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Financial Markets: Headlines for June 23

June 23, 2011

EQ The S&P 500 traded sideways Wednesday but began to decline during Fed Chairman Bernanke’s press conference, ending down 0.7% on the day at 1287.14, weaker across all sectors led by consumer services (-0.9%) and technology (-0.8%); the Fed lowered its 2011 and 2012 GDP growth forecasts and the Chairman noted that in addition to the temporary factors that are weighing on activity, other headwinds may also be stronger than previously assumed; the Euro Stoxx 50 fell 0.3% on Wednesday after the bounce of 2.0% in the previous session; the index is up +0.1% year-to-date

FI USTs were slightly higher ahead of the FOMC decision and press conference but then erased gains to end flat on the session as the Fed flatly confirmed the end of QE2 and acknowledged stronger inflation; the yield on the 10yr benchmark was steady at 2.983% and the 2yr held at 0.37%; the Sep’11 Bund future rose 32 ticks to 126.21 and peripheral Euro area government debt ended mostly weaker as hurdles to avoid a Greek debt restructuring remained in focus; Gilts rose as the BoE MPC minutes showed a less-hawkish vote breakdown and some voters in the neutral camp noted that further asset purchases might become warranted; the yield on the 2yr gilt fell 4bps to 0.748%

FX Sterling weakened across the board versus major currencies and lost 1.1% versus the US dollar to 1.607; the euro gained 0.7% versus sterling to 0.893 but fell 0.5% versus the Swiss franc, shrugging off the confidence win by the Greek PM; the euro lost 0.4% versus the dollar to 1.435 and continued to decline after the US close; USD strengthened late in the day during Fed Chairman Bernanke’s press conference

OIL WTI Aug’11 crude rose during the US session, gaining 1.0% to $94.6bbl as the EIA figures showed a larger-than-expected draw down in crude stocks last week, but the contract is still down 3% from a month ago; gold rose again and inched closer to the record high of early May; the Aug’11 contract was up 0.2% to $1547.6oz

$ The Fed will complete its $600bn Treasury purchase program by the end of this month and will continue reinvesting principle payments on MBS and agency holdings into Treasuries, with the aim of holding the securities portion of the balance sheet at a stable level; the FOMC expressed disappointment with the pace of the ongoing, moderate economic recovery; although some of this is due to temporary factors and a pick up in growth is expected in coming quarters, Fed Chairman Bernanke said that other more permanent headwinds may be stronger than the Fed had thought; the 2011 growth projection was lowered further to 2.7-2.9% from 3.1-3.3% in April and the unemployment rate projections were upwardly revised through 2013; the wording of the policy statement implied that inflation is now above its mandate-consistent level, but it is expected to fall back in 2012/13

$ US Tsy Secretary Geithner: It’s important not just to bring more gravity to our fiscal position and demonstrate that we can live within our means, but we have to do that in a way that that’s going to be good for growth. Good for the economy in the near term and good for the economy in the long run, and that’s a complicated challenge”

$ US FHFA house prices rose for the first time since May 2010, up 0.8%MoM in April versus a revised decline of 0.4% in March (originally -0.3%); the decline versus a year ago eased to -5.7% versus -6.2% previously

€ The Greek cabinet approved draft legislation of its new five-year austerity plan, which will be submitted to parliament on Friday – Reuters

€ German Chancellor Merkel said that no concrete decisions on Greece will be taken at this week’s EU leaders summit; the confidence vote in the Greek government was an important step but now they must push through the austerity package; she called for a voluntary, substantial and quantifiable contribution from the private sector in a Greek aid deal, but noted that there is not broad support for this in Europe; the ECB must agree on the method; a default would unleash contagion

€ European Systemic Risk Board: the most serious threat to financial stability is the link between the vulnerabilities in the public finances and the banking system; debt problems have potential contagion effects across the EU and beyond

€ Eurozone EC preliminary June consumer confidence stabilized at -10.0 versus -9.9 in May (originally -9.8); the 3m moving average has remained at a plateau of about -10.5 since Nov’10, which is above the historic average of -12.0 (since 1985)

€ Eurozone industrial orders rose 0.7%MoM in April, below consensus at +1.0%, following a March decline of 1.8%; the 3-month change eased to +1.2% in April from +3.4% in March and +3.9% in Q1

€ French INSEE business confidence bounced back to 109 in June from a revised 106 in May (originally 107), and came in above the 6-month average of 108

£ UK BoE MPC voted 7 to 2 as expected in favour of holding Bank Rate at 0.5% at the decision on June 9; Chief Economist Dale and MPC member Weale continued to support a rate hike of 25bps, while on asset purchases, Adam Posen remained dovish and voted for an increase of £50bn to £250bn; the Committee judged that upside risks to inflation in the medium term had changed little over the month, but downside risks had increased; for the steady-rate voters, the current weakness in demand growth was thought likely to persist for longer than previously expected, and “fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand”; for some members “it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialized”, although others in the neutral camp remained concerned that inflation expectations could rise

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