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Financial Markets: Headlines for September 8

September 8, 2011

EQ US equities rallied after 3 days of declines although the S&P did not breach 1200, gaining 2.9% to 1198.62 on Wednesday; gains were broad across sectors, with financials up 4.8% and oil & gas +3.6%; focus is on the chances of more Fed stimulus, ahead of a speech from Fed Chairman Bernanke today, and on President Obama’s plans for promoting growth and hiring to be outlined this evening; Euro Stoxx 50 surged 3.4% after 3 days of declines and Greece’s bourse jumped 8.0% on the news that Germany’s top court rejected legal challenges to the government’s participation in the Eurozone’s rescue funds

FI USTs reversed part of the recent rally and the yield curve steepened; the 30yr yield jumped 9bps to 3.367% and the 2yr held at 0.20%; the Dec’11 Bund future lost 86 ticks to 136.15; yields fell on Italian and Spanish government debt, while Greek yields continued to rise amid concern about progress on fiscal targets and release of the next aid tranche, despite some relief provided by the ruling of the German court; iTraxx 5yr W. European sovereign CDS index fell 9bps to 318

FX The euro gained 0.7% against the dollar to 1.4096, and also posted gains versus the Swiss franc, yen, and sterling in a small relief rally following the ruling from the German constitutional court; EUR/GBP rose 0.4% to 0.8815; sentiment in FX markets is likely to be driven today by policy comments from ECB President Trichet and Fed Chairman Bernanke; the US dollar index fell 0.7% to 75.43 on Wednesday; Gold prices retreated for a second day and the Dec’11 contract lost 3.1% to $1819.7oz

OIL US crude prices jumped to a 5-week high as risk sentiment perked up, tropical weather remained a concern in the Gulf of Mexico, and API inventory figures showed a decline in crude and gasoline stocks last week; the Oct’11 WTI contract rose 3.5% to $89.4bbl

$ Chicago Fed President Evans (voter) uttered more dovish comments and called for the FOMC to act, describing his advocacy as “aggressive”; he expects a robust FOMC debate at the September meeting; he suggested the FOMC provide more clarity on policy accommodation, for example how long it will be in place; all easing options are on the table and the Fed could promise to hold interest rates low until the jobless rate falls to 7.5% as long as inflation stays below 3%; the Fed could also use price-level targeting or peg its policy to nominal GDP; he warned against an “inappropriately asymmetric” inflation focus and said central banks should focus on inflation in the medium term; the Fed’s aim of 2% inflation is a goal over time, not a cap

$ San Francisco Fed President Williams (non-voter) hinted that he would support more monetary easing, which could offer a “measure of protection” against further worsening in the economy; heightened risks could cause growth to falter or go into “negative territory”; more easing would not eliminate economic problems and costs and benefits must be weighed; disagreement among FOMC members is healthy and partly stems from the fact that policymaking is in uncharted waters

$ Fed’s Beige Book: US economic activity continued to expand through August but at a modest pace and “some Districts noted mixed or weakening activity”; several regions said “recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks”; “consumer spending increased slightly in most Districts…but non-auto retail sales were flat or down in several Districts”; several contacts said “heightened consumer anxiety was weighing on sales”; the NY region reported widespread disruption in retail activity due to Hurricane Irene, which is expected to weigh adversely on August sales tallies; manufacturing conditions were mixed – pace slowed in many regions; labor markets “generally stable” indicating little job growth; wage pressures were minimal apart from in skilled positions; “the majority of Districts reported fewer price pressures”

$ The Fed and other US regulators have reportedly questioned major US banks about their plans to raise capital and asked them to stress-test their balance sheets against fall 2008 conditions – CNBC

€ EU Economic Commissioner Rehn noted financial market stress, European bank funding pressures, and effects on the real economy: "Stress in financial markets increased over the summer, leading to substantial volatility and occasional turbulence… funding pressures in the EU banking sector have risen…The continued financial turbulence is spilling over to and potentially harming the recovery of the real economy"

€ Germany’s Constitutional Court ruled that the German government had not violated law by contributing to the bailouts of euro members, but said that the government must seek the approval of parliament’s budget committee before granting future aid – Chancellor Merkel said this confirms that the Court backs the government’s prior decisions

€ Chancellor Merkel said the Eurozone crisis cannot be solved with debt restructuring or euro bonds, but a fundamental rethink of how policy, including the build up of debt, has been conducted for decades; discussing changes to European treaties should not be taboo, and leaders should think about allowing the European Court of Justice to judge violations of the Stability and Growth Pact; the euro will not be allowed to fail; Greece must make reforms, invest and be transparent

€ German FinMin Schaeuble: "The Constitutional Court expressly leaves untouched the procedure that, when necessary, approval (from parliament) can be obtained afterwards…the government’s ability to act has not been endangered”

€ EU Commission spokesman Altafaj said the Commission is satisfied with the ruling from Germany’s Constitutional Court; the EU/IMF/ECB (troika) is expected to resume talks with Greece’s government in mid-September

€ The Italian Senate approved the government’s revised austerity package; the Chamber of Deputies will vote later this week

€ Italian banks increased borrowing from the ECB to €85.09bn in August from €80.49bn in July and €41.32bn at the end of June

€ Finnish PM Katainen said again that Finland could opt out of the Greek aid package if it does not get collateral for its loans

€ Cyprus FinMin Kazamias is in consultation with Cyprus’ central bank about asking the ECB to buy government bonds

€ German industrial production jumped 4.0%MoM in July versus a revised decline of -1.0% in June (originally -1.1%), which put the level of output above the previous historical peak reached in Feb’08; the July result exceeded the consensus forecast of +0.5% and reflected the first increase in construction output (+3.2%) in 4 months and a sharp gain in manufacturing & mining output (+4.5%); German manufacturing orders rose 3.2% in Q2 before falling 2.8%MoM in July

£ UK industrial production fell 0.2%MoM in July and disappointed versus the consensus forecast of +0.2% after a flat pace in June; the decline reflected drops in output across mining & quarrying (-1.4%), utilities (-1.1%), and oil & gas (-1.5%), while manufacturing output rose 0.1% versus -0.4% previously; on a 3m/3m basis, industrial output remained in contraction territory, down 0.4% in July versus -1.6% in Q2 and -0.1% in Q1

£ UK NIESR’s GDP growth estimate for the 3 months through August was +0.2%, a steady pace versus Q2

£ UK BRC shop prices rose at a marginally slower pace of +2.7%YoY in August versus +2.8% in July as food shop inflation slowed to 5.0% from 5.2% in July and 5.7% in June; non-food prices remained subdued although they accelerated modestly to a 5-month high of 1.4%YoY in August versus +1.3% in July

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