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Financial Markets: Headlines for August 17

August 17, 2011

EQ The S&P 500 fell back below 1200 and traded weaker throughout a choppy session (-1.0% to 1192.76) after the gains of the previous three trading days; the index hit its intraday low after the press conference held by German Chancellor Merkel and French President Sarkozy, during which they said they would introduce a proposal for a financial transaction tax in the Eurozone and said there is not enough integration to allow for a euro bond; S&P bank stocks fell 2.8% also under pressure from filings that showed a large fund reduced holdings of some US lenders in Q2; European stocks fell modestly ahead of the leaders’ press conference; Euro Stoxx 50 fell less than 0.1% to 2323.67

$ The CBOE Vix volatility index rose 1.0pt to 32.85 on Tuesday, down only marginally from a week ago (35.1) and still far above the 50-day moving average of 22.7

FI US Treasuries advanced amid concern about the Eurozone leaders’ plans for dealing with the crisis, which currently do not include a doubling of the EFSF or common euro bond issuance; the curve flattened and the yield on the 10yr benchmark dropped 9bps to 2.22%; the Sep’11 Bund future rose 18 ticks to 133.11; in the European session Spain and Greece sold bills at lower yields; the Spanish 10yr yield fell 2bps to 4.966%; the Italian 10yr yield fell 3bps to 4.988%

FX EUR/USD was trading at 1.434 at the start of the Asian session, down 0.5% from Monday’s US close; the Swiss franc moderated against all major currencies on Tuesday ahead of the Swiss federal council meeting today; EUR/CHF rose 0.8% to 1.14 at the highest levels since end-July; USD/CHF gained 1.1% to 0.794; Sep11 gold rose 1.4% to $1786oz

$ Fed’s Bullard (non-voter) said the language on holding the fed funds rate at an exceptionally low rate until at least mid-2013 is not a signal that more QE is forthcoming; he would have dissented in the recent vote; the risk of deflation is “remote” although QE remains an option if the economy weakens substantially

$ Fitch officially affirmed its triple-A rating on the US and said the outlook is stable; “key pillars of US’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base”; Fitch will review its fiscal projections in light of the deliberations of the bipartisan deficit committee due by end November; if the Committee fails to agree on at least $1.2trn in deficit reduction, or economic growth is weaker than expected, and there are upward revisions to medium-long-term public debt projections, Fitch would likely take a rating action such as reducing the outlook to negative

$ US industrial production rose 0.9%MoM in July versus an upwardly revised gain of +0.4% in June (originally +0.2%); manufacturing output accelerated, up 0.6% versus +0.2% in June, led by a surge in motor vehicles & parts output (+5.2% vs. -0.9%) and slightly faster ex-vehicle manufacturing output (+0.3% vs. +0.2%) as well; total motor vehicle assemblies were the strongest since March; utilities output jumped 2.8% vs. +0.8% previously; mining output rose 1.1% vs. +1.2% in June

$ US import prices rose 0.3%MoM in July versus a revised decline of 0.6% in June (originally -0.5%); petrol and food/beverage prices rose in July after declining in the previous two months, but capital goods prices were flat and auto prices fell 0.3%; compared to a year ago import prices were still up sharply at 14.0% versus 13.7% in June and 5.6% at the start of the year

$ US housing starts fell 1.5% in July to an annualized pace of 604k and the June gain was revised down to 10.8% from +14.6% reported originally; the July result was broadly in line with the consensus forecast of 600k and although still at a depressed level, the 3m average was the highest in over a year; building permits slumped 3.2%MoM in July to an annualized pace of 597k, below that of starts

€ German Chancellor Merkel and French President Sarkozy said euro bonds are possible one day but only after European integration is complete; they proposed a “real economic government for the euro zone…made up of …heads of state and government that will meet twice a year…It will elect a stable president for 2-1/2 years”; jointly, they will “table a joint proposal at the EU level next September for a tax on financial transactions”; they also proposed that Eurozone members write rules on debt limits into their constitutions; they support common definitions for the corporate tax base and rates

€ EC President Barroso and EU Economic Commissioner Rehn: "The proposals made today by President Sarkozy and Chancellor Merkel are a welcome step forward in our common efforts to strengthen the governance of the euro area"

€ Eurozone FinMin Fekter: "The euro zone is not yet ready for euro bonds without a common economic and financial policy"

€ EC spokesman Bailly: "For the time being, we think that the level of the EFSF is enough…we should reassess this amount if there would be a need for more support"

€ ECB’s Liikanen: there is greater uncertainty about economic growth than before; “monetary policy can’t alone solve tension in the financial markets as the background is excessive debt in public finances. It requires action by governments”

€ The ECB drained €96bn through a 7-day deposit operation as planned to sterlise the effect bond purchases through the SMP

€ Spain sold €5.7bn in T-bills, at the upper end of the €5-6bn target range; yields were lower than at the previous similar auctions, although bid/cover ratios indicated weaker demand; the 12-month bill sale drew an average yield of 3.335%, down 37bps from the yield at the previous similar auction on July 19; the 18-month bill drew a yield of 3.592%, down 32bps

€ Greece sold €1.3bn in 3-month bills, above the target amount of €1bn; the yield moderated for a second consecutive auction, down at 4.50% versus 4.58% on July 19; the bid/cover ratio fell slightly to 2.95 vs. 3.08 previously

€ Eurozone Q2 GDP growth was the slowest so far of the recovery, at 0.2%QoQ versus +0.8% in Q1, disappointing versus the median analyst forecast of +0.3% and highlighting a slowdown in core economies; Germany posted growth of just 0.1% in Q2 vs. +1.3% previously while French GDP was flat following a gain of 0.9% in Q1

€ Eurozone trade deficit was higher at €1.6bn in June versus a revised €0.8bn in May (originally €0.6bn); exports dropped 4.7%MoM in June versus +1.5% in May; imports slumped 4.1% versus +0.3% previously

£ BoE Governor King wrote another required letter to the UK Chancellor to explain why the CPI remains more than 1% above the 2% target; he reiterated that based on the analysis done before the August meeting, inflation is expected to fall back during 2012, with the chances of it being above or below target in the medium term seen as broadly balanced; however, Gov. King noted there have been “significant movements in financial asset and energy prices since the last MPC meeting”; there is a risk of “further severe stress and dislocation in financial markets” which would be negative for the UK economy and likely for inflation; upside risk to inflation remain from the sustained period of above-target CPI which could affect inflation expectations, as well as potential fluctuations in commodity or import prices, but the “recent evidence of a moderation in global growth suggests” that that risk has diminished

£ The UK CPI was flat on the month in July but up on an annual basis to 4.4% versus 4.2% in June, above consensus at 4.3%; the core measure excluding energy, food, alcohol & tobacco jumped to 3.1% from 2.8% previously; upward impact came from a variety of areas, including financial services where fees rose more than in July of a year ago; price of non-energy industrial goods accelerated to 1.4% from +0.8% in June; housing costs rose on account of faster growth in rents (+3.0% vs. 2.2%) tied to social housing

£ UK DCLG house prices fell 2.0%YoY in June versus a revised decline of 2.2% in May (originally -1.6%)

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