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Financial Markets: Headlines for August 30

August 30, 2011

EQ The S&P 500 rose for a fifth session out of the past six and closed above 1200 for the first time since August 15 although trading volumes were light; the index gained 2.8% on Monday to 1210.08 as sentiment was supported by stronger-than-expected US personal spending figures, news that Bank of America (BAC, +8.1%, $8.39) will raise more capital, and downward revisions to estimates of insurance claims from Hurricane Irene; European bourses posted strong gains as well; Euro Stoxx 50 rose 2.2% to a 1-1/2 week high of 2239.3; Greece’s Athex Composite rose 14% to 1006.59 on the news of a merger between two Greek banks

FI USTs moderated during Monday’s European session and fell further after publication of the stronger-than-expected personal spending figures; the yield on the 10yr benchmark rose 7bps to 2.256%; the benchmark Bund future reversed Friday’s gains and declined 82 ticks to 134.39; most Euro area peripheral government bonds declined as well (excluding Ireland); ECB figures showed a smaller intervention in the bond market last week and investors are focused on the Italian bond auctions today and the Spanish and French issuance on Thursday; the Italian 10yr yield rose 2bps to 5.064%, the highest since August 10; the Greek 2yr yield jumped 165bps to 41.4% on Monday remaining at euro-era high levels, despite news of consolidation within the Greek banking sector

FX The Swiss franc and yen declined broadly and the dollar underperformed versus the remaining G10, while stronger risk sentiment supported ZAR, BRL, NOK and NZD; USD/CHF rose 1.2% to 0.816, the highest since July 22; USD/JPY rose 0.3% to 76.85; EUR/USD gained 0.1% to 1.452, up 1% from a week ago

OIL US crude prices jumped after the US personal spending report showed a strong gain in July led by auto sales; WTI for Oct’11 delivery rose 2.3% to $87.5bbl; Brent gained 1.0% to $112.2bbl

G20 A draft of the IMF’s latest World Economic Outlook showed a slightly weaker 2011 global growth forecast of 4.2% versus 4.3% forecast in June; the 2012 growth outlook was revised down to 4.3% from 4.5%; for the US, the 2011 forecast was slashed to 1.6% from +2.5% in June, and 2012 to 2.0% from 2.7%; IMF said the Fed should be prepared to adopt new non-conventional policy measures to sustain the economy; the Eurozone growth forecast for 2011 was reduced to 1.9% from 2.0% in June and the 2012 projection was lowered to 1.4% from 1.7%; the ECB should continue to intervene in sovereign debt markets and has room to ease monetary policy if downside risks persist – ANSA news agency

$ US personal spending jumped 0.8%MoM in July, surprising positively versus the consensus forecast of +0.5%, and the June decline was revised to -0.1% (originally -0.2%); when adjusted for price changes real spending rose 0.5%MoM, the first increase since March, led by spending on durable goods and services; the 3m annualized pace held steady versus Q2 at +0.4%; disposable personal income rose 0.3% in July vs. +0.2% in June, but stronger spending weighed on the saving rate – down at 5.0% vs. 5.5% previously and below the 12-month moving average of 5.2%

$ The US price measure of core personal consumption expenditures (ex-energy & food) rose at a steady monthly pace of 0.2% in July as expected; when annualized over 3 months the rate accelerated to 2.4% from 2.2% in June and 1.6% in Q1, now up at the fastest pace since Jul’08 (2.5%) during the height of the commodity price boom

$ US pending home sales, which track signed contracts on sales of pre-existing homes, fell 1.3%MoM in July following gains of 2.4% in June and 8.2% in May; the result disappointed slightly versus the consensus forecast of -1.0%; compared to a year ago pending home sales were up 10.1%

€ The ECB slowed its bond purchases for a second consecutive week, at €6.7bn last week versus €14.3bn the week before and €22bn in the week prior to that; the 1wk deposit tender will be held today in an attempt to sterilise the effect of the €115.6bn in holdings

€ ECB President Trichet said “risks to the medium-term outlook for price developments are under study in the context of the ECB staff projections that will be released early September,” thus he refrained from saying that risks “lie to the upside,” supporting expectations that the ECB is done tightening; when asked about the risks that the ECB assumes through asset purchases, he said that the ECB’s balance sheet is not as large as the Fed’s or BoE’s; he suggested banks should bolster their balance sheets

€ EU Economic Commissioner Rehn sees a further moderation in Eurozone economic growth after Q2; despite European banks moves to reinforce capital as required by the stress tests, “banks have experienced difficulties in their access to funding in recent weeks. As the necessary recapitalisation of EU banks proceeds, we expect their funding conditions to improve. And of course, the banks have access to the provision of liquidity by the central banks”

€ Over the weekend IMF head Lagarde called for a "mandatory substantial recapitalization" of European banks, through private channels if possible but otherwise through public funding; EU Commission spokesman Altafaj said more capitalization beyond what was outlined by the stress tests was not necessary

€ Greek banks Eurobank (EUROB, +29%, €2.24) and Alpha Bank (ALPHA, +30%, €2.47), the country’s second and third largest lenders respectively, announced that they will merge; the Qatar Investment Authority will participate in the deal and gain a 17% share; the plan involves a capital boost of €3.9bn which will increase the core tier 1 capital ratio to 14%

€ Finland drafted a plan for the creation of a Luxembourg-based company that would hold Greek assets as collateral for new EFSF loans to Greece; in the case of a Greek default on the loans, ownership of the holding company shares would be transferred to Eurozone member states – Reuters

€ Eurogroup head Juncker said there will be an answer to the Greek collateral issue by mid-September; the debate about Greek collateral will not stop implementation of the July 21 leaders’ decisions [on expanding the powers of the EFSF, etc.]

€ The German CPI fell to 2.3%YoY in August according to the preliminary reading, in line with the consensus forecast and down from 2.4% in July; the CPI remained above the YTD average of 2.2%

€ Italian ISAE consumer confidence fell to the lowest level since Mar’09, down at 100.3 in August versus 103.7 in July, a disappointment versus consensus at 101.9; the 6-month moving average remained on a downward trend and fell to the lowest level since Jun’09

¥ Japanese FinMin Noda won the vote to become Japan’s next PM as expected

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