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Financial Markets: Headlines for August 9

August 9, 2011

EQ Investors dumped US equities in heavy trading volumes on Monday as Standard & Poor’s followed up its late-Friday US credit rating cut with downgrades today on the GSEs and some large insurers, raising concern about US banks; the S&P 500 lost 6.7% to 1119.46, now the lowest since Sep’10, and financials lost 9.8%; the Dow dropped 635pts to 10809.85, the largest decline since December 1 2008; in Europe the Stoxx 600 fell 4.1% into bear market territory, down 21% from the recovery high reached in February

$ The CBOE VIX volatility index advanced to 48 versus 32 at the end of last week – now matching the 2010 intraday high recorded last May during the first major intensification of the Greek debt crisis

FI US Treasuries retained their safe-haven status and rallied sharply on Monday amid the equities sell-off; the yield on the 10yr fell 24bps to 2.318%, the lowest since Jan’09 while the 2yr yield fell to a record low of 0.228%, ending down 3bps on Monday at 0.26%; Bunds gained as well (-8bps to 2.259%) and peripheral markets were supported by ECB intervention following a Sunday declaration that the central bank would “actively implement” the Securities Markets Programme; yields on the Italian and Spanish 10yrs both fell back below 6%; the Italian yield dropped 82bps to 5.265% and the Spanish fell 92bps to 5.120%

FX The Swiss franc and yen rose broadly against all other major currencies; USD/CHF fell to a new record low of 0.7485 early on Monday, more than unwinding the effects of last week’s SNB action; EUR/CHF hit a new low as well (1.062) and lost 1.8% from Friday to 1.070; EUR/USD was down 0.5% from Friday at 1.417; gold for Sep’11 delivery was trading at a record of $1722oz after the US close, up 3.6% from Friday’s close

OIL US Sep’11 crude dropped to a 1yr low, down 7.7% from Friday to $80.5bbl; Brent was down 5.4% to $103.8bbl, ending below the 200dma of $106.8bbl

$ President Obama responded to the US credit rating downgrade on Monday but did little to soothe investor angst; he said markets continue to believe the US is a triple-A rated country; he urged for a balanced approach on more fiscal consolidation, including tax reform and modest adjustments to healthcare programs like Medicare; he urged an extension of the payroll tax cut and unemployment benefits

$ Standard & Poor’s cut Fannie & Freddie’s long-term credit ratings by 1 notch on Monday to AA+ , reflecting “their direct reliance on the U.S. government"; S&P also stripped 5 insurers of their AAA ratings and put 5 others on negative watch

G20 Finance Ministers and Central Bank Governors: “we…affirm our commitment to take all necessary initiatives in a coordinated way to support financial stability and to foster stronger economic growth in a spirit of cooperation and confidence. We will remain in close contact throughout the coming weeks and cooperate as appropriate, ready to take action to ensure financial stability and liquidity in financial markets”

€ The ECB issued a statement on Sunday that they “will actively implement” the Securities Markets Programme, signaling that they would purchase more peripheral bonds; they tied the decision to announcements from the governments of Italy and Spain about new fiscal and structural reforms, and also to a reaffirmed commitment made Sunday from Germany and France to implement the Eurozone leaders’ July decisions

€ The ECB settled no new bond purchases in the week through August 5 and no purchases matured according to the weekly report on the Securities Markets Programme, so this week’s absorption operation will again be for €74bn; the bond purchase interventions noted by traders at the end of last week should be accounted for in next week’s ECB figures

€ French business sentiment from the Bank of France fell to 98 in July from 99 in June, down from 103 a year ago and the lowest since Oct’09

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