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Financial Markets: Headlines for October 13

October 13, 2011

EQ US and European equities resumed solid gains on Wednesday – risk sentiment improved as EU leaders offered broad roadmaps to address the crisis and Slovakian leaders said they will approve the EFSF changes; the S&P 500 rose 1.0% to 1207.85, led by financials (+2.5%) and industrials (+1.3%); bourses closed higher across Europe and Stoxx 50 jumped 2.4% to 2372.15, the best close since August 5; Greece’s ASE rose 4.8% from Tuesday’s 18-year low

FI Treasuries fell at the long-end for a 6th session, as rising equities and an impending 10yr note auction exerted downward pressure; however USTs pared losses slightly after the FOMC minutes confirmed that the option of more QE remains on the table; the yield on the 10yr note rose 6bps to 2.210%, the highest since Aug31; the German 10yr cash yield jumped 10bps to 2.187%, also the highest since Aug31; Euro area peripheral yields rose as well (ex-Ireland); the Italian 10yr yield has been climbing for the past week and jumped 10bps to 5.710% on Wednesday ahead of today’s bond auctions

FX EUR/USD continued the month’s rally and touched the highest level since September 19, up 1.0% to 1.379 at the US close; EUR/JPY jumped 1.9% to 106.53; the yen and dollar were down broadly versus other major currencies amid the improvement in risk sentiment and the US dollar DXY index touched a 3wk low; Cable jumped 1.0% to 1.575 tracking EUR/USD higher despite the deterioration seen in the UK labour market figures

$ The US sold $21bn in 10yr notes at a high yield of 2.271%, up from 2.00% at the Sept.13 auction; b/c ratio fell to 2.86 from 3.03 previously and was weakest since Nov’10; indirect bidders took 35%, smallest share since Feb’10

$ FOMC minutes from Sep. 20-21: there was a full discussion of policy options and participants agreed there was “considerable uncertainty surrounding the outlook for a gradual pickup in economic growth”; the FOMC will consider further how to use monetary and liquidity tools to address potential adverse shocks; two members believed “that current conditions and the outlook could justify stronger policy action” beyond an Operation Twist and renewed MBS purchases; FOMC is considering how to provide greater clarification on long-run policy objectives and “most participants” saw advantages in being more transparent about the forward guidance and the economic conditions to which the guidance refers; “a couple” of members supported tying the forward guidance to economic conditions, but no decision was taken; some judged that more QE should remain available as an option to support the recovery if needed, but some thought more QE would only be appropriate if deflation risk becomes elevated; on the IOR rate “participants generally agreed that they needed more information on the likely effects of a reduction” and many “voiced concerns” that a cut “risked costly disruptions to money markets and to the intermediation of credit” and that the fed funds market could contract

$ Fed’s Pianalto (voter in 2012) supports the actions the Fed has taken – monetary policy is appropriate given the outlook

€ EU’s Barroso laid out a roadmap to address the crisis in the Eurozone: he suggested a fully coordinated approach to bank recapitalization measured against a temporarily higher requirement for core tier 1 capital, first by tapping private sources, then governments, and then loans from the EFSF if necessary; he said Greece should get its 6th tranche of aid and the EU should agree on a 2nd aid package the includes adequate public & private financing; the launch of the European Stability Mechanism should be moved forward to mid-2012; a governance system should integrate ESM and EU budget rules, and would allow intervention into national budgets; proposals on euro bonds will be made by the end of the year

€ The European Banking Authority (EBA) may mark all sovereign debt to its current market value in its assessments of bank balance sheets; it is likely to apply a 9% core tier 1 capital ratio in assessing banks capital needs – Reuters

€ A larger haircut of 30-50% on privately held Greek debt is currently being discussed by Eurozone officials – Reuters

€ Eurogroup Chairman Juncker: "If elements appear in the troika report which call into question the sustainability of Greece’s debt burden, then we must discuss how we can guarantee Greek debt [with measures] beyond a participation of the private sector”; the Eurozone needs an economic government

€ ECB’s Weidmann said a write-down of Greek debt “cannot be ruled out” but this “must not become an attractive way out of self-made problems. Otherwise trust will never return to the sovereign debt issues of at-risk countries"

€ ECB’s Draghi urged Italy to meet its fiscal commitments, make structural changes and not rely on a solution from external sources; persistent rises in market rates could have "a further negative effect on debt servicing costs, in a spiral that could become ungovernable”

€ ECB’s Nowotny: "One need not have any fear of inflation… We expect a clear decline of inflation, under the 2 percent mark in the second half of 2012…What one must fear is the real economy”

€ The ECB’s 84-day USD liquidity tender had an uptake of €1.353bn, as 6 banks bid for funds at a fixed rate of 1.08%; the regular 1wk USD operation had an uptake of €0.5bn by 1 bank, also priced at a fixed rate of 1.08%

€ The ECB lent €4.159bn to banks through the overnight lending facility on Tuesday, the most since May 10th, up from €2.87bn on Monday and above the 50dma of €0.8bn

€ Eurozone industrial production rose 1.2% in August and the July gain was upwardly revised to 1.1% (originally +1.0%); the August result surprised positively versus the consensus forecast of -0.8%, as output gains in France (+0.6%) and several peripheral countries outweighed a decline in Germany (-1.0%)

€ The French CPI stabilized at 2.2%YoY in September, remaining at the highest level since Oct’08 (2.7%)

£ UK BoE’s Dale said decisions on QE will “depend critically on what happens in our economy but even more importantly in the rest of the world”; he does not think the UK is in a liquidity trap; “what we showed last month is we were willing to act quickly and decisively in order to support demand in our economy”

£ UK labour market figures showed further deterioration: ILO unemployment rate jumped to a new cycle high of 8.1% in the 3 months to August from 7.9% in the 3m to July, at the highest since July 1996; employment fell 178k in the 3m through August, down at the fastest pace since Q2’09; claimants for jobless benefits rose 17.5k in September versus a revised gain of 19.1k in August (originally 20.3k); the claimant count rate rose to 5.0% as expected in the median forecast from 4.9% in August, now the highest since Jan’10

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