Obama, Republicans Diverge on Debt Talks; 8 European Banks Fail Test

Bikram Pandey
16 Jul, 2011
New York City

U.S. debt talks veered in a direction that raised stakes for both parties as the House prepares to vote next week on a spending cut plan. Eight banks in Europe failed the watered down stress test and 16 additional banks will need to raise capital to meet regulatory requirements.

[R]7:15 AM New York – U.S. debt talks veered in a direction that raised stakes for both parties as the House prepares to vote next week on a spending cut plan. Eight banks in Europe failed the watered down stress test and 16 additional banks will need to raise capital to meet regulatory requirements.[/R]

U.S. indexes closed higher on Friday after consumer prices dropped 0.2% but industrial production rose in June. Republican controlled U.S. House plans to vote on a spending limit and an increase in the U.S. debt ceiling of $2.4 trillion tied to a constitutional amendment to balance the budget.

The plan drew immediate fire from the U.S. President Barack Obama and the Democratic leadership. Both sides remain apart in how to control spending and raise taxes and the prospect of the government default loom in 18 days.

Icahn offered to acquire the remaining shares in Clorox in a deal valued at $12.6 billion.

Google second quarter net income surged to $2.51 billion and Citigroup second quarter net income soared 24% to $3.3 billion. Cubist reported second quarter net loss and Genuine Parts second quarter net income increased 22% to $151.8 million. Mattel second quarter net increased.

European indexes traded lower ahead of the European Banking Authority tests results later today. Italian Parliament to vote today on a €48 billion austerity package. BHP Billiton agreed to acquire U.S.-based Petrohawk for $12 billion.

Euro area trade gap narrowed in May after exports rose 1.5%. European new car registrations fell and Swedish home prices remained flat in June. German factory employment increased and Dutch trade surplus rose in May.

After the market close, the European Banking Authority said of the nine banks stress tested, eight failed and 16 more will need to raise capital immediately. In all, eight banks are required to raise 2.5 billion euros.

European banks in the first four months of the year raised nearly 28 billion euros ahead of the stress test but bond market may not be convinced. The tests did not include full default on Greek bonds but only 25% decline in value but counted the trading losses resulting from the equity markets fall of 15% and economic growth decline of 0.5% in the euro-zone.

Greece based two banks, EFG Eurobank Ergasias SA and Agriculture Bank of Europe, Spain based five banks, Banco Pastor SA and Caja de Ahorros del Mediterraneo, Banco Groupo Caja3, CatalunyaCaxia and Unnim and Austraia based Oesterreichische Volksbanken AG failed to pass the test.

The UK indexes edged lower and Rebekah Brooks resigned as the chief executive officer of News International, a division of News Corp. The parent of Fox News has been reeling under pressure from several UK and U.S. inquiries that may unearth details of one of the longest held practices of phone hacking at the now defunct tabloid News of the World.

Stocks in Japan regained the upper end of the trading range of the last five weeks as the yen hovers near 4-month high. Electronics retailers jumped on the speculation that Japan may revive energy efficiency program as it faces severe power shortage this summer.

Australian stocks closed lower but resources linked stocks advanced and News Corp edged lower. Peabody raised its bid for Macarthur Coal to $4.73 billion and initiated the due diligence process.

Commodities, Bonds and Currencies

The 10-year U.S. bond yield increased to 2.91% and 30-year U.S. bond traded up to 4.25%.

The U.S. dollar decreased at $1.414 to one euro and fell against the Japanese yen to 79.08 yen.

Immediate delivery futures of Texas crude oil increased $1.65 to $97.35 a barrel and futures of natural gas increased 0.16 cents to $4.54 per mbtu and gasoline price added 1.48 cents to 313.96 cents a gallon.

In metals trading, copper increased 3.3 cents to $4.41 per pound, gold added $3.80 to $1,593.10 per ounce and silver increased $0.41 to $39.10.