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Financial Markets: Headlines for October 11

October 11, 2011

EQ Equities rose broadly in light holiday trading as risk sentiment was boosted by the Merkel/Sarkozy commitment to work on a plan to recapitalize banks; no details were available and a Eurozone leaders’ meeting has been pushed back until 23 October to allow time for development of a “comprehensive” solution for banks and Greece; meanwhile, Dexia and Greece’s Proton Bank will receive government support; the S&P 500 gained 3.4% on Monday ahead of earnings season, after last week’s gain of 2.1%; Stoxx Europe 600 rose 1.7%, building upon last week’s gain of 2.6%

FI US fixed income markets were closed for Columbus Day; Gilts and German benchmarks posted declines as safe haven positions continued to be unwound; the 10yr gilt yield jumped 12bps to 2.582%, up for a 4th consecutive session and to the highest levels since early September, despite renewed BoE asset purchases; the Dec’11 Bund future fell 79 ticks on Monday to 134.62 and was the lowest since Sept 2; PIIGS 10yr bonds declined but Italian, Spanish and Irish outperformed versus Bunds; the Italian 09/21 BTP yield rose 5bps to 5.556%

FX The euro surged above 1.36, up 2% versus the dollar over the sessions to 1.364, up 3.8% from last week’s 9-month low; the dollar declined against all major currencies and hit a 6-session low of 0.90 versus the Swiss franc; Cable rose 0.6% from Friday to 1.565, up 2.5% from the low of last week reached after the BoE QE decision

OIL WTI Nov’11 crude jumped 3.6% to $85.80bbl, hitting a level above the 50dma for the first time since August 1; the Brent contract rose 3.3% to $109.3bbl

€ German Chancellor Merkel and French President Sarkozy met in Berlin and announced that they “are determined to do everything necessary to ensure the recapitalization of Europe’s banks” and will deliver a plan by the G20 meeting on Nov4; this meeting will focus on the Eurozone debt crisis and the risk of spillover; the Eurozone leaders have delayed a summit to Oct. 23 from Oct. 17 originally scheduled

€ EU’s Van Rompuy said the postponement of the EU leaders’ summit until October 23 will allow more time for finalizing a comprehensive strategy on the debt crisis; further elements are needed to address the situation in Greece, banks’ capital levels, and the EFSF

€ Eurogroup head Juncker has not ruled out a larger haircut on Greek debt

€ ECB’s Kranjec indicated that more restructuring of Greek debt is likely: "I’m sure that Greece will not go bankrupt, at least not in a sense that it would pull other countries down as well, but a reprogram is very likely and is already being debated"

€ German FinMin Schaueble: “we assumed in July a level of debt reduction that was too low” for Greece

€ German Deputy FinMin Asmussen said he would prefer that a comprehensive package (including recapitalization) be developed for the Eurozone; a simultaneous recapitalization would be better than a bank-by-bank approach

€ The Greek central bank effectively nationalized Greek lender Proton Bank by activating a Financial Stability Fund (FSF) which currently has capacity of €10bn

€ Dexia’s board approved the sale of the Belgian retail & commercial portion to the Belgian government for €4bn; the governments of France, Belgium and Luxembourg will guarantee up to €90bn in borrowing by the French division for the next 10 years

€ The ECB completed €2.312bn in bond purchases last week under the Securities Markets Programme, down from €3.795bn in the previous week; the total purchases settled under the programme total €163bn

€ ECB’s Nowotny said the Austrian banking sector is healthy although Eurozone political leaders are taking too long to implement rescue facilities; he expects lower inflation in 2012

€ Fitch cut Italy by 1 notch on Friday to A+ from AA- with a negative outlook; Spain’s rating was cut 2 notches to AA- from AA+, also with a negative outlook

€ Moody’s downgraded 12 UK and Portuguese banks on Friday

£ UK FinMin Osborne said he is “not against a financial transaction tax in principle” but against one that is solely implemented in Europe; he would want a global agreement with the US, China and others which he does not view as likely

£ The BoE bought £1.7bn in 3-10yr gilts on Monday versus offers of £6.64bn in the first operation of the new round of asset purchases

£ UK BoE MPC member Miles said survey results have deteriorated markedly and suggest that Q4 GDP will be broadly flat; renewed gilt purchases are expected to impact a range of asset prices as well as the cost & availability of credit

€ The German trade surplus was higher at €11.8bn in August versus an upwardly revised €10.5bn in July (originally €10.4bn); exports rose 3.5%MoM, the first increase since May; imports stabilized versus a revised gain of 0.5% in July (originally -0.3%)

€ French business sentiment (Bank of France) stabilized at 97 in September as the August reading was revised down from 98 reported originally – now the weakest since Nov’09

€ French manufacturing production rose 0.7%MoM in August and surprised versus consensus at +0.2%; the July increase was revised up to 1.8% (originally +1.4%)

€ Italian industrial production also surprised versus consensus and jumped 4.7%MoM in August following a revised decline of 0.3% in July (originally -0.7%)

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