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Financial Markets: Headlines for July 8

July 8, 2011

EQ US equity indices posted strong gains on Thursday as sentiment was boosted by stronger-than-expected ADP payrolls and some retail chain-store sales; the S&P 500 climbed 1.1% to 1353.22, the highest close since 10 May and off just 0.8% from the 2011 high recorded at the end of April; the Euro Stoxx 50 touched an intraday high during the ECB press conference as President Trichet waived the minimum credit rating threshold for accepting Portuguese government bonds as collateral; the index rose 0.4% to 2844.51, the first gain of the week

FI Greek and Portuguese government bonds at the shorter maturities remained under pressure despite the ECB announcement on collateral – the Greek 2yr yield rose 39bps to 27.8% and the Portuguese was up 94bps to 16.8%; the iTraxx 5yr sovereign CDS for W. Europe stabilized at 246bps versus 250bps on Wednesday; US Treasuries declined and the curve bear-flattened as the jobs data boosted risk sentiment, with the 2yr yield up 5bps to 0.468% and the 10yr yield up 3bps to 3.138%

FX EUR/USD reversed losses during the ECB press conference and ended the US session up 0.3% at 1.436; EUR/CHF gained 1% to 1.213 and both the Swiss franc and yen fell across the board versus other major currencies; the dollar gained 0.3% against the yen to 81.20 but was down broadly versus higher yielding currencies

OIL Commodity prices rose broadly on Thursday and crude prices jumped; Brent Aug’11 rose 3.8% to $118.3bbl, reaching the highest levels since mid-June; WTI rose 2.1% to $98.7bbl

€ Spain sold €1.5bn each in 2014 and 2016 bonds, at the top of the €2-3bn target range; the 2014 issue had an average yield of 4.291%, up 25bps from the yield at the auction on June2 and the bid/cover ratio was slightly weaker at 2.29 versus 2.49; the yield on the 2016 bonds rose 32bps to 4.871% but the b/c was stronger at 2.85 versus 1.86 on May5

$ The US Treasury will offer $32bn in 3-year notes on Tuesday, $21bn in 10yr notes on Wednesday and $13bn in 30yr bonds on Thursday, the same amounts as in the June auctions

$ US President Obama said that he will reconvene with Congressional leaders on Sunday; all parties reaffirmed the importance of raising the debt limit, but “the parties are still far apart on a wide range of issues”

$ Fed’s Hoenig (non-voter) again called for the FOMC to stop using the “extended period” language on low rates and raise the fed funds rate to 1% before pausing to evaluate; holding rates near-zero causes the economy to adjust and creates risk of a shock when rates do eventually go up; long periods of accommodative monetary policy sow the seeds of future imbalances

$ ADP private payrolls rose 157k in June versus +36k recorded in May (originally +38k), surprising positively versus the June consensus forecast of +70k; when averaged over the 2 months, the monthly gain of 97k was about half the average monthly gain recorded over the first 4 months of the year (197k); payrolls in the manufacturing sector rebounded by 24k in June versus -10k in May; private services payrolls were up 130k versus +46k previously

$ US initial jobless claims eased to 418k in the week ended 2 July versus an upwardly revised 432k in the previous week (originally 428k); the 4-week moving average edged down 3k to 425k but was unchanged from a month ago

€ The ECB announced a 25bps hike in the main refinancing rate to 1.50% as was widely expected and left the interest rate corridor at +/- 75bps; key language in the policy statement signaled that the ECB will likely hold steady in August but could tighten later this year; “rates across the entire maturity spectrum remain low” and the “monetary policy stance remains accommodative”; “will continue to monitor very closely all developments with respect to upside risks to price stability”

€ The ECB waived the minimum credit rating threshold in the collateral framework for the refinancing operations as it relates to debt instruments issued or guaranteed by the Portuguese government

€ Portuguese Banking Association (APB) head Antonio de Sousa said he would be “very surprised” if any Portuguese banks failed the stress tests

€ Eurogroup’s Juncker is in favour of a European-based rating agency; today’s rating agencies will lose relevance if they continue to behave as they have been

€ German industrial production rebounded 1.2%MoM in May versus -0.8% in April, led by output from manufacturing & mining (+1.2% vs. -0.3%) and construction (+1.1% vs. -5.0%)

£ The Bank of England left Bank Rate at the record low of 0.5% in place since Mar’09 and will keep asset holdings at £200bn as expected; the meeting minutes including the details of the vote will be released on July 20

£ UK industrial output rose 0.9% in May versus -1.7% in April, as manufacturing output surprised to the upside at +1.8%MoM versus consensus at +1.0% and a revised April decline of 1.6% (originally -1.5%); on a 3m/ 3m basis, industrial output was down 1.5% in May versus -0.1% in March

£ UK NIESR’s estimate of Q2 GDP growth was +0.1%, down from +0.5% recorded in Q1

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