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Financial Markets: Headlines for October 3

October 3, 2011

EQ A volatile quarter ended with more declines in equities, as data from China, Japan and Germany on Friday underlined fears about the global slowdown and a Eurozone recession, exacerbating concern about the Eurozone debt crisis and the effect on banks; the Dow lost 241pts on Friday to end at a 1-week low of 10913.38, having shed 12.1% over the quarter; the S&P 500 fell 2.5% to 1131.42 and underperformed on the quarter versus the Dow, down 14% in the biggest quarterly drop since Q4’08; European bourses declined on Friday and Stoxx 50 lost 1.5% to 2179.66 which cut the weekly gain to 7.6%; the quarterly drop of 22.2% was the most since Q3’02 (-29.7%)

FI Treasuries rose further in Asia, building on Friday’s rally which cut into the week’s losses; the curve flattened 12bps at the 2/30s to 267 and the yield on the 10yr note fell 8bps to 1.915%, reducing last week’s increase to 8bps; Bunds outperformed and the German 10yr cash yield dropped 12bps to 1.883% although this was still 21bps above the level reached Sept. 22; the 10yr Gilt yield fell to a 4-session low and ended down 10bps at 2.424%; Greek, Portuguese and Italian government debt withstood Friday’s deterioration in sentiment and yields fell further at the 2yr maturity; PIIGS 10yr yield spreads over Bunds narrowed on the week; European iTraxx 5yr senior financials index rose 13bps on Friday to 275 but was down 14bps from a week ago

FX EUR/USD fell on Friday and continued its drop in today’s Asian session, down 1.9% from Thursday at 1.333, the lowest level since January 17; the dollar DXY index was up 1.4% from Thursday’s US close at 79.04, up 0.5% from a week ago and at the highest levels since mid-January

$ The Fed announced the details for the start of “operation twist”; the NY Fed will sell about $44bn in Treasuries in 6 operations beginning October 6 through October 28; the $44bn in long-end purchases will be conducted in 13 operations from October 3 to October 27

€ Greece’s government cabinet approved €6.6bn in austerity measures over the weekend, including the measure to eventually reduce state employment by 30k, aiming to secure the pending EU/IMF aid payment in October; the FinMin said Greece will not meet this year’s deficit target in part due to an estimated GDP contraction of 5.5%

€ ECB’s Noyer said French banks’ real vulnerability is from their dependence on USD funding; he is open to schemes that would allow the EFSF’s existing capacity to be leveraged

$ US personal income disappointed versus the consensus forecast and fell 0.1%MoM in August, the first decline since Oct’09 and reflecting a decline in wage & salary payments; nominal personal spending rose 0.2%MoM as expected but the July gain was revised down to +0.7% (originally +0.8%) and real spending was flat on the month vs. +0.4% in July; the 3m annualized pace of real spending remained very subdued, at +0.5% in August, down from +0.7% in Q2 and +2.3% in Aug’10

$ US price measure of personal consumption expenditures ex-energy & food rose 0.1%MoM in August, below consensus of +0.2% and the smallest increase since March; the annual rate was steady at 1.6%

$ US Chicago PMI rose unexpectedly to a 3-month high of 60.4 in September, up from 56.5 in August and little changed from a year ago; the new orders measure rose to a 5-month high of 65.3 and the production index bounced to 63.9 from 57.8 previously; the employment measure rose to a 4-month high of 60.6

$ US UMich consumer sentiment was revised up in the final September estimate to 59.4 from 57.8 originally reported, now up 3.7pts from the dismal August reading; sentiment remains extremely depressed, well below the 12m average of 69.0 and the historical average of 85.7; inflation expectations were revised down in the final September estimates which may reflect the further decline in gasoline prices; the 1yr measure was revised to 3.3% from 3.7% originally and was the lowest since Dec’10; 5yr inflation expectations at 2.9% were in line with the average since 2000

€ The Eurozone “flash” September CPI came in at 3.0%YoY, the highest since Oct’08, versus the consensus forecast for a steady reading of 2.5%YoY; the jump in the CPI brings the measure further above the ECB’s target of “below, but close to, 2%”, and provides support for the consensus expectation that the ECB will leave the main refinancing rate at 1.5% this week

€ German retail sales dropped 2.9%MoM in August in the sharpest fall since Mar’08, disappointing versus consensus at -0.5%

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