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Financial Markets: Headlines for July 6

July 6, 2011

EQ The S&P 500 traded slightly weaker and in a narrow range at the start of a holiday-shortened but busy week, losing 0.1% to 1337.88 following last week’s gain of 5.6%; financials weighed on Tuesday (-0.8%) as Moody’s cut Portugal’s credit rating into junk territory after the European market close; the Euro Stoxx 50 index fell for a second consecutive session, down 0.7% to 2850.51 amid some disappointing Eurozone economic figures and ongoing uncertainty over the credit rating implications of private sector participation in the next Greek aid package

FI USTs rose and rates on 3-month T-bills turned negative toward the end of the session; the yield on the US 10yr benchmark fell 6bps to 3.127% but this marked a fourth full session in which it remained above 3%; the Sep’11 Bund future shot higher after Moody’s downgrade of Portugal, ending the session up 14 ticks at 125.62; in the European session Greek, Spanish and Italian government bonds were under pressure for a second session; the Greek 2yr yield surged 72bps to 27.5%; the yield on the Italian 10yr rose 9bps to 4.99%

FX The euro fell broadly against major currencies on the Moody’s announcement, and lost 1.6% against the Swiss franc to 1.213, while the franc strengthened across the board; the dollar rose broadly as well amid weakness in equities and heightened risk aversion, gaining 0.8% versus the euro (1.443) and 0.4% against the yen to 81.10

OIL Brent Aug’11 rose 1.9% to $113.46bbl on Tuesday and the contract came off only slightly from the day’s high of $114.44 after Moody’s Portugal downgrade; Barclays raised its 2012 price forecast for Brent by $10 to $115bbl; the Aug’11 WTI contract rose 2.0% to $96.83bbl; gold rose for a second session as Eurozone sovereign fears dominated investor psychology, up 2% to $1512.5oz

$ US President Obama invited the Congressional leadership to the White House for talks on Thursday about the debt ceiling and deficit reduction; he said the parties must come together over the next 2 weeks to find a deal; he does not support a short-term deal to raise the debt ceiling

€ Moody’s cut Portugal’s long-term government bond rating by 4 notches into junk territory at Ba2 with a negative outlook; the drivers were 1) growing risk that a 2nd round of official financing will be required, possibly requiring private sector creditor participation, and 2) heightened concern that Portugal will not be able to achieve deficit reduction and debt stabilization targets as set out in official agreements

€ The ECB would reportedly rely on the principle of using the best credit rating available from the credit rating agencies when making decisions about accepting Greek debt as collateral – Financial Times

£ UK FinMin Osborne said Europe faces a big task in making the bank stress tests credible; he noted that the BoE has warned that the greatest risk to the UK banking system is the European sovereign debt situation

$ US factory orders rose 0.8%MoM in May, disappointing slightly versus consensus at +1.0%, although the April decline was revised to -0.9% (originally -1.2%); durable goods orders rose 2.1% versus -2.5% in April, led by a rebound in orders for core capital goods (+1.6% vs. -0.4% in April), civilian aircraft (+36.5% vs. -29.0%), and defense capital goods (+4.1% vs. -3.6%); nondurable goods orders fell 0.2% in May, the first decline since Jun’10 which likely reflects a decline in energy prices; shipments of core capital goods accelerated on a 3-month annualized basis to 10.2% in May, the strongest since October (+10.5%)

€ The Eurozone services PMI was revised down to 53.7 in the final June estimate versus the preliminary reading of 54.2, marking a larger decline from 56.0 in May to leave the PMI at the lowest level since Oct’10; new business expanded, but at the slowest pace in 7 months; Eurozone business expectations deteriorated to the weakest since Jul’09; growth in services sector activity remained driven by Germany (56.7) and France (56.1), but the Italian PMI declined sharply to 47.4 from 50.1 and the Spanish measure signaled stalled growth at 50.2 versus 50.9 previously

€ Eurozone retail sales dropped 1.1%MoM in May, the largest decline since Apr’10, versus an increase of 0.7% in April; this left sales down at a sharper pace of -0.6% in the 3 months to May versus -0.2% in Q1 and -0.3% in Q4

£ The UK services PMI rose 0.1pt to 53.9 in June but remained below the historic average (55.1) for a third consecutive month, signaling a subdued pace of activity; new business expanded but the pace was the slowest in 4 months; business expectations fell to an 8-month low


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