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Financial Markets: Headlines for August 31

August 31, 2011

EQ US equities were under pressure in the early part of the session and hit intraday lows after the extremely weak consumer confidence report, but the S&P 500 traded in a narrow range and ended the day stronger again after publication of the FOMC minutes which indicated that serious discussion about further easing will continue in September; some members supported stronger action in August although the Committee is divided; the S&P rose 0.2% to 1212.92 but financials weighed (-0.7%); the CBOE Vix index rose slightly to 32.9 from 32.3 on Monday, remaining below last week’s levels; the FTSE100 reopened and gained 2.7% to 5268.66; Euro area bourses closed mixed after Monday’s rally; with Germany (-0.5%), Greece (-4.8%), Italy (-0.2%) and Portugal (-0.1%) losing ground

FI US treasuries rose throughout the session, as dovish comments from Fed’s Evans and weak economic figures supported speculation about more near-term monetary policy action, ahead of FOMC minutes publication; the yield on the 10yr benchmark fell 8bps to 2.177%; the 2yr yield declined 1bp to 0.195%; Bunds rallied as well, and the 10yr cash yield fell to its intraday low after the US confidence figure, ending down 7bps at 2.147%; Greek 10yr yields stabilized (-6bps to 16.9%), but the Italian 10yr yield rose amid government bond auctions and ended 4bps higher at 5.105%; the ECB was reportedly active in the secondary market

FX The euro fell broadly during the European session as Eurozone economic sentiment came in lower than expected and demand at the 10yr Italian bond auction was seen as weak, while the Greek/Finnish collateral-for-aid issue remained unresolved; EUR/USD fell 0.4% to 1.444 and EUR/JPY weakened 0.7% to 110.84; the US dollar was mixed against major currencies on Tuesday as risk sentiment remained tepid, despite rising expectations that the Fed will ease further; the gold Dec’11 contract jumped 2.7% to $1839oz

OIL US crude prices climbed for a 4th session and the Oct’11 WTI contract reached $89.21bbl, the highest since 4 August

$ FOMC minutes from August 9: most members agreed at the meeting that the economic outlook had deteriorated enough to warrant further action and there was broad discussion of the various ways in which policy could be eased, including tying forward guidance to the state of the economy, conducting more asset purchases, or increasing the average maturity of the existing portfolio; a discussion about costs & benefits of policy tools would continue at the extended meeting in September; most members thought monetary policy “could contribute importantly to better outcomes” on employment and price stability although “some” judged that none of the tools would do much to promote a stronger recovery and would risk boosting inflation; those who supported more accommodation viewed the decision on strengthening the “forward guidance” on rates to be a “measured response,” although “a few” members believed that a more substantial move could be justified; the 3 members who dissented preferred that the previous “extended period” language be maintained; Mr. Fisher believed “nonmonetary factors” were holding back the recovery; Mr. Kocherlakota did not think easing was justified given that inflation had risen and unemployment had fallen since Nov’10; Mr. Plosser thought the decision conveyed “an excessively negative assessment” and could be misinterpreted as suggesting that policy was no longer contingent on how the outlook evolved

$ Fed’s Evans (voter): "I’m in favor of some of the most aggressive policy actions of anyone on the committee”; he believes the Committee needs to clarify its policy intentions and explain what it means by conditionality, perhaps by detailing desired levels of “economic markers” such as the unemployment rate or inflation; he said the economy is heading sideways and unemployment rates are consistent with previous recessions

$ Fed’s Kocherlakota (voter) does not believe further monetary policy easing is needed at this point; there is a “disconnect” between the Fed’s 2% inflation target and its move to ease policy earlier in the month; he indicated that he would not dissent going forward on the new forward guidance on the fed funds rate because undoing the pledge could hurt future Fed commitments

$ US consumer confidence plummeted 14.7pts to 44.5 in August according to the Conference Board, the sharpest decline since Oct’08 after Lehman; the result disappointed versus consensus at 52.0 and was the lowest since Apr’09 during the recession; the debt ceiling discussions were cited as a contributing factor “since the decline in confidence was well underway before the S&P downgrade”; most of the drop was driven by sharp deterioration in the 6-month expectations component, down 23.0pts to 51.9, also the lowest since Apr’09; the measure of the present situation fell 2.4pts to 33.3; consumers’ evaluation of labor market conditions was the most pessimistic since Nov’10

$ US S&P/CS 20-city house prices fell 4.5%YoY in June versus a revised decline of 4.6% in May (originally -4.5%); on a monthly basis prices showed signs of stabilization, down by just 0.1% in June and May following an April increase of +0.5%

€ ECB’s Noyer said he did not understand IMF Chief Lagarde’s calls for European bank recapitalizations and said perhaps she was badly i by IMF staff; rumours about a downgrade to France’s credit rating are absurd

€ Italy sold €7.74bn in 3-, 7-, and 10-year government bonds, close to the target maximum of €8bn; the €3.75bn 10yr issue drew a lower bid/cover ratio of 1.27 vs. 1.38 at the previous similar sale on July 28, although the yield fell to 5.22% from 5.77% reflecting the impact of support from the ECB in the secondary market

€ Bank of Italy deputy director-general Visco: "We risk a phase of stagnation, which would slow the decrease in the debt”

€ The Finnish PM reportedly expects the Greek collateral issue to be resolved in a matter of days or weeks because national parliaments need to begin their debates about the next Greek aid package

€ EC Eurozone industrial confidence fell to -2.9 in August versus +0.9 in July, disappointing versus consensus at -2.0 and now at the lowest level since Jul’10; the final August consumer confidence figure was revised up by 0.1pt to -16.5 but remained the weakest since Jun’10; the drop reflected sharp deterioration in expectations about the labor market and the general economic situation in the next 12 months

£ UK mortgage approvals rose for a 3rd consecutive month to reach the highest level since May’10, up at 49.2k in July versus 48.5k in June

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