Germany Cut to Negative by Moody's|
Late Monday, Moody's Investors Service cut its outlook on Germany’s triple-A
credit rating to negative from stable as well as, the Netherlands and
Luxembourg, leaving only Finland with a stable outlook. “Moody’s now has
negative outlooks on those Aaa-rated euro-area sovereigns whose balance sheets
are expected to bear the main financial burden of support — whether because of
the need to expand the European Stability Mechanism (ESM) or the need to develop
more ad hoc forms of liquidity support,” the ratings firm said. Strategists
warned yield-hungry investors that they may be pushing their luck by piling into
core euro-zone government bonds as well as longer-dated German bunds. The
renewed threat of a Greek exit from the euro zone along with rising fears that
Spain will be forced to seek a full-fledged bailout, have fueled haven-related
flows into German and other core European government bonds in recent weeks. In
early July, the European Central Bank’s decision to cut the rate it pays on
overnight deposits to zero from 0.25% have also fueled flows into those markets.
Germany, France, Finland, Belgium and the Netherlands and have all seen negative
yields on short-term bills. Spain’s 10-year yield is pushing well above the 7%
level that many economists fear could force the country to seek a bailout unless
brought down quickly. The euro-zone 'semi-core' - French, Austrian and Belgian
long-term bonds, have outperformed Germany, narrowing yield spreads versus bunds
to levels seen last summer before the debt crisis intensified in the autumn.
While Moody's said it does not see a Greek exit as its 'base case', the threat
has increased. “Although Moody’s would expect a strong policy response from the
euro area in such an event, it would still set off a chain of financial-sector
shocks and associated liquidity pressures for sovereigns and banks that policy
makers could only contain at a very high cost,” the ratings firm said. Moody’s
said if they failed, the result would be a gradual unwinding of the currency
union with a “profoundly negative” impact on all euro-zone members. Even without
an exit, the liabilities taken on by the strongest euro-zone countries are
rising due to foot dragging by policy makers or what Moody’s termed a 'continued
reactive and gradualist policy response'. “Moody’s view remains that this
approach will not produce a stable outcome, and will very likely be associated
with a series of shocks, which are likely to rise in magnitude the longer the
crisis persists,” the firm said. Moody’s warned that the continued deterioration
of the situation surrounding Spain and Italy increases the risk that the
countries will need external help. Additionally, Moody’s warned that Germany is
vulnerable due to its banking system’s sizable exposures to the most distressed
countries in the euro zone, particularly Italy and Spain. German banks are
particularly vulnerable to a further deepening of the crisis as they have a
combined limited capacity to absorb losses and structurally weak earnings.
According to a survey released Tuesday, growth in the U.S. manufacturing sector
slowed in July to the second-weakest level since the country emerged from
recession. The Markit flash U.S. manufacturing purchasing managers index dropped
to 51.8 from 52.5 in June, striking the worst level seen since December 2010 and
second-worst seen since late 2009. Readings above 50 indicate an improvement
from the prior month. The Markit flash index is based on 85% to 90% of typical
monthly responses and released about a week ahead of the final data. The output
index dropped to 52.2 from 53.4 in June, and the new-orders index fell to 51.9
from 53.7, with the new-export orders staying in contraction territory at 48.2
from 48.3. Employment moved ever so slightly higher to 52.9 from a 52.8 reading.
“The U.S. manufacturing sector is clearly struggling under the pressure from
falling exports, which showed the first back-to-back monthly decline for almost
three years in July,” said Chris Williamson, chief economist at Markit, in a
statement. Much of the export weakness stems from the euro-zone debt crisis and
slowing activity in China.Markit reported that euro-zone manufacturing PMI
dropped to 44.1 in July from 45.1 in June, which marks the worst level in more
than three years, and that the HSBC Chinese manufacturing PMI edged up to 49.5
from 48.2 in June.
Richmond Fed reported its manufacturing index for the central Atlantic region
tumbled to a -17 reading from -1 in June. That index, designed so that readings
above zero indicate growth, was hurt by deeply negative readings for shipments
and new orders. The shipments index plunged to -23 from zero in June, and the
new-orders index dropped to -25 from -7.
When an accomplished 'fixer' like Pascal Lamy, the head of the World Trade
Organization and the longtime chief of staff for former European Commission
President Jacques Delors, describes the situation in Europe as “difficult, very
difficult, very difficult, very difficult,” you know it is time to run for
cover. The financial volatility in Europe may have created a situation that is
now beyond the capacity of policy makers to curb or control. The European crisis
has gone well beyond the prospect of breaking up the euro (EURUSD) and the
threat is now that of a full-fledged financial and economic collapse in Europe
that could plunge the world into a second Great Depression. During the
depression of the 1930's, the worldwide banking crisis started by cascading bank
failures in Austria and Germany as one of the major causes of that Depression.
In the summer of 1931 the collapse of Creditanstalt in Vienna forced one of
Germany’s big banks, Danatbank, to fail, leading to a credit crisis that
prompted bank holidays around the world and exacerbating an already severe
economic crisis. German banks are notoriously undercapitalized, poorly
supervised and have created a number of mini-crises in the past few decades
since the collapse of the Herstatt Bank in 1974. The latest austerity measures
in Spain which were approved by the national Parliament last week, even as the
economy continues to contract, has led to new riots in the streets, pushing the
yields on Spanish bonds above the 7% level deemed manageable, and increasing the
likelihood of contagion to Italy. German Economics Minister Philipp Roesler said
the possibility of a Greek exit from the euro has 'lost its horror'. German
Finance Minister Wolfgang Schauble says Greece must try harder to meet its
austerity commitments. The problem is the growing possibility of defaults in
Spain and Italy that will lead to bank failures across the continent and
incalculable consequences. Federal Reserve Chairman Ben Bernanke has been
relatively timid in recent months, keeping his distance from the European crisis
and failing to make a convincing case for the Fed’s inaction in following its
own mandate to promote employment in the U.S. The worst may still be averted but
the challenge of the crisis in Europe is indeed very, very, very difficult, and
it is hard to see at this point where salvation could come from.
Baidu Inc. (BIDU) U.S. listed shares were higher by 7% into late afternoon
trading after posting 70% surge in Q2 earnings, Tuesday morning. BIDU revenue
jumped 60% during the period, narrowly beating analysts' expectations for the
period. Trading volume was almost 4x normal trading average.
Carl Icahn said he believes "Forest Labs (FRX) is in crisis." In a letter to
Forest Labs board, Icahn wrote another harshly worded letter despairing the
company's prospects, the latest move in a long-running battle between the drug
maker and the billionaire investor. Icahn said the company is unprepared for the
upcoming patent cliff for Alzheimer's drug Namenda, which could be 'devastating'
for the company, and was 'completely unprepared for the Lexapro patent cliff'.
Icahn added that Chief Executive Howard Solomon will be 'wrong again about his
currently optimistic view of the company's pipeline', noting that Forest's new
pipeline drugs have missed guidance eight out of 11 times in the past four
years. "I strongly believe that this current crisis is the direct result of
strategic flaws that have caused a lack of focus and cost inefficiency. At the
core of these strategic flaws is the board's decision to allow David Solomon,
Howard Solomon's son, to be unduly given so much responsibility over such a
critical area as strategic planning," Mr. Icahn said. He urged shareholders to
vote in favor of his four board nominees. In June, the scuttle between Forest
Labs and Mr. Icahn was revived when Icahn nominated four candidates to Forest's
10-member board and said he was seeking records of the company's actions. Forest
said Mr. Icahn's nominees have "significant and obvious conflicts and
entanglements that compromise their independence and ability to represent all
Forest shareholders." Last week, Mr. Icahn fired back at Forest, saying that he
doesn't believe this board has "the slightest grasp over what constitutes a
conflict." In the past, Icahn has pointed to companies that improved after his
nominees were on their boards - for example - Amylin Pharmaceuticals Inc. (AMLN)
and Biogen Idec Inc. (BIIB). Forest recently reported fiscal Q1 earnings that
fell 79% as the pharmaceutical company was hit by sharply lower sales of
Lexapro, its antidepressant, which masked growth from some of its other drugs.
Last month, Forest Labs reduced its fiscal-year earnings guidance because of
lower-than-expected branded Lexapro sales and more-aggressive pricing for the
authorized generic version of the antidepressant following the March loss of the
drug's patent exclusivity.
Shares of Sarepta Therapeutics (SRPT) share price rocketed higher by 149% into
late day trading today after the biotech group released positive Phase IIb
clinical results for its drug candidate eteplirsen. Sarepta is testing to see if
the drug can slow the progression of Duchenne muscular dystrophy.
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