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Financial Markets: Headlines for October 12

October 12, 2011

EQ The Nikkei was down 0.7% early in the Asian session and US equity market futures were lower; Alcoa (AA, +2.1%, $10.30) reported net income of $0.15 per share after the US market close, up from $0.06 a year ago but the result disappointed versus the average analyst estimate of $0.22 and was lower than in Q2 due to lower prices and weakness in European demand; the S&P 500 inched up 0.1% on Tuesday to 1195.54 with sector performance mixed; most European bourses closed lower and Stoxx 50 lost 0.2% to 2315.97, pausing after 4 sessions of gains; there was uncertainty about the outcome of the Slovakian EFSF vote, but the Troika indicated that Greece is expected to receive the next aid tranche and EC Pres. Barroso said he will outline some proposals related to a comprehensive response to the crisis

FI US Treasuries declined and the yield curve steepened as fixed income markets reopened on Tuesday; the yield on the 10yr benchmark rose to the highest level since Sept. 1, up 7bps on the session to 2.151%; yields showed little change after a decent 3yr note auction; Bunds fell marginally further, with the Dec’11 future down 7 ticks to 134.55; Euro area peripheral 10yr yield spreads widened over Bunds; the Italian-German spread widened 5bps to 353.6; Greek 2yr yield fell marginally by 17bps to 65.3%; 3m Euribor rose to 1.570% from 1.567% previously and was the highest since August 4

FX The euro traded in a narrow range and ended flat versus the dollar at 1.365 while USD climbed modestly against other major currencies as risk sentiment stabilized; the DXY index was up 0.1% to 77.65, but down 1.9% from a week ago; sterling fell broadly versus the G10, down 0.5% against both the dollar and euro

$ US sold $32bn in 3yr notes at a yield of 0.544%, up from the record low of 0.334% recorded last month; bid/cover ratio at 3.30 was strongest since Aug’10, up from 3.15 at the September auction; indirect bidders took 37.8% vs. 35.7% previously

$ The US Senate defeated a version of President Obama’s jobs’ bill by a vote of 50 to 48; the President is now likely to press for passage of individual components

$ The Senate passed the “Currency Exchange Rate Oversight Reform Act” which will now go to the House; the bill is aimed at China’s forex policies and could lead to tariffs on imports from countries that act to “fundamentally misalign” their currencies

$ The Fed opened a 3-month window to take public comments on the “Volcker Rule” within the Dodd-Frank financial reform bill

€ The Slovakian government of PM Radicova fell as lawmakers failed to pass the EFSF-expansion which was tied to a no-confidence motion; the largest opposition party (Smer) will reportedly support the EFSF expansion when it is brought for another vote, perhaps later this week – Bloomberg

€ The EU/IMF/ECB inspectors said that Greece will get its next aid tranche (€10.2bn) when the Eurogroup and IMF approve the results of the review, which is most likely in early November; Greece will not meet its 2011 deficit target; decisive implementation of new austerity measures should be enough to meet the 2012 target; progress on reforms has been uneven

€ EC President Barroso said he will make some proposals in the Commission today related to a comprehensive response to the crisis, including bank recapitalization

€ ECB President Trichet said “the crisis has reached a systemic dimension…tensions have spread throughout capital markets around the world…The situation has been aggravated by the progressive drying up of bank term funding markets”; he called for rapid action on banks’ balance sheets

€ Standard & Poor’s downgraded its assessment of the Spanish banking sector

€ Italy sold €7bn in 12-month bills at a yield of 3.570%, down 58bps from the yield at the previous similar auction on September 12; the bid/cover ratio was stronger at 1.876 vs. 1.529 previously

€ Greece sold €1.3bn in 6-month bills at a yield of 4.86%, up 6bps from the yield at the previous similar auction on September 6; b/c ratio at 2.73 vs. 3.02 previously

£ UK BoE MPC member Miles indicated support for the recent monetary policy decision and said the Committee had decided to embark on more QE “because the outlook for inflation was actually weaker and demand was weaker”; he said the gilt purchases could have a “knock-on” effect on the corporate bond market; "we could have quite a substantial effect on bringing down the cost of that corporate debt”; he said he has “some sympathy” for the idea of buying corporate bonds directly although it would not be “natural” for the BoE to make decisions about the creditworthiness of particular companies

£ UK BoE MPC member Posen expects a period of relatively volatile, but low, inflation over the next 10-15 years

£ UK industrial production rose 0.2%MoM in August versus the consensus forecast of -0.2%, but the July decline was revised to -0.4% (originally -0.2%) and the industry breakdown highlighted cyclical weakness; gains in production were reported in oil & gas (+2.3%), mining & quarrying (+2.1%), and utilities (+1.9%), but manufacturing output contracted for a 3rd consecutive month, down 0.3% vs. -0.2% previously; the annual pace of manufacturing output (+1.5%) was the weakest since Feb’10

£ UK BRC same-store retail sales rose 0.3%YoY in September versus -0.6% in August and beat the consensus forecast of -0.9%; the pace remained depressed versus the historic average of +2.1% (since 1995)

£ UK NIESR Q3 GDP estimate was +0.5% versus +0.4% in the 3 months to August and +0.1% recorded in Q2

£ UK RICS house price balance stayed at -23 in September and continued to hover above the 6-month moving average (-24)

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