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Financial Markets: Headlines for June 20

June 20, 2011

€ The Eurogroup finance ministers did not officially approve or set a date for disbursement of the next Greek aid tranche; they will decide on its disbursement by mid-July according to their statement published early Monday morning, as they wait for the Greek parliament to pass “key laws on the fiscal strategy and privatization”; they agreed that the next aid programme will include financing from official and private sector sources, and they welcomed informal, voluntary involvement of the private sector through rollovers of Greek bonds at maturity, avoiding a selective default; “ministers decided to define by early July the main parameters of a clear new financing strategy”

EQ Euro area bourses posted gains on Friday as Germany softened its position on the private sector’s role in a new Greek bailout and pledged alongside France to work with the ECB and only support voluntary involvement of private creditors that does not trigger a credit event or default; Euro Stoxx 50 rose 1.5% to 2770.12 and was up 1.4% on the week in the first weekly advance since 29 April; the Dow closed in positive territory as well (+0.4% to 12004.36) although Italy received a credit warning from Moody’s late in the US session; the Dow rose 0.4% over the choppy week, forestalling a 7th week of losses

FI US Treasuries fell modestly at the longer-end on Friday after the sharp, mid-week rally; the yield on the 10yr benchmark rose 2bps to 2.944%; the 2yr yield held at 0.375%; the Sep’11 German Bund future fell 41 ticks on Friday to 126.07 but was up 13 ticks over the week still near the contract high; peripheral debt rose on signs that Germany and France have agreed in principle on a role that private creditors should assume in the next aid programme for Greece; the yield on the Greek 2yr fell 163bps to 27%, down from the week’s high of 28.8%; the yield on the Spanish 10yr fell 8bps to 5.56%

FX The euro rose broadly on Friday, gaining 0.8% against the dollar to 1.430, but was still down 0.5% on the week; the dollar declined against all major currencies as the euro rallied, under some additional pressure from the IMF’s downwardly revised US economic projections and a disappointing reading on June UMich consumer confidence; USD/JPY fell 0.8% to end near the 80 mark

OIL Crude prices fell despite a weaker dollar; the Jul’11 WTI contract lost 2% to $93.01bbl by the end of the US session, the lowest close since January and below the 200dma of $95.23bbl; the Aug’11 Brent contract fell 0.8% to $113.25bbl, below the 100dma of $113.77bbl; Gold Aug’11 rose for a fourth session, up 0.6% to $1539.1oz

€ Greek PM Papandreou: "The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country’s credibility”; Greece’s cash reserves will soon be exhausted without the next aid tranche; he urged for unity in parliament

€ Greek PM Papandreou appointed current Defence Minister Evangelos Venizelos as the new finance minister and deputy prime minister in a cabinet reshuffle on Friday; the cabinet will face a vote of confidence on Tuesday night

€ Newly appointed Greek FinMin Venizelos: the government is stilly seeking a national consensus and does not plan to deviate from fiscal targets

€ German Chancellor Merkel and French President Sarkozy agreed on principles for participation of the private sector in a Greek aid packaged; they called for 1) voluntary involvement of private creditors, 2) no triggering of credit events or defaults, 3) agreement with the ECB, 4) quick action; they agreed that a Vienna-style initiative is a good foundation to use for negotiating private creditor participation; faster is better when it comes to a Greek aid package but they would not offer a strict timeline

€ Moody’s late on Friday placed Italy’s Aa2 rating on review for possible downgrade

€ ECB President Trichet: "Governance of the economic union is insufficient”; lessons of the current situation suggest that bold changes are needed

€ ECB’s Bini Smaghi said the impact of a Greek sovereign default is unclear, as was the case with Lehman’s collapse, in terms of who holds and has issued CDS, how it would affect the financial system, and the risk of contagion; Greek citizens must realize that a default would be worse than austerity

€ EU President Rompuy: any action on senior bondholders of Anglo Irish must be taken in consultation with the ECB

G20 IMF Global Financial Stability Report: risks to global financial stability have increased since the April report, due to 1) signs of a slowing global expansion; 2) concern about debt sustainability and political support for fiscal adjustment programs, leading to market pressures and worries about contagion; 3) a prolonged period of low interest rates that may push investors in a “search for yield” and increase financial imbalances

G7 IMF Fiscal Monitor: on Europe: “Rising risk perceptions in Greece, Ireland, and Portugal underscore the need to implement their adjustment programs and to develop a comprehensive and consistent approach to crisis management in the euro area” on the US: “to ensure fiscal sustainability, it is urgent that broad political support be forged on a comprehensive and balanced set of specific measures to underpin a credible medium-term fiscal adjustment plan with objectives (e.g., an explicit debt target) endorsed by Congress”

G7 IMF Economic Projections: the IMF lowered its US growth projection for 2011 and 2012 by 0.3ppts and 0.2ppts to 2.5% and 2.7% respectively; the 2011 UK growth forecast was lowered 0.2ppts to 1.5% while the 2012 forecast was left at 2.3%; the 2011 Euro area projection was revised up 0.4ppts to 2.0% on account of Germany and France, while the 2012 forecast was lowered 0.1ppts to 1.7%

$ US UMich preliminary consumer confidence fell more-than-expected to 71.8 in June from 74.3 in May, disappointing versus consensus at 74.0; the expectations component fell 2.7pts to 66.8 but remained above the 6m average of 66.1; the current conditions index fell 2.3pts to 79.6 and was the lowest since October; the 1yr inflation expectations measure fell to a 4-month low of 4.0% in June from 4.1% in May; the longer-term inflation expectations measure rose to 3.0% from 2.9%, but was within the range of the last 2 years (2.7-3.2%)

$ US index of leading indicators rose 0.8%MoM in May versus a revised decline of 0.4% in April (originally -0.3%); the annual change over the 6 months through May has moderated to 6.0% from 8.2% in Q1

€ The Eurozone trade deficit widened to €2.9bn in April from €2.2bn in March (originally €0.9bn), as imports rose 1.1% and outpaced exports at +0.6%; on a year-to-date basis the trade deficit was up at €21.9bn versus €7.0bn in the 2010 period

€ Eurozone construction output rose 0.7%MoM in April versus a revised decline of -0.1% in March (originally -0.3%) and -0.6% in February

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