“There are two kinds of people who lose money: those who know nothing and those who know everything” — Henry Kaufman (Economist)

1. China/Japan Disputes over Shenkaku Island Continues — tensions continued to flare between China and Japan as protests reportedly coalesced in at least 100 Chinese cities in the wake of a recent territorial dispute; The two countries’ worst diplomatic crisis in years puts at risk a trade relationship estimated at $340B.
2. Bank of Japan adds to stimulus — expand asset purchases by another ¥10 trillion — The Bank of Japan last week said it will provide more monetary stimulus in response to a slowing in domestic economic activity, increasing the size of its asset purchases by 10 trillion yen ($126.7 billion) to about ¥80 trillion. The central bank also left its policy-interest-rate target unchanged, in a range of zero to 0.1%.
3. Sales of existing homes surge in August, best of activity best since May 2010 — according MarketWatch, the National Association of Realtors reported sales of existing homes surged 7.8% in August and rose to a seasonally adjusted annual rate of 4.82 million from July’s 4.47 million. Fueled by low interest rates and pent-up demand, home sales have improved considerably from their recession-era lows, but still are well below the 2005 peak of just over 7 million.
4. Chinese PMI improves but still continues to shrink — China’s flash HSBC PMI rose to 47.8 in September from 47.6 in August, which, if confirmed, would represent the 11th straight month of contraction in the country’s manufacturing sector.
5. Another Californian city heads for bankruptcy — per Merced Sun-Star Atwater is the latest Californian city facing bankruptcy protection after racking up a deficit of over $3M. Council members held a meeting late last week to discuss declaring a fiscal emergency, which would allow Atwater to file for Chapter 9.
6. EU in talks over Spanish rescue plan — according to FT,
EU authorities are working behind the scenes to pave the way for a new Spanish rescue programme and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform programme that will be unveiled next week.
7. Russia may limit grain exports if prices jump — Russian Economy Minister Andrei Belousov has warned that the country may restrict grain exports – as it did in 2010 – if domestic prices increase too sharply. The government had previously said it wouldn’t limit exports despite a drought that will cause output to fall to an estimated 72M-73M metric tons from a record 94.2M tons last year.

The week ahead — Economic data from Econoday.com:

“Don’t fight the Fed” — unknown

1. German Court Opens Door for Rescue Fund — Germany’s Constitutional Court has ruled that the eurozone’s ESM rescue fund and the “fiscal compact” are constitutional, opening the way for the country’s president to sign the proposals into law. However, the court said that German liability must not surpass €190B without the Bundestag providing further authorization.
2. Spain considers request for ECB bond purchases — as reported by Reuter, Spain is considering asking for assistance from the ECB’s bond-buying program, PM Mariano Rajoy has told Finnish newspapers. His comments indicated Spain may apply for a precautionary assistance program under which the euro zone’s rescue funds could buy Spanish bonds as they are auctioned without the country being taken off the credit markets, rather than the kind of full sovereign bailout granted to Greece, Portugal and Ireland.
3. EU unveils new powers for ECB — European Commission President Jose Manuel Barroso today outlined EU plans to turn the ECB into the eurozone’s banking supervisor, the first step towards a banking union. The ECB would begin overseeing the bloc’s largest banks from July 2013 and smaller institutions six months later, although national authorities would retain control of daily supervision. Giving the ECB supervisory power will also enable the ESM to provide aid directly to banks.
4. Ford, GM mull European factory closures — the WSJ reported, Ford (F) is preparing to restructure its operations in the region and close a factory, possibly a 4,000-staff facility in Genk in Belgium. Meanwhile, GM (GM) is in talks with labor unions about shutting an aging plant in Bochum in Germany as it also struggles to turn around major losses.
5. Draghi’s planned bond-buying scheme lower yields for Italy & Spain — Yields dropped at an Italian auction of €6.5B of government paper, including €4B of 3-year debt which carried a rate of 2.75%. That’s down from 4.65% in July and the lowest since October 2010. The falling yields were attributed to the ECB’s planned bond-buying scheme, but it’s early days yet to see how long Italian yields will stay low, not to mention those of Spain.
6. Fed bets big in QE3 to rescue economy — per Reuter, the Federal Reserve launched another aggressive stimulus program last Thursday, saying it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market. The dollar has taken a dive as well as Treasurys.
7. S&P 500 Sectors Distance From All-Time Highs — courtesy from the Bespoke Investment Group, the S&P500 index is currently just 9% below its all-time high; However, the ten S&P 500 sectors would need to rally in order to trade to an all-time high(see chart below).

The week ahead — Economic data from Econoday.com:

“The market can stay irrational longer than you can stay solvent.” John Maynard Keynes.

1. Spanish, Italian yields fall on Draghi bond comments — ECB President Mario Draghi indicated that the bank would be open to buying government bonds with a maturity of 2-3 years, telling the European Parliament that doing so wouldn’t contravene EU treaties.
2. Moody’s Changes Euro Zone Rating Outlook to ‘Negative’ — NYTimes reported Moody’s Investors Service cut the European Union’s credit outlook to negative on Monday, reflecting the risks to Germany, France, Britain and the Netherlands, the four countries in the group with AAA ratings, which account for about 45 percent of the group’s budget revenue.
Moody’s also lowered the outlook on the union’s AAA long-term bond rating from stable.
3. DOJ accuses BP of “gross negligence” — the Department of Justice sharpened its rhetoric against BP (BP) and Transocean (RIG) over the Deepwater Horizon oil spill, accusing the companies of “gross negligence” in deciphering a key pressure test.
4. Spain plays game of chicken with ECB –knowing that the ECB is set to start bond purchases, Spain has begun a game of chicken: Finance Minister Luis de Guindos said the country isn’t so sure it will submit to a full-blown bailout if the terms are too harsh. Germany thought it had a deal – forcing Spain and Italy into Greek-like austerity in exchange for allowing the ECB to buy government debt.
5. Bank of England and the ECB left interest-rate unchanged — The BOE kept its interest rate unchanged at 0.5% and made no changed to its 375 billion pounds ($596.5 billion) asset-purchase program. The ECB kept its key lending rate at 0.75% as the ECB President Mario Draghi stated that ECB would engage in outright monetary transactions, or OMTs, to address “severe distortions” in government bond markets based on “unfounded fears”.
6. China unleashes $158B infrastructure stimulus — according to CNN, China is ramping up the stimulus as it seeks to boost its slowing growth, disclosing plans for 13 highway construction projects, nine sewage-treatment plants, seven waterway schemes, and five port and warehouse projects. That’s on top of the 25 subway projects China announced earlier this week, and takes total spending to 1T yuan ($158B).

The week ahead — Economic data from Econoday.com:

“The facts are unimportant! It’s what they are perceived to be that determines the course of events” — R. Earl Hadaly

1. Spain will probably need €60B of bailout according to Economy Minister — Spain expected to use approximately €60B of the €100B available for its bank rescue, Economy Minister Luis de Guindos has told the NYTimes.
2. Election Years chart pattern — the S&P500 (SPX) continues to track the typical election year chart pattern, courtesy of the Bespoke Investment Group. If the correlation continues to hold, the equity markets should track higher into the beginning of September before a pre-election correction.

3. Borrowing costs drop as Spain sells 3- and 6-month debt — Spain saw borrowing costs collapse at an auction of three- and six-month government bonds, amid growing expectations the European Central Bank will implement policy measures to help stabilize the euro zone’s sovereign debt markets at its next policy meeting in early September.
4. Hurricane Isaac Hits Louisiana — Hurricane Isaac arrived in New Orleans seven years to the day that Katrina struck, although Isaac is less powerful. Still, hundreds of thousands have been left without power, while nearly all oil output and two-thirds of gas production in the Gulf of Mexico have been shut down.
5. Catalonia Seeks Spain Rescue — the semi-autonomous NE region, which accounts for about 1/5th of national GDP, said it needs 5 bil euro. Catalomia is the 2nd province to ask for a Madrid bailout as Spain mulls requesting a national sovereign bailout.
6. Bundesbank chief considered resigning — Germany’s Bild reported Bundesbank President Jens Weidmann has thought about resigning in recent weeks, due to his opposition to Mario Draghi’s plans for the ECB to resume the buying of eurozone government debt.
7. Bernanke Speech at Jackson Hole — In a speech at the Fed’s Jackson Hole retreat last Friday, Bernanke did not pre-commit to taking action. However, he did reinforce the case for more asset purchases.

The week ahead — Economic data from Econoday.com: