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Financial Markets: Headlines for July 20

July 20, 2011

EQ The Dow surged 202pts and the S&P rose 1.6% to 1326.73 in the largest gain since early March; risk sentiment was boosted on Tuesday by several good earnings reports, a jump in US housing starts, and the news of some support from President Obama for a new bipartisan proposal from Senators on increasing the debt ceiling and enacting substantial deficit cuts; Euro Stoxx 50 rose 1.3% to 2657.45 after posting declines in the previous 3 sessions; financial shares recovered 2.5% after Monday’s sharp drop of 3.6%

$ Apple (AAPL, +0.8%, $376.85) reported results after the US market close and both earnings and revenues came in stronger-than-expected on the quarter versus a year ago

FI The UST curve bull-flattened and the yield on the 30yr dropped 13bps to a 4-session low of 4.178% on some optimism that US politicians will get the debt ceiling raised and perhaps even agree to large fiscal reforms; the yield on the 10yr benchmark fell 5bps to 2.875%; the Sep’11 Bund future declined 39 ticks to 129.05; Euro area periphery-German 10yr yield spreads tightened after the run up of recent days; the Italy-German spread narrowed 26bps to 306

FX The Swiss franc fell broadly versus major currencies on Tuesday, with USD/CHF up 0.8% to 0.824 and EUR/CHF up 1.0% to 1.166, reflecting a broader improvement in risk sentiment rather than positive developments toward resolution of the periphery’s debt crisis; the euro gained 0.2% against the dollar to 1.414; sterling was mixed on the crosses, but Cable rallied 0.5% to 1.613; gold prices dropped as some fear about a US default receded; the Sep’11 gold contract fell below $1600oz, down 0.9% to $1589oz

OIL Crude prices rose as housing starts came in better-than-expected and President Obama’s comments about the new deficit reduction plan boosted optimism about US economic prospects; the Aug’11 WTI contract rose 1.8% to $97.7bbl

$ US President Obama expressed some support for a plan that emerged Tuesday from a bipartisan group of Senators (the Gang of Six) which includes an increase in the debt ceiling, $3.75trn in deficit reduction over 10 years, and a variety of elaborate procedural measures to help ensure its implementation; Pres. Obama said he still requires at a minimum a last ditch means of raising the debt ceiling by Aug2

$ US housing starts jumped 14.6%MoM in June to an annualized pace of 629k, a 5 month high, versus a flat pace in May (revised down from +3.5% originally); starts were stronger across single (+9.4%) and multi-family units (+30.4%) in June; starts on multifamily units have shown sustained improvement while single family starts have been broadly flat over the past year; building permits rose 2.5%MoM in June versus a revised gain of 8.2% in May (originally +8.7%)

€ The results of the Greek 3m bill auction were stronger than in June; Greece sold €1.625bn in 3-month bills at an average yield of 4.58%, down 4bps from the yield at the Jun21 auction; the bid/cover ratio was higher at 3.08 versus 2.94 previously

€ Spain sold €4.4bn in 12-month (€3.8bn) and 18-month bills (€0.7bn), close to the maximum target of €4.5bn, but yields were higher than at similar June auctions; the average yield at the 12m bill auction was up 101bps to 3.702% and the bid/cover ratio was lower at 2.18 vs. 2.85 in June; the yield at the 18m bill auction was up 65bps to 3.912%, with b/c at 5.49 vs. 3.91

€ German Chancellor Merkel said that this Thursday’s meeting of Eurozone leaders will not result in “one spectacular event which solves everything…such a spectacular step won’t happen”

€ Irish FinMin Kenny said the agenda for the EU leaders’ meeting has not been finalized; he hopes “that on Thursday … agreement can be reached that will put an end with certainty to this problem of anxiety with respect to the second Greek bailout deal … that also the contagion consequent on what has been happening in Greece is prevented from filtering into other countries with implications for Ireland"

€ ECB’s Nowotny said early on Tuesday that there were a range of proposals being discussed on Greece in a serious way; some would involve “a very short-lived selective default situation that would not really have major negative consequences”; his spokesman later clarified that he is “in complete agreement with the position of Jean-Claude Trichet and the ECB”

€ Germany’s auditor body (IDW) said German banks and insurers will have to record write downs in Q2 on their banking book holdings of Greek sovereign bonds

€ German ZEW economic sentiment fell to -15.1 in July from -9.0 in June, disappointing versus the consensus forecast of -12.5 to mark the worst 2-month result since Feb’09; the measure of the current situation improved unexpectedly to 90.6 in July vs. 87.6 previously and was the 2nd highest reading on record, just below the May reading of 91.5

€ Eurozone construction output fell 1.1%MoM in May but the April gain was revised up to 1.2% from +0.7% reported originally; output remained depressed versus a year ago, down 1.9% on a workday adjusted basis, versus -1.3%YoY in April

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