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Financial Markets: Headlines for July 12

July 15, 2011

€ The Eurozone Finance Ministers late on Monday “reaffirmed their absolute commitment to safeguard financial stability in the euro area… stand ready to adopt further measures that will improve the euro area’s systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate”; the Eurogroup’s Working Group has been tasked to explore steps to fund Greece through a new adjustment programme, “to reduce the cost of debt-servicing and means to improve the sustainability of Greek public debt”

EQ US and European equity indices posted further declines on Monday as sentiment remained depressed after the weak US labor market report and greater concern about financial market contagion spreading to Italy or Spain while a new aid programme for Greece remains under construction; the Euro Stoxx 50 dropped 2.9% to close at a new 2011 low of 2709.14, led down by financials (-5.0%); the Italian bourse closed down 4.0% and the Portuguese lost 4.3%; the S&P 500 fell broadly and closed near intraday lows, down 1.8% on Tuesday at 1319.49, just marginally above the 50- and 100-day moving averages; after the US market close, Alcoa (AA, -2.9%, $15.91) kicked off the Q2 earnings season by reporting stronger revenue and earnings versus a year ago, due in part to higher aluminum prices

FI USTs posted further sharp gains and the yield on the 10yr benchmark fell back below 3%, down 11bps on the day to 2.917%; Bunds rallied and the cash yield on the German 10yr plunged 16bps to 2.669%, while yields on peripheral Euro area debt rose sharply especially at 2yr maturities; the spread between Italian and Spanish 10yr yields and the German Bund touched new euro-era highs; Italian 5yr sovereign CDS rose 56bps to close at a record high of 296

FX The euro fell to a new record low of 1.167 against the Swiss franc, ending the session down 1.7% from Friday at 1.173; EUR/USD lost 1.2% to 1.403, trading at the lowest levels since late-May; the dollar index rose steadily, up 1.2% to 75.99, above the 100dma of 75.26, although USD/JPY fell 0.6% as the yen outperformed versus all major currencies

OIL Crude prices fell as risk aversion intensified; the benchmark WTI contract lost 1.2% to $95.2bbl; moves in Brent were more subdued, with the Aug’11 contract down 0.9% to $117.14 but still above the 100dma; gold rose for a fifth consecutive session, up 0.5% to $1549.2oz

$ US President Obama hopes to achieve “the largest possible deal” to cut the deficit along with raising the federal debt ceiling

$ Fed Senior Credit Officer Opinion Survey on Dealer Financing Terms: June results “pointed to a continued gradual easing in credit terms with respect to major classes of counterparties, including hedge funds and other private pools of capital, insurance companies and other institutional investors, and nonfinancial firms. Reasons cited as most important…were more-aggressive competition from other institutions and an improvement in general market liquidity and functioning”

€ EC President Rompuy on his meeting with ECB President Trichet, EC President Barroso, Eurogroup Chairman Juncker and EU Economic Commissioner Rehn: "We discussed the issues related to the implementation of the decision of the European Council on a new programme for Greece and we also exchanged views on recent developments in the euro area"

€ German FinMin Schaeuble: "We have put in the place what was necessary for Greece and now we will swiftly, but without undue haste, negotiate a new programme for Greece. We’re on the right track”; "We will today sign the agreement for the medium-term stability mechanism. We will adjust the EFSF [European Financial Stability Facility] to the volume that we see fit for the medium term.”

€ German Chancellor Merkel: "Italy must itself send an important signal by agreeing on a budget that meets the need for frugality and consolidation”; she has spoken by phone with Italian PM Berlusconi; "Regarding Greece, I would like to say it must get a new programme very quickly, within a very short time frame"

€ ECB’s Bini Smaghi: the correlation between sovereign and bank CDS is potentially explosive; the lower capitalization levels of Italian banks compared with foreign rivals lend an “element of fragility”; Italian banks must accelerate the recapitalization process; Italy will never default because it is a rich country and clearly able to pay back its debt

€ ECB’s Nowotny: "On the one hand, it is of course important to push for strict discipline and for the keeping of promises in a country like Greece. But looking at the tradition and experience of the Marshall Plan it is certainly sensible to have an expansive element, a positive element"

€ French manufacturing production rose 1.5%MoM in May, coming in above the consensus forecast at +0.3%, versus a revised gain of +0.1% in April (originally +0.2%)

£ UK BoE Governor King: “inflation should fall back towards the target during the next two years" as pressure from temporary factors eases

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