Global Markets Jump on Europe’s Greek Debt Deal

October 27, 2011

By CHRISTINE HAUSER and DAVID JOLLY
Stocks rallied around the world on Thursday, pushing the broader market in the United States back onto positive ground for the year, after European leaders reached a deal to spread the pain of restructuring Greece’s debt and try to bring the crisis in the euro zone under control .

While the deal helped to restore confidence to the financial markets, analysts noted that questions remained about how it would be implemented. They also worried that fully fixing the problems of excessive debt and weak growth could take years.

Still, after days of anticipation, the markets put whatever uncertainties remained behind them, at least for now. Financial stocks in particular were up more than 6 percent.

The Dow Jones industrial average soared 339.51 points to close up 2.86 percent at 12,208.55, while the broader Standard & Poor’s 500 index was up even more, 3.43 percent, at 1,284.56 and the Nasdaq composite index rose 3.32 percent to 2,738.63.

The S.&P. moved into positive territory for the year on Thursday, up about 2.1 percent. The Dow was up more than 5 percent and the Nasdaq more than 3 percent for the year.

Stocks closed up as much as 6 percent in Europe, after a strong showing in Asia.

It was a marked turn-around from just a few weeks ago, when anxiety over the European debt crisis helped push Wall Street to the brink of a bear market. On Oct. 3, the S.&P. 500 was down 19.4 percent from its high on April 29.

The latest news from Europe came early Thursday, when officials from the European Union and the International Monetary Fund reached a deal with bankers to write down the face value of their Greek debt by 50 percent, hoping to reduce the ratio of the country’s debt to gross domestic product to 120 percent by 2020. Economists believe that is essential if Greece is not to default on its loans.

Officials also agreed that European banks would need to raise more capital and said they would increase the euro zone bailout fund to $1.4 trillion, a move that they hope will provide the capacity necessary to keep Italy and Spain from following Greece’s painful path.

“The most important outcome is it seems to remove from the table fears of an imminent bank crisis,” said David Joy, chief market strategist for Ameriprise Financial. “What this does is it buys Europe time to do the hard work of initiating structural reforms.”

But like others, he injected a note of caution: “It addresses the symptoms, but not the disease. They need to follow through, there is no question.”

Economists noted that the deal Thursday was but the latest in a series of such agreements addressing the debt crisis, which are usually followed by gains, then losses in the financial markets.

After the last deal was struck in July, for example, stocks and bonds in Europe and the United States gave it a positive reception. But the sentiment soon turned and markets failed to sustain their gains. The S.&P. in the United States fell below 1,300 after about a week. and eventually sank to its lowest level for the year.

“Overall, then, while the plans represent a step forward, we suspect that they will soon be viewed in the same way as every other policy response during this crisis — as too little, too late,” Jonathan Loynes, an economist with Capital Economics, wrote in a research note.

He said he still expected a “prolonged recession in the euro zone,” further market turbulence, and continued to have doubts about the future of the euro itself “in its current form.”

The Euro Stoxx 50 index, a barometer of euro zone blue chips, closed up 6.1 percent, while the FTSE 100 index in London gained 2.9 percent. In Paris, the main index was up 6.3 percent, while Frankfurt’s was 5.35 percent higher.

Financial shares led European indexes.

The United States 10-year Treasury bond yield rose to 2.37 percent, from 2.21 percent on Wednesday.

The dollar fell against most major currencies. The euro rose to $1.42 from $1.39 late Wednesday in New York, while the British pound rose to $1.61 from $1.5975. The dollar also fell to 75.8 yen from 76.17 yen, and to 0.86 Swiss franc from 0.88 franc.

Anthony Valeri, a fixed income investment strategist for LPL Financial, said that the European deal, to an extent, removed one of the lingering risks to the market and more specifically, to the banking system.

“But the devil is in the details,” he added. “There are some implementation risks going forward.”

He said there were questions about participation in increasing the bailout fund.

“We don’t know the participation from private investors or the emerging market countries, as the case may be,” he said.

Another negative was that banks must meet a new core capital ratio of 9 percent by the middle of 2012, he added. That could mean they could either raise capital or shed assets, which would be a negative for the market because of the pressure on prices.

In Asia, shares were stronger almost across the board. The Tokyo benchmark Nikkei 225 stock average rose 2 percent, the Sydney market index S.&P./ASX 200 rose 2.5 percent, and Hong Kong’s Hang Seng index rose 3.3 percent.

“Bank recapitalization, haircuts and more firepower for the rescue funds are supposed to form a euro-style bazooka,” Carsten Brzeski, an economist with ING in Brussels, said in a research note. “Even if there are still loose ends and unsolved questions, yesterday’s summit was an important step in the right direction.”

Shortly after the deal was announced, United States crude oil futures for December delivery rose 2.8 percent to $92.71 a barrel. Comex gold futures slipped were mostly unchanged, at $1,723.40 an ounce.

Bond market movements showed investors moving out of the securities considered the most secure and into riskier assets.

The Federal Reserve on Thursday is starting a bond buy-back measure that will bump up prices on long-term notes, Mr. Valeri said.

Bond prices for embattled euro zone governments rose sharply, while the yields fell. The yield on Greek 10-year bonds was 22.16 percent, down 1.17 percentage points. Spanish and Italian bond yields also fell.

David Jolly reported from Paris.

Pescod says...

EXTORRE GOLD MINES
CROWN POINT VENT.
(T-XG)
(V-CWV)


It’s hard to believe that Argentina at the beginning of the
20th Century was considered potentially the best economy
of the Americas. So much for management of those rich
natural resources though as between dictators and what-
ever, those resources have been terribly mismanaged.

People had hopes with the election of Cristina Fernandez
de Kirchner, things might be altered positively, but today we
learn the country is lurching from bad to worse. In her first
move since winning re-election Bloomberg writes they have
changed a 2002 decree and is now requiring oil and mining
companies to keep at least 30% of their export revenue in
the country and that applies to all future sales.

Meanwhile, the average Argentinean doesn’t trust his
own government, a government that suggests inflation is
9.9%, but private economists say it’s closer to 24% and be-
cause of that and other factors, Argentineans pulled $10
billion out of their own country in the first six months of this
year and sent it elsewhere. Sad to see such a resource-rich
country so terribly managed, one wonders what next and
how the companies will cope with it.

We caught up with Canaccord oil and gas analyst Fred
Kozak who just a while a go wrote an 83-page report enti-
tled, “Investors Crying for Argentina...But will it be the ad-
ventures of Old or New Cristina?”...referring of course to the
new President and needless to say, Fred is a fan of the re-
sources and potential resources of Argentina, but so many
others wonder about governments there.

As we catch up him today, he suggests that this sell off
in the oil sector in Argentina might well be an opportunity as
he points to the important tidbit and that is...30% of their
export revenues must stay in the country. He reminds us
that the oil and gas companies that are based in Argentina
do not export their oil and gas and of course their revenue
does stay in the country anyway! The mining companies, he
reminds us, that’s a different case as they export most of
their ore or commodities and that might not be a buying op-
portunity, he infers.

Meanwhile there is a long list of companies with assets in
Argentina from Pan American Silver to Yamana Gold to
Goldcorp and even Barrick Gold. Extorre Gold Mines though,
is probably the most exposed.



One of the biggest of the movers on the markets yes-
terday (ironically gold was up 50-some dollars and yet
many gold stocks barely budged) was Orezone Gold, up
almost 20% on the day.

We tracked down President, Ron Little and he sug-
gested that there’s nothing imminent that he knows of
other than a recent marketing trip he did to funds and
brokers in Montreal and Toronto. Must have been some-
thing he was saying…

He reminds us though that while the old Orezone
company he and his current team led was sold, they are
going to make sure the current Orezone is in a different
state of affairs, if and when they ever get to the point of
becoming a potential take-over candidate. None of that
being in debt and at the mercy of other players.

In the meantime, the company sits at about a three
and a half million ounce resource with two million of
those ounces inferred, and their target is that by April
when new resource numbers come out, they hope to be
up to as much as five million ounces with three of that
measured and indicated.

They are still working on a massive drilling program
on their Bombore project in Furkina Faso for 170,000
meters of drilling, averaging about 10,000 meters a
month. The drilling program should be completed by
Christmas and then the bookkeeping starts...calculating
just how big a resource they really do have.

Their project is turning out to be quite a big one with
Bombore being about 11 miles long and anywhere be-
tween a couple of hundred meters and a kilometer wide
and so far much of the drilling has come up with grades
better than had been expected.

Interesting to see that Orezone’s stock has fared a
little bit better than many others in the $300 correction in
gold price, but the question is, what next for the direc-
tion of gold and Orezone?

When we ask Little for any other speculative stocks
out there that one should be looking at, he suggests
Northern Shield in the Ring of Fire.

MPR on the agenda

The chase by Marty Cej:

The Bank of Canada yesterday cut its forecast for Canadian economic growth and warned that Europe will suffer at least a brief recession, presaging statements from Finance Minister Jim Flaherty later in the day that he will cut the government’s growth projections in the next few weeks and that Europe could trigger another global recession if it can’t resolve its persistent and worsening debt crisis. Today, European leaders will get another chance to fix their troubles and the Bank of Canada gets a chance to explain its latest interest rate decision in greater detail.

The Canadian central bank releases its Monetary Policy Report at 10:30 am Eastern. Linda Nazareth will report from the lock-up as the headlines break and we’ll follow the Q&A with Governor Mark Carney beginning at 11:15. We can expect Carney to field questions on the European mess, the pace of the U.S. economy, the impact of U.S. and European monetary policy on Canada, demand for Canadian exports from developing nations and maybe a question or two on the dollar. We can also expect Carney to field at least one direct question on when he might raise or cut the benchmark interest rate by an enthusiastic young journalist who has been put up to the question by his more experienced, smirking colleagues.

And now that the Bank of Canada has been explicit and as forthcoming with its monetary policy as any central bank can be, we’ll turn our attention to fiscal policy. Minister Flaherty refused to be drawn yesterday on whether the government will be able to stick to its plan to balance the budget by 2014.

Slowing economic growth will make it difficult (impossible?) to meet the government’s revenue expectations while at the same time increasing pressure on Ottawa to shelve planned spending cuts that might exacerbate a slowdown by putting more jobs at risk. And what about Canadians’ household debt levels, which are sitting at U.S.-like levels? And how about the still-booming real estate market? Are Canadians taking on too much risk with interest rates low and home prices continuing to rise?

We’ll also take a look at how interest rates being lower for longer will affect Canadian consumers and companies. Record low bond yields will put immense pressure on banks’ margins and prompt all sorts of accounting gymnastics at the insurers. Are current share prices justified by the outlook for slowing profit growth? And let’s not forget about the impact of puny yields on pension plans. Air Canada is a good example of a pension plan under pressure and it deserves a much closer look today.

And why are we talking about falling earnings expectations, record low bond yields and a slowing global economy? Because European leaders have yet to come up with a credible solution(s) to their debt crisis. Brussels today hosts the 14th crisis summit in 21 months – in fact, it hosts two summits today; a cocktail summit with all 27 leaders from the European Union at noon Eastern, followed by a dinner summit with just the 17 countries that share the euro currency. The 10 non-euro leaders will be shown into an adjacent room where they will sit at fold-out tables and be offered spaghetti or chicken fingers and fries. What markets hope to see is an agreement on detailed plans for bank recapitalizations, a bigger and bolder EFSF and sharper haircuts on Greek debt.

As much as expectations have been massaged lower, a major disappointment today will be priced out quickly and severely by financial markets.

In the meantime, industrial commodities are doing pretty well today after Chinese Premier Wen Jiabao said economic policy will be fine-tuned as needed and the Chinese industry minister said it is studying “stimulative policies” for smaller companies. The market has interpreted the comments as being pro-growth.

It is a big day for earnings. In Canada, we’re tackling Rogers Communications – which appears to have beaten expectations and has named a new CFO; Agnico-Eagle, Goldcorp, Methanex, Open Text and Lundin Mining.

In U.S. earnings, we have Ford, Boeing, Nasdaq, Lockheed Martin, Norfolk Southern, Sprint, Visa, Northrup Grumman and Corning.

Banks Squabble With EU Over Greek Debt Losses

By Aaron Kirchfeld - Oct 24, 2011

The world’s biggest banks are squabbling with European leaders over the size of losses on their Greek bonds as they seek a deal to cut the country’s debt load, two people with knowledge of the discussions said.

The financial companies, represented by the Institute of International Finance, proposed a loss of 40 percent on Greek debt, said one of the people, who declined to be identified because talks are confidential. The European Union is calling on investors to forfeit as much as 60 percent, making a compromise at 50 percent possible, the person said.

The talks are part of an attempt to solve the two-year-old sovereign-debt crisis that has pushed Greece closer to default, roiled global markets and dented confidence in the survival of the 17-nation currency. EU leaders are scrambling to reach an agreement on bolstering the region’s rescue fund, recapitalizing banks and relieving Greece to avoid contagion spreading to Italy and Spain before another summit in two days.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said talks on private-sector involvement in a second aid package for Greece are focusing on losses of “about 50 percent, 60 percent.”

Charles Dallara, managing director of the IIF, the lobby group for 450 of the world’s biggest financial companies, said on Oct. 22 that “discussions are making progress, albeit limited.” The group remains “open to explore options on a voluntary approach built on a realistic outlook for the Greek economy and restoration of Greece’s market access,” he said.

Larger Writedowns

EU policy makers have been calling for larger writedowns amid a deteriorating Greek economic and financial situation, as highlighted in a draft report last week by the European Commission, the European Central Bank and the International Monetary Fund, collectively known as the troika.

Greek two-year notes currently trade at about 40 percent of face value. Under the terms of a July 21 accord with the IIF, the banks would take losses of 21 percent on the net present value of their holdings of the nation’s debt. That plan includes up to 35 billion euros ($49 billion) in high-quality collateral for the investors.

One option being considered involves a swap with no collateral of any kind in a so-called hard restructuring, people familiar with the matter said on Oct. 21. Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either European Financial Stability Facility bonds or new 30-year Greek government debt, the people said. Upfront exchanges could involve a 50 percent discount off face value.

To help European lenders shoulder sovereign losses, lenders may be required to raise about 100 billion euros in capital by mid-2012, according to two people briefed on the matter. The European Banking Authority tested lenders to see how much money they’ll need after writing down bonds from countries such as Greece and marking up stronger debt including that of Germany, they said.

Reuters reported the 40 percent proposal by banks late yesterday.


Still waiting for a European solution

The BNN Chase by Marty Cej:

European leaders have adjourned to Wednesday, taking fresh proposals from the weekend’s summit back to their respective parliaments where dismay and disappointment will be expressed in a multitude of languages. Formal plans should be drawn up by Tuesday and announced at the completion of another summit Wednesday.

There will be three main pillars to the plan: A haircut for holders of Greek debt that is likely to become more of a buzz cut; larger European bank recapitalizations, and some kind of external support for the EFSF bailout mechanism that assures markets that those in greatest need of bailouts or backstops – Greece now, Italy soon – will get what they need when they need it. The next three days ought to see plenty of leaks to the media as governments try to lessen the shock to markets and voters of coming to an actual decision.

The solution will be televised.
In the meantime, central bankers elsewhere continue to wrestle with the impact of the European debt crisis on their own economies. Federal Reserve Bank of Dallas President Richard Fisher was one of three Fed members to dissent from Open Market Committee decisions in August and September to lower borrowing costs and stimulate the U.S. economy through “unconventional” means. Fisher doesn’t like “Operation Twist” – the Fed’s plan to sell shorter-term bonds and buy longer-term bonds in a bid to push yields at the long end lower – and he doesn’t care who knows it. Fisher sits down with us at 1:00 pm on Headline.

Our conversation with Fisher comes less than 24 hours before Bank of Canada Governor Mark Carney must explain to markets why interest rates won’t be raised anytime soon even as inflation accelerates beyond the central bank’s preferred target pace.

Canada’s benchmark rate is expected to remain unchanged and the accompanying statement is expected to be explicit in its assessment of the threats to the Canadian economy from the European debt crisis and U.S. unemployment. A survey released today by the National Association for Business Economics shows U.S. companies’ hiring plans at their worst level since January 2010.


Caterpillar doesn’t seem to be feeling the pinch, though. A few minutes ago, the world’s biggest maker of heavy yellow earth-moving equipment, reported higher-than-expected third-quarter earnings, record revenue and thousands of new jobs. The company said it expects year-end profit at the high end of its previously announced range and “2012 is shaping up to be better.” The quarterly earnings report from Caterpillar is always full of economic analysis and detail from around the world and this one is no different. Paul Bagnell has the file.

As I was typing that last bullet point, three deals were announced: Healthcare provider Cigna agreed to buy Healthspring for $3.8 billion; Oracle agreed to buy cloud computing company RightNow Technologies for $1.5 billion and J.M. Smucker agreed to buy a majority stake in Sara Lee’s coffee business for $350 million up front and another $50 million over the next 10 years.
Back to earnings, we’ll be taking a look at numbers from Netflix, Texas Instruments and West Fraser Timber.

This week sees Canadian earnings season pick up with numbers beginning tomorrow from CP, CNR and Astral Media. Wednesday will be busy with Rogers Communications, Corus, Agnico-Eagle, Mullen Group, Methanex, Goldcorp, Sherritt, Lundin Mining and Open Text.