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Financial Markets: Headlines for September 13

September 13, 2011

EQ US equity indices nudged into positive territory late in the session on reports that Italian and Chinese officials discussed the potential for investment in Italy or purchase of Italian debt; the S&P 500 traded below 1150 for most of the session but ended 0.7% higher on the day at 1162.27 led by technology (+1.2%) and financials (+1.2%); the Dow rose 69pts to 11061.12; the Euro Stoxx 50 dropped 3.8% to 1995.01 on Monday, down YTD by 28.6%; the French CAC40 underperformed (-4.0%) amid fears about the potential for credit rating downgrades on French banks (-11.5%) and their exposure to Greek debt as fears of a default intensified

FX EUR/JPY hit a record low of 103.9 intraday before pulling back above 105 during the European session; the euro stabilized versus the dollar on Monday, at 1.368 by the US close following Friday’s sharp decline of 1.7%; the pair was down 2.9% from a week ago; the dollar index paused at 77.15 amid the September rally (+4.1%); USD/JPY fell 0.3% in choppy trade to 77.2

FI The USTs reversed early gains and fell after the 3yr note auction and the Italy/China news to end slightly lower versus Friday; the yield on the 10yr hit a new low of 1.877% before pulling up to 1.947%, up 3bps on the session; the German 10yr cash yield fell 3bps to 1.739% but the French yield rose 4bps to 2.514% and the Italian shot up 17bps to 5.54%, despite reports of ECB purchases in the secondary market; the Greek 2yr (20Aug’13) yield rocketed more than 1000bps to 63.8% amid intensifying speculation about a Greek default; highlighting bank funding stresses, the EUR 12m Euribor/OIS spread rose further to 153bps, up 11bps from a week ago at the highest levels since Dec’08

€ Italy has reportedly asked China to make “significant” purchases of its debt; the Chairman of China Investment Corp met last week with Italian FinMin Tremonti – FT

$ US Treasury Secretary Geithner will attend the Eurogroup meeting of finance ministers on Friday; reportedly this is a first – Reuters

$ Fed’s Fisher (voter) remained cautious about supporting more accommodation: "If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it. But the bar for such action remains very high for me until the fiscal authorities do their job…if they do, further monetary accommodation may not even be necessary"

$ The US sold $32bn in 3yr notes at a high yield of 0.334%, down 17bps from the yield at the previous similar auction on August 9; the bid/cover ratio of 3.15 was below the 6-auction average of 3.26; indirect bidders took a smaller share of 35.7% vs. 47.9% previously and the 6-auction average of 36.5%

€ Italy’s funding costs rose in Monday’s t-bill auctions; the Treasury sold €7.5bn in 12m bills at a yield of 4.153%, the highest in 3 years, up 119bps from the yield at the auction on Aug. 10 which took place after the start of ECB bond purchases; the bid/cover ratio was weaker at 1.53 vs. 1.95 previously; Italy also sold €4bn in 3m bills at a yield of 1.907%, up 87bps from the yield at the previous similar auction back on March 10th

€ The ECB made bond purchases of €13.96bn in the week to 9 September, little changed from purchases of €13.31bn in the previous week; bond holdings now total €143bn and the ECB will hold the usual 1wk deposit tender today to sterilise the effect of the purchase programme

€ An EFSF bond due in September 2021 is expected to be launched this week to fund lending to Portugal

€ Bank of France Governor Noyer tried to soothe fears about French banks’ solvency and access to liquidity: "No matter what the Greek scenario, and whatever measures must be passed, French banks have the means to face up to it"

€ ECB’s Orphanides said the European banking system is not undercapitalized

€ ECB President Trichet spoke after BIS Global Economy Meeting: “we are observing a slowing down of the global economy”, but the officials do not see a recession as “on the cards”; the “central banks stand ready to provide liquidity to banks as required”; Mr. Trichet said he respects Juergen Stark’s personal reasons for resigning from the ECB Exec. Board

€ Germany has proposed that Deputy Finance Minister Joerg Asmussen assume Mr. Stark’s place on the ECB Exec. Board

€ EU’s Almunia: "There are signs of tension in the interbank business but the current situation is under no circumstance comparable with the situation surrounding the collapse of Lehman Brothers"

€ EU’s Rehn: "Profound renovation of Greece’s public finance is a better alternative for the euro zone than insolvency”

€ Italian industrial production fell 0.7%MoM in July, disappointing versus consensus at +0.1%, and June’s decline was revised to -0.8% (originally -0.6%); production declined versus a year ago (-4.6%YoY) for the first time since Jan’10 (-3.0%)

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