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Financial Markets: Headlines for July 7

July 7, 2011

EQ US equity indices erased early declines and closed modestly higher on Wednesday in mixed sector performance as sentiment remained cautious ahead of Friday’s nonfarm payrolls and the start of earnings season next week; the S&P 500 rose 0.1% to 1339.22; Euro Stoxx 50 fell for a third consecutive session and closed below the 50dma, losing 0.6% to 2832.63 led by financials (-2.1%) following the downgrade of Portugal and a rate hike by China; the Portuguese (-3.0%) and Italian (-2.4%) bourses underperformed

FI USTs rose again and the yield on the 10yr benchmark declined 1bp to 3.108%; the Portuguese 2yr yield surged 355bps to 15.9% and the 10yr yield spread versus Germany widened to a record of more than 1000bps; the iTraxx 5yr sovereign CDS for W. Europe also widened to a record high; Gilts tracked Bunds higher and the yield on the UK 10yr fell 7bps to 3.243%

FX The euro fell sharply during the morning session and was down 0.7% by the US close at a 6-session low of 1.431; EUR/CHF fell 0.9% to 1.202 as the Swiss franc again strengthened across the board amid concern about market contagion in the fallout from the Portugal downgrade; the US dollar index rose 0.5% to 75.03, up for a second session; Cable fell below the 200dma of 1.604, down 0.3% to 1.599

OIL Crude prices stabilized as China hiked rates and the US dollar strengthened; Aug’11 WTI fell 0.2% to $96.6bbl on Wednesday; gold benefited from safety bids as turmoil continued in European debt markets; the Aug’11 contract touched a two-week peak of $1534.5oz before moderating to $1529.2oz after the US close

CNY The PBoC announced an interest rate hike on Wednesday of 25bps, effective today, bringing the benchmark 1yr lending rate to 6.56% and the 1yr deposit rate to 3.5%

€ IMF MD Lagarde: the IMF will meet on Friday to discuss the next aid tranche for Greece; the IMF’s priority issues are sovereign debt in the developed economies and the risks of inflation and overheating in the emerging markets

€ Portugal sold €848m in 3-month T-bills on Wednesday within the target range of €0.75-1.0bn; the average yield was 6bps higher at 4.926% versus the yield at the previous similar auction on June 15; the bid/cover ratio was weaker at 2.04 versus 2.40 previously

€ European Commission officials questioned Moody’s decision on Portugal’s rating; EC Spokesman Altafaj said the timing and the use of hypothetical scenarios were questionable; EC President Barroso said the EU will strengthen regulations on ratings agencies from this month; the fact that there are no major ratings agency based in Europe suggests bias

€ EC Commissioner Barnier said the EU could explore the possibility of suspending the ratings of countries that are under EU/IMF aid programmes; "I invite the agencies, which are under the control of national supervisors, to be extremely careful to fully respect EU rules”

€ German FinMin Schaeuble said the influence of the rating agencies should be limited; he said that Portugal is ahead of the curve in implementing recommendations of the troika

€ Institute of International Finance Managing Director Dallara said after meetings in Paris that Greece’s creditors are looking at a “menu of options” including rollovers and buy-backs

€ German Deputy FinMin Asmussen: “since rating agencies have signaled that they will consider modalities (such as) the French proposal as a selective default — that means a rating event — we can also put other options like a bond exchange on the table”

$ The US ISM non-manufacturing index remained on a moderating trend and fell slightly more-than-expected in June to 53.3 versus the consensus forecast of 53.7 and 54.6 in May; the 3m moving average was the weakest since September; within the components, business activity (53.4) and new orders (53.6) growth slowed further and were both below their historic averages; the employment balance stabilized at 54.1 versus 54.0 previously

$ US Challenger job cuts rose 5.3% versus a year ago in June, the first increase since February (+20.5%); on the month, the government/non-profit sector announced the most cuts, at 10.2k in June versus 14.8k in May

€ German factory orders rose 1.8%MoM in May and the April gain was revised up to 2.9% from 2.8% reported originally; the result surprised positively versus the median forecast (-0.5%) for a second consecutive month, although foreign orders faltered in May and fell 5.8% in the sharpest decline since September; growth in foreign orders slowed on an annual basis to 11% in the 3 months to May versus 19% in Q1 and 24% in Q4

£ UK BRC shop prices accelerated to 2.9%YoY in June from 2.3% in May but the pace remained below the official UK CPI at 4.5% in May; food shop prices were up 5.7%YoY in June versus 4.9% in May, the fastest since May’09; non-food prices remained subdued, up 1.3%YoY versus 0.8% previously

£ UK Halifax house prices rose 1.2%MoM in June versus a revised increase of 0.4% in May (originally +0.1%), the largest monthly gain since Oct’10; prices remained in negative territory on an annual basis in the 3 months to June, down 3.5% versus -4.2% in May

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