their lenders, making it harder for them to borrow.

But the central question as to whether individual countries or the euro zone assumes liability for banks that are rescued by the ESM remains open.

Leaders agreed to remove the ESM's preferred creditor status when it lends to Spain, to calm investors who were worried they would not be repaid money they had already lent.

They also decided that the ESM and the euro zone's temporary bailout fund, the EFSF, can buy euro zone bonds at auction and in the open market to lower borrowing costs, with some conditions attached but without a full program.

The ESM is due to start operating during the European summer, but at least for now, countries will need to provide guarantees in return for bank aid it gives, according to one euro zone official who is involved in preparing the Eurogroup.

That might help overcome German concerns about the ESM taking on this risk.

"There is some degree of mystification going on here ... in the broader public who think that under current rules the ESM could all of a sudden end up owning Bankia with the full risk of Bankia on the balance sheet of the ESM," he said, referring to the Spanish lender. "This is very much not the case."

OPTIMISTIC

As always in the euro zone's crisis management, finance ministers are given the difficult task of juggling national interests, in particular among the bloc's four biggest economies, Germany, France, Italy and Spain.

But it looks optimistic that they can do what leaders said in their statement on June 29 when they told the Eurogroup of finance ministers "to implement these decisions by July 9".

Much depends on the ECB's crucial role as supervisor, which will need to be grounded in European law. It falls to the European Commission to propose such legislation, which is not expected until at least September.

Despite the obstacles to the broad package outlined by leaders, the range of measures agreed allow some short-term action, and vocal opposition to euro zone bond buying in the Netherlands and Finland is unlikely to ruin those plans.

Finland has said it opposes bond-buying in secondary markets, because it considers such purchases to be ineffective.

In emergency cases, the ESM's treaty allows for decisions to be taken with an 85 percent majority, and the Netherlands and Finland only account for 8 percent combined.

Coordinating euro zone finance ministers has been the job of Luxembourg Prime Minister Jean-Claude Juncker since 2005, but his terms ends on July 17 and ministers are due to discuss his successor on Monday. However, confusion over who that is likely to be means his term may be extended.

GREECE MUST DELIVER

Ministers will discuss the findings of the "troika" of the European Union, the European Central Bank and International Monetary Fund from their first mission to Greece since the June 17 election. Another mission is due to return later in July.

Greece's new Finance Minister Yannis Stournaras said on Thursday he had been warned to expect a tough time at the Eurogroup, having acknowledged Athens was off course on its pledges linked to a 130-billion-euro rescue.

One senior euro zone official said the Eurogroup needed to see that Athens is getting back on track before it can hand over more aid, even if the previous Greek government said the administration risked running out of money by the end of July.

Greece's Prime Minister Antonis Samaras wants to ease the terms of the bailout, but that would mean more money for Athens.

"Even if the second program as it stands were fully implemented, it is not clear that market access could resume (in 2015)," said David Mackie, an economist at JP Morgan. "A third program seems likely in any event."

For Spain, ministers are likely to agree in principle to an aid package although no formal green light will follow until the end of the month, one euro zone official said.


From Reuters

European commissioner to take action over Libor scandal: FT

      

Michel Barnier, the European commissioner in charge of financial regulation, is expected to bring forward changes to his market abuse directive and regulation within in the next weeks, the Financial Times said on Monday.

In response to the Libor rigging scandal, Barnier will amend reforms to European Union market abuse rules so that potential "loopholes" are closed and criminal sanctions specifically cover tampering with indices such as Libor and Euribor, the newspaper said.

He is cited as calling the falsification of such benchmark rates a "betrayal" with potentially "systemic consequences".

Libor, the London interbank offered rate, is the benchmark interest rate that underpins trillions of loans, credit cards, mortgages and derivatives around the world. Euribor is the Euro interbank offered rate.

Barnier is expected to work with the European Parliament to add amendments to the market abuse rules he already proposed last year.

Amendments would still have to be approved by EU governments and the parliament, which could take up to a year.

A review of market indices to see whether they should be brought under the watch of regulators is also due to be carried out by Barnier's staff. This review could take several months, the FT said.

"I have never believed in self-regulation for a public good. I believe that we need to make sure there is more transparency in this process," he is quoted as saying.

Barnier's intervention follows the forced resignation of Bob Diamond from Barclays, who said the bank was encouraged by the Bank of England to engage in the practice.

On Monday, Paul Tucker, deputy governor of the BoE, will appear before a panel of lawmakers asking key people what they knew about Barclays and other banks submitting inaccurate figures for Libor.

Obama team targets Romney over taxes, Republicans cry foul

President Barack Obama's campaign and top Democrats on Sunday called on Mitt Romney to release more personal tax records and raised questions about his offshore assets that the Republican challenger's campaign condemned as an "unseemly and disgusting" character assault.

Democrats and Republicans tussled over the economy, but it was Romney's offshore assets that Democrats seized on during the Sunday talk shows in their quest to portray him as a wealthy man out of touch with ordinary Americans. Romney faces Obama in the November 6 election and polls indicate a close race.

Democratic National Committee Chairwoman Debbie Wasserman Schultz raised the issue on "Fox News Sunday" as her interview time ran out.

"I'd really like to see Mitt Romney release more than one year of tax records, because there's been disturbing reports recently that he's got a Bermuda corporation, a secretive Bermuda corporation that no one knows anything about, investments in the Caymans, kind of Swiss bank account."

"Americans need to ask themselves why does an American businessman need a Swiss bank account and secretive investments like that?" Schultz said.

Obama campaign adviser Robert Gibbs, on CNN's "State of the Union," called on Romney to release years of back tax records to allow scrutiny of his adherence to tax law. Asked whether Romney had broken the law, Gibbs said, "Well, we don't know."

"The one thing he could do ... to clear up whether or not he's done anything illegal - whether he's shielding his income from taxes in Bermuda or Switzerland - is to do what every other presidential candidate's done, and that's to release a series of years of their own tax returns," Gibbs said.

"This is a guy whose slogan is: 'Believe in America' - and it should be 'Business in Bermuda.' That's what Mitt Romney's all about," Gibbs said.

Romney's campaign fought back.

"The Obama campaign's latest unfounded character assault on Mitt Romney is unseemly and disgusting," said Andrea Saul, a Romney campaign spokeswoman.

The Associated Press has reported that an offshore company based in Bermuda has helped bolster Romney's wealth even though it did not appear on his state or federal financial reports for 15 years.

The Obama campaign released an online video on Sunday raising questions about Romney's offshore accounts. "Mitt Romney could be the first president in history to stash millions offshore so the American people deserve an explanation as to why he chose to invest in other countries known as tax havens rather than the United States," the campaign said in a statement.

'DISHONEST ATTACKS'

Saul defended the Republican presidential challenger, saying, "Mitt Romney had a successful career in the private sector, pays every dime of taxes he owes, has given generously to charitable organizations, and served numerous causes greater than himself."

"Barack Obama has become what he once ran against - a typical politician willing to use false and dishonest attacks to save his job after failing to do his job," Saul said.

Romney, a multi-millionaire former private equity executive, is one of the richest men ever to run for U.S. president. He has an estimated net worth of up to $250 million.

Romney has released his 2010 returns and estimates for 2011 but has been reluctant to release more. In April, he requested an extension to file his 2011 tax forms while estimating his tax liability at $3.2 million for last year.

Four months before the presidential election, Democrats are seeking to portray Romney as out of touch with the plight of Americans in a struggling economy, while Republicans point to Obama's policies as inadequate for strong economic growth.

The latest data point in the political battle over which candidate is better for the U.S. economy was the June U.S. employment report on Friday that showed non-farm payrolls grew by 80,000 jobs and the unemployment rate stayed at 8.2 percent.

Republicans said it showed Obama's policies were not invigorating the economy, while Democrats said it pointed to movement in the right direction.

"Clearly what they're doing is not working," Senate Republican Leader Mitch McConnell told CNN's "State of the Union" program. He called Obama's job creation record "terrible."

"People are unhappy with the economy. They know that Mitt Romney is a job creator," McConnell said.

Gibbs said the employment report showed that the economy was growing. "We've made progress, but we've got a long way to go."

Asked about the Obama campaign trying to define Romney as an outsourcer of jobs in a new ad, Republican National Committee Chairman Reince Priebus responded: "The only job that we need to make sure we outsource in this country is Barack Obama's job."

He said on "Fox News Sunday" that "Barack Obama hasn't done anything in regard to what he promised he would do and making sure that we have a level playing field with China. He's in the sand box with China every day. He hasn't stood up to China."

From reuters