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Financial Markets: Headlines for September 26

September 26, 2011

EQ US equities stabilized and the S&P 500 rose 0.6% to 1136.43 after the rout on Thursday that had marked a 4th day of losses, although the Nikkei and Kospi were trading weaker in Monday’s Asian session; the S&P cut the week’s loss to 6.5% which was still the worst performance since Mar’09; gains on Friday were broad across sectors led by financials (+1.2%) although basic materials (-0.3%) and oil & gas (-0.8%) continued to suffer as commodity prices fell further amid fear about recession and weakening global demand; European bourses closed mixed but the Stoxx 600 gained 0.6% as financials bounced 2.1% on rising speculation that state-led bank recapitalization plans will be announced; the Stoxx 600 lost 6.1% on the week and was down 22% YTD

FI US Treasuries fell on Friday to pare the week’s gains as equities stabilized; the 10yr yield rose11bps to 1.834%, although still down 21bps on the week; the 2/30 spread widened 8bps to 268bps but was down 47bps over the week; Bunds declined and the German 10yr cash yield rose back above 1.70%, up 8bps on the day; Italian and Spanish yields declined although Greek and Portuguese debt remained under pressure; the 3m Euribor-OIS spread rose further on Friday and was up more than 10bps on the week at the widest level since mid-Mar’09

FX The euro recovered 0.3% against the dollar to 1.351 on Friday but was trading back below 1.35 in Monday’s Asian session; the US dollar index endured a choppy session on Friday and ended the session little changed, although weakness in Asian equities has sent it back up above 78.5 not far off last week’s high of 78.80; the Dec’11 gold future fell another 6% on Friday to $1640oz and posted a weekly loss of 10%, the steepest since 1983

G20 Finance ministers committed to "a strong and coordinated international response to address the renewed challenges facing the global economy, notably heightened downside risks from sovereign stresses, financial system fragility, market turbulence, weak economic growth and unacceptably high unemployment… the euro area will have implemented by the time of our next meeting the necessary actions to increase the flexibility of the EFSF and to maximize its impact in order to address contagion”

$ US Tsy Sec. Geithner continued to press for stronger action by Eurozone officials: “The threat of cascading default, bank runs and catastrophic risk must be taken off the table, as otherwise it will undermine all other efforts, both within Europe and globally”; further action must be taken to expand the capacity of bailout facilities

$ Fitch reported that the 10 biggest US prime money market mutual funds reduced European bank assets to 42% of holdings by end-August versus 47% in July; “declining exposure to core European banks is being significantly offset by increasing investment in Australian, Canadian, Japanese and Nordic bank instruments”

$ NY Fed President Dudley (voter) said that the recovery is “unusually anemic” on account of the pre-crisis build-up of debt and the financial crisis itself; this created “terrible outcomes” for economic growth and jobs; he said banks are better capitalized than in 2008 but more progress is needed on bolstering bank liquidity

$ San Francisco Fed President Williams (non-voter) said that forward guidance from the Fed on rates is a powerful tool judging from the decline seen in Treasury yields; asset purchases are also effective but he said it is unclear whether they are as effective as cutting short-term rates and whether the yield-lowering effect comes from the size of the purchases or the type of asset purchased

€ IMF’s Lagarde thinks it may be necessary to have a combination of ECB and EFSF bond buying in Europe; she was not expecting agreement on solutions at the weekend IMF meeting, but agreement on diagnosis; she said collective, rapid action is needed now; downside economic risks are “piling up”; problems are largely economic and solutions will be largely political

€ EU Economic Commissioner Rehn said officials are contemplating the possibility of leveraging the EFSF; EC spokesman Bailly: "There is no big European plan to recapitalise banks in Europe"; since 2008 €420bn in capital has been injected into European banks and this is ongoing

€ Eurozone finance ministry officials will reportedly discuss this week the option of bringing the European Stability Mechanism (ESM) into force a year ahead of schedule; the Fund would have $500bn in paid in capital and includes provisions for burden sharing by bondholders for countries with “unsustainable” debt levels

€ IMF Europe head Borges would be very supportive of more expansionary monetary policy in the Eurozone

€ ECB President Trichet said Europe is the epicenter of the global crisis of sovereign risk and banks should reinforce their balance sheets in a very active way; risks to the EU financial system have increased considerably and stress has spread across global capital markets; he sees no risk of materialization of upside risks to inflation or of deflation in the Eurozone, essentially reiterating that inflation risks are still broadly balanced

€ ECB Governing Council member and Dutch central bank governor Knot said the EFSF might have to be expanded to €1trn or more; Dutch banks are well prepared for a deterioration of the debt crisis

€ German FinMin Schaeuble said the recapitalization of European banks is not a matter for the ECB but for member states; he would not oppose early adoption of the permanent ESM bailout mechanism

€ ECB’s Coene hinted that the ECB could act in October if economic figures are worse than anticipated and said that longer-term refinancing operations are perfectly possible if needs are deemed urgent; "If the data in early October shows that things are worse than we anticipated we will look at the kind of decisions we have to take for that"

€ ECB’s Weidmann said the ECB has proven in the past that it is prepared to provide banks with long-term liquidity; ECB’s Nowotny said it may be advisable for the ECB to reintroduce 1yr liquidity tenders

€ ECB’s Noyer said that French banks could withstand a 100% write down on Greek debt holdings; “it would be absorbed in less than one quarter of profits."

€ Italian retail sales fell for a 3rd consecutive month, the longest string of declines since Q4’08; sales were down 0.1%MoM in July and disappointed versus the consensus forecast of +0.1%; the June decline was revised to -0.3% from -0.2% originally reported

€ French INSEE consumer confidence fell to 80 in September and was the lowest since Feb’09, down from 82 in August and 86 a year ago

€ French INSEE business confidence continued to decline in September and fell to 99 from 102 in August; the 3-month decline of 11pts was the steepest since Q4’08 (-17pts)

£ UK BBA loans approved for house purchase remained on a gentle upward trend and rose to 35.2k in August from an upwardly revised 33.7k in July (originally 33.4k); the result surprised against market expectations for a decline to 33.3k

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