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Financial Markets: Headlines for October 5

October 5, 2011

EQ The S&P 500 swung 4.6% over the session, between a bear-market intraday low of 1074.77 and the high of 1125.12 recorded right before the close; the 2.3% gain on the day was led by financials, which pulled higher (+3.9%) amid reports that EU finance ministers are working on plans to increase capital in their banks; Moody’s cut Italy’s credit rating after the US market close by 3 notches to A2; European bourses closed sharply lower on Tuesday – Germany’s Dax -3.0%; Italy -2.7%; Greece -6.3%

FI Price action in Treasuries was choppy as the market faced a dovish speech from Chairman Bernanke, NY Fed “operation twist” purchases in the Nov’19 to Aug’21 range, and reports of EU officials discussing bank recapitalisation; USTs ended lower on the session and the curve steepened, with the 2yr yield up 2bps to 0.251% and the 10yr up 6bps to 1.821%; in Europe the 10yr Gilt again outperformed Bunds, with the yield down 10bps to 2.245% while the German 10yr yield slumped 9bps to 1.723%; Greece and Belgium were the worst performers with 10yr yields up 46bps and 19bps respectively

FX The euro fell further to an intraday low of 1.315 during the European session but bounced during Chairman Bernanke’s dovish speech and rose further to 1.335 by the US close, holding onto the day’s gain (+1.3%) even after the Italian downgrade; the euro rose broadly on the crosses and gained 1.7% versus the yen to 102.56; EUR/GBP gained 0.9% to 0.861

$ US Fed Chairman Bernanke said the economy and recovery are close “to faltering” and the Fed “is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability"; there are no immediate plans for QE3 although all options remain on the table; the Fed is also prepared to provide liquidity to banks, and with Treasury permission could initiate a broad-based lending program to respond to a run on the financial system; he urged avoidance of fiscal actions that could impede the economic recovery

$ US factory orders fell 0.2%MoM in August and disappointed versus the median forecast for a flat result, while the July gain was revised down to +2.1% (originally +2.4%); non-durable goods orders fell 0.3% versus a revised gain of +0.4% in July (originally +1.0%); durable goods orders were confirmed down 0.1% following a July jump of 4.1%, but orders for core capital goods were revised lower, up only 0.9% in August versus +1.1% reported in the prelim. report

€ Moody’s cut Italy’s credit rating after the US market close by 3 notches to A2 – outlook negative

€ The EU finance ministers reportedly discussed how they can coordinate recapitalization of their banks; EU Economic Commissioner Rehn said there is an “increasingly shared view” that a coordinated approach is needed – FT

€ German FinMin Schaeuble: the Eurozone intends to support its banks; the EFSF could not directly inject capital; aid is only possible through governments

€ Austrian FinMin Fekter said Eurozone countries want to evaluate the capital situation of their banks

€ The Belgian and French central banks pledged to support Dexia via guarantees for a “bad bank”

€ ECB President Trichet said he is “not in favour of bailout funds refinanced by the ECB"; Eurozone economic growth would be “very moderate” in H2’11; “in the eyes of the last Governing Council meeting” the risks to the outlook for inflation were broadly balanced; he said liquidly is ample but that it may be being held by banks for “precautionary reasons” rather than for spending, which in our view highlights disruption in the monetary policy transmission mechanism; he said the ECB’s bond market interventions are only to aid monetary policy transmission, not to support financial stability

€ German Chancellor Merkel said debt rescheduling for a country like Greece would only make sense once it achieved a primary surplus; debate about boosting the EFSF is “absurd” and is driven by those who want debt rescheduling

€ Eurozone producer prices fell 0.1%MoM in August versus a gain of 0.5% in July; the annual rate receded to 5.9% from 6.1% in July and the 2011 peak of 6.8% recorded in March/April

£ UK FinMin Osborne said the UK Treasury is considering a program of “credit easing,” which would “inject money directly into parts of the economy that need it such as small business”; further details expected when he presents the Pre-Budget Report to Parliament on Nov. 29

£ The UK construction PMI fell to 50.1 in September from 52.6 in August and reversed all of its 2011 gains, now at the lowest level since Dec’10 (49.1); new business declined as confidence weakened

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