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Financial Markets: Headlines for July 14

July 15, 2011

$ Moody’s followed through on its comments from early June and put the US Aaa credit rating on review for possible downgrade, “given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations”; if the debt limit is raised but there is no substantial and credible agreement on long-term deficit reduction, Moody’s said the outlook on the rating will likely remain at negative; the Aaa ratings of Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks were also put on review for downgrade

EQ US equity market futures fell in after-market trade as Moody’s lowered its outlook on the US credit rating; US cash equity markets had closed higher Wednesday, although off of the day’s highs, as Fed Chairman Bernanke left the door open to further monetary stimulus; the S&P 500 rose as much as 1.4% but pared gains to 0.3% (1317.72) by the end of the session; equity indices closed broadly higher across Europe (Stoxx 600 +0.6%) although Greek (-2.2%) and Portuguese (-0.1%) bourses underperformed

FI USTs showed little reaction to Chairman Bernanke’s testimony or the solid 10yr note auction on Wednesday and closed little changed; the yield on the 10yr benchmark rose 1bp to 2.882% and the 2yr yield was flat at 0.351%; the Sep’11 Bund future fell 54 ticks to 128.35, down for a second consecutive session; Italian government bond yields fell slightly as Italian policymakers said they would approve a 4yr austerity package on Friday and Fitch affirmed its AA- credit rating on Italy with a stable outlook; the yield on the Italian 10yr fell 2bps to 5.540% after brushing against 6% earlier in the week; Irish debt underperformed following Tuesday’s downgrade from Moody’s

FX The dollar posted declines against all major currencies on Wednesday as Fed Chairman Bernanke said that more QE remains a possibility; the late statement from Moody’s added to downward pressure; EUR/USD rose throughout the session, also supported by strong economic figures from China, and climbed to 1.422 after the Moody’s warning; cable gained 1.2% to 1.610 on Wednesday; the dollar weakened 0.5% versus the yen to 78.9, trading at the lowest levels in 4 months; gold rose for an 8th consecutive session and spot hit a new record high of $1587.97oz during the Q&A portion of Bernanke’s testimony

OIL Crude prices rose as the dollar weakened amid speculation about further monetary easing; Aug’11 Brent crude rose 1.3% to $118.8bbl ahead of today’s contract expiration; WTI gained 1.0% on Wednesday to $97.8bbl, also up 1% from a week ago

$ The US sold $21bn in 10yr notes at a high yield of 2.918%, the lowest since November (2.636%); the bid/cover ratio at 3.17 was in line with the average over the past 6 auctions; indirect bidders bought 42.0%, the lowest share since Oct’10

$ Fed Chairman Bernanke said during his semi-annual testimony before the House Financial Services Committee that the Fed has “to keep all options on the table” including quantitative easing, because of uncertainty about the future direction of the economy

$ Fed’s Fisher (voter) “will not support further monetary accommodation" and does not see potential benefit even if the economy weakens further; monetary policy has “exhausted itself”; there is already plenty of liquidity that can be put to work and potential for economic activity to accelerate; it is up to Congress to take action on long-term debt and deficit issues and reduce uncertainty

$ Fed’s Rosengren (non-voter): “With fiscal austerity slowing down economies both here and abroad, it will in my view be important to maintain sufficiently accommodative US monetary policy so that national labor market conditions can improve"; recent labor market report was “dismal”; he sees slow growth in H1 as a continuation of the consistently weak recovery

$ US import prices fell 0.5%MoM in June, the first decline in a year, versus +0.1% in May; downward pressure was exerted by petroleum (-1.6%) and food & beverage (-1.9%), while capital goods prices were flat; price increases of autos & parts moderated versus recent months, up 0.3% in June versus +0.5% in May and +0.4% in April

$ The US federal budget deficit was $43.1bn in June, slightly less than the consensus forecast of $45.4bn and down from $68.4bn a year ago in June

€ Fitch downgraded Greece 4 notches to CCC from B+ and said default is a real possibility; there is not enough clarity from EcoFin on the volume, terms or nature of private sector involvement

€ Eurozone finance ministers are reportedly considering a buyback of Greek bonds at 50% of their face value through the EFSF, to lower debt to 120% of GDP – FT Deutschland

€ ECB’s Weidmann: "The money of the bailout should not be used for the purchase of government bonds in the secondary market”; it would be a step too far for the ECB to accept bonds “in the event of a default”

€ IMF on Greece: the scope private sector involvement in a Greek aid program “is under discussion, but would likely extend through at least mid-2014 and aim to draw in wide participation by the private sector to deliver a substantial reduction in Greece’s funding needs"; "given the impact PSI could have on Greece’s credit rating, it is imperative for euro area member states to put in place mechanisms to guarantee liquidity support to Greece’s banking system while a PSI operation is undertaken"

€ ECB’s Draghi again said that Italian banks will pass the stress tests

€ Eurozone industrial production rose just 0.1%MoM in May, below consensus at +0.4% and the April gain of 0.2%

€ German wholesale prices fell 0.6%MoM, the first decline since October, versus a flat pace in May

£ UK claimant count rose 24.5k in June versus an upwardly revised 22.5k in May (originally 19.6k); this marked a fourth consecutive increase and was the largest since May’09

£ UK average weekly earnings excluding bonuses rose at an annual pace of 2.1% in the 3 months to May, up from 2.0% in the 3 months to April; the pace was in line with the average over the past 12 months

£ UK ILO unemployment rate held at 7.7% in the three months to May, down from 7.8% in February

CNY China GDP growth came in slightly stronger than expected at 9.5%YoY in Q2 versus consensus at 9.4%, although down from 9.7% in Q1; figures on June retail sales and industrial output showed faster growth than in May and were also came in above consensus forecasts

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