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Financial Markets: Headlines for August 16

August 16, 2011

EQ The S&P 500 jumped 2.2% and closed at its intraday high of 1204.49, up for a third consecutive session to erase last week’s declines; the low level of valuations and some merger news boosted flows into equities; Google (GOOG, -1.2%, $557.23) announced a $12.5bn takeover of Motorola Mobility Holdings (MMI, +55.8%, $38.12); European bourses broadly closed stronger although markets were closed in Italy, Greece and Austria for holidays ; Euro Stoxx 50 gained 0.7% to 2324.48, also the highest close since 5 August

FI USTs declined at the longer maturities as sentiment toward riskier assets improved somewhat; the yield on the 10yr benchmark rose 5bps to 2.305%; the 2yr yield held at 0.19%; moves in European sovereign markets were muted amid modest gains in European equities and ahead of today’s meeting of French and German leaders; the German 10yr cash yield fell 1bp to 2.322%; Italian and Spanish 10 yields were little changed over the session, at 4.999% and 4.942% respectively

FX The euro gained 3.2% against the Swiss franc to 1.133 as the franc weakened across the board amid the reports that the SNB and Swiss government are in discussions about pegging the franc to the euro with a lower bound of 1.10 to restrict further appreciation; the euro rose sharply versus the dollar during the US session and was up 1.3% from Friday at 1.444; the dollar weakened broadly versus major currencies amid the stabilization in sentiment and the gains in riskier assets; USD/JPY traded in a narrow range on Monday and ended the US session little changed from Friday at 76.85; gold remained below record highs but the Sep’11 contract rose 1.3% over the session to $1764.0oz

OIL US Sep’11 WTI crude rose 2.6% from Friday to $87.67bbl despite signs in the US economic data of a sharp slowdown in manufacturing activity; the Brent contract rose for a fourth session, up 1.8% to $109.7bbl

$ Fed’s Lockhart (non-voter) said the Fed is “not out of bullets” and has options for more monetary easing, including a change in “the duration of the portfolio”; he supported the changes in last week’s FOMC statement and said it was a “measured response”; the bar for more asset purchases is still high; risk of another recession is higher than seen 1-2 months ago

€ The ECB purchased €22bn in bonds through the Securities Markets Programme in the reporting period to August 12, the largest amount on record since the SMP was first used in May 2010; a total of €96bn has now been settled in the SMP and the ECB will hold its regular weekly 1wk deposit tender today to absorb excess liquidity

€ The French President’s office said a common Eurozone bond is not on the agenda of today’s meeting with Chancellor Merkel

€ German FinMin spokesman Seibert said no one should expect a major breakthrough out of the Merkel/Sarkozy meeting

€ EU Economic Commissioner Rehn does not expect that France, Italy or Spain will have to turn to the stability mechanism; "They are taking the right measures themselves to get their budgets and economies in order. That is the way to restore and strengthen market confidence"

€ ECB’s Mersch said it would be unrealistic and equivalent to “economic suicide” for a country to exit the euro block; "Leaving the euro area is not an option for any member country” – China Business News

£ UK BoE MPC member and “neutral voter” Miles indicated he is not in favor of more QE at this time; the UK is on a recovery path, albeit a fragile one; "there could be circumstances under which I would judge the right policy would be to embark on further asset purchases but that’s not how I’ve seen things thus far"

$ The NY Fed Empire manufacturing PMI fell further into negative territory and disappointed versus the consensus forecast, down at -7.7 in August versus -3.8 in July; the 3-month average (-6.4) was the lowest since June’09 at the end of the Great Recession; new orders (-7.8) contracted at the fastest pace since November; shipments rose marginally, with the balance at 3.0 versus 2.2 in July; employment growth also remained slightly in positive territory at 3.3 vs. 1.1 previously but the average workweek contracted for a 3rd consecutive month; expectations about business conditions in 6 months fell to the weakest level since Feb’09

$ US June net long-term TIC flows slowed to $3.7bn in June versus a revised $24.2bn in May (originally $23.6bn), coming in sharply below the consensus forecast of $35.0bn; private foreign investors sold a net $23.0bn in long-term securities in June while official net purchases slowed to $11.5bn from $23.2bn previously; the shift was driven by private net sales of Treasury notes/bonds and corporate bonds, and slower official net purchases of Treasuries

$ US NAHB homebuilder sentiment remained at a weak level, steady at 15 in August as expected, which was in line with the 6- and 12-month moving averages

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