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Financial Markets: Headlines for July 13

July 15, 2011

EQ The S&P 500 fell after Moody’s cut Ireland’s credit rating to junk status, which left the index lower for a third consecutive session, down 0.4% at 1313.64; most bourses across Europe closed lower as well on Tuesday (Stoxx 600: -0.6%), although losses were more moderate than in recent days following the Eurogroup’s expressed commitment to safeguard financial stability and loosen the terms of EFSF loans for borrowers, although the finance ministers also seemed to soften their stance on selective defaults in favor of achieving debt sustainability in Greece; the main Italian and Portuguese stock indices outperformed on Tuesday and posted gains of 1.2% and 0.9% respectively

FI USTs rose again as investors remained cautious amid headline risk and volatility in euro markets; the yield on the US 10yr benchmark touched a new 2011 low of 2.814%, finishing the US session at 2.877%, down 4bps on the day; government bonds from Italy, Spain, Portugal and Greece rose during the European session amid some talk of ECB bond buying, a completed Italian 12m bill sale, and the prospect of an EU leaders meeting on Friday, although the Eurogroup has taken a less cautious tone toward restructuring; profit-taking in Bunds sent the 10yr cash yield up 4bps to 2.708%, but the yield was still down 30bps from a week ago; the UK 10yr gilt yield stabilized at 3.089%, down 23bps versus last Tuesday

FX The euro lost 0.5% versus the dollar on Tuesday to 1.396 but had bounced from the intraday low of 1.384 posted at the start of the European session; EUR/CHF posted a new record low of 1.155; the yen rallied broadly again and there was a sharp drop in USD/JPY to 78.55 in thin trade after the NY close; cable fell to the lowest level since late-January (1.58) but stabilized at 1.591 by the NY close

$ The US Treasury sold $32bn in 3yr notes at a high yield of 0.670%, down from 0.765% at the sale on Jun7; the bid/cover ratio was solid at 3.22, above the 10-auction average of 3.15

$ US FOMC minutes showed some differences of opinion about future policy action depending on how economic conditions evolve; “a few members noted that…the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run”; however, there were a few members who highlighted greater inflation risks which could warrant removal of accommodation “sooner than currently anticipated”; “a few participants expressed uncertainty about the efficacy of monetary policy in current circumstances”; overall, “many members saw the outlook for both employment and inflation as unusually uncertain”

$ Fed Minutes: as part of prudent, advance planning the FOMC outlined some key elements on the exit strategy, including the view that when the fed funds target is finally increased, this target will again become “the primary means of adjusting the stance of monetary policy”

€ Moody’s downgraded Ireland late in the US session to junk status at Ba1 from Baa3 previously and the credit rating outlook remains negative; the agency cited growing risks that the country will need more rounds of official financing, as well as the risks to implementation of the fiscal reforms

€ The European Commission expressed disappointment with Moody’s decision on Ireland and said the Irish programme is on track; the Irish Debt Management Agency said that the Eurogroup’s proposed changes to the EFSF are a positive for Ireland

€ EC President Van Rompuy: "Let me be very clear, there is the highest commitment at the highest level to do whatever is necessary to safeguard financial stability”

€ German FinMin Schaeuble said it is clear that Greece’s debt sustainability must be improved; extending payment periods and lowering interest rates will help; all options for involving the private sector will be examined without reservation

€ Dutch FinMin Jan Kees de Jager said that a selective default “is not excluded any more…the 17 [Eurozone] ministers did not exclude it any more so we have more options, a broader scope"

€ EU leaders may hold a special summit on Friday about the Eurozone debt crisis

€ The Institute of International Finance (IIF) said quick action from EU officials on a Greek plan is needed; they suggest a debt buyback facility to reduce Greece’s debt burden; the ECB must clarify the impact of a potential selective default by the ratings agencies and clarify its collateral policy

€ ECB’s Bini Smaghi: "In a certain framework, the euro zone states should pass the emission of sovereign bonds to a supranational organization. That would ensure that each individual country would not take on more debt than agreed in the framework of stability programmes. We would have a real debt brake."

$ US trade balance fell to -$50.2bn in May from -$43.6bn in April, recording a larger-than-expected deficit on the month versus consensus at -$44.1bn; imports rose 2.6%MoM in May, led by crude oil (+14.7%) as well as ex-petroleum goods (+0.9%); US exports fell 0.5%MoM vs. +1.4% previously

€ The German CPI was confirmed at 2.3%YoY in June as expected and was steady versus May; food prices stabilized in June and petroleum prices fell for a 2nd consecutive month (-1.7% vs. -0.6%), although ex-energy prices rose 0.2% vs. a flat pace in May, up 1.5% from a year ago

€ The French CPI rose to 2.1%YoY in June as expected, up from 2.0% in May and from 1.5% recorded a year ago

£ The UK CPI fell unexpectedly to a 3-month low of 4.2% in June from 4.5% in May; the core measure excluding energy, food, alcohol & tobacco fell to a 7-month low of 2.8% vs. the consensus forecast for a steady reading of 3.3%; non-energy industrial goods prices slowed sharply to 0.8% from 1.8% led mainly by a drop in recreational goods prices, down 3.5% vs. -1.2% previously; energy prices advanced at 10.7%YoY versus +9.9% in May and food price growth accelerated as well, with processed foods and non-alcoholic beverages up 7.7% versus 6.2% previously

£ UK visible trade balance fell to -£8.5bn versus a revised -£7.6bn in April (originally -£7.4bn); this marked the widest monthly goods trade deficit since the record high was posted in December (£-9.9bn)

£ UK BRC like-for-like retail sales fell 0.6%YoY in June versus -2.1% in May; the decline was smaller than the median forecast (-1.4%)

£ UK RICS house price balance rose 1pt to -27 in June and the 6-month moving average continued to gradually improve, up at the highest level since Nov’10 (-26); this remains well below the average balance recorded over the past decade (-3.0)

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