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Financial Markets: Headlines for September 29

September 29, 2011

EQ US equities rose following strong figures on capital goods shipments, but indices then headed lower and declines accelerated into the close; the S&P 500 fell more than 2%, with stocks down broadly across sectors led by basic materials (-4%); positive sentiment was challenged following 3 sessions of gains, as uncertainty about the next policy steps in Europe remained the dominant driver of market psychology; Finland approved the EFSF changes and Germany votes today, while the troika will resume its review out of Athens; Greek stocks rose 2.4% led by financials (+5.3%) although most European bourses closed lower; Stoxx 50 traded in a narrow range and fell 0.8% to 2176.64, reversing a bit of Tuesday’s +5.3% surge

FI USTs cut losses after the solid 5yr note auction but still closed lower on the session despite the weakness in equities; the yield on the US 10yr benchmark rose 3bps on the day to 2.002% and gained 28bps over the last 4 sessions; Bunds declined as well and the German 10yr cash yield rose 5bps to 2.009%; Italian debt underperformed and the yield on the 2yr rose 11bps to 4.304%, up 3bps from a week ago; yields declined on Greek, Portuguese and Irish debt as the Eurozone moved closer to implementing the expanded EFSF

FX Moves in G10 forex were muted; EUR/USD touched a 1wk high of 1.369 but then ended down 0.4% on the session at 1.354; the US dollar index gained 0.3% to 78.00

$ The US sold $35bn in 5yr notes at a record low auction yield of 1.015 vs. 1.029% at the August 24 auction; the bid/cover was the strongest since May, up at 3.04 vs. 2.71 in August; indirect bidders received 45.9%, the most since May (47.1%)

$ Fed’s Rosengren (non-voter) is supportive of the FOMC’s recent decisions on the balance sheet and said the decline in the spread between the 30yr mortgage yield and the 10yr Treasury is “very significant”; the Fed could consider more action if the spread widens again significantly

$ Fed’s Hoenig said inhibiting interest rates from rising to their equilibrium levels has brought on economic problems; he retires on October 1

$ US durable goods orders fell 0.1%MoM in August, led by defense, vehicles & parts, and metals, following the July surge of 4.1% (originally +4.0%); however, orders for core capital goods ex- defense & aircraft rose 1.1% in August, above the consensus forecast of +0.4%, and the July decline was revised to -0.2% (originally -1.5%); shipments of these goods jumped 2.8%MoM vs. +0.4% in July, signaling a stronger positive contribution to Q3 GDP from business investment, with the 3m annualized pace up at 16.2% versus 11.2% in June and 3.9% in March

€ EU’s Barroso said the Eurozone must move toward an economic union: “It was an illusion to think that we could have a common currency and a single market with national approaches to economic and budgetary policy"; Greece will remain in the Eurozone; on the EFSF, the “financial envelope” will be used in the most efficient way; the enactment of the permanent ESM should be accelerated; euro bonds would be “a natural and advantageous step for all” once the Eurozone is “fully equipped with the instruments necessary to ensure both integration and discipline”; the Commission will outline options for “Stability Bonds” in the coming weeks; he encouraged the ECB to support financial stability

€ Italy and Spain extended temporary bans on short-selling financial shares

Finland’s parliament approved the enhanced version of the European Financial Stability Facility (EFSF); the vote did not address the issue of collateral for Greek loans, which is likely to be decided on “within days or weeks” according to the Prime Minister

€ The EC/ECB/IMF troika returns to Athens today; an additional Eurogroup meeting will be held in October to discuss Greece and to consider disbursement of the next aid tranche

€ ECB President Trichet gave no signal of a rate cut at next week’s Governing Council meeting, and said that the ECB is “a very solid anchor of stability and confidence in the turbulent times we are experiencing”; measures to refinance banks at full allotment at a fixed rate at 1wk, 1m and 3m maturities are “the most important of our non-standard measures"

€ The ECB allotted $500m to one bank at a fixed rate of 1.09% in the weekly 7-day operation

€ ECB’s Mersch said that liquidity, funding, and sovereign risks constitute the main theats to the European banking system; contagion risk is of a systemic nature; central banks should be ready to intervene

€ The preliminary German CPI for September rose to 2.6%YoY and was above the consensus forecast for a steady reading of 2.4%YoY; this marked a new high for the year and will dampen expectations of an ECB interest rate cut next week; the harmonized CPI rose to 2.8% from 2.5% previously and was the highest in 3 years

€ France’s GDP was unrevised at a flat pace in Q2 as expected, down from +0.9% in Q1

€ Italian ISAE business confidence slumped to 94.5 in September, the lowest since Feb’10, down from a revised reading of 98.6 in August (originally 99.9)

£ UK MPC member Miles: "The case for quantitative easing has become in my mind quite finely balanced…It wasn’t quite as closely balanced a decision two or three months back, before we really got the bad news over the summer"

£ From the BoE’s Financial Policy Committee statement: "in the event that severe risks crystallised, it would be natural for banks’ capital and liquidity ratio to be run down to ensure that lending to the non-financial economy was not impaired"

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