Month: July 2016

Back in May 2013, we wrote an article titled “Europe’s EUR 500 Billion Ticking NPL Time Bomb” in which we laid out very simply what the biggest danger facing European banks was: non-performing, or bad, loans.

We further said, that “Europe’s non-performing loan problem is such an issue that there is increasing bluster that the ECB may take this garbage on to its balance sheet since policymakers realize that bad debts and non-performing loans (NPLs) reduce the capacity of banks to lend, hindering the monetary policy transmission mechanism. Bad debts consume capital and make banks more risk averse, especially with respect to lending to higher risk borrowers such as SMEs. With Italy (NPLs 13.4%) now following the same dismal trajectory of Spain’s bad debts, the situation is rapidly escalating (at an average of around 2.5% increase per year).

The conclusion was likewise simple:

“The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. As we answered at the time – the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? With Periphery non-performing loans totaling EUR 720bn across the whole of the Euro area in 2012 and EUR 500bn of which were with Peripheral banks.”

Now, three years later, the bomb appears to be on the verge of going off (or may have already quietly exploded), and nowhere is it more clear than in an exhaustive article written by the WSJ in which it focuses on Italy’s insolvent banking system, and blames – what else – the hundreds of billions in NPLs on bank books as the culprit behind Europe’s latest upcoming crisis. 

To be sure, nothing new here, although it is a good recap of the Catch 22 Italy finds itself in: from the WSJ’s “Bad Debt Piled in Italian Banks Looms as Next Crisis“

Britain’s vote to leave the EU has produced dire predictions for the U.K. economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans.

 

Years of lax lending standards left Italian banks ill-prepared when an economic slump sent bankruptcies soaring a few years ago. At one major bank, Banca Monte dei Paschi di Siena SpA, bad loans were so thick it assigned a team of 700 to deal with them and created a new unit to house them. Several weeks ago, the bank put the bad-credit unit up for sale, hoping a foreign partner would speed the liquidation process.

The headquarters of Banca Monte dei Paschi di Siena

 

The U.K. vote to exit the European Union has compounded the strains on Europe’s banks in general and Italy’s in particular. It imperils the Monte dei Paschi sale, some bankers say, and creates fresh uncertainty at a time when lenders are struggling with ultralow and even negative interest rates and sluggish economic growth.

 

Brexit has many executives concerned that central banks will keep interest rates lower for longer than they might otherwise, in an attempt to counteract the slower growth—in the eurozone as well as Britain. European banks’ stocks slid after the vote, with those in Italy especially hurt. Shares in Monte dei Paschi are down roughly a third since the June 23 referendum. All this threatens to spark a crisis of confidence in Italian banks, analysts say. Although Italy has only one bank classified as globally significant under international banking regulations—UniCredit—some analysts say bank stresses worsened by Brexit could threaten Italy’s stability and, potentially, even that of the EU.

 

“Brexit could lead to a full-blown banking crisis in Italy,” said  Lorenzo Codogno, former director general at the Italian Treasury. “The risk of a eurozone meltdown is clearly there if Brexit concerns are not immediately addressed.”

A quick tangent on why in the aftermath of Brexit, Italian banks have been scrambling to get a special permission from Europe to bail-out (instead of ‘In’) local banks, as the alternative would likely spark a chaotic bank run.

When the financial crisis of late 2008 hit, Italian banks tended to roll over loans whose borrowers weren’t repaying on time, hoping an economic upswing would take care of the problem, say Italian bank executives.Italian banks’ struggles have led to the first serious test of a model the EU adopted two years ago for handling banking woes. The Italian government has sought EU permission to inject €40 billion into its banks to stabilize the system.

 

To do so would require bending an anti-bailout rule the bloc adopted in 2014 to force troubled banks’ stakeholders—shareholders, bondholders and some of their depositors as well—to pay a financial price before the country’s taxpayers must.

 

Rome argues that bending this rule would be a small price to pay for erecting a firewall against possible bank contagion stemming from Brexit. Italy’s EU partners, led by Germany, reject the idea, leaving Rome exposed to the potential for a banking crisis.

… Especially if the man who was in charge of Italy’s banks in 2008, Mario Draghi, were to be somehow identified as the key man responsible for Italy’s insolvent financial system. However, so far Merkel has been again a full-blown bailout, knowing the further “bending of Europe’s rules” would simply mean more German taxpayer money being flushed down the drain.

And while we wait for the outcome of this soap opera which as of last night has seen harsh words of frustration expressed by Italy’s PM Renzi and directed at Draghi, here are some numbers:

When the European Central Bank began supervising the eurozone’s largest banks in 2014, things got harder. The new supervisor applied tougher criteria than the Bank of Italy did for declaring loans impaired, say bankers. In April, it forced one bank to take bigger write-downs to bad loans before receiving its blessing to merge with another bank. The result is that impaired loans at Italian banks now exceed €360 billion—quadruple the 2008 level—and they continue to rise.

 

Banks’ attempts to unload some of the bad loans have largely flopped, with the banks and potential investors far apart on valuations. Banks have written down nonperforming loans to about 44% of their face value, but investors believe the true value is closer to 20% or 25%—implying an additional €40 billion in write-downs.

 

One reason for the low valuations is the enormous difficulty in unwinding a bad loan in Italy. Italy’s sclerotic courts take eight years, on average, to clear insolvency procedures. A quarter of cases take 12 years. Moreover, in many cases, the loan collateral is the family home of the owner of the business, or it is tied up in the business itself.

 

“There is a desperate need to make collateral liquid,” said Andrea Mignanelli, chief executive of Cerved Credit Management Group. “Right now, it gets stuck in auctions and judicial procedures that make cashing the loan very hard.”

The problem is that as of this moment, Rome finds itself in a lose-lose situation:

With investors pummeling its shares this year, UniCredit ousted its chief executive, Federico Ghizzoni. Last week, with its stock falling, it rushed to appoint a new CEO, Jean-Pierre Mustier, its former head of corporate and investment banking. In short order, Mr. Mustier must now present a convincing restructuring plan and raise as much as €9 billion to shore up investor confidence. UniCredit declined to comment. The Italian government pushed for a broad solution that would recapitalize banks and draw a line under the bad-loans crisis, when it appealed to the EU for permission to inject €40 billion into the lenders. The Italian government argues that without such a recapitalization move, Italy’s banking problems could mushroom into a broader crisis.

 

“There is an epidemic, and Italy is the patient that is sickest,” said Pierpaolo Baretta, an undersecretary at the Italian Economy Ministry. If “we don’t stop the epidemic, it will become everybody’s problem…The shock of Brexit has created a sense of urgency.”Italian Prime Minister Matteo Renzi pressed the issue in his meeting last week with German Chancellor Angela Merkel.

 

The European Commission, with strong backing from Berlin, has dismissed the push from the Italians. Some European officials privately expressed annoyance that Rome has been slow to deal with its banking problem and is paying the price in such volatile markets. Now, they say, the Italians are using Brexit to press for permission to bend the rules of a hard-fought banking regime.

 

* * *

 

Rome has criticized the EU’s new banking regime and doesn’t want to use “bail-in” rules that prescribe the order in which stakeholders must bear losses for winding down an ailing bank, in part because of the peculiarities of the Italian banking system. About €187 billion of bank bonds are in the hands of retail investors, whose holdings would be wiped out by a bank resolution under the new rules.

 

Last year, more than 100,000 investors in four small Italian banks that were wound up saw their investments wiped out. Some lost their life savings. The controversy exploded in December after Italian news media reported that a retiree committed suicide after losing €110,000 in savings invested in one of the banks.

 

Such problems carry little truck in Brussels. “Every grandmother has bought bank shares,” said one EU official. “That’s how it’s presented to us…. This work has to be done within the rules, using all the flexibility there is.”

In that case, “every grandmother” in Italy has a big problem then, but not nearly as big as Renzi, because if the bank run (ahead of bail-ins) begins, it will all be over for Europe’s most insolvent banking system.

Finally, while none of the above is actually new – we have been covering it for over 5 years – so far Europe, and Wall Street, had been successful in ignoring it. As the latest JPM “Early Look at the Market” shows, everyone’s attention is finally, and fully, on Italy.

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• Pound Tumbles to 31-Year Low as Its Post-Brexit Selloff Resumes (BBG)
• Bad Debt Piled in Italian Banks Looms as Next Crisis (WSJ)
• Stock Market to Bond Market: ‘La-La-La I Can’t Hear You’ (WSJ)
• A Prime Minister, a Referendum and Italy’s Turn to Get Worried (BBG)
• Brexit Vote Paralyzes Companies Across Europe  (WSJ)
• Brexit-Like Populist Pressure May Spawn ’70s-Style Stagflation (BBG)
• Boris Johnson backs Andrea Leadsom for Prime Minister as Tory MPs vote (Telegraph)
• Brexit: Theresa May demands early talks on Britain leaving the EU (Evening Standard)
• Saudi crown prince seeks to assure Saudis after triple bombings (Reuters)
• Russia to exhaust Reserve Fund in 2017 – Finance Ministry proposal (Reuters)
• Slowdown in Shadow Lending Tightens Credit on Main Street (WSJ)
• Islamic State Extends Reach as It Suffers Defeats (WSJ)
• Volkswagen’s finance arm sells Russia bond to fund local operations (Reuters)
• New York Police Investigate Mysterious Central Park Blast  (WSJ)
• China says wants peace after newspaper warns on South China Sea clash (Reuters)
• July 4 Opening Is No Guarantee for Success at Box Office (WSJ)
• Realtors Pitch Vancouver to Soak Up Capital Flight From Brexit (BBG)
• Turkey’s Erdogan moots plan to grant citizenship to Syrians (Reuters)
• London Banker Bonuses Set to Shrivel as Brexit Hits Dealmaking (BBG)

 

Overnight Media Digest

WSJ

– Britain’s vote to leave the EU has produced dire predictions for the UK economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. on.wsj.com/29cz6xi

– During a rare spate of attacks in Jordan recently, Western officials in the capital Amman intercepted messages from Islamic State leaders urging supporters to spread terror at home rather than join militants across the border in Syria. on.wsj.com/29kQdzC

– The Fourth of July weekend has often been the time for Hollywood to launch some of its biggest hits. But new releases “The Legend of Tarzan” and “The BFG” are the latest examples of big-budget disappointments this summer. on.wsj.com/29saTsS

– Beepi, a Silicon Valley company selling used vehicles on a mobile app or website, will launch a new service this week that delivers cars to buyers nearly anywhere in the U.S. regardless of where the vehicle currently resides. on.wsj.com/29cF0yF

– Snapchat has become a digital mecca for high-school and college-age students, allowing them to send disappearing photos and videos. Now, the “older folks” are arriving in force, whether they are parents spying on their kids, or professionals trying out another social-media platform. on.wsj.com/29k4jRF

 

FT

– Simon Stevens, head of the National Health Service, said the UK government should honour existing NHS funding pledges after Brexit.

– Royal Dutch Shell wants to leave behind extremely large steel and concrete structures when it abandons Brent field and Shell has concluded that safety and environmental risks involved in removing much of the infrastructure would far outweigh the benefits.

– Nigerian President Muhammadu Buhari removed deputy oil minister Emmanuel Kachikwu from his joint role as the national oil company’s managing director and has also appointed a new board.

– Boris Johnson has backed UK’s energy minister Andrea Leadsom as the next prime minister. His endorsement establishes her as a serious rival to frontrunner Theresa May.

 

NYT

– YouNow, a live-streaming app that allows users to perform and interact with fans, has helped singers like Hailey Knox break into the industry. http://nyti.ms/29mwAsn

– As officials struggle to balance the city budget of San Francisco, activists and some lawmakers want the sector to help pay for programs for the homeless and for affordable housing. http://nyti.ms/29md5A4

– A California initiative meant to lower skyrocketing prescription drug prices faces opposition from not only drug makers but also some patient advocacy groups. (http://nyti.ms/29eMs0W)

– A British mutual fund with large investments in London commercial real estate said on Monday that it had suspended requests from investors wanting to exit the $3 billion fund. The decree from Standard Life Investments, the asset management unit of the large British insurance company, was a response to panicked investors looking to pull their assets following the vote by Britons last month to sever ties with the European Union. (http://nyti.ms/29i8vW3)

 

Britain

The Times

Boris Johnson has endorsed Andrea Leadsom to be Britain’s next prime minister, days after he ruled out making his own bid for the post. (http://bit.ly/29fem9t)

Top Gear host Chris Evans said he was quitting the BBC show and the corporation said it had no plans to replace him. (http://bit.ly/29fehCZ)

The Guardian

Investors in Standard Life Plc’s property funds have been told that they cannot withdraw their money, after the firm acted to stop a rush of withdrawals following the UK’s decision to leave the EU. (http://bit.ly/29fgjTl)

Sainsbury Plc has ditched its joint venture with the low-cost retailer Netto, putting up to 400 jobs at risk and marking the Danish chain’s second exit from the UK in six years. (http://bit.ly/29fgle8)

The Telegraph

Three former Barclays Plc traders have been found guilty of conspiracy to defraud after a three-month trial at Southwark Crown Court. (http://bit.ly/29fgFtl)

Britain will scrape by without a full-blown recession over the next two years as a weaker pound cushions the Brexit shock and panic subsides, Standard & Poor’s has predicted. (http://bit.ly/29fhxhv)

Sky News

Nigel Farage has announced he will step down as leader of UKIP in the wake of the UK’s vote to leave the EU. (http://bit.ly/29fhhPu)

A suicide bomber detonated a device near the security headquarters of the Prophet’s Mosque in Medina, according to Saudi television. (http://bit.ly/29fgXk1)

The Independent

Tom Watson will hold emergency talks with trade union leaders after a fresh attempt to persuade Jeremy Corbyn to step down failed. (http://ind.pn/29fhnXu)

London Stock Exchange shareholders have approved the company’s merger with Deutsche Boerse AG.

 

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The Bank of England lowered capital requirements for UK banks Tuesday in an effort to shore up the UK economy, saying that it “strongly expects” banks to support the economy with fresh loans in the wake of Brexit.

In its first official easing act, the Financial Policy Committee lowered the countercyclical-capital buffer rate for UK exposures to zero from .5% of risk-weighted assets in a move that it said would raise the capacity for bank lending to households and businesses by as much as £150 billion. “This action reinforces the FPC’s view that all elements of the substantial capital and liquidity buffers that have been built up by banks are to be drawn on, as necessary” the committee said in a statement.

More from the WSJ

The BOE’s decision marks one of the first instances of a major central bank deliberately lowering bank capital requirements to maintain growth in credit to offset an economic shock. Lower capital requirements allow banks to finance loans and other assets with more borrowing and less equity.

 

The bank’s move will be closely watched as a test case of the new “macroprudential” regulatory regime adopted in the U.K. and other advanced economies after the financial crisis. The BOE gained broad new powers over the financial system and an explicit goal of safeguarding financial stability. It has spent the past few years bolstering lenders’ financial strength.

 

Officials warned Tuesday that the stability of the U.K. financial system faces multiple threats in the wake of the Brexit vote. The BOE said it has already detected signs in stock markets and commercial real-estate markets that foreign investors are pulling money out of the U.K. A real-estate fund managed by Standard Life Investments on Monday suspended withdrawals following a spate of redemption requests.

 

The BOE said some overstretched households might struggle to service their debts if the economy lurches downward. And officials warned that the outlook for the global economy has darkened.

 

Still, officials stressed the financial system is stronger now than it was in 2008 and 2009, when British taxpayers had to bail out stricken lenders and credit dried up. They also flagged that banks have parked collateral with the BOE sufficient to access more than £250 billion of funding if they need it.

“The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging” the report said, identifying five channels through which the referendum could increase risks to financial stability.

From the report:

The Committee had identified the following channels through which the referendum could increase risks to financial stability:

 

• the financing of the United Kingdom’s large current account deficit, which relied on continuing material inflows of portfolio and foreign direct investment;

• the UK commercial real estate (CRE) market, which had experienced particularly strong inflows of capital from overseas and where valuations in some segments of the market had become stretched;

• the high level of UK household indebtedness, the vulnerability to higher unemployment and borrowing costs of the capacity of some households to service debts, and the potential for buy-to-let investors to behave procyclically, amplifying movements in the housing market;

• subdued growth in the global economy, including the euro area, which could be exacerbated by a prolonged period of heightened uncertainty;

• fragilities in financial market functioning, which could be tested during a period of elevated market activity and volatility.

“The FPC stands ready to take any further actions deemed appropriate to support financial stability,” the panel said, which of course precisely what the market is ultimately looking – the assurance that if ever anything does happen central banks will jump in at a moments notice.

And since this was the Mark Carney’s first official easing act, UK stocks took it in stride and have not only pared all overnight losses but were up 0.6%, trading at session highs, while U.K. bank shares cut losses after Bank of England Governor Mark Carney cut their capital requirement to zero to raise capacity for lending. The FTSE 350 Banks index had lost as much as 1.2 percent before and was trading fractionally in the green as a result of this latest central bank intervention.

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The festering wound involving Italian banks in general and Italy’s third largest bank Monte Paschi, just got worse yet again, as the bank which suddenly everyone is focused on extends yesterday’s 14% drop, and is halted in Milan trading after falling 7%, once again dragging down European bank stocks with it, and this time US equity futures are starting to notice. 

As a reminder, Matteo Renzi’s helplessness at Italy’s financial situation, appears to have started to boil over, when as we reported overnight, some testy words were exchanged, in which the Italian PM accused the ECB’s head and former Bank of Italy governor, Mario Draghi, of not doing everything in his power to “help Italian banks.” Instead it was up to the Italian government to flaunt bail-in rules once again, after La Stampa reported that the government is once again studying a capital plan for Monte Paschi that includes new convertible bonds and support from Atlante fund, the latter worth at least €3 billion even as Brussels says intervention would need to respect principle of “burden sharing” by shareholders and bondholders. As La Stampa also adds, the results of 2016 stress test, due to be published on July 29, could trigger the start of the process to inject new capital in the bank

In short, Italy is desperate to bail out a bank whose failure (or even bail in) may spark a bank run, yet neither the ECB is rushing to help it, nor Europe has given any indication it will budge.

It wasn’t just Italian banks, which have become a near-daily fixture of Europe’s failing system, that dragged risk lower, but also the latest surge in the Yen and another fresh all time low in DM bond yields. Indeed, the Yen headed for biggest advance in more than a week, with the USDJPY tumbling overnight, down -0.8% to 101.65, a move which started earlier in Asian session amid thin liquidity, around the time Japan’s 10-year bond auction draws record-low average yield.

And then there was sterling, which after flirting with a rebound over the past week following the Brexit vote, fell to its weakest level in 31 years against the dollar, exceeding lows reached in the aftermath of Britain’s vote to leave the European Union. Sterling sank before Bank of England Governor Mark Carney gives a press conference in London, in which he outlined more tools to contain the fallout from the U.K.’s decision to quit the bloc, among which the first indications of how he would ease stress on UK banks:

• Bank of England’s Financial Policy Committee cuts countercyclical capital buffer for U.K. banks to zero from 0.5%, according to Financial Stability Report published Tuesday.
• Expects buffer to stay at zero until at least June 2017
• Says there is evidence that risks surrounding Brexit have begun to materialize
• Says current financial stability outlook is challenging; sees period of uncertainty, adjustment

That said, Carney’s “easing” remarks have pushed UK stocks to session highs and helped cut the S&P drop to only 9 points, while pushing the pound off its multi-decade lows. Yes, we have reached a singularity in which central bank easing is currency positive.

So why the latest intervention by the BOE? As Bloomberg adds, there are increasing signs that the U.K. vote is weighing on investor confidence. As reported last night, Scotland-based Standard Life Investments suspended trading in its 2.9 billion-pound ($3.8 billion) fund this week, after seeing an increase in redemption requests “as a result of uncertainty for the U.K. commercial real estate market.” Data published by YouGov Plc and the Centre for Economics and Business Research on Tuesday indicated that pessimism about the economic outlook almost doubled following the June 23 referendum. “There’s a lot of nervousness in the sterling market,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt.

A measure of U.K. business confidence dropped sharply following the referendum, a report showed on Tuesday. Across Europe, Purchasing Managers Indexes for manufacturing and service showed lackluster growth. “We have an amalgamation of small reasons to fall piling up,” said Takuya Takahashi, a Tokyo-based senior strategist at Daiwa Securities Group Inc.

Putting this all together, and we get a major drop across European markets in which all industry groups on the Stoxx Europe 600 Index declined, with insurers and banks among the biggest losers, as the market takes a second look at the Brexit aftermath and suddenly is not so sure that everything is “contained.”

Brent crude dropped below $50 a barrel as nickel slid from an eight-week high, while gold and silver retreated for the first time in at least a week. The pound fell to its weakest level since 2013 against the euro and South Africa’s rand led losses among the currencies of commodity-exporting nations. Bond yields plumbed new lows from Australia to the U.S. The MSCI All-Country World Index dropped 0.4% in early trading, its first slide in more than a week. The Stoxx 600 lost 1.3%, extending its decline into a second day, while S&P 500 Index futures slid 0.6%, The U.S. market is reopening after being closed for the Independence Day holiday.

The MSCI All-Country World Index dropped 0.4 percent at 10:58 a.m. in London, its first slide in more than a week. The Stoxx 600 lost 1.3 percent, extending its decline into a second day, while S&P 500 Index futures slid 0.6 percent. The U.S. market is reopening after being closed for the Independence Day holiday. In Europe, all industry groups fell, and more than 550 companies in the Stoxx 600 declined, with commodity producers among the biggest losers. Anglo American Plc and BHP Billiton Ltd. dropped more than 2.5 percent, while precious metals miner Fresnillo Plc dropped 2.9 percent after reaching its highest price since 2013. Standard Life Plc lost 4.2 percent after its money manager unit suspended trading in its 2.9 billion-pound ($3.9 billion) U.K. Real Estate fund. Legal & General Group Plc fell 6.4 percent after Jefferies Group lowered its rating on the insurer on concern over its dividend. The MSCI Emerging Markets Index fell 1.1 percent, after climbing 6.2 percent in the past five days in the biggest rally since the period ended March 7.

Meanwhile, global bond yields continued setting new record lows: the yield on Treasury 10-year notes slid seven basis points to an unprecedented 1.3750 percent. The securities are rallying as futures indicate that the chance of the Federal Reserve raising interest rates this year has dwindled to 12 percent, down from 50 percent prior to the U.K.’s vote on EU membership. Thirty-year bond yields dropped to as low as 2.1395 percent, also a record. “This is the most obvious manifestation of the global search for yield forcing investors further out the curve,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “The size of the drop in the 30-year yield reflects a bit of a capitulation trade, but I am not particularly surprised.”

Germany’s 10-year bond yield was at minus 0.16 percent, approaching the minus 0.17 percent all-time low reached on June 24. The yield on the U.K.’s 10-year gilt yield slid four basis points to 0.79 percent. Australia’s 10-year yield dropped as much as nine basis points to a record 1.92 percent following the RBA meeting. Taiwan’s declined four basis points to an unprecedented 0.70 percent after the island’s central bank was said to have reduced an overnight interest rate. Japan sold 10-year debt at a yield of minus 0.24 percent, the lowest-ever rate, and the yield on its 20-year notes touched a record low of 0.03 percent.

Market Snapshot

• S&P 500 futures down 0.5% to 2086
• Stoxx 600 down 1.31% to 325
• FTSE 100 up 0.3% to 6544
• DAX down 1.4% to 9569
• Nikkei 225 down 0.7% to 15,669
• Hang Seng down 1.5% to 20,750
• Shanghai Composite up 0.6% to 3006
• US 10-yr yield down 6bp to 1.39%
• WTI Crude futures down 2% to $47.22
• Brent Futures down 2.3% to $47.82
• Gold spot down 0.3% to $1,254

Top Global Headlines

• Italy Said to Consider Capital Injection in Banca Monte Paschi
• Tesla Misses Delivery Forecast Amid ‘Extreme’ Production Ramp-up
• Buffett Applies to Fed to Expand Wells Fargo Holding Beyond 10%
• Aurobindo Said to Enter Fray for $1.5 Billion Teva Portfolio
• Wall Street Takes a Hit in Draft of Democratic Party’s Platform
• ‘Dory’ Swims Past ‘Tarzan’ for Third Straight Box-Office Win
• Petrobras CEO Said to See $15b 5-Year Payment in U.S. Case: Estado
• Google, Facebook Said to Have Looked at Buying LinkedIn: Recode
• London Banker Bonuses Set to Shrivel as Brexit Hits Dealmaking
• Goldman Sachs Tells Asset-Management Staff to Curb Spending: FT
• U.K. Business Expectations Fall ‘Off a Cliff’ on Brexit Vote
• Staples Hires KPMG to Weigh Possible U.K. Unit Sale: Telegraph

Looking at regional markets, dampened demand was observed for riskier assets in Asia following the US holiday and losses seen in European stock markets. Nikkei 225 (-0.7 %) was pressured from the open by a firmer JPY, while ASX 200 (-1.0%) was dragged lower amid a decline across the commodities complex, with participants initially tentative ahead of the RBA rate decision. Chinese markets were mixed with the Hang Seng (-1.5%) conforming to the mostly downbeat tone, while Shanghai Comp (+0.6%) was resilient amid somewhat encouraging data in which Caixin Services PMI printed an 11-month high and although the Composite figure printed slightly lower than prior, it remained above the 50 benchmark level. 10yr JGBs traded lower but are off their worst levels following a 10yr auction which showed the lowest accepted price, beat estimates and better than prior.

In Europe, equities have been equally volatile today, with all major European indices trading in negative territory (Euro Stoxx: -1.5%), and attention given to the yoyo-ing Italian financial sector as well as yet another German automaker scandal. Italian financials saw downside initially, before moving higher shortly after the open, however with Banca Monte dei Paschi (-9%) still one of the worst performers despite source reports suggesting that Italy could be considering capital injections in the Co. German Automakers also unperformed today after the likes of Daimler, Volkswagen and BMW have all been implicated in alleged collusion with regards to steel prices. Given the price action across other asset classes, fixed income has been comparatively quiet, with Bunds higher by around 30 ticks by mid¬morning, however failing to break 167.50, while the US 10-year reached fresh record lows.

In FX, the pound fell to its lowest in more than three decades against the dollar, surpassing levels immediately after the referendum. An index published by YouGov Plc and the Centre for Economics and Business Research indicated pessimism about the economic outlook almost doubled in the week following the June 23 vote. Sterling slid 1.1 percent to $1.3148 and was 1 percent weaker at 84.73 pence per euro. The yen climbed 0.9 percent to 101.66 per dollar. The currency has gained more than 4 percent since the U.K. referendum amid persistent demand for haven assets. The Bloomberg Dollar Spot Index rose 0.2 percent. Australia’s dollar fell 0.5 percent, after climbing 1.2 percent over the last two sessions. A national election over the weekend failed to produce a clear winner with officials continuing to tally votes on Tuesday. The MSCI Emerging Markets Currency Index retreated 0.5 percent. It was little changed on Monday after jumping 2 percent in the four days through Friday.

“Markets are concerned about what’s going on in the U.K. and there’s more uncertainty about Italian banks,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd.

In commodities, precious metals declined as the dollar snapped five days of losses. Silver tumbled 2.9 percent to $19.73 an ounce, ending its biggest two-day advance since 2011. Gold fell 0.4 percent to $1,345.63 an ounce. Industrial metals also declined, led by a 1.2 percent loss in Copper to $4,836 a metric ton. Oil extended losses, with West Texas Intermediate crude dropping to $47.71 a barrel, a decline of 2.6 percent relative to Friday’s close following the July 4 public holiday. Brent fell 2.1 percent to $49.03.

On today’s calendar, in the US we get factory orders data for May (expected to print at -0.8% mom reflecting the weak durable goods data) and the IBD/TIPP economic optimism reading for July due. Final revisions to May durable and capital goods orders data will also be released. Away from the data, this morning BoE Governor Mark Carney will publish the BoE financial stability report and this will be closely followed up by a press conference at 11am BST which will be worth watching closely

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• European equities trade lower across the board as risk aversion persists with Italian banking names and German auto names further souring sentiment
• GBP/USD hit a fresh 31-year low as the post-Brexit fallout continues to grip FX markets and UK Services PMI falls short of expectations (albeit from a partly out-of-date report)
• Looking ahead, highlights include US IBD/TIPP Economic Optimism, Factory Orders & Durable Goods, GDT Auction and a host of central bank speakers
• Treasuries rally with 10Y and 30Y hitting record lows as risk-off sentiment sends global equities and commodities lower; this week will feature nonfarm payrolls on Friday and FOMC minutes Wednesday.
• Italy is considering injecting fresh capital into Banca Monte dei Paschi di Siena SpA to boost the finances of Italy’s third-biggest bank ahead of stress test results
• It’s now a familiar refrain: A European prime minister calls a referendum, his job could be on the line and markets are getting worried. This time it’s not Britain’s David Cameron but Italy’s Matteo Renzi has called a vote, expected in October
• The Bank of England cut its capital requirements for U.K. banks and pledged to implement any other measures needed to shore up financial stability after Britain’s shock decision to leave the European Union
• BOE’s Carney said bank will take whatever action is necessary to support U.K. but its actions cannot fully offset Brexit volatility
• Confidence of British executives plunged and pessimism doubled as the Brexit turmoil stoked concerns that business investment and the property market are poised to slump
• Commercial-property companies slumped after Standard Life Investments suspended trading in its 2.9 billion-pound ($3.9 billion) U.K. Real Estate fund on Monday as redemptions surged in the wake of Britain’s vote to leave the European Union
• The pound fell to its weakest level in three decades against the dollar, exceeding lows reached in the aftermath of Britain’s vote to leave the European Union
• The euro-area economy continued growing at a lackluster pace in June, ahead of the U.K.’s referendum on its European Union membership. Purchasing Managers Index for manufacturing and service activity was unchanged at 53.1
• The Australian dollar erased losses after the central bank left its benchmark cash rate unchanged at a policy meeting on Tuesday. The Aussie rose by as much as 0.1% after the decision
• Four banks including ING Groep NV and ABN Amro Group NV agreed to pay hundreds of millions of euros to settle a long-running dispute with Dutch businesses over interest- rate swaps that backfired after the 2008 financial crisis
• Oil prices won’t rise much further over the next year and a half as demand growth slows and refiners comfortably meet gasoline consumption, according to the world’s largest independent oil-trading house

* * *

US Event Calendar

• 9:45am: ISM New York, June (prior 37.2)
• 10am: IBD/TIPP Economic Optimism, July, est. 48.3 (prior 48.2)
• 10am: Factory Orders, May, est. -0.8% (prior 1.9%)
  • Factory Orders Ex Trans, May (prior 0.5%)
  • Durable Goods Orders, May F, est,. -2.2% (prior -2.2%)
  • Durables Ex Trans, May F, est. 0.3% (prior -0.3%)
  • Cap Goods Orders Non-defense Ex Air, May F (prior -0.7%)
  • Cap Goods Ship Non-defense Ex Air, May F (prior -0.5%)
• 2:30pm: Fed’s Dudley speaks in Binghamton, N.Y.

* * *

DB’s Jim Reid concludes the overnight wrap

One theme which could instead dictate near term direction for markets however and which arguably Brexit has reignited and brought back to the forefront is the ailing and fragile state of the Italian banking sector. Indeed following on from the weekend headlines concerning Italy PM Renzi and the suggestion that he is prepared to go against EU bail-in principles by using public funds to bail out domestic banks, yesterday the sector was put under further stress after Banca Monte dei Paschi revealed that it had received a notice from the ECB requiring it to meet certain non-performing loan requirements. Indeed the draft statement laid out NPL targets for the next three years which would require Monte to shed bad loans by just over €14bn by 2018.

That sent Monte shares down 14% yesterday with the rest of the Italian bank complex also sent tumbling (Banco Popolare SC -4.50%, Mediobanca -4.21%, Unicredit -3.63%, UBI -3.05%). Monte shares – which are at an all time low – are now down over 70% year-to-date already while yesterday’s move took the bank’s market cap below €1bn. With the sector sitting on a €360bn behemoth of bad loans the results of the EU bank stress tests on the 29th July loom large and it’s hard not to picture this Italian job as an important event for markets. Don’t forget that we’ve also got the not-so-small matter of the senate reform referendum in October. On a similar topic, interestingly a poll run by Ipsos for Corriere della Sera yesterday showed 46% of Italian voters are in favour of remaining in the EU versus 28% in favour of leaving. That leaves a relatively sizeable 26% undecided or unwilling to vote.

Meanwhile the daily soap opera that is UK politics rolls on with the news yesterday that UKIP leader Nigel Farage has become the latest political leader to stand down after arguing that he had achieved his political ambition following the referendum result. Today the first rounds of voting for the Conservative leadership position commence with MP’s voting to take the five candidate race down to four. Further voting is set to come on Thursday and then again on Tuesday when we will be down to the final two candidates. However we’ll still have to wait until September until we know the result of the final vote and therefore the subsequent position on renegotiation and Article 50.

In terms of markets yesterday, with the US on holiday and so volumes much lower than usual that weakness for Italian banks was enough to see risk assets finally succumb to losses in Europe following the strong run since last Monday. The Stoxx 600 ended -0.74% by the closing bell and the FTSE 100 was -0.84%. Sterling was up a fairly modest +0.15% to $1.329. Unsurprisingly the FTSE MIB (-1.74%) and Euro Stoxx Banks (-1.52%) indices underperformed. BTP’s were also underperformers in sovereign bond markets with yields a couple of basis points higher. Moves for credit markets were highlighted by weakness in financials. The iTraxx Main and Crossover indices were little changed however senior and sub financials materially underperformed after closing 6bps and 16bps wider respectively.

Some of the more notable price action yesterday came in the commodity complex and specifically precious metals. Silver in particular extended its post Brexit rally after rising another +2.86% yesterday and at one stage rising above $21/oz for the first time since July 2014. Gold closed up +0.70% meaning it is now up nearly 8% since pre-Brexit. Silver is up a fairly remarkable +19% in the same time frame.
Refreshing our screens now, with the exception of China most major bourses are lower in early trading in Asia this morning. The Nikkei (-0.78%), Hang Seng (-0.81%), Kospi (-0.35%) and ASX (-0.89%) are all in the red as we type, however the Shanghai Comp is +0.40%. That perhaps reflects the latest Caixin services reading for June in China which rose 1.5pts to 52.7 and to the highest level since July last year. Combined with the soft manufacturing reading from last week however the composite reading nudged down 0.2pts to 50.3. Meanwhile the Aussie Dollar (-0.27%) is a touch weaker this morning following the latest trade data which revealed a widening in the deficit. The RBA cash target rate decision is due shortly after we go to print (no change expected). US equity index futures are modestly in the red.

In terms of the rest of the newsflow, yesterday saw the ECB release their latest CSPP holdings data which showed the Bank as continuing its strong run rate of purchases and so far surprising on the upside. Total purchases settled by July 1st were €6.798bn. This implies that the latest weekly purchases amount to €1.9bn and an average daily run rate in that week of €380m. The average daily run rate since the program started is €425m. Interestingly we also got a breakdown of purchases by primary and secondary markets and it showed that 96% of purchases were made in the secondary and only 4% in the former, so perhaps making the quantum of buying even more impressive given the low amount of new issue buying.

There wasn’t much in the way of economic data for us to highlight yesterday. Of the data that was released, Euro area PPI printed at +0.6% mom for May which was higher than expected (+0.3% mom) and has had the effect of slowing the rate of deflation to -3.9% yoy from -4.4%. The other release was the July Sentix investor confidence reading which printed at a below market +1.7 for the headline (vs. +5.0 expected) and down 8.2pts from June. That was the lowest print since January last year and a first bit of evidence of the impact of the Brexit vote. The expectations component reading actually tumbled to -2.0 from +10.0.

Looking at the day ahead, this morning in Europe we’ve got a much busier calendar to get through with the final June services and composite PMI’s due out for the Euro area, Germany and France. We’ll also get the readings for the UK and the periphery. Euro area retail sales data for May follows this shortly after. Over in the US this afternoon we’ve got factory orders data for May (expected to print at -0.8% mom reflecting the weak durable goods data) and the IBD/TIPP economic optimism reading for July due. Final revisions to May durable and capital goods orders data will also be released. Away from the data, this morning BoE Governor Mark Carney will publish the BoE financial stability report and this will be closely followed up by a press conference at 11am BST which will be worth watching closely. Prior to this the EU’s Juncker is due to address EU Parliament (at 8am BST) on the conclusions of the Heads of State and Government meeting last month. Over at the Fed the NY Fed President Dudley is due participate in a panel discussion at 7.30pm BST. Finally the aforementioned first round Conservative Party leadership election in the UK kicks off today.

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Authored by Michael Goodwin, originaly posted at The New York Post,

She can’t help herself. Even yesterday, with the political world fixated on her meeting with FBI agents, Hillary Clinton had her flack mislead the public.

A spokesman said she gave a “voluntary” interview, which is true only because she agreed to talk instead of waiting to be subpoenaed. The flack also said she was “pleased” to assist the gumshoes.

Who believes she was “pleased” to be interviewed by the FBI in a criminal investigation that could upend her life?

But that’s the way the Clintons roll.

Wherever they go, whatever they do, ethics are trashed and suspicions of criminal conduct follow them like night follows day.

It’s who they are and it’s self-delusional to believe another stint in the White House would make the Clintons better people. Power exacerbates rather than cures an absence of integrity.

Yet there’s another dimension to their chronic crookedness, and it gets insufficient attention even though it might be more important to the nation’s well-being.

It is that, in addition to being personally corrupt, the Clintons are corrupters. They are piggish users, with the people and institutions around them inevitably tarnished and sometimes destroyed even as the Clintons escape to their next scam.

Monica Lewinsky is a prime example, and Loretta Lynch is the latest. The attorney general’s dumbfounding decision to meet privately with Bill Clinton while the FBI investigates Hillary’s handling of national secrets stained Lynch’s reputation and added to public mistrust of the Justice Department.

Lynch didn’t create that mistrust — she was supposed to be the antidote. Her predecessor, Eric Holder, was a left-wing activist who used his role as the nation’s chief law-enforcement officer to further his and Obama’s political agenda.

That role earned Holder an undesired distinction. His refusal to cooperate with Congress on the disastrous Fast and Furious gun sting led to a bipartisan vote in the House holding him in criminal contempt, the first time in history a sitting Cabinet member ever faced such a censure.

Lynch, as his successor, was handily confirmed by the Republican-controlled Senate, with her steady, firm demeanor and solid record as a prosecutor carrying the day.

Yet her lifetime of good work and the hope for a fresh start at Justice are now overshadowed. She acknowledges the meeting with Bill Clinton was a mistake, and pledged to accept the recommendation of FBI agents and career prosecutors on whether Hillary should face charges.

That’s not enough, not nearly enough, given the circumstances and stakes.

While Lynch offers no explanation as to why in the world she agreed to the 30-minute meeting on a plane in Phoenix, perhaps she felt she owed the former president something. Remember, he first nominated her to be the US attorney in Brooklyn in 1999, a promotion that changed her life.

After his presidency, she went to a top private law firm, and became a member of the Federal Reserve Bank of New York. Bill Clinton had been very, very good to her, and without his boost, she probably wouldn’t even have been a candidate to replace Holder.

And now her patron wanted a private meeting. Both had to know it was wrong, but he had nothing to lose and didn’t care about her reputation or the Justice Department’s.

That was her responsibility. And it doesn’t really matter if they didn’t discuss the case. Just his being there was reminder enough that she owes him.

Lynch also had to know that an FBI agent who socialized with the spouse of a suspect in a criminal case probably would be investigated and fired. Yet she agreed to the meeting anyway.

Despite Lynch’s vow to let others make the call, her refusal to recuse herself means she will remain in charge. That was never ideal because Obama endorsed Hillary and all but exonerated her, but there seemed no way to argue for a special prosecutor without more evidence that the outcome was rigged. There was also FBI Director James Comey’s reputation as an independent straight shooter to provide some reassurance that the case would be handled on the merits.

Now Lynch has broken that fragile confidence, and the need for a special prosecutor is obvious.

The explosive result shows the Clintons haven’t lost their touch for leaving destruction and chaos in their wake. The remarkable events also serve as a clear reminder that while the Clintons enriched themselves over the years, they were helping to bankrupt the public trust in its government and institutions. And they won’t stop until they’re stopped.

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In the aftermath of the tragic suicide bomber attacks at Istanbul's Ataturk Airport, Turkey's biggest city now feels like a ghost town.

Restaurants sit empty in the Sultanahmet tourist district, and five-star hotel rooms can be booked for bargain prices. As AFP reports, in better times, the queues outside the Hagia Sophia (a former mosque and church that is now a museum) might have stretched an hour or longer at this time of year, today you can walk straight in and share the place with just a smattering of other visitors.

"It's disastrous. All my life I've been a tour guide, most of us have come to a turning point where we don't know if we can go on. It's tragic." said Orhan Sonmez, hopelessly offering tours of the Hagia Sophia.

Analysts say the attack on Istanbul's airport may have been a deliberate attempt to weaken the Turkish state by hitting its tourist industry, and it appears to be working. The United States, Germany and several other countries have warned their nationals against threats in Turkey, and to make matters worse, the TAK, a radical Kurdish group that has carried out several attacks in Turkey this year has also warned foreign tourists to stay away.

This development comes at a time when Turkey had just suffered its worst drop-off in visits in 22 years in the month of May, which was down 35% from a year ago. The tourism industry, which according to AFP brings in over $33 billion a year, is now in a free fall.

Part of the downturn was driven by a Russian ban on Turkish package holidays, but the ban has since been lifted, providing at least a small relief for the industry.

Those that are still visiting say they are enjoying the peace and quiet, while taking a more philosophical approach as AFP puts it. "This could happen in any city, it's an unlucky lottery. The people are really friendly, and I really think I'll come back and spend some more time here." said Nessa Feehan, a visitor for Ireland.

However, the situation is still dire for many who depend on tourism to make a living.

"If it goes on like this, many shops will close. I'm thinking of moving to America, I can't make money here." said Ismail Celebi, an owner of a jewellery shop. Even though large Chinese tour groups are still arriving, Celebi says "It's not enough, we need Americans, we need Europeans."

"Even I'm afraid to come to work here" Celebi went on to say.

* * *

These recent security concerns as well as the economic hits that Turkey has endured as a result of the attacks and overall tension in the region are key factors in President Recep Tayyip Erdogan's pivot to a softer approach in an attempt to strengthen diplomatic ties. As we reported last week, Erdogan even apologized to Vladimir Putin for the death of a Russian pilot, and even called Russia a "friend and a strategic partner."

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