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Financial Markets: Headlines for August 3

August 3, 2011

EQ The Dow dropped 266pts to close below 12k at 11866.62 and the S&P 500 fell 2.6% to 1254.05, erasing its 2011 gain to end below the 200-day moving average of 1286; the 7 day slump was the longest since October 2008; stocks drew no support from full passage of the US debt deal, as economic figures showed that real personal spending has not increased since March, raising concern about the sustainability of the recovery; EuroStoxx50 declined 1.9% to close at the lowest level in over 12 months; the Greek bourse dropped 3.3% and the Italian -2.5%

FI The US yield curve flattened as Treasuries surged at the long end; the 2/30 yield spread is down 30bps over the past week to 359bps, the narrowest since November; the 30yr yield dropped 17bps to 3.909% and the 2yr yield fell 5bps to 0.316% on Tuesday, below the closing low of Nov’10; the Sep’11 Bund future soared 65 ticks to another record high of 131.82; Portuguese debt underperformed among PIIGS and the 2yr yield rose 31bps to 13.4%; the Italian 10yr yield jumped 12bps to end firmly above the 6% mark at 6.12%; Italian and Spanish 10yr yield spreads over bunds widened to new euro-era highs of 371 and 387bps respectively

FX The Swiss franc powered higher and appreciated against all major currencies on Tuesday; the Sep’11 gold future rushed above $1650oz, up 2.5% on the session to $1660.9oz; the Aussie dropped 4.2% versus the Swiss franc to 0.824; USD/CHF dropped nearly 3% to a new record low of 0.762, although the dollar benefited from haven/liquidity bids and rose modestly against fx majors other than CHF and GBP; the euro fell 0.3% against the dollar to 1.421 and 0.3% against sterling to 0.872; Cable stabilized at 1.63

OIL Crude prices fell over the session and the WTI Sep’11 contract lost 1.8% to $93.3bbl, down 4% from a month ago; Brent lost 0.7% to $116.0bbl but has held on to the gains made in early July, up 4.3% from a month earlier

$ The US Senate passed the bipartisan debt deal in a vote of 74 to 26 and President Obama signed it into law ahead of the midnight deadline for extending the debt ceiling; a bipartisan committee must now identify means of reducing deficits by a further $1.5trn, and report on this legislation by November 23; Congress is required to vote on the Committee recommendations by December 23

$ Fitch affirmed the US AAA rating for now and noted that “despite the intensity and theatre of political discourse in the United States, there is the political will and capacity to ultimately do the right thing”; the agreement “is an important first step” but a credible plan is still needed to reduce the budget deficit to a level that is commensurate with AAA status over the medium term; Fitch plans to conclude its scheduled review of the US rating by the end of the month

$ IMF Chief Lagarde welcomed the US debt deal and said planned spending cuts were "appropriately phased and not overly frontloaded so as not to undermine growth”; the challenge now is to develop clear medium-term debt and deficit objectives

$ US personal spending fell 0.2%MoM in June, the first nominal decline since Sep’09, versus a revised gain of +0.1% in May (originally flat); spending on goods fell for a 2nd month, and services spending was flat in June; disposable personal income rose 0.1% in June, and the saving rate lifted to 5.4% from 5.0% previously, the highest yet this year; when adjusted for price changes, consumer spending fell less than 0.1% in June and has not posted an increase since March

$ US domestic vehicle sales rose to an annualized pace of 9.62m in July from 8.95m in June and surprised versus consensus at 9.20m; the pace was marginally below the 6-month moving average of 9.69m

€ An Italian Financial Stability Committee said the Italian banking and financial system is solid because of quick action taken to strengthen capital bases; international uncertainties are weighing and there are market tensions in Italy despite progressive reduction of the deficit; the committee will continue to monitor the situation

€ EU Commission spokesperson on Italy and Spain: "Both countries are taking necessary actions and keeping economies on track. We are confident in their abilities"

€ Greek banks expect to receive a memorandum of understanding providing the details of the bond swap offer in mid-August; they would have about 2 weeks to respond, with the aim of having the exchange completed in September – Reuters

€ Eurozone producer prices were flat in June versus a decline of 0.2% in May; energy prices fell 0.3%MoM vs. -1.1% previously and ex-energy prices were subdued, up just 0.1% to mark the smallest gain since Jul’10; the annual rate of producer prices moderated to 5.9% as expected versus 6.2% in May and 6.8% in April

£ The UK construction PMI fell 0.1 to a 3-month low of 53.5 in July, but came in above the median analyst forecast of 53.1; new orders growth was described as “solid” and activity expanded within commercial building and civil engineering, but house-building activity and employment contracted for a second consecutive month

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