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Financial Markets: Headlines for September 7

September 7, 2011

EQ US equities reopened sharply lower on Tuesday as European shares declined further following Monday’s rout; the S&P 500 pared losses after the better-than-expected ISM non-manufacturing result and ended the session down 0.7% at 1165.24; Euro Stoxx 50 also fell for a 3rd consecutive session, down -1.3% to close at the lowest level since 31Mar’09; the FTSE100 and Swiss Market Index outperformed, up 1.1% and 4.4% respectively, with Swiss stocks supported by the SNB’s move to intervene directly in currency markets to weaken the franc

FI Long-end USTs traded higher during most of the session and the 30yr yield fell 2bps to a new low of 3.272%; the yield on the 10yr benchmark remained below 2%, ending flat versus Friday at 1.984%; the German 10yr cash yield also remained below 2%, ending flat at 1.844%; Greek government yields rose further and the Greek-German 10yr spread widened to a new euro-era high of 1796bps, up 240bps from a week ago amid concern about Greece’s slow progress on fiscal reforms and the outlook for aid programmes; the Italian 2yr yield jumped 17bps to 4.11%, a new high since the ECB began Italian bond purchases, highlighting concern about the prospects for the Italian government’s fiscal austerity packages; iTraxx 5yr senior European financials CDS index rose to a new record high

FX EUR/CHF surged to an intraday high of 1.216 in the aftermath of the SNB’s announcement that it will enforce a floor for EUR/CHF of 1.20 through purchases of foreign currency; EUR/CHF then stabilized at 1.205 in the US session, up 8.8% from Monday and back at the levels of early July; the euro also jumped briefly versus other major currencies amid expectations of massive SNB euro-buying, but most pairs reversed gains in concern about Euro area political risk and the Greek aid programme; EUR/USD declined 0.7% to 1.399 as the dollar posted broad gains in bids for liquidity although NOK and CAD outperformed among the G10; USD/CHF jumped 9.5% to 0.861 and was the strongest since end-May

CH The Swiss National Bank announced that it will buy foreign currency to enforce a minimum EUR/CHF exchange rate of 1.20 since “the current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development”; the SNB “is prepared to buy foreign currency in unlimited quantities” to manipulate the exchange rate; the SNB hopes that EUR/CHF will strengthen above 1.20 over time; “the SNB will take further measures” if deemed necessary by the evolution of the economic outlook and deflationary risks; Chairman Hildebrand said later that the costs associated with the policy might be very high but “doing nothing would almost certainly inflict tremendous long-term damage on our economy”

$ Fed’s Kocherlakota (voter) believes it is unlikely that September data will prescribe further monetary easing; the August FOMC policy change was inconsistent with the Fed’s inflation goals, on which it is currently doing “very well”

$ Fed’s Lacker (non-voter): "My sense is that more monetary stimulus at this point would likely show up almost entirely in higher inflation with very little constructive influence on growth"

€ The ECB successfully drained its target amount of €129bn through the 1wk deposit operation to sterilise the effect of bond purchases made through the Securities Markets Programme; the weighted average allotment rate was 1.0% and deposit bids totaled €173.6bm; the ECB purchased €13.3bn in bonds last week through the SMP versus €6.7bn in the previous week

€ Greece sold €1.3bn in 6-month bills at a yield of 4.80%, down 5bps from the yield at the previous similar auction on August 9; the bid/cover ratio was 3.02 versus 3.06 previously

€ German FinMin Schaeuble: "The troika mission [in Greece] must be resumed and it must come to a positive conclusion, otherwise the next tranche for Greece will not be paid out"; the IMF’s calculations about Eurozone banks’ capital levels will be discussed at the G7 meeting on Friday; the current crisis must be resolved on the basis of current treaties but further integration and institutional reforms are still needed in the long run

€ The Italian Senate is expected to vote by this evening on an amended austerity package that now includes a balanced budget amendment, a 1% hike in VAT to 21%, a levy of 3% on those earning more than $500k/year, and changes from 2014 to the pensions of women in the private sector

$ US ISM non-manufacturing index rose unexpectedly to 53.3 in August from 52.7 in July, a result which surprised versus the consensus forecast of 51.0, although performance was mixed, with only 10 industries reporting growth in August versus 13 in July; within the data breakdown, the new orders balance signaled faster growth at 52.8 vs. 51.7 and supplier deliveries slowed amid ongoing growth in business activity; new export orders jumped to 53.5 from 47.5 in July; the business activity balance was little changed at 55.6 vs. 56.1 previously, remaining above Q2 levels; the employment balance fell to 51.6 in August from 52.5 in July and was the lowest since Sep’10

€ Eurozone Q2 GDP growth was confirmed at +0.2%QoQ, down from +0.8% in Q1; the dynamics in the expenditure breakdown were broadly weaker; household spending fell 0.2%QoQ vs. +0.2% in Q1, marking the first decline since Q3’09; government spending declined 0.2% vs. +0.4% previously, highlighting the impact of fiscal austerity measures; fixed investment slowed to +0.2% from +1.8% previously; the contribution from net exports was steady at +0.2ppts; the change in inventories added +0.1ppt to the headline versus a flat contribution in Q1

€ German factory orders fell 2.8%MoM in July and disappointed versus consensus at -1.5% as foreign orders slumped 7.4% led by weaker foreign orders for capital goods (-12.8%); the annual pace of factory orders weakened to 8.7%, the lowest since Dec’09 (+7.3%); the Economy Ministry noted that “the factory orders dynamic has weakened in recent months, although the trend remains pointed upwards”

£ UK BRC same-store retail sales fell 0.6%YoY in August versus +0.6% in July and +1.0% a year ago, a disappointment versus the flat consensus forecast; total sales were up modestly from a year ago, at +1.5%YoY vs. +2.5% in July; according to the BRC report, “non-food sales fell further below their year-earlier level, with footwear and homewares showing the largest declines, despite further promotions”

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