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Financial Markets: Headlines for July 15

July 15, 2011

EQ US equities reversed the early gains that were linked to JPMorgan’s (JPM, +1.8%, $40.35) strong earnings report and some slightly better-than-expected US economic figures, falling after Fed Chairman Bernanke dampened expectations of QE3 at least in the near term; the S&P 500 fell 0.7% to 1308.87, the lowest close since 29 June and the CBOE Vix index closed above 20 versus 16 at the end of last week; Euro Stoxx 600 fell broadly, down 0.8% to reverse the gain of the previous session

FX The US dollar index bounced slightly from early intraday lows, ending flat versus Wednesday at 75.20 as the Fed Chairman expressed greater caution about the prospects of further easing; USD/JPY gained 0.2% to 79.10 and the euro lost 0.1% to 1.414; both the dollar and euro remained near record lows versus the Swiss franc, recorded after Moody’s warning on the US credit rating; the Aug’11 gold future hit a new record high of $1594.9oz on Thursday

FI The US yield curve bear-steepened following Moody’s warning on the US rating, despite good results at the 30yr bond auction, although the yield on the 10yr benchmark remained below 3%, up 7bps on the day to 2.953%; the 30yr yield rose 8bps to 4.254%; the Sep’11 German Bund future stabilized, up 7 ticks on the session to 128.42, but Euro area peripheral bonds sank ahead of the stress test results; the yield on the Italian 10yr rose 9bps to 5.62% and the Spanish gained 6bps to 5.84%

$ The US sold $13bn in 30yr bonds at a high yield of 4.198%, the lowest since Oct’10; the bid/cover ratio was higher at 2.80 vs. 2.63 previously and the 10-auction average of 2.64; indirect bidders bought 37.8% vs. 38.4% previously

$ US Fed Chairman Bernanke’s 2nd day of Congressional testimony dampened hopes of more monetary easing; “We’re not prepared at this point to take further action”; inflation now is “higher” and “closer” to the Fed’s informal target than before QE2; further monetary stimulus may not be needed and may not be effective given the current constellation of problems; all options for either policy tightening or easing are on the table; on the debt ceiling decision, even if the Treasury prioritizes payments to bondholders, a failure to raise the debt ceiling would boost interest rates and be counterproductive

€ German Chancellor Merkel: a special EU summit will only be held if there is a completed agreement on a new Greek programme

€ Greek FinMin Venizelos: “there is absolutely no problem with the Greek banking system. The Greek banking system is absolutely covered and absolutely secured within the euro-system"; he said that the term selective default should not be interpreted as bankruptcy

€ The IMF/EC/ECB declared that Ireland’s aid programme remains on track and is well financed; Ireland’s credibility is high in terms of fiscal programme implementation; the changes to the EFSF will be useful for Ireland; the public debt is sustainable so discussion of private sector involvement in a second bailout is not relevant

€ Irish FinMin Noonan: experience shoes that if Spanish and Italian bond yields go to 7% then they are in bailout territory; Ireland’s NTMA debt management agency still plans to test the market in 2012

€ Spanish FinMin Salgado: "The markets attack all countries that have low growth or high debt, like Italy or Belgium. Therefore an answer must be quick, determined, and clear"

€ ECB’s Gonzalez-Paramo: "The euro bond has many attractive points and I personally, and I’m not talking for my institution, think in the future we are sure to see something similar"; he acknowledged that this would not solve Greece’s deeper problems

€ The ECB said in its Monthly Bulletin that nonstandard measures will be phased-out “in line with evidence of self-sustained normalization of the functioning of the transmission mechanism"; if they “are maintained for too long, however, they may encourage excessive risk taking by financial market participants, distort incentives and delay the necessary process of balance sheet adjustment by private and public sector entities. This would ultimately undermine price stability over the medium term, with detrimental effects on economic growth"

$ US retail sales rose 0.1%MoM in June, surprising versus consensus at -0.1%, above the revised May figure of -0.1% (originally -0.2%); motor vehicle sales rose 0.8% versus -1.8% previously, up unexpectedly in June given the negative signals from the industry figures; gasoline sales fell 1.3% in the first drop in a year; the core sales measure ex-autos, gas & building materials rose just 0.1% in June and the 3m annualized pace slowed to 4.7% from 7.4% in May and 7.6% in Q1, the weakest gain since Q3’10

$ US producer prices fell 0.4%MoM in June versus +0.2% in May, as energy prices dropped 2.8% on lower gasoline and electricity prices; capital goods prices rose 0.3% vs. +0.2% in May, reflecting upward pressure from light motor truck prices (+1.6%); goods prices at the crude stage of processing fell 0.6% vs. -4.1% in May; intermediate goods prices were flat vs. +0.9% previously

$ US initial jobless claims were more moderate at 405k in the week to 9 July, a 12-week low, versus an upwardly revised 427k in the week before (originally 418k); the sharp decline partly reflected lower seasonal layoffs within the automobile industry as manufacturers worked to rebuild inventories; the lagging data on continuing claims showed an increase of 15k to 3.727m in the week to 2 July, a 6-week high

$ US business inventories rose for a 17th consecutive month, up 1.0%MoM in May versus consensus at +0.9%; the April gain was revised up to 1.0% (originally +0.8%)

€ Italy sold €4.97bn in bonds on Thursday, close to the €5bn maximum on offer; the yield at the 15yr bond sale was the highest since the bond was first issued in 2002 (5.90%); the bid/cover ratio was 1.49; at the 5yr sale the yield rose to 4.93%, up 103bps versus the previous similar auction on Jun14, although the b/c was stronger at 1.93 vs. 1.28

€ The Eurozone CPI was confirmed at 2.7%YoY in the final June estimate and was steady versus May, although above the YTD average of 2.6%; the core measure rose 0.1% on the month and the annual pace rose to 1.6% from 1.5% previously, above the consensus forecast for a steady reading of 1.5%

€ The Italian CPI was confirmed at 2.7%YoY in June, the highest since a matching reading in Nov’08, and up from 2.6% in May

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