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Financial Markets: Headlines for July 25

July 25, 2011

EQ The S&P 500 rose 0.1% on Friday to end the week up 2.2% at 1345.02; mixed earnings reports led to divergent sector performance on Friday as Advanced Micro Devices (AMD, +19.2%, $7.75) reported consensus-beating sales and revenue forecasts while Caterpillar (CAT, -5.8%, $105.15) weighed on industrials after disappointing earnings; the Dow fell 0.3% to 12681.16; in Europe, the Stoxx 600 rose 0.6% and 1.9% on the week after the conclusion of the Eurozone summit; the Greek bourse shot up 5.9% on gains across all sectors led by banks (+11.5%)

FI USTs rose through the session on Friday and the yield on the 10yr fell back below 3%, down 5bps to 2.962%; yields on Euro area programme country debt fell sharply again following confirmed details of the next Greek aid plan and changes to the terms of official loans; the Greek 2yr fell 564bps to 25%; the Irish 2yr yield dropped 385bps to 13.5% and the Portuguese -184bps to 13.2%; however Bunds still rose and the German 10yr cash yield fell 5bps to 2.824%; Italian and Spanish yields rose as investors remained wary that changes to the EFSF/ESM would be enough to prevent the crisis from spreading; the yield on the Spanish 2yr rose 10bps to 3.633%

FX The euro pared gains against most major currencies and the Swiss franc rose broadly as risk taking tapered off at the end of the week and investors digested details of the new Eurozone crisis stabilization plan; EUR/USD hit an intraday high of 1.444 at the start of Friday’s European session, the highest since July 6 but declined to 1.437 by the US close, still up 1.5% from a week ago; EUR/CHF fell 0.4% on Friday to 1.172; Gold for Sep’11 delivery rose 0.8% on Friday to $1604oz, up 0.6% over a choppy week

$ The failure of US lawmakers to reach agreement on any debt ceiling increase and deficit reduction plan over the weekend weighed on investor risk sentiment in Monday’s Asian session; House Speaker Boehner walked out of White House talks on Friday, related to disagreement with Pres. Obama over the size of tax/revenue measures in their plan under discussion

$ US Tsy Secretary Geithner, Fed Chairman Bernanke and NY Fed President Dudley said in a statement that they remain confident that Congress will approve an increase in the debt ceiling

$ President Obama: "I’m willing to sign a plan that includes tough choices I would not normally make”, still he would like to include some elements that would be good for growth in a deficit package, such as renewal of the payroll tax cut for workers

€ Fitch said it will downgrade Greece’s sovereign issuer rating into restricted default; this may only last for a few days; new ratings will be assigned following the default event and will likely be a low speculative grade; the operational flexibility given to the EFSF will not imperil its AAA rating

€ The International Swaps & Derivatives Association (ISDA) said that the voluntary exchanges and swaps of Greek debt by private investors is clearly voluntary and thus does not trigger a credit event or payment of CDS contracts

€ ECB’s Nowotny: the ECB could continue to accept bonds that are in selective default if they have extra guarantees

€ ECB’s Weidmann: Eurozone leaders’ “decisions could help to reduce the acute tensions in financial markets. But, as substantial additional risks were shifted to assisting countries and their taxpayers, the euro zone took a big step toward collectivisation of risks…In the future, it will get harder to maintain incentives for sound fiscal policies"

€ ECB President Trichet: “I think that the Europeans will invent a new type of confederation which … would have, naturally, a European finance ministry with its own responsibilities"

€ German Chancellor Merkel: the ECB’s concerns about debt restructuring were heard; changes to the EFSF will be voted on in the German parliament after the summer break; there will be no automatic transfer mechanism created in Europe

€ Austrian FinMin Fekter: "The finance ministers will not allow the EFSF to become a bad bank that buys junk bonds”

€ EU Economic Commissioner Rehn: the Eurozone leaders’ agreement gives Greece the necessary financing to support its fiscal adjustment, gives the EFSF and ESM the necessary instruments and flexibility to ensure Eurozone stability; and reduces lending rates for Portugal and Ireland to strengthen their programmes

€ Greek FinMin Venizelos: Greece now has a sustainable debt situation and borrowing needs are covered up to 2020; the Greek banks will need capital support but there is protection for the Greek banking system; Greek pension funds will swap their bonds with new 30yr debt and will not suffer write downs

€ German IFO business climate fell to 112.9 in July from 114.5 in June, disappointing versus the consensus forecast for a smaller decline to 113.7; the IFO is now at the lowest level since Oct’10, although still strong versus this series’ average of 101.0 (since 1994); the expectations index fell 1.2pts to 105.0, reaching the lowest since Jan’10 and the current conditions measure fell 1.9pts from the series’ high to 121.4 in July

€ Eurozone industrial orders rebounded in May, up 3.6%MoM to surprise versus consensus at +0.8%; the April figure was revised down to -0.1% from +0.7% reported originally; in the 3 months through May orders were up 2.3%, slower than in Q1 (+3.9%) and Q4 (+2.4%)

€ Italian retail sales fell 0.1%MoM in May as expected; the April gain was revised down to +0.2% from +0.4% reported originally; beyond the monthly volatility, retail sales remain depressed, down 0.1% in the 3 months to May compared to the same period of a year ago

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