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Financial Markets: Headlines for September 27

September 27, 2011

EQ US equity indices rose for a second consecutive session after last week’s sharp declines, amid signs that the ECB will take action to provide greater liquidity to banks and hopes that Eurozone leaders will find a way to leverage the capacity of the EFSF and shore up banks’ capital; the S&P 500 gained 2.3% to 1162.95, up broadly led by financials (+4.4%), oil & gas (+3.6%), and basic materials (+3.4%); Euro area bourses rose broadly apart from in Greece (-1.7%), with the Euro Stoxx 50 gaining 2.8% to 2083.35, led by financials (+5.9%)

FI USTs declined and the curve steepened at the 2/30s for a second day; the yield on the 2yr benchmark rose 1bp to 0.227% and the 30yr yield jumped 9bps to 2.993%; the German 10yr Bund unwound last week’s rally and the 10yr cash yield rose 8bps to 1.825% on Monday, up 3bps from a week ago; Spanish debt rose at the 2- and 10-year maturities but Italian bonds underperformed ahead of this week’s issuance; the yield on the Italian 2yr rose 11bps to 4.257%; the Greek 2yr (08/20/13) yield continued to climb, up more than 100bps on Monday to 67.1%

FX Moves in forex were muted given uncertainty about any forthcoming policy responses from Euro area officials; the US dollar index fell 0.3% from Friday’s close to 78.06 amid a perceived improvement in investor risk sentiment over the past 2 sessions, although the index remains at levels previously seen in February; USD/JPY declined 0.3% to 76.44 and EUR/USD gained 0.1% to 1.352, up from the 8-month low of 1.336 posted earlier on Monday; sterling rose fairly broadly against major currencies on Monday and gained 0.5% versus the euro (0.869) and the dollar (1.556); gold prices fell further in heavy trading and the Dec’11 contract settled down 2.7% at a 2-month low of $1594.8oz

OIL Crude prices rose on Monday cutting into some of last week’s sharp declines; the Nov’11 WTI contract rose 1.5% to $81.4bbl but was down from $86.1 a week ago

$ Fed Governor Raskin (voter) said additional policy accommodation may be warranted under current circumstances; "raising inflation or raising inflation expectations … is something I would be quite leery of”

$ Fed’s Bullard (non-voter): "Monetary policy is ultra-loose right now, appropriately so"; asset purchases are the most effective tool to ease policy in the current circumstances and on this he would prefer meeting-to-meeting decisions

$ The NY Fed announced that the first batch of agency MBS purchases will be $10bn, to be conducted October 3-13; in the $400bn “Maturity Extension Program” on the Treasury holdings, the Fed will sell short-term Treasuries/TIPS 6 times per month and make purchases 13 times per month

€ The ECB will reportedly discuss restarting purchases of covered bonds, the reintroduction of 12-month liquidity operations, as well as rate cuts at next week’s Governing Council meeting – Bloomberg

€ The ECB settled €3.95bn in bond purchases last week, down from €9.79bn in the previous week; this was the smallest weekly settlement since purchases were restarted in early August

€ ECB’s Mersch said speculation about an October interest rate cut was “wild” but later said that cuts cannot be completely ruled out; if there is a significant worsening in the economy the ECB has “room to move”

€ ECB’s Bini Smaghi said it is useful that the ECB has room to maneuver on interest rates; the ECB is “ready to do what is needed” on liquidity provision; he said discussions are underway about leveraging the EFSF, the assets of which could possibly be used as collateral at the ECB

€ ECB’s Orphanides said monetary policy is appropriately accommodative; a TARP-like entity would be the responsibility of the Euro area governments

€ ECB’s Weidmann said pre-emptively cutting interest rates would reduce pressure on politicians to act on debt problems; fiscal and monetary policy are being blurred; the July 21st decisions of Eurozone leaders weakens responsibility on public finances; he expects German growth of 0.5% in Q3 although the winter months are subject to considerable risks

€ Greek FinMin Venizelos said there has been not been any discussion with ECB President Trichet or IMF’s Lagarde “about the so-called scenario of an orderly default"

£ BoE MPC’s Broadbent said he was reasonably close to voting for more QE at the Sept. meeting and does not believe it would take much more deterioration for him to make such a decision; “the international environment is clearly disinflationary. Slow growth in the US, the sovereign debt crisis in the euro zone and its knock-on effects on the cost of finance for UK and European banks — all threaten a further tightening in retail credit and a further slowing in domestic activity"

$ US new home sales fell 2.3%MoM to an annualized pace of 295k, the lowest since February (281k) and below the 12-month moving average of 303k

$ US Chicago Fed national activity index dropped to -0.43 in August from an upwardly revised reading of +0.02 in July (originally -0.06); the 6m moving average remained on a moderating trend and fell to the lowest level since Feb’10

€ German IFO business climate fell to 107.5 in September from 108.7 in August, but did come in above the consensus forecast of 106.5; the assessment of the current situation declined only slightly to 117.9 from 118.1 previously, still at the lowest level since January; the expectations index lost 2pts to 98.0 and was the lowest since Jul’09; the business climate deteriorated across manufacturing, construction, and services

€ Italian ISAE consumer confidence fell for a 4th consecutive month in September, down at 98.5 vs. 100.3 previously, now at the lowest level since Jul’08 (95.8) as expected

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