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Financial Markets: Headlines for August 23

August 23, 2011

EQ US equities pared early gains to end just modestly higher at the start of the week as sentiment remained cautious and volatility high in front of a busy economic calendar and speech from Chairman Bernanke on Friday; US financial shares weakened on Monday tied in part to institution-specific news; the S&P 500 closed up less than 0.1% at 1123.82 after reversing nearly 2% of early gains; some optimism about the progress of political rebels in Libya and hopes about restored oil production supported European shares; Stoxx 600 rose 0.8% as all major sectors posted gains, although in regional bourses the German Dax lost 0.1% and the Greek ASE slumped 2.2%

FI US Treasuries fell ahead of $99bn in note sales this week and the curve steepened marginally as equities held on to modest gains; the yield on the 10yr benchmark rose 4bps to 2.101%, remaining above 2% for a second full session; the 2yr yield rose 1bp to 0.201%; the German 10yr cash yield ended flat at 2.099%, down 73bps from a month ago; PIIGS bond yield spreads over Bunds widened at the 10yr maturity (ex-Ireland), with the Italian-German up 5bps to 287

FX The Swiss franc and the yen fell broadly against other major currencies as central bank action remained a threat; USD/CHF rose 0.7% to 0.7902 and USD/JPY gained 0.4% from Friday to 76.82, now up 1% from Friday’s post-WWII low; the euro fell 0.2% against the dollar to 1.436; Cable pulled back from Friday’s 3-1/2 month high of 1.6618, back down at 1.646 at the US close; the Dec’11 Comex gold future rose 2.4% from Friday and reached $1900oz

OIL Brent crude prices fell as Libyan rebel forces entered Tripoli raising the prospect of some eventual restoration of supply; the Oct’11 contract was down 0.8% from Friday at $108.35bbl, and down 8.6% from a month ago; the Oct’11 WTI contract diverged and rose 2.1% to $84.4bbl as equities recorded tentative gains and investors positioned ahead of Chairman Bernanke’s speech on Friday

$ US Chicago Fed national activity index rose for a 3rd consecutive month in July to a 4-month high but continued to signal below-trend growth; the index rose unexpectedly to -0.06 versus an upwardly revised -0.38 in June (originally -0.46)

€ The ECB bought €14.3bn in bonds through the Securities Markets Programme last week versus €22bn in the previous week; the 1wk deposit tender will be held today in an attempt to sterilise the effect of the €110.5bn in SMP bond holdings

€ The Bundesbank expressed dismay at the Eurozone leaders’ agreements from July 21, which “result in a further big step towards joint liability and reduced disciplining via the capital markets…The incentives for appropriate fiscal policy are also further reduced by secondary market (bond) purchases"

€ German FinMin Schaeuble said those who want to introduce euro bonds under current conditions would turn Europe into a “debt union”

€ ECB’s Nowotny expressed concern that there will be a delay in parliamentary approvals of the proposed changes to the EFSF (which would allow the facility to purchase government bonds in the secondary markets)

£ UK BoE MPC member Broadbent said he was on the hawkish side of the interest rate debate when he first joined the MPC but is now “much more in the middle”; the economic outlook has softened since earlier this year; he believes there is significant spare capacity in the economy and implied that if the outlook changed sufficiently to reduce inflation prospects, more easing was possible

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