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Financial Markets: Headlines for July 21

July 21, 2011

€ German Chancellor Merkel and French President Sarkozy will reportedly take a joint position on issues at today’s Eurozone leader’s summit, following lengthy preliminary talks in Berlin

EQ The S&P 500 stabilized on Wednesday following the sharp gains in the previous session, trading in a narrow range and ending down 0.1% to 1325.84 as some optimism about the prospects for the new US debt ceiling/deficit proposal wore off; the CBOE Vix index stabilized at 19.1 vs. 19.2 at the end of the previous session; Euro area bourses posted more strong gains on Wednesday apart from in Greece where the main index fell 0.3%; Euro Stoxx 50 rose 1.8% as financials surged 4.1% ahead of the leaders’ summit

FI USTs reversed part of Tuesday’s gains and the yield curve steepened; the 30yr yield rose 6bps to 4.247% and the 5yr yield was up 4bps at 1.474%; the benchmark German Bund future declined again, down 91 ticks to 128.14, and peripheral-German spreads tightened for a second day as some caution subsided amid hope that Eurozone leaders will provide clarity on future financing for Greece and changes to the EFSF

FX The dollar fell broadly versus major currencies, losing 0.5% against the yen to 78.74 on Wednesday while EUR/USD gained 0.6% to 1.4221 and then headed higher in Asian trade on news that German Chancellor Merkel and French Pres. Sarkozy are in agreement on issues ahead of the leaders’ summit; the euro jumped to 1.175 versus the Swiss franc, up from 1.165 at the US market close; gold resumed its advance and the Sep’11 contract rose 0.9% to $1603.3oz

OIL Crude prices were choppy on the expiry date for the Aug’11 WTI contract ($98.14bbl); the Sep’11 Brent contract rose 0.9% to $118.2bbl

$ The White House said that President Obama would only accept a very brief extension of the debt ceiling in the case that a deficit reduction programme had been agreed but needed a few more days to pass through the legislative process

$ US Fed’s Plosser (voter): the Fed is actively working on contingency plans in the case of a US default, including how Treasuries would be treated as collateral; on monetary policy, it could be appropriate to tighten in H2 if growth accelerates as he expects and the jobless rate declines; he said one could argue that the policy of last fall is no longer appropriate given the dissipation of deflation risk

$ Fed’s Hoenig (non-voter) expects growth of 2.5%, or 3% in a good quarter, in 2012 and 2013; he remained critical of QE2 and said it “was a monetization of $600bn of debt”

$ The Fed will conduct a 28-day term deposit auction on July 25 for $5bn, as part of continued testing of the facility to remove reserves from the system when an exit is deemed appropriate; the maximum bid rate is 0.75%

$ US existing home sales fell for a third consecutive month, down 0.8%MoM in June versus -3.8% in May to disappoint versus consensus at +1.9%; sales of single family homes were flat at an annualized pace of 4.24m, the weakest since Nov’10; sales of condos/co-ops fell 7.0% vs. -8.1% previously

€ Portugal sold €750m in 3m and 6m bills, at the low end of the €0.75-1.0bn target range; the 3m sale had a higher average yield of 4.982% versus 4.926% at the previous similar sale on Jul6; the bid/cover ratio was slightly stronger at 2.40 vs. 2.04 previously; the yield at the 6m sale was 4.96% little changed from 4.954% at a sale on Jun15; b/c was 3.72 vs. 3.81 previously

€ EC President Barroso outlined the minimum goals of today’s Eurozone leaders’ summit: clairity must be provided on 1) Measures to ensure the sustainability of Greek public finances, 2) Feasibility and limits of private sector involvement, 3) Scope for more flexible action through the EFSF, 4) Repair of the banking sector, 5) Measures to ensure provision of liquidity to the banks

€ ECB’s Bini Smaghi said a hard or soft Greek debt restructuring would be “a disaster”; governments should give the EFSF more flexibility to buy back bonds

€ ECB’s Stark: "We will continue to demand adequate collateral and will deal only with solvent and financially healthy partners in our refinancing operations"

€ Eurozone EC consumer confidence fell to a 3-month low of -11.4 in the advance July estimate versus a downwardly revised -10.3 in June (originally -9.8); confidence has been trending flat since November and the July reading marked the first dip below the 12-month moving average since May’09

€ German producer prices rose 0.1%MoM in June versus a flat pace in May, but the annual rate moderated to 5.6% from 6.1% previously, down from a 2011 peak of 6.4% posted in both April and February; food prices continued to exert upward pressure (+0.4% vs. +0.5% previously), while energy prices fell for a 2nd month (-0.1% vs. -0.5%)

€ Italian industrial orders rose 4.1%MoM in May versus a revised decline of 6.0% in April (originally -6.4%); compared to a year ago orders were up 13.6% but have still not regained their pre-Lehman levels

£ UK BoE MPC again voted 7:2 to hold Bank Rate steady at 0.50% as expected; those voting for no change noted that “recent developments had reduced the likelihood that a tightening in policy would be warranted in the near term”, but the minutes did not record any broad discussion about the merits of making more asset purchases, and this month the majority noted that the weaker exchange rate and fall in market interest rates over the month could provide some stimulus; Adam Posen continued to call for an immediate increase in asset purchases of £50bn to £250bn; the 2 dissenters supporting a rate hike thought that the case for removing stimulus “remained strong” given “upside risks to inflation in the medium term from global pricing pressures and the possibility that inflation expectations could increase”; the MPC judged that inflation was still likely to exceed 5% in the coming months and might come sooner and a little higher than was previously expected; on growth figures suggested “continued modest underlying” growth in Q2 but some tentative softening in the outlook for Q3

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