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Financial Markets: Headlines for October 7

October 7, 2011

EQ The S&P 500 closed above 1150, up 1.8% on the session to 1164.97 as shares rose broadly across sectors led by financials (+3.2%) and industrials (+2.1%); European shares rallied for a second day and the Euro Stoxx 50 closed at the highest level since September 1st; up 3.2% to 2248.78 also led by financials and industrials as sentiment remained supported by hope that European officials are working on a plan to coordinate bank recapitalizations; Stoxx 50 lagged slightly during the ECB press conference during which Pres. Trichet did not signal a rate cut, but stocks powered higher in the last hour of trade

FI USTs fell again and the curve steepened further; the 10yr yield approached 2%, up 10bps on the session to 1.987% while the 2yr yield edged up 1bp to 0.263%; Bunds remained under pressure as equities rallied and the ECB kept rates on hold and did not clearly signal a November cut; the German 2yr yield jumped 11bps to 0.603% and was the highest since Sept1; Italian, Spanish and Portuguese debt rose as Spain completed bond auctions and the ECB announced non-standard measures that will lend support to banks; the yield on the Spanish 10yr (Apr’21) fell 7bps to a 1-month low of 4.989%; gilts rallied briefly after the BoE’s surprise decision to increase asset purchases by £75bn, but stronger risk sentiment erased gains and yields rose apart from at the very long end; 30yr yield down 3bps to 3.345%

FX EUR/USD rose during President Trichet’s last press conference and gained 0.7% on Thursday to the week’s high of 1.345; the pound fell broadly versus major currencies as the BoE announced more QE; cable declined briefly to a 13-month low of 1.537 but pared losses to finish the US session at 1.545

$ Dallas Fed President Fisher (voter; dissenter): the Fed “can’t do everything; we do not decide how much is taxed, how much is spent, how much is borrowed”

$ US initial jobless claims were higher at 401k in the week to Oct.1 versus an upwardly revised 395k in the week prior (originally 391k); claims came were below the median forecast of 410k and the 4wk moving average moderated slightly (414k)

$ US ICSC retail chain store sales rose 5.5%YoY in September versus 4.6% in August; this was the strongest pace since June

€ The ECB held the main refinancing rate at 1.5% and announced broader use of non-standard monetary policy measures; the ECB will provide long term liquidity to banks by conducting a 12- and 13-month operation this year and will restart the covered bond purchase programme to the tune of €40bn; although risks to the inflation outlook were still judged as “broadly balanced,” the ECB softened its language and took further steps toward a policy stance in which it could justify a rate cut in coming months

€ Spain sold €4.5bn in 3.4% Apr’14, 3.3% Oct’14, and 3.0% Apr’15 bonds, at the top of the €3.5-4.5bn target range; the Apr’14 bond sold at an average yield of 3.589%, down from 4.813% at the previous similar sale on Aug4 before the ECB restarted bond purchases; the bid/cover ratio was weaker at 1.8 vs. 2.1 previously

€ EC President Barroso: "We are now proposing member states to have a coordinated action to recapitalise banks and so to get rid of toxic assets they may have"

€ German Chancellor Merkel: the view that European banks need to be recapitalized should be taken very seriously

€ Eurogroup Chairman Juncker: a Greek default would be a disaster; the group is thinking about “virtuous” leverage for the EFSF; troika report on Greece expected Oct.24

€ German factory orders dropped 1.4%MoM in August, disappointing again versus consensus, following the sharp drop of 2.6% in July (originally -2.8%); orders were down across capital, consumer, and intermediate goods categories; domestic orders slumped 3.2% while foreign orders stabilized (+0.1%)

£ The BoE MPC voted on Thursday to increase asset purchases by £75bn over the next 4 months; the result surprised versus the consensus forecast that the size of asset purchases would be left on hold at £200bn, although about 1/3 of analysts were expecting a boost of £50bn; according to the MPC, “the deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term…the scale of the programme will be kept under review”; purchases will begin next week; 3 auctions will occur per week, in the maturity range of 3-10 years (Mondays), +25yrs (Tuesdays), and 10-25yrs (Wednesdays); the BoE plans to purchase evenly across all 3 gilt sectors

£ UK BoE Governor King gave an interview after the MPC decision and said that more action cannot be ruled out; he said there is not “enough money” in the UK economy as was the case in the 1930s; money supply growth needs to get back to 5-6%

£ UK FinMin Osborne: "Given evidence of continued impairment in the flow of credit to some parts of the real economy, notably small and medium-sized businesses, the Treasury is exploring further policy options. Such interventions should complement the MPC’s asset purchases"

£ UK services output rose 0.2%MoM in July but the June decline was revised to -0.3% (originally -0.1%); on a 3m/3m basis output was up 0.9% versus +0.2% in Q2

£ UK Halifax house prices fell at a 3-month annual pace of 2.3% in September versus -2.6% in August , in line with the pace recorded over the past year


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