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Financial Markets: headlines for September 9

September 9, 2011

EQ US equities lacked direction early but then headed down decisively after Chairman Bernanke did not indicate any greater conviction or details about further monetary easing than in his Jackson Hole speech; the Dow lost 1.0% to 11295.81 led by basic materials (-2.1%) and financials (-2.0%); European bourses posted a second day of gains on Thursday (ex-Greece) amid signs from ECB has halted interest rate hikes; the Euro Stoxx 50 see-sawed over the session but managed to close up 0.6% at 2163.40; the Greek bourse dropped 4.6% to give back more than half of Wednesday’s rally; revised Q2 GDP figures for Greece showed a sharper annual contraction of 7.3% vs. -6.9% reported originally

FI US Treasuries rose as fear about the Eurozone crisis and a weakening economic cycle perpetuate risk aversion; Treasury investors were undeterred by the lack of specificity in Chairman Bernanke’s comments about the potential for further easing; the 10yr yield ended back below 2%, down 7bps to 1.975%; the German 10yr yield touched a new crisis low of 1.821% during the ECB press conference before pulling up to 1.865%, down 4bps on the session; Euro area peripheral government bonds closed broadly weaker but declines were muted, although the Greek 2yr rose 11bps to a new high of 47.7% and the sovereign CDS hit a new record as well

FX The euro dropped to a 2-month low against the dollar and fell broadly on the crosses as President Trichet highlighted balanced, rather than upside, risks to the Eurozone inflation outlook and downside risks to growth, EUR/USD lost 1.5% at 1.388 by the end of the US session; EUR/JPY declined 1.2% to 107.61, posting a new low since the mid-March BoJ intervention; EUR/CHF did gain 0.4% to 1.21 as the franc continued to depreciate broadly under the SNB’s new regime

OIL Crude prices declined as the dollar rallied and US equities posted losses amid concern about the economic outlook and uncertainty regarding future policy actions; the WTI Oct’11 contract lost 1.5% to $88.8bbl

$ President Obama outlined a range of tax cut and spending initiatives in an American Jobs Act and urged Congress to pass it right away; the cost comes to $447bn and would be covered by reducing the deficit by the equivalent amount over the next 10 years; in the next few days the President will release a detailed plan on how to achieve the additional deficit reduction; the largest cost in the jobs act comes from a 50% payroll tax cut for employees in 2012 (cost of $175bn) and a 50% payroll tax cut for employers on the first $5m in payroll, with complete payroll tax holiday cuts for employers that add workers or raise wages ($65bn); long-term unemployment insurance benefits would be extended ($49bn); upgrades would be made to infrastructure and funding sent to localities to retain police/teachers ($140bn)

$ Fed Chairman Bernanke reiterated that the Fed has a range of tools available for providing more stimulus and will continue to debate the costs and benefits of these at the next FOMC meeting; the Fed is “prepared to employ these tools as appropriate to promote a stronger economic recovery in a context of price stability"; he noted that household spending has been unusually weak during the recovery and he believes consumers are “exceptionally cautious”; on fiscal policy, he said “there is ample room for debate about the appropriate size and role for the government in the longer term, but–in the absence of adequate demand from the private sector–a substantial fiscal consolidation in the shorter term could add to the headwinds facing economic growth and hiring.”

$ US Treasury Secretary Geithner wrote an op-ed for the FT and said that current global challenges are different than in 2009 and “cannot realistically be confronted by a repeat of that coordinated global response of financial stabilization and fiscal and monetary stimulus”; he called on governments in the Eurozone to act forcefully and "generate confidence that it can and will resolve its crisis"; China and other EM economies should work to strengthen domestic demand and allow for flexible exchange rates; he added that none of the major central banks are out of ammunition to ease monetary policy

$ US weekly jobless claims rose marginally to 414k in the week to September 3, up from a revised 412k in the previous week (originally 409k); the result was above the consensus forecast of 405k and the 4wk moving average moved higher to 415k from 406k a month ago, although part of this average reflected the upward impact from the Verizon strike in mid-August; the 8wk moving average stabilized at 410k

$ The US July trade deficit narrowed to $44.8bn in July from a revised $51.6bn in June (originally $53.1bn) and was smaller than expected by the median forecast ($51.0bn); exports rose 3.6%MoM while imports declined 0.2% led by a fall in crude oil imports (-7.6%); the price-adjusted, real trade balance narrowed to a 3-month low of $45.3bn and was below the Q2 average of $47.3bn

The ECB held the main refinancing rate at 1.50% as expected and changed key language in the policy statement related to growth and inflation risks to signal a more neutral bias

€ French FinMin Baroin said that the G7 officials will discuss the economic slowdown but do not plan to issue a final communiqué; each country should adopt their own economic measures to suit their situation; he called on Eurozone member states to accelerate procedures on adopting changes to the EFSF

€ Italy’s lower house of parliament will begin debate on the €54bn austerity package on Monday; the Senate passed the programme earlier in the week

€ The Dutch parliament has postponed a debate about the expansion of the EFSF’s powers, likely until next week

€ Greek Economy Minister Chrysochoidis: Greece’s 2011 budget deficit will be higher than the agreed target due to the recession but he still expects the troika to grant the next aid tranche; Greece will fulfill its commitments

€ Greek government spokesman Mosialos: "There is no threat of Greece exiting the euro zone. We are proceeding with reforms quickly"

€ The German current account surplus shrank to €7.5bn in July from a revised €11.5bn in June (originally €11.9bn); the 3-month average fell to the lowest level since Oct’09

€ French business sentiment from the Bank of France stabilized at 98 in August but the 3- and 6-month moving averages remained on a downward trend, at 98 and 102 respectively

£ The Bank of England MPC announce no change in monetary policy as expected, holding the asset purchase target at £200bn and keeping Bank Rate at 0.50%; no policy statement was published which moves focus to the minutes on September 21; MPC members Dale and Weale dropped their calls for a rate hike in August, and further deterioration in the economic figures has raised speculation that another MPC member could have joined Adam Posen in calling for an immediate increase in QE


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