Financial Markets: Headlines for July 18

EQ US equities moved between gains and losses but managed to close higher on a busy Friday that included a strong earnings report from Citigroup (C, -1.6%, $38.38), a slew of broadly-disappointing US economic figures, and the publication of the European bank stress tests (8 failed; 16 nearly-failed); the S&P 500 rose 0.6% to 1316.14 but lost 2.1% on the week; the Euro Stoxx 50 fell 0.7% on Friday ahead of the stress test publication, led by financials (-1.5%); the index lost 4.1% on the week and is down 4.2% YTD, as risk sentiment remains dampened by uncertainty about the final solution for Greece and fears that the crisis will spread to Italy and Spain; the Spanish IBEX35 fell 1.2% on Friday and Italy’s FTSE MIB declined 1.0%

FI Treasuries closed higher and the yield on the 10yr fell 5bps to 2.906%; the benchmark Bund future advanced as well after the disappointing UMich consumer confidence figure and release of the stress tests, up 57 ticks on Friday and 154 over the week to 128.99; the UK 10yr gilt yield fell 3bps to a new 2011 low of 3.075%, the lowest since November; Italian and Spanish debt remained under pressure; the Italian 10yr yield rose for a 3rd session, up 12bps to 5.75%; the Spanish 10yr yield rose 19bps to 6.045%

FX Moves in G10 forex were muted on Friday and the dollar index fell 0.1% to 75.13; USD/JPY stabilized after a volatile week, down 0.1% to 79.03; the euro came under pressure in today’s Asian session; EUR/USD has fallen 0.6% since Friday’s European close to 1.407 and EUR/CHF has hit a new record low of 1.138 versus 1.154 on Friday post-stress test release

OIL WTI Aug’11 crude bounced 1.5% on Friday to $97.4bbl after a week of choppy trade (+0.8%) around the 200dma ($96.8bbl)

€ ECB President Trichet: “If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country. Because, in the eyes of the Governing Council, this would impair our ability to be an anchor of confidence and stability”

€ German Chancellor Merkel will only travel to an EU Summit this week if the Greek rescue plan has been finalized; she said Europe should have its own credit rating agency in the medium term and she welcomed input from industry

€ EBA European Bank Stress Tests: 8 of the 90 institutions for which results were published failed the stress tests with a total capital shortfall of €2.5bn; 5 of the banks are Spanish, 2 are Greek, and 1 is Austrian; 16 other banks came close to failing, meaning their core capital ratio was between 5-6% after the tests’ adverse shocks, which included a 25% write-down in the value of Greek 10yr government bonds; of the “nearly-failed” banks, 7 are Spanish, and they have until April 2012 to bolster capital; of the Greek sovereign debt holdings accounted for in the stress tests, 67% were held by Greek banks, 9% by German banks, and 8% by French

€ The ECB welcomed “the EBA recommendations to promptly remedy the capital shortfall of the banks that do not meet the threshold ratio of 5% core Tier 1 capital and to strengthen the capital position of those banks that are above but close”

€ ECB’s Bini Smaghi: allowing the EFSF to buy bonds in the secondary market would be useful; Greek banks should seel assets abroad and seek mergers with foreign banks to attract capital

€ ECB’s Nowotny: the ECB is open to various aid plans for Greece as long as they do not trigger a default rating from the rating agencies; discussions about extending maturities were “relevant”

€ German FinMin Schaeuble: "We must make sure that Greece can carry and service its debt"; the crisis is now endangering the euro as a whole; stress tests show that German banks do not need to undertake further measures

$ The US CPI fell 0.2%MoM in June, the first decline in a year, versus consensus at -0.1% and +0.2% in May; gasoline prices dropped 6.8%MoM and household energy prices fell 0.8%; recreation prices fell as well, down 0.1% versus +0.3% in May; consumer prices rose at an annualized pace of 3.8% in H1 and 1.5% in Q2; the core CPI excluding energy and food prices rose at a steady, above-consensus pace of 0.3%MoM in June, reflecting another 1.0% gain in vehicle prices and a 1.4% jump in apparel prices; the 3m annualized rate of core consumer prices rose to 2.9% from 2.0% in March

$ US UMich consumer sentiment fell sharply to 63.8 in the preliminary July estimate versus 71.5 in June, disappointing versus consensus at 72.2, at the lowest level since Mar’09; the expectations index fell 9pts to 55.8 and was also the lowest since Mar’09 during the depths of the recession; the current conditions measure fell 5.7pts to 76.3, the lowest since Nov’09; inflation expectations at the 1yr horizon moderated to 3.4% vs. 3.8% previously, in line with the 12m average; 5yr inflation expectations fell to 2.8% from 3.0%, now back below the past decade’s average of 2.9%

$ US NY Empire manufacturing PMI remained in negative territory in July, at -3.8 versus -7.8 in June; and disappointed versus the median forecast of 5.0; shipments stabilized (+2.2 vs. -8.0 previously), but new orders fell at a faster pace (-5.5 vs. -3.6); the employment balance slumped to 1.1 vs. 10.2 in June and was the lowest since December

$ US June industrial production disappointed versus consensus, up 0.2%MoM versus a downwardly revised May reading of -0.1% (originally +0.1%); manufacturing output was flat versus +0.1% in May, as motor vehicle & parts output dropped 2.0% vs. -0.3% previously; utilities (+0.9%) and mining (+0.5%) boosted the headline

€ The Eurozone trade balance rose to -€0.6bn in May from -€2.5bn in April (originally -€2.9bn), the smallest deficit since October

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