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While the only topic of discussion for “sophisticated” investors everywhere is when (and if) the Fed will ever dare to reduce its monthly flow injection into US markets from $85 billion to a paltry $75 billion, everyone has forgotten that across the Pacific, for the past seven months the BOJ has been calmly injecting another $75 billion each and every month into the market, with no risk of this liquidity boost ever being tapered (since the broad 2% inflation target relies on ever broader wage increases that will never come). However, much to Japan’s chagrin, in the current insta-globally fungible capital markets, over the past five months the bulk of this liquidity has found its way to the US stock bubble, leaving the Nikkei in the dust. As a result, the local Japanese liquidity junkies have started to loudly complain once again, and now the FT reports that “as excitement over the world’s second-biggest stock market has faded, some are now crying out for another jump-start.”

In other words: the BOJ must do “moar” to push the Nikkei bubble even higher following its rangebound trade since May.

A bigger problem is that suddenly hope is fading: “The chief Asian investment officer at one major global asset manager says foreign investors are getting increasingly “antsy” with the apparent lack of progress. “Personally, I wouldn’t be a major buyer of Japan,” he says. “If you buy now you are still buying on hope.“

Intuitively, one can see why Japan should be worried: while the epic debasement of the Yen – the direct outcome of the BOJ’s unprecedented dilution of its currency – had worked to stimulate the “wealth effect” early on, now there is hardly any wealth effect to speak of, while the pernicious consequences of Abenomics, soaring food and energy import costs, are here to stay, and will only get worse especially if Japan is unable to restart its mothballed nuclear power plants.

So without stock gains to at least psychologically offset the price shock apparent everywhere except in rising wages, which instead have declined for 16 months in a row, suddenly Abenomics finds itself trapped. And the only possible resolution it seems is for the BOJ to do even more to offset the languisihing stock market.

Sure enough, the junkies are worried. FT reports:

Money from abroad is still coming in, rising to a year-to-date total of $108bn in the last week of October, as institutional investors start handing out mandates to Japan managers. But having ranked as the best-performing major market over the first six months of the year, Japan has languished in the bottom half of the pack since then.

 

“The market needs more than mega long-only pension funds accumulating [stocks] on weakness, which doesn’t drive prices,” says Peter Eadon-Clarke, head of Japan research at Macquarie Securities in Tokyo. “We need those aggressive macro traders looking for a mini-replay of the BoJ’s major loosening at the beginning of this year.”

 

With or without another nudge from Mr Kuroda, something needs to happen, say analysts.

 

The rally that began exactly one year ago, when former prime minister Yoshihiko Noda called the election that would sweep Shinzo Abe to power for a second time, has not come close to reclaiming its peak of late May, when fears over US tapering jolted world markets.

And so the worst-case scenario for Japan has materialized. Because while the Fed recently understood that flow is all that matters, Japan which continues to provide copious amount of monetary flow each month, has found that said flow not only is not doing much to boost its own stock market, but is promptly departing for greener pastures, mostly found in the collocated servers in the NYSE facility in Mahwah.

All Japanese attempts to redirect this flow direction have so far failed:

The awarding of the 2020 Olympics to Tokyo in September did not provide much of a lift. Neither did the government’s October decision to increase the consumption tax, which had been seen as a test of Japan’s determination to put its state finances in order as it tries to haul itself out of more than decade of mild but persistent deflation.

 

A good first-half earnings season thus far has not roused investors either. As Morgan Stanley notes, only those companies beating forecasts by more than 10 per cent have seen a surge in their share prices.

 

The TS multiple – or the Topix index divided by the S&P 500, described by Mizuho strategist Yasunari Ueno as “a report card on ‘Abenomics’” – has recently dropped below 0.7 times, and continues to fall.

 

“Overseas investors are now less inclined to put their faith in further progress,” he says.

Oh no, not loss of fiath, pardon faith. How can the fanatic monetary religion function if the faith in future upside is gone? Well… enter the BOJ.

So eyes are turning once more to the BoJ, where the governor has promised to supply more stimulus should the economy weaken next April when taxes go up. But some say the central bank cannot wait that long.

 

A pledge to buy even more assets at the BoJ’s meeting next week could weaken the yen once more, pushing up profits at exporters, and would send the broader message that Japan is absolutely serious about emerging from deflation, says Mikio Kumada, Hong Kong-based global strategist at LGT Capital Partners Asia, which manages the assets of the House of Liechtenstein.

 

But this and other “third-arrow” structural reforms need to be seen to be advancing, say analysts, especially in light of the Rakuten row. Last week Hiroshi Mikitani, the founder of Japan’s largest online shopping site, complained that a government decision to exclude some over-the-counter medicines from an internet sales law was a victory for vested interests and suggested the Abe administration was ducking difficult reforms.

Even cries for moar, moar, moar may fall on deaf ears: because first it was the Rakuten CEO saying Abenomics is failed, and now such statist dignitaries as the CEO of Allianz are chiming in saying that “Abenomics will fail without third arrow.” What a funny name to give to a stuck CTRL-P combo. As for any actual reforms: forget it – as the Fed whistleblower yesterday so eloquently described, “Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy.” The same goes for Japan.

But even if the BOJ relents, the one commodity that is in increasingly short supply in Japan is hoap pardon hope: hope that the BOJ, and Abe, have any idea what to do besides diluting the currency even more.

The chief Asian investment officer at one major global asset manager says foreign investors are getting increasingly “antsy” with the apparen
t lack of progress.

 

“Personally, I wouldn’t be a major buyer of Japan,” he says. “If you buy now you are still buying on hope.”

 

This impatience bothers some market veterans. Japan has always been a slow-burn story, says Rupert Kimber of London-based Tiburon Partners, who runs a £1.5bn ($2.4bn) open-ended fund.

In the meantime, as we predicted all along, Abenomics is actually imploding from within:

The growing appeal of the Japanese market has little to do with the return of Mr Abe, he says, and everything to do with the likes of Japan Tobacco, which said last month it would shut plants and cut 15 per cent of its domestic workforce to protect profits.

 

“If the Japanese labour market is so rigid and unmovable, those things aren’t possible, are they?”

In short: as a result of its decision to double the monetary base, Japan delayed the inevitable thanks to the distraction of a surging stock market, but now that the surge is over, attention has returned to the flaming wreck that is Japan’s economy. And while its bond yields have been stable for the time being, this will be the final domino to fall before Abe is once again carted off stage left following another epic bout of diarrhea as Abenomics officially fails, and the sun finally sets on the radioactive land of the formerly rising sun.

It is all, as Kyle Bass foretold many times before, just a matter of time.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/jDu7bjAzRZE/story01.htm Tyler Durden

The big news from the Q3 2013 earnings announcements so far is that the mainstream financial media has discovered non-bank financials.  The non-bank sector has been growing fast, this as the traditional financials comprised of depositories and broker dealers have been flat to down in terms of revenue and earnings.  The non-banks include a number of different platforms and strategies, making the selection and analysis process difficult for novice observers.  But if you’re looking for top line growth in the post Dodd-Frank world, non-banks are the place when it comes to financials. 

The publicly traded names in the non-bank sector can be divided into several categories, including various flavors of large multi-asset managers like Blackstone (BX), The Carlyle Group (CG) and Fortress (FIG).  There are specialized finance companies like CIT Group (CIT) and ORIX Corporation (IX).  And then there are real estate companies and investment trusts or REITs focused on a wide range of residential assets from whole loans to residential mortgage backed securities (RMBS) to 1-4 family rental properties to mortgage servicing rights (MSR). 

Some of mortgage REITs have affiliates that provide financing and/or management services, as in the case of PennyMac Mortgage Investment Trust (PMT) and PennyMac Financial Services (PFSI).  FIG and its progeny, like Nationstar (NSM), Newcastle (NCT), New Residential Investment Corp. (NRZ) and a myriad of other FIG-controlled legal entities comprise one of the more complex corporate groupings operating in the mortgage space today.

Perhaps the most visible sector in terms of growth is non-bank mortgage servicer/lenders, led by names such as Ocwen Financial (OCN), Walter (WAC) and NSM.  According to Inside Mortgage Finance, OCN ranks number four in terms of total servicing and NSM ranks sixth. Wells Fargo is the largest loan servicer in the US and the biggest among the top banks, roughly 2.5x the market share of JPMorgan Chase (JPM).  There are many other smaller lender/servicers in the non-bank sector that specialize in areas such as asset management and distressed servicing, including my employer.    

The major difference between commercial banks and non-banks is funding costs and regulation.  Banks today fund their operations at something like 1/10th the cost of non-banks, which generally finance their assets via cash, short-term credit lines and repurchase agreements.  The latter source of liquidity comes from, well, commercial banks.  This capital and funding asymmetry and consequent liquidity risk is a major concern of regulators looking at the non-bank sector today.  Long-term debt is another sources of funding, but one that is very expensive.  Even large players like FIG, for example, still pay over 6.5% for unsecured parent level funding vs. a 3% dividend yield on FIG’s common.  Compare this with 3/8th of a point blended cost of funds for WFC and other large money center banks. 

In terms of capital, on the other hand, commercial banks are at a decided disadvantage to non-banks.  Commercial banks are required to allocate at least 100% capital weightings (or $8 per $100 of assets) to risky exposures like non-agency mortgages or business loans, while government and agency obligations require a fraction of the capital cover.  Under the Basel III accord, banks are actively discouraged from lending on most real estate transactions or any type of “at risk” lending for new, entrepreneurial business ventures.  It is amazing how little comment one sees in the media about the stifling effects that Dodd-Frank and Basel III have on private credit creation, and thus jobs and consumer spending. The poor economic situation is not about “austerity,” as the Krugmanite socialists believe, but a dearth of credit creation in the private sector.

One reporter who does not need a tutorial on non-banks is Kate Berry at American Banker. She recently did an important story, “Nonbank Mortgage Servicers’ Rapid Growth Alarms Investors,” that gets into some of the investor perception problems dogging non-banks. Berry writes that:

“[C]oncern is mounting among investors and analysts that Nationstar (NSM), Ocwen Financial (OCN) and Walter Investment (WAC) are getting so big so quickly that they are becoming too difficult to manage.  Shares of Ocwen and Nationstar have plunged in recent days following earnings announcements in which the companies disclosed a range of operational problems, including delays in integrating acquisitions of servicing portfolios. Meanwhile, Walter recently disclosed that it is under investigation by the Consumer Financial Protection Bureau and facing scrutiny from the Department of Housing and Urban Development over management of its reverse mortgage program and other issues.”

An interesting thing about the AB story is that it tracks quite a bit of the alarmist narrative coming from some financial regulators in Washington.  In particular the Consumer Financial Protection Bureau or CFPB, which fancies itself the paramount financial regulator in Washington in the post-Dodd-Frank era, has been making life miserable for many consumer lenders.  CFPB, for example, makes a lot of fuss over whether or not it will allow the larger mortgage servicers to continue growing via transfers of loan servicing from the TBTF banks. 

Delays of transfers of distressed loans from the large banks to specialty servicers hurt consumers and investors.  But the folks at the CFPB seem unconcerned about collateral damage as they move to regulate every aspect of consumer finance in the US, from making mortgages to loan servicing to auto loans to debt collection.   The hegemonic bluster from the CFPB comes as unwelcome news to the folks at the Federal Reserve Board, OCC, Financial Housing Finance Agency, and FHA, all of whom still have primary responsibility for the largest mortgage servicers.  There is even news of an impending civil war between the CFPB and the other federal regulatory agencies, but no shooting has been observed as yet. 

Suffice to say that all of the regulators are making life very difficult for loan servicers, each in their own special way, and especially for the largest commercial banks.  This is one reason why commercial banks are not willing to originate new loans other than prime mortgages with little likelihood of default.  In many respects, the only thing the CFPB is protecting Americans from is getting a mortgage.  Read more on the history of Dodd-Frank in my latest article for The National Interest below:

http://nationalinterest.org/article/dodd-frank-money-never-sleeps-9279

If you follow non-banks that are trying to build val
ue based on acquiring loans and/or mortgage servicing rights (MSRs) and have not read “FHFA’s Oversight of Fannie Mae’s 2013 Settlement with Bank of America,” you should do so.  The proclivity for regulation via enforcement at CFPB, FHFA and other agencies is greatly slowing the process of working through the several hundred billion worth of remaining distressed assets and REO in the US banking system.  And there are a lot more distressed assets still to be fixed inside the GSEs and HUD. 

FHFA report on BAC:  http://tinyurl.com/ocoe6g4

Meanwhile in the RMBS REIT space, the growing market angst regarding when and where the Federal Open Market Committee will change monetary policy is playing havoc with leveraged RMBS REITS such as Annaly Capital Management (NLY).  NLY is near its 52-week low despite a handsome $1.40 per share or ~ 12% dividend yield, the highest in the S&P 500.  Since the markets persist in predicting a change in the extreme monetary policy of the FOMC, this despite the poor quality of “better” jobs data, the result is extreme volatility for NLY.

Chart:  http://tinyurl.com/nvjm8ef

In the most recent form 10-Q, NLY reports that its interest rate risk is small, with just a 1% change in portfolio valuation given a 0.75% move in benchmark interest rates – “with Effect of Interest Rate Swaps and Other Hedging Transactions (Page 52).”  But the fact of shrinking unrealized gains and mounting unrealized losses on the NLY portfolio seem to be dominating the minds of investors, hedges or no.  The fact that these positions are funded with repurchase agreements maturing in one year or less seems to be another worry.  Even though NLY has doubled its cash position in the past nine months, the equity markets continue to punish this RMBS REIT. 

NLY 10-Q:  http://tinyurl.com/pkkr4em

Speaking of punishment, the latest disclosure from PMT suggests that the lender/servicer missed its interest rate hedges by a wide margin.  Paul Miller of FBR writes in his latest note on PMT: “The company reported disappointing mortgage metrics with correspondent locks of $6.7 billion and fundings of $7.8 billion leading to a revenue/expense mismatch that drove a significantly lower gain on sale of 37 bps compared to 85 bps last quarter.”  That’s a miss of $1.1 billion on hedging, a 16% gap between locks and funding. 

Then we had the announcement last week from NSM that it is selling its wholesale lending business to Stonegate Mortgage (SGM), a move that caught the analyst community be surprise.  The official line is that NSM saw lending margins fall due to interest rate volatility.  NSM says that will focus on servicing, solutions & REO sales, and investment vehicles due to higher margins.  With this announcement, NSM just took earnings down 30% and has guided investors to expect an operating loss in Q4 2013. 

A cynic might say that one reason for the NSM decision to sell most of its lending business to SGM is to reduce its profile with regulators and focus on the higher margin activities of servicing and buying MSRs.  In particular, pressure from CFPB and other regulators on both non-banks and banks is intense, and is forcing continued deleveraging in the credit markets.  Note that market leader WFC is down to 25% overall market share in 1-4s from 33% last year, and just 19% correspondent vs. 50% a year ago.

Meanwhile, the carnage in the commercial banking sector continues apace, with most of the major players in mortgage reporting double-digit declines in new origination volumes in Q3 of 2013 and related restructuring expenses.  This is all still a surprise to some, but the trend in terms of lower refinance volumes has been visible since the start of 2013.

Mortgage industry maven Rob Chrisman reports that U.S. Bancorp (USB) and Regions Financial Corp.  (RF), as well as other residential lenders, expect waning mortgage-refinancing activity to continue to create headwinds in the fourth quarter. USB estimates mortgage-banking revenue will decline about 30% from the previous quarter, Chief Financial Officer Andrew Cecere said Friday at an analyst conference in Boston.

http://www.robchrisman.com/

At WFC, the year over year comparisons in mortgage banking were grim, with a 43% YOY decline in revenue to just $1.6 billion in Q3 2013.  The 156% increase in servicing income miraculously made the overall drop in mortgage revenue seem less grievously bad. Mortgage loans held for sale fell by 25% YOY and overall the WFC balance sheet shows the worst effects of the Fed’s quantitative easing.  The yield on earning assets at WFC fell from 4.28% in Q3 2012 to just 3.79% in Q3 2013, illustrating how the Fed’s overdone monetary ease is starting to cause the cash flow inside the financial sector to shrivel along with the income of individual and corporate savers.

The one thing you can say about the growth in the non-bank sector over the past several years is that it is a direct result of government intervention in the marketplace.  Both Fed zero rate monetary policy and Dodd-Frank represent a massive intrusion by the federal state into the world of consumer finance.  The extreme monetary policies pursued by the FOMC have launched a number of new bubbles in the non-bank world that are obvious for all to see – RMBS, REO to rent, to name just two — but barely discussed in the media. 

Add to all this the fact that all of the regulation by the CFPB and other agencies is arguably offsetting the intended expansionary effect of QE on the economy and specifically consumer finance.  Along with the income shrinkage on savers of QE, the regulatory environment created by Dodd-Frank is retarding credit expansion for the private sector, hurting consumption and employment.  But the interest rate risk created by the Fed after years of zero rates is very real and may soon be “Topic A” for Janet Yellen and other members of the Federal Open Market Committee.  It’s like we all know that the emperor is naked, but none of us, not even the smallest child, is willing to say so. 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/tkjbkt7JDmQ/story01.htm rcwhalen

As we discussed two weeks ago, it would appear Germany's lack of willingness to throw itself on the pyre of self-sacrifice and not adopt a global Fairness Doctrine – as engendered by the US Treasury's (and IMF's) bashing of the core European nation's for maintaining its export strength and daring to keep Europe in tact and thus a periphery-damaging strong Euro – is gathering steam. None other than Europe itself is now 'probing' Germany's trade surplus, using enhanced powers over how euro nations manage their economies with the IMF urging German Chancellor Angela Merkel to curtail the trade surplus to an “appropriate rate” to help euro  partners cut deficits.

As we previously noted, Jack Lew (and everyone else) appears surprised at the following chart all of a sudden…

 

It is also a complete shock to the US Treasury that the current layout of the Eurozone – the same Eurozone that the Fed has stepped in on numerous occasions to bailout, common currency and all – was simply to facilitate German exports to fellow European countries.

Which is probably why, after years of saying nothing, in its semi-annual currency report released yesterday and "employing unusually sharp language, the U.S. openly criticized Germany's economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy."

 

And now – it's the Europeans jumping on the 'Bash Germany' bandwagon…

Via Bloomberg,

European Union regulators began a probe of Germany’s trade surplus, using enhanced powers over how euro nations manage their economies.

 

The decision to step up monitoring of imbalances in the German economy follows criticism that the country’s current-account surplus — which at 7 percent of gross domestic product is the second highest in the euro area — is limiting exports from other euro countries by adding to the strength of the  single currency.

 

The opening of an in-depth review into the imbalances in Germany’s economy comes after the U.S. Treasury blamed German surpluses for draining European and global growth. The International Monetary Fund also reprimanded Germany for its surpluses, urging German Chancellor Angela Merkel to curtail the trade surplus to an “appropriate rate” to help euro  partners cut deficits.

 

“Crucially, a rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a blog post on Nov. 11. “Removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus.”

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/3CxraRFEAI8/story01.htm Tyler Durden

With a shiny red ballon dog selling for $58 million, perhaps it was time to take a little profit in the equity exuberance. S&P futures are down 9 points from last night’s close – which in the new normal is considerable (sadly) – with no macro data headlines this morning to spark a move, we will be watching JPY (which for now is rallying awkwardly) for signs of ignition. Meanwhile, as the USD flatlines (despite dispersion in FX), Bitcoin just toppped $400 for the first time ever – doubling in the last two weeks. Precious metals are up modestly; treasury yields are limping lower; and European equities (and sovereign bonds) are having another tough day.

 

S&P Futures an odd shade of green (called red we hear) this morning…

 

 

Bitcoin tops $400…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/29a-D_i9590/story01.htm Tyler Durden

The lack of prosecution of bankers responsible for the great financial collapse has been a hotly debated topic over the years, leading to the coinage of such terms as “Too Big To Prosecute“, the termination of at least one corrupt DOJ official, the revelation that Eric Holder is the most useless Attorney General in history, and even members of the judicial bashing other members of the judicial such as in last night’s essay by district judge Jed Rakoff. And naturally, the lack of incentives that punish cheating and fraud, is one of the main reasons why such fraud will not only continue but get bigger and bigger, until once again, the entire system crashes under the weight of all the corruption and all the Fed-driven malinvestment. But what can be done? In this case, Vietnam may have just shown America the way – use the death penalty on convicted embezzling bankers. Because if one wants to promptly stop an end to financial crime, there is nothing quite like the fear of death to halt it.

Bloomberg reports that a Vietnam court will consider the death penalty for a Vu Quoc Hao, the former general director of Agribank Financial Leasing Co. who is charged with embezzling 531 billion dong. While that sounds like a whole lot of dong, converted into USD it is only $25 million, or what Goldman would call “weekend lunch money.” Just imagine how much cleaner Wall Street would be, where the typical bank fraud is generally in the billions, if bankers and other white collar criminals had the fear of death if caught manipulating petty prices or outright stealing amounts that are considered petty cash by most of the 0.001%.

But back to Vietnam and its shining example:

The trial comes as the government seeks to shore up Vietnamese banks saddled with Southeast Asia’s highest rate of bad debt and turn around an economy that grew last year at the slowest pace since 1999. The central bank governor vowed to crack down on violations by groups of shareholders working against banking reforms last year.

 

Eleven defendants, including Hao, 58, and Hai, are charged with embezzlement, mismanagement, abuse of power and fraud, according to a statement on the court’s website. Prosecutors allege that Hao and Hai formed 10 fake financial leasing contracts to disperse almost 800 billion dong.

 

At the trial yesterday, Hao said he regrets his violations and hopes the judges will give other defendants lighter sentences, Tuoi Tre newspaper reported today. The verdict and sentencing is expected to be announced Nov. 15, according to the newspaper.

 

Under Vietnam law, those convicted of embezzling property valued at 500 million dong or more, or creating “other particularly serious consequences,” can be sentenced to life imprisonment or death.

 

“The party, the government, prosecutors and our courts will give stiff verdicts in these types of cases,” Deputy Prime Minister Nguyen Xuan Phuc, said on the sidelines of an anti-corruption conference in Hanoi yesterday. “We need to make our regulations and legal framework tighter to reduce and prevent corruption.”

 

“It would be a signal: You could be executed for being caught doing large-scale corruption,” said Adam McCarty, the Hanoi-based chief economist at Mekong Economics. “It has implications for the whole bank restructuring the government is about to do. They want to really dig into these bad debt issues and find out who is responsible for the problems.”

And while one can dream, an outcome such as this in the US is impossible: after all it is these same embezzling bankers that control the legislative and judicial branches (the executive branch is too busy with 404 website errors), which is why deterrence of any substantial scale will never take place in the US and small, medium and large-scale theft will continue unabated, with the occasional slaps on the wrist, until there is nothing left to steal.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/v0pvTpcRXzc/story01.htm Tyler Durden

• Headline du jour: Granted ‘decisive’ role, Chinese markets decide to slide (Reuters)
• Desperate Philippine typhoon survivors loot, dig up water pipes (Reuters)
• Fading Japanese market momentum frustrates investors (FT)
• China’s meager aid to the Philippines could dent its image (Reuters)
• Central Banks Risk Asset Bubbles in Battle With Deflation Danger (BBG)
• Navy Ship Plan Faces Pentagon Budget Cutters (WSJ)
• Investors pitch to take over much of Fannie and Freddie (FT)
• To expand Khamenei’s grip on the economy, Iran stretched its laws (Reuters)
• Short sellers bet that gunmaker shares are no long shot (FT)
• Deflation threat in Europe may prompt investment rethink (Reuters)
• Apple’s $10.5B on Robots to Lasers Shores Up Supply Chain (BBG)
• Japan passes law to launch reform of electricity sector (Reuters)
• Attack on Junk-Loan Excess Risks LBO Profits as U.S. Cracks Down (BBG)
• Equity Traders’ Bonuses Seen Rising as Rates Salesmen Face Drop (BBG)

 

Overnight Media Digest

WSJ

* New guidelines for reducing cholesterol and heart-attack risks mark the biggest shift in cardiovascular-disease prevention in nearly three decades. The change could more than double the number of Americans who qualify for treatment with the cholesterol-cutting drugs known as statins. ()

* China’s Communist Party plans to establish a new state security committee that analysts say will cement President Xi Jinping’s hold on the military, domestic security and foreign policy. ()

* AMR Corp and US Airways Group reached an antitrust settlement with the U.S. government to allow their $17 billion merger to proceed with only limited concessions, paving the way for a new global airline colossus. ()

* Microsoft is abandoning major elements of its controversial “stack ranking” employee review and compensation system, the latest blow against a once-popular management technique. ()

* Starbucks was ordered to pay nearly $2.8 billion for backing out of a partnership with Kraft Foods to distribute packaged coffee to grocery stores. ()

* President Barack Obama tapped senior Treasury Department official Timothy Massad to head the Commodity Futures Trading Commission, setting up a tight deadline to avoid a commission hobbled by vacancies. ()

* Boeing’s unionized workers were set to vote Wednesday on a contract that could have a far-reaching impact on relations between America’s biggest exporter and organized labor. ()

* Francis Bacon’s “Three Studies of Lucian Freud” just became the most expensive work at auction when it sold for $142.4 million at Christie’s in New York. Christie’s in New York made auction history Tuesday when it sold well over half a billion dollars worth of contemporary art in less time than it takes to watch a football game. ()

 

FT

US Airways Group Inc and AMR Corp, parent of bankrupt American Airlines, will be allowed to merge to become the world’s largest airline after they agreed a series of divestments to settle a suit filed by U.S. antitrust regulators to stop the $11 billion merger.

Britain’s Financial Conduct Authority, one of seven regulators investigating a global probe on foreign exchange manipulation, has so far requested information from at least 15 of the world’s biggest banks, according to two people close to the situation.

Activist investor Dan Loeb, founder of hedge fund Third Point LLC, said Tuesday that his investment firm has taken a stake in FedEx Corp and that he met Chief Executive Fred Smith to discuss ways to improve the U.S. parcel delivery company’s performance.

Starbucks Corp has been ordered to pay Kraft Foods $2.76 billion for ending the companies’ grocery deal at least three years early, the coffee chain said on Tuesday.

IntercontinentalExchange Inc confirmed it would float Euronext, dismissing speculation that the owner of the Paris and Amsterdam stock exchanges could be sold, as it completed the $10 billion takeover of NYSE Euronext on Wednesday.

EDF Energy, one of the Britain’s “big six” energy suppliers, said it would raise gas and electricity prices for British households by 3.9 percent, significantly lower than the size of increases announced by four of its competitors.

 

NYT

* Nearly half of the members of the House of Representatives have signed letters signaling opposition to “fast track” authority for a trade pact with Pacific Rim nations.

* After months of setbacks and delays, the merger of American Airlines and US Airways to create the world’s largest airline became all but certain on Tuesday after the airlines reached a settlement with the Justice Department just two weeks before a scheduled trial.

* President Obama nominated Timothy Massad, who oversaw the unwinding of the government’s bailout program, to succeed Gary Gensler at the Commodity Futures Trading Commission.

* Johnson & Johnson has tentatively agreed to a settlement that could reach up to $4 billion to resolve thousands of lawsuits filed by patients injured by a flawed all-metal replacement hip, said two lawyers briefed on the plan. ()

* Mayor Michael Bloomberg on Tuesday insisted that Bloomberg News, which he owns, did not censor itself by killing two articles related to China. But he also asserted that, for at least a couple more months, he is not involved with the news service because of his role as mayor. ()

* Janet Yellen, President Obama’s choice to lead the Federal Reserve over the next four years, has championed the idea that the Fed can stimulate the economy simply by speaking clearly. ()

* High-voltage, superfast public devices for recharging electric cars are appearing more frequently, though some are more expensive for drivers than home chargers, or even gasoline. ()

* Starbucks said on Tuesday that it would pay Kraft Foods $2.75 billion, ending a long-running spat over an agreement the two food titans had for distribution of Starbucks packaged coffee in grocery stores. ()

* Private bank consultants, long known as Wall Street’s shadow regulators, are now facing some regulation of their own. The Office of the Comptroller of the Currency, which oversees some of the nation’s biggest banks, announced on Tuesd
ay that it had adopted some of the first federal standards governing the use of consultants. ()

* Hotel operator Extended Stay America priced its initial public offering on Tuesday at $20 a share, in the middle of its expected range. At that price, the company will have raised $565 million and will be valued at $4 billion. ()

 

Canada

THE GLOBE AND MAIL

* The Conservative government will squeeze public-service salaries and sell off government assets to enter the next federal election with a budget surplus of at least $3.7 billion, paving the way for promised big-ticket tax cuts.

* Ontario is looking to clamp down on tax-dodging corporations, reform its system of credits and drag the black market into the light of day – all in a bid to raise more revenue.

Reports in the business section:

* The U.S. oil boom will vault the country into first place among crude producers within two years, the International Energy Agency says, which will pose a stiff challenge for the Canadian energy industry as it faces rapidly declining American demand for imported oil.

* Canada’s finance minister Jim Flaherty says he’ll intervene in the housing market for a fifth time, if that’s what’s needed, to head off any bubble. Canada’s housing market is seen by some groups as among the frothiest in the world, though most economists do not expect a U.S.-style meltdown.

NATIONAL POST

* Ottawa has earmarked $2.8 billion to pay for Alberta’s flood recovery costs. Federal Employment Minister Jason Kenney says the amount is less than the $3.1 billion Alberta had asked for following the devastating floods that hit southern Alberta in June.

* Members of Canada’s top court directed sharp questions at federal lawyers Tuesday about whether the Harper government can unilaterally change the Senate and thus alter Canada’s democratic landscape.

FINANCIAL POST

* The Chinese state-owned firm CNOOC Ltd has plunked down $12 million with the British Columbia government to secure land for a potential gas plant on Canada’s West Coast, in the latest move by a state-owned energy company doubling down on the province’s gas resources.

* The Canadian Secured Credit Facility, one of Ottawa’s responses to the credit crisis, may be the most financially successful government program in recent history. The reason: every penny of capital that was provided has now been repaid and the government received market interest rates along the way.

 

China

SHANGHAI SECURITIES NEWS

– The People’s Bank of China is mulling the creation of a commodities trading platform in the Shanghai free trade zone, starting with an oil futures contract, an unnamed industry source said at a forum on the free trade zone (FTZ) in Shanghai.

– China’s central bank is considering a platform for trading commercial paper in the Shanghai FTZ, said an academic.

SHANGHAI DAILY

– Shanghai will adjust the city’s air pollution warning system after it took 27 hours to report poor air quality last week, the Shanghai Environmental Protection Bureau said on Tuesday. Changes may include a lower threshold and a more finely delineated pollution gauge.

CHINA DAILY

– The Ministry of Public Security says it is preparing to crack down on websites brokering marriages between Chinese and foreigners on concerns they enable human trafficking and fraud.

– Electric luxury car maker Tesla continues to struggle with a trademark dispute in China preventing it from selling cars under the Tesla or Tesla Motors name.

– SOHO China has begun to “rebalance” its real estate portfolio in Shanghai and Beijing, according to a microblog post by SOHO Chairman Pan Shiyi, indirectly confirming domestic media reports that the property giant was beginning to sell off property in both markets.

PEOPLE’S DAILY

– China’s reforms stand at a historic starting point, said a commentary in the paper that acts as the government’s mouthpiece, referring to announcements of new policy directives from the third party plenum that closed on Tuesday. The overall objective of comprehensive reform is to improve the socialist system with Chinese characteristics, it said.

 

Fly On The Wall 7:00 AM Market Snapshot

ANALYST RESEARCH

Upgrades

ATK (ATK) upgraded to Outperform from Neutral at Credit Suisse
Heartland Express (HTLD) upgraded to Outperform from Market Perform at Wells Fargo
NuStar GP Holdings (NSH) upgraded to Neutral from Underperform at Credit Suisse
Pernix Therapeutics (PTX) upgraded to Hold from Sell at Cantor
Red Hat (RHT) upgraded to Overweight from Neutral at Piper Jaffray
Synutra (SYUT) upgraded to Outperform from Perform at Oppenheimer
U.S. Steel (X) upgraded to Overweight from Equal Weight at Morgan Stanley
Western Refining (WNR) upgraded to Buy from Neutral at UBS

Downgrades

Air Methods (AIRM) downgraded to Hold from Buy at WallachBeth
Amedisys (AMED) downgraded to Sell from Hold at Deutsche Bank
Aon plc (AON) downgraded to Neutral from Buy at UBS
Computer Programs (CPSI) downgraded to Equal Weight from Overweight at First Analysis
Dean Foods (DF) downgraded to Neutral from Outperform at Credit Suisse
Denbury Resources (DNR) downgraded to Market Perform from Outperform at Raymond James
Nucor (NUE) downgraded to Equal Weight from Overweight at Morgan Stanley
WhiteHorse Finance (WHF) downgraded to Equal Weight from Overweight at Barclays
WhiteHorse Finance (WHF) downgraded to Hold from Buy at BB&T

Initiations

Aetna (AET) initiated with an Outperform at FBR Capital
Boyd Gaming (BYD) initiated with a Market Perform at FBR Capital
Centene (CNC) initiated with an Outperform at FBR Capital
Durata Therapeutics (DRTX) initiated with a Buy at Janney Capital
Flamel Technologies (FLML) initiated with a Buy at Janney Capital
Humana (HUM) initiated with a Market Perform at FBR Capital
Impax (IPXL) initiated with a Buy at Janney Capital
Las Vegas Sands (LVS) initiated with an Outperform at FBR Capital
lululemon (LULU) initiated with an Overweight at JPMorgan
MGM Resorts (MGM) initiated with an Outperform at FBR Capital
Penn National (PENN) initiated with a Market Perform at FBR Capital
Splunk (SPLK) initiated with a Hold at Jefferies
Tableau Software (DATA) initiated with a Buy at Janney Capital
UnitedHealth (UNH) initiated with an Outperform at FBR Capital
Wellpoint (WLP) initiated with a Market Perform at FBR Capital
Wynn Resorts (WYNN) initiated with a Market Perform at FBR Capital

HOT STOCKS

Five banks (C, BK, JPM, HBC, BAC) to provide information on U.S. taxpayers with offshore bank accounts
PetroChina (PTR) acquired Petrobras (PBR) assets in Peru for about $2.6B
Mondelez (MDLZ): Arbitrator ruled Starbucks (SBUX) must pay $2.7B to end contract dispute (KRFT)
CNOOC (CEO) to examine LNG development in British Columbia
Cooper Tire (CTB) filed to delay 10-Q
Clean Energy (CLNE), UPS (UPS) signed LNG fuel agreements to supply LNG in North America
YRC Worldwide (YRCW) in contract talks with International Brotherhood of Teamsters
Tim Hortons (THI) to buy back up to 2.12M common shares
Cosi (COSI) adopted shareholders rights plan

EARNINGS

Companies that beat consensus earnings expectations last night and today include:
TRI Pointe Homes (TPH), E-House (EJ), Copa Holdings (CPA), SINA (SINA), WuXi PharmaTech (WX), Hyperion Therapeutics (HPTX), Babcock & Wilcox (BWC), Luxoft (LXFT), MBIA (MBI), GenMark (GNMK), Potbelly (PBPB), RealD (RLD), Cvent (CVT), Woodward (WWD)

Companies that missed consensus earnings expectations include:
Dawson Geophysical (DWSN), NGL Energy Partners (NGL), Thompson Creek (TC
), Banro Corporation (BAA), Frank’s International (FI), Discovery Labs (DSCO), MarkWest Energy (MWE), Federal Agricultural Mortgage (AGM), YRC Worldwide (YRCW), Codexis (CDXS),

Companies that matched consensus earnings expectations include:
NQ Mobile (NQ)

NEWSPAPERS/WEBSITES

• Royal Dutch Shell (RDS.A) and the Iraqi government are nearing a deal to build an $11B petrochemical facility in southern Iraq, sources say, the Wall Street Journal reports
• The pay TV industry (DISH, VZ, CHTR, T, DIS) continued to lose subscribers in Q3, analysts estimated, providing further evidence that some consumers are dropping their pay TV subscriptions, or cutting the cord, the Wall Street Journal reports
• The Federal Reserve should keep monetary policy ultra-easy given the economy’s tepid growth and an uncertain outlook for jobs growth, two senior officials said, reinforcing views that the U.S. central bank will not taper bond buying before next year, Reuters reports
• NTT Docomo (DCM), Japan’s largest mobile-phone operator, said the addition of Apple’s (AAPL) iPhone to its handset lineup in September is helping reduce subscriber losses to competing carriers (SFTBF), Bloomberg reports
• Wynn Resorts (WYNN) has yet to receive a demand for information for a U.S. criminal investigation into the company’s donation to the University of Macau seven months after prosecutors disclosed the probe, Bloomberg reports

SYNDICATE

Annie’s (BNNY) announces secondary offering of 2.54M shares for holders
Atossa Genetics (ATOS) files to sell 4.2M shares of common stock for holders
Baltic Trading (BALT) files to sell common stock
BreitBurn Energy (BBEP) files to sell 15M common units
Chegg (CHGG) 15M share IPO priced at $12.50
Chelsea Therapeutics (CHTP) to offer common stock
Dynagas LNG (DLNG) 12.5M share IPO priced at $18.00
EROS International (EROS) 5M share IPO priced at $12.00
Einstein Noah (BAGL) files to sell 2.5M shares of common stock for holders
Extended Stay America (STAY) 28.25M share IPO priced at $20.00
Luxoft (LXFT) files to sell common stock for Rus Lux Limited
Safe Bulkers (SB) files to sell 5M shares and 1M shares in private placement
Synta Pharmaceuticals (SNTA) files to sell common stock

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Jz_uz5rNlLg/story01.htm Tyler Durden

As non-collocated, carbon-based traders walk in today, they are once again greeted by a very unfamiliar shade of green in the equity futures market. There has not been a specific catalyst for another day of equity weakness however it started in Asia, where we again witnessed a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng.

In Europe, stocks also traded lower, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, where UniCredit shares fell over 4% as credit spreads widened (iTraxx subFin index up 6bps). The focus was very much on the UK, where market participants digested the release of better than expected jobs report and then the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, GBP outperformed its peers and the short-sterling strip bear steepened as market participants reassessed future interest rate path. Looking elsewhere, softer stocks supported Bunds, which edged higher after supply from Italy and Germany was successfully absorbed.

As DB notes, it appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent – so his comments that the government shutdown will make coming data “less reliable” than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.

In other words, an Oscar-worthy good-cop/bad-cop performance by the Fed’s henchmen, confusing algotrons for the second day in a row.

Going forward, the US Treasury will auction off USD 24bln in 10y notes, while Cisco will report after the closing bell on Wall Street. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

 

Overnight news bulletin from Bloomberg and RanSquawk

• BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.
• UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) – 12th straight monthly decline.
• German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.
• Treasuries gain, led by belly of curve; 10Y yield retreat from highest level since mid-Sept. as stocks decline across the globe, copper falls.
• Focus remains on timing of any Fed decision to taper asset purchases; Yellen may shed light at tomorrow’s confirmation hearing. Lockhart yday said taper would likely be considered in December; Kocherlakota said tapering could impede economy’s slow progress
• 10Y notes to be sold today yield 2.790% in WI trading; drew 2.657% at October auction and 2.946% in Sept., which was highest since June 2011
• Bank of England Governor Mark Carney signaled that officials may consider raising interest rates sooner than they previously forecast as the U.K. economy recovers “robustly” and inflation slows * U.K. unemployment declined to 7.6% in 3Q, closer to the  BOE’s key threshold, while a narrower measure of joblessness fell for a 12th month in October
• U.K. Deputy Prime Minister Nick Clegg will distance himself from David Cameron’s call for permanently lower state spending, saying his Liberal Democrats aren’t ideologically wedded to budget cuts
• Merkel’s willingness to compromise with the Social Democrats to form a coalition risks rolling back steps taken by her predecessor that made Europe’s biggest economy stronger, her Council of Economic Experts said
• Former President Bill Clinton endorsed altering a key provision of Obamacare, saying Obama should keep a pledge he repeatedly made in campaigning for the law that Americans wouldn’t lose coverage they liked when it took effect
• China elevated the role of markets while maintaining the state’s dominance in the nation’s economic strategy, seeking to balance finding new sources of growth with sustaining the Communist Party’s grip on power
• Sovereign yields mostly lower, EU peripheral spreads widen. Asian and European stocks, U.S. equity-index futures fall. WTI crude, and gold gain; copper lower

Asian Headlines

On the Chinese third plenum, Goldman Sachs says China Plenum is ‘insufficient’ to drive China stocks up.

Separately S&P’s Kim Eng Tan says the implementation of reforms that support the decisive role of market forces in the allocation of resources could in turn support the long term sovereign credit ratings on China. In other news, Morgan Stanley says China to cut interest rates twice in 2014.

BoJ’s Miyao said won’t rule out any steps in advance if BoJ were to act again.

EU & UK Headlines

BoE brings forward likelihood of 7% jobless rate to 2015 Q3, cuts forecast for near-term inflation on lower data and GBP.

BoE’s Carney said constant rate scenario shows potential advantages of keeping rates unchanged after hitting 7% unemployment. He also did not rule out lower jobless threshold to 6.5% from 7.0%. Forecasts are based on market expectations, not nominal rates and uses market forecasts of key rate reaching 1% by 2015 Q4.

UK Jobless Claims Change (Oct) M/M -41.7K vs Exp. -30.0k (Prev. -41.7k, Rev. to -44.7k) – 12th straight monthly decline.
– ILO Unemployment Rate 3-months (Sep) 7.6% vs. Exp. 7.6% (Prev. 7.7%)
– Employment Change 3M/3M (Sep) 177K vs. Exp. 113K (Prev. 155K)
– Claimant Count Rate (Oct) M/M 3.9% vs Exp. 3.9% (Prev. 4.0%) – lowest Since Jan 2009
– Average Weekly Earnings (Sep) 3M/Y 0.7% vs Exp. 0.7% (Prev. 0.7%, Rev. to 0.8%)
– Weekly Earnings ex Bonus (Sep) 3M/Y 0.8% vs Exp. 0.9% (Prev. 0.8%)

German government advisers see 0.4% 2013 growth, 1.6% in 2014 vs. Exp 2013 GDP of 0.5% and 1.70% in 2014.

Eurozone Industrial Production SA (Sep) M/M -0.5% vs Exp. -0.3% (Prev. 1.0%)

Eurozone Industrial Production WDA (Sep) Y/Y 1.1% vs Exp. 0.0% (Prev. -2.1%) – biggest gain since September 2011.

Italy successfully sold EUR 5.468bln (vs. exp. EUR 5.5bln) in 3y, 30y and CCTeu bonds. The shorter dated paper was sold at lowest yield since March 2010. Germany also sold EUR 4.032bln in 0.25% 2015, b/c 2.2 (Prev. 2.3) and avg. yield 0.1% (Prev. 0.19%), retention 19.4% (Prev. 15.18%).

US Headlines

PIMCO’s Bill Gross raised the percentage of Treasuries and other US g
overnment-related debt in his flagship fund in October after the Federal Reserve unexpectedly maintained its bond purchases.

CME Group has substantially raised transaction fees for the first time in four years as it flexes its pricing muscle as the dominant US futures exchange operator.

Equities

Risk averse sentiment dominated the session this morning, with the FTSE-100 index underperforming its peers where a number of blue-chip companies traded ex-dividend. Overall, financials and basic materials sectors led the move lower, as credit spreads widened (iTraxx subFin index up 6bps) and Bunds moved into positive territory after supply from Italy and Germany was absorbed.

FX

GBP outperformed its peers, driven by the release of better than expected jobs report and also the release of the latest Quarterly Inflation Report by the BoE, who brought forward likelihood of 7% jobless rate to 2015 Q3. As a result, the pair managed to recover some of the losses made yesterday following the release of softer than expected inflation data.

RBNZ Financial Stability Report said the NZD remains elevated, and timing and size of interest rate increases are uncertain. RBNZ’s Wheeler said interest rates are likely to rise.

Commodities

Commerzbank’s technician Axel Rudolph says that a slip through the six-month support line at USD 1270.16 will confirm bearish outlook.

AMCU lowered basic wage increase demand to ZAR 8,668 from ZAR 12,500, according to Impala spokesman. Also, according to AMCU, Impala Platinum raises wage offer to union by 0.5%. It was also reported that Amplats security disperses protest with rubber bullets, according to SAFM.

The Israeli PM Netanyahu has called for Western countries to trim their dependency on oil for the transportation sector due to the instability of the commodity.

Libya’s Zawiya refinery has reopened, according to the National Oil Corp

Following last month’s late payment by Ukraine to Russia, Ukraine has said it does not need to buy any Russian gas before the year’s end.

Key Macro/FX highlights from SocGen

Let’s hear it from the horse’s mouth this morning: does BoE governor Carney now believe that the UK unemployment rate threshold of 7% will be reached earlier than it though t back in August? GBP is not an outright buy vs the USD if that is the case (UK real rates are falling vs the US), but sterling should stay bid vs the currencies where deflationary or disinflation pressures reign supreme, ie the Scandis, the EUR and the Swiss Franc. EUR/GBP did well yesterday to reach back over the 50d ma (0.8440) but this should be as good as it gets if the BoE revises up its short-term growth and inflation forecast. UK rate hike expectations have eased back thanks to the delayed tapering in the US, but short sterling may not easily be swayed by the governor to give up pricing in a first hike at the turn of 2014/2015 in particular if the employment data due one hour ahead of the QIR shows a fall in the unemployment rate to 7.6%.

UST 10y yields traded a 2.79% high yesterday (swaps 2.92% high) giving the USD free rein to strengthen vs its major counterparts. Scandi currencies continued to take a beating after CPI data showed Sweden slipped into deflation in October. Whether that leads the majority on the Riksbank committee to give in to the two doves Ekholm and Flordenand vote for a 25bp rate cut at the December meeting remains to be seen, but the high correlation with US 10y yields suggests there is further upside potential for USD/SEK. Also keep an eye on USD/JPY. As the pair approaches 100.00, short-term vol has started to pick up.

Bank of Indonesia, in a surprise decision yesterday increased its benchmark reference rate by 25bps to 7.25% a move aimed at easing its current account shortfall. Meanwhile, INR depreciated for a 9th day in a row (MSCI EM down for an 8th day on trot) and there could be more pain for the rupee after weaker industrial output (+2% yoy) and higher inflation (10.09%) sparked worries of stagflation.

The RUB took no solace from the flash GDP estimate yesterday (Q3 GDP +1.2% yoy in Q3). The central bank widened tio corridor by 5 kopeks to 32.45-39.45 rubles. We believe another quarter of growth below1.5% would force CBR to cut its benchmark rate in early 2014. With EUR/HUF on the verge of 300, we will be paying close attention to the minutes of Hungary’s central bank meeting. Will these provide justification to expect future policy easing after a sharp drop in CPI inflation to 0.9% in October? Next resistance is at 303.21.

DB’s Jim Reid concludes the overnight event recap

It appears that markets continue to steadily price in a greater probability of a December taper judging by the 2bp increase in 10yr UST yields, 1.2% drop in the gold price and an edging up in the USD crosses yesterday. Indeed, the Atlanta Fed’s Lockhart, who is considered a bellwether within the Fed, kept the possibility of a December tapering open in public comments yesterday. But his other comments were quite dovish, particularly when he said that he wants to see inflation accelerate toward 2% before reducing asset purchases to give him confidence that the US economy was not dealing with a “downside scenario”. Lockhart stressed that any decision by the Fed on QE would be data dependent – so his comments that the government shutdown will make coming data “less reliable” than might otherwise have been, until at least December, were also quite telling. The dovish sentiments were echoed by Kocherlakota, a FOMC voter next year.

In Asia this morning, we are again witnessing a bout of EM vulnerability led by the likes of Indonesia. This follows weakness in EM across EMEA and LATAM yesterday that saw major EM sovereign CDS about 3-5bp wider while a number of LATAM 10yr rates were up between 5-10bp. EM FX in EMEA was under some pressure yesterday as well (PLN and ZAR notably), but this abated as the day wore on. This morning Indonesia CDS is quoted about 6bp wider while cash bonds are down about half to 1 point. Asian EM FX is generally weaker across KRW, INR and IDR. Asian equities have been sold from the open today including a 2% drop in the Jakarta Composite index which is on track for its largest fall since Sept 30th. The disappointment over lack of detail from the Chinese government’s Third Plenum meeting is showing up via a 2.0% drop in the HS China Enterprises Index and 1.3% drop in the Hang Seng. On this point, DB’s Jun Ma thinks further detail may be released a few days later, but it’s fair to say that the market has been a little underwhelmed thus far. US treasury secretary Jack Lew said this morning that there are “lots of questions still to be answered” on Chinese reforms, particularly in the area of currency.

Coming back to the issue of low inflation, European inflation has been topical recently especially following the low inflation reading for the euro area in October, the recent rate cut from the ECB and a dovish report on Draghi yesterday (Germany’s FAZ newspaper reported that Draghi is concerned about the possibility of deflation in the euro zone although he will dispute that publicly). Indeed yesterday we saw the October inflation reading in Germany confirmed at just 1.2% YoY, while in the UK the annual inflation reading was below consensus at both the headline (2.2% vs 2.5% expected) and at the core level (1.7% vs 2.0% expected). Indeed the UK’s core inflation number is at a level that was last seen in 2009. Again this ties in with the arguments made in our long-term study from September “A Nominal Problem” where we highlighted how we were having a global problem with both low real GDP and low inflation. The latter get mentioned less when talking about central bank policy, especially in connection with the US taper. In terms of the market reaction, EURGBP gained 0.75% yesterday, with the bulk of the increase coming after the UK inflation p
rint with 10yr gilts outperforming amid a generally weakish day for fixed income.

The economic data calendar looks light again today but one highlight will be the Bank of England’s inflation report. UK employment, Eurozone industrial production and Spanish CPI are also worth looking out for today. It will be a bumper day of Italian auctions with more than $5bn in new issuance today consisting of 5yr floaters, 2016s and 2044s. After the US market close, Bernanke will be speaking at townhall of teachers on the history of the Fed. He will be taking Q&A.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/v25lBWBJJxA/story01.htm Tyler Durden