MarketView for October 31

 

 

Summary

 

It was a dismal end to Wall Street’s best month in 20 years on Monday, brought on by the failure of trading firm MF Global Holdings and new worries about Europe's debt crisis, both of which sent financial shares tumbling

 

In a sign that Europe's woes were far from over, Italian and Spanish bond yields soared, prompting the European Central Bank to buy the debt, while shares of European banks came under heavy selling pressure. News late in the day that Greece called an unexpected referendum on a new EU aid package unnerved investors and added to the uncertainty.

 

MF Global, the futures broker that made big bets on European sovereign debt, filed for Chapter 11 bankruptcy protection, making it the largest U.S. casualty of the euro-zone crisis. Trading in MF Global shares was halted.

 

Financial shares took the brunt of the downturn on Monday with Morgan Stanley falling 8.6 percent to $17.64. Monday's losses marked a reversal of last week's euphoria over European leaders' deal to contain the debt crisis.

 

Stocks fell at the open on Monday as a spike in the U.S. dollar weighed on commodity prices and dried up bids on other risky assets. Despite early losses, the benchmark S&P 500 index was still on track for its largest monthly percentage gain since early 1987.

 

The dollar rose to a three-month high against the yen as the government of Japan intervened to curb its currency's appreciation, which is hurting the export-based economy.

 

The rise in the dollar pressured commodity prices, with copper off 2 percent and Brent crude down 0.3 percent. Many commodities are priced in dollars, making a spike in dollar prices more expensive for traders in other currencies and sapping demand. Shares of Freeport-McMoRan Copper & Gold were down 4 percent to $41.07 but were up nearly 35 percent so far in October.

 

As the sell-off accelerated at the market's close, the CBOE volatility index rose 22.1 percent, its largest daily gain since mid-August. Nonetheless, despite the declines, the S&P 500 index was up nearly 11 percent for the month and posted its best monthly percentage gain since December 1991.

 

Volume was moderate, with about 7.7 billion shares changing hands on the three major equity exchanges.

 

Greece Calls for Referendum on EU Aid

 

Greek Prime Minister George Papandreou called an unexpected referendum on Monday on the EU bailout deal for his debt-ridden country, a move that could necessitate a snap election if a public angry with swinging austerity measures rejects the deal.

 

Pressured by his own lawmakers to share the heavy political burden of belt-tightening with other parties, Papandreou said he needed wider political support for the fiscal measures and structural reforms required by international lenders. Yet, holding a referendum was a baffling decision, given that the latest survey showed a majority of Greeks taking a negative view of the bailout deal.

 

Opposition parties reacted angrily, accusing Papandreou of looking for a way out for his embattled party by dragging Greece, which has seen violent clashes between protesters and riot police, through a lengthy period of political instability.

 

Papandreou, grappling with Greece's worst financial crisis in 40 years, had discussed holding a referendum but many people were shocked at the prospect of weary, disgruntled citizens being asked to decide whether to accept or reject the bailout.

 

Weekend polls showed most Greeks took a negative view of the decision by euro zone leaders last week to hand cashed-strapped Athens a second, 130-billion-euro bailout and a 50-percent write-down on its enormous debt to make it sustainable.

 

Germany issued a statement saying the EU was working hard to put the second Greek aid package in place by the end of the year and had no comment on the referendum. EU leaders hammered out the deal last week, fearing the Greek debt crisis would speed to other euro zone countries and shake global markets.

 

Papandreou also said he would ask for a vote of confidence to secure support for his policy for the rest of his four-year term, which expires in 2013.

 

Analysts said he was likely to win that, despite dissent among his parliamentary team. He was forced to expel a senior party member for voting against part of his latest austerity package and others warned him it was the last time they would vote for measures they did not believe in.

 

Parliament officials said the confidence debate would begin on Wednesday, with a vote on Thursday or Friday.

 

Papandreou said the referendum would ask Greeks whether or not they agreed to the deal and would take place in a few weeks. But parliamentarians questioned its legality under the constitution, which does not allow referendums on economic issues, only on matters of great national importance.

 

The last time Greeks held a referendum was in December 1974, when they voted to abolish the monarchy shortly after the collapse of a military dictatorship.

 

For a referendum result to be binding, there must be a minimum 40 percent turnout on issues of "crucial national importance" and 50 percent on a law that has already been voted on in parliament and "regulates a serious social issue," according to legislation enacted earlier this year. It was not clear which option the government would favor.

 

Nearly 60 percent of Greeks view Thursday's EU summit agreement on the new bailout package as negative or probably negative, a survey showed on Saturday.

 

Several lawmakers have defected from Papandreou's Socialist party over the packages of austerity measures enacted to qualify for bailout payments under last year's aid agreement, and the party trails in opinion polls. New Democracy is rising fast in opinion polls, but no party would win outright if polls were held now, leading to coalition governments or repeated elections.

 

MF Global Files for Bankruptcy

 

MF Global Holdings Ltd, the futures broker run by former Goldman Sachs chief Jon Corzine, has filed for Chapter 11 bankruptcy after a tentative deal with a buyer fell apart. The firm's meltdown in less than a week is a stunning setback for Corzine, who sought to turn MF Global into a mini-Goldman. Corzine became CEO last year after losing his governorship of New Jersey, and his big bets on euro-zone debt sealed the company's fate.

 

The bankruptcy filing came after talks to sell a variety of assets to Interactive Brokers Group broke down early in the day on Monday. The morning also saw central banks and exchanges suspend the firm’s trading activities. The New York Federal Reserve suspended MF Global from conducting new business with the central bank. CME Group, ICE Futures U.S. and Singapore Exchange all halted the broker's operations in some form.

 

The bankruptcy makes MF Global the most prominent U.S. casualty yet from the euro-zone debt crisis, and harkens back to 2008 when Lehman Brothers collapsed at the height of the U.S. financial crisis. However, the impact from this collapse is far smaller would be contained.

 

MF Global scrambled through the weekend and into Monday to find buyers for all or parts of the company, while at the same time hiring restructuring and bankruptcy advisers in case nothing could be done.

 

The company's shares and bonds have fallen sharply in recent days. In the past week, MF Global posted a quarterly loss, its shares fell by two-thirds and its credit ratings were cut to junk. The company, which under Corzine ramped up more risky proprietary trading, is suffering because of low interest rates and the bets on European sovereign debt. Corzine was trying to transform MF Global from a brokerage that mainly places customers' trades on exchanges into an investment bank that bets with its own capital.

 

If a sale is in the offing, the buyer may be a European bank or sovereign government, as such entities would be particularly keen on stopping the slide and maximizing the value of the notes, Brandt said.

 

MF Global's deeply distressed 6.25 percent notes maturing in 2016 fell 10.5 cents on the dollar to 39.5 cents, pushing their yield up to 31.6 percent, according to the Trace bond pricing service. The price had earlier fallen as low as 15 cents.

 

The company hired boutique investment bank Evercore Partners to help it find a.

 

Japan Intervenes on Yen

 

Japan sold yen for the second time in less than three months after the currency hit another record high against the dollar Monday, saying it intervened to counter excessive speculation that was hurting Japan’s economy.

 

The intervention vaulted the dollar more than 4 percent higher, which would mark its biggest one-day gain in three years, and Finance Minister Jun Azumi said Tokyo would continue to step into the market until it was satisfied with the results.

 

Many market players voiced doubts the impact would last given that previous intervention since September 2010 had failed to prevent the yen from resuming its rally and setting a series of all-time highs against the dollar.

 

Tokyo's latest foray followed repeated warnings that its patience with the yen's strength was wearing thin, and came just days before the Group of 20 leaders' summit in Cannes, France. The summit will focus on Europe's efforts to contain its sovereign debt crisis and avoid a repeat of the financial shock that roiled markets after the Lehman Brothers collapse in 2008.

 

However, Tokyo is determined to win G20 understanding that a strong yen is one challenge too many for an economy grappling with a nuclear crisis, a $250 billion rebuilding effort from a March earthquake and tsunami and ballooning public debt.

 

Japan also says investors buy the yen as a safe haven from the euro zone debt crisis and stuttering U.S. growth. It argues such demand has nothing to do with the fragile health of the Japanese economy.

 

"We started currency intervention this morning in order to take every measure against speculative and disorderly moves and to prevent risks to the Japanese economy from materializing," Prime Minister Yoshihiko Noda told parliament.

 

The intervention came after the dollar touched a record low of 75.31 yen and pushed the world's main reserve currency up past 79 yen. The dollar, however, slipped below 78 in European trading.

 

Japan's economy has been recovering from its post-quake recession with companies swiftly restoring production and supply chains and Tokyo has counted on reconstruction spending and robust emerging markets demand to sustain the momentum. But the yen's climb has spurred policymakers to act.

 

Several G20 nations, including Japan's exports rival South Korea, have intervened frequently in markets. But Japan is under more scrutiny as an issuer of one of three global currencies and does not want to be labeled as a currency manipulator.

 

Even though the yen's exchange rate measured against a trade-weighted currency basket and adjusted for inflation is not far from its 30-year average, its dollar rate is much stronger than that used by exporters in their earnings projections. That has led to a flurry of warnings from car makers and electronic firms that they might be forced to move more production abroad to cope.

 

Chipmaker Elpida warned it might have to move production overseas and Honda's chief executive said earlier this month that the company would half exports from Japan over the next decade because of the strong yen.

 

Last Thursday, acting in part out of concern that such "hollowing out" of the industry could stunt Japan's recovery, the BOJ eased its monetary policy by boosting government bond purchases.

 

($1=75.76 yen)