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Financial Markets: Headlines for August 24

August 24, 2011

EQ The S&P 500 closed up 3.4% at its intraday high of 1162.35 as equity investors shrugged off weak US and Eurozone economic figures and a minor earthquake in the mid-Atlantic region, focusing on weak valuations and the chances that Chairman Bernanke signals further monetary easing on Friday; the CBOE Vix volatility index fell to 36.3 from 42.4 previously; in Europe the Stoxx 50 rose for a second session, paring an early gain of 2.6% to close up just 0.8% at 2199.98; financials weighed (-0.4%) and national bourses ended mixed with peripheral indices in the red

FI USTs see-sawed ahead of the Treasury’s 2yr note auction and spiked briefly after the earthquake in Virginia, but ended weaker on the session amid stronger risk sentiment; the yield curve steepened and the 10yr yield jumped 5bps to 2.156%; yields rose on most euro-denominated government bonds, with the German 10yr cash up 3bps to 2.124%; Greek and Portuguese underperformed amid uncertainty about the collateral arrangements and approval of the next Greek loan package; the Greek 2yr yield surged 135bps to 37.2%

FX The US dollar fell broadly against major currencies and the DXY index lost 0.4% to 73.84, but was down only 0.2% from a month ago; USD/JPY fell 0.3% to 76.62 and EUR/USD hit an intraday high after the disappointing Richmond Fed manufacturing result which increased speculation about QE3, and rose 0.5% on the day to 1.444; the dollar rose for a second session against the Swiss franc, up 0.3% to 0.793; gold fell sharply from levels deemed overbought despite a broad decline in the US dollar on Tuesday; the Dec’11 contract dropped 3.7% to $1832oz after its foray above $1900 on Tuesday

OIL Crude prices rose amid the rally in US equities and as fighting continued in Libya although the rebels said they had entered Qaddafi’s compound; the Oct’11 Brent contract rose 1.6% to $110.0bbl and WTI jumped 2.0% to a 3-day high of $86.0bbl

$ The FDIC said there were fewer “problem” banks in Q2, at 865 vs. 888 in Q1, the first decline in 19 quarters; banks’ loan balances rose for the first time in 3 years, but "a significant portion of the overall growth in loans represented intra-company lending between related banks. Lending activity still has a long way to go before it approaches more normal levels”

$ Fed’s Bullard (non-voter): "If the economy weakens substantially, and especially if the inflation picture starts to deteriorate so that deflation becomes a risk again, then I think the committee would definitely take action”; he outlined the policy-easing options still available to the Fed, and said if they do decide to eventually engage in more QE he would prefer month-to-month decisions

$ The US sold $35bn in 2-year notes at a record low yield of 0.222% on Tuesday versus 0.417% at the July auction, reflecting the FOMC’s August 9 communication that it anticipates holding the fed funds target at exceptionally low levels through mid-2013; the bid/cover ratio was stronger at 3.44 vs. 3.14 at the July auction and the 10-auction average of 3.32; indirect bidders took 31.6%, also above the 10-auction average of 31.1%

€ Spain sold €2.94bn in 3- and 6-month bills, at the top end of the €2-3bn target range; yields fell versus the previous auctions and bid/cover ratios were stronger; Spain sold €0.81bn in 3m at an average yield of 1.357%, down 54bps from the July 26 auction; the bid-to-cover ratio rose to 7.6 vs. 6.3 previously; also sold €2.14bn in 6m at an average yield of 2.187% down 33bps from July, while the b/c was stronger at 3.6 vs. 2.2

€ The ECB allotted €133.7bn in 7-day funds at a fixed rate of 1.50% versus €147.7bn allotted in last week’s MRO

€ The ECB successfully drained €110.5bn through a 1wk deposit operation to sterilize the effect of the SMP bond purchases; the weighted average rate of 1.03% was up from 0.96% last week when the ECB drained €96.0bn

€ Austrian FinMin Fekter said that many Eurozone states oppose the agreement made between Greece and Finland over the provision of cash collateral in support for participation in the Greek bailout

€ Finnish PM Katainen said Finland could end participation in the Greek aid plan if it does not receive collateral from Greece for its portion of loans, although “of course the Finland-Greece collateral deal cannot block the [bailout] package”

€ Greek banks will reportedly have to declare by September 9 whether they will participate in the bond swap (PSI) and to what extent – Reuters

€ Spain may implement a constitutional cap on public debt before the November elections; PM Zapatero said that it would represent “a step toward strengthening confidence in the medium- and long-term stability in the Spanish economy” and a commitment to more consolidation within EMU

$ US Richmond Fed manufacturing index fell to -10 in August versus consensus at -5 and -1 recorded in July; the result was the lowest since Jun’09 at the end of the last recession (-12) and reflected faster declines in shipments and new orders and the slowest employment growth in 11 months

$ US new home sales fell 0.7%MoM in July and the June decline was revised to -2.9% (originally -1.0%); the annualized pace at 298k was the weakest since February and below the 12-month moving average of 301k

€ The Eurozone composite PMI held at 51.1 in the advance August estimate, coming in above the consensus forecast of 50.0, but the details of the report were bearish, with new orders and business expectations indices showing sharp deterioration; both the manufacturing & services PMIs came in above median August forecasts, although the manufacturing measure still fell into contraction territory to a 23-month low of 49.7 versus 50.4 in July; the French manufacturing PMI slumped to 49.3 from 50.5, but the German measure held steady in growth territory at 52.0; the services PMI declined 0.1pt to 51.5 but this was also a 23-month low; outside of Germany & France, business output declined for a 3rd consecutive month

€ Eurozone EC preliminary consumer confidence dropped in August by the most since Sep’90, down 5.4pts to -16.6, which disappointed versus consensus at -12.4 and left the index at the lowest level since Jun’10; confidence dropped 6.7pts over the 3 months through August, the sharpest quarterly decline since Dec’08 during the financial crisis (-11.7); the full report will be published August 30

€ The German ZEW investor measure of economic sentiment plunged to -37.6 in August from -15.1 in July and came in below the consensus forecast of -26.0 at the lowest level since Dec’08; the drop of 22.5pts just exceeded the post-Lehman decline of 21.9pts and was the largest since Jul’06, as investor fear led equities down sharply amid concern about the Eurozone and US debt problems, policy incapacity, and slowing growth; the measure of the current economic situation dropped 37.1pts to a 1yr low of 53.5

£ UK CBI Industrial Trends: total orders balance rose to +1 in August from -10 in July, surprising positively versus the median forecast for further deterioration to -12; the balance measuring expectations of output in the next 3 months rose to +13 from +6 previously, but remained below the 6m moving average of +17

£ UK BBA loans for house purchase rose to 33.4k in July from an upwardly revised 32.1k in June (originally 31.7k) and were the highest since Jun’10

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