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Financial Markets: Headlines for August 11

August 11, 2011

EQ All Dow stocks declined and the index dropped 519.8pts to 10719.94, reversing Tuesday’s post-FOMC gain of 429pts; the S&P 500 fell 4.4% to 1120.76, hanging on to only a bit of the previous day’s +4.7% surge; all European bourses weakened with major indices of Germany, France, Italy and Spain all posting declines of over 5%; Stoxx 600 lost 3.8% led by financials (-5.9%) amid fear that France could be the next sovereign to lose its AAA rating raising concern about the implications for the EFSF and the health of French banks

FI Treasuries rallied ahead of the 10yr note auction and rose further after solid results; the 10yr outperformed and the yield fell 16bps to 2.093%; the US 2/10 yield spread closed at the tightest since April 2009, down at 192bps versus 256bps a month ago; the yield on the UK 10yr dropped 23bps to a record low of 2.479%; the French 10yr yield fell 15bps to 3.055% but the spread over the German 10yr cash yield widened to 88bps versus 69bps a month ago; the ECB was reportedly in the bond market again and 10yr yields among PIIGS debt fell for Portugal, Italy and Spain but declines were more moderate than on Tuesday; the Italian 10yr yield fell 7bps to 5.072% and the Spanish fell 5bps to 4.976%

FX The Swiss franc’s gains were curtained against some major currencies on Wednesday as the SNB announced that it will act to further increase the supply of Swiss franc liquidity in the money market and will restart an fx swap program; the dollar rose 0.7% against the franc to 0.727; fears about risks emanating from the Eurozone left EUR/CHF weaker on the day, down 0.9% to 1.030; the euro fell 1.2% against the dollar to 1.418; Cable fell to the lowest since July 21, down 1.1% to 1.614 following publication of the BoE’s dovish Inflation Report

OIL Crude stabilized and the Sep’11 WTI contract rose 0.8% to $81.7bbl; Brent gained 0.4% to $105.6bbl

CHF The SNB announced additional measures on Wednesday to try to counter the massive appreciation in the Swiss franc which has increased the risk of recession and negative price pressures; the SNB will conduct fx swap transactions and significantly increase the supply of Swiss franc liquidity in the money market; the SNB said it will take further monetary policy measures if necessary

$ The US sold $24bn in 10yr notes at a record low yield of 2.140%, down sharply from 2.918% at the July auction and the previous record low of 2.419% in Jan’09; the bid/cover ratio was 3.22 versus 3.17 previously and the 10-auction average of 3.11; indirect bidders took 35.4%, below the 10-auction average of 50.3% while purchases from direct bidders were sharply higher at 31.7% versus the 10-auction average of 8.3%

€ France’s AAA rating has been affirmed by all 3 rating agencies

€ France’s market regulator AMF said it is monitoring the functioning of markets, especially that for bank stocks

€ Italy sold €6.5bn in 12m bills as targeted, at an average yield of 2.959% which was down from 3.67% recorded at the previous similar auction on July 12; the bid/cover ratio of 1.94 was stronger than 1.55 at the July sale

€ The ECB allotted €49.752bn in 6-month funds in its extraordinary long-term refinancing operation on Wednesday, the rate of which will be indexed to the main refinancing rate (currently 1.5%); the result was broadly in line with market poll results (Reuters: €50bn), but uptake in the ECB’s 7-day (€157bn) and 1-month (€76bn) operations earlier in the week exceeded expectations

€ Greek FinMin Venizelos said that Greece may extend the terms of the bond swap proposal to include debt maturing after 2020, in order to gain more private sector participation

$ The US monthly federal budget deficit was smaller at $129.4bn in July versus $165.0bn a year ago; on a FYTD basis the deficit was $1.099trn versus $1.169trn in the same period of 2010, a decline of 5.9%

$ US wholesale inventories rose less-than-expected, up 0.6%MoM in June versus consensus at +1.0% and a downwardly revised increase of 1.7% in May (originally +1.8%); automotive stocks rose strongly again, up 4.3% vs. +5.6% in May; ex-petrol inventory growth slowed to +0.9% from +1.7%; wholesalers’ sales rose 0.6% versus -0.3% in May

£ UK BoE Inflation Report: Governor King struck a somber and dovish tone in his prepared statement; “the outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker… the weakness in underlying activity is likely to be somewhat more persistent than previously expected”; risks to UK GDP growth remain on the downside and the projections for 2011 and 2012 were lowered versus May, even though market interest rate expectations show policy is expected to be accommodative for longer than previously expected; the CPI in 2 years is now expected to come in slightly below the 2% target, although risks are still slightly to the upside; this leaves the prospect of more quantitative easing on the table; Gov. King said that the BoE is not out of tools

€ The German CPI was confirmed at 2.4%YoY in July, up from 2.3% in June, to match the 2011 high last posted in April; the ex-energy CPI rose to 1.5% from 1.4% previously

€ French manufacturing production fell 1.9%MoM in June and disappointed versus the consensus forecast of -0.1%; the May increase was revised to 1.4% from +1.5% reported originally; manufacturing output was up 3.3% from a year earlier, the slowest gain since Oct’10 (+2.7%)

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