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Financial Markets: Headlines for September 14

September 14, 2011

EQ Euro area bourses posted gains on Tuesday apart from in Greece (-0.5%) as French banks tried to assure investors on their ability to obtain dollar funding or withstand a freeze; Euro Stoxx 50 rose 2.1% to 2036.64 led by gains in financial sector shares (+4.9%); the VStoxx volatility index fell to 49.1 from 53.5 on Monday which was the highest closing level since Jan’09; US equities posted modest gains for a second session, with the S&P 500 gaining 0.9% to 1172.87, up broadly led by industrials (+1.9%) and basic materials (+1.3%)

FI USTs declined as sentiment toward equities stabilized and the US sold 10yr notes; the yield curve steepened as the 30yr yield rose 7bps to 3.325% and the 2yr held at 0.20%; the 10yr yield rose back toward 2% after touching the new low of 1.877% on Monday; Euro area core and peripheral government bonds fell broadly; the German 2yr yield rose 7bps to 0.494% and the French was up 10bps to 0.973%; the Italian 10yr yield jumped 12bps to 5.67% and hit its intraday high after the weak 5yr bond auction; the Greek senior 5yr sovereign CDS rose to a new record high of 4084.2

FX EUR/USD lacked direction and gained 0.1% to 1.368; EUR/JPY traded narrowly to end little changed over the session at 105.2, down 3.2% from a week ago; the dollar fell 0.6% against the yen to 76.85 and was down broadly versus the rest of the G10 as well after last week’s rally; sterling came under broad pressure and cable touched a new 8-month low of 1.576

OIL The Oct’11 WTI crude contract rose above $90bbl to the highest levels since August 4th as the dollar weakened and the API inventory figures showed a larger-than-expected drawdown last week

$ Fed’s Bullard said the Fed has already provided aggressive accommodation, although he acknowledged that US economic performance has been disappointing; the Fed should avoid easing policies that have fixed end dates

$ US import prices fell 0.4%MoM in August, led by food & fuels, versus a gain of 0.3% in July; the annual pace eased for the first time since Sep’10, down to 13.0%YoY from a 3-year high of 13.8% reached in July

$ The US sold $21bn in 10yr notes at a yield of 2.00%, the lowest on record and down from 2.14% at the August 10th sale, although the bid/cover ratio was weaker at 3.03 vs. 3.22 previously and the 10-auction average of 3.13; indirect bidders took 48.5%, the highest share since the June auction (50.6%)

€ Italy sold €6.5bn in fixed-rate bonds on Tuesday, below the maximum target of €7bn; the sale of 4.75% 2016 bonds, which was the largest portion (€3.9bn) of the issuance, priced at a yield of 5.60%, up from 4.93% at the previous 2016 sale conducted on July 14th; the bid/cover ratio was weaker at 1.28 vs. 1.93

€ ECB’s Weidmann highlighted his disapproval of ECB and EFSF bond purchases, as well as common euro bonds; he said the Eurosystem of central banks is “now burdened with considerable risks” and these should “be unwound and definitely not increased”; allowing the EFSF to purchase government bonds will weaken governments’ incentives for appropriate fiscal policy

€ German Chancellor Merkel on a Greek default, "We are using all the tools we have to prevent this….it is our top priority to avoid an uncontrolled default”; after her meeting with Finnish PM Katainen she said they will find a solution to the Greek collateral issue that is open for all partners and fulfills Finnish wishes

£ BoE MPC member Posen said the BoE and other G7 central banks should implement more monetary stimulus without delay to avoid potentially long-term damage; the correction in risk-taking after the crisis has gone too far; he called for the BoE to restart QE with at least another £50bn in gilt purchases conducted over the next 3 months; he believes the government and BoE need to cooperate to promote credit extension to small businesses so they can invest; the government could set up a new bank for small- and medium-size enterprises, using parts of UK nationalized banks

£ The UK CPI rose to 4.5%YoY in August, in line with the consensus forecast, up from 4.4% in July and back at the highest levels of 2011; goods prices accelerated to 4.8%YoY from 4.5% previously led by energy goods (12.2% vs. 10.7% previously), clothing & footwear (4.0% vs. 3.0%) as summer discounting waned, and household goods (+6.2% vs. 5.1%); the core CPI ex-energy, food, alcohol & tobacco was stuck at 3.1% and came in above the consensus forecast of 3.0%, although it remained below the YTD average of 3.2%

£ UK trade balance in goods fell to -£8.92bn in July vs. -£8.87bn in June; this marked the largest trade deficit in goods since Dec’10 and disappointed versus the consensus forecast of -£8.5bn

£ UK RICS house price balance continued to signal declines and fell to -23 in August from -22 in July, in line with the consensus forecast; the balance remained on a slowly improving trend at a level above the 6m average (-24)

£ UK DCLG house prices remained in contraction, down 1.5%YoY in July versus -2.0% in June

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