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Financial Markets: Headlines for August 2

August 2, 2011

$ The US House passed the compromise debt deal in a vote of 269 to 161; the Senate is scheduled to vote today at noon EDT and assuming passage and signing by President Obama, the debt ceiling would be raised immediately by $400bn

EQ The Nikkei was down early in today’s Asian session following losses in Monday’s US and European sessions, but US equity index futures were up marginally given the House vote; US equities had reversed early gains on Monday that were tied to relief about a tentative agreement to raise the debt ceiling, heading lower after the July ISM manufacturing index came in sharply weaker at the lowest level since Jul’09 which raised concern about another recession before federal spending cuts even get underway; the S&P 500 fell 0.4% to 1286.94, down for a 6th session; European stocks dropped sharply, with Stoxx 50 down 2.9% to continue the worst negative streak since mid-March

FI USTs posted gains at the longer end of the curve after the disappointing ISM report and the yield on the 10yr benchmark fell 5bps to 2.749%; yields fell slightly on US short-term paper given progress on a debt ceiling deal that would immediately extend borrowing authority; Bunds outperformed and the German 10yr cash yield fell 8bps to 2.451%; PIIGS 2-year yields climbed higher, led by Italy and Spain; the Italian 2yr yield rose 20bps to 4.427% and the 10yr rose 14bps to 5.991%

FX The Swiss franc and yen remained buoyant versus the dollar and other G10 currencies amid uncertainty about a US debt deal before Aug2 and more signs of a broad slowdown in manufacturing; USD/CHF hit a new record low of 0.773 on Monday before stabilizing around 0.783, down 0.6% from last week; USD/JPY bounced from an intraday low of 76.30 that was just above March’s record low, to end up 0.4% on the session at 77.21; EUR/USD dropped sharply during the US session, down 0.9% to 1.425; Cable lost 0.7% to 1.629

$ The US Congressional Budget Office said the proposed debt deal would reduce deficits by at least $2.1trn over 10 years, which was broadly in line with statements made by Congressional leaders on Sunday and Monday

$ The US Treasury plans to proceed as normal with the quarterly refunding assuming an increase in the debt ceiling; there are no plans currently to replenish the Supplementary Financing Program; Treasury expects to issue $331bn in net marketable debt in Q3, which would be $74bn lower than was estimated in May, reflecting lower outlays in Q2 and a higher-than-expected cash balance at the end of June; in Q4 Treasury expects to issue $285bn in net marketable debt

€ ECB’s Mersch: "We are for the moment having an economic performance for this and next year which is above the growth potential”; inflationary exceptions are still well anchored

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

€ The EU/ IMF/ECB began their quarterly review in Portugal to judge progress on fiscal and economic reforms associated with the financial aid programme

€ EU Commission: the issue of a financial assistance package for Cyprus “is not on the table”

$ The US ISM manufacturing index fell sharply to 50.9 in July from 55.3 in June, signaling stagnation at the lowest level since Jul’09, well-below the consensus forecast of 54.5; the new orders balance signaled the first decline since Jun’09, at 49.2 vs. 51.6 previously; the production balance fell to 52.3 from 54.5, below the historic average of 55.8; the employment balance declined to 53.5 from 59.9 before

$ US construction spending rose 0.2%MoM in June, coming in marginally above the consensus forecast of +0.1%; the May figure was revised up to +0.3% (originally -0.6%)

€ The Eurozone manufacturing PMI was confirmed at 50.4 in July, down from 52.0 in June and at the lowest level since Sep’09; the result was below the historic average of 51.9 recorded since 1997; new orders posted a second consecutive decline and export orders fell for the first time in 2 years; country PMIs declined broadly and Spain, Greece, and Ireland reported faster paces of contraction

€ The Eurozone unemployment rate remained at 9.9% for a fourth consecutive month in June, the lowest since Aug’09 (9.8%)

£ The UK manufacturing PMI fell to 49.1 in July from an upwardly revised 51.4 in June (originally 51.3), posting the first reading signaling contraction since Sep’09 (49.9) and the lowest since Jun’09; the new orders balance dropped to 47.6, the lowest in over two years; output growth slowed toward stagnation; employment declined for the first time in 16 months

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