2. Euro zone Crises
1) Spain’s Rating Cut by Moody’s for Third Time Since June 2010
Spain’s credit rating was cut for the third time since June of last year by Moody’s Investors Service as Europe’s debt crisis threatens to engulf the nation.
Moody’s, in a statement, cited the “continued vulnerability of Spain to market stress” that is driving up the cost of borrowing, as well as weaker growth prospects. “Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro area crisis.”
“Even if policy action at the euro-area level were to succeed in the short term in returning some degree of normality to bank and sovereign debt markets in the euro area, the underlying fragility and loss of confidence is deep and likely to be sustained,” Moody’s said.

2) Italy Punches Below Political Weight in Draghi Succession Fight
Prime Minister Silvio Berlusconi’s inability to nominate Mario Draghi’s successor to head the Bank of Italy illustrates the political paralysis that’s left Italy marginalized in Europe and under threat from the region’s debt crisis.
The deadlock over the Bank of Italy reflects the deepening divisions within the Berlusconi government, fueling political gridlock at a time when the 75-year-old premier needs to convince investors about his ability to tame the euro region’s second-biggest debt.
Analyst Comment: Failure to act on this matter unnecessarily exposes the country to market speculation by further highlighting that Italy is the weakest link among the large sovereigns in the euro area.

3) France’s Ratings Pressure Handicaps Sarkozy in EU Crisis Talks
French President Nicolas Sarkozy heads into decisive talks on solving Europe’s debt crisis handicapped by concern that France’s top credit rating is at risk.
France, Europe’s second-biggest economy, is under pressure, Moody’s Investors Service said Oct. 17, because the global financial and economic crisis has made its debt measures the weakest among its Aaa rated peers, including Germany and the U.K.
Analyst Comment: It’s a classic trap of contagion that is now closing in on France. This is very dangerous. Everyone in the government has insisted that everything they do is with the objective of keeping the triple-A. If they lose it, it’s a disaster.

4) Merkel Says EU Summit Will Be Important, Not Final, Crisis Step
German Chancellor Angela Merkel said that a European Union summit in five days will mark an “important step,” though not the final one in solving the euro-area sovereign debt crisis.
Analyst Comment: It is far from clear that the summit will deliver a package that is viewed as broad and deep enough. Indeed, comments out of Germany appear to be trying to dampen expectations of what the summit will deliver.

5) EU Gets Deal on Naked Sovereign CDS Curbs, Short-Selling Rules
The European Union reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt.
Under the deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it. Nations will have the right to opt out of the measure if they detect signs that it may affect their borrowing costs.
“These balanced measures will ensure that sovereign CDS are used for the purpose for which they were designed, hedging against the risk of sovereign default, without putting at risk the proper functioning of sovereign-debt markets,” EU Financial Services Commissioner Michel Barnier said in a statement.

6) Greek Paralysis in Debt Markets Spreads to Streets: Euro Credit
Greece is shutting down for two days as unions protest Prime Minister George Papandreou’s efforts to stave off default with more austerity while stretching public and political acceptance close to a breaking point.
Mounds of uncollected garbage lined the streets of Athens today as parliament debated new taxes, fresh cuts to pensions and wages, and plans to dismiss 30,000 state workers to keep outside aid flowing. The extra austerity is necessary as the economy contracts more than forecast by Greece’s international creditors, driving 10-year bond yields to 24.3 percent, or three times those of fellow bailout recipient Ireland.
Analyst Comment: Insisting with the same medicine of incremental austerity has not worked so far, and it probably won’t work in the near future. It will prolong and deepen the recession and lead to ever more acute social tensions.

7) Papandreou Presses Austerity as Strikes Hold Greece ‘Hostage’
Greek Prime Minister George Papandreou vowed to push through a further round of austerity measures in the face of public anger, appealing to European leaders to help cut Greece’s debt burden at a weekend summit.
“Greece is being held hostage by strikes and protests,” Papandreou told lawmakers late yesterday. “This government has been fighting for two years to save the country and still has much work ahead,” he said. “We will give battle and we will win.”
Papandreou is risking social unrest as he banks on Greek lawmakers to push through additional austerity in an Oct. 20 vote to continue receiving international support under a 110 billion-euro ($151 billion) bailout negotiated last year.

8) Europe Banks Vow $1 Trillion Shrinkage as Recapitalization Looms
European banks, assuring investors they can weather the sovereign debt crisis by selling assets and reducing lending, may not be able to raise money fast enough to prevent government-forced recapitalizations.
Analyst Comment: Asset sales are impractical in the current environment. Every bank is selling, and no bank is buying. It just won’t work. Beyond that, the magnitude of the cuts the banks are talking about is nowhere near the likely required amount of deleveraging. They need to reduce hundreds of billions more to adjust to the new world order. There has to be a recapitalization.

9) France’s Socialists Get Real on Europe’s Economic Crisis: View
In a vote that may have serious consequences for Europe’s economic crisis, the French Socialist Party showed laudable level-headedness this week in selecting the moderate Francois Hollande as its presidential candidate for next year’s election.
Hollande focused on the correct big issue: the need for France to shrink its ballooning budget deficit. In many regards, his approach is almost indistinguishable from that of his expected adversary in the election, France’s center-right president, Nicolas Sarkozy. Both vow to narrow the deficit to 3 percent of gross domestic product in 2013, from about 7 percent now. Hollande, however, goes further, by promising a balanced budget by 2017.
Most surprising, perhaps, the Socialist agenda calls for capping government-spending increases at 1.7 percent a year (a little less than the latest inflation rate of 2.2 percent). Sarkozy’s recently introduced austerity measures would limit spending growth at 1 percent.

3. Central Banks
1) King Says ‘Time Is Running Out’ in Battle With Imbalances, Debt
Bank of England Governor Mervyn King said the global recovery is faltering and “time is running out” for authorities to reduce imbalances and strengthen banks.
King said monetary policy is limited in its capacity to revive the U.K.’s “reluctant recovery” as governments delay dealing with underlying imbalances between countries with current account surpluses and deficits.
“Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone,” he said.
“A transparent recognition of losses and a substantial injection of additional capital are necessary to restore market confidence,” King said.

2) Turkey $1 Billion Lira Defense Fails to UBS as Reserves Sink 9%
Turkey may lack resources to stop the lira’s tumble after selling more than $1 billion yesterday to prop up the currency, extending a two-month campaign to end the declines, according to UBS AG and Commerzbank AG.
Analyst Comment: We are skeptical that intervention will be sufficient to arrest the lira’s decline. The central bank of Turkey’s foreign-exchange reserves ammunition is weak when one takes short-term external debt into consideration.

4. ECO
1) Maersk Shareholders Suffering With Too Many Containers: Freight
The container industry may be facing half a decade of oversupply that will curb freight rates as shipping lines launch vessels into a global trade slowdown.
The rise in container capacity will exceed demand by as much as 10 percentage points over the next three years, and that gap won’t substantially improve for five years. Those estimates assume no slump in world economic output.
Analyst Comment: The market outlook is pretty bleak. Given the overcapacity that’s built up in the market, a few years will be required to consolidate the situation.

2) Second Miracle in 15 Years Needed for U.S. as Productivity Wanes
The world’s largest economy may need its second miracle in 15 years as waning productivity growth sets the stage for slower income gains, fewer job opportunities and larger federal deficits in the U.S.
Worker output per hour has fallen for two consecutive quarters, the first back-to-back decline since 2008. Going forward, business efficiency will advance at only about half the 3.4 percent pace during the so-called productivity miracle of 1997 to 2003.
Analyst Comment: This is not good news amid already dim prospects. An underlying trend of slow productivity growth has emerged, which means our baseline assumptions about economic growth may be a little too optimistic.

5. FRX
1) Yen, Dollar Climb on Spain Rating Cut, Before Confidence Report
The yen and dollar strengthened against the majority of their most-traded peers after Moody’s Investors Service cut Spain’s credit rating and before a European report that may show consumer confidence dropped.
The euro failed to extend a gain versus the dollar from yesterday, which came as the Guardian newspaper reported Germany and France support boosting a rescue fund for indebted member states to 2 trillion euros ($2.8 trillion). The Australian dollar slid versus 15 of its 16 major peers as futures indicated U.S. shares will fall.
Analyst Comment: Market sentiment is rather risk-off. The bias is for the yen to rise amid risk aversion.

2) ‘Screamingly Overvalued’ Aussie to Be Biggest Loser, BBH Says
Among Group-of-10 currencies, the Australian dollar will come under the most pressure against its U.S. counterpart as the rally in higher-yielding assets reverses, according to Brown Brothers Harriman & Co.
Strong domestic economic fundamentals will not support a “screamingly overvalued” Australian dollar, Mark McCormick, a New York-based currency strategist at Brown Brothers said in a telephone interview today. The Aussie’s price is farther above its 20-day moving average than any other G10 currency, according to McCormick. It is followed by the New Zealand dollar.
Analyst Comment: This risk rally has run out of momentum and the currency most sensitive to a potential sharp deterioration in risk appetite would definitely be the Aussie, based on short-term valuations. Relative to all the other currencies that have increased over the last two weeks, the Aussie is likely to snap back the most as markets capitulate again.

3) Canada Dollar Strengthens on U.S. Economy, European Debt Plans
Canada’s dollar strengthened against the greenback on eased concern its largest trading partner may be heading into recession after a report showed U.S. wholesale prices rose in September more than forecast.
The Canadian currency rose versus all of its 16 most-traded counterparts as stocks and crude oil, Canada’s largest export, climbed.

6. Stock Market
1) S&P 500 Rallies to Highest Level Since August as Banks Surge
U.S. stocks gained, sending the Standard & Poor’s 500 Index to the highest level since August, as Bank of America Corp. paced a rally in financial shares and optimism grew over progress on expanding Europe’s rescue fund.
Analyst Comment: We could be into one of those buying stampedes. It feels that the worst is in the rear-view mirror. Housing is not going to be a thing that sucks you down into a recession. Earnings are still going to look pretty good. Something has to happen in Europe.
It’s time to get less bearish. There’s a realization that at some stage this thing is going to turn. We know that they will come up with a deal in Europe, but the issue is if that deal will make the economy any good.

2) U.S. Stock Futures Fall After Apple Misses Estimates
U.S. stock futures fell after Apple Inc., the world’s biggest company by market value, missed analysts’ profit estimates for the first time since at least 2004.
While stocks rallied yesterday amid optimism about the European debt crisis and after Bank of America Corp. posted better-than- estimated results.
Analyst Comment: There’s just no conviction that seems to survive. Apple’s results have disappointed some people. People are wondering where the economy is going, what earnings will look like and whether Europe will work its way through this crisis.

3) European Stocks Fall on Debt Crisis, China Concern; BHP Drops
European stocks fell as concern that France may lose its top credit rating added pressure on the region’s leaders to find a solution to the debt crisis and as China’s economy grew at the slowest pace in two years.
The benchmark Stoxx Europe 600 Index slipped 0.4 percent to 235.33 at the close of trading. The gauge retreated 1 percent yesterday as a German government spokesman said that euro-area leaders will not provide a complete fix to the debt crisis at their next meeting. The measure has still rallied 9.5 percent from this year’s low on Sept. 22.
Analyst Comment: The crisis is not over yet. We had a very strong rally in the last couple of weeks, which was exaggerated. There was no fundamental reason behind it.

4) Asian Stocks Advance as U.S. Earning Boost Recovery Outlook
Asian stocks rose on signs a global economic recovery may be strengthening after Bank of America Corp. swung to a profit and Intel Corp. forecast sales that beat analyst estimates, boosting the earnings outlook for Asia’s companies.
Analyst Comment: There’s bound to be some residual optimism because of the strong gains in the U.S. on the back of some earnings optimism. We’re bound to see some positive momentum in Asian markets, but the risks with the European situation are still very, very high.

5) Bank Puts Drop Most in S&P 500 as Profits Cut Pessimism: Options
The cost of options protecting against losses in financial companies is falling faster than any other industry as earnings reassure investors that banks and brokerages will avoid a repeat of 2008.
Analyst Comment: A great deal of pessimism is baked into bank-stock valuations. Perhaps less volatility baked into the valuations is appropriate.

7. Commodity
1) Sugar Shortages Pummel Europe as World Glut Grows: Commodities
At a time when the world is facing its biggest sugar glut in at least four years, trade barriers mean the European Union is contending with a second consecutive annual shortage.
The EU, once the second-biggest sugar exporter, spent about 5.2 billion euros ($7.1 billion) since 2006 to shrink the industry after the World Trade Organization ruled it was dumping subsidized supply on world markets. At the same time, the bloc failed to scrap import duties, leaving users with the choice of either paying about 60 percent more than in the international market or shunning purchase and shuttering production.
Analyst Comment: We can’t buy sugar in the EU because there isn’t any. Anything like fizzy drinks, ice cream and bakery products is going to rise dramatically.

2) Rice May Rally on Thai Floods, State Buying, C.P. Group Says
Rice may advance 19 percent after floods cut supplies in Southeast Asia, including in the biggest shipper Thailand, and that nation’s government started a state- purchasing program, according to the country’s largest packer.
Costlier rice may push up global food costs and elevate inflation, complicating the task for the world’s central bankers as they seek to sustain economic growth hurt by the euro zone debt crisis. Indian suppliers may benefit from sales not met by Thailand and the South Asian nation may become the world’s second-largest supplier.

3) WTI-Brent Gap to Fall as Goldman Sees Glut’s End: Energy Markets
The biggest disparity in prices between the world’s two most traded grades of oil is likely to shrink next year as crude producers boost shipments by rail from the U.S. Midwest to refiners on the Gulf Coast.
Analyst Comment: Rail capacity should increase rapidly during the first half of 2012, which we expect will be enough to begin alleviating congestion.

4) Cocoa Drops to Two-Year Low as Ample Supply May Cut Hershey Cost
Cocoa fell to the lowest since July 2009 as rising output from West Africa and slowing economies in the U.S. and Europe signaled supply may exceed demand for a second year.
Analyst Comment: With the global economy the way it is right now, the demand isn’t there for cocoa. It’s hard to buy chocolate when you can’t afford Spam.