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Financial Markets: Headlines for July 22

July 22, 2011

EQ US equities rose early on optimism about EU leaders talks and some better-than-expected US economic figures; stocks held onto gains after details of the EU plans for Greek financing and an enhanced EFSF were announced; the S&P 500 closed near the day’s high, up 1.4% to 1343.80; European equities rose strongly as a draft document from the EU leaders circulated ahead of their final decisions and indicated that Greece’s debt burden would be addressed and the EFSF would be allowed to purchase bonds in the secondary market and help in recapitalization of banks; Euro Stoxx 50 rose 2.1% to 2763.34 and was up 3.3% from last week; the Italian and Spanish bourses outperformed on Thursday, up 3.8% and 2.9% respectively

FI € The Sep’11 Bund future dropped sharply during the European session and ended the day down 113 ticks at a near 2-week low of 127.01 as the EU leaders laid the groundwork for improving Greece’s debt sustainability and set up measures that may help to stem contagion; yields on peripheral Euro area government debt fell in the run up to the official EU announcements; the Greek 2yr yield plunged 433bps to 30.6%; the Italian 2yr yield dropped 39bps to 3.531%; the iTraxx W. European sovereign CDS index fell for a third consecutive session, down sharply on Thursday by 19bps to 262

FI $ US Treasuries fell as risk sentiment improved while little progress was seen on a US debt ceiling/deficit deal; the yield on the 10yr benchmark rose 9bps to 3.014%, above 3% for the first time since 11 July

FX The euro held onto sharp gains versus the dollar after the EU leaders released their official statement, rising further after the US market close to 1.442, the highest since July 6; EUR/CHF rose to 1.178 in choppy trade reaching the highest levels since July 11; the US dollar index fell 1.1% to 74.0, the lowest since mid-June as sentiment toward the euro improved and Fed’s Evans issued dovish-sounding comments; USD/JPY fell 0.5% to 78.35 and touched the weakest levels since the mid-March plunge

OIL The Sep’11 WTI crude contract rose briefly above $100bbl, ending the day up 1.2% at $99.2bbl and 3% stronger than a week ago

€ The Eurozone leaders announced new measures to address Greek financing and debt sustainability; new official financing for Greece will total €109bn and future loans will have longer maturities (15-30 years with a grace period of 10 years) and lower interest rates (3.5-4.0%); the EFSF lending rates and maturities agreed upon for Greece will be applied also in the programmes for Portugal and Ireland; the private sector will voluntarily participate through debt exchanges and rollovers at a discount with an estimated net contribution of €37bn; a debt buyback facility will also be set up to further reduce the level of outstanding debt; “Credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks”; the EU will “provide adequate resources to recapitalise Greek banks if needed”; the IMF will participate but no amount of loans has yet been specified as Greece has not made a formal request

€ The Institute for International Finance outlined 4 options in which private sector investors can participate in the Greek financing program through debt exchanges and rollovers; the program aims for a participation rate of 90% and a large group of banks has already expressed support; the exchanges/rollovers will provide €135bn in financing for Greece through 2020 and would reduce the Greek government debt burden by €13.5bn; all options will be priced to produce a 21% Net Present Value loss based on an assumed discount rate of 9%; the outstanding amount of Greek debt will be further reduced through

€ The EU leaders also widened the scope of the EFSF and ESM in an attempt to prevent contagion, although the overall size of the facility was not enlarged; the EFSF and ESM will be able to purchase bonds in the secondary markets subject to ECB approval; recapitalisation of financial institutions could be financed through loans to governments including in non-programme countries; and the facilities can “act on the basis of a precautionary programme” likely through credit lines

€ Spain sold €2.6bn in 10yr and 15yr bonds on Thursday, at the top end of the €1.75-2.75bn target range but paid euro-era record high rates; the yield on the 2021 bond was 5.896%, up from 5.395% at the previous sale on May 19; the yield at the 2026 sale was 6.191% vs. 6.027% at the June16 auction; the auctions saw decent demand although the amount on offer was modest; the bid/cover ratio at the 2021 sale was 1.9 vs. 1.8 previously; the b/c at the 2026 sale was 2.1 vs. 2.6 before

$ The US will auction $99bn in notes next week – $35bn in 2yr on Tuesday, $35bn in 5yr on Wednesday, and $29bn in 7yr on Thursday – amounts unchanged from the June sales

$ Fed’s Evans (voter) sounded dovish and said that Q3 economic figures will be key to judging if the recovery is regaining traction; there is still a lot of slack in the economy and inflation pressures are still a little bit below the Fed’s objectives; if the Fed had normal monetary policy tools at its disposal right now, he would advocate using them, but now the Fed has to consider other options, such as giving more specific forward guidance on how long accommodation will stay in place, set against objectives such as targets on price levels

$ Fed’s Hoenig (non-voter) does not think QE3 would be useful; a zero interest rate is not the correct policy

$ White House spokesman Carney denied reports that a deal on the debt ceiling and deficits was close at hand; President Obama and House leader Boehner are reportedly discussing a deal that would raise the debt ceiling and make $3trn in cuts over 10 years

$ Standard & Poor’s continues to see at least a 50% “likelihood that we could lower the long-term rating by one or more notches on the U.S. within the next three months and potentially as soon as early August” in the case that Congress does not agree to a credible plan to reduce future deficits

$ US SEC Chairman Schapiro says the capacity to keep up with financial regulatory obligations will be hurt by budget cuts; the SEC is actively discussing the idea of floating net asset values for money market funds

£ UK BoE MPC member Posen is hopeful that the MPC will decide to undertake more asset purchases; inflation should peak in the next few months; the UK economy has “slack demand, high unemployment, tightened fiscal policy”

$ US Philly Fed manufacturing PMI rose slightly more-than-forecast to +3.2 in July from -7.7 previously but at this level the index was still below the recovery average of 11.8; shipments rose at a slightly faster pace in July (4.3 vs. 4.0) while new orders held steady (+0.1 vs. -7.6); the employment balance rose to 8.9 from 4.1 in June but was still below the 6m average of 14.9; expectations about activity in the next 6 months were the strongest since April

$ US initial jobless claims were higher at 418k in the week to July 16 from a revised 408k in the week prior (originally 405k); the result was above the consensus forecast of 410k but claims were slightly lower versus a month ago, as was the 4wk moving average, at 421k vs. 426k in the week to June 18

$ US leading indicators index rose 0.3% in June versus +0.8% in May, surprising positively versus consensus for a second consecutive month; however when viewed over a 6 month period the index continues to highlight a slowdown in economic activity; the annual change over the six months through June was 5.4% versus 8.2% in March

$ US FHFA house prices rose for a 2nd consecutive month, up 0.4% in May versus a revised increase of 0.2% in April (originally +0.8%)

€ Eurozone advance July PMIs fell further to the lowest levels since Sep’09 and disappointed versus consensus forecasts as activity growth slowed across Germany and France; the Eurozone manufacturing PMI dropped to 50.4 from 52.0 and both the orders and output balances came in below-50; the services PMI fell to 51.4 from 53.7 in June

£ UK retail sales rose 0.7%MoM in June, surprising marginally versus consensus at +0.6%, and the May decline was revised to -1.3% from -1.4% reported originally; excluding auto fuel sales, which fell 1.1%, retail sales rose 0.8% versus a revised -1.5% in May (originally -1.6%); the Office of National Statistics noted anecdotal evidence that summer discounting had begun early; sales volumes at household goods stores jumped 2.6% vs. -0.9% previously; sales at clothing & footwear stores rose 0.6% vs. -1.2% previously; in the 3 months to June, sales ex-auto fuel were up just 0.7% versus the same period of a year ago, down from +1.7% in March

£ UK public finances: public sector net borrowing was £12.0bn in June versus £14.6bn in May (originally £15.2bn), a result above the consensus forecast of £10.4bn but below year-ago borrowing of £13.9bn; in the fiscal YTD period (April-June) borrowing is down only slightly from the year ago period, at £39.2bn versus £39.5bn previously

£ UK Nationwide consumer confidence fell to 51 in June from 55 in May but came in above the consensus forecast of 49; the level of confidence remains depressed versus the series’ average of 79 (since 2004) but has improved from the historic low of 40 posted in February

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