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Financial Markets: Headlines for July 26

July 26, 2011

EQ US equities fell sharply at the market open as risk sentiment was constrained by lack of progress on a debt ceiling deal in Washington; the S&P cut some losses during the session but still ended down 0.6% at 1337.43, weaker across all sectors barring utilities (+0.2%); bourses closed lower across Europe after Friday’s rally and the Stoxx 50 lost 1.1% to 2742.70, with Greece (-1.3%), Italy (-2.5%), and Spain (-1.9%) underperforming

FI US Treasuries declined on the session and the yield curve steepened amid concern about the debt ceiling-deficit reduction impasse; the yield on the 10yr benchmark rose back above 3%, up 4bps on Monday to 3.002%, and the 30yr yield rose 6bps to 4.317%; in Europe, Moody’s cut Greece’s credit rating further and yields rose slightly on programme country debt after the sharp declines at the end of last week; the Greek 2yr yield rose 49bps to 26.8%, but was still down sharply from 34.5% a week ago; yields on Italian and Spanish debt rose for a second session; the Italian 2yr yield jumped 36bps to 3.953%, although still below last week’s peak of 4.542%

FX The Swiss franc rallied across the board on Monday while the euro and US dollar fell broadly; USD/CHF dropped 1.6% to 0.806 and then hit a new record low of 0.8006 after late speeches from President Obama and Speaker Boehner which confirmed that a compromise remains elusive; EUR/USD moved within Friday’s range and ended the US session up 0.1% at 1.437 but jumped to 1.447 in Asian trade; gold prices rose to new record highs on Monday with the Sep’11 contract up 0.6% to $1614.5oz

OIL Crude prices declined on Monday despite a broad weakening in the dollar; the Sep’11 Brent future fell 0.7% to $117.7bbl; WTI declined 0.7% to $99.1bbl but was still up 3.1% from a week ago

$ US President Obama addressed the nation late on Monday but did not announce any deal; he called for a “balanced approach” to cutting deficits, urging Republicans and Democrats to forge a compromise that can pass through Congress before August 2; House Speaker Boehner gave his own remarks separately and said he had put in a “sincere effort” to work with the President, but that the Republicans were not going to give “a blank check”

$ Fed’s Hoenig (non-voter) prepared testimony for today: "I am not advocating for tight monetary policy…I’m advocating that the FOMC move … to non-zero rates"; he is concerned that zero rates create risk of imbalances and new sets of bubbles

€ Moody’s cut Greece’s credit rating by 3 notches to Ca and is still developing its outlook; "The announced EU programme along with the Institute of International Finance’s statement implies that the probability of a distressed exchange, and hence a default, on Greek government bonds is virtually 100%”; Greece still faces medium-term solvency challenges and “very significant” implementation risks; Moody’s also placed a group of Greek banks on review for possible downgrade

€ The ECB did not purchase any government bonds last week according to its weekly disclosure; ECB government bond holdings remained at €74bn

€ US Treasury Secretary Geithner met with Greek FinMin Venizelos on Monday: “Geithner welcomed the progress Greece has already made toward strengthening its public finances and underscored the need for continued and full implementation of the program"

$ US Chicago Fed national activity index rose for a second consecutive month, up at -0.46 in June versus a revised -0.55 in May (originally -0.37), but the level was below the average for this recovery thus far (-0.20) and below the long-term average for the series since 1990 (-0.18), highlighting below-trend growth

€ The National Bank of Belgium’s business confidence indicator fell for a 4th consecutive month, down at -2.5 in July versus -1.1 in June, and disappointing versus consensus at -2.1; the index reached the lowest level since Oct’10 (-2.8)

€ Italian ISAE consumer confidence fell to 103.7 in July from 105.8 in June and disappointed versus consensus at 104.5, at a level below the 6-month average of 105.2

£ UK Business Secretary Vince Cable said that if a period of weak demand continues, it is not the right approach for the government to relax its fiscal discipline; “It is about the Bank of England pursuing policies of low interest rates, which also help keep our exchange rate down and help exports, but also using expansion, quantitative easing in more imaginative ways, not just in acquiring government securities"

£ UK BBA loans for house purchase rose to 31.7k in June from a revised 30.8k in May (originally 30.5k); the level of approvals surpassed the 12-month moving average (30.8k) for the first time since Dec’09

¥ Japan FinMin Noda on Monday: "At the March 18 joint [foreign exchange market] intervention we judged currency moves were excessive and disorderly. This time again, we need to closely watch currency market moves”

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